Ciena Corporation

Ladies and gentlemen, welcome to the Ciena's Fiscal Second 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 and one on your telephone keypad. To withdraw your question, please press star and two. Please note that this event has been recorded. I would like now to turn the conference over to Greg Lampf, Vice President of Investor Relations. Please go ahead.

Thank you, George. Good morning, and welcome to Ciena's 2024 Fiscal Second 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, commentary on market dynamics, and discussion of opportunities and strategy, 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 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 we expect to follow at the SEC later today. Sienna 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. With that, I'll turn the call over to Gary.

Thanks, Greg, and good morning, everyone. As you've seen from the press release, today we reported fiscal second quarter revenue of $911 million and adjusted gross margin of 43.5%. Q2 performance also included quarterly adjusted operating margin of 6.8% and quarterly adjusted EPS of 27 cents. And we generated $42 million in free cash flow in the quarter. Later in the call, Jim will provide additional details about our Q2 financial performance, as well as highlights from the quarter with respect to our portfolio and business outlook. Since we spoke with you about 90 days ago, industry dynamics and therefore our current operating environment are largely unchanged. Specifically, the drivers of bandwidth demand remain strong and durable. Increasing cloud adoption and a growing number of AI use cases are accelerating global data generation. As a result, network traffic is increasing and forecast to continue growing at a strong rate. This all really means that demand for bandwidth will continue to grow at 30% CAGR, if not more. But despite this positive secular demand, as we all know, it is taking longer than we and others in our industry initially expected for service providers to absorb and deploy the large amount of inventory they have accumulated over the last year or so. And we are still seeing some caution related to macroeconomic concerns, particularly internationally. Importantly, we continue to believe these dynamics are temporary. And we are seeing some encouraging signs of recovery beginning to emerge, including with respect to order volumes. In fact, there were several highlights from Q2 that I think illustrate not only an improving service provider environment overall, but also accelerating cloud provider dynamics and the overall momentum in our business. Specifically, with respect to our service provider customers, orders in Q2 increased from the prior quarter and service provider revenue was up sequentially in Q2. Our 10% customer in the quarter was a service provider. Very importantly, service provider inventory levels are starting to decline. and service provider engagement and RFP activity levels are higher than in the past several quarters, resulting in several recent new wins and a growing pipeline of opportunities. For example, we secured a significant design win in Q2 with a leading North American Tier 1 service provider for a multi-year network evolution project that includes both our line systems as well as our transponders. Based on these data points, we believe that order flows from our service provider customers will continue to improve from here. Turning to our cloud provider customers in Q2. We secured important new design wins in this customer segment across terrestrial, submarine, and coherent pluggable applications as we leverage the opportunities presented by strategic investments to build out their data center infrastructures. Two of these wins include long-term awards for deployment of our optical systems across their global network infrastructure. We are also starting to build meaningful momentum with cloud providers for our coherent pluggables. In addition to the significant design win we announced last quarter for our 400GB ZR Plus plugs, we added two new cloud provider wins in Q2 for these products, including one that is a new customer to Ciena. And later this calendar year, we'll bring to market WaveLogic 6 Nano, our next generation coherent pluggable family. With this, we will be first to market with the power advantage of 3 nanometer technology. And in Q2, we're pleased to advise that we were already awarded business by a large cloud customer for this 800 gig ZR plus technology. As expected, in addition to our market leading optical systems business with cloud providers, our coherent pluggable solutions represent an incremental business and market share growth opportunity for Ciena with these customers, particularly in shorter reach DCI type applications. And as a reminder, as much as 50% of our total revenue is driven now directly and indirectly from cloud providers. And we anticipate continued growth from this customer segment in the second half of fiscal 2024, particularly as WaveLogic 6 becomes generally available for both systems and next generation pluggable applications. This will obviously give us significant time to market advantage with cloud providers who typically adopt these leading type technologies more rapidly. Stepping back, understandably, there's been a lot of focus on short-term industry dynamics in recent quarters, and we continue to manage through those. Importantly, we remain focused on the longer-term demand drivers of our business and our growth opportunities. With that said, I'd like to take a few minutes to walk you through how we're thinking about the market will evolve and how we will benefit from that evolution. As I mentioned earlier, the fundamental industry drivers of bandwidth demand and network growth traffic continue to increase. These drivers are increasingly being impacted by several business and network architectural trends. Obviously, first