Ciena Looks Beyond Telcos to Boost Webscalers

In its earnings report for the fiscal quarter ended May 2, 2020, optical networking titan Ciena (NYSE: CIEN) announced analyst-beating second-quarter revenues of $894.1 million (up 3.4% year over year) and non-GAAP net income of $.76 per share. The company also reiterated its reliance on so-called Web-scale providers, a market Ciena touted in its first-quarter report in March.

By Web-scale, Ciena means cloud providers (such as Amazon, Google, Microsoft, et al) and content providers (such as Akamai), which are potentially the biggest customers for Ciena’s products, particularly in the 800-gigabit equipment market. Web-scalers also will be key players in the emerging 5G-enabled edge services sector.

These Web-scale providers contrast with traditional telcos, most notably AT&T (NYSE: T) and Verizon (NYSE: VZ), which still account for the bulk of Ciena's sales, though not quite as much as last quarter.

Telco Sales Suffer

In all, 58% of Ciena's sales this quarter came from telcos, as opposed to 65% last quarter. And this quarter, of the 42% of revenue coming from non-telco customers, 24% of sales were to Web-scale customers, including an unnamed cable multiple-system operator (MSO) that accounted for 10% of total revenue. Last quarter, 15% of sales were to Web-scale players, and the unnamed cable company contributed 9% of revenue.

Cable and Content Carry the Day

Ciena says the increased bandwidth demands forced by COVID-19 led to more sales from cable and content customers in North America and Europe, such as Charter Communications (Nasdaq: CHTR) and CenturyLink (NYSE: CTL).

These kinds of companies deployed Ciena’s converged packet/optical hubs to boost bandwidth capacity quickly during the pandemic, execs said today. And now they are looking to the vendor’s 800-gigabit WaveLogic 5 photonic components, commercially released in March 2020.

“We’ve shipped [WaveLogic 5] already to date — and it hasn’t been commercially available that long — to north of a dozen customers,” said Scott McFeely, Ciena’s SVP of global products and services, on today’s conference call with analysts. Ciena has announced WaveLogic 5 sales to Comcast, Deutsche Telekom, the Internet2 consortium, Telia, Southern Cross, and Verizon.

The Pandemic's to Blame

Even as bandwidth demand boosted Web-scale sales, Ciena says it was difficult to manage telecom infrastructure upgrades due to severe lockdown measures in parts of Asia, particularly India and Japan. The holdup made for what CEO Gary Smith today called “lower business velocity” and lower telco profits.

But there may be more to the story. Telco revenues have suffered during the pandemic, but the role of traditional telcos is also changing, as digital transformation progresses and 5G is spurred by bandwidth demand.

But at least one analyst thinks telco demand and role-shifting isn’t Ciena’s problem. “We think Ciena could face issues in the supply chain still including risk to temporary shutdowns at its contract manufacturers,” wrote Simon Leopold and colleagues at Raymond James in a recent note. “We believe demand remains healthy. Checks suggest Ciena could not satisfy orders from top customers. We do see some risk that carriers could reduce capex in a macroeconomic crisis and that some demand was pulled-in as carriers worried about supply chain issues.”

Lowered Guidance Due to Pandemic

Ciena cited the pandemic in guiding to annual revenue growth for
2020 of 2% to 4% year over year (down from earlier guidance close to 6%). This led to a beating from investors, who at press time were trading Ciena shares at $53.06, down 5.77% (-3.25).

But the company foresees better times ahead -- at least after the next several quarters. And execs see eventual growth across all markets. “As network providers emerge from the crisis and begin to normalize, it is certain that network architectures will be more closely evaluated to adapt to new user behavior,” said Ciena CEO Smith on today’s call. “And essentially we believe that over the medium to longer term, the rise of remote everything will accelerate the drive towards cloud-based models and virtualization.”