Q4 2021 Ciena Corp Earnings Call

December 9, 2021

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Okay.

Good day, and thank you for standing by. Welcome to the Ciena announcements reporting date and web broadcast for fiscal fourth quarter and year-end 2021 result conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded.

So the C&I announcements reporting date and without broadcast well fiscal fourth quarter and year end 2021 result conference call.

At this time all participants are in a listen only mode.

The speaker's presentation, there will be a question and answer session.

To ask a question during the session you will need to press star one again, it's all about.

Please be advised that today's conference is being recorded.

If you require any further assistance please press star zero. I'd now like to hand the conference over to Gregg Lampf, Vice President of Investor Relations. Please go ahead.

I'd now like to hand, the conference over to Gregg Lampf, Vice President of Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to Ciena 2021 fiscal fourth quarter and year-end review. On the call today is Kerry Smith, President and CEO and Jim Moylan CFO. Scott Mcfeely, our senior Vice President of global products and services is also with us for Q&A.

On the call today is Kerry Smith, President and CEO and Jim Moylan CFO.

Scott Mcfeely, our senior Vice President of global products and services is also with us for Q&A.

In addition to this call and the press release, we have posted to the investors section of our website an accompanying investor presentation that reflects this discussion as well as certain highlighted items from the quarter and fiscal year.

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 standard results of operations. A detailed reconciliation of these non-GAAP measures to our GAAP results is included in today's press release.

Today's discussion includes certain adjusted or non-GAAP measures.

And as a result of operations a detailed 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 and long term financial targets, discussion of market opportunities and strategies and common center that has an impact of COVID-19, and supply constraints 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.

Such statements, including our quarterly and annual guidance and long term financial targets discussion of market opportunities and strategies and common center that has an impact of COVID-19, and supply constraints are based on current expectations forecasts and assumptions regarding the company and its markets, which include risks and uncertainties that could cause actual result.

materially from the statements discussed today.

These statements should be viewed in the context of the risk factors detailed in our most recent 10-Q filings and then our upcoming 10-K filing. Our 10-K is required to be filed with the SEC by December 29th, and 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. As always, will allow for as much Q&A as possible today, but we ask that you limit yourself to one question one follow up.

Our 10-K is required to be filed with the SEC by December 29, and we expect to file by that date.

<unk> assumes no obligation to update the information discussed in this conference call, whether as a result of new information future events or otherwise.

And <unk> will allow for as much Q&A as possible today, but we ask that you limit yourself to one question one follow up.

This call is being recorded and will be available for replay on investor's page of our website shortly after the call's conclusion. With that, I'll turn the call over to Gary.

Thanks, Brian and good morning, everyone. Today, we reported strong fourth quarter and full fiscal year 2021 results. This performance further demonstrates our continued ability to successfully navigate challenging market conditions and to deliver on the objectives and financial outlook we laid out as we enter the year, including annual revenue growth of 2.5%, which was at the high end of our expectations. Fiscal '21 adjusted gross margin, 48 cents which exceeded our forecast. And adjusted operating margin, 16.8% for the full year also above our original forecast.

Today, we reported strong fourth quarter and full fiscal year 2021 results.

This performance further demonstrates our continued ability to successfully navigate challenging market conditions.

And to deliver on the objectives and financial outlook, we laid out as we enter the year, including.

Annual revenue growth of two 9%, which was at the high end of our expectation.

Fiscal 'twenty, one adjusted gross margin, 48%, which exceeded our forecast.

And adjusted operating margin, 16% for the full year also above our original forecast.

Revenue in the fourth quarter exceeded $1 billion for the first time and came in higher than expected. Additionally, orders in the quarter were once again significantly higher than revenue. With our third consecutive quarter of orders outpacing revenue, we have substantial momentum and increased confidence in the demand environment.

Additionally orders in the quarter were once again significantly higher than revenue.

With our third consecutive quarter of orders outpacing revenue, we have substantial momentum and increased confidence in the demand environment.

We ended the year with our highest ever backlog of approximately $2.2 billion. We doubled our backlog of a year ago. This performance reflects abnormal leadership within a very strong demand environment. Specifically, the combination of our differentiated balance sheet, leading innovation and R&D capabilities, and deep and growing customer relationships around the globe give us a strategic advantage in the industry.

He built a backlog of a year ago.

This performance reflects abnormal leadership within a very strong demand environment.

Specifically the combination of our differentiated balance sheet, leading innovation and R&D capabilities, and deep and growing customer relationships around the globe.

<unk> strategic advantage in the industry.

And of course, our people continue to amaze us with their resilience and kindness as they continue to perform at the absolutely highest levels. [The highlights] from the fourth quarter and fiscal year, our focused investments are in three key areas. Optical routing and switching and software automation and they are yielding great results. [In optical,] we continue to lead the market in high capacity coherent technology.

They need to perform and be absolutely price levels.

Clinical highlights from the fourth quarter and fiscal year.

Our focused investments in three key areas.

Optical routing and switching and software automation and they are yielding great results.

The multiple we continue to lead the market in high speed coherent technology.

Q4 was a record quarter for [inaudible]. We added 34 new customers, including 30 new logos [and in all regions]. Total customer count for wave logic, five right now under the 40 globally and we shipped nearly 25000 [inaudible] to date. We also shipped our first customer orders in Q4 for [inaudible] optics. We had a strong quarter in routing and switching and we continue to grow momentum in that space. In Q4 will be the cumulative new wins including significant multiyear deals with two of the largest US tier-one service providers.

We added 34, new customers, including 30, new logos in the <unk>.

We.

Total customer count for wave logic, five right now under the 40 globally and we shipped nearly 25000 to date.

We also shipped our first customer orders in Q4 for a wave logic five years, so it will be really.

Global upturn.

We had a strong quarter in routing and switching and we continue to grow in that space.

In Q4 will be the cumulative new wins.

including significant multiyear deals with two of the largest US tier one service providers.

