Ciena Corporation

Good morning, everyone, and welcome to Ciena's Fiscal Third Quarter 2025 Financial Results Conference Call. All participants will be in a 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 then one using a touchstone telephone. To withdraw your questions, you may press star and two. Please also note, Today's event is being recorded. At this time, I would like to turn the conference call over to Mr. Greg Lamp, Vice President of Investor Relations.

Sir, please go ahead. Thank you, Jamie. Good morning, and welcome to Ciena's 2025 Fiscal Third Quarter Conference Call. On the call today is Gary Smith, President and CEO, and with us here today for the first time is Mark Graff, who officially joined Ciena as CFO on August 1st. Welcome, Mark. We look forward to introducing you to our investment community in person over the coming weeks and months. 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 Siena'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 long-term 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 posted earlier today, are an important part of our 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 file with the SEC later today. Jeanne 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. I'd like to start by welcoming Mark to Ciena and to today's call. We're excited to have you on board and look forward to the value and experience you'll bring in leading our finance organization and our global financial strategy moving forward. Now let me turn to the quarter's results. We had another really strong quarter across the board. Q3 25 revenue was $1.22 billion above the top end of our guidance. Importantly, As we focus on driving increased profitability, we delivered quarterly adjusted EPS of 67 cents, up 60% sequentially, and 91% year over year. This really demonstrating our expanded operating leverage from our business. I would characterize demand during the quarter as continuing to be broad-based and durable across both cloud provider and service provider segments. In fact, we had two 10% customers in the quarter, including one global cloud provider and one tier one service provider, really underscoring our diversified strength and momentum. Further evidence of strong demand was in our Q3 order book, which was, again, considerably above revenue and, in fact, set a new quarterly record for us. The step function increase in orders we've seen in recent quarters really underscores how the network is now fundamental to the underpinning, growth, and monetization of AI. At a strategic level, for cloud providers to monetize their substantial AI investments in LLMs and GPUs and related data center infrastructure, they need to invest in the network infrastructure that interconnect data centers, or they risk stranding their massive investments. Quite simply, AI enablement and adoption is only achieved when data is moved beyond the data center by the network to end customers. Whether for training or inferring, these data center investments need to be interconnected by cutting edge, low latency, high speed connectivity solutions. This is a powerful combination that requires the scaling up of system rack density, scaling out between racks within the data center, and scaling across with connectivity between data centers. This will entail a multi-year investment effort on a truly global scale. And this growing focus on high-speed connectivity plays directly to our core strengths and value proposition. Our portfolio, as you know, including WaveLogic Technologies, the RLS platform, the Navigator domain controller, and our interconnect solutions continue to be recognized as the industry standard for AI network infrastructure. solidifying our role as a critical enabler in this transformation. And with an 18 to 24 month lead with WaveLogic 6 and RLS, we clearly have the world's most advanced technology. When coupled with our global customer relationships, this means that Ciena is best positioned to serve these opportunities. Now let's return to our customer highlights, starting with cloud providers. Cloud providers continue to invest in AI at an unprecedented pace, with many announcing over the past quarter their intent to increase their expected spend on AI for future quarters and years beyond. Here I'd like to update you on our progress with two industry-first wins with cloud providers that we signaled last quarter. The first win is for the scale across architecture that I just mentioned. More specifically, this is a dedicated AI infrastructure project related to training and the interconnection of geographically distributed regional GPU clusters. This North American-based project is the industry's first dedicated build for this use case and is comprised of our RLS platform and the WaveLogic 6 nano 800 gig ZR plug from our interconnects portfolio. Initial revenue shipments are underway, and we expect this to ramp to hundreds of millions of dollars over the next several quarters. The second of these wins that I'd like to highlight is for a focused application inside the data center for out-of-band network management, a solution we have shorthanded as DCOM. We co-developed this solution with a hyperscaler which allows them to streamline the installation and management of its large-scale data center operations, improving scalability and reducing power and space. We also now have significant orders in-house for this application. Overall, we have increasingly strong partnerships with all of the major hyperscalers, driving increased demand for our industry-leading technology in these AI infrastructure builds. In Q3, another major hyperscaler placed its first large order for 400 ZR plus pluggables, establishing Ciena as the lead supplier of this technology for this customer. Consequently, we are on track to meet our expectations to at least double revenue year over year for our InterConnex portfolio in 2025. We now also believe that we're likely to be in a position to at least double and more our InterConnex revenue again in FY26. I want to mention here that there is another sizable emerging group of cloud providers beyond the four to five large well-known hyperscalers. This diverse group of network operators is now generally being referred to as neo-scalers, a term which is inclusive of AI compute specialists such as GPU as a service providers, cloud and edge service providers, and smaller data center and co-location providers. As they build and scale their own infrastructure, Neoscalers are strategically positioned to leverage AI traffic growth, distributed compute and automation, creating significant opportunities for Ciena globally over time, and adding to the durability of the demand. In fact, we've already secured multiple new wins with these cutting-edge Neoscalers, and we see this as a rapidly expanding new market for Ciena. Turning now to service providers, really on trend with the last few quarters, we continue to see more steady and sustainable investment patterns, both in North America and internationally. And in fact, three of our top five customers in Q3 were service providers. This includes renewed investment in building out their core infrastructure, in part driven by strong demand from cloud providers for managed optical fiber networks, or MOFAN. It also reflects strong enterprise demand pull-through and service providers' increasing focus on the role they can play in delivering AI to the edge as more enterprises move workloads to the cloud and AI-driven applications get adopted over time. It is clear that both our cloud and service provider customers are focusing their network investments where bandwidth and network scale are critical to support and enable AI traffic growth to drive monetization and adoption. This dynamic is reinforcing the significance of the current and long-term opportunity for both our systems business and our interconnects portfolio, including over time for inside the data center. To ensure we can take full advantage of those growth opportunities and as part of our regular review of our overall product portfolio, we recently made decisions to align our strategic investments on our coherent optical systems, interconnects, coherent routing, and innovative solutions like our data center out of band management solution, which I mentioned earlier. To that end, we will be redirecting additional R&D investment into these technologies and away from our residential broadband access portfolio, given the larger customer priorities for AI-driven and cloud network investments over the next several years. To be clear, we will continue to sell and support our existing broadband access products. However, we will be limiting forward investments only to strategic areas such as DECOMP. I'll now hand over to Mark for a closer look at our Q3 performance and our business outlook.

