Ciena (NYSE:CIEN) Corporation reported its third-quarter fiscal 2024 earnings, revealing a notable miss on earnings per share (EPS) compared to forecasts. The company posted an EPS of $0.54, falling short of the expected $0.65. Despite this, revenue surpassed expectations, reaching $1.12 billion against a forecast of $1.1 billion. The market reacted negatively in premarket trading, with Ciena's stock dropping by 4.37% to $70.01.
Key Takeaways
- Ciena's EPS of $0.54 missed the forecast by 17%.
- Revenue exceeded expectations by $20 million, reaching $1.12 billion.
- Stock fell 4.37% in premarket trading following the earnings release.
- Strong demand in AI-driven network traffic and cloud infrastructure investments.
- Strategic supply chain realignment and inventory reduction efforts underway.
Company Performance
Ciena's performance in Q3 2024 highlighted mixed results, with revenue growth but a significant EPS miss. The company continues to capitalize on the increasing demand for bandwidth, particularly driven by AI and cloud services. Despite revenue growth, the EPS miss indicates potential cost pressures or operational challenges.
Financial Highlights
- Revenue: $1.12 billion, up from $942 million in the previous quarter.
- Earnings per share: $0.54, down from the forecast of $0.65.
- Adjusted Gross Margin: 43.7%.
- Adjusted Operating Margin: 8%.
- Cash used in operations: $159 million.
- Cash and Investments End of Quarter: $1.2 billion.
Earnings vs. Forecast
Ciena's actual EPS of $0.54 was 17% below the forecasted $0.65, marking a significant miss. In contrast, the company exceeded revenue expectations by $20 million, achieving $1.12 billion against a forecast of $1.1 billion. This mixed performance reflects challenges in maintaining profitability despite strong sales.
Market Reaction
The stock's premarket decline of 4.37% to $70.01 reflects investor disappointment with the EPS miss. This movement contrasts with the company's 52-week high of $75.11, indicating a cautious market sentiment. The broader market and sector trends will be important to watch as investors digest these results.
Company Outlook
Looking forward, Ciena has provided Q4 revenue guidance between $1.06 billion and $1.14 billion, aiming for a fiscal 2024 total revenue target of approximately $4 billion. The company maintains a long-term revenue growth target of 6-8% CAGR, driven by webscale and cloud provider market growth.
Executive Commentary
- "We believe 6% to 8% is a good long term growth rate." - Jim Moylan, CFO
- "Our optical portfolio has never been stronger." - Gary Smith, CEO
- "Webscalers are going to grow as a percentage of our business over the next several years." - Jim Moylan, CFO
Q&A
During the earnings call, analysts focused on the potential of pluggables as an incremental revenue opportunity and the strategic importance of the broadband access market. Questions also addressed ongoing inventory reduction and supply chain normalization efforts.
Risks and Challenges
- Supply Chain Issues: Continued realignment and inventory reduction pose operational risks.
- Market Saturation: Increasing competition in the optical technologies sector.
- Macroeconomic Pressures: Potential impacts of global economic conditions on demand.
- Cost Management: Challenges in maintaining profitability amidst rising operational costs.
- Technological Advancements: Need to keep pace with rapid technological changes in network infrastructure.
Full transcript - Ciena Corp (CIEN) Q3 2024:
Chris, Conference Moderator: Good day, and welcome to the Ciena Fiscal Third Quarter 20 24 Financial Results Conference Call. Today, all participants will be in a listen only mode. Please note that today's event is being recorded. I would now like to turn the conference over to Greg Lance, Vice President of Investor Relations. Please go ahead, sir.
Greg Lance, Vice President of Investor Relations, Ciena: Thank you, Chris. Good morning, and welcome to Ciena's 2024 fiscal 3rd quarter conference call. On the call today is Gary Smith, President and CEO and Jim Moylan, CFO. Scott McFeely, Executive Advisor is also with us for Q and A. In addition to this call and the press release, we have posted to the Investors section of our website an accompanying investor that reflects this
Jim Moylan, CFO, Ciena: discussion as
Greg Lance, Vice President of Investor Relations, Ciena: well as certain highlighted items in the quarter. Our comments today speak to our recent performance, our view on market the current market dynamics and drivers of our business as well as a discussion of our financial outlook. Today's discussion includes certain adjusted or non GAAP measures of Sienna's results of operations. A reconciliation of these non GAAP measures to our GAAP results is included in today's press release. Before turning the call over to Gary, I'll remind you that during this call, we'll be making certain forward looking statements.
Such statements, including our quarterly and annual guidance, commentary on market dynamics and discussion of our opportunities and strategy, are based on current expectations, forecast and assumptions regarding the company and its markets, which include risks and uncertainties that could cause actual results to differ materially from the statements discussed today. Assumptions relating to Rad whether mentioned on this call or included in the investor presentation that we will post shortly after, are important part of such forward looking statements, and we encourage you to consider them. Our forward looking statements should also be viewed in the context of the risk factors detailed in our most recent 10 ks and our 10 Q, which we expect to file with the SEC today. Deanna assumes no obligation to update the information discussed in this conference call, whether as a result of new information, future events or otherwise. As always, we will allow for as much Q and A as possible today, though we ask that you limit yourself to one question and one follow-up.
With that, I'll turn the call over to Gary.