and foremost, an increasing portion of bandwidth demand and network traffic growth will be driven by AI. Traffic flows from AI and machine learning will pressure all parts of the network, from broadband access to the metro to inside and around the data center. thereby impacting both service provider and cloud provider networks. As an example, one of our North American Tier 1 service provider customers recently reported they are seeing a dramatic rise in demand for high capacity, low latency network and edge services, specifically related to the advent of Gen AI and the complexity of hybrid multi-cloud architectures. Optical delivers the combination of high capacity and low latency essential to supporting this type of traffic. Another opportunity where we have a significant funnel of opportunities is managed optical fiber networks, or known as MOFN. This term MOFN may be new to you, so let me briefly explain what it means. While cloud providers can build their own network infrastructure in many parts of the world, certain countries have specific rules for fiber ownership, policies on licensing, and standards for workforce qualifications. In addition, given the need to add capacity sometimes very quickly, cloud providers are turning to MOFON even in jurisdictions where there are no such restrictions. With MOFON, telecom service providers build highly advanced optical networks and lease fiber pairs to cloud providers. This enables the cloud providers to quickly expand their reach and better serve their end users. This is an example of an indirect source of revenue from the cloud providers through our service provider customers. Ciena is obviously uniquely positioned to lead this model by leveraging our strong relationships and presence with both global cloud and service providers. With all that in mind, I'd like to expand upon how we are investing to address these opportunities. And I think to start with, I would say that all of our TAM expansion efforts are deeply grounded in the competitive advantage we have with our optical technology. It is well established and recognized that our industry-leading optical technology has been the driving force and foundational reason behind our success in serving the long haul, subsea, metro, regional, and DCI markets. We expect to continue to lead and take share in these markets with our best-in-class coherent technology. This includes the upcoming availability of WaveLogic 6, which will further extend our leadership in terms of performance, scale, and sustainability. In addition, as I noted, our optical technology is also increasingly applicable to high growth opportunities where we are investing for growth by expanding our addressable market in three principal key areas. These include number one, broadband access, and number two, metro routing. where both the high capacity optical fiber connectivity we enable has become a foundational element of next generation edge and metro networks. And number three, inside and around the data center, the superior performance of our foundational optical technologies in a variety of form factors can serve the cloud provider trend towards disaggregated consumption models in support of AI fabric connections. In broadband access, we have the market-leading XGS PON solution providing our customers with modularity and openness that they haven't enjoyed in previous generations of PON deployments. This cost-effective, flexible, and sustainable OLT solution can address residential, enterprise, and mobility use cases. Looking further out, As you know, we also expect to lead in 25 GS PON as it emerges next year. With prioritized customer investment in broadband access, fueled in part by massive public funding around the world, we estimate the 10G and above PON market will grow at a 55% plus CAGR to approximately $7 billion by 2027. Secondly, converged IP and optical layers in the Metro are now being used to reduce costs, simplify networks, and achieve new levels of scale to support AI. This is precisely what our coherent routing solution is designed to address with our purpose-built Metro routers, including the 5,000 and 8,000 series platforms, as well as our recently expanded Wave router family. This solution offers our customers scaling choices, common next-generation IPOS, integration with the world's best optics and photonics, and the market-leading multi-layer domain control to manage and fully converge these metro networks. We estimate the metro routing market specifically will grow at a 12% CAGR to nearly 5 billion by 2027. And finally, number three, in addition to our strength in data center interconnect, we see an expanding and incremental opportunity inside and around the data center that also leverages our optical technology leadership. As cloud providers continue to build massive data centers with high data rates to handle AI workloads, they are increasingly reaching power and space limitations. We believe that coherent technology and our high-speed interconnect solutions will ultimately better address the need for superior scale, power, and signal quality. This is similar to what we saw in the WAN, and while still early, we believe it is largely a function of time as to when a meaningful portion of inside and around the data center moves to these technologies. In fact, we already engage with several cloud customers and ecosystem partners in this area as a direct result of our leadership incoherent. And we expect these engagements to increase and intensify over time. So in summary, we believe we are incredibly well positioned to continue growing our leadership in optical and are leveraging that technology. as well as our deep relationships with both cloud and service providers to further expand our addressable market and deliver profitable long-term growth. With that, I'll turn it over to Jim who will provide details on the quarter's results as well as our business outlook. Jim.