Mark. Thank you, Gary, and good morning, everyone. Let me start by saying how excited I am to join Gary and the rest of the team to capitalize on the tremendous opportunities ahead for the company. While only a month in, my enthusiasm has only grown as I've found my new colleagues both focused and determined our technology portfolio world-class, and the company's cultured center on delighting our customers. Moreover, Ciena and its owners have benefited greatly from Jim Moylan's leadership and guidance, as well as the strong financial foundation he's built. As I look to build upon that strong foundation, my concentration will be on driving incremental value creation for our owners. While learning continues, my initial areas of focus will be structurally improving our gross margin performance, establishing world-class working capital management practices, and a continuing focus on our capital allocation policies, which will prioritize organic investment in our product and technology roadmap, ensuring adequate capital available for inorganic accretion, and returning excess free cash flow to our owners. and I plan to continue advancing the operational efficiencies already underway. Lastly, I will be reviewing our framework and approach to providing long-term financial targets. With that, let me recap our strong fiscal third quarter performance. Revenue of $1.22 billion exceeded the high end of our guidance, up 8% sequentially and nearly 30% year over year. with a strong showing in our RLS optical products and routers and switches. Adjusted gross margin in Q3 was 41.9%, 90 basis points above our guidance, primarily driven by benefits from sales of previously reserved material and lower net tariff impacts. Adjusted operating expense in Q3 was $380 million, This was higher than expected, driven entirely by incentive compensation associated with strong order performance and our continued strong overall financial performance in fiscal 25. When adjusted for these impacts, we remain on track to meet our base OPEX spending level for the full year. With regard to profitability measures in Q3, we delivered adjusted operating margin of 10.7%, up 270 basis points year-on-year. Adjusted net income was $96 million, and adjusted EPS was 67 cents, up 91 percent year-on-year. In addition, we generated $174 million in cash from operations and a free cash flow margin of 11 percent. Adjusted EBITDA was $158 million, or 13 percent of revenue. We ended the quarter with approximately $1.4 billion in cash and investments, which included a repurchase of 1 million shares for $81.8 million in the third quarter, which brought our year-to-date share repurchases to $245 million. And we expect to repurchase another $85 million in fiscal Q4 to bring the total share repurchase to $330 million for the fiscal year or about one-third of our current authorization. Before I get to guidance, let me provide a brief update on tariffs. Last quarter, we told you that we expect to mitigate most of the quarterly tariff impact and believe that the net effect to our bottom line in future quarters would be immaterial. While still a highly fluid environment, Q3 played out slightly better than expected as we gained more clarity on specific tariffs. We continue to work closely with our supply chain and customers to monitor and respond to any changes in the tariff environment. So as I turn to guide, it is against the backdrop of today's tariff regime, and any changes would have a resulting impact on our results. Barring any unforeseen changes, we continue to expect the impacts to be immaterial. Now, on to guidance. The fiscal fourth quarter, We expect to deliver revenue in a range of 1.24 to 1.32 billion dollars. We expect Q4 adjusted gross margins to be between 42 and 43 percent. We believe fiscal Q2 marked the floor for gross margins, and we expect improving trends over the next several quarters. We expect adjusted operating expense in Q4 to be in a range of 390 to 400 million dollars, reflecting the impacts of continued strong order flow and overall financial performance on incentive compensation. As Gary noted, subsequent to the close of the quarter, we made the decision to further align our strategic investments toward our coherent optical systems, interconnects, coherent routing, and innovative solutions like out-of-band data center management applications or DCOMs. As a result of redirecting R&D investments into these technologies and ceasing further development of our 25-gig pond broadband activities, we expect to record a non-cash charge in Q4 against in-process R&D with a carrying value of approximately $90 million. This will be adjusted from our GAAP-reported earnings. Further, as we align our investments and as part of a broader effort to drive operating efficiencies, we are implementing a reduction in headcount that impacts approximately 4% to 5% of our workforce, inclusive of the broadband investment shift. This will result in a Q4 restructuring expense of approximately $20 million to cover employee severance and related costs expected to be paid starting in Q4 and additionally adjusted out from our GAAP-reported earnings. Looking further out, we believe demand to be very durable over the mid-term horizon in both our systems and interconnect portfolios. This is being borne out by our orders and backlog that provide visibility into the second half of 2026. With this strength and the momentum we're seeing in 2025, we have increased confidence to provide a preliminary view of 2026. As we see it today, we expect to deliver approximately 17% year-on-year growth in fiscal 2026, similar to what we're currently projecting in fiscal 25, achieving the high end of our three-year revenue CAGR target one year early. We expect that gross margins will continue to improve in fiscal 2026 with an initial estimate of 43% plus or minus one point. And we expect to continue investment in our product and technology roadmap funded by a combination of portfolio decisions and operational efficiencies, the net result of which will enable fiscal 2026 OPEX to be flat to fiscal 2025 at approximately $1.5 billion. Taken together, we now believe that we will accelerate our longer-term goal of 15% to 16% operating margin by one year, from 2027 to 2026, driven by increased operating leverage and improving gross margins. Given that, and in combination with the continued rapid growth we are seeing in the market, we will not be providing new three-year targets. With that, let me turn it back to Gary for some closing comments before we take your questions.

