Ciena Corp (CIEN) 0 Q0 法說會逐字稿

Ladies and gentlemen, thank you for standing by. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ciena Corporation Preliminary Fiscal Q1 2022 Financial Results Conference Call. (Operator Instructions)

It's now my pleasure to turn this call over to Mr. Gregg Lampf, Vice President of Investor Relations. Sir, please go ahead.

Thank you, Brent. Thank you, everyone, for your attention today regarding the announcement of our preliminary financial results for our fiscal first quarter ended January 29, 2022. Our call today is scheduled for 45 minutes. On the call is Gary Smith, President and CEO; Jim Moylan, CFO; and Scott McFeely, Senior Vice President of Global Products and Services.

We are providing this update on the spirit of transparency, sharing what we know today about our expected financial performance for the quarter. In addition to this morning's press release, we felt it would benefit investors to provide additional context for our expected financial results for Q1 and to describe, in greater detail, the specific reasons and contributing dynamics for today's announcement. 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 included in our expected quarterly results, annual guidance and long-term financial targets, discussion of market opportunities and strategy and commentary about the impact of COVID-19 and supply constraints 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. These statements should be viewed in the context of the risk factors detailed in our most recent 10-K filing and in our upcoming 10-Q filing, which is required to be filed with the SEC by March 10. We expect to file by that date.

Ciena assumes no obligation to update the information discussed in this conference call, whether as a result of new information, future events or otherwise. We will open today's call to Q&A, focusing on the specific topics raised in our prepared remarks. Consistent with that, please also note that given the preliminary nature of today's announcement, we may not be able to fully address your questions today. On March 7, we look forward to discussing our complete Q1 results in more detail, including our GAAP results and the detailed reconciliation to those non-GAAP measures as well as our outlook for the fiscal second quarter. We're also planning to hold investor meetings at OFC on March 8 and 9. As in the past, we have reached out to the sell-side community for scheduling through [then]. We look forward to seeing many of you there.

With that, I'll turn the call over to Gary.

Thanks, Gregg, and good morning, everyone. As you've seen from this morning's press release, we have announced preliminary financial results for fiscal Q1 as follows: Quarterly revenue in the range of $840 million to $850 million. Whilst this range reflects roughly 12% year-over-year growth at the midpoint, it is lower than our previous expectation of $870 million to $910 million. Adjusted gross margin for Q1 of 45% to 46% is at the high end of our previous guidance range and adjusted operating expense of approximately $290 million is in line with our previous guidance.

With respect to our Q1 revenue, we experienced two specific types of disruptions in the supply chain in the quarter. These occurred late in the quarter and served to exacerbate an already challenging macro supply situation. The first type of disruption included later-than-expected delivery of certain key components from a few suppliers, and the second type involves some third-party manufacturing disruptions that took capacity offline for a period of time.

Ordinarily, we would have had the capability to successfully navigate through these challenges. However, as noted, these events manifested in the second half of the quarter, beginning roughly in late December and [continuing into] January. And they occurred against the backdrop of a challenged logistics environment that was worsened by the Omicron surge in our Q1, which further constrained production and logistics due to workforce shortages. As a result, we simply did not have the typical flexibility to fully mitigate these additional disruptions in the quarter.

In considering the impact of these dynamics, I think it's important to place them in proper context. We believe it is unlikely that the same set of circumstances that occurred in our Q1 and the specific timing of them within the quarter will occur in future quarters in the same manner and with the same results. Indeed, we already started to see the impact of these disruptions improve as we exited the quarter.

Additionally, investments we've been making in supply chain capacity will provide us greater flexibility for the remainder of the year. And importantly, these specific circumstances certainly do not reflect a shift in overall network demand dynamics, which remain extremely strong. And to that end, I want to speak in more detail about the demand environment, including some metrics about our quarterly order flow and backlog that we typically do not provide. I will also review some of the proactive steps we've taken with respect to supply that give us confidence about fiscal 2022.

Firstly, we continue to experience truly unprecedented levels of demand for our products and services, including extraordinary orders growth across key customer verticals and geographies. This growth is underpinned by an acceleration overall of cloud adoption and traffic growth as well as some demand catch-up and security of supply activity. With our fourth consecutive quarter of orders outpacing revenue, we are clearly benefiting from significant momentum and what is undeniably positive long-term secular demand. As a proof point to this, our book-to-bill ratio in Q1 was in excess of $2.5 million of our quarterly revenue. This ultimately resulted in significant backlog growth to more than $3 billion exiting the quarter, providing exceptional visibility for the full fiscal year as we now exit Q1.

