Ciena Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
December 12, 2024

There are 14 speakers on the call.

Operator

Good day, and welcome to the Seattle Fiscal 4th Quarter and Year End 2024 Financial Results Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Greg Lamp, Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you. Good morning and welcome to Ciena's 2024 fiscal 4th quarter and year end results 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 presentation that reflects this discussion as well as certain highlighted items from the fiscal quarter year.

Speaker 1

Our comments today speak to our recent performance, our view on current market dynamics and drivers of our business as well as 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 and our long term targets, commentary on market dynamics and the discussion of our 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.

Speaker 1

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. Our forward looking statements should also be viewed in the context of the risk factors detailed in our most recent 10 Q filing and in our upcoming 10 ks filing, which we expect to file with the SEC by December 24. Sienna assumes no obligation to update the information discussed in this conference call, whether as a result

Speaker 2

of new

Speaker 1

information, future events or otherwise. As always, we'll allow for as much Q and A as possible today. The last that you limit yourselves to one question and one follow-up. Before we get started, I wanted to remind everyone our webinar entitled Expanding Leadership in Optical: Sienna's Strategy for Growth in AI and Data Center Markets. This can be found on the Events and Presentation page of the Investors section of our website.

Speaker 1

Both the webinar and recorded Q and A have been very well received and should be helpful resources as you consider Ciena's positioning and opportunities. With that, I'll turn it over to Gary.

Speaker 3

Good morning, everyone. Today, we reported strong fiscal 4th quarter results, including revenue of $1,120,000,000 Notably, orders in the quarter were once again above revenue, representing the 2nd quarter in a row of book to bill above 1. And recall that we had expected orders to be below revenue when we spoke with you in September. We had several significant achievements in the quarter. 1st and foremost, WaveLogic 6 Extreme became generally available, locking in our position as the only provider of 1.6 terabit capable coherent modems in the market today, further extending our technology leadership.

Speaker 3

We also took revenue for WaveLogic 6E in Q4, having shipped to multiple customers, many of which have announced their trials and deployments, including Verizon, EU Networks and One New Zealand. Notably, Q4 was our largest quarter ever for shipments of line systems, led by our next generation intelligent line system, RLS, primarily to large cloud providers. We also in the quarter continued to gain strong momentum with pluggables. At the end of Q4, total shipments to date of WaveLogic 5 Nano were more than 43,000. And also in Q4, we announced our WaveLogic 6 Nano 1.6 Terabit Coherent Light Pluggable, which is designed to optimize performance and efficiency of data center and campus networks as they scale to support traffic from growth in cloud, machine learning and AI.

Speaker 3

Moving back to our Q4 financials, we reported adjusted gross margin of 41.6 percent, which was lower than expected due to a larger than typical provision for excess and obsolescence in our inventory. Jim will provide additional detail on this momentarily.

Speaker 4

The full fiscal year, we delivered revenues of $4,000,000,000

Speaker 3

Also in both the Q4 fiscal year, we had 2 10% customers, a Tier 1 North American service provider and a major cloud provider. I think this is further evidence that purchasing patterns of North American service providers continue to improve, with supply and demand coming into balance as they work through inventory buildup from prior periods. During Q4, service provider orders in North America actually outpaced revenue for the first time in nearly 2 years. Also in addition to our 10% cloud customers in Q4, 4 of our top 10 customers for the year were indeed cloud providers. Let me now touch on the broader market landscape and really what's driving our business today and going forward.

Speaker 3

As always, bandwidth demand remains the most consistent driver for our business and growing at about 30% per year over the last couple of decades consistently. With cloud and AI now the lead drivers of demand, we believe bandwidth growth will rise above those historical levels over the coming years. And to be clear, AI is not just a data center phenomenon. To monetize the massive AI super cycle of compute investments, traffic is already flowing out of the data center and impacting all parts of the network today. And we are beginning to see evidence of this in our business today in several ways across service providers and cloud providers.

Speaker 3

Our strategy is to take full advantage of the growth of cloud and AI traffic across multiple network segments and is threefold. First of all, we continue to extend our leadership and grow market share in our core business, inclusive of subsea, long haul, metro, DCI and increasingly Mofin opportunities. Today, cloud providers are making significant investments in large scale infrastructure projects to support AI growth and deliver the necessary scaling and densification of fiber infrastructure across the network. For this, they require a next generation of intelligent line systems like our RLS photonic platform and wavelength solutions such as Waveserver really to address the need for scalability, resilience and automation. And in fact, we support every major cloud provider with our RLS platform, which we co designed with our cloud provider customers and is now their line system of choice.