Gary Smith, President and CEO, Ciena: Thanks, Greg, and good morning, everyone. Today, we reported strong fiscal 3rd quarter results, including revenue of $942,000,000 and adjusted gross margin of 43.7%. We also delivered quarterly adjusted operating margin of 8% and adjusted EPS of $0.35 Later in the call, Jim will provide additional details about our Q3 financial performance, highlights from the quarter with respect to our portfolio and our outlook for the Q4. And speaking of Jim, you will also have seen the news this morning that he's informed us of his decision to retire next year after more than 16 years with Ciena. Jim is obviously an outstanding member of our executive leadership team and we look forward to him continuing as CFO while we commence the search process to identify a success.
On the state of our business, overall industry dynamics continue to be encouraging and our innovation leadership has frankly never been more apparent. As expected, order flow in Q3 was strong, largely driven by cloud providers and we finished the quarter with a book to bill ratio above 1. We see this as a positive sign that the market is moving in the right direction with the gap between supply and inventory absorption narrowing. And ultimately, bandwidth demand continues to be strong and is growing, particularly with the anticipated rise in AI driven network traffic and increased cloud adoption. We are now clearly seeing customers move towards dedicated network capacity and architectures initially to support AI for machine to machine type traffic.
And this brings me to my next point, which is that we believe it is most helpful to look at the really the current environment through the lens of our 2 largest customer segments, cloud providers and service providers. So starting with cloud providers. They are clearly leading the charge in building out their networks to support the expected growth in cloud and AI related track. Specifically, they are investing in their network architectures from subsea cables to long haul routes to data center connectivity, essentially to add capacity with the most efficient use of space and power. Our leading technology best addresses these key requirements And combined with our deep and expanding relationships with cloud providers, our business with this customer segment is strong and getting stronger in all aspects.
In Q3, we secured new wins with major cloud provider customers, spanning terrestrial, submarine and coherent pluggable applications, the majority driven by preparations for the expected growth in AI and cloud traffic. For the same reason, we are seeing a growing market opportunity for us amongst the expanding set of cloud players, including data center operators and companies that offer a range of cloud applications and cloud infrastructure services. And we have in fact been winning an increasing number of these deals with these customers over the past several quarters. Now moving to service providers. Overall, our pipeline with service providers globally continues to increase, and we are winning significant deals, including many new logos.
For example, in Q3, we secured new customers in India, South Asia, Germany, Scandinavia and several new ones across North America. In addition, Mofen activity, which we mentioned last quarter, remains strong with 4 major wins in Q3. And just as a reminder, with Mofen, telecom service providers build advanced optical networks and lease fiber pairs to cloud providers, really enabling them to quickly expand their reach and better service their customers. I would say that while these wins bode incredibly well over the longer term, our current results continue to reflect the challenges related to the timing and volume of service provider orders. Specifically in North America, we have started to see the purchasing patterns of service providers come back into more of a normal balance as they continue to deploy inventory buildup from prior periods.
Obviously, this recovery remains gradual and will take several more quarters to play through completely, but we are absolutely seeing clear evidence of improvement here. Further, with respect to international service providers, cautious spending persists and particularly in Europe related to macroeconomic, geopolitical concerns as well as industry structure issues. As a result, we expect the recovery in order volumes from international service providers to generally lag that of our North American counterparts. With that and talking about the market, I want to move to a discussion about portfolio and specifically the technology advantages that we have in the market today as well as our market expansion opportunities from our innovation leadership. In summary, our optical portfolio has never been stronger with our industry leading coherent modem technology, optical line systems and automation and network control software.
Starting with our coherent modems and our latest generation WaveLogic 6 technology. Last week, I think many of you saw that we achieved the world's first 1.6 terabit wavelength data transmission across some 4 70 kilometers in a live network with our customer Airelion. This is a clear demonstration that our WaveLogic 6 Extreme technology, the first of its kind in the world to leverage 3 nanometer technology in a telecom application, can deliver unprecedented capacity and performance, setting a new benchmark for the industry. We expect to benefit from a considerable time to market lead with our 1.6 terabit solution, particularly given that no other competitor has even announced plans for a solution beyond 1.2 terabit. And we already have orders from 23 customers for WaveLogic 6, a list that continues to grow.
And we will recognize revenue in Q4 as we begin shipping. As AI traffic demand increase and do become more distributed, line systems that are reliable, maximize capacity on fiber and most importantly, minimize power are critical to forward looking network architectures. For several years, we have been closely collaborating with leading cloud providers on the design of that next generation line system. The result is our reconfigurable line system platform, often referred to as RLS. It is the industry's leading open line system that can manage bandwidth intensive applications with greater scale, density and programmability, all while consuming less space and of course power.
As a result, RLS is now being deployed by all of the major cloud providers as well as a growing number of service providers. In fact, it has quickly become the industry's line system of choice to form the foundation of their AI optimized network architectures. And accordingly, we expect orders and revenue for RLS to increase over the coming quarters, which lays further track quite literally for future business with capacity adds over time. Finally, let me talk about our Navigator Network (LON:NETW) Control Suite, the most advanced network control software in the industry today. Some of you may remember this by its former name, MCP.
As network architectures evolve to meet bandwidth demand driven by AI and cloud based applications, they are also obviously growing in complexity. As a result, the need to automate the management and control of these networks has never been greater. Our Navigator Network Control Suite is designed to do just that, and it is the 1st and currently the only domain controller based on a microservices architecture to optimize scale and performance. It basically provides a single view across all network layers, optical, Ethernet and IP to coordinate life cycle network operations all within a single software system. Moving on from our optical foundation technologies and with respect to our market expansion opportunities, we are seeing a growing and incremental opportunity inside and around the data center.