And in summary, we are seeing strong broad-based growth across our portfolio, driven by accelerated demand from AI workloads, related cloud traffic, and steadily improving service provider investments. To be clear, we believe we're in the midst of a positive secular change in the scope of our opportunity. as well as our growth trajectory, given that the network has never been more critical, particularly as traffic flows out of the data centers. And as you know, for the last several years, we've been investing in technologies and products that address this demand. That demand is here now, and it's only just the beginning. Globally, more than $7 trillion is projected to be spent through 2030 to accelerate investments in data centers, GPU clusters, the power grid, and AI model development. And increasingly, networking will have a greater wallet share of this spend. We believe we are at the early stage of a multi-year, highly durable network investment era. It's now all about the network, and Ciena's high-speed connectivity is front and center in this critical AI scaling. As it basically moves from electrons to photons, it's all about optical. With that, we'll now take questions from the cell side analysts.

We will now begin the question and answer session. To ask a question, you may press star and then one on your touchtone phones. If you are using a speakerphone, we do ask that you please pick up the handset before pressing the keys. To withdraw your questions, you may press star and two. Again, that is star and then one to join the question queue. We'll pause momentarily to assemble the roster. And our first question today comes from George Nodder from Wolf Research.

Please go ahead with your question. Hi, guys. Thanks very much. I guess I wanted to start by just asking some questions about sort of the industry structure and how you see that impacting your gross margin over time. Obviously, we've seen Infinera get consumed by Nokia. They're putting those two businesses together. A lot of the smaller subscale guys in the industry have fallen by the wayside, I think, to some degree. And so it seems like the market environment should be much better for you guys. How do you think about that as it relates to gross margin going forward? And do you see some opportunities to be more firm on price or even raise price as the market kind of coalesces around, you know, two vendors or even just Sienna? Any thoughts there? Thanks.

Thanks, George. Listen, I think, as you know, we've invested very strongly in the high-speed connectivity, and we clearly have an 18-month to 24-month lead on that. So I think that's highly valued by the cloud providers and hyperscalers and service providers as well. So I think we have a very strong competitive advantage there, and I think the structure of the industry has improved considerably over the last few years. And that does play through to our expectation. You know, it's a confluence of elements around our improving gross margin. I'll let Mark talk to some of the other elements there. But basically, you know, that's part of, you know, the economics that we believe we can get over time into the mid-40s gross margin. As Mark said, we called really Q2 as the bottom for that, and we expect to see steadily improving gross margins quarterly over time.

Yeah, George, hi. This is Mark. What I would add to what Gary said is we're really trying to take a pretty structured approach to how we think about gross margins, and we think about those really in three buckets. The first bucket is How do we design products that have a long life with continuing reducing cost structures? The second is optimizing how we work with our supply chain and our suppliers to really make sure that we're realizing and accelerating those unit costs on those items that we procure. And then the third piece is really making sure that we're having the conversations, which we are real time with some of our customers, to ensure a fair value exchange. As we think about the current construct, we're really excited about expanding our footprint. And given the long life of these products, we think that sets us up really well for gross margin expansion as they continue to invest in their networks.

