Ciena Corporation

Good day, and welcome to the CNS Fiscal First Quarter 2024 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Greg Lamp, Vice President of Investor Relations. Please go ahead.

Thank you, Dave. Good morning, and welcome to Ciena's 2024 Fiscal First Quarter Conference Call. On the call today is Gary Smith, President and CEO, and Jim Moylan, CFO. Scott McFeely, Executive Advisor, 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 performance, our view on current market dynamics and drivers of our business, as well as a discussion of our financial outlook. Today's discussion includes certain adjusted or non-GAAP measures of Ciena's results of operations. A reconciliation of these nine 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 and our long-term financial outlook, and discussion of market opportunities and strategy, are based on current expectations, forecasts, and assumptions of our 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 will post shortly after, are an important part of such forward-looking statements, and we encourage you to consider them. Our forward-looking statements should also be viewed in the context of the risk factors detailed in our most recent 10-K and our 10-Q, which will be followed with the SEC today. 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'll allow for as much Q&A as possible today, though ask that you limit yourselves to one question and one follow-up. As a reminder, we'll be hosting investor group meetings with the sell side at OFC later this month. We look forward to seeing many of you in San Diego. With that, I'll turn it over to Gary.

Thanks, Greg, and good morning, everyone. As you've seen from the press release today, we reported strong fiscal first quarter results, including revenue of 1.04 billion and adjusted gross margin of 45.7%. Our Q1 performance also included very strong profitability metrics, with quarterly adjusted operating margin of 13.2% and adjusted EPS of 66 cents. Additionally, we generated $250 million in free cash flow within the quarter. The drivers of bandwidth demand remain strong, and we believe very durable. And network traffic is increasing as a result. And we remain incredibly focused on growing our business and capturing additional market share. Specifically, we are taking advantage of bandwidth growth and cloud adoption trends to extend our leadership in optical and to expand our addressable market, particularly in metro routing and broadband access. Fundamental to these growth ambitions is the expansion of our relationship with cloud providers as they rapidly grow their global networks. Reflecting these expanded relationships, in Q1, non-Telco revenue accounted for over 54% of our total revenues. And of that, direct cloud provider revenue was 346 million in the quarter, up 38% year over year, and both of our 10% customers in the quarter were in fact cloud providers. Orders from cloud providers were also up year over year in Q1, and we continue to secure new deals with all of the major players in this segment. In Q1, for example, we had a significant design win for our 400G ZR Plus pluggables with a very large cloud provider, which we plan to begin shipping and taking revenue on later this year. We were also recently selected by a major cloud provider as their primary vendor for its future global architecture based on our RLS platform. So it is very clear that we've been broadening our engagement with cloud providers, including discussion around how we can leverage our leading innovation as AI becomes a growing driver of traffic and a great opportunity for us. In fact, with about 50% plus market share in data center interconnect, We are incredibly well positioned to benefit as more data centers are built and when AI traffic flows begin to come out of those data centers. We are also developing solutions for inside the data center, a whole new market for us. And this is based on our next generation pluggables family as existing technologies are unlikely to satisfy the rapidly increasing requirements for this critical application space. This momentum really exemplifies the strong confidence we have in our position with cloud providers and our belief that we will have a very strong 2024 with them as we continue to expand these important long-term relationships. However, at the same time, the normalization of order volumes from our service provider segment is not materializing as we expected. We were very clear in our commentary last quarter that our fiscal 2024 financial performance would be largely determined by the timing and magnitude of order flow from our service provider customers, particularly those in North America. More specifically, we expected to see orders from these customers begin to increase significantly in Q2. And as we sit here today, it is taking longer than we and many in the industry anticipated for these customers to absorb their high levels of inventory. This is in part due to difficulties installing and deploying equipment, including site readiness and access to fiber, which is limiting their placement of new orders and the absorption of existing inventories. In addition, in other parts of the world, we are seeing some caution driven largely by macroeconomic concerns that are contributing to lower than expected order volumes from service providers in certain international geographies, almost entirely and predominantly being Europe. Our current view, based on our discussions with customers, is that we now expect a recovery in order patterns from service providers to occur more gradually over the next few quarters. And Jim will speak shortly about how we expect this to impact our business outlook. But I want to emphasize that we and our customers view these dynamics as temporary. And to be clear, we are confident in the durability of the underlying demand drivers in the industry and our ability to continue to take share and grow over the mid to longer term. In fact, there are several key highlights from our Q1 performance that really illustrate the strength of these fundamental demand drivers. In optical, we continue to take share and remain the undisputed leader across virtually every domain, including Metro, DWM, DCI, Submarine, and Long Haul. During Q1, we added 11 new customers for WaveLogic 5 Extreme, bringing our total customer count to 270. And to date, we've shipped more than 115,000 WaveLogic 5E modems. WaveServer had a record quarter as well in Q1 with more than $250 million in revenue, reflecting a 34% growth year-over-year. Quarterly revenue doubled year-over-year for our reconfigurable line system or RLS platform, with eight new customers in the quarter, bringing the total to nearly 70%. And for our WaveLogic 5 nano 400 ZR and ZR plus pluggables, we gained 19 new customers in the quarter and now have a total of 86 total customers. Looking ahead in optical, we're already taking orders for WaveLogic 6 Extreme, the industry's first and only 1.6 terabit solution, which will become generally available this summer. In fact, we've already announced two of these winds, Southern Cross and VOCUS. Further, WaveLogic 6 Nano, our next generation pluggables family, will feature products such as H100 Gig ZR in the latter half of calendar 2024. In routing and switching, where we've been making both organic and inorganic investments, we continue to execute our strategy to expand our TAM into faster-growing markets. And in Q1, we had double-digit revenue growth year over year for the combination of our 3,000 and 5,000 series platforms. And our 8100 continues to gain traction as we scale our metro and coherent routing capabilities. and we now have more than 50 customers around the globe for this platform. We continue to build momentum with this portfolio, including our Wave Router platform, of which we are building additional form factors to address a wider range of applications over time. Other portfolio highlights for Q1 include notably another very good quarter for platform software and services with 22% revenue growth year over year and 9% sequentially. We also saw 13% revenue growth year over year in our global services business. And this is most notable because it was driven by another strong quarter for installation and deployment. which really illustrates our role and visibility in helping our service provider customers work through some of their near-term absorption challenges. In summary, we delivered a strong performance in our fiscal first quarter. Our technology leadership position has never been better and will continue to improve. Our customer engagements remain focused on helping them meet the growing demand for bandwidth, digitally transform their operations and monetize their networks faster. And more recently, positioning them for the rise of AI and what it means to network infrastructure and operations. We remain very confident in the opportunities ahead and in the execution of our long-term strategy. With that, I'll turn it over to Jim. We'll provide details on the quarter's results as well as our business outlook, particularly in the context of the current service provider order dynamics that I referenced earlier. Thank you, Jim.