Ciena Corporation

Good day and thank you for standing by. Welcome to the Siena's fiscal third quarter 2022 financial results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Greg Lamps, Vice President, Investor Relations. Please go ahead.

Thank you, Michelle. Good morning, and welcome to Ciena's Fiscal Third Quarter 2022 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 Prizes and Services, is also with us for Q&A. In addition to this call on the press release, we have posted 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 Q3 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 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 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 supply chain constraints on our business 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. Assumptions relating to our outlook, whether mentioned on this call or included in the investor presentation that we'll post shortly after, are an important part of such forward-looking statements, and we encourage you to consider them. These statements should be viewed in the context of the risk factors detailed in our most recent 10-K filing and in our upcoming 10Q filing, which is required to be filed with the SEC by September 8th. 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 ask that you limit yourselves to one question and one follow-up. With that, I'll turn it over to Gary.

Thank you, Greg, and good morning, everyone. Today we reported lower than expected fiscal third quarter financial performance, including revenue of $868 million and adjusted gross margin of 40%. In a moment, I will discuss the specific supply chain challenges that impacted our results and our continued actions to mitigate their effects on our customers and our business. Before doing so, however, I think it's important to understand the context of the current environment as it relates to Siena and specifically demand. Despite supply chain challenges and elongated lead times, strong secular demand trends show no signs of abating. And we remain confident that the fundamental macro drivers propelling this demand are durable over the long term. As we all know, these include 5G, cloud, and automation, in addition to infrastructure spending, residential broadband funding, and opportunities to displace Huawei. The combination of these secular drivers and our market leadership, including our technology, investment capacity, and global scale, is driving continued robust demand from customers in both absolute and relative measures. In fact, we had nearly 60% order growth in our last four quarters versus the same prior four-quarter period. In Q3 specifically, orders outpaced revenue by more than 30%, and we continue to grow our backlog, which is now well over $4 billion. And we project further growth in our backlog in Q4. Obviously, as we convert this large backlog to revenue and continue to win new business in a strong demand environment, we have confidence in continuing to gain market share as the supply chain challenges ameliorate. Let me talk about supply chain. In the face of this strong demand, challenging supply chain conditions persist. I would like to note that at a high level, the majority of our suppliers are delivering to their promised, albeit extended lead times, and we are also starting to see higher volumes. And I think this is sort of consistent with recent market commentary that has pointed to some signs of improvement in the overall supply environment. We have recently been challenged by the unpredictable performance of specific vendors and their associated componentry. And when we spoke to you after our second quarter, our outlook for the remainder of the year reflected commitments made to us by our suppliers in early June, which a very small number of them did not meet. Specifically, in the second half of our Q3, we experienced substantial delays and lower than expected component deliveries from this very small group of suppliers. These late notice decommits were primarily for certain integrated circuit components that represent a very small fraction of our overall materials. However, these delays and decommits impede our ability to build and deliver finished goods and systems such as modems for our customers and our ship product for revenue. Put another way, this relatively small number of low-cost, low-value components is holding up a disproportionate amount of revenue primarily for our optical modems. As a result, our Q3 revenue and adjusted gross margin were both negatively impacted to a significant degree. And to size this for you, but for this specific challenge, we would have been at the high end of our revenue range and in line with consensus gross margin expectations for Q3. I would also say that certain of these supply dynamics have continued into our fiscal fourth quarter. and are expected to negatively impact our current quarter's results, which Jim will discuss shortly. We remain very focused on our investments and actions to minimize the impact of these challenges on our customers. Firstly, we are working very closely with this small number of partners to resolve these acute challenges around delivery commitments and volumes. We continue to qualify engineering alternatives to expand our sources of supply and to pursue product redesign activities. And thirdly, we continue to invest in our readiness with respect to contract manufacturing capacity as well as our inventory levels to be prepared when these components do arrive. As a reminder, we also continue to place large advance purchase commitments in their various forms. pay premiums and expedite fees and access the broker market to secure additional supply. While these actions have obviously been ongoing for a long time and their benefits take time to be fully realized, we believe that we will start to achieve an improvement in volume and predictability with our suppliers as we move into fiscal 2023. At the same time, it's important to stay focused on the investments that we're making in our long-term strategy to further open the aperture of our addressable market. Our portfolio and solutions offerings are at the heart of our customers' network priorities, and our innovation has never been stronger or more competitive than it is today, evidenced by the strong order flows. In optical in Q3, we added 14 new customers for WaveLogic 5 Extreme, and despite the supply challenges, we had a record number, a quarter for WaveLogic 5 shipments, bringing our total WaveLogic 5 Extreme modem ship to date to more than 44,000. And for WaveLogic 5 Extreme specifically, Q3 was strong with North American Tier 1 service providers as well as web-scale customers. Also in the quarter, we were awarded sole vendor status with a large international tier one service provider for a major network upgrade. I would also say that our switching and routing revenue grew 45%, not all organic, year over year, as we continue to capture additional opportunities and expand our TAM in this important area with a differentiated adaptive IP approach, which is clearly resonating with customers. In Q3, we added 25 new adaptive IP customers, bringing the total to nearly 200, as customers continued to seek alternatives to many traditional legacy IP vendors. Of those new customers, many were wins in key new areas, including 5G XOR, cell site routing, residential broadband, and in enterprise with the UCPE SD-WAN solutions. A particular note is the momentum with our universal aggregation and pond solution, where our customer count has grown significantly this year, and we are now expanding globally. Indeed, as you can see in our Q3 results, our routing and switching portfolio has not been impacted to the same extent by supply chain challenges, certainly when compared to our converged packet optical segment. And I think this is consistent with some of the more positive recent commentary from others in the packet IP space. Overall, we have tremendous momentum in the combination of significant secular demand drivers, our leading portfolio, and our TAM expansion opportunities. The business has never been positioned better. As we are increasingly able to service the unprecedented demand, we are confident in our ability to continue to gain share and expand addressable market. With that, I'll turn it over to Jim.