One way to choose where nationwide 5G cell site router deployment. Additionally, we've now closed the deal with AT&T to acquire this momentum virtual routing and switching technologies, which will help strengthen our adaptive IP capabilities and increase our exposure at a certain [inaudible].

Additionally, we've now closed the deal with AT&T to acquire this momentum virtual routing and switching technologies, which will help strengthen our adaptive IP capabilities and increase our exposure at a certain point.

Mrs.

We also announced the partnership with Samsung to couple IMAX whole solution Nextgen, MCP domain controller, and services with Samsung volume core non-equipment to support 5G networks. Moving to our software and automation business. [inaudible] performed well in FY '21 growing 23% in the year to deliver an annual revenue of $77 million, which again was above the high-end [inaudible], as well as record bookings.

Moving to our software and automation business planning.

<unk> performed well in FY 'twenty, one growing 23% in the Europe to deliver an annual revenue of $77 million, which again was above the high end device volume, mainly as well as record bookings.

Some of the marquee wins in the year, including British Telecom, Vodafone calls as well as a major new tier-one service provider and launch US, MSO. I also want to highlight our global services business, which grew 7% year over year with revenue growth across each of our service categories and then earning 95% customer satisfaction rating in 2021.

I also want to highlight our global services business, which grew 7% year over year with revenue growth across each of us to have these categories on the adding of 95% customer satisfaction rating in 2021.

And also as part of that and advancing a key part of our strategy. We landed major network migration, including three US tier-one service providers and an international tier-one service provider. Shifting to diversification of our business across both customers for the year. Our top 10 customers for the year, including three US service providers. Two international service providers. One MSO. All four major web scales. Strong illustration of the continued diversity in our business. In fact, our non telco revenue was 41% of the total revenues for the year.

Shifting to diversification of our business across both.

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Our top 10 customers for the year, including three U S service providers.

Two international service providers want to do so.

All four major web scale those strong illustration of the continued diversity in our business.

In fact, our non telco revenue was 41% of the total revenues for the year.

Also of note in FY '21, we had more than $1 billion in orders from web-scale customers. We also performed well once again submarine segments, gaining more than 2% market share year over year. Bringing our MLP market share at the mid-sixties. And finally, international growth was also strong led by EMEA and India. Which each grew 13% year over year. Overall customer demand remains very strong driven by increasing bandwidth needs. The shift to the cloud and also the focus on edge applications as well as digital transformation on the growing needs. <unk>. And we continued to take full advantage of our leading position to address these network policies.

We also performed well once again submarine segments, gaining more than 2% market share year over year.

Bringing our MLP market share at the mid sixties.

And finally international growth was also strong led by EMEA and India.

Which each grew 13% year over year.

Overall customer demand remains very strong driven by increasing bandwidth needs.

The shift to the cloud and also the focus on edge applications as well as digital transformation on the growing needs.

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And we continued to take full advantage of our leading position to address these network policies.

And we're making forward investments in our portfolio and go to market resources that are aligned to these trends and longer-term opportunities. As an example, we are leveraging our people expertise to offer new architectural approach to address next gen Metro edge use cases.

As an example, we are leveraging our people expertise to offer new architectural approach to address next Gen Metro edge use cases.

Where we are investing to expand that total addressable market in this growing market from about 13 billion overall currently to roughly $22 billion over the next several years. I would also like to highlight the development of critical assets and software automation. Including the layout or dimension with MCP. This is a micro services based domain controller that has now been adopted by the vast majority of our customers around the world.

I would also like to highlight the development of critical assets and software automation.

Including the layout or dimension with MCP. This is a micro services based domain controller.

The layout or dimension with MCP. This is a micro services based domain controller.

<unk> now been adopted by the vast majority of our customers around the world.

Also our differentiated software for our adaptive IP approach and this can be deployed as embedded in routing and switching portfolio on white boxes or virtually. And finally, our multi bandwidth blue planet services automation software. Which is now deployed by the 30 largest global carriers around the world to help drive their digital transformation efforts. These software elements of delivering innovation to the marketplace and expand our relationships with customers. Our overall software business constitutes less than 10% of our [total] revenue.

And finally, our multi bandwidth blue planet services automation software.

You can deploy the acuity of the largest global carriers around the world to help drive the digital transformation efforts.

The software elements of delivering innovation to the marketplace and expanding our relationships with customers.

Our overall software business, while it constitutes less than 10% of our clinical revenue.

We do think this growing over time as we expand both the adoption and application and move to more recurring and subscription-based models. Of course, the strong secular demand for bandwidth utilization remains challenged by the global supply chain constraints in the current environment.

Of course, the strong secular demand for bandwidth utilization remains challenged by the global supply chain constraints in the current environment.

And we continue to believe that these supply challenges are likely to persist through at least to the middle of calendar 2022. And to be clear supply conditions are adversely impacting product costs availability and lead times as well as our overall supply chain operations.

And to be clear supply conditions are adversely impacting product costs availability and lead times as well as our overall supply chain operations.

We expect these variables to affect that gross margin as well as the level and timing of revenue during fiscal 2022. And we've obviously incorporated all of these elements and consideration we brought our guidance accordingly.

And we've obviously incorporated all of these elements and consideration we brought our guidance accordingly.

However, as you can see from our performance to date, we continue to manage these challenges well. While we are obviously not immune, we expect to continue to outperform in this regard going forward. And in fact, we then since fiscal year '22 with increased confidence and visibility.

While we are obviously not a mean, we expect to continue to outperform in this regard going forward.

And in fact, we then since fiscal year 'twenty, two with increased confidence and visibility.

And in a moment, Jim will provide outlook for FY '22 which we believe will be a year of outsized revenue growth for Ciena. And that is driven by several factors, including number one, strong order flow on additional visibility short term customer purchasing decisions. Number two, the return to historical customer spending levels to address the continued bandwidth demand following about two years of slow investment due to the pandemic.

And that is driven by several factors, including number one strong order flow on additional visibility short term customer purchasing decisions.

Matured.

the return to historical customer spending levels to address the continued bandwidth demand following about two years of slow investment due to the pandemic.