Specifically, our foundational optical technologies can be leveraged in a variety of form factors, including pluggables and high speed interconnect technologies, really to address a range of consumption models. In pluggables, we already have several significant wins. In fact, we're ramping revenue for 400 CR at cloud providers for around the data center applications, specifically really short reach data center interconnect. I would remind everybody that we've now won 3 of the top 4 cloud providers for 400 ZR. And as we mentioned last quarter, we are also the recipient of the first 800 ZR award by any major cloud provider.
In looking at opportunities for our interconnect portfolio inside the data center, we are collaborating closely with several cloud customers and ecosystem partners in this area and expect this opportunity to develop and mature over time. We are also gaining traction in our market expansion opportunities around broadband access and coherent routing. In broadband access, as public funding is distributed, which admittedly is taking longer than expected, we would look forward to providing more customers a modular and open XGS PON solution. This is grounded in the competitive advantage that we have with our optical technology and is a cost effective, flexible and sustainable OLT solution that can address residential, enterprise and mobility use cases. In coherent routing, the growing need for scale and cost efficiency across network domains to support increased traffic flows from new applications will continue to drive customers to converge the IP and optical layers we believe over time in the metro.
And we are well positioned to support them with our purpose built coherent aggregation routers. So in summary, I'd say that we delivered a strong performance in Q3, and we remain encouraged by the improving industry dynamics. File providers clearly continue to be strong. Spending dynamics among our North American service providers are gradually improving, while we remain cautious about international service providers generally. It is clear that our market leadership, driven by the strength of our innovation and time to market advantage, will continue to drive share gains and open up new opportunities over time.
With that, I'll turn it
Jim Moylan, CFO, Ciena: over to Jim. Thank you, Gary. Good morning, everyone. As Gary stated, we delivered strong fiscal Q3 financial results. Total (EPA:TTEF) revenue in Q3 was $942,000,000 This included 2 10% plus customers, 1 cloud provider and 1 service provider.
Adjusted gross margin was 43.7%. Q3 adjusted operating expense was $336,000,000 Book to bill was greater than 1, as we expected. With respect to profitability measures in Q3, we delivered adjusted operating margin of 8%, adjusted net income of $51,000,000 and adjusted EPS of $0.35 per share. In addition, we used $159,000,000 in cash for operations. We have been engaged in a strategic realignment of our supply chain activities, including improvements in processes and systems as well as changes in our vendor relationships to improve resilience.
As a part of this transition and to facilitate inventory movement across our vendor base, we made a cash advance of approximately $175,000,000 to one of our vendors, which will be recovered over the next few quarters. Adjusted EBITDA in Q3 was $99,000,000 Finally, we ended the quarter with approximately $1,200,000,000 in cash and investments. We repurchased approximately 600,000 shares for $29,000,000 during the quarter. And we continue to target the repurchase of $250,000,000 in shares by the end of fiscal year 2024. Turning to some portfolio highlights from the quarter.
In Optical, WaveLogic 5 traction continues. We shipped close to 12,000 WaveLogic 5 Extreme modems in Q3 and added another 12 customers, 9 of which are new logos for Sienna. We also continue to gain momentum with WaveLogic 5 Nano 400ZR and ZR Plus shipping a record number of pluggables in the quarter for revenue. We added 18 new WaveLogic 5 nano customers for a total of 122 to date. Also in optical, Wave server revenue in Q3 was up 29% year over year and 25% sequentially with 7 new customers in the quarter.
Greg Lance, Vice President of Investor Relations, Ciena: Our routing and
Jim Moylan, CFO, Ciena: switching business continues to gain momentum. In Q3, we secured 9 new broadband access customers across Europe and the U. S, increasing our global broadband customer count to more than 65. And our coherent routing solution, which leverages our coherent aggregation routers in combination with our WaveLogic 5 Nano pluggables and navigator network control suite is also increasingly being selected by customers to replace outdated legacy IP solution. Other portfolio highlights from the quarter include another good quarter for platform software and services with revenue up 5% year over year and Blue Planet revenue nearly doubled year over year.
Turning now to guidance. For the fiscal Q4, we expect to deliver revenue in a range of $1,060,000,000 to $1,140,000,000 This would put us at about $4,000,000,000 in revenue for fiscal year 2024, in line with the guidance we provided in June. We expect Q4 adjusted gross margin to be in the low to mid-40s range. Gary spoke about our reconfigurable line system, which has the combination of intelligence and high capacity that makes it ideal for next gen AI driven network, and we're selling alignment. This has a near term effect on our gross margins, but as we sell the modems to provide capacity on these lines, our margin will improve.
And we expect adjusted operating expense to be approximately $350,000,000 Looking ahead to fiscal year 2025, as is our normal practice, we will provide a detailed view of our expectations when we report our Q4 results in December. With that said, we previously indicated that fiscal 2024 would be a transition year, following a few years that were impacted by the unusual events of the pandemic that led to supply chain challenges and a subsequent snapback resulting in outside of growth in fiscal 2023. We've also said that we believe using a 6% to 8% compound annual growth rate is the best representation of our long term revenue growth rate, which is faster than market growth based on current forecasts. This range, by the way, matches our revenue growth rate over a long period of years. We continue to believe that this is a reasonable and balanced view for the long term, keeping in mind that any 1 year growth rate can be outside that range.
Before we conclude our prepared remarks, I'll say a few words about my planned retirement. We understand that the investment community likes to have advanced notice of the departure of a senior executive, and we are providing that notice today. BIM is a great company. We have the best optical technology in the world, and our lead on the competition is growing. We also have a group of passionate and talented employees all over the globe who makes Sienna a great place to work.
