Ciena reaps cloud revenue amid optical equipment backlog

  • Ciena CEO Gary Smith said order volumes from service providers still haven’t gone back to normal

  • On the bright side, Q1 cloud provider revenue of $346 million was up 38% YoY

  • Ciena’s already taking orders for its WaveLogic 6 coherent optics product

Ciena has yet to pass the bump on the road that is inventory backlog, but cloud revenue is certainly a silver lining.

CEO Gary Smith expressed concern on the Q1 earnings call that the “normalization of order volumes” from Ciena’s service provider segment “is not materializing as we expected.”

Nothing new there. Smith in December said that orders from North American service provider customers remained an uncertain variable.

“As we sit here today, it is taking longer than we and many in the industry anticipated for these customers to absorb their high levels of inventory,” said Smith. “This is in part due to difficulties installing and deploying equipment, including site readiness and access to fiber, which is limiting their placement of new orders and the absorption of existing inventories.”

According to Dell’Oro, supply chain constraints in the region in 2021 and 2022 led to elongated lead times, which resulted in advanced order volumes in the optical equipment market. Although the supply chain improved in 2023, the year saw a pause in new equipment orders as service providers worked their way through existing inventory.

Plus, a fresh report from Dell'Oro last month found the optical transport market declined 6% year on year in Q4 2023, due to reduced demand in North America as well as in Europe and Japan.

But it’s not all doom and gloom. Cloud provider revenue of $346 million was up 38% year on year. Smith noted non-telco revenue accounted for over 54% of Ciena’s total revenues. Orders from cloud providers were also up YoY, he added.

“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.

Indeed, expanding Ciena’s relationships with cloud providers is “fundamental” to that strategy. Without naming any names, he said the company inked a deal with a “very large cloud provider” that plans to use Ciena’s 400G ZR+ pluggables.

Smith also pointed out that another un-named cloud provider tapped Ciena as its primary vendor for its “future global architecture” based on Ciena’s Reconfigurable Line System (RLS) platform.

On the optical side, Ciena’s shipped more than 115,000 WaveLogic 5 Extreme modems to date, bringing the company’s customer count to 270. WaveLogic 5e is Ciena’s current coherent optical solution, which can transmit and receive up to 800G of network traffic on a single wavelength.

Ciena’s on the cusp of its next generation of coherent optics, WaveLogic 6, which can deliver 1.6 Tbps over a single wavelength using half the space and power required by its predecessor.

Smith said Ciena is already taking orders for WaveLogic 6 and that will become generally available this summer.

Ciena by the numbers

Consolidated Q1 revenue of $1.04 billion was flat year on year, compared to $1.06 billion in Q1 2023. Optical networking products amassed 67% of total revenue ($696 million) whereas the routing and switching segment made up 11% ($111 million).

Revenue in the Americas dropped from $765.1 million in the year-ago quarter to $718.2 million, yet still made up 69% of Ciena’s revenue, compared to 20% from EMEA ($207 million) and 11% from the Asia Pacific region ($112.1 million).

CFO James Moylan said on the call that Ciena in Q2 expects to deliver revenue in a range of $850 million to $930 million.

Dell'Oro analyst Jimmy Yu told Fierce that Ciena's optical transport revenues came in as expected, given the market environment, but that the guidance the vendor gave for its next fiscal quarter "was a little disappointing."

"Although the revenue figure for the quarter was lower compared to the year-ago quarter, it caps off a great year for the company," he said. "We estimate Ciena gained three percentage points of global market share in calendar 2023. Much of this growth was due to their increased sales to web-scale, including the large internet content providers."

While "disappointing," Ciena's guidance isn't surprising, "considering the inventory correction that the market is undergoing, especially in North America," said Yu.

"We will need to see where in the guidance range the company ends up. However, as I have mentioned, I am expecting this inventory correction to last at least through the first half of calendar 2024," Yu concluded.

At press time Ciena's stock (NYSE: CIEN) was trading at $51.05, down 0.99% on the day.