And thirdly, amongst uniquely [inaudible] increased monetization of wins. Both those that we've secured over the past couple of years as well as the [new awards]. Jim will also provide a new set of long term targets that we are confident in providing now given the positive demand environment, the strength of our business and overall financial position. Jim.

But we've secured over the past couple of years as well as the New award.

Yes.

Jim will also provide a new set of long term targets. We are confident in providing now given the positive demand environment, the strength of our business and overall financial position Jonathan.

Thanks, Gary. Good morning, everyone. We delivered a solid Q4 performance. Total revenue in the quarter was [inaudible]. Somewhatabove our expectations. It is a milestone quarter. It's the first ever billion dollar revenue quarter for Ciena. There will be many more to come. And were in the quarter significantly exceeded them. Q4, adjusted gross margin was 46.3%, which was within our guidance range and reflects the dynamics we highlighted last quarter.

Morning, everyone.

We delivered a solid Q4 performance.

Total revenue in the quarter was one <unk>.

Good morning.

Somewhere in all of our expectations. It is a milestone quarter with.

The first ever billion dollar revenue quarter for Sienna.

There will be many more to come.

And were in the quarter significantly exceeded them.

Q4, adjusted gross margin was 46, 3%, which was within our guidance range and reflects the dynamics, we highlighted last quarter.

Primarily the impact of increased supply and logistic costs as well as increased monetization of new wins. Adjusted operating expenses in the quarter was $307 million due to higher variable comp as a direct result of extremely strong order flow at the end of the year.

Adjusted operating expenses in the quarter was $307 million due to higher variable comp as a direct result of extremely strong order flow at the end of the year.

With respect to profitability measures in Q4, we delivered adjusted operating margin of 16.8%. Adjusted net income of $132.7 million. Adjusted EPS of 85 cents. In addition in Q4, our adjusted EBITDA was $199 million. And cash from operations was $255 million.

Adjusted net income of $132 7 million.

Adjusted EPS of <unk> 85.

Yeah.

In addition in Q4, our adjusted EBITDA was $199 million.

And cash from operations was $255 million models.

Also in Q4, we repurchased approximately 494,000 shares for $26.7 million for a total of approximately 1.7 million shares repurchased in fiscal '21. Regarding our performance, for the full fiscal year annual revenue was $3.2 billion, which was at the high end of our revenue guidance range and as Gary mentioned, we ended the year with $.22 billion in backlog.

Regarding our performance for the full fiscal year annual revenue was $3 2 billion, which was at the high end of our revenue guidance range and as David mentioned.

$2 $2 billion in backlog.

Adjusted gross margin was very strong for the year at 47.9%. Adjusted Opex for fiscal '21 totaled $1.3 billion largely as we've expected. Moving to profitability. Adjusted operating margin in fiscal '21 was 16.8% at the high end of our guidance range. Adjusted EPS was [inaudible] cents. Free cash flow for fiscal 2021 was very strong at $462 million almost 75% of adjusted operating income. Our balance sheet remains a significant competitive differentiator. We ended the year with approximately $1.7 billion in cash and investments.

One 9%.

Adjusted Opex for fiscal 'twenty, one no the $1 1 billion largely as we've expected.

Moving to profitability adjusted operating margin in fiscal 'twenty, one to 16, 8% at the high end of our guidance range.

Adjusted EPS was $2 three reasons.

Free cash flow for fiscal 2020, one was very strong at $462 million or.

<unk> was 75% of adjusted operating income.

Our balance sheet remains a significant competitive differentiator.

We ended the year with approximately $1 billion.

Cash and investments.

Looking to the full fiscal year, we believe fiscal year '22 will be a year of outsized growth for our business. We have strong visibility to our near term opportunities, including a record backlog in the year. Customer spending has returned to historical levels. Following two years of lower investments due to the pandemic and related economic uncertainty. More permits perhaps and unique to CN. Screening reporting to us that meets our moral monetizing our new units and increasing numbers of deployments for significant deals that we secured over the past couple of years as well as some new awards.

Our business.

We have strong visibility to our near term opportunities, including a record backlog.

Interest for the year.

Uh huh.

Customer spending has returned to historical levels. Following two years of lower investments due to the pandemic and related economic uncertainty.

More permits perhaps and unique to CN.

Screening reporting to us that meets our moral monetizing our new units and increasing numbers of deployments for significant deals we secured over the past couple of years as well as some new awards.

Accordingly, we expect to grow our revenue in fiscal year 2022 in the range of 11% to 13%. With respect to gross margin, we expect the dynamics of the [inaudible]. Specifically, the impact on one supply chain challenges including significant cost and higher logistics piece will continue. And the increased monetization of multiple new wins with initial deployments and rollouts will also affect gross margins. Accordingly, we believe our gross margin for fiscal year 2022 to be in the range of 43% to [46%.]

With respect to gross margin, we expect the dynamics of the selling.

Tim.

Sure.

Specifically the impact on one supply chain channels that are not insignificant.

Jason and higher logistics piece will continue.

And the increased monetization of multiple new wins with initial deployments and rollout will also affect gross margins.

Accordingly, we believe our gross margin for fiscal year 2000 to within the range of 43%.

30%.

For operating expense, we intend to continue investing strategically in our business in particular in our routing and switching and software automation portfolio. To leverage our opportunities in the growing addressable markets. Before we expect adjusted operating expense to average $300 million per quarter in fiscal '22.

To leverage our opportunities in the growing addressable markets.

Before we expect adjusted operating expense to average $300 million per quarter in fiscal 'twenty two.

As always this number will vary quarter to quarter and is expected to start a bit lower and increase through the year. We expect adjusted operating margins in fiscal '22will be in the range of 15% to 16%. In addition, during fiscal '22 we will be making investments in inventory and accounts receivables in order to continue [inaudible] supply chain challenges.

We expect adjusted operating margins fiscal 'twenty, two will be in the range of 15% to 16%.

In addition.

During fiscal <unk>.