It has been an honor to serve as Sienna's CFO, but more than that, it has been a tremendous learning experience and it will continue to be since I will be at Ciena for another year. We will start a search for Ciena's next CFO immediately, and I will work closely with my replacement to ensure a smooth transition. To close, we delivered a strong Q3. We're confident in achieving our 4th quarter guidance based on the momentum we see in our business and the wins we've discussed. We are optimistic about positioning to capture long term opportunities and deliver profitable growth, expanding into the new areas of available market over the coming years.
With that, Chris, we'll take questions from the sell side analysts.
Chris, Conference Moderator: Thank you. We will now begin the question and answer session. And today's first question comes from Meta (NASDAQ:META) Marshall with Morgan Stanley (NYSE:MS). Please proceed.
Meta Marshall, Analyst, Morgan Stanley: Great. Thanks so much. Maybe, Jim, just as you mentioned on the call, you had talked about kind of 6% to 8% kind of being a good long term guide. Just as we look at as you look at fiscal 2025 estimates as they are and they are within that range, is there a comfort that you have with kind of fiscal 2025 estimates of the Street as they are? And then maybe second question for Gary, just on the pluggables wins that you guys have had, noting that you said that a lot of those were very short reach.
Do you view the pluggables business that you're getting as additive to the business currently? Thanks.
Jim Moylan, CFO, Ciena: We won't comment on the 25 estimates out there today. I will say that we feel great about our position in the market. We think 6% to 8% is a good long term growth rate. It's going to vary from that in any given year that we've seen in the past. And I think we're going to continue to take share.
So all of those things are good for us, but we don't want to make a comment about $25,000,000 at this point in time. We just finished Q3.
Gary Smith, President and CEO, Ciena: So Meta, on the second part of the question, the very short answer is yes. We view pluggables as an incremental TAM opportunity for Ciena. We've been most consistent about this. Most of that is going to go into the short reach where we really don't have much revenues at all right now. So that's basically it.
We do not see it cannibalizing long haul submarine where they're very complex and high performance system requirements. We're not seeing that. On the metro PCI, which is less than 10% of the total optical market, by the way, we are seeing, again, incremental opportunities for us. And any cannibalization would be really into the metro part of that DCI. We're not seeing that gather shape and any cannibalization will be there.
It's more than made up by the incremental pluggable opportunity in the short reach and by the overall growing marketplace.
Meta Marshall, Analyst, Morgan Stanley: Great. Thank you.
Gary Smith, President and CEO, Ciena: Thank you, management.
Chris, Conference Moderator: And the next question is from Simon Leopold with Raymond (NS:RYMD) James. Please proceed.
Simon Leopold, Analyst, Raymond James: Thank you very much. First of all, Jim, congratulations and thank you for giving us a 1 year notice. Appreciate that. Hate being surprised and we'll miss you. So on the questions, first of all, I wanted to see if you could put some dimensions around the Mofin opportunity you've talked about, given that it's sort of buried in the telco, but it's somewhat indicative of cloud trends.
That's my first question. As a follow-up, I wanted to see if you could comment on your broadband opportunities in light of announcement yesterday from one of your competitors winning exclusivity or at least claimed exclusivity with a Tier 1 U. S. Operator? Thank you.
Gary Smith, President and CEO, Ciena: Simon, let me take the MoPM piece. It's increasingly becoming a larger part of our service provider piece in collaboration with the cloud providers around the globe. And it basically gives the cloud providers an opportunity to get to market quickly. Very often, they will define the architecture that they want delivered and they'll specify Ciena. And that's happening around the globe, particularly in places like India, which is obviously a large target market for the cloud providers.
It's difficult to get visibility to all of those deals, but I would sort of put a size on it. Probably 10% to 15% of our total service provider business is actually MOPON in some way shape or form. That would be sort of best view of it, which together with our direct cloud provider business and the Subsea business is getting us in that 40% to 50% of our total business really is cloud, both direct and sort of indirect. That's our best sort of perspective on it. And very often, in various countries, there will be a combination of different approaches by the cloud players.
Some may be dark fiber, they like themselves. Some may be provisioned on just normal capacity and some will be on the dedicated Mofund deal, which we're increasingly seeing a lot of the cloud providers lean towards. And we are kind of uniquely placed around that given our global footprint in most of the major carriers around the world, our deep relationships with the cloud providers and particularly the highest market share of all of the submarine cable piece as well. So you put all of that together and we're somewhat uniquely positioned to address that market.
Scott McFeely, Executive Advisor, Ciena: And then Simon, on the forward looking perspective on the broadband access business, I'd say this, but obviously our intentions in the marketplace is not to an individual customer, it's to a broad market opportunity. We're very excited about the value proposition that we're bringing to the marketplace in terms of virtualizing the OLT, integrating that into our coherent routing, adding that capability to our management suite that we talked about with Navigator. It's resonating well in the marketplace. We're up to 65 customer wins now and we're adding quarter by quarter to that count. So it's much, much broader play than any individual customer.
And obviously, we're not going to comment on 1 individual customer anyways. The other thing I'd say though is in the short term, it's obviously swimming right into the dynamics that are going on in the service provider space. So there's a bit of a headwind there and probably accentuated a bit by the delay in BEED funding. So there's been a bit of short term headwinds, but we're quite excited about the long term potential.
Greg Lance, Vice President of Investor Relations, Ciena: Thank you. Thank you, Sean.
