Ciena Corporation

Good day and welcome to the Siena Fiscal First Quarter 2025 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 your telephone keypad. 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, Michael. Good morning, and welcome to Ciena's 2025 Fiscal First Quarter Conference Call. On the call today is Gary Smith, President and CEO, and Jim Moyland, 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 Investors 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 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, commentary on market dynamics, and discussion of our opportunities and strategy, are based on current expectations, forecasts, and assumptions regarding the company and its markets, which includes 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. Our forward-looking statements should also be viewed in the context of the risk factors detailed in our most recent 10Q, 10K, excuse me, and our 10Q, which we expect to follow with the SEC by this Thursday. 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, so ask that you limit yourselves to one question and one follow-up. Also, in case there's a slightly longer pause than usual during Q&A, please note that our team is in two different locations for this call. With that, I'll turn the call over to Gary.

Thank you, and good morning, everybody. Today, we delivered strong fiscal first quarter results. including revenue of 1.07 billion, adjusted gross margin of 44.7, and adjusted EPS of 64 cents per share. Positive demand dynamics drove very strong order flow in the quarter. Significantly, direct orders from cloud providers were half of overall orders in Q1. And we've had our strongest back-to-back quarters of orders from service providers in over two years. This outstanding performance reflects balanced growth and strong momentum across all aspects of our business as we execute our strategy to take full advantage of the growth of cloud and AI traffic. Since speaking with you last in mid-December, we've seen the continuation of the positive demand dynamics that we've been discussing in recent quarters. This is playing out across our primary customer segments and geographies, and in both our foundational business and our market expansion opportunities. The rapid expansion and distribution of AI training and inferencing infrastructure has is driving global investment in ultra scalable, high performance networks operated by both service providers and cloud providers. And as the global leader in high speed connectivity, we are best positioned to partner with them on these critical infrastructure builds to help scale and monetize their networks. So, as we continue to execute our strategy and take full advantage of these opportunities, we remain focused on extending our leadership and growing market share in our core businesses, inclusive of subsea, long-haul, metro, DCI, and MOFON opportunities, and growing our addressable market into adjacencies, particularly inside and around the data center over time, as well as in metro routing, all areas where our foundational optical technologies and leadership provide a significant competitive advantage. To best understand how our investments are fully aligned with these market dynamics and our customers' priorities, we believe that viewing our business through the lens of our major customer segments provides the most insight. So let's start with service providers. The supply and demand dynamics that we experienced in previous periods continue to come into balance, and we believe service provider inventory digestion impacts are largely now complete. Accordingly, we saw ongoing improvement in Q1 in revenue and orders, with North America leading the way and international markets continuing to show positive progress. Service provider revenue in Q1 increased 14% year-over-year, comprising approximately 51% of total revenue. Clearly, these customers are once again investing to scale their networks, specifically for the anticipated increase in cloud traffic and new AI workloads, including for MoFan opportunities with the cloud providers. We've now seen a couple of quarters with an improving service provider trend line, And we believe these positive service provider spending dynamics will continue moving forward. Moving now to cloud providers. We continue to broaden and deepen our relationships with cloud customers. In Q1, total direct cloud revenue comprised 32% of the total revenue, with five cloud providers in our top 10 customers for the quarter. AI is the key driver of scaling and provisioning these high-speed networks to support increased bandwidth demand and enable the monetization of AI today and well into the future. We expect these to be large, long-term investment plans over many years to come, as evidenced by the strong CapEx plans and strategic commentary that most cloud providers have recently announced relating to networks. Turning to the critical technologies that are required by both our service provider and cloud provider customers, we are seeing broad-based momentum again across our portfolio. WaveLogic 6 Extreme is off to an incredibly strong start in the marketplace, gaining momentum with customers who seek increased capacity and reduced space and power requirements in their networks. In Q1, we added 20 new customers for WaveLogic 6E. And we continue to ship our WaveLogic 5 solution. In Q1, we reached more than 1,600 WaveLogic modems shipped worldwide, 160,000. Confirming the WaveLogic portfolio is the foundation for world-class network backbones for the AI and cloud economy, both terrestrial and subsea. And our intelligent line systems, including our RLS photonic platform and Wave Server wavelength solution, are designed for the type of traffic and applications that are emerging and are the preferred choice for both service providers and cloud product customers alike. In fact, we have nearly 100 total customers now for RLS and more than 400 total for Wave Server. Importantly, our InterConnex portfolio is gaining traction and represents a substantial growth opportunity for us moving forward, particularly in the context of AI within the metro data center campus and in the future inside the data center itself. As a reminder, InterConnex is a general industry term to describe the infrastructure technologies that provide the connectivity between and within data centers. It includes both pluggables and component technologies. Demand for our high-performing, best-in-class pluggables is strong and growing. Q1 was our highest orders quarter yet for pluggables, as we continue to take share in this fast-growing market. We are also on track for general availability of our 800 gig WaveLogic 6 nano pluggable solution in the first half of this calendar year and expect deployments later in the calendar year for Metro DCI use cases. The WaveLogic 6 nano technology also supports the industry's first 1.6T coherent light solution for 2 kilometers to 20 kilometer campus applications. which will also be productized for deployment in the 2026 timeframe. And in fact, we will also be showing the first live 1.6T coherent light solution demonstration at the upcoming OSC conference in San Francisco in early April. And we will be hosting investor meetings to provide further details about our ongoing R&D efforts in this area. Before handing over to Jim, I'd summarize by saying that as the global leader in high-speed connectivity for both systems and the underlying technology, we are incredibly well positioned to partner with customers to address rapidly increasing bandwidth demands driven by cloud connectivity and AI. As a result, we have strong momentum across our business, which is driving balanced growth, and providing a solid visibility and confidence in our future. Jim, can you now take us through a more detailed readout of our financial performance in Q1, as well as our outlook? Jim.