We will be making investments in inventory and accounts receivables in order to continue with it.

London on kidney care.

As a result, we expect of course. Cash flow in fiscal '22 will be 50% to 60% [inaudible]. For [inaudible] '22, we expect to deliver revenue in a range of $870 million to $910 million. Adjusted gross margin in the 43.6% range and adjusted operating expense of $290 million.

Cash flow in fiscal 'twenty, two that will be 50%, 60%.

That's helpful.

For Q.

Q1, Q2, we expect to deliver revenue in a range of $870 million to $910 million.

Adjusted gross margin in the 43, 6% range and adjusted earnings.

Pretty well.

$290 million.

Yes.

As Mary noted strong secular demand is driving solid business. Henry visibility growth, which puts us in a position Zulu providing longer term to meet the targets. <unk> targets gives the best indication of our long term view of the industry and what to expect and see them for the next three years. Overall. We believe we are well positioned to continue to deliver the combination of topline growth. Profitability and cash usage.

Henry visibility growth, which puts us in a position Zulu providing longer term to meet the targets.

<unk> targets gives the best indication of our long term view of the industry and what to expect and see them for the next three years.

Overall.

We believe we are well positioned to continue to deliver the combination of topline growth.

Profitability and cash usage.

We believe the most important indicators of our performance and progress for revenue and EPS growth. On the top line, we expect. So low. Smith. In line with. Historic norms. And particularly in 2002, we intend to continue to gain. Take market share as we have over the last decade. Beginning in fiscal 'twenty, three we expect Brazil.

On the top line, we expect.

So low.

Smith.

In line with. Historic norms. And particularly in 2002, we intend to continue to gain.

Historic norms.

And particularly in 2002, we intend to continue to gain.

Take market share as we have over the last decade.

Beginning in fiscal 'twenty, three we expect Brazil.

Annual revenue growth rate range of approximately six to eight weeks. With respect to adjusted earnings per share and return to historical revenue growth rates to continue to focus on driving increased profitability through our business, we expect our EPS. Growth.

With respect to adjusted earnings per share and return to historical revenue growth rates to continue to focus on driving increased profitability through our business, we expect our EPS.

Growth.

Specifically, we expect to grow our adjusted earnings per share in the 10% range. Over the next. Also as part of our long term outlook beginning in 'twenty three we are targeting a free cash flow generation of approximately 75% to 85%.

Over the next.

Also as part of our long term outlook beginning in 'twenty three we are targeting a free cash flow generation of approximately 75% to 85%.

Adjusted operating income over the next few years.

Finally, with respect to operating margin, we continue to focus on driving leverage in our operating model.

In particular.

Knowing our operating expense at a lower rate than expected revenue growth.

<unk> increased profitability.

As a result, we are targeting to achieve adjusted operating margins of 17%, 18% for fiscal <unk>.

With our strong balance sheet and our expectations of cash generation over the next several years, we are now positioned to increase significant.

Return of capital to our shareholders.

Previously announced a program to repurchase up to $500 million of Dot com.

With the goal of completing those for the.

It's between one. Alright. Several leases. Yes. We suspended the repurchase we absorbed most of the year due to the payment as a result of the industry and market dynamics. Today, we announced that our board of directors has authorized a new program to repurchase up to $1 billion. So. Under this new authorization. We also are intent to enter into a $250 million accelerated share repurchase through agents. So. Whereby we will more than make up the unused portion of our previous repurchase authorization.

Alright.

Several leases.

Yes.

We suspended the repurchase we absorbed most of the year due to the payment as a result of the industry and market dynamics.

Today, we announced that our board of directors has authorized a new program to repurchase up to $1 billion.

So.

Under this new authorization. We also are intent to enter into a $250 million accelerated share repurchase through agents.

So.

Whereby we will more than make up the unused portion of our previous repurchase authorization.

On a settlement for the ASR is expected to be completed in the second quarter fiscal Q2. Following the completion. Timing of the remaining 750 annuity purchases will be based on our stock price. General business and market conditions, our liquidity and cash flow to other factors.

Following the completion.

Timing of the remaining 750 annuity purchases will be based on our stock price.

General business and market conditions, our liquidity and cash flow to other factors.

Our intent is to fully utilize the repurchase authorization by the end of fiscal '22. We expect to finance program with cash how do we use our. Our cash correct. <unk>. This new share repurchase authorization. <unk> represents a niche space, our cash deployment and demonstrate our commitment to return capital to shareholders, while maintaining the liquidity comments. In closing, we delivered very strong fiscal fourth quarter and 21 results despite challenging supply chain initiatives. With continued market leadership, and a very strong demand. As well as significant.

We expect to finance program with cash how do we use our.

Our cash correct.

<unk>.

This new share repurchase authorization.

<unk> represents a niche space, our cash deployment and demonstrate our commitment to return capital to shareholders, while maintaining the liquidity comments.

In closing, we delivered very strong fiscal fourth quarter and 21 results despite challenging supply chain initiatives.

With continued market leadership, and a very strong demand.

As well as significant.

Going into the year with another strong performance in fiscal 'twenty, two including outsized revenue growth. For the longer term, our differentiated financial position will enable continued investments in innovation to address and the. New edge applications through routing and switching technologies and digital transformation with our growing software automation portfolio. <unk>.

For the longer term, our differentiated financial position will enable continued investments in innovation to address and the.

New edge applications through routing and switching technologies and digital transformation with our growing software automation portfolio.

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And we're in a strong position to return capital to our shareholders since Houston.

The majors will now take questions.

Before we start the Q&A and we recognize there are some audio quality issues with the webcast. Please note that all of that information is on the earnings presentation treating our guidance on what would be happy to clarify anything that. If you buy two Q&A. As a reminder. As a reminder. Just to ask a question you will need to press star one on your telephone to withdraw your question press the pound key. Please standby, while we compile the Q&A roster. Your first question comes from the line of Rod Hall with Goldman Sachs.

Please note that all of that information is on the earnings presentation treating our guidance on what would be happy to clarify anything that.