Gary Smith, President and CEO, Ciena: Thanks, Sean.
Chris, Conference Moderator: Our next question is from Samik Chatterjee with JPMorgan (NYSE:JPM). Please proceed.
Samik Chatterjee, Analyst, JPMorgan: Hi. Thanks for taking my questions. Maybe for the first one, if I can sort of ask you more about the order commentary that you had in your prepared remarks. You mentioned the book to bill tracking above 1, which I think would largely be seen as positive from what your expectations were last quarter, but you also highlighted the more limited improvement or a slow recovery you're seeing with the service providers, particularly internationally. So I mean, can you just parse that out a bit in terms of the improvement orders between service providers and cloud?
And did sort of the service provider order improvement come in below your expectations? And I don't know if you ever provided like when it comes up the service provider exposure do you have, how much is how much should we think is North America versus international? And I have a follow-up.
Jim Moylan, CFO, Ciena: Clearly, our current order flows are driven mostly by the web scalars. But we do expect some improvement, particularly on North American service providers in the near term, and we expect improvement in the international service providers next year. Just as a point of reference, our backlog grew to about $2,100,000,000 at the end of Q3. We think our order flow in Q4 will be at maybe slightly below our revenue call. So our backlog, we expect at the end of this year will be $2,000,000,000 We think that it will be a little heavier than it is today around service providers because we do expect some improvement in their order rates.
Samik Chatterjee, Analyst, JPMorgan: Got it. Okay. And for me follow-up, we all sort of continue to see this robust investment or CapEx cycle from the web scalers and you talked about that being driven by or preparing for AI as well. How should we think about how much of that investment from the web scalers will be towards the pluggables or short reach versus really directed more towards your systems portfolio and more towards the sort of traditional portfolio that you have? How are you thinking about where does the AI preparedness benefit really come through on the portfolio side?
Thank you.
Jim Moylan, CFO, Ciena: Yes. I think if you think about the plug and
Scott McFeely, Executive Advisor, Ciena: bolt piece, separate out buying plugs to stick in other devices other than a whole end to end system, We've been pretty consistent in what we said that we think that that is place that plays in the Short Beach Metro DCI. And we also said that it would take longer for it to be a material piece of the industry or the business. And I think that's played out pretty accurately. And we're starting to see that come through in terms of financial results for us as we ship Harnik and ZR plugs into that application. And again, as Gary said, that is net incremental for us because we largely haven't been exposed to that part of the webscale networks.
I think the broader spend though, I remind you that we participate with them on submarine applications on their core network applications and then back into the service providers through the MOPED exposure that we have. In those cases, those are large complex networks and the winning hand on those comes back to optical modems, line systems and the control systems that go with them. And we think we have the best technology in all three of those dimensions. So we're going to continue to take our unfair share of that spend opportunity out there.
Meta Marshall, Analyst, Morgan Stanley: Okay. Thank
Samik Chatterjee, Analyst, JPMorgan: you. Thanks for taking
Gary Smith, President and CEO, Ciena: my questions.
Jim Moylan, CFO, Ciena: Can you
Gary Smith, President and CEO, Ciena: just add to that? The vast majority of spend will continue to be on optical systems in the cloud space. The vast majority of spend because exactly as Scott said, the complexity and the performance requirements of these large systems is what's driving their network traffic.
Samik Chatterjee, Analyst, JPMorgan: Okay. Thank you. Thanks for listening.
Chris, Conference Moderator: And the next question comes from Amit Daryani with Evercore. Please proceed.
Amit Daryani, Analyst, Evercore: Good morning and thanks for taking my question. I have 2 as well. Yousse, maybe to start with your October quarter guide for gross margins in the low to mid 40%. I think you talked about you're seeing some mix impact by initially setting more line systems there. Could you just quantify what that impact is?
Is it like 100 to 200 basis points headwind? And then do you see that normalized in fiscal 2025 as you start to sell more modems potentially? Or is there a longer duration to normalize that?
Jim Moylan, CFO, Ciena: I won't comment about 25 today. But clearly, the portion of line systems that we're selling today is very heavily weighted and that's resulting in a gross margin impact. It's at least a couple of 100 basis points. I mean, I can't give you an exact number, but it's at least that kind of a number.
Amit Daryani, Analyst, Evercore: Got it. And then on the telco side,
Jim Moylan, CFO, Ciena: you talked about just starting to
Amit Daryani, Analyst, Evercore: see a recovery in North America and then EMEA being macro driven, but a little bit weaker. I was wondering if you could just talk a little bit more about what are you seeing in APAC and India specifically when it comes to telco spending?
Gary Smith, President and CEO, Ciena: We're seeing strength in Asia Pacific. We've seen a number of wins particularly in Southern Asia, places like Indonesia, Vietnam, etcetera. So we see that. And then new logos for us. We have very low market share there.
So that's encouraging. In India, I think we're very bullish about India. We have number one market share there. We see good Mofin growth as obviously the cloud is very focused on it. It's a little bit cyclical.
They're sort of recovering from the investments in all of the 5 gs pieces, but we are seeing a lot of activity. So as we look out for the next 1 to 3 years in India, again, we remain bullish. It was up a little bit sequentially quarter to quarter. It's going to have some ebbs and flows, but I think we're we think that we're on to a strong cycle over the next 1 to 3 years in
Jim Moylan, CFO, Ciena: India. And Amit, I want to correct something I just said. In Q3, it's at least 100 basis points, not 200 basis points.
