Ciena Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 31, 2023

There are 13 speakers on the call.

Operator

Morning, everyone, and welcome to Ciena's Fiscal Third Quarter 2023 Financial Results Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask Please also note, today's event is being recorded. And at this time, I'd like to turn the floor over to Greg Lance, Vice President of Investor Relations, please go ahead.

Speaker 1

Thank you, Jamie. Good morning, and welcome to Ciena's 2023 fiscal 3rd quarter results On the call today is Gary Smith, President and CEO and Jim Moylan, CFO. Scott McFeely, our Senior Vice President of Global Products and Services 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 presentation that reflects this discussion as well as certain highlighted items from the quarter. Our comments today speak to our recent performance, our view on current market dynamics and drivers of our business as well as a discussion of our financial outlook.

Speaker 1

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 and our long term financial outlook and discussion of market opportunities and strategy are based on current expectations, forecasts 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 our outlook, Whether mentioned on this call or included in the investor presentation that we will post shortly after are an important part of such forward looking statements and we encourage you to consider them.

Speaker 1

Our forward looking statements should also be viewed in the context of the risk factors detailed in our most recent 10 ks filing and in our upcoming 10 Q filing, which will be filed with the SEC by September 7. Sienna 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 offer as much Q and A as possible today, Also for those in the investment community who will be attending ECOC, Jim, Willen and I will be meeting with investors on October 2nd 3rd. Please reach out to us if you're interested. With that, I'll turn the call over to Gary.

Speaker 2

Thanks, Greg, and good morning, everyone. Today, we reported strong fiscal 3rd quarter results, including quarterly revenue of 1,070,000,000 an increase of 23% year over year. Our results included solid profitability metrics With quarterly adjusted operating margin of 12% and adjusted EPS of $0.59 We are delivering a very strong year With 22% revenue growth year to date as we continue to capture market share. And in fact, we are confident as we look forward, Particularly given the secular demand for bandwidth continues to increase. In fact, bandwidth growth has remained consistent for years, Even through the recent period of supply chain constraints and the underlying drivers of that Strong growth are very durable over the long term.

Speaker 2

These include mobility, 5 gs, Cloud, automation and more recently artificial intelligence applications as they move out towards the network. These market dynamics in turn drive direct demand for our industry leading technology and services, which we measure through 3 indicators. Number 1 is customer pipeline and forecasts. Number 2 is orders and number 3 backlog and ultimately shipments, which collectively reflect demand in our business, Not just a single element of these. So I thought it might be helpful for me to provide some insights into what we're seeing across each These indicators of demand.

Speaker 2

Starting firstly with pipeline. We are very encouraged by the level of overall customer As they work to ensure their network readiness for machine learning and AI traffic coming out of the data center and into the WAN. With respect to orders, the flow of new orders in recent quarters has been directly impacted by several factors. Specifically, customers ordering decisions in the prior supply constrained environment resulted in both large order backlog and then higher than typical customer inventory levels. In addition, the recent rapid compression of our lead times Therefore, this order flow in isolation has not really been a good reflection of underlying demand.

Speaker 2

Now, however, we are starting to see an uptick in new orders led by cloud providers. Overall, orders were slightly up in Q3 and we expect higher orders in Q4. Importantly, we believe that this recent uptick in orders from cloud customers is a leading indicator Of a rebalancing of supply and demand, which we believe will begin to flow through to our service provider customers in the coming quarters. And finally, backlog. We have had and continue to have an outsized backlog Resulting from the previous period of supply constraints and the resulting elongation of lead times.

Speaker 2

I would remind everyone that our backlog is still larger in both absolute and relative terms than any of our competitors, which is testament to our increasing competitive advantage. And as we turn this backlog into revenue, It is translating into significant market share gains, which so far this year have been in approximately the mid single digits. We now expect that we will exit FY2023 with backlog that is approximately $2,700,000,000 Even with our strong revenue year. And I think this is very encouraging on several levels. Fundamental demand drivers for our business are strong and improving, customer activity is increasing And supply versus demand is gradually coming into alignment.