Thanks, Gary. Good morning, everyone. As Gary mentioned, we delivered strong fiscal first quarter financial results. Total revenue in Q1 was $1.07 billion. This included two 10% plus customers, one cloud provider and one service provider. Adjusted gross margin was 44.7%, driven by a few non-recurring events including software. Q1 adjusted operating expense was $347 million. With respect to profitability measures in Q1, we delivered adjusted operating margin of 12.3 percent, adjusted net income of $94 million, and adjusted EPS of 64 cents. In addition, we generated $104 million in cash from operations. Adjusted EBITDA was $156 million. Finally, We ended the quarter with approximately $1.3 billion in cash and investments. We repurchased approximately 1 million shares for $79 million during the first quarter. We continue to target the repurchase of approximately $330 million total in fiscal year 25. Turning to some additional highlights from the quarter, as Gary mentioned, we had a great quarter in optical. We have 25 total customers for WaveLogic 6 Extreme, including large service providers like Lumen, It's Just a Lot, Korea Telecom, Southern Cross, and Vocus, as well as several of the major cloud provider customers that are planning to standardize on this technology. We remain the only vendor in the market with a 1.6 terabit WAN solution and expect to hold that lead in this next generation of optical technology for at least two years. And pluggable momentum was strong in Q1, putting us well on track to at least double our revenue this year from fiscal 2024. In routing and switching, Q1 revenue was $93 million, up 17% sequentially. The total... Total count for our adaptive IP customers is now 390, including nearly 40 added during the first quarter. And we are winning new customers for our coherent routing solution, including international service providers and enterprise customers. Other portfolio highlights from Q1 include Platform software and services, including Navigator, had another good quarter, with revenue up 6% year over year. Blue Planet quarterly revenue nearly doubled year over year. Turning now to guidance. Before I talk about the guide, I will say that we are certainly aware of the potential for disruption in U.S. and the international economy, given the prospect of additional tariffs and retaliatory actions. However, we firmly believe that bandwidth demand will continue to grow through this period. Given the fluidity and uncertainty surrounding the situation, our guide does not include the effects, if any, of additional tariffs. For the fiscal second quarter, we expect to deliver revenue in a range of $1.05 billion to $1.13 billion. We expect Q2 adjusted gross margin to be in the low 40% range. And we expect adjusted operating expense to be approximately $355 million. We are very encouraged by the strength in our business and the continuation of positive demand dynamics across all of our segments. And we are very confident in our well-established position as the global leader in high-speed connectivity, as both our service provider and cloud provider customers invest at scale and monetize their networks in the AI era. With that momentum, though it's still early in the year, we are increasingly confident that we can deliver revenue growth toward the high end of our 8% to 11% guidance range for fiscal 2025. Also, for the year, we continue, as we said last quarter, to expect adjusted gross margin to be in the 42 to 44 percent range for the year and adjusted operating expense to average $350 to $360 million per quarter. In closing, I'll say that the strength of orders across all our market segments and verticals indicates that our position in the market continues to improve. Our lead in technology, which we believe is sustainable, coupled with the depth and breadth of our customer relationships, sets Ciena up nicely for long-term growth. Michael, we'll now take questions from the sell-side analysts.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster.