Against the backdrop of that strong demand environment, the overall supply chain environment continues to be challenging as we all know. As we sit here today, we are not assuming any significant improvement in component lead times through the remainder of the year. With that in mind and roughly 9 months ago, we began to make considerable investments in the growth of our business, specifically, we increased our component purchases, inventory levels and manufacturing capability to establish sufficient capacity to support this increasing demand in the face of continuing extended lead times. We expect the majority of this increase in capacity to materialize in the second half of our fiscal year, positioning us for a stronger-than-typical second half, which you may recall is what we also delivered last year. As a result, we have greater visibility in supply and capacity coming online, which will facilitate more flexibility than we had in Q1.

In summary, we have built a much larger ship going forward. Overall, we are incredibly encouraged by the combination of a very positive demand environment, aligned with an increasing supply chain capacity and increased visibility into the remainder of the year based on our order flow and backlog. Together, they give us even greater confidence in our ability to achieve our fiscal 2022 financial objectives and grow market share.

Accordingly, we continue to expect our annual revenue guidance of 11% to 13% for FY'22. We, obviously, remain very enthusiastic about our opportunities to address increasing bandwidth needs, the shift to the cloud, and the focus on edge applications as well as digital transformation, and the growing need for network automation.

I also want to take this opportunity to thank the entire Ciena team for remaining focused and dedicated to our strong execution. The shared commitment to managing through supply chain challenges and supporting our customers is remarkable.

With that, we'll now take questions related to today's announcements.

(Operator Instructions) Your first question comes from the line of Simon Leopold with Raymond James.

I appreciate you guys doing the call today. So thinking about what we've heard from some of your suppliers, we knew that optical switching devices were constrained as far back as September, but it sounds like what was incremental from a component perspective was related to transmission products. I just want to understand if that's what you've experienced, particularly in this quarter?

And the second thing I wanted to see if you could address is you've alluded to implementing some price increases. I wonder if you could give us an update on where you stand on that effort and if that's a factor that may be stimulating your customers to place orders before price increases?

Thanks, Simon. It's Scott. Thanks for joining. Let me take the first one, and then I'll ask with Gary to address the pricing one. On the supply side, Simon, the components we're talking about, I would classify as being in the category of semiconductors, ICs and memory devices, all of which would be sort of commercial low-value parts, "jelly bean" parts that have pretty broad applicability across our portfolio. Those arrived late. They were intended to arrive in late December. They were pushed by a couple of weeks. The quantity of components that was scheduled to arrive, did arrive and they were just too late to turn into finished goods in the quarter.

And Simon, on the pricing, I'll describe it as ongoing. Discussions are going well. In terms of order stimulation, yes, I think there's probably some. I don't think that's particularly material. And given the size and scale of the order flow in Q1, I don't think that's a really material factor. And I don't think these discussions will have any material impact really on our financial performance, certainly in this year.

Your next question comes from the line of Paul Silverstein with Cowen.

Gary, I heard the numbers in the commentary, sorry, but I have to ask, was there any demand weakness whatsoever in any aspect of the business? I recognized the backlog and order book was just not.

And separately, what was the manufacturing issue? Was that fully resolved? In Scott's comment, are you indicating that, that component issue, the components were delivered a bit late, but they have been delivered and that's being fully resolved?

Let me take the first part of that, Paul. And Scott can address the second question. On the demand side, no, I think we didn't see weakness anywhere. I'm thinking sort of geos, applications, product sets. It's really across the board, very strong demand. And I think it's a confluence of elements for sure. There's some catch-up in there. There's some security of supply, visibility. Some players are giving us full visibility for the year.

But I think as well, this is sort of underpinned by an increase in cloud adoption, both at the consumer level and at the enterprise level in the multi-cloud. I think we're seeing the sort of step function up in demand across the board. So I don't think there's any areas that I would think about as sort of weakness. It's very general and across the board.