Speaker 2

Against this backdrop, Ciena has never been better positioned To deliver faster than market growth through trusted customer relationships and increasing technology leadership, New platform introductions and considerable market expansions over time. Before turning it over to Jim, I'll run through some quick highlights from the quarter. Optical revenue was 27% up year over year. As expected, much of the growth in the quarter was in our optical line systems. Specifically, Q3 was a record quarter in revenue and shipments For our 6,500 reconfigurable line systems, RLS, driven by cloud and content provider network expansions.

Speaker 2

RLS is in fact the only next gen line system in the industry that is shipping at scale and serves as a strong indicator of future revenue growth and margin expansion opportunity. We added 18 new customers in Q3 for WaveLogic 5 Extreme, Bringing our total customer count to 246. And we also received our first order for WaveLogic 6 in the quarter, well before it is even generally available. Routing and switching revenue was also up 27% year over year With the addition of more than 30 new customers for the portfolio in the quarter, a clear example of our technology leadership and the growing pipeline. The increase in Q3 was primarily driven by sales of our access and aggregation platforms.

Speaker 2

We also continue to advance our TAM expansion efforts in this general technology area and particularly around coherent routing, Broadband access and PON opportunities. We also secured our first customer for the Wave router platform this quarter. Notably, our platform software and services revenue was up 24% year over year. This reflects strong growth in software maintenance services, Primarily related to our domain controller MCP. And as we know MCP is the industry's leading multilayerdomaincontroller Now with nearly 800 customers worldwide and more than a quarter of those customers leverage the advanced apps on the platform.

Speaker 2

In fact, in Q3, we added 18 customers for these advanced apps. Shifting to customers. We had 1 10% quarter customer in the quarter, which was a cloud provider. Overall, direct cloud provider revenue increased 39% year to date, well above our overall revenue growth in the same period. Panning out a little further, Total non telco revenue was 46% year over year in the quarter to $487,000,000 a record high.

Speaker 2

Further, Subsea revenue was up 21% year over year in the quarter to 76,000,000 Revenue from service provider customers was up 9% year over year, which included 1 Tier 1 customer that came in just under the 10% threshold In Q3. And we continue to win with this important segment. By way of example, We have recently secured a multi year strategic expansion of our relationship with a major U. S. Tier 1 service provider for our full portfolio, Including routing and switching as they continue to enhance their network, another example of growing customer activity and pipeline.

Speaker 2

And finally, with respect to geographic regions, Asia Pacific was again a solid contributor at nearly 16% of total revenue in Q3, 3, up more than 30% year over year. And in that region, India remains very strong With year to year revenue in FY2023 of just over $200,000,000 compared to just under $170,000,000 for all of last fiscal year, And we expect this growth to continue. EMEA also continued to perform well. Importantly, as our pipeline grows, we secured Several new design wins across the region in Q3, which we expect to begin taking revenue on in FY 2024. So in summary, we believe we are executing well and are confident as we look forward.

Speaker 2

We are benefiting from strong secular demand And growing our pipeline with increased customer activity. We are increasing our competitive advantage, bringing new platforms to market and And we are converting backlog to revenue and gaining market share. With that, I will turn it over to Jim to speak more about all of these elements and provide additional detail on the Q3 financial results. Jim?

Speaker 3

Thanks, Gary. Good morning, everyone. We delivered outstanding fiscal third quarter financial results. Total revenue in Q3 was $1,070,000,000 at the high end of our expectations, up 23% over Q3 of 2022. Adjusted gross margin in the quarter was 42.7%, reflecting the product mix shift towards line systems that we expected.

Speaker 3

And Q3 adjusted operating expense was $328,000,000 With respect to profitability measures, In Q3, we delivered adjusted operating margin of 12%, adjusted net income of $89,100,000 and adjusted EPS of $0.59 In addition, we generated $9,000,000 in cash from operations and adjusted EBITDA of $151,300,000 Finally, We ended the Q3 with approximately $1,300,000,000 in cash and investments. Inventory levels in Q3 went up $94,000,000 from last quarter as a result of changes in the mix of products delivered to customers from that which we expected. We also saw an increase in deferred cost of sales on product delivered to customers, but not yet taken to revenue. We expect total inventory to be down in Q4 and at the end of this fiscal year we expect it to be roughly equal to that of Q4 of 2022. We repurchased approximately 1,400,000 shares for $61,000,000 during the fiscal Q3.

