Q4 2023 Ciena Corp Earnings Call

December 7, 2023

Good morning, and welcome to Sienna's fiscal fourth quarter 'twenty to 'twenty three financial results Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad.

After todays presentation, there will be an opportunity to ask questions.

Good question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please.

Please note. This event is being recorded I would now like to turn the conference over to Gregg Lampf.

<unk> President of Investor Relations. Please go ahead.

Thank you Joe.

Good morning, and welcome to Cna's 2023 fiscal fourth quarter and year end results conference call.

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

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 the 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.

With me are seeing the results of operations a reconciliation of these non-GAAP measures to our GAAP results is included in today's press release.

Before turning the call over to Gary I'll remind you that during this call, we'll be making certain forward looking statements such statements, including our quarterly and annual guidance and our long term financial outlook and discussion of market opportunities and strategy are based on current expectations forecasts and assumptions regarding the company and its markets which include.

Risks and uncertainties that could cause actual results to differ materially from the statements discussed today.

Assumptions relating to our outlook, while they mentioned on this call that were included in the Investor presentation that we will post shortly after our important part of such forward looking statements and we encourage you to consider that.

Our forward looking statements should also be viewed in the context of the risk factors detailed in our most recent 10-Q filing and in our upcoming 10-K filing which will be filed with the SEC by December 29th.

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

As always we will allow for as much Q&A as possible today now ask that you limit yourself to one question and one follow up with that I'll turn the call over to Gary.

Thanks, Greg and good morning, everyone.

Today, we reported very strong fiscal fourth quarter results, including revenue of 1.13 billion and adjusted gross margin of 43, 7%.

Our team has been executing exceptionally well and in Q4, we shipped more hardware across our portfolio than ever before.

For the full fiscal year, we delivered revenue of $4 three 9 billion or.

A 21% increase over fiscal 2022.

Which as you can expect drove very strong market share gains.

We also drove a 43% increase in adjusted annual EPS.

Notably in FY2023 revenue for our routing and switching portfolio also increased 27% year over year.

I think a strong demonstration of the momentum within this element of our expanded addressable market.

Okay.

Before I continue.

I want to be absolutely clear that our Q4 performance.

Our commentary about market dynamics and the outlook. We are providing today is very consistent with what we said last quarter and indeed as we moved through most of fiscal 2023.

There have been no major changes to industry dynamics, including the demands remains incredibly strong.

As evidenced by high levels of customer activity and engagement across all segments and regions.

The single variable that remains uncertain today is the precise timing around the flow of new orders aligning with reduced lead times from our service provider customers, particularly those in North America.

And as a reminder, supply chain constraints led to elongated lead times, which resulted in large advanced order volumes.

In fiscal 2023, a faster than anticipated improvement in lead times is requiring some customers to digest the large amounts of equipment ordered in prior periods.

I would also note that the cloud providers were really the first to experience this dynamic.

Very clearly the first two have worked through it.

And in fact orders from our cloud provider customers as well as our total orders were up once again in Q4.

And we strongly believe that what we're seeing with cloud providers is a leading indicator.

And that service providers will similarly returned to normal order patterns in the coming quarters.

And that belief combined with strong fundamental demand, a leading innovation and customer relationships as well as our outsized backlog, which was still carrying.

We enter fiscal 2020 full very confident in our ability to continue to grow faster than the market and to take share.

Yes.

So moving to some highlights across the portfolio.

In optical networking, we continue to extend our leadership from both a market share and technology perspective.

In fact, we increased our global market share in optical by more than five percentage points on a year on year basis.

Which in fact puts us in an even stronger position than our pre pandemic market share.

Looking ahead, we will be first to market yet again with our next generation one six terabyte wave logic six in mid 2024.

And we intend to press down on this technology advantage as competitors have launched only one two terabits alternatives.

Yeah.

In Q4, specifically.

For optical it was a record quarter for both wave logic five extreme on 6500, Rls driven by cloud provider network expansions.

During the quarter wave logic, Fyvie surpassed 100000 total modem shipped making it the most widely deployed 800 gig solution in the market.

And as wave logic five success continues wave logic six ease of course building momentum, including orders from a large subsea customer and a strategic win in adoption with a cloud provider in Q4.