The first question comes from Atif Malik with Citi.

Please go ahead.

Hi, it's Adrienne Colby for Atif. Thank you for taking the question. I was hoping we could talk a little bit about the dynamics you were seeing in the cloud service provider segment. I'm interested in what the linearity of the order trends were in the quarter. If you saw any kind of a pause or a shift or signs that cloud customers are rethinking some of their strategy for the year. Thank you.

Adrienne, I take that. We've seen very solid order growth, really around accelerating demand across multiple cloud players. We saw no linearity at all around that. In fact, we're probably seeing an increase in demand, which has actually continued right now into Q2. We've actually started Q2. Another way of addressing your question here is saying Q2, we've started super strong with cloud providers, and we expect that to continue. And, you know, the fundamentals around that dynamics are, you know, driven by a multitude of things. One is machine-to-machine learning. We see expansion opportunities there, particularly in North America, where, you know, there's a need to basically they can't get all the power and compute in one space. Therefore, it has to link up to multiple data centers requiring low latency, high bandwidth solutions. And then globally, just the increase in cloud traffic and move to inference to link up all of these data centers requires a very large scale-up and build of submarine systems, metro, across the global landscape. We have seen absolutely no yielding in that at all. In fact, I'd describe it as an acceleration. And when you think about it, They need to connect these data centers if they're going to monetize any of this. And in fact, if we get more proliferation of reasoning models, that's just going to drive more traffic, frankly.

One thing I'd add to that, Gary, is that in a more general sense, our orders for the quarter were more than double over the last year during the same quarter and well above our revenue. And about half of those orders were cloud. So it just accentuates the comments that Gary made.

Thank you. Thank you.

The next question comes from Mayta Marshall with Morgan Stanley. Please go ahead.

Great. Thanks. Maybe to start with, just in terms of kind of following up on the previous question, but just kind of how do you see seasonality of cloud customers, you know, obviously it's kind of down quarter over quarter, but you noted very strong order activity. So just kind of what you're seeing in terms of seasonality. And then maybe as a second question, you noted no further tariffs contemplated, but just what are you assuming for tariffs as announced? And just how are you looking to mitigate those either through price or moving kind of distribution? Thanks.

I don't want to take the first, first part of that. And then Jim can take the second. Um, On the cloud side, given the scale up and the nature of it, I think we're not really susceptible to seasonality. You can have some ebbs and flows based on the end of their calendar year and shipments and things, but on the whole, I don't think you're going to see a lot of of seasonality here. I think it's largely up and to the right with a few variables quarter by quarter. You know, I think there's an increasing demand to make sure that they've got, you know, the right kind of scaled infrastructure and connectivity to be able to take advantage of this because this traffic is now really another way to simply think about it matter is this stuff is now beginning to come outside of the data center. both in terms of training and in terms of inference and just the general growth in cloud traffic. And I think that's going to be very consistent over, I think, the next few years.

And on the tariff situation, Matt, as you can appreciate, it is very fluid and dynamic. There have been lots of changes and decisions, lots of changes to decisions made on tariffs over the last few weeks. We've certainly been very busy looking at how we will mitigate the tariffs, if and when they come into play. And we do have a resilient supply chain that allows for this kind of mitigation, depending upon the shape of the ultimate tariffs. We'll work with our customers for reimbursement of tariffs. So we just didn't put it in there. We'll give you a view of that when and if we have certainty.

Okay, great. Thank you.

Thanks, Matt.

The next question comes from Amit Daryani with Evercore. Please go ahead.

Good morning. Thanks for taking my question. I guess maybe just to start on gross margins, you know, Jim, you sort of mentioned there were some one-time benefits in the Jan quarter you folks had. So could you just talk about, you know, very strong performance in gross margins in the Jan quarter? Sort of what drove that upside and, you know, what were the things that were perhaps non-reoccurring that were not sustained in out quarters?

Yes. I think you can appreciate from past quarters that gross margin is difficult for us to call precisely because there are any number of things that can happen during a quarter that are unexpected. In this most recent quarter, we had several unexpected one-time events, including some software events that drove it up. We also had a good performance on the supply chain in terms of overheads. So all of those things were good. and we did greatly exceed the number we put out for you this quarter. We don't expect those effects to recur in Q2. We are returning to our guide of low 40s for Q2. Remember, we said at the beginning of the year, the first half of the year was going to be in the low 40s. Second half of the year was going to be toward the mid 40s, and we'd end up the year at 42% to 43%. We still believe that to be true. Over the long term, we're hopeful that our charges will improve.