Speaker 3

Since the end of Q3, we have repurchased an additional $40,000,000 in shares, bringing our year to date total to approximately $100,000,000 in value. We continue to Turning now to guidance. As a reminder, the outlook I'm about to provide reflects all the key assumptions that we detail in our earnings presentation. Our expectations for Q4 are consistent with the fiscal full year guidance that we provided on the last earnings call. Specifically, for the fiscal Q4, we expect to deliver revenue in a range of 1.06 and adjusted operating expense of approximately $335,000,000 With respect to fiscal year 2024, As is our normal practice, we will provide a detailed view of our expectations for next year when we report our Q4 results in December.

Speaker 3

But it's important to remember the context we provided when we laid out our 3 year targets last December. Specifically, we said that revenue compound annual growth rate over the 3 year period from fiscal year 2022 to fiscal year 2025 would be 10% to 12% and would not be linear, particularly given our expectations for outsized revenue growth in fiscal 2023, which we will deliver. We are still comfortable with those projections for that 3 year period. Specifically, we expect fiscal 2024 to be a growth year. We also expect to grow faster than the market and to take market share.

Speaker 3

Before we close out the call, I want to highlight our recent announcement of science based environmental targets, which support and strengthen our sustainability commitments to stakeholders. Our science based targets Commit us to reduce our direct and indirect greenhouse gas emissions. They also align our decarbonization efforts with the Paris Climate Agreement to limit global warming to 1.5 degrees Celsius above pre industrial levels. Importantly, The achievement of our goals will help drive down the environmental impact both of Ciena and of our customers' networks across the globe. I encourage you to review this recent announcement.

Speaker 3

In closing, I will say that demand for bandwidth is strong and growing And that demand is reflected in our pipeline and in the recent trends in orders. We expect a strong close to the year in Q4 And continued growth in revenue going forward, both in absolute terms and in market share. Jamie, we will now take questions from the sell side analysts.

Speaker 4

Thank you. We will now begin the question and answer session. Our first question today will come from David Vog of UBS. Please go ahead.

Speaker 5

Great. Thanks, guys. Can you maybe Talk about what you're seeing directly from webscale. What's sort of driving sort of this inflection that you're speaking of from an orders perspective? Is it just underinvestment and optimization that's sort of transpiring to the last 4 to 6 quarters or is it maybe AI related or a combination of maybe that digestion in AI?

Speaker 5

Just would love to More color on what you're seeing there in terms of the order inflection and then why you think maybe SP orders follow closely thereafter from an inflection point perspective? Thanks.

Speaker 2

Yes, David, I would say generally the sort of chronology of the last few quarters as we've gone through this Supply demand alignment issues. It's the web scale that we're the first to kind of reschedule and pull back in terms of deployment for their absorption, they were the first to do that. I think what's encouraging now is they're working their way through that, probably still got a little more to go, but beginning to see new applications and new drivers and the specific things that we're seeing for Q4, which are new orders to be shipped in Q4 In addition to their existing backlog that we've got was driven by really the need to stop preparing for machine learning and AI traffic Coming out of the data center, it's the first time we've seen that sort of tagged specifically In the cloud players. So that's super encouraging. And generally speaking, I think the sort of general flow of traffic and activity We'll reflect the fact that the cloud providers were the first to go into this challenge.

Speaker 2

They're the first to come out of it, which makes sense. And typically the service providers will flow through that. I mean not least of which from the Traffic growth in cloud generally spilled through to the service providers a couple of quarters later, just generally. So I think our perspective is that this is very encouraging and is really the first leading indicator that We're getting alignment now around orders lead times and end user ultimate demand.

Speaker 5

Great. Thanks, Harry.

