Ciena Corporation (CIEN) Earnings Call Transcript & Summary

Good afternoon. My name is David, and I'll be your conference operator today. At this time, I'd like to welcome everyone to Ciena's Next-Gen Metro & Edge Investor Chalk Talk. Today's conference is being recorded. [Operator Instructions] Thank you, Gregg Lampf, Vice President of Investor Relations, you may begin your conference.

Thank you, David. Welcome, everyone, and thanks for joining us today. We hope you've had the opportunity to take the roughly 30 minutes to listen to the recording we uploaded last week before today's Q&A call. If not, please do go and check it out on the Events page at your convenience. There's a lot of great information there. We know a lot of you have been asking us questions on this topic that we certainly try to address there as well as during this call today. We're certainly excited to host this discussion about Ciena's Next-Gen Metro & Edge journey and the expanding TAM opportunities we've been investing towards over the past several years. And today, we're going to focus on your questions. Leading the call today will be Scott McFeely, who many of you know; and he'll be joined by subject matter experts, Brodie Gage, Vice President of Product Line Marketing; and Joe Marsella, Vice President of Metro & Edge Product Line Management. And Scott will take a couple of minutes to provide a high-level review of the presentation before we kick off the Q&A. Before handing it off to Scott, I just want to remind everyone that Ciena is in its quiet period. We won't be discussing current financial information, results, expectations or economic conditions. While we won't be discussing these items, we do expect to talk directionally about the technology market. And as such, please do take note of our safe harbor language from our most recent financial results call on the March 7, 2022, as well as our Form 10-Q filed with the SEC on March 9, 2022, for more details there. And with that, I'll hand the call over to Scott.

Thanks, Gregg, and good afternoon, everyone, and it's good to speak to you again, and thanks for your time today and your interest in this topic and in Ciena. Hopefully, you had, as Gregg said, a chance to listen to the -- or watch the prepared video with the stars of the show, Brodie and Joe. I wanted to just, for those that maybe haven't had a chance at a really high level, summarize some of the key points we were trying to get across in the video. We absolutely see a significant amount of change happening at the edge of the network. That's driven by well-discussed attributes and how we liberalize, how enterprises, how consumers are living their lives and the drive for bandwidth at the edge of the network. And the folks that provide those networks driving to a more cost-effective way to serve that bandwidth with the right performance attributes through the applications that they're trying to serve up. What that is driving is higher bandwidth per flow, fiber densification and fiber deeper into the network. And in an attempt to drive down or bend the cost curve, the disaggregation of services that historically would have been integrated into routers into solutions that take advantage of commercial office health compute capabilities. So what that means for us is there's a bunch of architectural change out there, which gives us opportunity. And we fundamentally believe the key attributes for stepping into those opportunities are optical, becomes an important -- more important part of the solution set, both in terms of the light sources, but also the optical layer, the photonics and the intelligence around the optical layer for carrying those higher bandwidth flows; a next-generation IP networking capability that is not tied down by the legacy services that are all integrated in these service edge routers in the past and a multiplayer operational set of tools that allow our customers to substantiate these technology capabilities in their network offers. Those dimensions are things that we have been investing in for quite some time. And we've been sort of funneling those investments into primarily 4 different use cases that we think is a great growth opportunity for Ciena over the next number of years. Just to reiterate them, they're -- we talked to them in some detail in the video, but wireless transport and everything from front haul, mid-haul and backhaul included in that enterprise networking, next-generation residential fiber access or XGS-PON and then backing off from those sort of more access parts of the network into the -- deeper into the network into a converged metro network that's capable of carrying all of the traffic coming at us from those different use cases. We've had some early success in each of those use cases. We highlighted some of those in the video, but we're happy to get into it a bit more here in the Q&A. So with that sort of -- for those of you that maybe didn't have a chance, that's sort of the background, and we'll just jump right into it.

[Operator Instructions] We'll take our first question from Simon Leopold with Raymond James.

I guess my big takeaway from the session, the Chalk Talk, was Ciena's argument of why ZR would not be a big threat. But I guess some of the metrics we've heard suggested ZR traction has been pretty good ramping in the beginning of this year. So I wanted to hear your latest takes on how you're sizing the ZR market in this year and then several years out?