Speaker 3

On service providers, we have won every major next generation optical infrastructure RFP recently issued by North American service providers, proving that our coherent optics and optical systems are increasingly the de facto choice in these advanced network architectures as well. This is in part in the service provider world driven by the increase in 2 significant opportunities for them, Mofen and multi cloud networks. As a reminder, with Mofen, service providers are building dedicated private optical networks for cloud providers, enabling them to quickly extend their reach and better service customer demand. For multi cloud networks, service providers are building out the robust networks that connect to and between cloud providers, enterprises and other service providers. Secondly, we aim to grow our addressable market into adjacencies where our foundational optical technologies provide a significant competitive advantage.

Speaker 3

And let me start with data center applications, which is a significant growth opportunity for Ciena with respect to AI within the metro data center campus as well as over time inside the data center itself for our interconnects portfolio. As a general industry term, interconnects are really the infrastructure technologies that provide the critical connectivity between and within data centers and include both pluggables and component technologies. This is an area where we are once again collaborating directly with cloud providers, just as we did very successfully with RLS, help them address their data center traffic flows. A large near term opportunity for our interconnects portfolio exists around the data center or in the metro data center campus for coherent technology. By this, we mean opportunities beyond our traditional DCI capabilities that extend into campus and short reach applications, typically in the 2 to 20 kilometer range.

Speaker 4

Our

Speaker 3

pluggables, including our recently announced 1.6 terabit coherent light, are a strong technology fit for these applications. In the coming years, we will also expect to see coherent optics begin playing a role inside the data center, where we can address this need with our interconnects portfolio in the form of plugs and components as legacy IMDD technology begins to reach certain limitations. And we are obviously recognized as having the world's leading coherent technology and we are therefore incredibly well positioned to drive its adoption and capture these future opportunities as they materialize. We also anticipate growing opportunities in metro routing and broadband access, again, leveraging our optical expertise and foundation. In the Metro IP and Optical Convergence, this will become essential for some service providers to achieve greater scale and cost efficiencies.

Speaker 3

And our coherent routing solution is ideally suited to address these needs. In broadband access, as public funding and deployments begin to materialize in the next few years, PON technologies like our industry first pluggable OLT will be key to offering customers more deployment flexibility and scale. And the last dimension of our strategy is really around operational transformation. As service providers continue to evolve in the cloud and AI era, they are accelerating their digital transformation strategies in order to automate and optimize their network and service lifecycle operations. We see evidence of this opportunity for us with the recent performance of our Blue Planet intelligent automation portfolio.

Speaker 3

Blue Planet had its strongest ever financial performance in FY 2024, including several key wins for which initial deployments helped drive a strong increase in revenue in the second half. We are confident this momentum will continue. Before handing over to Jim, I'd summarize by saying that we are incredibly confident in our future, both in terms of our technology leadership position and the industry dynamics that are playing to our strengths. Specifically, we have been investing to address long term opportunities, particularly those associated with the growth of cloud and AI. And these investments are proving to be fully aligned with market dynamics and our customers' priorities, both now and into the future.

Speaker 3

As a result, we expect to deliver accelerated revenue growth and improved operating leverage over the next few years. With that, I'll hand it over to Jim for a more detailed readout of our financial performance in Q4 and FY 2024 as well as our outlook for next year and an update on our 3 year targets. Jim?

Speaker 5

Thanks, Gary. Good morning, everyone. Before I get into the financials, I want to emphasize what Gary just said. First, we are seeing very positive market dynamics including powerful trends in cloud and AI. 2nd, our commitment to investment in innovation has given us industry technology leadership in key product areas.

Speaker 5

Finally, our TAM is expanding as we attack new market opportunities. All of this gives us a very high level of confidence in our future. And we believe that our performance in the fiscal Q4 is an indication of that momentum. Specifically, we reported Q4 revenue of $1,120,000,000 and our book to bill was above 1. In fact, book to bill was above 1 for the entire second half of fiscal twenty twenty four and our backlog grew by approximately $150,000,000 for this period.

Speaker 5

This resulted in an ending backlog of $2,100,000,000 at the end of the year. And we are off to a very strong start in orders for Q1. Adjusted gross margin in Q4 was 41.6 percent. This reflects a $39,000,000 charge for excess and obsolescence or E and O as we call it to our inventory. This is higher than typical for quarter E and M and this incremental amount accounted for an approximately 200 basis points reduction in our Q4 adjusted gross margin.

Speaker 5

This charge is the result of a combination of factors. 1st, forecast product mix changes now reflect a greater proportion of cloud related business. Secondly, our supply chain transformation initiative, which we've talked about over the past few quarters, including new systems and processes, has given us better visibility into our inventory positions across the supply chain. And finally, we've had during this period of supply chain disturbance, we've enjoyed extended lead times and that has had an effect on our ability to match demand with supply. Q4 adjusted operating expense was $355,000,000 With respect to profitability measures in Q4, we delivered adjusted operating margin of 10%, adjusted net income of $79,000,000 and adjusted EPS of $0.54 In addition, we generated $349,000,000 in cash from operations in the quarter.