Speaker 2

Thank you, David.

Speaker 4

Our next question today will come from Tim Long of Barclays. Please go ahead.

Speaker 6

Thank you. I was hoping kind of a 2 parter on the service provider telco piece. First, Gary, you mentioned the U. S. Tier 1 kind of renewal, which included some switching and routing.

Speaker 6

You just talk a little bit to that as far as kind of scope of that extension or new agreement? Any new use cases, particularly On the switch and routing side, any changes there? And then secondly, maybe just following on as you were talking about the cycle For the web scalers, where do you think we are in that for the service providing and the telco service providers? When do you think they'll get To the phase with it looks like the webscale players are at currently? Thank you.

Speaker 2

Yes. Tim, let me take the last one first and Then I'll address the issue about the Tier 1 service providers. Best view of it and we're pretty close With a lot of the large, and we're really when we talk about Tier 1, let me qualify a little bit more service providers. We're really talking about North America. This dynamic Of further ordering out ahead given supply chain, we did not really see that dynamic internationally with the service So I would really target my reply here to the Tier 1 North American players.

Speaker 2

I think we're very close with them and understanding around what their absorption challenges are around deployment of people, equipment, etcetera. I would suspect Really, Tim, that we've got another couple of quarters of that. So sort of mid-twenty 24 something like that with the Tier 1 Service Providers, we're beginning to see some encouraging signs with them as well. But I do think it'll be a couple more quarters Before we see them catch up and get into alignment with the reduced lead times that are now End market for us. Scott, do you want to take that?

Speaker 7

Yes. And then, Tim, on the scope of the relationship agreement with that Tier 1 service provider, Way to think of it basically is an extension of relationship that we have with them for their fiber based infrastructure across their core and their metro. And it includes transitioning that infrastructure to all of our next generation technologies and an extension obviously in time as well. So it's a very Whole cloth relationship with them, not so much new use cases, but the next generation technology evolution.

Speaker 8

Okay. Thank you.

Speaker 9

Our

Speaker 4

next question today will come from George Notter of Jefferies.

Speaker 6

Hi, guys. Thanks very much. I was definitely interested in the commentary about the content provider Thanks. And the order improvement. Can you talk about the magnitude of the order improvement?

Speaker 6

You said that orders were soft, quite soft, it sounds like the last few quarters and they've improved, I presume sequentially here. Is it is it significant sequential improvement? Maybe you can give us a book to bill ratio. Just give Some kind of sense for the scale of the order improvements. And then also I'm just curious about where backlog levels wound up at the end of the quarter And then also where you are on product lead times?

Speaker 6

Thanks.

Speaker 3

Hello, George. It's Jim. I'll take that. First of all, backlog at the end of Q3 Q3 was $3,100,000,000 very much in line with our expectations. We believe now that backlog at the end of the year will be more like 2.7 plus or minus as opposed to the slightly lower backlog that we had called last quarter.

Speaker 3

And that really expresses the Higher orders that we expect to get in Q4. We do believe that orders in Q4 will be below our revenue. As Gary said, that phenomenon is going to continue a few quarters, but with those numbers, I think you can sort of back into the range of what the increase in orders is from Q3 to Q4.

Speaker 6

Got it. That's great. And then product lead times, just curious about where those are now?

Speaker 7

Yes, George. On product lead times, as you'll remember, we said we entered the year enter our fiscal year approximately 52 weekly times. Last quarter, we said we had cut that in half, and we'd expect them to continue to improve. As we sit here today, the average is probably in the high teens across the portfolio. There's standard deviations on that, but Shows continuous improvement there and we would expect those to continue to reel in quarter over quarter.

Speaker 6

Okay. Thanks very much guys. Appreciate it.

Speaker 1

You're welcome, George.

Speaker 4

Our next question today is from Simon Leopold of Raymond James. Please go ahead.

Speaker 9

Great. Thanks for taking the question. I wanted to sort of get a little bit more granularity on how you see the hyperscale is trending in that. It sounds like you had some strength this quarter and you've got long term optimism. I'm just wondering whether or not there's Any kind of pause or transition over the next couple of quarters before the ramp or whether it's a more linear expectation?