If you buy two Q&A.

As a reminder.

Just to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.

Please standby, while we compile the Q&A roster.

Your first question comes from the line of Rod Hall with Goldman Sachs.

Yeah. Hi, guys. Thanks for the question. I guess I wanted to dig into the guidance for next year I mean, it's very strong relative to what we had expected. I wonder if you could talk a little bit about some of the drivers within that. I know that cell site routing seems like a really big opportunity I don't know Gary if you think that goes beyond that one installation or not curious how big Hyperscale is not. So that's kind of the first question. Can you give us more color on what's driving that growth? And then I have one follow up for you as well.

I guess I wanted to dig into the guidance for next year I mean, it's very strong relative to what we had expected.

I Wonder if you could talk a little bit about some of the drivers within that I know that cell site routing seems like a really big opportunity I don't know Gary if you think that goes beyond that.

one installation or not curious how big Hyperscale is not. So that's kind of the first question. Can you give us more color on what's driving that growth? And then I have one follow up for you as well.

Can you give us more color on what's driving that growth.

And then I have one follow up for you as well.

Yes. Thank you. I would describe it as sort of the monetization of new wins that are sort of been on hold for a couple of years plus the new wins that we're seeing. And the sell side router opportunity I think we've secured in this last quarter. The two large service providers in North America for us switching and routing portfolio. So I think this is, I view this as just the start, quite frankly.

The monetization of new wins that are sort of been on hold for a couple of years plus the new wins that we're seeing.

And the sell side Brown, our opportunity I think we've secured in this last quarter.

Two large service providers in North America for us switching and routing.

Portfolio. So I think this is I view this as just the stock quite frankly.

So we're very encouraged by the opportunities that we're seeing, we're seeing that and I think if you step back from those specific things too to Ciena, which is really the new business in the portfolio, the new innovations in the portfolio, we're seeing carriers return to sort of a catch up on their capacity barrels. Basically, you get into more normalized views around the modernization of their network. I think you're also seeing a lot of step-function increase in overall traffic demand. So it's a blend of all of those things. I would also mention are in terms of the order book some of that is customers wishing to get security of supply in this environment. So it's a blend of all of those dynamics.

Back from those specific things too to C&I, which is really the new business in the.

Portfolio, the new innovations in the portfolio, we're seeing carriers return to sort of a catch up on their capacity barrel.

Basically you get into more normalized views around the modernization of the network.

I think Youre also seeing rod.

Step function increase in overall traffic demand. So it's a blend of all of all of those things I would also mentioned we are in terms of the order book some of that is.

wishing to get security of supply in this environment. So it's a blend of all of

those dynamics.

But I think the secular demand for the industry I think is very positive and I think our own particular position. As you need to around the wins that we've had in the last few years, which began to see that flow through.

As you need to around the wins that we've had in the last few years, which began to see that flow through.

Okay. Great and then my follow up, Gary, was on the software comment you made you said it was below 10%. I wonder is it, by saying that do you mean, it's close to 10% or is it quite a bit below? I'm just curious how big that software element is now in the in the revenue stream. Let us know sort of three elements that I outlined.

By saying that do you mean, it's close to 10% or is it quite a bit below I'm just curious how big that software element is now in the in the revenue stream.

Let us know sort of three elements that I outlined.

For last year, it's about $8.

But you put it.

Put it all together.

Highlight that because I think where we're focused on growing that in absolute dollar terms.

Over time as a percentage of our overall revenue so blue planet MCP.

And we adapted by Fay.

Great. Okay. Thanks, a lot I appreciate it.

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

Sure can I ask you to just repeat the long term guidance.

Sure Sharon you My apologies my question.

As a negative gross margin operating margins have been on a normalized basis, how much of an impact are you getting hit from supply chain.

And I assume is your routing and switching business grows.

That's going to have a positive impact on the gross margin and operating margin anything you could say on that and what type of growth are you expecting there and Ive got one follow up to that thank you.

A lot of questions in there Paul.

And we kind of variation.

And the last one first which is routing and switching we do believe that routing and switching overall will provide.

Accretion to our gross margins as we move through time, and we do expect routing and switching to grow as a percent of our revenue.

With respect to what our profitability might have been.

What I will say is that the last time, we gave sort of run rate gross margins was.

We began writing for covenant relief and we said that they were centered around 45%.

I still believe that to be true.

At 45% or so call it $44 46 represents a.

The run rate percentage of new business and our revenue stack. So.

That's what I would say and you can count on them based on our guidance for the year, which is 43% to 46, you can sort of get somewhere close to what we think.

Sector of the supply chain challenges will be this coming year.

And just.

Just summarize our long term targets.

What we said was we expect the industry will return post 'twenty two.

Two.

Sort of a low to single mid single digits growth rate not going to be that different from that in <unk>, but our growth rate. We think will return to the great rates that we've seen historically for a long time, which is 6% to 8% range, which will reflect a continued taking the market share.

We also said that we expect our adjusted EPS will grow in the 10% range over the next several years.

We gave some other.

Metrics, but those are the key ones, we believe in it.

Yes.

Patient for it.

I appreciate that my follow.

Follow up.

Those are the pure from the numbers, but I'll ask the question are you seeing any impact from zero in particular as well as open line systems.

We've talked to are you seeing it obviously, just a safety award stage, but.

Any concerns.

The call Scott.

On the DRP I don't think our perspective has changed.

Last time, we spoke we really think it's.

Starting on the universe is really 2022, so no we're not seeing any impact.

In the short term on that.

<unk> made out in the press release, we shipped our first VR plugs to the marketplace from a commercial perspective, and certainly expect to participate in that market opportunity.

As it comes to fruition open line systems, that's a game that we've been planning for for some time and we're.

Quebec should benefit from by the way some of our technology leadership with online systems side and on the and on the <unk>.

Coherent modem side.

Whatever consumption models, our customers market shares.

It's a good thing for us.

No negative impact on our client business.

Just to be clear when you say no impact from <unk>.

