Ciena’s CEO: Bandwidth demands remain strong, but inventory issues remain a drag

“This all means that demand for bandwidth will continue to grow at 30% CAGR, if not more,” he said. “But despite this positive secular demand, as we all know, it is taking longer than we and others in our industry initially expected for service providers to absorb and deploy the large amount of inventory they have accumulated over the last year. And we are still seeing some caution related to macroeconomic concerns, particularly internationally.” 

He added that the company is seeing a turnaround starting. “We continue to believe these dynamics are temporary and we are seeing some encouraging signs of recovery beginning to emerge, including concerning order volumes,” Smith said.

Data center, cloud rising

Ciena reported securing new design wins across its terrestrial, submarine, and Coherent pluggable applications segments in the cloud and data center market.

Besides the significant win it announced during the last quarter for its 400 gig ZR+ plugs, it added two new cloud provider wins in Q2 for these products, including one new customer to Ciena.

Looking forward, Smith pointed to the potential of its next-gen coherent pluggable family, WaveLogic 6 Nano that it will introduce later this year. It also won a large cloud customer for its 800G ZR+ technology. 

“In addition to our optical systems business with cloud providers, our coherent pluggable solutions represent an incremental business and market share growth opportunity for Ciena with these customers, particularly in shorter-reach DCI-type applications,” Smith said. “As a reminder, as much as 50% of our total revenue is now driven directly and indirectly from cloud providers.”

Smith added, "We anticipate continued growth from this customer segment in the second half of fiscal 2024, particularly as WaveLogic 6 becomes generally available for both systems and next-generation pluggable applications.”

Service provider improvements

Ciena continues to operate in an environment where its service providers have halted spending due to macroeconomic challenges and inventory correction.

However, the company said it is seeing signs from its largest service provider customers that they are moving to make new investments again.

The company noted that second-quarter orders rose sequentially from the prior quarter, and 10% of customers in the quarter were unnamed service providers.

“Service provider inventory levels are starting to decline, and service provider engagement and RFP activity levels are higher than in the past several quarters, resulting in several recent new wins and a growing pipeline of opportunities,” Smith said.

Ciena won a large design during the quarter with a large North American Tier One service provider for a multiyear network evolution project that includes the company’s line systems and transponders.

“We expect meaningful order increases in Q3, primarily led by the cloud, but also an improvement in the service provider piece. And we're also seeing awards, the pipeline, and the whole activity level increasing,” Smith said.

Due to the ongoing near-term challenges, Ciena expects fiscal year 2024 to be approximately $4 billion, which is at the low end of the company's previous range. For the fiscal third quarter, Ciena expects to deliver revenue of $880 million to $960 million, adjusted gross margin in the low to mid-40s range, and adjusted operating expense of approximately $345 million.

“Based on our pipeline and current projections, we believe that orders will increase meaningfully in Q3 and have the potential to meet or exceed our revenue during the quarter,” said Jim Moylan, CFO of Ciena. “However, in the near-term, while we see signs of improvement, the recovery of service provider order patterns is still slower than initially expected, as they continue to absorb and deploy large amounts of their inventory.”

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