Fair enough. And then if I kind of step back and think about your commentary around auto growth and the cloud demand, it all seems like up and to the right. I was wondering if you'd kind of stack that up against your April quarter guide, which I think is calling for revenue growth of low single digits, 2% sequentially, which I think historically... it tends to be up more like 6%, 7% mid to high single digits. So maybe just talk about the guide for April seems to be a little bit lower than normal seasonality despite some very positive commentary on orders and cloud from your side.

I'd respond to that this way, Amit. We used to have a reasonably predictable seasonality in our order and revenue flow when our business was service providers. Now our business is roughly half driven by cloud providers, and their order flow and the resulting revenue is more a function of what projects they're working on at any point in time as opposed to annual seasonality. So my own feeling is that you shouldn't compare year over year here that much in terms of overall revenue. You should look at the trends. And as you know, we're calling 8% to 11% for this year, and actually we're going to tend toward the higher end of the quarter for the year.

The other thing I'd say, Amit, is obviously we've said we've had strong water flows, obviously greater than 1%. much greater than one, and our backlog continues to increase. So I think we're setting up for a strong second half as well. And just to clarify one point, the guide for the year on the gross margin is 42 to 44 in total.

Thank you, Gary. I'm going to stop.

Perfect. Thank you. Thank you.

The next question comes from Sameek Chatterjee with JPMorgan. Please go ahead.

Hi, thanks for the question. This is Joe Cardozo on for SOMIC. I guess first one from my end, you know, as you're thinking about the updated full year outlook for revenue, I guess is there any change in terms of how you're thinking about the composition between the customer verticals that you serve and maybe more specifically in terms of, you know, guiding or raising the guide here? Is there a specific customer vertical that is tracking ahead of your plans relative to 90 days ago, or is this more broad-based in terms of what you're seeing across the verticals and the trends you're seeing? And then I have a quick follow-up. Thank you.

Joe, let me take that first, and then Jim may add. I would say what's driving the increase for the year, I would say that's Two things. One, I think increasing confidence around the service provider recovery. We've seen multiple data points around that and it's quite broad. But I think rather, you know, in terms of getting to the upside, that's largely all cloud. That's largely cloud. I mean, we've got increasing confidence the service providers are going to do what we thought they'd do in terms of the recovery, which is pretty broad based. And I think the additional piece that would take it closer to our higher end of our range is really driven by cloud.

No, got it. Thank you. And then for my follow-up, I'm just curious if we can get an update on how you're seeing the pluggable opportunity unfold for the year. Anecdotally, it kind of sounds like you guys are more confident around revenues here at least doubling for the year. So just curious, is that fair in terms of seeing a better demand in terms of 90 days ago? And then as you think about the expectations for the year, any way to kind of size the contribution between how much is coming from Nano 5 versus 6 in terms of what you're embedding into the outlook?

You know, I think, Jim, I think, well, I mentioned it in the comments where we had record order flows for pluggables in the quarter. And I think we're increasingly seeing as pluggables move towards, you know, higher speeds, that really plays into our portfolio. So I think we've said, you know, we expect it to double for the year. And we're absolutely, you know, well on track to doing that. Scott, is there anything else you'd add there?

Yeah, a couple things. First of all, I think we're seeing growing momentum and we expect that momentum to accelerate as the demand for higher speed pluggables becomes a reality with the introduction of our WaveLogic 6N, 800 gig per plug, and beyond that, 1.6 terabits. So we're pretty bullish about that and our ability to gain share in that space and a reminder that that is incremental opportunity for us as a company. And then following on from that, we do see a continuing march of coherent technologies being developed being the preferred option in different parts of the network. We've seen it in the WAN for many years. We've seen it now in Metro DCI for the last couple of seasons. And we firmly believe we're going to see that in the campus, the 2 to 20-kilometer space, over the next couple of years. And being the leaders in Coherent, that sets us up well for that. Your question on WaveLogic 5 versus WaveLogic 6, Look, we've done this many generations over in terms of coherent technologies. It always takes a couple of years for the latest and greatest technology coming out of the machine to become the dominant volume contributor. So we would expect WaveLogic 5 to be the volume-dominant contributor through 2025. We do, however, you know, those new technologies are the... the vehicle that we use to compete for new business. So it's incredibly important in terms of winning new footprint. It just takes a while for it to become the volume contributor.

