Ciena is the latest optical vendor to find that Tier 1 service provider inventory digestion has affected its sales and financial outlook.
Speaking to investors during Ciena's fiscal first-quarter 2024 earnings call, Gary Smith, CEO, said that the vendor’s results reflect the uncertainty of North American service provider spending patterns.
Earlier, the vendor forecast Tier 1 service providers would be working through their inventory faster and begin to normalize their ordering patterns by the second quarter.
"We were very clear in our commentary last quarter that our fiscal 2024 financial performance would be largely determined by the timing and magnitude of order flow from our service provider customers, particularly those in North America,” he said. “More specifically, we expected to see orders from these customers begin to increase significantly in Q2, and as we sit here today, it is taking longer than we and many in the industry anticipated for these customers to absorb their high inventory levels.”
He added that “this is partly due to difficulties installing and deploying equipment, including site readiness and access to fiber, which limits their placement of new orders and the absorption of existing inventories.”
However, North America is not the only region where providers have been challenged. Smith noted, “We are seeing some caution primarily driven by macroeconomic concerns contributing to lower-than-expected order volumes from service providers in certain international geographies, almost entirely and predominantly in Europe.”
Despite the near-term challenges, Smith maintains that Ciena expects customers to ramp up spending this year. “Our current view based on our discussions with customers is that we now expect a recovery in order patterns from service providers to occur more gradually over the next few quarters,” he said.
Revenue challenges, opportunities
Due to slower carrier spending, Ciena reported revenue of $1.04 billion for the fiscal first quarter of 2024, down from $1.06 billion for the fiscal first quarter of 2023.
Ciena's GAAP net income for the fiscal first quarter 2024 was $49.5 million, or $0.34 per diluted common share, which compares to a GAAP net income of $76.2 million, or $0.51 per diluted common share, for the fiscal first quarter 2023.
The vendor's revenue from Networking Platforms declined from $855.1 million to $807.2 million. Within this segment, Ciena saw its revenue from Optical Networking and Routing and Switching dip to $695.8 million and $111.4 million, respectively. Likewise, Ciena’s Blue Planet Automation Software and Services were $14 million, down from $15 million.
However, Ciena saw an uptick in Platform Software and Services and Global Services, which were $89.7 million and $127 million, respectively.
“We also saw 13% revenue growth year-over-year in our global services business, and this is most notable because it was driven by another strong quarter for installation and deployment, which illustrates our role and visibility in helping our service provider customers work through some of their near term absorption challenges,” Smith said.
Looking forward, Ciena has forecast fiscal 2024 revenue to be between $4 and $4.3 billion, down from its previous expectations of 1% to 4% growth over fiscal 2023.
“Service providers are working down this inventory, and things are improving. However, it is taking longer than we and many in the industry anticipated for Tier One service providers in North America to work through these high levels of inventory, impacting their placement of new orders,” said James Moyla, CFO of Ciena. “Additionally, we are seeing increased caution from certain European service providers related to macro concerns. This is broadly consistent with what our customers, competitors, and suppliers have reported in recent weeks and months.
He added, “We continue to believe that these dynamics are temporary and currently expect to see orders improve over the next few quarters.”
Optical rising
While the overall division saw declines in the quarter, Ciena is seeing growth potential in its optical segment.
During the first quarter, Ciena added 11 new customers for WaveLogic 5 Extreme, bringing its total customer count to 270. To date, Ciena said it has shipped over 115,000 WaveLogic 5E modems. Ciena’s Waveserver had $250 million in revenue, reflecting a 34% growth year-over-year.
The vendor also saw year-over-year growth of its reconfigurable line system or RLS platform, with eight new customers in the quarter, bringing the total to nearly 70.
Smith noted that Ciena is already taking orders for its WaveLogic 6 Extreme, its 1.6 terabit solution, which will become generally available this summer. Southern Cross and Vocus have already adopted the WaveLogic 6platform. Also, WaveLogic 6 Nano, our next-generation pluggables family, will feature products such as 800G ZR in the latter half of calendar 2024
Overall, Smith said, "We are confident in the durability of the underlying demand drivers in the industry and our ability to continue to take share and grow over the mid to longer term.”
Cloud gains momentum
As Ciena continues to navigate revenue challenges with its traditional service provider base, it is seeing momentum in the cloud service provider arena.
Ciena reported that non-telco revenue accounted for over 54% of its revenues. Moreover, direct cloud provider revenue was $346 million, up 38% year-over-year.
The company noted that 10% of customers in the quarter were cloud providers. Orders from cloud providers also went up year-over-year in Q1, and we continue to secure new deals with all of the major players in this segment.
“We are taking advantage of bandwidth growth and cloud adoption trends to extend our leadership in optical and to expand our addressable market, particularly in metro routing and broadband access,” Smith said. “Fundamental to these growth ambitions is expanding our relationship with cloud providers as they rapidly grow their global networks.”
While Ciena did not reveal any specific customer names, the vendor cited what Smiths said was a “significant design win” for its 400G ZR+ pluggables with a large cloud provider, which it plans to begin shipping and taking revenue on later this year. It was also recently selected by a major cloud provider as its primary vendor for its future global architecture based on Ciena’s RLS platform.
“So, it is very clear that we've been broadening our engagement with cloud providers, including discussions around how we can leverage our leading innovation as AI becomes a growing traffic driver and a great opportunity for us,” Smith said. With about 50% plus market share in data center interconnect, we are incredibly well positioned to benefit as more data centers are built and AI traffic flows begin to emerge from those data centers.”
Additionally, Ciena is developing solutions to accommodate bandwidth demands inside data centers.
Smith said it is targeting this opportunity with its next-gen pluggable product family. “Existing technologies are unlikely to satisfy the rapidly increasing requirements for this critical application space," he said.
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