In terms of value exchange, I assume you're talking about the potential for raising price or being firmer on price. Is that an option for you guys?

I think the expression value exchange is a much nicer expression, George. Yes. Yes.

Fair enough. Thanks very much, guys.

Thanks. Thanks, George.

Our next question comes from Sameek Chatterjee from J.P. Morgan. Please go ahead with your question.

Sameek, are we happy?

And, Sameek, is it possible your line is on mute?

Yep. Can you hear me now? We can hear you now. Please proceed. Sorry about that. Congrats on the strong outlook here. Maybe just to start with the new scalar opportunity and sort of how you're thinking about how that evolves more in terms of sizing and timing as well, and how should we think about that contributing to your updated guide for fiscal 26? What are the sort of range of engagements you have on that front? Thank you. And I have a follow-up as well.

Hey, Sameek. You know, listen, I think it's a net incremental opportunity for us that's going to scale over time. We're encouraged by what we're seeing at the early stages of that. A lot of these neo-scalers are identifying fairly early on that they want to invest in the network. They understand the issues around, you know, connectivity and how they're going to enable their business. So you're seeing a lot of new builds beginning with these neoscalers, and we've won a number of them, and we have a number in our pipeline. So I think as we go through 26, we've included that, obviously, in our guide, what our expectations are for these. But I think they will increasingly, over the next few years, play a more significant role in our overall growth.

Correct. And maybe for my follow-up, staying on this sort of guidance for about 17% growth similar to fiscal 25, how should I think about the composition if it's at all different compared to fiscal 25? Because between telcos, mofins, cloud companies, and then you have the incremental opportunities around neocloud and the component revenues that you've also talked about, is there sort of a way to think about how maybe the composition of The growth is different from fiscal 25, even though the growth rate is pretty similar.

I think increasingly, obviously, it's driven by AI workloads, but I would also say that we expect service providers to play an increasing role in that, both delivering hybrid networks to the cloud players and also in these managed optical fiber networks. We're seeing multiple opportunities both in North America and internationally Mofin so you know roughly right now directly hyperscalers in their various forms including neo scalers is roughly about 50% of our business you know our kind of view is expect that to be similar actually in in in 26 but a large part of that service provider workload will be Mofin and cloud and AI edge related and So, you know, I think it's going to be a confluence of platforms that deliver those workloads.

Yeah, if I would just haste to make this, Mark, I would just add that, you know, we've got reasonably good visibility into that given the huge backlog that we have today and what we expect to leave Q4 with. So I would agree with what Gary is saying.

Good. Thank you. And, Mark, I look forward to working with you. Thank you. Thank you. You too.

And our next question comes from Maida Marshall from Morgan Stanley. Please go ahead with your question.

Great, thanks. And congrats on the great quarter. I just wanted to get a sense of, you know, you guys had been making efforts to increase utilization on some of the pluggable platforms and just kind of getting increased utilization out of that. Just wondered how much of the growth margin upside kind of came from mix relative to kind of initiatives on... your own part and then just if you could kind of identify on gross margins just what was the upside from tariffs versus expectations. Thanks.

Yeah. Hi, Mita. It's Mark. Let me take that and then I'll let Scott and Gary add some color. In terms of the gross margin uptick that we're looking at, as we scale those parts, we're expecting, obviously, those unit costs to come down. And that really played out the way we expected in Q3. As we look forward to the 42% to 43% guide that we gave, and then the 43% plus or minus guide that we gave for 26, we expect those trends to continue. And so we should be seeing some tailwinds from improving ramps of those products as they, you know, get cost reduced just through scale. The second part of your question around the goodness that we saw in Q3 from tariffs, you know, we told you last quarter that we expected to be about $10 million roughly in tariff costs per quarter. As we saw the administration kind of work out some of the trade deals with various nations that impact us, like India or Vietnam, et cetera, we were able to tighten up some of those expectations. So we saw a little bit of good news. Maybe it's 20 or 30 basis points of the benefit that we got out of the 90 that I cited. And that's really what was driving it. It was just getting tighter on a pretty uncertain environment.

Amita, just to follow up on your margin question, you referred to headwinds that we referenced in previous calls around some of our new product introduction, whether it be pluggables or 6E or RLS, and Mark gave you the dimensions of what the margin changes were quarter over quarter, but I would say we did that margin improvement despite the fact that we were shipping a lot more RLS and a lot more plugs. And to give you a sample of that, quarter over quarter on their plug business, the ports that we shipped were up 20% sequentially. So we were able to deliver margin improvement even in the face of that. And RLS had another bumper quarter. And that's all coming from scale in general matters, the natural life cycle of these new introduction products and our continuous focus of cost reduction over time. And then as we look forward into 2026, And we will be able to take advantage of a technology transition into our WaveLogic 6 family as well, which will yield better margins for us.