Amit Daryani, Analyst, Evercore: Got it. Perfect. Thank you for that. And Jim, congrats on the retirement, and I will see you around quickly this year.
Jim Moylan, CFO, Ciena: Thank you. Thank you, Nick.
Chris, Conference Moderator: The next question is from Tim Long with Barclays (LON:BARC). Please proceed.
Tim Long, Analyst, Barclays: Thank you. Congratulations for me too as well, Jim. We'll miss you. Yes, first one if I could, then I have a follow-up. I understand you don't want to get too into the fiscal 'twenty five at this point.
But Jim, you did make some comments about kind of looking a little bit more normal or maybe Gary did after a strong 'twenty three and a correction here in 'twenty four. When we look at next year or just going forward, do we think we're back towards more typical linearity in the business, just as a go forward comment? And then I have a follow-up after that.
Jim Moylan, CFO, Ciena: You're referring to seasonal linearity, Tim?
Tim Long, Analyst, Barclays: Yes, seasonality, yes.
Jim Moylan, CFO, Ciena: Seasonality. Our business used to be very predictable as to its seasonal nature because our business was mainly service providers. With the increase in the sales that we make to web scalars, as Gary said, it's 40% to 50% of our business is driven by their activity. We've become a much less predictable company in terms of our revenue seasonally. We've had very strong first quarters.
And typically in the past, our 3rd and 4th quarter were our biggest quarters. That can change with the web scale. So really, I can't call our seasonality right now. And by the way, we haven't even completed our plan for next year. So I don't know what it's going to be.
Tim Long, Analyst, Barclays: Okay, great. And then just kind of a 2 part follow-up here. 2 of the business lines looked a little big changes quarter to quarter. So for Blue Planet that jump, is there just a big deal in there or some kind of seasonality and similarly the drop in routing and switching sequentially. So in both either of those businesses where there's anything like kind of one time in them or these more normalized levels here?
Gary Smith, President and CEO, Ciena: So firstly on Blue Planet, Tim, basically doubled from this time last year, but off a relatively small base. We've been basically focusing Blue Planet on very specific applications around inventory orchestration, and that's been increasingly successful. So it's not just one big deal. We're very encouraged by what we're seeing with Blue Planet, and we'll talk more about that during the coming quarters. You saw the recent announcement with Lumin, which is, I think, good evidence of that, but we're seeing broad engagements across a more focused set of applications from Blue Planet, including things like network assurance.
On the routing and switching, really, I think that's more a function of the overall service provider challenges. And I think we are continuing to make good progress on routing and switching. We're seeing new logos. But I think it really it's held back right now by the overall service provider challenges, particularly internationally. North America, I think, as we've talked about, I think, is gradually improving.
We're seeing clear evidence of that, including routing and switching. The challenge is more internationally and particularly in Europe.
Tim Long, Analyst, Barclays: Okay. Thank you, guys.
Jim Moylan, CFO, Ciena: Thanks, Evanston. Thank you.
Chris, Conference Moderator: And the next question is from George Notter with Jefferies. Please proceed.
Greg Lance, Vice President of Investor Relations, Ciena0: Hi, guys. Thanks very much. I guess I wanted to ask about sort of the trend in your direct web scale revenue. You've had a couple quarters in a row now that are a bit smaller relative to what was a couple quarters of really, really strong web scale sales. So, yet the narrative around AI, the narrative from you guys I think just sounds better and better and better.
I'm kind of wondering what's causing that sort of step down versus the run rates you're at a couple of quarters ago. Is that inventory digestion? Maybe it's a function of not seeing the whole picture and I've got to look more at your muffin deals and sort of adjust for that. But how do you sort of explain that trajectory relative to the narrative?
Jim Moylan, CFO, Ciena: Yes, George. I think that the all of our business is going to be project driven, including that with the webscalers. And there are going to be ebbs and flows in their activity. So an increase or a decrease in any one given quarter does not necessarily make a trend. Clearly, as you've seen though, our webscale business over time has grown from virtually nothing to directly between 25% 30%.
And as we said, MOPEN is MOPEN plus submarine is another 15%, maybe 10% to 15%. So we're getting up to 40% to 50%. But I will say this, one of the things we are saying is that with the demands on network that the web scalars are putting, they can't do all the work themselves. Even they can't do it on themselves. That's why they're turning to open.
And open has increased pretty significantly over the past year or 2. And so that is something that adds to the picture and shows you that we're getting good growth with the web scaler.
Greg Lance, Vice President of Investor Relations, Ciena0: Got it. Great. And then just as a follow-up, you guys made a comment in the monologue about interconnect opportunities, I think inside data centers and collaborating with several content providers. Could you talk a bit more about what the application is there and what exactly you guys are doing?
Scott McFeely, Executive Advisor, Ciena: First of all, George, when we talk about our interconnect business, there's really 3 parts to it. There's us selling our coherent modem technology as plugs to outside of our system business. There's us selling our virtual OLT plugs outside of our system business. And then there's the third one that you talked about, which is the opportunity of taking that technology and reapplying it inside the data center. That third one is a longer term opportunity.
The first two are obviously shifting for revenue today. On that third one, the dynamic that we see is as the data rates between at a high level between GPUs increase as the distances that they have to communicate increase because of the constraints of power. And as the cloud providers start to look at things like optical switching as a way to provide interconnect at a lower cost and lower power footprint, all those things push you to need higher performing optics to connect. And the physics will dictate that at some point in time, today's existing technology is just not going to cut it. And you're going to have to bring to bear the techniques that the LAN has seen and coherent for the last couple of decades.