No, understood. And I appreciate all the color guys. Thank you. Thanks, Joe.

The next question comes from Simon Leopold with Raymond James. Please go ahead.

Thanks for taking the question. Look, I understand that tariffs are very fluid and change by the minute some days. But I guess what I'm trying to get a better understanding of is I feel like your supply chain and contract manufacturer relationships have been re-engineered somewhat and changing apart from tariffs. So if you could help us in understanding maybe what's the exposure to Mexico and how you envision this changing, because I believe you're moving more into Southeast Asia and So any way to sort of quantify the risk if the tariffs stick as they are today? And what else is going on in your supply chain reengineering? Thank you.

We've designed our supply chain for resilience. So we have the capability to manufacture in a lot of different places, just about all of our products. Our supply chain comes from Mexico, Thailand, Canada, India. I think that lists them all for now. And we do have a concentration today in Mexico and Thailand, but we do have the capability to move that around depending upon what the shape of the ultimate tariffs are.

A couple things to note, Simon, just to follow on from Jim, a couple things to note in terms of the architecture of the supply chain. We've taken steps over the last couple of years to take direct control over our component infeed into that supply chain so that we have the flexibility to direct it to different locations and contract manufacturers around the world to take advantage of the resilience that Jim talked about. And just a reminder, I think many of you know because we had the conversation in the past, but our architecture We own all the test assets, so we have the ability to invoke that flexibility over time and move the production around the world. Obviously, it's shorter time intervals where we have existing capacity for a given product, and the time intervals will lengthen if we have to go to a new location, but we do have that capability.

Simon, it wouldn't be useful for us to quantify these exposures because it's very dynamic and we have the ability to move things around. So, as I said, when we have certainty about the effects of these tariffs, we will update you as appropriate.

Thank you very much.

The next question comes from Tal Liani. with Bank of America. Please go ahead.

I have a few small questions, kind of. What are the applications for WaveLogic? Why is it growing and where do you see it in the network? And the second question is about pluggables. Can you... Same question, kind of. Is it because, is the growth because of the launch of 800 gig or is it in 400 gig and are you taking share from Cisco? The market share data shows that Cisco was very, very strong in 400 gig. So can you give us a little bit more on pluggables? And I have one little question at the end.

Yeah, so Scott. So first of all, starting with our traditional core strength in our business and, you know, long-haul submarine metro-regional networks. We're seeing tremendous demand for increased traffic on those networks driven by all the cloud and AI dynamics that we've talked about. on the call. We see it coming at us in terms of demand for wavelengths in various different forms, whether it be pluggables or embedded in our systems, and we see it in tremendous demand for lighting new fibers with our line systems, in particular our next generation one, RLS. So that's the first place where we're seeing it from an application set perspective. Second place for us is around the metro DCI space. And remember, that wasn't, if you go back four or five years, that wasn't really the domain of coherent technologies. It's become the de facto way to deliver it. That's where the pluggable opportunity has really, pluggable coherent opportunity has really been over the last couple of seasons. We serve that with our WaveLogic 5N. We weren't first to market with that technology, but we have had a growing share, and if you look at the Q4 reports, you see our share substantially growing, and we think that's going to grow substantially in 2025 and will continue to grow as the data rates go from 400 gig to, as you mentioned, 800 gig or 1.6 eventually there as well. So that's here and now. That is really mostly net new business for us because we never really had exposure in the past to that Metro DCI use case. Looking more into the future, we do see that continued march of Coherent being relevant to their high-speed data interconnect. The next place it's going to hit, we've been saying this for a while, but now others in the industry have joined us in saying it, is in the 2 to 20-kilometer campus data center interconnect, which has not been coherent in the past. We would expect to start seeing revenue in our business in 2026 on that use case, and those All of that is included in our three-year guide. We have a further belief system beyond that, that that march of coherent is not going to stop at the walls of the data center. That is going to bleed into the data center as bandwidth rates increase and the technical challenges servicing those bandwidth rates gets larger. That's a little bit farther out in the future. We do believe that that is going to happen, and being a leader is incoherent. That will benefit us, but from a timing perspective, it's a little bit beyond what our three-year guide was. Hopefully that helps you in terms of... Perfect.