Yes. The one thing I'd say, Paul, is the single largest contributing factor in the quarter itself was the fact that a lot of our customers gave us visibility into their full year of demand. And they did that specifically because they wanted us to work on our supply chain to get it ready for this demand. But generally speaking, we now expect the full year to be higher in terms of orders than we did coming into the year. It doesn't affect our view on revenue because we still have to deliver all that. But we do expect higher orders this year than we thought we would have at the beginning of the year.

And Paul, on your supply chain-related questions, on the components themselves, yes, they have all been delivered and they were delivered in quarter just too late in the quarter.

On the production disruptions, they added up to several days of production capacity, not exclusively, but partially related to Omicron staffing shortages. Really, in normal times, I would have said we could have mitigated either of those and possibly both of those. The fact that it happened late in the quarter, and we were swimming into an environment, both on the production and logistics side that was hampered by Omicron itself just made it a too-difficult task to recover in the quarter. By the way, both those supply component related items and the production related items are in the rear-view mirror.

Your next question is from the line of Tim Long with Barclays.

Yes, two quick ones, if I can. First, on the gross margin side, maybe Jim, narrowed that at the higher end. Could you go into a little bit more detail why that's happening? And is there anything to read into future quarters from that?

And then second, just following up on, Jim, your comment about orders this year being better than what you thought a few months ago. Obviously, backlog number is huge here. Maybe, Gary, talk a little bit about kind of the next few-year view, I'm assuming the overall view has to be more positive if you start looking into fiscal '23, '24. I know you don't want to go out that far, but maybe just at a high level, what you think of kind of industry market growth and your position in that as you look out a little bit further?

Yes. Tim, we'll go into all the detail about our gross margin when we do our call on March 7. I can say that we had a good mix of software and services in these results. And mix is always very important to our gross margin. Our expectation for gross margin for the year still is based on a 43% to 46% range. That's our view.

On the -- again, a similar kind of answer. Obviously, today, we wanted to address sort of the specific issues and it's still sort of early into the quarter. So talking about the '23 and '24 is probably a little premature for us. But I think what we're seeing overall as you sort of step back from it, we've had kind of 2 years of not-strong growth in the industry overall. And I think what you're seeing now is an increased adoption on cloud, both the consumer and enterprise level, the whole multi-cloud phenomenon, which really is all about getting higher capacity and bandwidth closer to the customer. That's really what all of that is, whether it manifests in 5G, in fiber speeds to the home, it's all really about getting greater capacity close to the customer.

And I think we're in for a period of very strong sort of secular demand over the next probably couple of years, so feel very good about that. And in terms of our order flow, Jim talked to some of the reasons for that, but it's great to get that visibility. But if you look at the midpoint of our guide here, it's 12% growth, which means it's pretty healthy from an industry point of view. Also means that we're going to be taking share again this year. And even with the Q1 that we had, which was disappointing to us in a little frustrating, given the issues that we face, we still grew 12% in the year-on-year as well. So I think we feel very good around the future of this space.

Your next question is from Meta Marshall with Morgan Stanley.

I just wanted to see from a customer standpoint, I would assume that they were having their own labor kind of shortages during the quarter. And so just whether this has delayed your pause and ability to get them as much supply as they needed probably combined with their own labor shortages, whether it just pushed back kind of their implementation plans? Or have there been any more meaningful changes to -- we're not going to do this implementation, we'll just do it 6, 9 months from now? I'm just trying to get a sense of is timing -- has timing just been pushed back? Or have there been any notable delays from any customers on any projects.

Meta, I just want to be really clear, the completely opposite of that is what we're seeing. We're seeing customers wanting equipment more and more and more. There is absolutely no customer delays at all. This was all about our ability to supply them. And customers would take -- if we could have greater capacity now, they would take more. That really is the dynamic. There's nothing around customer adoption or projects that's been delayed.

I mean when we mentioned the logistics, it wasn't on the customer side, that was our ability to mitigate the lateness in the quarter. Typically, we would have put on more air flights, et cetera, that just wasn't available to us due to the staffing shortages, that's what we were referring to.

Got it. No, the comment was just to say that I think everybody had staffing shortages for installation in kind of this last quarter period. And so just seeing if that kind of trickled through to customers, but it sounds like it didn't.

Your next question is from the line of Rod Hall with Goldman Sachs.