Speaker 5

Free cash flow was $266,000,000 and quarterly adjusted EBITDA was $137,000,000 During Q4, we repurchased approximately 2,100,000 shares for $132,000,000 This completed $1,000,000,000 share repurchase program, which was authorized by our Board in 2021. As you saw in October, our Board has authorized another $1,000,000,000 share repurchase program, which we plan to execute over the next 3 fiscal years. With respect to the full fiscal year performance, annual revenue was $4,000,000,000 adjusted gross margin was 43.6 percent and adjusted OpEx totaled $1,360,000,000 On profitability for the fiscal year, adjusted operating margin was 9.7 percent, adjusted net income was $266,000,000 and adjusted EPS was $1.82 In addition, free cash flow in fiscal year 2024 was $378,000,000 and adjusted EBITDA was $481,000,000 for the year. Strength of our balance sheet remains a significant differentiator as we ended the year with approximately $1,330,000,000 in cash and investments. Inventory was $820,000,000 at the end of the year, down nearly $120,000,000 for the quarter and approximately in line with what we expected at the start of the year.

Speaker 5

Now turning to guidance. With respect to the long term, we have previously described our long term average annual revenue growth target of 6% to 8% as being our best view of the future. For all the reasons we've discussed on this call, we are very confident in our business going forward and therefore are providing a new set of long term targets for the 3 year period encompassing fiscal 2025 through fiscal 2027. We are seeing plans for strong CapEx investments by our cloud provider customers as they continue to invest in networks to support AI training and increasingly inferencing. And we expect service provider order patterns to continue to improve.

Speaker 5

Their inventory is basically at normal levels and we believe their orders and actual consumption are coming into balance. Accordingly, we now expect average annual revenue growth of approximately 8% to 11% over the next 3 years. We will also drive operating leverage through the combination of higher gross margin and moderation of the rate of our OpEx growth. We are targeting adjusted operating margin of 15% to 16% for fiscal year 2027. And we expect to generate meaningful annual free cash flow over the next 3 years of approximately 55% to 60% of adjusted operating income.

Speaker 5

Moving to fiscal year 2025. We expect revenue growth in fiscal year 2025 to also be in the range of 8% to 11%. We expect gross margin for the full year to be in a range of 42% to 44% with quarterly gross margins starting in the low 40s and approaching the mid-forty percent range as we exit the year. This reflects our expectation for product mix to be more heavily weighted toward line systems earlier in the year and more balanced as we exit the year. We expect adjusted operating expense in fiscal 2025 to average $350,000,000 to $360,000,000 per quarter.

Speaker 5

We expect quarterly adjusted OpEx to start slightly lower in the first half and increase throughout the year to reach that average for the year. Finally, in the year, we plan to repurchase approximately $330,000,000 in shares under our recently authorized plan. Finally, with respect to Q1, we expect to deliver revenue in a range of $1,010,000,000 to $1,090,000,000 adjusted gross margin in the low 40s range and adjusted operating expense of approximately $350,000,000 In conclusion, as we look ahead, we believe the increasing influence of cloud and AI will continue driving bandwidth growth across the network,

Speaker 6

and we

Speaker 5

are ideally positioned to support that demand. We continue to invest in leveraging our optical leadership to grow our core business while expanding our market opportunity. A combination of positive market trends and technology leadership gives us strong confidence in our ability to deliver accelerated revenue growth and improved operating leverage in the coming years.

Speaker 2

With that, I'll turn

Speaker 5

the call over to Q and A with questions from our analysts. Operator?

Operator

We will now begin the question and answer session. The first question today comes from Amit Daryani with Evercore. Please go ahead.

Speaker 2

Good morning, everyone. Thanks for taking my question. I guess maybe just to start with the fiscal 2025 guide for 8% to 11% growth, extremely impressive we're studying what folks are looking for. Maybe you folks could just help us understand how do you see the cloud markets versus North America versus international kind of stacking up? Could you just dig into a little bit on what's embedded in this 8% to 11% assumption across the segments?

Speaker 2

That would be helpful.

Speaker 3

Hi, Amit. Let me start with that. I would say that my first sort of comment to it, we're seeing as we said a little bit in the prepared comments, we're seeing the service provider, 1st of all, market come into balance in terms of supply and demand. And that's manifesting as orders. We saw that in Q3.