Yes. So let me try that. By the way, good afternoon. How are you? The ZR market specifically, and you've heard me talk about this before, let me separate out ZR specifically from the extension of ZR, ZR+,ZR++ whatever label you want to put to it, which is sort of pluggables beyond just the definition of ZR. When we're talking about next-generation metro and edge, by the way, we kind of separate out inter-data center connectivity and the ZR piece, but I'll talk to it anyways. The ZR piece -- we haven't changed our perspective on it, by the way. We think the market size is around $500 million a year. As this gets matured, we actually do believe that it will be a consumption model that will have a place to play in the sort of campus/metro data center interconnect. That's the single-span, less than 80 kilometers, very simple network in between. We think we have a great offer there, and we will participate in that. And as you say, it's starting to get going, but it's still in front of us in terms of being a significant part of anybody's spend. And even that $500 million, when you're talking about an overall addressable optical market or whatever, $12 billion or $13 billion, depending on who you're looking to count it, it's still a relatively niche application in the ZR context. And for Ciena, I'll just remind you that our exposure to the folks that will roll this out, which is web-scalers, it is largely dominated by core infrastructure and submarine. We have some exposure on the metro. But for the metro, it's as much an upside opportunity for us than it is a threat. Now let me take it to the part of the question, I think that does apply to the next-generation metro and edge piece of it, which is will pluggables have a play in the technology piece? Not necessarily ZR's prospect, but coherent in a pluggable form factor, lower power footprint than maybe, say, a submarine solution. We believe, absolutely, they will. And it's an important part of the winning hand. But the winning hand also includes sophisticated photonics, an IP forwarding and routing capability and the management tools for the folks that deploy these type of networks, which is the service providers, for the most part, to be able to operationalize this. And just because it may be "a plug-up solution", we still think the dominant consumption model is going to be buying that from an end-to-end system vendor. Brodie, if you wanted to add anything to that, please feel free to jump in.

No, that's exactly right. ZR is going to be for metro DCI use cases almost solely. That's a net opportunity for us. The service provider, Metro, ZR does not play there, higher performance, pluggable optics do play there, but you need to have that end-to-end hand of photonics, modems, IT platforms and all of off-box software automation intelligence that sits on top of it for it to be successful in the service provider space.

Yes. Maybe just a quick follow-up that you're sort of alluding to here is, I think, folks understand one of the limitations of ZR is the reach, typically about 80 kilometers. What are some of the other limitations that would dissuade an operator from using ZR besides range?

Yes. So ZR optics are optimized for the Metro DCI use case. So things like the tunable optical filter, the ED flow that provides high-performance output power, the linear and nonlinear compensation has all been pulled out of it to make it cost-effective and low power for that DCI use case. Those optics are not relevant for metro service provider or regional applications because they can't go through ROADMs, and they can't meet the applications that the service providers want to deploy in.

[Operator Instructions] Next, we'll go to Fahad Najam with Loop Capital.

My question is more on the software-related opportunity in the edge. And to give you a bit of a context of what I'm talking about, I recently attended a conference which is primarily enterprise IT. So nothing to do with telecom. And I was pleasantly surprised to see Ciena there, making presentations to CIOs about orchestrating and managing their deployments. So to the extent that coherent technology further penetrates potentially in the campus environment, at 1.6 terabit or even at higher speeds, what is the related software opportunity? And how are you thinking about that opportunity overall?

Brodie, do you want to talk to some of our thought process on high-speed Enterprise Connect? Enterprise Cloud Connect?

Yes. [Technical Difficulty]. There's a couple of things in some [Technical Difficulty].

What happened? Go ahead, Joe. Brodie, your line is open.

Can you hear us okay now? We're having technical problems with the...

Yes. We can hear you now. Here we go.

Okay. Yes. So there was a couple of things in that question. Number one, with regards to the higher speed connectivity within the data center as you move [Technical Difficulty]. Can you still hear us okay?

You're choppy.

You're clipping, okay.

Yes, audio's breaking up.

Yes. so -- okay. We'll try again. So there's a couple of things in that question. As data centers move to higher capacities within the data center, so as you move from 400-gig gray optics to 800 gig to 1.6 T and 3.2 T, et cetera, there is absolutely an opportunity going forward for coherent implementations for those what we call current light implementations. [Technical Difficulty]

Brodie, we're going to have to cut the line. Yes. we're going to switch rooms to a different phone. We'll be back.