Thanks for the elaborated answer. Services. Last year was a big year, like a big quarter. Same quarter last year was a big quarter for service growth. This quarter it grew 2.5%. and I see that the growth kind of decelerated throughout the year, 12, then five, then three and a half, two and a half now. What are the trends in services?

Generally speaking, our services business has grown, and it's grown roughly correlative to the optical growth. I would say that we've had a lot of opportunities to help our cloud providers most recently in building up their networks because they don't necessarily have all the resources to do all the building and implementation that they need in order to get their networks right. So we're very happy with our services business, and we think it's going to grow for the future. All of the sequential movements are basically just noise.

Tal, one thing I'd just add to that is we are seeing an uptick, and it hasn't flowed through the revenues yet probably, but in installation services, both, as Jim said, for the cloud players and also the service providers. So it is a bit of a sort of a proxy for the consumption and increase and build-out of the networks is the ramp in our installation services.

So, Jim, the range for year-over-year growth in the last four quarters was very, very big, you know, from 2% to 12%. What's a good assumption for us for kind of steady-state growth, ignoring all the, you know, mountains and valleys? What's a good assumption for services growth, annual growth?

I wouldn't use any particular quarter. What I would use is, generally speaking... Our services revenue is going to grow approximately as our optical business grows over time. It might in any given quarter grow faster or slower given what's going on with particular projects, but I don't think it's a bad proxy. Whatever your assumption is about optical growth, to use the same for services growth.

Got it.

Okay. Thank you.

Thanks, Tom.

The next question comes from Tim Long with Barclays. Please go ahead.

Hi, good morning. This is Alyssa Shreves on for Kim Long. I just had a quick question on the service provider business. Now with the kind of gradual recovery you've seen in service provider, can you talk about the MOFIN opportunities there? Should we still expect this to be kind of around 10 to 15 percent of telco? I'm just trying to get any color there. And then just a quick question on India. How are you guys viewing India recovery this year upside there? Thank you.

We're going to take the Mofun we've generally said certainly in the last sort of 12, 18 months, you know, it's probably about, you know, 10% plus of our service provider business. I think that's going to increase over the next, you know, years or 18 months. We're seeing a real expansion in opportunity around the globe for these build-outs, which is very consistent with the cloud players wanting to build out their global network capabilities, and that's encompassing submarine. It's encompassing a lot of geographies around the world, Europe, Middle East, Asia, India. So I would expect that to increase over time. You know, you said 10 to 15. I would even, you know, potentially say over the next 18 months or so could be as high as, you know, 10 to 20, you know, given the activity that we're seeing, you know, and they want to participate in the ecosystem build out of this. And there are large parts of the world where you know, for various reasons, the cloud players, you know, don't want to have the regulatory challenges of a license, et cetera. Um, and they, they need to provide the right kind of, uh, capacity to enable their, their business and their connectivity to data center and or consumers. And so, you know, I think this is a multi-year, you know, expansion on Mofin and on India, uh, You know, as you say, it's been, you know, a couple of years of kind of digestion where they moved to 5G. I think we're now seeing, you know, an improving pipeline there of build out. Some of that, again, you know, to your earlier question, is driven by Mofun, a lot of cloud activity in India, fastest growing internet market in the world. And so, you know, we feel pretty bullish around India and would expect it to be, you know, up for the year by the time we come out of Q4.

Thank you so much.

I'd just add that we have great positions with all of the three or four major operators in India, and I think that'll be a real source of growth for us for the next few years.

Thank you. Thank you.

The next question comes from Ruben Roy with Stifel. Please go ahead.

Thank you. Gary, maybe to stick with the international service provider theme, wondering if you have some updated thoughts for us on the Huawei, potential for Huawei replacement across various geographies now that inventories have normalized and supply chains have normalized. Any updates there? It sounds like there might be some movement, so just wondering if that's at all you know, if there are any assumptions, you know, with that replacement cycle, you know, over your next, you know, three-year outlook.

Okay. No, and I think we've always said this, you know, the greatest opportunity really is in Europe, and that remains the case. You know, it is a multi-year opportunity. This is sort of, they have a lot of infrastructure here. It's integrated into their back office, and there's not the obvious sort of free cash flows immediate, you know, to be able to rip all that stuff out. So, you know, you've got operational issues, you've got capital issues, et cetera, and that's what's taken a, you know, taken a long time. And I think just by its very nature. So I think, you know, you've still got a multi-year opportunity in front of us around the Huawei replacements. You are seeing it happen. We are winning those deals, more than our fair share of that, particularly in Europe. And I think that's going to be a tailwind for us as the service providers recover over the next one to three years.