Speaker 3

We saw it in Q4 and we're seeing it in Q1 now. So I think the stability of that market will steadily improve and we've got good visibility to that. Coming on top of that, which is driving the growth, outsized growth for both this year and beyond, it's really the cloud traffic, cloud and AI layering on top of that service provider base. So I would say the service provider strength absolutely in North America. We're seeing steady improvements in Europe and international markets, places like India.

Speaker 3

And then it's the cloud and AI growth on top of that. We're beginning to see dedicated capacity from machine to machine and we're beginning to see the build outs beyond that as well to deal with things like inference and longer distance training. So that's really what's driving the perspective over the next 1 to 3 years.

Speaker 2

Got it. That's really helpful. And then if I just kind of focus on this gross margin, the obsolescence risk impact that you folks had in the quarter, just say the assets out loud. Is there any risk there's a little bit more of that to happen in Q1 as well? Are you thinking that issue is well behind you at this point?

Speaker 2

And then as I think about the gross margin improvement in fiscal 2025, starting where you do in Q1 to beyond, how much of that improvement is mix normalizing versus revenue leverage kind of kicking in? If there's a way to parse that out, that would be helpful. Thank you.

Speaker 5

Yes. Amit, first I'd say that we typically have these E and O charges. It's just a function of the lead times that we have to buy our components under and the forecast we're getting from customers and sometimes all of that changes. So we typically had $10,000,000 or $12,000,000 a quarter. I think this quarter was certainly influenced by several things that we don't think are repeatable.

Speaker 5

We haven't a new forecast. We don't do the long term 3 year forecast every quarter. We've done a complete transformation of our supply chain and that's we now have extremely good visibility into where all this is. So we don't expect this to recur. We think that our charges are going to go back down to the sort of normal level that I described.

Speaker 5

With respect to the second question, it's all about mix. And there are many dimensions of mix, but the most important dimension of mix is the line system as opposed to the capacity adds in our revenue for a quarter. As we've said, our reconfigurable line system is really becoming an industry standard across both cloud providers and service providers. And so we are selling a lot of it now. That speaks to the future very positively because you have to populate these line systems over time.

Speaker 5

And when they do get populated that will be at higher gross margin. So the trend in our gross margins should be up during this year and even next year and the following years.

Speaker 2

Perfect. Thank you and congrats on a nice set of numbers here.

Speaker 6

Thanks, Amit.

Operator

The next question comes from Simon Leopold with Raymond James. Please go ahead.

Speaker 7

Thanks for taking the question. I first wanted to see if you could maybe unpack a little bit of the trending between your direct cloud sales and then the Managed Optical Fiber Network trend, Mofin. What I'm wondering here is what drives an operator to choose one option over the other and how do you see if at all a divergence between those two buying patterns? Thank you.

Speaker 5

First of all, I mean, let me start by saying that the cloud providers much prefer to go direct to us and build out their own networks. But there are places where they can't, including some countries where they're restricted by regulation to do so. But we've seen in the past, I guess, year or so, 6 months that this trend of Mofin and other forms of asking service providers to build their capacity has increased a bit. And it's because they're simply doing the service the cloud providers are simply doing so much that they can't do it all and help. So they're going to service providers to do movements even in the U.

Speaker 5

S. For example. Yes, that's

Speaker 6

absolutely right. And we see it, Simon, in we see it obviously in our results, but we also see it in a number of bid activities out there around the Mofin network. The fact of it is they're trying to go so fast. Then the cloud providers that they have to push on every tool in their toolbox, build direct where they can, Mofin where they can augment. And in some countries, obviously, that's their only choice is the Mofin network base.

Speaker 2

Thanks. And then just as

Speaker 7

a follow-up, I appreciate you've told us a little bit about the 10% customers for the fiscal year in the quarter. What's your thinking on customer concentration in the forecast for fiscal 2025? What are you assuming? Do you expect a similar top 2 or do you expect basically more diversification in the next fiscal year? Any color you can offer on how that's trending?

Speaker 7

Thank you.

Speaker 5

Yes. We have I guess we have 4 customers, 2 service providers and 2 cloud providers that in any given quarter can be a 10% customer and they move around a little bit. But I personally don't think the combination of the makeup of our 10% customers is going to change a lot. It's going to be 1 or 2 a quarter maybe 3. We've had 3 in the past, but I don't think it's going to change.

Speaker 5

But the actual customer that it is will change.

Speaker 7

Thank you.

Operator

The next question comes from George Notter with Jefferies. Please go ahead.

Speaker 8

Hi guys. Thanks very much. I was thinking about your guidance for gross margins 42% to 44%, I think for fiscal 2025. But when I adjust for E and O, looking at fiscal 2024, I get you guys at about 44.5% gross margin. I hear what you're saying in terms of the mix shift of new systems versus line cards.