Speaker 9

And just a quick clarification on the 10% customer, is that a customer that has been over 10% in a full year in the past, if you could let us know? Thanks.

Speaker 2

The answer to your last question is yes, George. I would say overall on the hyperscale, let's just remind everybody, I mean, we're close to 40% revenue growth with these guys this year. So despite the sort of public issues around year of efficiency and all the rest of it, they're still clearly prioritizing the network Because that's the lifeblood for them. Regardless of what the applications happen in their data centers, it lives when it gets into the network Into the cloud. So we've not seen really any back off in terms of their Commitment to build out the networks for that very reason.

Speaker 2

And I think If you look at the dynamics around machine learning and AI, etcetera, and who knows how that will play out and the timing of it and the modeling of the network piece. But you have to believe that that traffic will be incremental to what we've already seen over some point in time here. So we're not seeing any let up from the cloud players. We've got a lot of backlog that Jim talked about. A fair portion of that is cloud providers that they want as we go through next year.

Speaker 2

So we expect to have a strong year with them next year. Now, Because of the rule of large numbers, it's not going to be 40% growth at that rate, but we still expect a very strong year from the cloud providers.

Speaker 9

Great. And then just quick follow-up, remaining performance obligations, where are they now and how did they trend in the quarter versus the prior?

Speaker 3

They are slightly down, but still strong.

Speaker 9

Great. Thank you. $2,100,000,000 from $2,400,000,000

Speaker 5

Great. Appreciate that.

Speaker 1

Thanks, Ash.

Speaker 4

Our next question today will come from Michael Genovese of Rosenblatt Securities. Please go ahead.

Speaker 9

Thanks very much. Congratulations on the improving outlook here or actually consistent outlook, I should say. But In terms of the 3 year CAGR, if we talk about 2024 versus 2025, is are you thinking about those years being Fairly even with each other or is there a reason for instance 2024 would be lower coming off the strength of 2023? Thank you.

Speaker 3

All I'd say today is that we said the average over the next 3 years is going to be 10% to 12%. And you can back into what the average rate of growth is in 2024 and 2025 to get to that 10% to 12% based on whatever you think we're going to do for this year. Speculating on how it trends between those two years is not something we're going to do right now, Mike.

Speaker 9

Okay. Well, I take that to be a good thing, meaning that there's confidence in 'twenty four. That's it for me. Thanks, guys.

Speaker 2

Thanks, Mike. Thanks, Mike.

Speaker 4

And our next question today will come from Samik Chatterjee of JPMorgan. Please go ahead.

Speaker 10

Hi, thanks for taking my I have a couple, but maybe if I can start with the growth outlook or just the comments that you made that next year will be a growth year and to get into specifics, but how much of that confidence should I interpret as coming from the recent uptick that you're seeing in cloud orders? Or Is there a conference given sort of the activity you're seeing outside the Tier 1 telcos as well that telco as well as the vertical grows Next to your any thoughts around that please? And I have a quick follow-up.

Speaker 3

The way Gary described demand, I think, captures our confidence, because we said that it's a combination of Our confidence because we said that it's a combination of pipeline, which is customer activity and customer activity is very strong. We're in conversations with a lot of customers around the world for what they want to do next year and we're in the middle of a lot of Equivalent to RFP. So first of all, activity is strong. Secondly, we did start to see a trend upward in orders And they were from the webscale players. And thirdly, we expect a lot of that backlog, which still remains high To convert to revenue next year.

Speaker 3

So it's really all three elements of demand that we feel very good about, Smik.

Speaker 10

Okay. Got you. Great. And Jim, I guess the Follow-up was for you in terms of you're sticking to your 10% to 12% 3 year outlook, which sort of means that Generally, the other parts of that plan should hold. When we think about inventory that you want to carry through that plan, how does that Compared to what you were sort of carrying pre pandemic, which is more like $300,000,000 or so.

