Ciena Posts Record Sales, Sees No Slowdown

Optical networking provider Ciena (NYSE: CIEN) broadcast good news for its first fiscal quarter of 2023, citing strong demand and improvement in supply chain issues. And the firm sees consistent demand continuing in wireless transport, next-generation residential networking, enterprise edge, and converged metro core networks.

“While supply chain has not completely recovered and there is still some volatility in component deliveries, we are encouraged by the component availability in Q1 and our related strong shipment performance,” said CEO Gary Smith on the earnings call this morning. “With respect to demand, we remain positive about the fundamental drivers, including 5G, cloud, AI and automation, and [we] continue to believe that they are very durable over the long term.”

Smith said Ciena expects sales to grow faster than the market in both the short and long terms as cloud hyperscalers and enterprises continue to demand increased capacity, reduced latency, and optimized power consumption.

Ciena reported total revenue of $1.06 billion for the quarter that ended January 28, up 25% for the same quarter last year. Adjusted net income was $95.6 million, $.64 per diluted common share, up from $72.6 million or $.47 per share for last year’s quarter. Adjusted earnings before interest, taxes, depreciation, and amortization (adjusted EBITDA) was $155.1 million, up 25.4% year-over-year (y/y). Gross margin was down a bit at 43.7% compared to 46.2% last year.

Notable Growth Areas

Ciena’s chief product segments reported robust growth: Converged packet optical gear, including the company’s largest and most telco-worthy products, accounted for nearly 70% of all revenues and grew 36% y/y to $735.6 million in the quarter. Routing and switching equipment, a growing segment for Ciena that represents about 11% of revenue, grew 39% y/y to $119.5 million.

Management expects to see further growth in routing and switching, putting it in greater competition with Arista Networks (NYSE: NET), Cisco (Nasdaq: CSCO), and Juniper Networks (NYSE: JNPR). Indeed, in its end-of-year report in December 2022, Ciena cited growth of 46% in routing and switching for fiscal 2022.

Ciena sees metro and edge networking sales improving with its recent purchases of Benu Networks and Tibit Communications, which specialize in broadband access software and passive optical networking (PON) gear, respectively. (Interestingly, Ciena ended up spending a combined $292 million on those two acquisitions, instead of the $210 million initially estimated.)

Ciena is also seeing robust growth in sales to cloud providers, which grew 47% y/y and represented 24% of total revenues in the quarter. One hyperscaler accounted for over 10% of revenues, though management said sales were also good across the range of all leading hyperscalers.

But Can It Continue?

Ciena’s success recalls the recent report from rival Cisco (Nasdaq: CSCO), whose results last month also reflected improved supply chain and demand for routing and switching gear. But analysts poked at Smith and CFO James E. Moylan, asking whether recent revenues reflect a loosened backlog flush and questioning the ability of telcos and cloud hyperscalers to continue to buy gear given reports of reduced capex.

To which execs replied that yes, backlog accounted for some of the recent revenues, but they see no wavering in demand from hyperscalers and carriers. Indeed, CEO Smith told one sell-side analyst on today’s call, “We are not seeing any pushouts on the carrier side from a budget point of view. We’re not seeing it.”

Notably, Ciena sees its routing and switching portfolio as a major strength going forward. The company’s announcement of WaveLogic 6 coherent optical components will be a significant card in helping Ciena deal a winning hand against its rivals in space and power consumption.

As of this afternoon, Ciena shares were trading at $51.50, up 2.35 (4.78%).