Okay. Sorry about that. Yes, maybe I'll jump in and tell you where we have offers today and where we see this going in terms of -- I'll just call it the virtual lens. Today, if I look at our offers there, we've built a capability on top of our physical managed service infrastructure basically where you can drop one of our network terminating equipment and run integrated in there, the software infrastructure to run various different VNF's. And we have pre-integrated a number of VNF's, and we take that to market through a number of service drivers. That's sort of the networking offer. Above and beyond that, within our Blue Planet orchestration, we have the capability to offer orchestration of those virtual assets, including bundled, of course, with our networking offer. Going forward, the other incremental piece of that, that we see is as you start where you started with your question, will you start to see higher bandwidth going into those enterprises and that bandwidth being Cloud Connect services? We do see an opportunity to actually sort of have a programmable, if you like, virtual wave service that would be offered as a Cloud Connect service, either via service provider or via one of the hosting companies. That's the future. The other ones I talked about are our existing offers today.

Scott, if I could follow up. To the extent that we talk about 5G and private 5G and the potential for Edge Cloud to be as much an enterprise-driven initiative as much as it is a service provider-led initiative or a cloud provider-led initiative, just I'm trying to understand in terms of the fact that if coherent gets pushed deeper into the network, that is obviously the transport opportunity for you. But my real question is more on what emerging software opportunities do you guys see from the Edge Cloud and the metro edge overall, and especially as it pertains to enterprise opportunity and because I think that's something that wasn't privy to that you guys have meaningful exposure to. So maybe if you can just dive a little bit deeper on that.

Yes. I think on the software piece -- so first of all, you mentioned 5G and you mentioned the software piece, so I'm going to -- I'll talk to both. On the 5G piece of it today, we've had significant success in 2 domains. One is on the transport part of it, is your next-generation XOL to meet the architectures that are looking at C-RAN, et cetera. That's one, and we talked to some of that in the Chalk Talk. Second one actually is as an end-to-end orchestrator for 5G services with the demand for slicing capabilities and whatnot. So that's today on a classic 5G that are mobility network. You mentioned private 5G, and lots of talk about that and people are sort of starting to say work on proof of concepts and thinking about how they go to market with that. We are participating there with a couple of different partners on -- that have radio and compute pieces, and we are providing sort of the networking infrastructure and some SI services around that as well. So we think that's an opportunity, but it's more of a future opportunity than people actually making buying decisions today. In terms of the software assets that could fit into that or a broader enterprise play, obviously, we talked about the orchestration capabilities to Blue Planet, but we also have as you know, picked up some assets with the Vyatta acquisition that we did. And there -- in the year right now, they're pretty much focused on satisfying existing commitments within their installed base customers. But we are getting our mind around how do we take that broader market as well.

Next, we're going to go to Tim Savageaux with Northland Capital Markets.

I wanted to ask a question kind of breaking down the TAM increase that you guys talked about in the Chalk Talk in Next-Gen Metro Edge going from $6 billion to $14 billion. Is most of that kind of the global GPON residential PON market, if you will? And -- or are there other pieces worth calling out? And should we be looking at Ciena as much of a candidate to pursue 10GPON business for a lot of these fiber builds that are going on in the U.S. and globally as much as the incumbent players, such as a Nokia or someone like that?

Thanks, Tim. Thanks for the question. Brodie, do you want to take a crack at that one, if you're back.

Sure. Sounds good. Yes, can you hear me okay, Scott?

We can now, yes.

Sorry about that earlier challenges. So with regards to the TAM expansion, we stated that in the Next-Gen Metro and Edge, we're going from $6 billion to $14 billion. The current $6 billion or the historical $6 billion that we had is the L2 and L3 access in aggregation business and the Metro WDM market. The additional TAM is based on the service edge routing market that will move to an IP optical convergence play as well as a portion of the PON market, specifically the 10-gig XGS-PON portion of that market. Those are the 2 major things that drive the TAM expansion for Ciena.

And should I think about that as a 50-50? Or does that bias one way or the other between the 2?