Speaker 8

But I think what you're telling us is this is going to be the heaviest mix towards new systems that you guys have ever been at in terms of a company. Is that the right interpretation here or is there just conservatism in the guide? Or what can we learn on that front? Thanks.

Speaker 5

It is absolutely going to be the heaviest concentration of line systems next year, particularly in the 1st two quarters that we have seen. It is becoming an industry standard, George. The cloud providers and the service providers want this line system. It offers the best combination of capability, the scalability and being able to handle the massive volumes that are needed as the network demand continues.

Speaker 8

Got it. Okay. And then the other one I had was just on headcount. If I've got my math correct, I think you guys took headcount down a pretty good chunk sequentially. First time we've seen headcount come down by this magnitude in a very long time.

Speaker 8

Am I looking at that correctly? And if so, what's driving that? Thanks a lot guys.

Speaker 5

Remember about mid year, when we took our revenue call down, we also took our OpEx down. So we did that by a combination of terminations and

Speaker 9

dropping

Speaker 5

our plans for adding headcount. And so our headcount did take a drop as we move through the year. We don't expect next year's headcount is going to grow significantly. However, OpEx will be up mainly because we're not paying out 100% under our incentive compensation plans this year and we expect to pay out 100% next year. And also there's a merit increase in there.

Speaker 5

So those are the two big reasons why our OpEx is up from the from 24% to 25%.

Speaker 2

Great. Super.

Speaker 8

Thanks very much. Congrats on the results.

Speaker 5

Thanks, George.

Operator

The next question comes from Meta Marshall with Morgan Stanley. Please go ahead.

Speaker 9

Great. Thanks. Just as you were thinking about the 3 year, I guess, I just wanted to get a sense of how are you judging customers' ability to kind of install all of this equipment

Speaker 10

kind

Speaker 9

of as quickly as kind of they're purchasing it? Maybe particularly on the part of the telcos where we've seen kind of some limits before kind of in their ability to install. Maybe that's the first question. And then the second question is, as we look at kind of the OpEx step up, I know you guys have made some meaningful investments kind of in routing over the past couple of years. Just how are you judging some of those investments maybe versus some of the more nearer term kind of opportunities you're seeing with the cloud?

Speaker 9

Thanks.

Speaker 3

Hey, Meta, that's a very good question around because it does talk to the ability of both service providers and cloud players to absorb, I. E. Deploy all of this equipment. And I think we've got much closer over the last 2 to 3 years given all of the supply chain imbalances and the rest of it to exactly how are they consuming it and deploying. We've also ramped our services capability in that time too.

Speaker 3

And from a service provider point of view, we are doing more of those deployments than ever. We are very close to the major Tier 1 service providers and we're a critical part of their deployment services. So A, we have good visibility. And number 2, we're helping them ramp. We're also doing that with the cloud providers.

Speaker 3

And that may not be something that's well known and understood. Obviously, you're talking about installations around the globe, very complicated submarine cables and different countries around the world with service provider combinations as well, so quite complicated. We are project managing some of those for them and we're actually deploying and helping with the planning on many of the cloud providers as well. So, A, again, we have good visibility and B, we're helping accelerate those network deployments. And particularly, as Jim talked about, we're seeing an uptick in the whole line or automated line deployments that we've never seen before to this scale.

Speaker 3

And the first half of the year, particularly, which will weigh on margins in the first half, but it's a good news story and that we're laying track for the future with it. So I think we have good visibility, Meta, and we're confident in the capability of them to deploy. 2nd part of the question, in terms of operating expenses, as you know, during the course of the last few years of both COVID supply chain whiplash, we've continued to invest in this kind of architecture and the technology that we're rolling out now. So I think as I think about the next few years outside of as Jim said, expenses in terms of cost of living expenses, it's really about operating leverage now. We've made the investments.

Speaker 3

We've got the technology coming to market at the right time. Now it's about over the next 1 to 3 years driving operating leverage, which gets us back to that 15% to 16% operating margin.

Speaker 5

And the great news is that as a result of these investments, we have the best optical technology, the best line system and the best operating system. So we've successfully invested and our growth rate for the next 3 years reflects that.

Speaker 9

Great. Thanks so much.

Operator

The next question comes from David Voigt with UBS. Please go ahead.

Speaker 4

Great. Thanks guys for taking my questions. 2 if I may. Maybe Gary, I missed it earlier, but wanted to ask about the longer term opportunities, specifically within sort reach coherent, which you talked about, whether it's in campus or inside the data center. Can you kind of help better help us better understand sort of the timing and the magnitude of this opportunity?