No. They are just starting to ship youre not seeing meaningful awards by weather.

Our traditional service providers.

I think.

The game on that really starts in 2022.

Okay I appreciate it thanks, guys. Thanks Paul.

Your next question comes from the line of George Notter with Jefferies LLC.

Hi, guys, thanks very much.

Congratulations on the terrific results and guidance I guess I wanted to ask about.

Yes market share opportunities.

You certainly you are implying that you will you'll take continued share I think Huawei obviously is.

One of the opportunities out there and what are you seeing in terms of new wins competitively against them.

What are you seeing in terms of the opportunity to mine out the installed base and any additional color you could provide would be great. Thanks.

Yes, George the Gary.

Say efforts surround that have been ongoing for a while we're seeing this dynamic.

It's around two two region gets Europe.

And India, and what we have seen.

And both of those regions even during last year, we have seen an ongoing move to migrate their dependency on these carriers away from Huawei.

On the on the optical transport side and in other areas.

We're getting more than our fair share of that.

The fact that we saw good growth in Europe, and India or some of that is absolutely directly attributable to that.

That move and we expect that.

We're going to continue over the next one to one to three years and as I said, we're taking.

More of our fair share of that George.

The other thing I would say George is that you see market share gains in our revenue numbers, we actually see them quite a bit before that we see them at the contract rewards we see them in our order book and all of that has been going on in our business over the last couple of years and.

Particularly when you look at our backlog at the.

Beginning of this year, it's $2 2 billion.

Hundreds of millions higher than we've ever seen of course, some of that is visibility to future orders, but it reflects the fact that we have been taking market share and it's going to show up in our revenue this year and 'twenty two.

Great great. Thanks very much.

Thanks, Charlie.

Your next question comes from the line of Tim long with Barclays.

Thank you.

Just hoping we could talk a little bit about the web scale business.

<unk> was down a bit sequentially in the quarter I'm, assuming that kind of lumpiness.

So if you can just touch on that as well as to the $1 billion in orders is good.

For the year it looks like whatever one two or so book to bill.

It seems other than the web scale world are seeing.

<unk> plus of orders, so probably more growth so is there something.

Going on there where maybe it's.

Theres a little less forward are ordering and then maybe some of the networking folks are seeing and then as a follow up if you can just touch on on Asia.

With India up Asia still under a little bit of pressure can you talk about what's going on in the other parts of the Asia theater. Thank you.

Yes.

Let me say dedicated web scale for us.

I would just say in the quarter.

Lumpy I think during the year.

The supply chain stuff weighed a little bit on on revenues.

Space, but we certainly maintain share as expected.

Yes, I would say the fact that we had all full web scale those for the first time and non top 10 customers.

As a testament to the position that we have there are more than $1 billion in orders is a significant milestone from them and a lot of a not features in our backlog as well. So we have good visibility to the year and we expect actually web scale and the guidance that Jim.

<unk> guided for our overall business with the web scale growth 22 will probably be above the corporate average.

If thats helpful too.

And we've got good very good visibility into that in terms of other parts of Asia.

We expect to again I would make the same comment about talking about India, I think that will grow faster than our corporate average as well other parts of Asia.

More challenging to US I think Australia, and New Zealand I think we will have a very good 2002.

Got a couple of new when there are new customers for us.

Japan continues to be challenging.

But we additionally, about a couple of new wins there.

One of them would be.

The large large tier one that so I think over time, our position in Japan over the next probably 18 months or so will will improve obviously, we're not we're not focused on China. The rest of Asia I think has been a bit of a challenge.

I think that the bill.

The pandemic continues to weigh on.

And a lot of those countries.

Okay. Thank you.

And also it's also a huawei is sort of our home turf.

Not under as much pressure there.

But as they are in Europe for example.

India.

That's part of it.

Okay makes sense. Thank you.

Okay.

Your next question comes from the line of Simon Leopold with Raymond James.

Thank you very much for taking the question.

Two as well first I wanted to understand what you actions you may be taking in terms of.

The prices.

To your customers, whether you're you're planning on or have made adjustments and if so how successful have you been getting any price increases to stick to cost perhaps on the higher input costs and then I've got a follow up please.

Yes.

<unk> is really driven by a lot of that stuff, we just absorbed in the normal.

Our bumps and moves.

By China, and the ecosystem, but I think those elements to this which everybody saying the cost environment. We do not think is transitory product split it into two elements. There's all the expedite fees on logistics and the rest of it eventually that will ameliorate but.

Some of these costs from a chip point of view, we do not see that.

Transitory we are actively I always say, we are actively engaged with our customers on how best to navigate this from a partnership point of view.

How do we do that in an equitable way, we don't expect any of those.

Dialogues to really impact.

Slide 22, largely because we've got such a large backlog already but we are engaged.

We're engaged with our customers on that.

And then as a follow up.

That's calendar.

If we are able to share these costs as well as the current backlog that will affect orders going forward.

Thank you for that thank you for that.

On the follow up Gary mentioned.

Web scale growing faster India.

But you did mentioned the cable TV vertical which in the fourth quarter was really strong.

And we've been observing some spending shifts in that vertical.

How are you thinking about your cable TV market in in your 2022.

Guidance. Thank you.

We're going to have a good year with the <unk>.

But we had a very very strong year, particularly with our biggest customer there, which is Comcast and Graham good year with them, we're just not going to see a kind of growth rate.

So that we're going to see across our business through 'twenty two.

What I would add to that though I do think from a specific from a blue planet point of view year. We've had two additional NSO wind portfolio client, but will begin to rollout.

For the year, So we've got a pretty good footprint now.

From a product mainly on the inventory side across across a number of those large paper company.

Thank you thanks.

Thanks, John.

Your next question comes from the line of Jim Suva with Citigroup.

Thank you and good morning.

During COVID-19.

Sure.

Are coming back a little bit.

Later than other parts of the world just given the timing of when Covid hit those societies.

Is it fair to say that your growth outlook in those is not only higher than corporate average, but also come out multiyear sustainable is I believe some of those countries kind of put.