At least initially, it's more biased towards the heavier portion of it, is the edge routing market versus the 10-gig XGS-PON. Over time, 10-gig XGS-PON will grow as a -- to be a substantial part of the overall PON market, but that will take a few years.

I think the other dimension that you have to factor into the addressable piece of it is if you go to the wireless use case that we talked about in the Chalk Talk, historically, we've had great success in parts of the world where there has been a layer or 2 of wholesale service for wireless, but we've been cut out of the sell-side broader domain because we didn't -- when those decisions were made 10 years ago, we didn't have an IP offer. And we've been building purpose-built portfolio for that opportunity set that's going to present itself and is starting to present itself as people start to look at their architecture changes to 5G. So whether it's numerically in those numbers are not is a significant part of the opportunity expansion for us.

Right. So maybe that's a piece of what you might call the edge router market but a very specialized piece around 5G and something.

Yes. Correct.

Got it. Great. And then to follow up, to the extent that you're moving closer to the edge, I wonder if there are any kind of meaningful margin implications as you move out in that direction? Historically, PON market, in particular, could see a little bit lower margins. I know you're approaching it differently with a pluggable, not a coherent pluggable but -- and kind of IP capability. But any thoughts on how this increasing presence in metro and access might impact on gross margins over time?

Yes, I think -- look, I think from a -- the solution set will be picked on as our primary focus, Tim? Net-net across all those 4 use cases we talked about, I think the margins will be at or better than corporate average. The specifics you're talking about as you get closer to the edge, I think we'll probably be at the corporate average in terms of the approach that we're taking at it. So I don't see we're going to see a significant delta to our corporate average. As this comes as, I'll say, more routing and switching revenue for us, as we've talked about in the past, routing and switching is a slightly higher margin rate than our corporate averages.

[Operator Instructions] We'll go to Tal Liani with Bank of America.

I want to go to the basics. What's the advantage of going with Ciena routers? I see that Juniper, for example, is addressing the same market, and again, to my understanding, correct me if I'm wrong, but addressing with the same market with their own routers, access routers, and Ciena is coming from the other side. So what's the advantage of using Ciena versus using an existing routing vendor that is already probably providing other routing needs in the network?

Yes.. So I'll paraphrase the question, and I'm going to pass it to -- I'm going to ask Joe to speak to it because Joe is at the cool phase, just above competitive engagement that we have around this part of the portfolio. So he is the perfect guy to speak to it. Joe, why do we win in the different use cases that we have?

That's a good question and one I probably get asked quite a lot these days. At a high level, it's back to the approach that we've taken, right? I mean, we've come at it from a slightly different approach. It's not just about protocols and speeds and feeds. Those are certainly important and table stakes to be in the IP game, and I don't want to discount those by any means. But we've taken a more operational approach. And this approach, we've defined Adaptive IP, which is built around the idea of close-loop automation and creating a multi-vendor capable IP network that's more about how you manage and the life cycle of the IP network than the day 1 protocol. So not to speak about specific vendors, as you mentioned, but that story is resonating pretty well. And I think the combination with the optical side of things as IP and optical converges with the intelligent control that we talked about, all of that adds to, I think, our bullishness in the space and our belief that we can be successful.

Sorry. Maybe if I could add to that. It's also dependent on the use case. So in 5G, the reason that we've already had wins and been very successful in that space is, one, we had incumbency on the wholesale, that call portion of it. So we had incumbency there. And two, we built a set of purpose-built routers for that application, that knowing that 5G was going to drive more towers and more capacity per tower, we kind of got ahead of the curve and built routers specific for that use case. In PON, we've been successful already with multiple accounts because we've combined the routing function together with the OLT, the head end of the PON function are combined into the router, whereas historical architecture has the OLT and router as separate devices. So we've been successful there. And we've been successful in the metro core because we can solve all aspects of the winning hand, photonics, coherent modems, IP platforms, NOS, off-box software, including automation and control that allows the customers to manage that entire architecture. That's why we've been successful in these areas already.

So someone that comes -- a carrier that comes to Ciena for these solutions, they need to subscribe to your holistic view of how to manage the IP network? Or are they buying it as a point product to do aggregation of cell sites?

You can do both, right? I mean the holistic view is it's an architecture, but we've built it from a set of disaggregated principles, which means you can select some, all or none of those principles to build a network off of. So it's very open from that perspective.