Thank you, Gary. And I had a follow-up for Scott, I think. Scott, kind of considering some of your commentary on kind of longer-term projects, potential opportunities inside the data center. You know, there's been a lot of chatter in recent weeks and months around CPO, and I assume we're going to hear more about that over the next several weeks. What are your thoughts there? Again, thinking through, you know, sort of longer-term prospects for CNL, either with, you know, transceivers or ingredients that make up transceivers inside the data center, CPO, an opportunity, a threat, or, you know, neutral. Thank you.

Hi, Revan. Thanks for the question. So if you take a step back, think of whether it's CPO or various other different packaged topics, LPOs, etc. That all speaks to the industry trying to innovate around solving the challenge of continued increase in demand for scale. And, you know, that's scale and compute, but also scale in terms of the high-speed data interconnects. And, you know, clearly, you know, our, you know, we're, as Sienna, we're more interested in the high-speed data interconnect piece of that. All the applications that I talked about, coherent, sort of having an expanded market perspective, I don't think the CPO conversation has any impact at all on those. The CPO, we've never said, by the way, even given the march of Coherent becoming more and more relevant up to the walls of the data center and inside the data center, we never said IMDD or Direct Detect was going to go away. CPO and the other different flavors of it is at a really high level is a repackaging of that IMDD technology to solve for the scale issue. We think there are going to be other challenges there as well, and we think some of the component technology that we've had to solve for inside of Coherent may have a play as people try to figure that out as well. So we see an opportunity to play both sides of the street, Coherent as it comes inside the data center, and then as they try to solve some of these scale problems in the IMDD world, we have some value there as well. Those are conversations that are ongoing. None of that inside the data center stuff that was in our numbers right now.

Right. Thanks a lot for the detail, Scott.

The next question comes from Tim Savigo with Northland Capital Markets. Please go ahead.

Hey, good morning. A couple of questions. I guess the first one on the competitive front, I'd just love to get an update on, given the closing of the Nokia Infinera deal, are you seeing anything you know, changing competitively either on the cloud side or the service provider side of the market. And I'll follow up.

Tim, I would say that, you know, we've obviously competed with them separately and we've done extremely well with that. And I think we're, you know, we think we're incredibly well positioned with competitive advantage and a multi-year technology advantage on both modems, line systems, and microservices domain manager, so I don't think anything changes from that point of view. Obviously, they've got the challenge of rationalizing the portfolio, so I think that's an opportunity for us as they try and figure out their portfolio. So I think in the short term, that's a good opportunity for us.

Great. Thanks. And

You know, I think, Gary, you mentioned that in terms of upside drivers for the year, you felt that the cloud was really driving it. But, you know, if you look at the dynamic in Q1, where you've got service provider up double digits and cloud down a little bit, as you look at fiscal 25 and look at that kind of low double-digit growth that you seem to be targeting, I mean, is it possible that most of that comes from service provider this year, given the dynamics, or do we expect to see a big ramping cloud later in the year?

It looks like your orders might be out a little bit. Yeah, I would expect to see a big ramping cloud. I mean, I think, you know, so what were the assumptions going in, you know, kind of midpoint of that original guide was the service provider's, you know, sustained recovery, and I think we're very confident about that now. So, you know, tech, that's one of the big assumptions there. I think, touched. And I think the upside to the range was always really around cloud. And I think given the order flows and pipeline and activity that we're seeing, you know, both on MOFA and on direct, I mean, the order flows in Q1, you know, half our orders directly were from cloud. So we're getting good visibility into that as they plan these global build-outs. So I would expect that to come on strong in the next few quarters from a revenue point of view. It absolutely will, and I think it'll form the main elements around driving us to the high end of the range. Great.

Thanks very much. Thank you.

The next question comes from Ryan Kuntz with Needham. Please go ahead.

Great. Thanks for the question. We could double-click for a minute on the strength out of North America SP, which really sounds like it got off to a strong, kind of unseasonably robust start here. Is that driven by just purely an improved spending environment, or maybe are there specific programs or share gains that are driving that uptick?