I had a couple of backlog questions for you. The first one is the backlog growth, I think you called out backlog of $2.2 billion last quarter and now $3 billion. So let me get this straight. You just added about a quarter's worth of revenue backlog to $800 million. And I wanted to see whether you expect that backlog to work its way down by the end of this calendar year? Or are you expecting it to be roughly this level? I'm just kind of curious what the flow of that backlog through the next few quarters looks like to you.

It is true. Our backlog is actually pretty much in excess of $3 billion. So we added more than a quarter's worth of revenue to our backlog. But remember that this is in large part because customers want to give us visibility into their demand. And we're seeing the duration of our backlog extended as compared to previous periods. In previous periods, a large proportion of our backlog would be drained in the next quarter. That's not happening now because people are giving us visibility into the longer-term orders view the supply chain situation. Is it still as constrained as it has been over the past 6 months or so? If that's the case, then yes, I think we will exit this year with a pretty significant backlog higher than we've seen in the past. And we'll just have to see how that goes.

I guess Jim, would you expect that to be a lower number than it is now? Or -- some companies have told us that they expect their backlog to basically be unchanged from current levels as they exit the calendar year. And I don't know if you guys think the same or...

I think it will totally depend upon customer behavior, Rod. Yes, as we go through this year, customers are still concerned about the supply chain situation and want to give us visibility into next year's demand, then we could see a flurry of orders in Q4 higher than we've seen in previous Q4. So I think it depends upon their behavior totally.

Your next question comes from the line of Fahad Najam with Loop Capital.

I had two questions. One, Gary, if I heard you correctly, it seems like most of your challenges that you had in the first quarter have been addressed and it's likely that in Q2, you're going to recover most of that shortfall. And if I layer in your comments about the second half being stronger, consistent with last year. It sounds to me that you are actually may be seeing more strength in your revenue outlook than 90 days ago. So that's one, if you can help me understand that dynamic.

And two for Jim, the question on backlog. Can you just give us an -- maybe some color on the duration. There's obviously backlog and duration are two factors that we need to understand. So how far out of a duration visibility do you have? Do you have full year, 1.5 years type of visibility? Can you just give us some more clarity there?

Let me take the first part of that, Fahad. Yes, we -- the issues that we had in Q1 were mitigated. And as Scott said, they actually were resolved before we got out of the quarter, but the timing was such that we couldn't take revenue on them. So yes, we've got a much stronger order flow than we had anticipated. But as Jim said, a lot of that dynamic is customers giving us visibility for the year. We've built a much bigger ship that comes online as we get into the second half from both the component and a manufacturing capacity perspective. But you think about what we've got to do in the second half to get to that 11% to 13%. That's also a big strong performance in the second half. Obviously, we've got great demand visibility for it, and we think we've got the capability, both from a component supply and manufacturing and logistics capacity to deliver on that. And that's really, I think, blended into our forecast and guidance for the year at 11% to 13%.

So I certainly wouldn't change the outlook on that right now. I just think we've got greater confidence given the fact that we've got this demand visibility, which is quite extraordinary. I would describe it as greater confidence, and we're certainly -- in the numbers that we're talking about here.

Jim, do you want to talk about that?

Yes, on the backlog, a relatively small piece of our backlog is as a result of getting multiyear maintenance orders from some customers. That's a few hundred million dollars. The rest of it are products and services and software for -- with specific delivery dates. And in this case, just about -- almost all of the rest of our backlog specified delivery dates in this fiscal year. There is some that extend into next year, but most of it is in this year.

So we have sort of total visibility into our demand for the year. It gives us great confidence. But as Gary said, we still have to deliver these orders and the supply chain remains constrained. So that's what I'd say.

Gary, if I can just follow-up on your response. So assuming that you made up for all of your lost revenue from 1Q in the second quarter. So then the second half outlook is just purely a function of how much capacity you can add and how quickly you can add and that's part of your guys' upside. I just want to make sure I understand the dynamic.

Yes. I wouldn't necessarily translate all of the revenue into Q2. We'll give guide. Obviously, we'll give guidance on that when we do our proper call. We just wanted to come out today and describe the issues in Q1, and we're very confident about the full year. But in terms of -- the thing I would caution on is we've built a much bigger ship in the second half, but we don't expect the actual delivery times on components to specifically improve in the second half.