Great. Thank you. And our next question comes from Ruben Roy from Stiefel. Please go ahead with your question. Yes.

Thank you. A question for either Gary or Scott. I wanted to dig in a little more to scale across. You obviously talked about the GPU clusters last quarter, Gary. But, you know, this term scale across is popping up more and, you know, with NVIDIA talking about a dedicated switch for scale across. I wonder if you could talk through the opportunity relative to coherent light and, you know, sort of your broader portfolio, because it seems like you've been talking about coherent light for a while now, maybe almost a year, but it seems like there's a bigger opportunity across, you know, these dedicated switches. areas of infrastructure that are being discussed, you know, with this concept of scale across. Am I thinking about that right? Thank you.

Yeah, good morning, Ruben. Yeah, absolutely correct. You know, the scale across network, as you say, is sort of connecting GPUs at distance beyond a single data center. The actual specific example that we referenced in terms of the first customer movement on that At a high level, you would have thought that may have been an opportunity for coherent light. But what we actually see is more and more often these cloud providers are needing to bring the network to the power. And the power and where they can get the power is dictating the distances and the performance requirements. In order for you to be a leader to service that demand, you need to have a breadth of capabilities. Coherent light will be an important one of those on the menu. But this particular example, we had to actually use our performance optics. So it's 800 gig, 6 nano because of the distance they were pushing. But for sure, coherent light still believes in the opportunity. It's not a question of if, it's a question of when. And the view we put out in the past was that we would expect to see revenue start to flow on those technologies in 27. I don't think our perspective has changed on that.

Got it. Thank you, Scott. And then just a quick follow-up on the residential broadband. I might have missed this, but in terms of, you know, I think you said you're going to continue to support the business. It sounds like there's a little bit of pond activity going on again, and we've got some subsidy-related, you know, stuff happening here in North America. Is that something that you folks might be looking to potentially divest or, you know, just no more investment and just kind of run rate that out, you know, for however long the time period is that that takes?

I think, Ruben, it's more the latter approach. And I think, you know, if you think about the growth opportunities that we've got, you know, across the board on AI workloads, you know, we really want to prioritize those. So we're going to continue to support our broadband initiatives there. We are just really not going to put the longer-term roadmap for that in place, which we were investing in. And I think given our priorities, it makes absolute sense to put it front and center behind the optical portfolio.

Yeah, and Ruben, specifically when we say defocus or prioritize the future investment, what we're talking about here is the higher capacity PON technologies, 25 gig and 100 gig PON. PON is still an important technology for us in terms of offering an access choice on our running and switching portfolio and a key contributor to optics inside the data center with our DCOM solution set.

Very helpful. Congrats on the great quartering guide. Thanks, Ruben.

Our next question comes from Simon Leopold from Raymond James. Please go ahead with your question. Thanks for taking the question.

The first thing I wanted to ask about is maybe a little bit of a kind of compare and contrast of this DCI opportunity, because clearly Ciena has been interconnecting data centers for years, but In this use case, you're talking about hundreds of millions to interconnect a pair of data centers. And so what I'm trying to get a better sense of here is sort of the distinct differences and then what is sort of that market opportunity from here. And then just I'll give you my follow-up as well, which is the routing and switching business outperformed expectations this quarter and when we pair this with the reduced focus on residential broadband, it would imply that there's some other aspect driving it. And I'd like to see if you could unpack, is this more about the service provider activity in routing, or is the strength this telemetry opportunity that Harry mentioned earlier in the call? Thank you.

Simon, let me take the first part of that, and Scott will take the second part of the question. I think what's different around this data DCI connectivity we're seeing, it's shorter distance and it's a dedicated training network, if you were to put it simply. So it's super high speed, low latency. That's why it's using our RLS and the 800 gig plugs at scale. This is just one region of this particular hyperscaler. We believe that there are other applications, you know, that will, this same application will roll out both at this hyperscaler and at others. It's the first one of its kind that we're aware of, and we're beginning to roll that out now. But it's dedicated for training across multiple GPU clusters.

And on the routing and switching question, Simon, I think there's two dynamics here. One, for sure, it has mirrored sort of the comeback in terms of service provider spending. As you know, it was largely exposed to the service provider space in terms of the opportunity set. So that's one key driver. The second one, though, is we are seeing an emergence of coherent routing opportunities. This is playing to the strength of our optics inside our routers, and then you start to see that in service provider aggregation networks. And then the third one, you mentioned it, which is the opportunity to take that routing portfolio and the technologies that we have and create this optics inside the data center for their communication network, so the DCOM, as we called it, opportunity. So those are the three drivers, and they're all contributing.