Speaker 10

And right now, you're tracking by the end of this year about $900,000,000 plus. So how are you About like is that plan still intact to get back to a pre pandemic level? How do you want to plan around inventory exiting that window?

Speaker 3

Yes. Without commenting on what our revenue is going to be next year, we do expect a good year and we do expect our inventory levels

Speaker 9

to come

Speaker 3

down very significantly next year. That's our expectation as we sit here today. I won't give you an exact number. I will say that given what the supply chain has gone through and the changes In the supply chain that we will likely carry a bit more inventory as compared to revenue Than we have in the past. You'll recall that we used to for many quarters we ran at about 6 turns.

Speaker 3

I don't believe given our need for buffer stocks Going forward that we will run at 6 times. The question is, where we end up below that and it's probably going to be between 4 times and 5 times. I don't know exactly where in that range. But that means that that inventory will come down next year, we believe.

Speaker 10

Got it. Thank you.

Speaker 4

Our next question today will come from Alex Henderson of Needham. Please go ahead.

Speaker 11

Great. Thank you very much. So clearly, the optical line systems was a key driver of Shipments in the period and those carry significantly lower margins. They often generate Future orders of transceivers 2, 3 quarters, 4 quarters out. So can you talk about how you think the mix The shipments will change over time as you've been shipping out the optical line systems here and whether that Implies some improvement in the margins in the forward periods as the mix shifts to transceivers Going forward, should we expect a couple of 100 basis points of margin expansion at some point over the next year?

Speaker 2

I would say this, Alex. I mean, I think the dynamic that you highlight is exactly the right one. I mean, it's Very encouraging that we're putting all the track out there basically. And RLS, the adoption of RLS has been terrific. And we're now in a position where we can ship it in large scale.

Speaker 2

So I think That's very encouraging because that will translate into modems over time. And I would expect, Again, we're not in a position to sort of guide for next year, but I would expect generally improving margins because of this dynamic. And also you haven't got the associated costs of the supply chain is beginning to ameliorate. So I think the combination of those two things, a better mix Overall from a margin point of view, as we take advantage of all the track that we're laying, plus a little bit more of a normalization of Costs from a supply chain point of view should point to higher gross margins going forward.

Speaker 3

So just And I'll note

Speaker 9

that we did So just And

Speaker 3

you'll note that we did

Speaker 11

The impact of the supply chain On 'twenty three gross margins?

Speaker 3

We said a couple of 100 basis points this year, 200 or 300 and it'll get better next year.

Speaker 11

And then last question, OpEx, I assume this is a managerial decision. So can you give us some sense of what your Psychology is relative to spending on OpEx as we progress through the end of the year and into next year, just conceptually.

Speaker 9

Thanks.

Speaker 3

As we've said over many quarters, Alex, we intend to invest through this cycle. We have the leading position in optical technology and we will continue to invest there, but we are a challenger in the routing and switching space and it's important that we increase Our investment in that space, that's where our increase in R and D has come in routing and switching. And we expect to continue to have a very active R and D program in both optical and R and D in routing and switching going forward.

Speaker 11

Appreciate the answer. Thank you.

Speaker 1

Thanks, Alex.

Speaker 4

Our next question today will come from Meta Marshall of Morgan Stanley. Please go ahead.

Speaker 8

Great, thanks. Maybe just on kind of your commentary about believing service providers will improve kind of in the coming quarters. I guess is that Just trying to get how informed that is by just having a greater sense of what their inventory levels are versus kind of what new projects Actually taking place. And just I guess the impetus of that question is, can you guys grow Into next year just by virtue of them working through inventory this year? And then the second question is On the clouds and kind of that improving cloud commentary, is that pretty uniform across the clouds?

Speaker 8

Or are there still kind of some puts and takes Between various cloud vendors? Thanks.

Speaker 2

Meta, let me take the first part of that. In terms of the service providers, and again, I want to qualify this, We're talking North American Tier 1 service providers here when I answer this through the lens of this question. It's a confluence of elements. It's visibility into their activity and pipeline and projects. And obviously, we're very close to these folks.

