Ciena Corporation

Good morning, everyone. Thank you for standing by and welcome to the CNF fiscal Q2 2021 financial results conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question in the intersession. To ask a question during the session, you would need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Greg Lance. Thank you. Please go ahead, sir.

Thank you, Casey. Good morning, and welcome to Ciena's 2021 Fiscal Second Quarter Results Conference Call. On the call today is Gary Smith, President and CEO, and Jim Moylan, CFO. Scott McFeely, our Senior Vice President of Global Products and Services, is also with us for Q&A. In addition to this call and the press release, we have posted to the investor section of our website an accompanying investor presentation that reflects this discussion as well as certain highlighted items from the quarter. Our comments today speak to our fiscal second quarter performance, our view on current market dynamics, as well as a discussion of our outlook for the third quarter and fiscal 2021. Today's discussion includes certain adjusted or non-GAAP measures of Ciena's results of operations. A detailed reconciliation of these non-GAAP measures to our GAAP results is included in today's press release. Before turning the call over to Gary, I'll remind everyone that during this call, we'll be making certain forward-looking statements. Such statements, including our quarterly and annual guidance, opportunities, and commentary about the impact of COVID-19 and supply chain constraints are based on current expectations, forecasts, and assumptions regarding the company and its markets, which include risks and uncertainties that could cause actual results to differ materially from the statements discussed today. These statements should be viewed in the context of the risk factors detailed on our most recent 10-K filing and in our upcoming 10-Q filing, which is required to be filed by the SEC by June 10th. We expect to file by that date. CNS knows no obligation to update the information discussed in this conference call, whether as a result of new information, future events, or otherwise. As always, we will allow for as much Q&A as possible today, though ask you to limit yourselves to one question and one follow-up. With that, I'll turn the call over to Gary.

Thanks, Greg, and good morning, everyone. This morning we reported strong performance for our fiscal second quarter, including $834 million in revenue and a particularly strong gross margin that drove a 16% adjusted operating margin and a $0.62 adjusted earnings per share. These results reflect continued strength in the fundamental demand drivers of our business. They reflect our distinct competitive set of advantages, as well as continued encouraging signs of improvement in the overall market environment. And I must first once again thank our people for their hard work and fortitude in these challenging times. They continue to drive our business forward and build on our position as the industry leader. As you may recall from our commentary, as we entered fiscal 2021, and again last quarter, we laid out several key assumptions that formed the basis of our outlook for the current year. First was an improvement of industry and economic conditions overall, which we are starting to see in many parts of the world, where the effects of the COVID-19 are somewhat abating. Of course, fully recognizing that the current COVID status globally of each region and country varies tremendously. Secondly, we noted that service provider spend, which has been constrained since the second half of 2020, needed to return to more typical pre-pandemic levels. I am pleased to report that during Q2, we began to see material amelioration of the operational and fiscal caution of key service provider customers around the world. And we believe that this is translating into a more normalized approach to network investments and operations, including more focus on new architecture builds and deployments. And lastly, really as a result of these two dynamics, we indicated the need for strong order flow and backlog growth, particularly in Q2, if we are to drive a stronger than typical uptick in second half performance in order to meet our outlook for the year. We absolutely achieved that, as orders in Q2 were significantly greater than revenue, and backlog grew both sequentially and year over year. So as we close out the first half of the year, the things we said we needed to happen in the market and our business are in fact materializing. And this has yielded financial results in line with our expectations and overall business performance that continues to outpace the competition. Based on these dynamics, we continue to be confident in our ability to deliver on the financial guidance we provided for fiscal 2021. In fact, we now believe that we will exceed our profitability target for the year through better than expected gross margins. And Jim will cover that in more detail. Before I review some of the highlights from the quarter, I'll briefly comment on the shared industry concerns around semiconductor supply chain constraints that are impacting a broad range of technology market sectors. and while we have experienced some lengthening of component lead times we have in place very strong mitigation strategies for supply chain disruptions as we've proven over many years and most recently through the covid 19 challenges we also benefit scale and diversification of our supply chain and continued investments in inventory as well as a high degree of vertical integration as a result We are well positioned to navigate this dynamic. And as we sit here today, our perspective is that we can believe we can manage the current supply chain challenges with no material impact to our revenue expectations for fiscal 2021. Moving to highlights from the quarter, our innovation and diversification continue to strengthen our competitive position. And with respect to innovation, Our lead in fifth-generation coherent technology with WaveLogic 5 is uncontested. In Q2, we secured 16 new wins for WaveLogic 5 Extreme, bringing our total customer count to 95. And we shipped nearly 5,000 WaveLogic 5e modems in the quarter. bringing our total to date to roughly 11,500 WaveLogic 5e modems shipped to a wide range of customers around the world active in their networks. We also remain on track with our WaveLogic 5 nano-pluggables and expect to have GA product in time to intersect with customer demand, which will likely begin later this year. We have product in customer labs today with the solution performing extremely well, including best-in-class power performance, perhaps the single most important metric for a differentiated pluggable. I mentioned last quarter our increased strategic focus on IP technologies in our routing and switching portfolio and our growing customer engagements in this area. specifically around our adaptive IP solution and ability to address key use cases in areas like 5G, Internet of Things, and Edge Cloud. Our momentum for this portfolio continued in Q2, with roughly a dozen new wins ranging from global Tier 1 service providers to MSOs and enterprises. Q2 was also a very strong again for Blue Planet. with the largest order quarter to date and four new portfolio wins with major service providers. Turning to customer segment and regional performance in the quarter, our overall non-telco business continues to be strong, comprising 43% of revenue in Q2. Direct web scale contributed 24% of quarterly revenue as these customers have once again started building and expanding data centers. We continue to retain a very strong leadership position in this segment as our relationships with these key customers become increasingly broader and more strategic. And I think the introduction of our WaveLogic 5 pluggables further enables us to address a wide range of our web-scale customers' needs. Activity with our Tier 1 service provider customers, especially in North America, is increasing. as they can no longer put off adding capacity to their networks, and they are now better able to navigate logistical COVID-related challenges. EMEA also performed well in the quarter, with revenues increasing 10% year over year, as service providers in the region invest to address their own traffic growth needs, as well as to support increasing traffic flows and bandwidth requirements of the web-scale players. And finally, on India, With the recent wave of COVID across the country, we've expanded support and resources for our local team, and we continue to be incredibly impressed by their resilience and optimism amidst a very challenging situation. With respect to the business in India, this new wave of the pandemic is obviously slowing the expected recovery. However, revenue from the country for Sienna still grew sequentially and year over year. And I would also say that winds and order activity continue to be strong, with the impact to date largely related to deployment schedules. We continue to expect India to grow year over year in fiscal 2021, with any near-term challenges mitigated by our general geographic location. Overall, there remains strong underlying secular demand for bandwidth and automation that drives our business. Our strong performance in Q2 is a reflection of that demand, and it gives us greater visibility as we sit here today. These results, together with encouraging signals in the market environment and the continued execution of our strategy, gives us confidence in a strong second half and our ability to achieve our financial targets as we move through the year. Jim. Thanks, Gary.