Thank you. Our next question comes from Tim Long from Barclays. Please go ahead with your question.

Thank you. Yeah, two for me as well. First, if you could just touch on the kind of interconnect pluggable business with the double this year and the double or more next year as well. Just talk a little bit about kind of the breadth of customer base currently in that interconnect pluggable business. And to get to that level of doubling again next year, does that imply you need some incremental wins there or not? That's number one. And number two, back to that win, Gary, that you were just talking about, if you could just touch on, it sounded like hundreds of millions, maybe discuss a little bit the ramp of what you have in that one region, like kind of what's in hand right now, and any margin implications that we would expect as that deal gets up to full run rate.

Thank you.

Yes, let me tackle the first one on the interconnect business. Just a reminder for folks on the call, when we talk about interconnects, it's really the categorization of selling our high-speed optical technologies either as plugs or subcomponents independent of our system business. So that's what embodies the interconnect business. As I said earlier, we had our best quarter ever in terms of plug shipments. They're up 20% sequentially and up something like 140% year on year, which puts us well on track to beat or exceed our stated goal of doubling that piece of the business from 24 to 25. We are shipping revenue against our 6N, which is the next technology platform, both in terms of Complete plugs, but also subcomponents of that as DSPs and our electro-optics sold as component unbundled from our plugs. And that's just starting. I would say, you know, the number of customers here measures in the tens, multiple tens. And, you know, the confidence that we have to say we're capable of doubling it year over year actually is in our order book. We have a fantastic backlog in order book here. We've got great visibility into the next year.

Tim, the second part of your question around the application I talked about with the dedicated training network, it is multiple hundreds of millions. It is a considerable amount of RLS, which is pretty much the de facto standard now amongst all of the hyperscalers, our line system. We're laying a massive amount of tracks around the globe. This is another example of it. We have the orders for this first region in-house, and we are beginning to deliver in Q4. We'll recognize some revenues in Q4, but fairly small. but it will ramp up in Q1 and Q2 of next year. And that, you know, is really just one region. And it's the first time that we've seen this application. And this, obviously, is a new application for connecting data centers. And it really represents, we think, over time, a pretty expansive TAM opportunity for us. And obviously... was super well placed for it. You know, both our line system, our modem technology, and in fact, our domain manager, they're all industry leading. And you put those things together, and it really is a sort of de facto standard for this kind of high-speed, low-latency application.

Thank you. Tim, this is Mark. You had a question about the impacts on the margin, the 43%. that plus or minus that we gave you for 2026 is inclusive of what we have in place today. As we continue to ramp that, one of the benefits that we see of these large orders is it gets us to scale faster. And so that will be a tailwind for us as we continue to ramp those solutions.

Okay. Thank you, Mark.

Yep. You bet.

Our next question comes from Tim Savageot from Northland Capital Markets. Please go ahead with your question.

Hey, good morning and congrats on the results. My first question is on WaveLogic 6. Can you give us any color or details in terms of customer additions in the quarter and where you are from a total customer count or you know, revenue impact or any kind of details you might be able to add there. Thanks.

Thanks, Tim. I assume you're talking about WaveLogic 6 Extreme. If that's not right, you can jump in and correct me. But we've had great success with 6E in early days. We added 11 new customers last quarter. We're up to a total of 60 customers. The port shipments on 6E doubled last quarter, quarter over quarter sequentially, so we're in a significant ramp phase. We are either a standardizer in the process of standardizing across all the major hyperscale cloud providers. And from a generation perspective, it's a bit of a subjective statement, but I believe it's sort of our fastest ramp on any of our generations on coherent technologies.

Great, appreciate that.

And my follow-up is on the supply side. Doesn't really seem to be impacting you, but I wonder if you can comment on the overall component or supply constraint situation.

Yeah, Tim, I would say that we've invested significantly across the supply chain ecosystem, and we continue to do so. That's really what has enabled us to grow 30% year on year by quarter comparison, you know, that's a result of that 17% midpoint of the guide for the year. So you can see, you know, we've scaled that up. We have made considerable investments to continue that scaling up in 2026, given the opportunity. And as Mark indicated, we expect similar kind of growth rates next year. Obviously, the scale of the business we're at, you can imagine that requires considerable investment, which we've already made. So we believe that whilst we're constrained, our revenues would be higher if we've had bigger capacity. But we are ramping that up in alignment with what we see the market opportunity to be. So we still have challenges in certain components as you ramp up this kind of scale. but we're working our way through them, and we believe that the things that we put in place across our global supply chain will put us in a very good position to, over time, potentially, as we get through 26, reduce some of our lead times as that capacity comes online.

Great. Thanks very much.

Thanks, Tim.