In routing and switching we continue to grow our share as a challenger in this market ending the year with greater than 500 million in annual revenue.

We added 14, new routing and switching customers in Q4 alone and now have more than 300 in total.

During the quarter, we received initial orders for wave router, our industry first converged metro platform, which became generally available in Q3.

Yeah.

And as some of you may have seen we announced last week, we are partnering with flex to add new U S based manufacturing capabilities for our unique nextgen plug a bull optical line terminals.

Yes.

Our optical network units and use.

As broadband access is a key part of our addressable market expansion strategy over time.

We're very excited to support the department of Commerce is broadband equity adoption and deployment the bead program.

And to ensure our customers can meet the build America buy America requirements of this program.

Also in Q4 Blue planet had a good quarter with $20 million in revenue.

And as some of you also may have seen we've just recently announced a new collaboration with BT group, which is using blue planet solutions towards the orchestration and delivery of network services.

And lastly, our global services segment had a record quarter in Q4 with revenue of $150 million an increase of 20%.

And interestingly, obviously, driven by installation and deployment services, which again is a positive leading indicator of service provider's ability to consume product.

Taking a perspective around customer segments.

Clearly, we had a record quarter with cloud providers as they continue to invest in data center interconnect for that traditional business and.

And begin to provision their networks for AI related traffic.

Indeed, our wave logic leadership continues to be particularly highly valued by this critical customer segment.

And as I mentioned orders from cloud providers were up once again over the prior quarter.

Significantly for.

For the first time at 210% customers in Q4 were both cloud customers.

Also in the quarter direct cloud provide a revenue accounted for 35% of total revenue the highest percentage ever.

And for the fiscal year direct cloud provider revenue grew 57%, reaching $1 2 billion or 27% of total revenue.

So importantly, as we reflect on all of this the fundamental demand drivers for our business remain incredibly strong.

Over the past 20 years, the 30% plus annual growth in bandwidth demand has been driven by many mega trends like the monetization of the Internet the move to the cloud mobile with digital transformation to name a few.

And we have been the leader in servicing that demand for bandwidth with our leading technology.

It is becoming increasingly clear that over the next several years AI will be a catalyst for continued strong bandwidth growth.

And we are incredibly well positioned to address these opportunities across our portfolio and from a customer relationship perspective.

We have industry, leading optical technology to high speed delivery at the edge to network automation.

We will continue executing on our strategy to be the best in class innovator in optical.

Bringing to market, leading innovation lightwave logic, six while expanding our market opportunities in routing and switching.

Specifically in that we will continue investing in our portfolio to address higher growth areas and converged metro core <expletive> and virtual routing, where we are already winning deals and taking market share.

So in summary, we delivered an outstanding year in fiscal 2023.

Gaining significant market share and further advancing our leadership position.

Obviously, we are well positioned to continue to grow faster than the market driven by our leading innovation.

The diversity and strength of our customer relationships.

With that I will.

I'll turn it over to Jim who will provide more details on our results as well as our business outlook, Jim Thanks, Gary Good morning, everyone.

Sienna delivered very strong Q4 results revenue came in at 112 9 billion and adjusted gross margin was strong at 43, 7%, reflecting a favorable product mix as well as improvements in component costs in the quarter.

Yeah.

Q4, adjusted operating expense was $338 million.

With respect to profitability measures in Q4, we delivered adjusted operating margin of 13, 8% adjusted net income of $111 million and adjusted EPS of <unk> 75.

Okay.

In addition, <unk>.

Q4, adjusted EBITDA was $179 million.

Cash from operations was $196 million and free cash flow was $173 million driven by a $140 million.

Duction and inventory.

We repurchased approximately four 2 million shares for $189 million complete.

Completing the $250 million repurchase target for the year.

With respect to performance for the full fiscal year annual revenue was $4 three $9 billion.

We drove adjusted gross margin of 43, 5% for the year and.

And adjusted Opex for fiscal year 'twenty, three totaled 133 billion precisely as we planned.

Moving to profitability adjusted operating margin in fiscal 2023 was 13, 1% and adjusted EPS was $2 72.