Speaker 2

We have strategic relationships with all of them. We now have a good handle on their inventory and what their absorption Rates are on the various elements of manpower and things that have got to be deployed to do that. So we have pretty good visibility to that. And obviously, we still have large backlog with them as well. So it's all of those elements.

Speaker 2

I think it'll be another couple of quarters Before that sort of gets broadly into alignment. But I think that they're continuing To see strong demand there from a capacity point of view, I would stress that. This is really about the rate of absorption In its broadest sense. So I think we have a pretty good view to those folks. And obviously, We can continue to grow even do that period.

Speaker 2

I mean, we've just demonstrated as we're coming through the height of that period as it will, we're putting up 22 percent revenue growth. And even with the carriers, the service providers globally just at 9% of that. So you can see the balance of our business around subsea, high growth areas such as India and the cloud players gives us a much more balanced Business that we can withstand those kinds of shorter term challenges. I would say the cloud providers, To your question about how widespread, I think we're seeing that with 2 to 3 of the large players. So we have evidence, it's not just one.

Speaker 2

Now they're all very different in terms of their dynamics, I would say that. We talk about them homogeneously, but their networks are very different, their business models are very different. But we are Encouragingly seeing it across a number of them, Meta.

Speaker 8

Great. Thanks.

Speaker 4

Our next question today will come from Craig Mazdanias of Westpark Capital. Please go ahead.

Speaker 12

Yes. Thank you for taking my question. You mentioned that orders are clearly picking up at this point and The DSO number for the quarter was pretty on the high side at 96%. I was wondering if you can give us some View on the linearity of the quarter and how you see linearity progressing in the next quarter and beyond? Thanks.

Speaker 3

It's just fact that our quarters tend to be back end loaded. That's just the way the business works. And as a result, we end up with big shipments in the last month of the quarter and DSOs reflect that. We don't collect Those shipments in that same sort of in that month. So that's why our DSOs are high.

Speaker 3

They're actually down slightly From the previous quarter. And it's the linearity of the quarter, frankly, which drives that number more than anything else.

Speaker 12

Got it. And just as a quick follow-up, as you draw down your backlog and continue to do so, Can you

Speaker 9

give us

Speaker 12

any indication or metrics or data points regarding any cancellations? I'm assuming there haven't been many, but if you could just give us Some indication for that. Thanks.

Speaker 3

Early on, as the supply chain started to improve, The companies that had put big advance orders on us looked at the new lead times And they looked at the amount of orders that they had put on us. And at first, as Gary said, starting with the cloud players, they started to push Some amounts of orders out that was followed by the service providers who pushed them out. They held on to the orders, but they pushed the delivery dates. We did also have a small number of cancellations from a very few customers was not material To our backlog, our backlog is has high integrity. They just have sort of changed the way they view the delivery dates.

Speaker 2

But I would add that, Greg, we have not seen that dynamic for that is ameliorated that dynamic over the last few Quarters, both in terms of the cancel any small cancellation, absolutely, we have not that's been de minimis, absolutely. What we have seen is the even the rate of change of pushing stuff out has slowed considerably. So we have pretty good Visibility into what they want and when.

Speaker 12

Great. Thank you for that color.

Speaker 2

Thanks, Craig. Thanks, Craig.

Speaker 4

Our next question will come from Dave Kang of B. Riley FBR. Please go ahead.

Speaker 5

Thank you. Good morning. My question is on India. What inning are we in? And is it mainly geo?

Speaker 5

What about your position with the other 2 major service providers there?

Speaker 2

I think to use a cricket sparkling cricket analogy, I would say that we're if you're into test cricket, we're just on the 1st day Of the 5 day sparkling cricket match. So it's got a long way to go. I mean, you basically Growing Internet market in the world, you're talking about where they're consuming it from a mobile perspective, most of the Internet. And there's still a very, very long way to go with that. And I would also say, Dave, that it's broadly based Now I think the structure from an industry point of view was settled down.