What's the reality? How -- what's the -- how do you see customer's deploying it?

I mean it depends on what you're talking about, Tier 1 or the rest of the world? I mean Tier 1s typically buy point products because they have more people, they have more -- they can do more analysis. They do RFPs per product. If you get into the Tier 2s, Tier 3s, rest of the world, they typically like to buy more holistically from a complete solution perspective from a single vendor.

Got it. So just my last question. Sorry, I'm taking too much time, but I want to finish this topic. So when you look at your revenue so far, your order book, et cetera, give us some -- maybe not even data, just qualitatively talk about the breakdown between Tier 1 and Tier 2s, 3s and so on.

Can you repeat the question? I apologize.

Yes. You said that there are different use cases, different kind of deployment cases for Tier 1, so they're buying more point solutions; and then Tier 3, Tier 4s that are doing more holistic view of their IP network and they're taking Ciena for higher-level reasons. So when you look at your revenue so far, your order book so far, how is the exposure that you have on the Tier 1s who are buying in to the point solution versus someone who's subscribing more to your more holistic view on IP networks?

I think it's pretty evenly split, is the best answer I can probably give you.

[Operator Instructions] And next, we'll have a follow-up from Fahad Najam with Loop Capital.

Scott, I wanted to ask you, in terms of -- as you push deeper into the network, closer to the edge, at some point, I'm assuming the access or the transport technology really becomes agnostic because I've heard of trials at large Tier 1 operators in North America, where they were using these pluggable OLT from a company called Cable Communications and your routing platform. And it almost sounds like you can start to plug in the transport technology into these more IP software-enabled platform. Is that something resonating with customers? And is that something that's kind of like as you push deeper in the network, you essentially become more agnostic to the transport?

Yes, you're absolutely right, Fahad. I mean if you look at the XGS-PON offer, what's kind of unique about this is we brought XGS-PON to a routing platform and on a sort of port-by-port basis. You can configure whether or not you want that to be on a PON base or an active use router base, et cetera. That has a value proposition to our customers that are serving multi-use cases from a universe, what we call universal aggregation device. But what's important to them as well, though, is 100% consistent software stack or next-generation IP NOS. The fact that, that OLT and the 12 PON data path is operationally integrated into our networking capabilities, and that we manage this for them from our domain controller. And Brodie and Joe, you guys can jump in because you guys are, as I said, every day talking about the solution in front of customers.

Yes. I mean I would say there's 2 main reasons we're being successful in this space IN the 10G, XGS-PON in particular. Number one, it's -- I think Brodie touched on it earlier. In majority of architectures out there, there's no Ciena routers sitting next to each other. And we've integrated the 2 together to simplify how that gets deployed. And that really resonates, particularly even back to my point earlier, with the Tier 2 and Tier 3 space, less equipment, less things to manage, less CapEx, et cetera, et cetera. The second big reason that I think we're having success, to the point Scott was getting at is, we've been able to better optimize the footprint at these locations. So our architectural approach from a product perspective is not about putting big chassis out in these sites. It's about more of a scalable, both up and down pizza box, plug-based model, which has quite significant power space, thermal advantages has been played well into a number of opportunities. So that combination of power space thermal savings, coupled with the ability to combine functionality into a single platform has really resonated against the traditional PON incumbents so far.

And I guess, Joe, the other thing is when it makes sense, the fact that they can integrate on more of the networking-facing side versus the access side, the world's best coherent optics is another part of the value proposition.

Yes. And keep in mind, we've been -- we talk a lot about IP optical. I mean, PON is effectively another form of IP optical. It's just the optical technology is slightly different underneath the cover. So it's very well aligned to our strategy and our core competency and we fully intend to be successful in the space.

And like coherent, it's not just about plugging the plugs in. There's an integration aspect of it, and we've done -- like we've done on coherent, we're doing the same thing on 10-gig XGS-PON, which is integrating it into the platform, having an end-to-end winning hand, including the off-box software and automation control and the services to support that.

I mean it's a good point both from a coherent plug perspective as well as the OLT plug perspective, it's not just about sticking a plug in a box. It's a lot of software that has to happen behind the scenes to implement all the functionality. And I think we've done a pretty good job of doing that integration on both sides.