Free cash flow for fiscal 2023 was $62 million.

Strength of our balance sheet is a significant differentiator, particularly in this uncertain environment and we ended the year with approximately $1 $25 billion in cash and investments.

Inventory ended at one point over $5 billion down roughly $140 million from Q3.

But somewhat higher than we expected due to a shift in product mix delivered to customers.

We expect inventory to come down by $250 million to $300 million by the end of the year.

Now turning to guidance.

We will be giving new three year revenue targets today.

To start however, I want to compare and contrast, the targets. We gave last year at this point in time due to the new three year targets for fiscal 2024 through fiscal 'twenty six.

You'll recall that last year, we provided a three year revenue compound annual growth rate of 10% to 12% through fiscal year 'twenty five.

We made it clear then that 10% to 12% revenue growth is not our long term sustainable rate of growth. However, we provided that target knowing that fiscal year 'twenty three would be a year of outsized growth and that we would return thereafter to our long term trend of 6% to 8% annual growth.

Fiscal year 'twenty, three followed three years of low annual revenue growth due to the unprecedented set of dynamics that resulted from the global pandemic and the subsequent supply chain challenges.

Given that our revenue performance in fiscal year 'twenty, three was outsized as expected and with confidence in our ability to continue leveraging our market and technology leadership going forward. We believe that we remain on track to be in that 10% to 12% revenue CAGR for the three years ending in fiscal year <unk>.

25.

With that as we look ahead, we believe it's valuable to look at a period that excludes the outsize growth in fiscal year 'twenty three in order to provide a more accurate reflection of our anticipated average growth rate going forward.

Accordingly today, we are providing a new set of long term targets for the three year period encompassing fiscal year 'twenty four 'twenty five 'twenty six.

We believe that we are well positioned to deliver strong top line growth and profitability for the long term.

With that we expect average annual revenue growth of approximately 6% to 8% for the next three years, which is consistent with the growth growth rates, we have delivered over the long term, whether the past three 510 or even longer years.

All of this reflects our confidence in the fundamental demand drivers for our business, we expect to leverage those opportunities by continuing to lead in optical while expanding our addressable market and routing and switching.

Additionally, with respect to operating margin, we continue to focus on driving leverage from our operating model.

Accordingly, we are.

We're targeting to achieve adjusted operating margin of 15% to 17% for fiscal year 2006.

Yeah.

As we think about fiscal year 'twenty four specifically I wanted to reinforce a few points as Gary stated the fundamental demand drivers for our industry, including the growth in bandwidth demand remained strong.

As expected, we enter 2024 with $2 6 billion in backlog, which is still outsized both on a relative and an absolute basis over twice our historical levels in absolute dollars.

And we have begun to see both increased spend and plans for a strong 2020 for capex by our cloud provider customers.

We believe that the recent increase in orders from cloud customers as a leading indicator that service providers order patterns will improve in the coming quarters.

However, as Gary stated earlier current service provider order flow is low, particularly in North America. As these customers continue to work through relatively high levels of inventory.

While we expect service provider order patterns to improve as we move through 2020 for the timing and volume of that improvement remains uncertain.

Taking these factors into consideration, we will guide to a slightly wider than typical range of revenue in fiscal year 'twenty four.

Accordingly, we expect our revenue growth growth in fiscal year 'twenty four to be in a range of 1% to 4%.

Within this environment optical industry growth estimates for 2024 are currently being updated by industry analysts based.

Based on what we've seen from those sources and our own assessment. We believe the prevailing expectation is for largely flat market revenue in 2020.

Given our diversification, leading position and differentiation, we expect to take share and to grow revenue faster than the market.

With respect to gross margin for fiscal year 'twenty four we expect it to be in the mid 40% range with some variability by quarter, but generally reflecting the positive impacts of improving supply chain conditions.

For operating expense in fiscal year 'twenty four.

We intend to continue investing strategically both to advance our leadership position in our core markets and to expand our addressable market in key growth areas, including converged Metro core and broadband access.

Therefore, we expect adjusted operating expense to average $355 million per quarter in fiscal 'twenty four.

This number may vary by quarter, and we expect opex to start slightly lower and increase through the year.