It's the analogy of when the LAN went from 10 gig to something greater than 10 gig. We firmly believe that's going to happen. The question is when and what technology slice. So think of it at a really high level of taking those components, whether they be digital assist with ESPs or whether that be some of the capabilities that we have on analog digital and the electro optics and applying it to just interconnect inside the data center, interconnecting GPUs.
Greg Lance, Vice President of Investor Relations, Ciena0: Okay. Thank you very much.
Greg Lance, Vice President of Investor Relations, Ciena: Thanks, Yuri.
Chris, Conference Moderator: Our next question comes from Tal Liani with Bank of America (NYSE:BAC). Please proceed. Hello, you there?
Greg Lance, Vice President of Investor Relations, Ciena1: Yes, I was on mute. Here we go. Thanks guys. Jim, we're going to miss you. I want to ask you two questions.
Number 1 is cloud. So cloud was strong over the last if you take a multiple year view, cloud was strong. And you did not participate in this debate of InfiniBand versus Ethernet. You were kind of external to that debate. So the question is, when you look at the cloud opportunity going forward and take a 3 year view, 5 year view, is the opportunity for you first, is the deployment going to get stronger?
Meaning, do you think the growth is going to be higher than what we've seen the last 3 to 5 years in general? And second is the opportunity for you getting bigger, meaning do you are you going to be in parts of the network that you were not there before, So you could see better growth in the next few years. So, I have another question, but maybe we can start with the cloud because I think that it will it does define your stock and valuation and I want to better understand kind of your participation there. Thanks.
Jim Moylan, CFO, Ciena: Given the pace at which the cloud providers are building data centers And given that there are increasing number of webscale players that are in the data center business and building out between those data centers, it seems very likely that the web scalers are going to grow as a percentage of our business over the next several years. So yes, I think that's probably true. Now are we going to participate in places that we don't participate? Yes, I believe we will. We as we've said earlier, we don't really participate in the short reach metro business.
That's just not the place where we have won a lot of business. I think we will play in that space with our plugs. As we said, we have an 800 ZR win and I think we'll have more of those and it will be short reach and long reach, but short reach in particular. I also think there's a possibility inside the data center. Now that's farther out and we still have a lot of work to do to make sure that we can provide the technology that's going to be needed inside the data center.
We don't know when the transition will occur. But we do believe that we'll have a good opportunity to play there. So yes, we're going to be in broader parts of the webscaler network, including having a big part in the ultra long haul and submarine parts of their networks as we do now.
Greg Lance, Vice President of Investor Relations, Ciena1: Got it. Okay. 2nd question is about the broadband and I'm going to ask it in a sarcastic way, but I'm not a mean person. Why are you even in this business? This is a commodity like that's what we've learned the last few years, right?
Commodity like, it's about pricing. There are companies that have been doing it for a while. Why suddenly you increase participation in this fiber to the X and why is this attractive for you?
Scott McFeely, Executive Advisor, Ciena: Yes. I think a couple of things. First of all, you're right in the sense that if there was sort of just a continuum of yesterday's world, that's a very valid question to ask. But our hypothesis is that we're staring at a different world in the future, which is fiber will continue to have continue to be more prevalent in the network. Capacities are going to increase.
And the technologies that you require to do that continue to play to our strength of the coherent optics. And that's playing itself out in the broadband access space. If you think about where the standards are going with 100 gig PON, it's a coherent technology. So the technologies are swimming to our sweet spot. We own the technology.
We're vertically integrated. We will have a great cost base there on the OLT side. And we're bringing in a very, very innovative architecture to our customers to service that future looking demand. It's also the same customer base that we have. So same customer base swimming towards the technology that we have to strengthen.
We own the technology and we're ready to integrate on. Those are the reasons why and it's a big spend opportunity out there in the marketplace. So those are the reasons why we're targeting it. We're clearly a challenger, but we like the hand that we have.
Jim Moylan, CFO, Ciena: And do you think you can earn good margins on this business?
Scott McFeely, Executive Advisor, Ciena: Yes. Our margins today, as I said, we've got 65 customers today. The margins on that today is in line with our corporate average margins.
Greg Lance, Vice President of Investor Relations, Ciena1: Got it. Perfect. Thank you.
Chris, Conference Moderator: Thank you, Tom. And the next question comes from David Vogt with UBS. Please proceed.
Greg Lance, Vice President of Investor Relations, Ciena2: Great, guys. Thanks for taking the time and Jim, congratulations. Maybe just a big picture question to start. I don't want to get into specifics on fiscal 2025, but against the long term model of 6% to 8% growth in Gary's comments, that's clear that webscale is going to
Jim Moylan, CFO, Ciena: be a bigger part of
Greg Lance, Vice President of Investor Relations, Ciena2: the business. Can you help us understand maybe before webscale had taken off to the point that it did recently, How we should think about SP spending either in aggregate or by region given the law that we've lived through for a number of years? And in the context of that and Jim to your point about the backlog and systems being a bigger part of coming out of into revenue now, how should we think about that gross margin impact going forward if we look at maybe history as a comparison? I know COVID was probably an unfair comparison when you shipped a lot of transceivers out of backlog and that health gross margin. But just any kind of framework or guardrails you can kind of put around the different moving pieces over the longer term, not necessarily 2025 would be helpful.
Thanks.