So we've built a ship to deliver that 11% to 13% growth and to be able to withstand any of the normal challenges you get quarter-to-quarter and it give us some flexibility around that. So I think it's way too early to get -- to affect those numbers yet.

Your next question comes from the line of Samik Chatterjee with JPMorgan.

I have a quick one. I know you mentioned you started doing some work in securing supply and sort of good longer purchase commitment starting last year at [sale], which you expect to bear fruit in the second half. Now just given the disruption that you had and what's got referred to as sort of more standard jelly bean components, are you now taking a different approach to these components? Does that increase the cost of doing business? Or has an impact on gross margin longer term as you think about it? And is there then a need to sort of price that incrementally with your customers? If you can help me think through that.

I'd say the answer to that is no. We -- what's happened is that -- and it's happened over the last 6 months, is that lead times have extended and we've seen price increases. But all of that was factored into our guide that we gave for the year. We're not seeing incremental price increases from here. So no, we don't expect any different gross margin this year than we indicated earlier, which is 43% to 46%.

Your next question comes from the line of Tim Savageaux with Northland Capital Markets.

A couple of questions. You had mentioned a couple of times now that the primary factor in driving the order strength in the backlog increase was kind of this customers getting in line a bit early. I wonder if I could ask you to be a little more specific about that. Is that 3 quarters of what you saw in terms of demand growth? It sounds like it's the majority.

And the follow-up would be any difference in customer behavior across segments? Specifically, are you seeing similar type of behavior from your cloud and carrier customers?

Tim, I would say that, as Jim said, I think a large portion of the stuff in Q1 was visibility for the year. But it is a little bit difficult to pass it up, to be honest. You've got sort of all this catch-up where a lot of carriers have run their networks very hot for the last 18 months or so. And you've got catch-up on both capacity. You've also got catch-up on network modernization. Many of the wins that we've had 18 months ago are now beginning to flow through as orders. And then you've also got this dynamic around security of supply. I'd say particularly amongst the North American carriers, where they're looking to secure supply chain. So you've definitely got that.

Underpinning, sort of, all of that, then you've also got this step function, I think, in traffic growth as well from the expectation that folks had really by the adoption of the cloud in its various forms. So you've got all of those 3 elements in the part of the order flow. It's difficult to really parse all of that out and put sort of clear percentages on it.

Having said that, I would say that Q1, we saw some very specific large carriers and also the web-scale folks looking to secure supply for the year. So we absolutely did see that. And you're obviously seeing all of the other demand characteristics around 5G now beginning to be a reality and building that out. You're seeing an increase again from all of the web-scale folks globally in terms of their data center build-outs. And I think the secular demand dynamics around all of this, I think, is very, very positive.

I think it's also a very strong event that our expectation for orders for this year is higher. Even with this pull forward [regional part] of certain customers, our expectation for orders is higher than it was at the beginning of the year.

Jim, if I can squeeze a follow-up in on that. I mean to the extent that order expectation is higher, can you point to any particular customer segments or development driving that?

Broadly based. Customer types and verticals, geographies, it's very broadly based.

(Operator Instructions) Your next question comes from the line of Jim Suva with Citigroup.

I just have one question. And while you talked about the supply chain and kind of the push out to those orders, the bigger question I have is I'm still trying to grasp the impact to margins in the future. So if customers are giving you longer visibility and longer lead times and bookings and more visibility, are they locking in today's prices? Or are there some type of indexing that is? Because I assume that your suppliers and shipping costs and raw materials are all going higher. So is that going to be a margin headwind as we look further in the year? As you mentioned, the sales growth isn't impacted, but I'm more interested in the margin impact.

Yes. On the cost side of that, Jim, we've been dealing with increased component costs and increased logistics costs for a period of time, and that's been factored into our guidance range for 2022. I'm not seeing an improvement, and I'm not seeing a deterioration of those.

There are no further questions at this time. I will now turn the call back over to Mr. Gregg Lampf.

Thank you, and thanks again, everyone, for joining us on short notice. We look forward to speaking with you again on March 7. And after a long period of time of not seeing people in person, and we're also looking forward to seeing you at OFC on March 8 and 9. Thank you. Have a good day.

Ladies and gentlemen, thank you for your participation. This concludes today's conference call. You may now disconnect.