Spending in infrastructure on pause during COVID-19 a lot more than others. If you can just kind of look.

Talk a little about that thank you.

Yes.

It does ebb and flow.

Hanging on particularly India, India has gone through a number of challenges some of which in a pre COVID-19 more industry based.

I do believe that <unk>.

Doug out from that.

Obviously, they had this sort of the way.

Covid with truly dampened down demand, but we are seeing a very strong.

Plumbing set of dynamics in India, and obviously, we have number one market share in India and I think.

I look at it from an RFP in an order point of view, we've actually grown share in India or in the last 18 months during that period and I think we've said this before that.

<unk> deployments may have been very patchy and some of these territories different countries the RFP activity.

Is largely gone on unabated, and which is why we've got about some of these territories and I would agree I think this is a multiyear dynamic.

Ami, obviously everybody's supply constrained right now but.

I look over the next one to three years feel very bullish about Australia and New Zealand.

India and longer term I think our position in Japan, as well, but thats going to take a little more rebuilding.

Thank you so much for the details and clarifications.

Thanks, Kevin.

Your next question comes from the line, Amit <unk> with Evercore.

Oh, yes.

A lot and congrats on a good print a guy I have two questions as well is unfortunately, maybe.

This led to a 14% guide revenue guide for fiscal 'twenty, because you've talked about web scale Asia doing better.

I was wondering if you just touch on what are you seeing in North America, and Europe sort of a geo basis.

In the context of the guide for fiscal 'twenty.

I would say that.

<unk>.

I think that will also be probably above our average corporate average. So then you get to the question Mark is not above our corporate average Ipos you had enough on that point.

And that would be North America and its mandate.

We are a big number but also we've got such a large market share in North America across the board, but we do expect growth in North America.

Alright.

Let me be really clear.

Clear about that but I think the dynamics in Europe, and I'd say, there's two dynamics in Europe, one in <unk>.

Basically of under funded their infrastructure for a period of time now this is way prior to Covid.

And then any COVID-19, obviously, it's affected like everybody else, but so I think Europe and then you've got the Huawei dynamic there.

As well, which you don't really have in North America, there's not much deployed.

As has been taken out.

So I think we do expect a good year in North America for sure and I look at the number of wins that we've had but will help drive that but.

But I think Europe will have another.

Another strong year in 2002.

Perfect.

You said I could just follow up.

I think when you talked about the long term guide you kind of said, we expect the industry to grow low single digits and I think that's the same assumption you have for fiscal 'twenty, two if I'm not mistaken.

Clearly I think the implication of your share gains are much more outsized in fiscal 'twenty two versus what you think happens beyond that.

Is that fair I guess my question is why do you think this outsized share gains that you have this year on a one time phenomenon versus perhaps something thats more enduring a durable I E double digits.

I would I would describe it as best I think <unk> got a bit of a catch up.

Had a bit of a backlog of wins, but if not the colorado monetize flow with antibody anticipated because of the supply chain, but I think it is a bit of a bit of a catch up year over and I think it is somewhat unique to CNN because I think both the market rate overall is probably going to be in the single.

Low single digits for 2000.

And I expect that to.

Further out you get more difficult.

But if you look over the sort of 'twenty three 'twenty four I would expect it to be similar.

And I would expect us to continue to take share, which is why you get into that sort of six 8% and our if you look at it over the last decade.

Number is that kind of guy.

Dynamic on structure as what we've seen play out.

I don't expect any different.

We're also.

Essentially as we've said opening up that time, and the switching and routing, which I think will be helpful to reinforce our outsized growth.

Thank you.

Your next question comes from the line of some meat chatterji with J P. Morgan.

Hi, Thanks for taking my question.

I guess I just wanted to start.

Jim.

I know you mentioned some headwinds to cash conversion I think next year, if I heard you right.

As you return to a more normal level of growth.

Fiscal 'twenty two I think it would be generating mode 400, 500 may look like.

Why shouldn't I mean, given the needs.

Our deployment of cash that you have I don't.

See any major M&A requirements that you guys on lithium. Thank you company why shouldn't we be thinking that the surety book to this can be.

Yes, sure Don is going to be as much as 100 close enough free cash flow.

Strong balance sheet that you highlighted and I have a follow up please.

Yes, one whereas per se is that we would like to consider good M&A transactions and we've done that.

Can't see it because it's in our offices, but we've been very active in.

And thinking about things, we just have not been able to find something that works for us we hope to be able to do that.

So that's why we're going to keep.

Very good and solid cash balance and a strong balance sheet.

But I would say this year.

Youre right were going to be generating a lot of cash over the next several years and if we can't deploy that either in the business or an M&A and we can probably expect to see more share repurchases.

Got it.

My follow up.

Going back again to the long term guidance beyond a five to.

<unk> Street, both index Ralph.

Similar to what you had prepays that make for your long term guidance.

If you can shed any talks about how similar similar is that composition to how you've talked about it.

Dan.

More growth coming out of telcos or is there maybe let's try it again.

I would say.

International growth.

But we'll be pretty much as we talked about in 2002, I would expect that to continue largely function you've got such a large market share in North America, we will grow but it's more difficult to do that.

Big numbers I also think the web scale it will be a fantastic opportunity for us.

The medium to longer term and the time talking about that so I would expect.

All of that growth to be from international and from web scale and further diversification of the customer base.

Also routing and switching.

The great opportunity for US, we've said that our Tam.

Okay increase from around $13 billion to $22 billion because of this convergence of optical and IP technology in our routing and switching.

Investments and engagements are going to increase our revenue over the next several years.

Great.

Okay. Thanks Nate.

Your next question comes from the line of Alex Henderson with Needham.

Thank you could you just repeat the the order.

Backlog that you have and is that primarily.

Product backlog.

$2 2 billion it is products and services.

Some very small portion of that.

And our smaller low hundreds of millions of services and maintenance that will continue beyond fiscal 'twenty. Two so the vast bulk of that backlog will be delivered in fiscal 'twenty two.