Gary Smith, President and CEO, Ciena: David, let me take the first part of that question, the overall sort of service provider dynamics. I would say that they've certainly been challenging all the way through COVID, supply chain and then this absorption, which I think has lasted longer than any of us would have certainly anticipated. But seeing through the smog of all of that, if you will, service providers continue to be the primary delivery for all of this bandwidth, including all of the things like AI and cloud connectivity around the world, and particularly when you talk about the last mile or so and on the mobile side. So service providers are certainly not going away. It's been very challenging around the dynamics that we all know from that.
I think they are coming into balance, particularly we're seeing that in North America, where we expect it to be a continued gradual improvement. We're encouraged by what we're seeing. And certain international markets as well, places like India, places like South Asia for us look good. Europe, I think, has some particular challenges around the structure of it, which will take time resolve. But it's also got the tailwind there of Huawei replacement as well.
So I do think you're going to get back to a more normalized growth with the service providers going forward, I do, which builds into our underlying 6% to 8%, David, as you mentioned.
Jim Moylan, CFO, Ciena: And just on the shape of our gross margins, there the shape of our gross margins don't vary significantly across our customer base. Now when we're a challenger going into a new market, sometimes we'll put a pretty competitive price or available order to get in. But over time, whether we're selling to a service provider or to a web scaler, our gross margins by product are going to be in the same range. Now we have said that line systems in particular have lower gross margins than our modem to our capacity. And that's just a function of first cost in to our customers and that's true whether it's a service provider or a web scaler.
And then you look at optical margins versus routing and switching margins. We believe over time routing and switching margins are going to be accretive to our gross margins. Software (ETR:SOWGn) will be accretive to our gross margins and services is accretive to our gross margin. So that's the shape. It doesn't really vary across our customer base all that much.
It has to do with mix and timing of the project.
Greg Lance, Vice President of Investor Relations, Ciena2: Can I ask just a follow-up, Jim, mechanical question? I don't think I heard you say where you think inventory is going to end up at the end of the year.
Scott McFeely, Executive Advisor, Ciena: Do you
Greg Lance, Vice President of Investor Relations, Ciena2: have a sense that you could share with us?
Jim Moylan, CFO, Ciena: Yes. End of the quarter at $937,000,000 I think it will come down another $50,000,000 or so by the end of the year, I guess.
Greg Lance, Vice President of Investor Relations, Ciena2: Great, perfect. All right, perfect. Thanks, guys.
Jim Moylan, CFO, Ciena: Appreciate it.
Chris, Conference Moderator: The next question is from Reuben Roy with Stifel. Please proceed.
Greg Lance, Vice President of Investor Relations, Ciena3: Thank you. I guess, Jim, just to follow-up on that. So as you get through the inventory exiting fiscal 2024, how would you assess inventory levels at that point, pretty close to normal? Or is there more work to do there?
Jim Moylan, CFO, Ciena: You're talking about $25,000,000 now?
Simon Leopold, Analyst, Raymond James: Yes, dollars 25,000,000
Jim Moylan, CFO, Ciena: Yes, dollars 25,000,000 Yes. As obvious from the only $50,000,000 or so decrease in Q4, it's still elevated. We're still working through inventory and the big orders that we put on our supply chain over the past year and a half. We have we're a couple of 2 times turns or something like that. In the past, we were at much as 6 times turns.
But I don't think we'll get back to 6 times turns. Given what's happening in our supply chain, we will likely keep more surplus components or key components in order to make sure that we can get through difficulties in the purchase of some of these components. I think we'll get back down to something like 4.5 times, maybe 5 times, but maybe not 5x by the end of next year. Maybe it's going to be more between 4x and 4.5x by the end of next year.
Greg Lance, Vice President of Investor Relations, Ciena3: Thanks for that, Jim, and congrats on your future plans. I had a quick follow-up for Gary or Scott. Just around the 400 GR Short East TCI commentary, I was wondering it seems to me like that's maybe a little bit more of a competitive set of products relative to where you've been in systems historically. And just wondering, given the momentum there for your products, if you could maybe just give us a few details around why you're winning? I assume you mentioned power is important, etcetera.
But anything else we could just think of around kind of why you're winning and what your visibility is, I guess, for continued momentum in that seemingly important area of the market? Thank you.
Scott McFeely, Executive Advisor, Ciena: Yes. So just a reminder, our 400 gig ZR plug is based off of our WaveLogic 5 nanotechnology. If you go back a few years, we had 2 alternative WaveLogic 5.1s Extreme 1 was nano. We consciously made the decision to introduce Extreme 1st and Nano second in the marketplace and turned out to be the right decision based on our market share gains over the years. But it did mean that we did not intercept the first couple of early movers in the marketplace on the 400 gig pluggables.
Now the original definition of 400 gig ZR was sort of the least common denominator from a performance perspective. What's happened in the marketplace, of course, with AI coming on gangbusters as people are realizing that power is forcing data centers to be distributed further and therefore performance starts to be important again. So performance from a reach perspective and performance from a power perspective in that form factor is now what wins in the conversations. And I'd say after the first couple of awards in this sort of industry segment, we've had a tremendous win rate in terms of any of the competitive bids out there for this technology. I think we're going to continue to have that going forward because of that performance advantage.
Gary Smith, President and CEO, Ciena: Then I think there is a misconception there about plugs generally. Not all plugs are equal.
Greg Lance, Vice President of Investor Relations, Ciena3: Right. Got it. Thank you.
Greg Lance, Vice President of Investor Relations, Ciena: Thanks, Ruben. Thank you, everyone, for joining us today. We appreciate it. We look forward to catching up with folks later today and over the coming weeks. Thank you.
Chris, Conference Moderator: The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
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