Like other optical vendors, Ciena isn’t entirely out of the revenue challenge woods. Every vendor has faced slow spending from service providers, but the company is seeing signs of life from cloud providers and an ongoing thawing out of the carrier market.
Speaking to investors during Ciena's fiscal third-quarter earnings call, CEO Gary Smith said that order flow in the quarter was strong, driven mainly by cloud providers. The company is also starting to see a thawing out of the traditional service provider market, which has been sorting out inventory issues.
“In terms of the state of our business, overall industry dynamics continue to be encouraging,” he said. “As expected, order flow in Q3 was strong, largely driven by cloud providers and we finished the quarter with a book-to-bill ratio above one. This is a positive sign that the market is moving in the right direction with the narrowing gap between supply and inventory absorption.”
He added, "Ultimately, bandwidth demand continues to grow, particularly with the anticipated rise in AI-driven network traffic.”
Cloud, traditional provider ramp
Despite its near-term challenges, the advent of AI continues to bode well for Ciena, particularly with cloud service providers.
These providers initially use Ciena platforms to build dedicated network capacity and architectures to support AI for machine-to-machine-type traffic.
Smith said these cloud customers are investing in their network architectures, from subsea cables to long-haul routes to data center connectivity, to add capacity while using space and power efficiently.
“In Q3, we secured new wins with major cloud provider customers, spanning terrestrial, submarine and coherent pluggable applications, the majority driven by preparations for the expected growth in AI and cloud traffic,” Smith said. “For the same reason, we are seeing a growing market opportunity for us amongst the expanding set of cloud players, including data center operators and companies that offer a range of cloud applications and cloud infrastructure services.”
He added that Ciena has “been winning an increasing number of these deals with these customers over the past several quarters.”
From a traditional service provider perspective, Ciena has won large deals in several countries, including India, South Asia, Germany, Scandinavia, and several new North American customers.
“In North America, we have started to see service providers' purchasing patterns come back into more of an average balance as they continue to deploy inventory buildup from prior periods,” Smith said. “This recovery remains gradual and will take several more quarters to play through, but we see clear evidence of improvement here.”
However, Ciena is seeing slower results in the international markets. “Concerning global service providers, cautious spending persists, particularly in Europe, related to macroeconomic, geopolitical concerns as well as industry structure issues,” Smith said. “As a result, we expect the recovery in order volumes from international service providers to generally lag that of our North American counterparts.”
Managed Optical Fiber Networks (MOFN) momentum
In addition to its traditional network platform and software businesses, Ciena is finding continued interest in its Managed Optical Fiber Networks (MOFN) program.
Leveraging relationships with carrier customers, Ciena’s MOFN program enables providers to design and build a dedicated optical network tailored to the hyperscaler’s architecture and technology needs. Using Ciena’s data center interconnect (DCI) platforms, open line systems (OLSs), and coherent optics, service providers can offer solutions with technology designed for hyperscaler networks. The resulting infrastructure is provided to the hyperscaler or cloud provider as a managed service.
Ciena finds that MOFN, which leverages its relationships with large carriers worldwide, is finding a cadence with cloud providers.
“MOFN is becoming a more significant part of our service provider piece in collaboration with cloud providers around the globe, and it allows the cloud providers to get to market quickly,” Smith said. “Very often, they will define the architecture that they want delivered and specify Ciena, and that's happening around the globe, particularly in places like India, which is a large target market for the cloud providers.”
While Ciena did not reveal any specific customers, it did have what Smith said were “four major wins in Q3.”
He added, "While these wins bode incredibly well over the longer term, our current results reflect the challenges related to the timing and volume of service provider orders.”
Software dominates the revenue mix
From a revenue standpoint, Ciena’s software and services units were the star performers in the third quarter.
The company reported most of its quarterly growth in Platform Software and Services and Blue Planet Automation Software and Services. Platform Software and Services revenue was $83.2 million, up year-over-year, while Blue Planet Automation Software and Services revenues rose to $25.8 million.
Ciena’s Smith Blue Planet doubled from this time last year but with a smaller base of customers. “We've been focusing Blue Planet on particular applications around inventory orchestration,” Smith said. “And that's been increasingly successful.”
Lumen has been one of Blue Planet’s key customers. In August, Lumen announced it selected Blue Planet’s intelligent automation software to help drive its strategic network inventory transformation initiative. Blue Planet Inventory (BPI) will enable Lumen to consolidate multiple legacy inventory systems, streamline its service delivery and assurance processes, digitize its network assets, and improve global customer experience.
“We're very encouraged by what we're seeing with Blue Planet, and we'll talk more about that during the coming quarters,” he said. “You saw the recent announcement with Lumen, which is, I think, good evidence of that. Still, we're seeing broad engagements across a more focused set of applications from Blue Planet, including things like network assurance.”
Ciena also saw new customer wins in its routing and switching business, securing nine new broadband access customers across Europe and the U.S. It also increased its global broadband customer count to over 65. Its coherent routing solution, which leverages the company’s coherent aggregation routers with our WaveLogic 5 Nano pluggable and Navigator Network control suite, is increasingly being selected by customers to replace outdated legacy IP solutions.
However, these gains weren’t enough to stem the segment's declines. Ciena’s Routing and Switching Business revenues were $92.7 million, down from $128 million in the same quarter a year ago.
Smith attributed the lower revenues to ongoing service provider issues. “Routing and switching are more a function of the overall service provider challenges,” he said. “We are continuing to make good progress on routing and switching and seeing new logos. But I think they are held back by the overall service provider challenges, particularly internationally.”
He added that it is seeing new signs of growth in North America. “North America is gradually improving,” Smith said. “We're seeing clear evidence of that, including routing and switching. The challenge is more internationally than mainly in Europe.”
The company is also seeing growing interest in its WaveLogic 5 Nano, ZR, and ZR Plus platforms. In the quarter, Ciena shipped what it said was a record number of pluggables. It added 18 new WaveLogic 5 Nano customers, for a total of 122 to date. Also, in optical, WaveServer revenue in Q3 was up 29% year-over-year and 25% sequentially, with seven new customers in the quarter. Despite these gains, Ciena’s optical Networking revenues dipped to $606.8 million.
For the fiscal third quarter of 2024, Ciena reported revenue of $942.3 million, down from $1.07 billion for the fiscal third quarter of 2023.
In the fiscal fourth quarter, Ciena expects to deliver revenue from $1.06 billion to $1.14 billion. “This would put us at about $4 billion in revenue for fiscal year 2024, in line with the guidance we provided in June,” said Jim Moylan, CFO of Ciena.
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