Yeah, Ryan, I think we've had a number of design wins over the last couple of years that are now beginning to come to fruition with the major service providers in North America. So that is particular to us. I think, secondly, you've seen this dynamic around getting inventory in balance. I think over the last few quarters that's cleaned itself up. And so, you know, now we're able to recognize revenues and new orders. And I think that's sort of all in balance. And I think the third dynamic is, you know, they just haven't invested as much in infrastructure over the last few years. And I think part of that is, you know, they've been focused on 5G. And that, you know, both in the U.S. and globally is now, you know, petering down. And so they're now returning to, you know, look at their overall infrastructure, automation of the networks, and how do they sort of, you know, scale that to meet the demands of things like MoFurn and cloud expansion. So, you know, it's a multitude of dynamics that we're seeing, some of which are just industry-based, some of which are, you know, particular to Sienna of some of the design wins that we've got, and we pretty much now are the preferred partner in all of the major tier one carriers in North America. And that's also playing into the strength.

That makes a lot of sense. Thanks for that. And with respect to your broad exposure in cloud, which sounds like it's poised to see some strong sequential growth through this year, would you attribute that coming primarily from kind of the top four classic players? Or historically, more recently, you've talked about strength out of the next tier, tier twos that are growing rapidly. How would you characterize your growth there and exposure?

Yeah, I mean, it's tough to think about these as tier twos as well, given the size of their business. I think it's sort of their, you know, now sort of pivot towards the network part of it, which they've not been focused on before. So, you know, I think a telling statistic, which folks might have missed, is we've now got five cloud providers in our top 10 customers for Q1. And I think that kind of illustrates the sort of point that you're making around, it's broadening out the amount of players that are investing and realizing that for them to optimize their position around AI and cloud, that they've got to actually focus on the network from a delivery point of view and a monetization. And you're seeing, we've had a number of wins In these you know newer that they're certainly well-established large companies But these newer wins that are focused on the network and so you've got an expanding group of players and we've also got deepening relationships With the with the major existing players as well, you know, you think about the relationships we have it's it's submarine its Metro its long haul its pluggables and It's into the campus now with some of the plugables. It's, you know, the services aspect of it. We're increasing our engagement around all of that. So it's, you know, it's both broader and deeper in the cloud market.

Makes a lot of sense, Gary. Thanks for that.

Thank you, Ryan.

The next question comes from David Vogt with UBS. Please go ahead.

Thank you. It's Andrew for David. I wanted to ask a higher level gross margin question. I think you've said you expect it to move higher over time. And I think I expect it to move maybe 100, 200 bits higher to get to your three-year plan for your margins. And what I'm thinking about is I'm wondering, can I model and think about your gross margins moving higher over time as revenue scales and you get typical scale benefits? Or should I think about it more as something that you know, kind of goes sideways for a while and then inflects as your revenue shifts away from line systems. And so maybe the gross margin ramp in the three-year model is more back half loaded. I'm trying to think through that.

Yeah, I'll answer that. Notwithstanding the fact that we had some unexpected one-time effects in this most recent quarter, our... Gross margin is most heavily influenced by mix. And typically, we have a somewhat razor, razor blade structure of pricing and gross margins. As we put out the original line systems and photonics, that's at a lower gross margin. As we add capacity to the lines, it's at a higher gross margin. And that's the way our businesses work for a long, long time. It happens to be the fact that our RLS line system which is the next-gen line system that's becoming an industry standard, is really doing extremely well in the marketplace. Essentially, all of the cloud providers are buying that. Most of the service providers are or will buy it. And so we have a very heavy percentage of RLS in our mix. We also are beginning to sell plugs, and these are 400 ZR plugs. They're at a higher cost point than they will be going forward as we get production to scale and as we cost reduce those products. So we're experiencing a period of lower than trend gross margins, which will trend up over time. I do expect that it will trend up from what we're calling for Q2. And I think as we move through time, we're going to get back to a more traditional balance between line systems and capacity, which will naturally move our margins up. So as you said, I think it's reasonable to expect something in the mid-40s over the next couple of years. It's not going to happen this year, probably not going to happen next year. But I think by the time you get out to 27, we should be in that range. And where it goes from there, who knows? We'd like to get back to the mid-40s, and then we'll work on it to improve it.

Thank you. Thank you, everyone.

Thank you for the question and answer session. I'd like to turn the conference back over to Greg Lamp for any closing remarks.

Thanks, Michael. Thank you, everyone, for joining us today. We do look forward to seeing everyone at OFC. We will be hosting, as Gary mentioned, a number of investor meetings through that conference, and we look forward to seeing you also at an event we are planning that Tuesday at 445 Pacific. Thanks and we'll speak to you all soon.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.