What do you think your normalized backlog would be.

If you were in a normal environment.

Much of that is outsized backlog.

Yeah.

Yes.

Scott I'll address this but we've talked about that internally the business really the because of.

The COVID-19 situation and what quickly follow matures a supply chain imbalance.

The ordering pattern of our customers.

Our curve has changed and Scott do you want to address that as we've talked about.

I think Alex if you look at a couple of data points number one is kind of the backlog grew from beginning of 'twenty one.

One by $1 billion.

The environment going into 'twenty, one I wouldn't say it was normal either so that might have been a bit slow.

And going into 'twenty, two is probably a bit high so somewhere in between there is in our minds. The normalized rate. If you go back and historical numbers through.

That said, we sort of entered the year typically somewhere between 30 and 35% of the annual revenue plan for the year end backlog.

Maybe give you some indication of what sort of normal status.

Personally I think will be living in this new environment, where we have.

Longer visibility and therefore more backlog for quite a while probably draw an investment question.

Yes. So the primary reason im asking these questions I wanted to get at the.

Mechanics of how the backlog normalizes. So over the course of C Y 20 to FY 'twenty, two will do but we see a book to bill start to run.

Below one and therefore, the backlog start to trend lower or do you expect in your guidance that the backlog stays at elevated levels.

And we don't bring that down I mean, if I'm looking at the backlog at 61% of your total.

Trailing revenues and 75% of product revenue so.

Very large backlog.

That's the mechanics to normalize and that doesn't.

Doesn't happen all in 'twenty, two or do we actually end up with a large chunk of that backlog.

Being realized.

In 2023, which case guide seems conservative inventory.

I actually think the.

One of the things that we probably need to change your mind around a little bit of sort of looking at a.

Short term period and trying to figure out how much revenue moves from one to the other because in the old world, we see that in the period.

Relatively low proportion of that periods revenue was actually in backlog in and then we had pretty pretty fast convergent cycle. So it made sense.

The question on how much domestic right now we're in a different world.

The demand profile.

Given us long visibility, it's a very significant portion on.

The delivered revenue in a short period of time, and therefore, you're less dependent on what it does mean is.

Unlike in 'twenty, one, where we said the <unk>.

<unk> dynamic was really well this year.

Backend loaded that's going to be.

Lots of demand in this case, that's going to be somewhat shaped a tough one, but it's going to be the supply environment, that's going to be the shipping.

And so you can naturally expect nano.

Revenue, increasing as we go through the year.

B the convergence too.

<unk>.

Our ratios.

Question.

Whether it is flipped to being one.

We don't know.

But I think youll still see an oversized backlog realm.

Relative to historical.

Measures going into timeframe.

So are you assuming a reduction in the book to Bill because of the.

Parts elements.

Becoming more available over the course of the year when do you expect that to actually start to put it in the in the guide.

What im really trying to get at.

Thanks.

I would say at this point I don't think.

It's difficult to give you precision in terms of the quarters, but I would say this.

We do expect our book to Bill.

In the year to be still greater than one on that and we do expect the supply chain environment largely persist through most of our fiscal 'twenty.

Two things.

I think people will start to see some improvements in lead times.

As we get into the back end of the year.

That will probably change the ratios.

The backlogs that revenue in.

'twenty, three but not back to sort of the historical amounts.

Thanks Al.

Sure.

Your next question comes from the line of meta Marshall with Morgan Stanley.

Great a couple of questions for me, maybe just a little bit more market focused.

Clearly you're seeing strong web scale order flow and just what are you seeing in terms of that upgrade activity is it wholesale upgrades to wave logic five like we maybe saw with Florida.

400 gig cycle are you seeing more of a mix of speeds being installed.

In the data center, and then maybe a little less of a question for fiscal 'twenty two but.

Our partnership with the service providers as you look towards making price increases just trying to get a sense.

Q3 and beyond.

For the industry do you think that will be more price.

Okay, So you've driven our unit driven.

In terms of how much.

The price increases will be absorbed versus.

Absorbed by the suppliers versus the service providers. Thanks.

But I'll try the first one on.

On the web scale. So as you know we've got exposure to the wesco in multiple parts of their infrastructure their campus Metro data center attack in some cases, they're sort of national backbone network and certainly a lot of activity around the submarine networks I think in all three of those use cases, what we're seeing.

Regarding capacity elements.

John met hit Us.

Typically the.

The most advanced state of the shelf technology yesterday, they tried to introduce kind of the lowest cost per bit.

Okay as aggressive as they can but not all anhui logic five years, but.

That transition is happening as we speak.

The second thing.

But we are saying is.

Expansion in terms of their reach so that comes at us.

In terms of.

New builds.

And both in terms of photonics.

And wave logic modems.

And then with media that are unique to us and the timing wise that we had talked in the past around new logo wins in that space that we're significantly and youre starting to see those come to revenue.

Okay.

<unk> on the on the other part of your question on the industry growth.

Whatever happens on the pricing environment I don't think that they will have a major impact on the actual size of the growth to be honest because I think.

Wherever the pricing dynamics and up I think certainly from our point of view is that we will absorb the vast majority of the additional costs associated with the component piece.

I just want to be clear I do not think that will be able to be passed on.

To our customers and that too will encompass.

Guy.

And I don't think it will really impact.

The 22 from a price increase point of view, but what I what.

What I would say is over time as Jim alluded to gross margins you look at the guidance, we've given for the sort of three year piece.

<unk>.

I do think that we will be able through innovation, our own cost productions that vertical integration and mix and also our increased levels of software and our exposure to the growth in routing and switching that will help our gross margin and as Jim said, it's probably if you look at our.

The baseline gross margin if you didn't take into account leads.

<unk>.

The increases.

Thank you very much and thanks, everyone.

During your time today attention, we look forward to catch up with everybody today in the next few days happy holidays, everyone and happy healthy new year. Thank you.

This concludes today's conference call.

Thank you for participating you may now disconnect.

Okay.

[music].

Okay.

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