Speaker 4

And if I would assume some of that revenue opportunity is embedded in the rolling 3 year guide? And I'll give you my second comment as well or question. I heard Jim mentioned operating leverage in the out years. And to go back to George's question, should we expect gross margin expansion higher in fiscal 2026 and fiscal 2027 as well to support that 15% to 60% operating margin in the out year that you laid out earlier? Thank you.

Speaker 5

Yes. Let me take the second part first. And the answer is yes. We do expect that our margins will improve to something approaching historical numbers that will get us to 15% to 16%. That along with operating leverage will get us to the 15% to 16% operating margin that we predicted.

Speaker 5

Scott? Yes.

Speaker 6

And then David, if you think about our opportunities outside of our system business, it starts with our coherent plugs. Those are seeing significant ramp in the back part of this year and we expect it to grow in 2025 and that really speaks to sort of the metro DCI opportunities that we really didn't have exposure to historically. So that's new incremental business for us. Stepping closer in and around the data center from there, we've been saying for some time now, we do believe that coherent technologies will have a play there in the future as data rates go up and the reach requirements expand a little bit. We think the next opportunity is in the campus.

Speaker 6

So think about that as the 2 to 20 kilometers type range and our WaveLogic 6 technology, our WaveLogic 6 Nano has that coherent light or LR capability as the industry talks about in it that DSP is sampling today. We would expect to be in customers' networks late in 2025 with that and start to see the revenue flow into our P and L in 2026. So that piece of it is included in our long term targets. Beyond that, we do see that trend continuing to be inside the data center as the data rates increase. That is a little bit from a time line perspective, a little bit beyond our 3 year guide.

Speaker 4

Thanks, Scott. Thanks, Jim. Helpful.

Operator

The next question comes from Atif Malik with Citi. Please go ahead.

Speaker 11

Hi, it's Adrienne Colby for Atif. Thank you for the question. I was hoping to go back to margins. I was wondering if you could comment about strategic opportunities for supply chain or portfolio optimization, if there's an opportunity for incremental benefits. Over the summer, one of Ciena's partners commented on an expanding relationship.

Speaker 11

So interested if there's a potential benefit to margins there?

Speaker 6

Yes. I mean, I think we're constantly looking at our supply chain to see how we optimize it. I think the reality of the last few years has been one where we are in a constrained environment from a supply chain perspective. That has actually gotten in the way of us getting at our typical cost reduction activities. The fact that we are carrying a bit of elevated inventory as well has been a headwind in that dimension.

Speaker 6

We do expect as we go through 2025 and further into our 3 year plan that we'll get back on to our typical year over year cost reduction activities. And that will absolutely help in the margin expansion that Jim talked about as we scale by

Speaker 11

the way. Thank you. And as a quick follow-up, can you comment on exposure to tariffs with the incoming administration? I know that you use a lot of 3rd party contract manufacturers, but even if you can just talk about it qualitatively, that would be helpful.

Speaker 5

Yes. What I'd say is that this is entirely speculative because we don't have a new administration yet and we don't know exactly what they're going to do. We have not factored into our numbers any effect from tariffs. We do have exposure to tariffs from Mexico on Mexico, I should say. And if that were to happen, we'll have to work hard to mitigate the effects.

Speaker 11

Thank you.

Operator

The next question comes from Ruben Roy with Stifel. Please go ahead.

Speaker 12

Yes, thank you. I just had one question, I guess a quick follow-up for either Gary or Scott. Just following along to some of your previous questions around the data center or cloud service provider contribution to revenue. Gary had mentioned in and around Coherent and Coherent Light Optics, the plugs and components. And I think the component part of it is more of a recent potential roadmap extension.

Speaker 12

So just wondering if you could comment a little bit on how you're thinking about components. I think, Gary, you mentioned, as you think about getting into the data center, that could be an opportunity. Wondering if you're thinking about DSPs in kind of more standard DCI ZR type coherent DSPs as an opportunity over the near to immediate term? Thank you.

Speaker 6

Yes. I think 2 parts to it. 1 is sort of the spaces where we play today. Obviously, some of the industry likes to have an insurance policy, I'll call it, where they can procure finished goods systems from us. Some would prefer to disaggregate that and buy it in another way.

Speaker 6

We've been very clear with that set of customers that we are willing to transact as they see fit. The reality of it is today, all of them have actually preferred to buy finished goods from us. Now that finished goods can come in the form of systems or as we've seen in the second half of the year, plugs sold independently from our systems as well. So they are today taking advantage of our optical technology in both of those forms, plugs or in systems. As we go further towards the data center, and ultimately, as I said, get inside the data center, it's more and more of a buying pattern for those consumers to want to consume as components.

Speaker 6

And we're capable and willing to do that. But as we sit here today, it's not part of our revenue.