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

Good morning, everyone, and thanks for taking my question. I have two as well. I guess maybe to start with, Gary, given the comments you just have been making on the strength of your backlog and auto momentum, is it fair to think that your cloud revenues should actually accelerate in fiscal 26 versus 25? And if that's fair, then does that sort of imply that the rest of the business is going to decelerate next year, or... Is that more a reflection of it's fairly early in the year and we're trying to be a bit more conservative or not?

No, Amit, I think, you know, there's a big change going on, you know, and it's not just obviously, you know, you're layering on, you know, service provider is continuing to have very good sustainable growth. You think about the service provider market. It's really under-invested in core optical infrastructure over the last five years. A, because of all the COVID, supply chain absorption, and all the rest of it. And B, the preoccupation with 5G. They're now, I think, well over that. And we're seeing, I think, a good runway for just service provider growth. It's at a lower growth rate. It's in the mid-single digits. But it's super helpful. It's half of our business. So, you know, we have a pretty good line of sight to that. I would also say that three out of the top five, you know, customers this quarter were service providers. And, you know, I also think the other dynamic around this shift of workloads, as you start getting, you know, these AI workloads closer to the edge, you're really talking service providers. And that, in addition to the movement opportunities which we're seeing both in North America and globally continue to expand, I think service providers are going to play a critical role in this whole AI workload delivery. So I would expect, even though we're going to have outsized relative to service provider growth in cloud, I think the mix is going to be fairly similar in terms of direct next year. So they're both growing. Hyperscale is obviously at a higher rate given the global scale of the investment necessary for the data center interconnect.

Got it. Super helpful. And then when I started listening to you talk about some of the big wins you've had on the AI side, especially the out-of-band networking management and the CL across wins, It almost sounds like you're starting to co-develop and co-design some of these solutions with your customers. Is that fair? And if that's the case, then should we think about Sienna having perhaps better market share, which it historically had going forward in this cloud opportunity? Thank you.

I think that's a very fair observation. If you look at RLS, RLS was actually also a collaboration with hyperscalers in terms of the design to it. And we're actually leaning into them across a number of technologies where we're co-creating the technology and the evolution of both the line system and the modem technology as well. So, you know, you look at the kind of growth rates we're having here, and I think over time, you know, one can only conclude that we're going to continue to expand our market share in this space.

Thank you. Thank you.

And our next question comes from David Voigt from UBS. Please go ahead with your question.

Great. Thanks, guys, for taking my questions. I have two as well, and my line cut out, so if you answer this, I apologize. Gary, can you help frame or mark the sort of contribution from the new DCOM opportunity, maybe in the quarter, and kind of how we should think about that in terms of scale relative to the broader, you know, broadly defined networking space out there? And then the second question is, you know, I appreciate the early look into Fiscal 26. Just trying to get a sense for how much of your confidence comes from, you know, where your backlog sits today, given how strong orders have been and how that converts into revenue. Or sort of an explanation is that maybe you think the continued growth in orders in 3Q and 4Q translates into continued strength in fiscal 26 as well. Like how much is coming from sustained order growth versus some of it coming from backlog rev rec at this point? Thanks.

Thanks. Thank you, David. On the DCOM side, you know, this is one customer that we've co-created with. We think, well, we know that this application, you know, can be generic to data center technology, given that it, you know, it plays nicely to reducing power and space, which is critical. I would say just with this one customer, it is hundreds of millions. and we've got the first initial orders for that, and we will begin deployments shortly. But that's continuing to ramp. So it is hundreds of millions, and that's just one customer.

Yeah, and so, again, as you think about the impact to the margins, David, as that thing ramps, again, we get the scale benefits, And that scale benefit kind of ripples through the entirety of the P&L. And so, you know, like Gary said, we're starting to ramp that now. This particular customer is one of our largest customers for this quarter. This particular workload, DCOM, is starting to ramp within that customer's envelope. And so we expect to get some tailwinds from that from a margin perspective, you know, as it ramps through Q4 and then obviously to hundreds of millions, as Gary talked about, in 2026.

And then overall fiscal 26 kind of color, if you can share. Yeah. Remind me of the, how much of your comp? Yeah. How much of your confidence comes from your elevated backlog in strength and orders versus kind of sustained demand going into next year?

Yeah. So it's really around the backlog that we're seeing this year. Right. So, you know, as, as we talked about in a previous question, If we had more supply, we'd be able to get more revenue. As that supply kind of goes into 2026, those orders are going to get fulfilled in 2026, and we'll recognize that revenue then. So as we talked about the visibility into the second half of 2026, we've got fairly high confidence that the guide that we gave you is going to be achievable. As Gary mentioned earlier, we're also seeing some pretty healthy growth as witnessed, again, by orders. from our service providers. And so the combination of those two things from both our cloud side of the customer house and the service provider customer house is giving us quite a bit of confidence as we go into 2026, which is why we decided to give you the 2026 guidance a quarter earlier than we normally would. I'm not sure we'll do that again, but You know, given the confidence that we had and the momentum that we're leaving this year with, we felt pretty comfortable giving you guys a sneak peek on what 2026 would look like.

