Ciena Corporation

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ciena Fiscal Second Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you, Greg Lamp, Vice President of Investor Relations. You may begin your conference.

Thank you, Rob. Good morning and welcome to Ciena's 2022 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 recent Q2 performance, our view on the current demand environment and supply chain conditions, as well as discussion of our financial outlook. Today's discussion includes certain adjusted or non-GAAP measures of CN'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 you that during this call, we'll be making certain forward-looking statements. Such statements, including our quarterly and annual guidance, discussion of market opportunities, and commentary about the impact of COVID-19 and supply chain constraints on our business and results 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, details in our most recent 10-K filing, and our upcoming 10-Q filing, which is required to be filed with the SEC by June 8, and we expect to file by that date. CN assumes 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 we do ask that you limit yourselves to one question and one follow-up, please. With that, I'll turn it over to Gary.

Thanks, Greg, and good morning, everyone. This morning, we reported largely in line financial results when considering really a strong achievement against a backdrop of an increasingly challenging supply environment. This included revenue of $949 million, reflecting year-over-year growth of 14%. as we continue to take share and grow faster than the overall market. Building off an historic first quarter order flows, our order flow in the second quarter remained very strong with a book-to-bill ratio well in excess of 1.5. As a result, we continue to grow our backlog. In fact, with continued strength in orders in recent periods, we have seen significant expansion in our backlog since the end of fiscal 2021, from about $2.2 billion to more than $4 billion exiting Q2. We are clearly seeing a number of positive demand trends at a secular level that we believe are very durable over the long term. And with our leading innovation, scale, customer relationships, and investment capacity, we will continue to capture market share. Ironically, the significant growth in demand for our technology has exacerbated the impact of ongoing global supply chain challenges on our business. And in fact, Q2 really presented the most volatile set of supply chain conditions to date. which in fact worsened as we moved through the quarter. To put it simply, demand continues to significantly exceed supply, and availability of supply is the most impactful factor in our performance and rate of revenue growth at this time. Within this context, we continue to execute well in Q2 and navigate these challenges through supply chain mitigation strategies. As a result, we delivered more product in Q2 than we did in the same quarter last year, including some notable highlights that illustrate our innovation leadership and the diversified business that we've built. To start with, non-Telco revenue in Q2 was approximately 44% or up 15% year over year. This included direct web scale revenue of 22%, an increase of 7% year over year, primarily for our Wave server platform. Our top 10 customers in the quarter included four web scalers, and we made our first product shipments to a new large web scale customer in the US. We now have the top six global web scale companies as customers of WaveLogic 5 Extreme in different stages and maturity of deployment. Overall in the quarter, we added 16 new customers for WaveLogic 5e, bringing our total to 172. Q2 was a record quarter for shipments of WaveLogic 5e, up 50% year-over-year and more than double that of last quarter. To date, we've shipped more than 35,000 WaveLogic 5e modems to customers globally. In routing and switching, our business is growing. driven by Tier 1 service providers as well as Tier 2-3 customers for our expanded routing and PON capabilities. Quarterly revenue there was up 27% sequentially and more than 70% year over year, including a strong contribution from the recently added Viata platform. And finally, platform software and services revenue was up 22% from this time last year. Looking at the overall demand environment, the shifts in business and consumer behavior have accelerated positive trends for our business, including cloud adoption, a greater focus on the network edge, which is really greater capacity closer to the customer, and the need, of course, for increased automation. These are strong and durable long-term secular drivers for the industry. creating an incredible demand environment for our business going forward. In optical specifically, we are experiencing significant growth in our large installed base of customers around the globe, fueled by exploding bandwidth requirements. Adding to this positive dynamic is continued incremental opportunity to displace Huawei in many countries, particularly in Europe. as well as increasing public investments in network infrastructure. In routing and switching, we continue to secure new design wins around the world, primarily associated with growth in wireless and accelerated cloud adoption, again at the edge of the network. And we continue to expand our addressable market in this space as we invest in new technologies and solutions to address additional use cases such as residential broadband. In Blue Planet, demand continues for automation that enables differentiated digital services for a fully connected experience. 5G, we believe, will continue to fuel the need for OSS modernization as new innovative services require end-to-end service lifecycle automation. These demand dynamics are present in our order book today, and we expect continued demand to address these network requirements will result in a growing backlog as we move through the second half of the year. This level of demand far outpaces, frankly, our expectations for orders in the year, driving a backlog that reflects strong underlying secular demand. As a result, we have tremendous confidence in our forward growth opportunities. Now, with that said, I want to be extremely clear. In this environment, our revenue is not a function of demand or even production capacity for that matter. It is purely a matter of component supply availability. And that, of course, brings me to supply chain. And as we all know, we remain in a very constrained supply environment, particularly with respect to semiconductors and integrated circuits. And I think it's important to remember that these particular parts are relevant to multiple industries, from telecom to consumer electronics to automotive and others, which only serves to exacerbate this global supply challenge. And of course, we continue to employ a range of supply mitigation strategies that we've previously discussed, including placement of large advanced purchase commitments for critical components in short supply with extended lead times and qualifying engineering alternatives to expand our sources of supply. However, As I mentioned earlier, supply chain conditions appreciably worsened as we moved through Q2. Specifically, we saw a significant increase in both the volume and magnitude of supplier decommits that we weren't able to fully mitigate in two areas that are critical to our business. Firstly, a number of key optical subcomponent suppliers, as they themselves have publicly noted, have been unable to fulfill their supply commitments due to constrained access to semiconductors. Second, we've seen additional supply decommits for a number of integrated circuit suppliers centered really on low value commoditized parts that are essential to the operation of our finished products. The second dynamic has been largely related to the COVID lockdowns in China. And while we have by design a very low overall supply chain exposure to China, our revenue is being affected given that China is effectively the primary source of many of these low value commoditized parts that are essential to the production of IC and semis. On both of these issues, there simply aren't enough parts to go around and satisfy demand across a number of industries and market segments. Just to reiterate, these dynamics do not represent a Ciena-specific challenge, rather this is an industry-wide global challenge. And despite the willingness of network operators to spend, we expect that the length and severity of current supply conditions will impact both overall industry growth rates and, of course, our own revenue growth. That said, when our industry begins to see improvement in supply dynamics, Our scale, investments, customer relationships, and strong balance sheet puts us in the best possible position to service industry demand. With that, I'll turn over to Jim for more detail on Q2 and to discuss our guidance. Jim.