Speaker 12

Got it. Thanks, Scott. I guess just for a quick follow-up on that. In terms of we've been hearing more about DCI and contribution to revenue. Can you just give us a quick comment on competitive environment?

Speaker 12

Are you seeing kind of competitive modules becoming, I guess, more prevalent in the bake offs or is that not the case?

Speaker 6

I think on the let me separate it out from the parts of the network where we see data center interconnect in longer reaches. So outside of the sort of the metro kind of campus area, I don't think the competitive dynamics have changed there at all. We continue to have outside share there largely because of our relationships around the world and our technology leadership. And that is consumed in our line systems that is consumed in products like our wave server and that continues to show increased market share period over period. The place that's we're relatively new to in terms of gaining market share is in the Metro DCI area.

Speaker 6

So think of it less than 100 kilometers. We typically haven't been a player there or not a large player there. With our WaveLogic 5 plugs that we introduced into the market a couple of seasons ago, we've become an increasing player there where we shipped, as we said in the script, over 43,000 plugs into that application, and it's growing rapidly. We had a very strong Q4 there. And from a 2025 perspective, we expect to continue to take share in that application.

Speaker 6

And we will be introducing, of course, the first 800 gig plug into that market. And we've been fortunate enough to win the early competitive bids that are out there for that technology. And we'll be taking revenue in that generation in 2025 as well.

Speaker 12

Very helpful. Thank you.

Operator

The next question comes from Samik Chatterjee with JPMorgan. Please go ahead.

Speaker 10

Hi. Thanks for taking my questions and congrats on the results and the guide. I guess if I can start off with the fiscal 2025 guide and just sort of ballparking here in terms of 10% revenue growth, which implies orders and revenue should be around the sort of $1,100,000,000 level every quarter that you did in 4Q. Maybe if you can sort of talk about the interplay between how you're thinking about interplay between orders and backlog here through the year? Because, are you assuming that you continue to sort of build backlog through the year and typically your orders do sort of pick up towards the back half of the year?

Speaker 10

So if that happens, do you have more upside for the year? And then I have a follow-up.

Speaker 5

Thank you. We feel really good about order intake for the year, first of all. And it started off very strong for the 1st 6, 7 weeks of this quarter. Now it's hard to predict what's going to happen to our backlog. If you go back historically, before all of the extended lead times and the supply chain disruption, our lead time I mean, our backlog at any point in time was roughly 1.5 quarters.

Speaker 5

That's just a rough way of describing it and there was a lot of stuff in there including long term service contracts etcetera. During the supply chain situation, it went up to 4 quarters of revenue. And it's come back down to something like a little over 1.5 times, maybe 1.6 quarters of revenue. We're just not sure what's going to happen to backlog. It's going to depend upon what our lead times are, how customers behave and all of that.

Speaker 5

And so I think it's going to become less important, frankly, for you to look at our backlog and more important for you to consider what's happening with our order flow in our revenue. So what I'd say is we don't know the answer to your question, Sameek, but we do expect really good orders for this year.

Speaker 3

Sameet, the other thing that I would add to that and you're seeing it manifest to some extent in our guide for Q1 is we typically have seasonality in Q1. I think it talks to the new dynamic where we're increasingly more indexed towards the cloud players than the service providers who are quite generally seasonal around our Q1. And I think we're seeing strong order flows in Q1. You've seen the revenue guide for Q1 as well. Now whether that continues into the next 3 years, but I do expect less seasonality in the business generally speaking because of our increasing exposure to cloud and AI traffic growth.

Speaker 5

Just one other related comment on this. It's not directly related, but it's certainly part of the mix. We did have a pretty significant reduction in inventory this past year. We think inventory will go down again this year, but by a smaller number, maybe $50,000,000 to $100,000,000 We are on a track to getting to inventory turns of 4 to 4.5 times. That's not going to happen by the end of this year, potentially by the end of 'twenty six, we'll be at that point.

Speaker 10

And for my follow-up, if I can just ask you on Slide 10, I was looking at some of the TAM addressable market assumptions that you have. And I was curious on 2 things. 1, I mean, as much as you're seeing accelerated bandwidth growth and you have a lot more revenue coming from the market expansion opportunities that you're pursuing, Why isn't sort of the estimate for core business addressable market going higher? It still is indicated to be 2% as it was before. Why aren't we seeing more of an uplift in the core business addressable market?

Speaker 10

And then it seems like your addressable market expansion in keywords came down by about a few percentage points because of a reduction of about $2,000,000,000 So maybe if you can just parse out the impact there as well? Thank you.

Speaker 5

What I would say is that I think it is possible that our base business grows faster than that. It depends upon how much artificial intelligence flows extend through the service provider networks. And we don't know the answer to that. And I should say the cloud provider networks as well. But those numbers we take from industry analysts, we don't develop them ourselves.