Thanks, Mark, for the clarity.

Thank you. The other point I would make is, you know, as you look out longer term here to the durability to it, first of all, you're looking at massive scale of investment that's going to be necessary. So I think we all take comfort from that. Secondly, you've got a lot of these new applications, some of which we've talked about today. But we also, none of this sort of guide that we've given you includes really inside the data center coherent adoption, which we think that intersection as you move from electrons to photons, as you require less latency and higher speed, is going to happen. It's just a matter of when. And so, you know, that's all in front of us. So, you know, not just the 26, but beyond, I think we have a very good high confidence in the dynamics that we're seeing. There's a secular shift in our opportunity. Great. Thanks, guys. Thank you.

Our next question comes from Carl Ackerman from BNP Paribas. Please go ahead with your question.

Yes, thank you. Given the doubling of the module business next year, your growing backlog of higher margin blades, and now these two hyperscale industry first wins that underscore your opportunity to partner with hyperscalers and perhaps GPU vendors earlier in the cycle, as well as your prudent investment in broadband, I guess why can't operating margins attain your long-term goal of 15% next year?

They are. So, sorry, maybe I wasn't super clear. So, one of the things that we're looking at is, you know, pretty significant increase in operating leverage as we go from, you know, one 17% growth year to the next 17% growth year while we're keeping OpEx flat. And so, what I mentioned in the preparative marks was we are pulling in the 2027 15% to 16% op margin goal into 2026. All right, so I want to be super clear. It's a one-year acceleration, and our expectation is we hit 15% to 16% in fiscal 2026. Does that help, Carl?

That does. That does, yes. And then just a quick follow-up. You spoke a lot about the revenue opportunity you see into fiscal 2026, but you talk about whether your order visibility extends into fiscal 2027 with these cloud providers that you spoke about today. Thank you.

You know, Carl, I think, you know, I addressed some of that in terms of the other opportunities that we're seeing, you know, that layer on, basically, in addition to what we're already seeing. Obviously, it's a little early to talk about 2017. It's a little early to talk about 2016. But, you know, we have good visibility into it, so we're giving those. Listen, I think this is a very durable, multi-year, secular shift. in the demand environment. And when you think about it, so much investment has gone into AI in its various forms. You know, the GPU accelerators, LLMs, data centers, and all the infrastructure about that. Now it's time for the network. Because without the network, it's got to come out of the data center to enable all of this stuff to happen. Monetization, training, inference, all of those things, you know, need the network. And there's a greater prioritization right now in terms of driving the growth of that network so you don't strand these assets and you really enable the whole AI infrastructure. And we're at the very early innings of that. Thank you.

Thanks, Carl. We have time for one more question.

And our next question comes from Ryan Koontz from Needham. Please go ahead with your question.

Thank you. I want to circle back to your comments on vertical integration and supply chain and really at the optical layer here. Can you maybe expand on where you are there relative to your own supply versus commercial components and how you've been able to navigate the tight supply situation out there? Thank you.

Good morning, Ryan. I'd say this. If I look at the optical modem piece, which is a big, big part of our portfolio. We are, in terms of capability, I believe the most vertically integrated supplier in the industry. And that's not to say that we depend only 100% on our own components because from a strategic perspective, we use our own components and we also use third-party component providers to provide us flexibility. And in a constrained environment like we are now, we're using all those levers.

Great. That's helpful. If I can squeeze in a little more around what you're seeing in share in North America, because of consolidation with Nocon and Finera, do you feel that's been an opportunity of strength for you guys to build more share in the U.S., or do you feel your customers are spending more maybe than theirs traditionally? Are you seeing competitive takeaways, or is it more just... a spending shift where your customers are stronger? Thanks.

You know, I actually think we're seeing both, frankly. You know, because of our leading technology and the investments, they remain the very focused, you know, technology spend, online system, modem, domain management. You know, we're 18 to 24 months ahead of everybody else on that. Obviously, consolidation is a helpful dynamic in the industry as well, for sure. But you're seeing, you know, I think at a very simple level, you're seeing service provider, you know, return to spending on infrastructure after a sort of, you know, underinvestment for five years. So that's a nice dynamic to have. And then you're leaning in on all the AI workloads. It's all about network and optical, you know, as it moves from electrons to photons, both in the DCI market and eventually in the data center. kind of plays to our strength, and that's why we think this is a very durable, multi-year, fantastic demand dynamic, and we are incredibly well positioned to it. The investments we've made in the last few years really intersect all of the key elements around this high-speed connectivity that's going to be required. That's great. Thanks, Gary. Thanks, Scott. Thanks, Ryan.

That's right. Thank you, everyone. We look forward to catching up with you later today and over the coming weeks. Thank you.

Ladies and gentlemen, the conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your lines.