So if I can maybe ask the question in a more high-level way, the more value differentiation now becomes increasingly in the software as you push deeper into the edge and the fact that your Blue Planet software has incumbency and you know how to do service chaining, its orchestration, it plays to your benefit, and the barrier to entry from other traditional routing suppliers, why have they not been able to crack this opportunity?

Yes. I mean software is a key part all the way from the network up to the orchestration layer, as you said. I mean, in the metro and edge, there's typically more technology types, more vendor types, more things to worry about. And our ability to layer Blue Planet over top of that has been a key contributor as sort of a 1 plus 1 equals 3 to couple with the underlying network solutions.

Next, we have a follow-up from Tim Savageaux with Northland Capital Markets.

I want to follow up on kind of the competitive landscape here. And I think you'd mentioned that capability across both the kind of photonic area as well as IP will be critical to kind of making the most of this edge opportunity. I might argue also that some incumbency or a stronger presence at the edge or in the access network might be a factor as well. So maybe it's a 2-variable equation, maybe it's 3. As I look across that, it seems like -- actually, it seems like Nokia might be your most formidable competitor as we're talking about these opportunities, perhaps Cisco as well. But I'd be interested in your comments on kind of the broader competitive landscape, whether you might agree with that, given the combination of strong IP and optical technology at both of those players. And what you're seeing in the market currently from a competitive standpoint?

Yes, Tim, I think at a high level, you're right in terms of who has some aspects of the winning hand, and you cannot debate the relative strengths and whatnot between optics, the photonics, the next-generation IP and sort of off-box software tools to be able to operationalize that new network. I think it's an important note to maybe refine the answer a little bit by use case, and maybe I'll let Brodie sort of walk around the use cases to give you a little bit more insight.

Yes. So if we just go -- I think it's great to go through the different use cases. So on the 5G side, who do we compete against? It's the traditional router vendors as well as the RAN vendors that have a CSR or routing portfolio. Can you imagine who that is? And again, we've been successful there because we've optimized our routing platforms for 5G and beyond, and we've gotten the time-to-market advantage to be successful there. The other thing I'll point out and that we included in our deck is we do have a Samsung partnership. And the Samsung partnership, it does give us go-to-market benefit but it also gives us technology benefit in building together solutions that are relevant for 5G-and-beyond wireless networks. And we've been successful there by being first to market. On the PON side, if you look at the competitive dynamics, you have 2 major players: Nokia, you mentioned; Huawei is the other, that have greater than 2/3 of that market. And if you look at who else is in that market, you have the Sanzone, Calyx and ADTRAN, relatively small players. Huawei has fallen out of favor in the Western world, and we think there's a great opportunity together with Nokia to grow our market share there, and we're taking a differentiated approach by combining routing and the coherent -- sorry, the pluggable optics as part of that. In the IP optical space, we believe that the winning hand again is the photonics, the modems, the platforms, the NOS and the off-box software. If you look at that, the traditional optical players that just have an optical portfolio will lack IP routing expertise and multilayer control and automation. The traditional routing players outside of Nokia either have no optical capabilities or have coherent modems but don't have the photonics or the controller, the multilayer orchestration and automation. And we really like our competitive position there because we have all aspects of the winning hand. And there are very few other companies that have all aspects of the winning hand. I think you mentioned one of them. So that's how I would break it down.

So we have no further questions at this time. I'll now turn the call back over to Gregg Lampf for any additional or closing remarks.

Great. Thank you. Again, we really do appreciate you taking the time. I know it's a busy time of the quarter for everybody. This was an important topic for us to cover. We wanted to make sure we covered it comprehensively between the presentation that, again, hopefully, you all will have a chance to listen to if you haven't already on the website. And we -- certainly, we continue to talk about this going forward. We're excited, really excited about leveraging the investments we've made over the past several years. We've talked about that in the past and now's coming -- really coming to fruition and building on the wins we've already developed and the momentum that we have, et cetera. So please listen up for more information on this, and we'll continue this series of Chalk Talks over time. Thanks again for your interest. And if you have any other questions, please do feel free to reach out to Adi and myself, and we'll be happy to answer them. Thank you, and have a good day, everybody.

Thank you.

This concludes today's conference call. You may now disconnect.