Speaker 5

And it's very much in keeping with what they've said in the past. It's a base business is a sort of a low to mid single digit growth business. Could be higher in the future, but that's what you're saying and we are okay with that. We can do very well in that context.

Speaker 3

Sameek, another way of sort of getting your head around that is that it's typically in our traditional business been about 2% to 3% growth and yet we've grown at 6% to 8%. And I think we continue to take share and we're confident we can continue to take share into that business. I think the point I would make is that, I think the other areas both within cloud build out and the Mofin piece are not really encapsulated in those numbers, frankly, from an outside analyst point of view, because we're seeing way more overlay activity across both service providers and cloud infrastructure build outs as well. And I don't think that's really reflected in those external perspectives yet.

Speaker 5

One other comment I'd make is, remember, these are industry analyst numbers and they're not our numbers per se. But with the slide in bead subsidies to the right, we still think they're coming. They've been allocated by the government and they're going to come, but they seem to continue to slide, which is not

Speaker 2

unexpected given the fact that there's a lot of work from

Speaker 5

the time the government meaningfully over the next 2 or 3 years.

Speaker 10

Thank you. Thanks for taking my question.

Operator

The next question comes from Tal Liani with Bank of America. Please go ahead.

Speaker 12

Hi, guys. I wanted just

Speaker 13

to ask about the margins. The orders you're talking about with cloud, is the proportion of pluggables higher than historical? I'm just my question is, if the contribution of pluggables is going to go up over the next few years, what needs to happen to offset the margin pressure? Is it true that they carry lower margin? And what needs to happen to offset the margin pressure from pluggables?

Speaker 13

And that's my first question. My second question is, I'm trying to understand what drives I fully understand the cloud. Cloud deployments, I know everyone knows what drives deployments of your solutions. I'm more struggling on the carrier side, on the telco side. They're under such pressure of spending and they talk about much lower spending cycle in the next few years.

Speaker 13

What drives their deployments? Thanks.

Speaker 5

Yes. I'll address the plugs question. I would say that our plug margins today are a bit below our average margins. But we're not at full ramp on those and we're selling WaveLogic 5 Nano plugs. When we get to WaveLogic 6 Nano plugs and as we ramp our volumes and by the way, we do believe that our pluggables volumes are going to increase pretty meaningfully next year, perhaps double.

Speaker 5

And but as we get up to ramp and as we get into WaveLogic 6 nano, the 800 gig ZR, then we will get better margins on those.

Speaker 6

The other thing, Tal, is taking a broader perspective on those cloud providers and the bandwidth demand that they're putting on us. It's coming at us in the form of our photonic line systems and wavelengths in the various different forms depending on where that bandwidth is in the network. So we see it in longer reaches in our wave server product portfolio and we see it in the plugs. By far, the biggest weight, if you like, in terms of the margin dynamic there is the line systems.

Speaker 3

And on the carrier spending, Tal, I would say this. I mean, our perspective is you've seen 2 years of very anemic spending and really under investing, running the networks hot by the service providers generally around the world. We're seeing that sort of come into balance from a supply demand point of view, but we're not expecting it to improve certainly in North America and a little bit in Europe. We're not really expecting it to get back to the kind of levels of spend that it was. We're not expecting that, which I think is consistent with your sort of perspectives to it.

Speaker 3

But given the additional growth and TAM expansions we've got, that's what's driving that's in the assumption there. What we are seeing with certain carriers around the world is Mofan opportunities driven by cloud. And that really is cloud, but the revenues go through from the service providers. So that is what's driving growth. Also with sort of multi cloud type provisioning, you saw that with the Lumin announcement this year.

Speaker 3

You've got carriers around the world taking these innovative kind of approaches. So I do think that we're not expecting service provider spend to accelerate dramatically at all, but just to recover and get back into some kind of balance, which we're seeing. And then on top of that, you've got the cloud growth that specific builds in Mofin and into cloud that's driving the revenue there.

Speaker 5

And remember, they're the connection between the cloud and end users, whether it's enterprises or individuals. So they have to keep their networks viable and strong and grow their networks just to handle that demand.

Speaker 3

As omnipotent as these cloud players are, they can't connect to everybody in the world.

Speaker 13

Understand. Thanks.

Operator

This concludes our question and answer session. I would like to turn the conference back over for closing remarks.

Speaker 1

Thank you everyone for joining us today. We appreciate it. We look forward to catching up with everyone over the following days weeks. Don't forget that webinar and recorded Q and A that I mentioned and happy holidays to everyone as well. Thank you.

Powered by Quartr
Earnings Conference Call
Ciena Q4 2024
00:00 / 00:00