Speaker 2

You've got 3 major players and we're seeing growth across all 3 major telcos. Plus all of the cloud activity there both directly and indirectly. You're also I think it's the fastest growing From a subsea system point of view landing in India as well, which we obviously got number one market share in there. And then you're also seeing our position, we've been there for a long time. So things like the government Ministry of Defense Networks based on Ciena.

Speaker 2

So we're seeing very strong activity orders and shipments across the whole of that spectrum. I think it's very broad based. And I think we're in a multiyear growth opportunity with these folks.

Speaker 5

Okay. Got it. Thank you.

Speaker 1

Thanks, Dave.

Speaker 4

And our next question will come from Tim Savageaux of Northland Capital Markets. Please go ahead.

Speaker 9

Hi, good morning. It looks like your backlog came down much less Significantly than last quarter. So what I'm seeing is a pretty significant uptick in orders in Q3 in the order of 30% sequential. Make sure I'm reading that right. And to the extent that's from cloud, I guess what I really want to ask is what was your book to bill in cloud in the quarter?

Speaker 9

And given how concentrated you are there, almost one customer, almost 50%, how concentrated was that? And if you could comment on applications at all, whether we're talking about data center interconnects, more long haul type stuff or subsea, What might be driving that? I'll count that all as my follow-up, but thanks.

Speaker 2

Thanks, Deb. Let me take the first of the multi questions. I would say, I would describe it as a slight order uptick. I wouldn't describe it as large. Our backlog did go up and obviously our orders came in.

Speaker 2

I think the point is, we really think it's bottomed out on the orders and is heading In the right direction now from an alignment point of view. And I think that will gather more momentum in Q4 as well. In terms of the uptick, it Was cloud based, but also the service providers were reasonably solid as well, which gives us some comfort that we think that over the next Couple of quarters will begin to come out. I would also say from a cloud point of view that it's broadly based amongst the cloud players. It's not just one, which also gives us some encouragement Across the various applications that we're seeing.

Speaker 2

Scott, in terms of particular applications you'd

Speaker 7

Yes, Tim. I mean, our position across That customer set really falls into 3 applications. Their metro campus data center interconnect, Where they can own their own infrastructure, we participate strongly in their backbone. And then obviously on the submarine segment where they have Private installs as well on cables. We are seeing growth across all three of those and that's what sort of sums up to the 39% Year to date growth in the broader segment.

Speaker 7

In addition to that, there are quite a few parts around the world where they have chosen not to or are not able to own their own infrastructure. So they have a Significant indirect pull on the service provider revenue, particularly outside of North America.

Speaker 9

Thanks very much. Thanks, Jack. Appreciate it.

Speaker 4

At this time, we will conclude the question and answer session. I'd like to turn the conference back over to Greg Lamb, Vice President of Investor Relations for any closing remarks.

Speaker 1

Thank you. Thanks everyone for joining us today. We appreciate it. We look forward to speaking with you during the day and seeing you at various events over the next several weeks. Also again, as a reminder, Jim and I will be at ECOC.

Speaker 1

If you're interested in meeting with us while we're there, please reach out and we'll be happy to do so. Thank you.

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Key Takeaways

  • Strong Q3 results: Revenue of $1.07 billion (up 23% YoY), adjusted operating margin of 12% and EPS of $0.59.
  • Robust demand and backlog: Secular bandwidth drivers (mobility, 5G, cloud, AI) underpin a $3.1 billion backlog, expected to exit FY 2023 near $2.7 billion, fueling mid-single-digit market share gains.
  • Optical momentum: Optical revenue rose 27% YoY on record reconfigurable line system shipments, 18 new WaveLogic 5 Extreme customers and the first WaveLogic 6 order pre-general availability.
  • Routing & switching growth: Revenue up 27% YoY with over 30 new customers, continued TAM expansion into coherent routing, broadband access and PON, and first Wave router customer secured.
  • Non-telco acceleration: Direct cloud provider revenue up 39% YTD, total non-telco revenue +46% to a record $487 million; Asia Pacific grew over 30% YoY, led by India.
AI Generated. May Contain Errors.
Earnings Conference Call
Ciena Q3 2023
00:00 / 00:00