Finally, as we improve our net working capital by reducing inventory levels throughout the year, we expect to generate significant cash in fiscal 'twenty. Four we believe that we will generate free cash flow of at least $400 million during the year.

We also plan to repurchase another $250 million in Siena shares under our $1 billion Board approved plan.

Yeah.

Finally, with respect to Q1 'twenty four we expect to deliver revenue in a range of $980 million to $1 <unk> 6 billion.

Adjusted gross margin in the mid <unk> percentage range and adjusted operating expense of approximately $350 million.

In conclusion, our strong Q4 and fiscal year results underscore our industry leadership, driven by our technology advancements across our portfolio and a diverse customer base.

Looking ahead, we anticipate a return to normalized order patterns as we go through 2024 and foresee AI as a growing driver of bandwidth growth.

And we are confident in our ability to seize market opportunities and to deliver profitable growth.

As we combine our leadership in optical with our continued investments to expand capabilities to address new markets and routing and switching.

With that I'll turn the call over to Q&A with questions from our analysts drew.

We will now begin the question and answer session.

You would ask any question you May press Star then one on your telephone keypad.

If youre using a speakerphone please pick up your handset before.

Pressing the keys.

If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.

Again, please limit yourself to one question and one follow up.

At this time, we will pause momentarily to assemble our roster.

The first question comes from semi strategy with J P. Morgan.

Please go ahead.

Oh, hi, Thank you for taking my questions I guess, just given the information that you see.

Particularly around the guidance and thanks for that.

Hello.

Details on the call today.

When we think about the one to four Boston grew 3% that you're guiding to for next year.

How should I think about what you're embedding in there.

Kelly cloud you have a lot more confidence in the growth, but when I think about the other vertical stelco gateway can you just share your thoughts about.

Clearly, if you're assuming telco sort of visits declined in terms of revenue next year or any other any color on the other customer verticals would be helpful and I have a follow up thank you yes.

If I sort of answered by sort of what we feel is going to be strong and we have visibility to good visibility I think is.

Cloud submarine, India or three three large elements that I would I would say we feel.

Very positive about both in terms of what we've got is backlog.

And pipeline and activity I think.

Service providers generally are beginning are working through their inventory. They are all at various stages of progress to that I think the.

The uncertain one on precise timing is really the larger north American tier one.

Service providers and again.

We talk about them collectively and they're all at different stages with different different <unk>.

Progress around the absorption of all of this some are actually in very good shape.

Our view on timing for the convert to a normal book to revenue and order flow. Our assumption is that it would be in mid year, which I think is consistent with what you've probably heard from a number of other different companies around.

<unk> the industry.

There's a lot of absorption that they took in 2023. There is some clean up that we think in the first part of 'twenty four.

But generally if you look through that.

Our underlying demand is strong capacity growth and traffic growth continues to be very robust and for the service providers.

Certainly not an issue of budget frankly, either it's really just.

Some of these larger ones, just absorbing and being able to get deployments of the of the stuff that we've shipped to them.

Okay got it.

For my follow up a bit more longer term question. I mean, you issued the guide for sixth Street both sandwiches.

<unk> with what you've done historically and what your guide has been one of the key investor concerns a huge around that long term growth trajectory is really D.

The expiration of the applicable market or the progression thereof.

This market is accelerating.

It doesn't really replicate the shared it hasn't systems when it comes to plug the holes. When you think about sort of where share gains have come from particularly as you highlighted a robust share gains like how do you think about that 6% to 8% growth impact.

And our data any sort of offset there, but you are gaining more share than you have historically provide offsets any color there. Thank you.

Yes, I would.

Just comment on the sort of applicable pace, we should be sort of I guess been having this sort of conversation, but over the last three or four years, it's taken a lot longer for plug a bulging of the 400 ZR and.

You've still got a lot of inventory of the stuff that's already been shipped so that's really not impacting the market right now.

If I think about when applicable as will happen I think we're very well placed for that both with the customer relationships and with leading technology. So we see that more as a as we've talked about as an opportunity than a threat. Even at 400 ZR will obviously be in market with wave logic six variance onto the.

800.

We are as well so we will take more than our fair share of that market. We believe.

And I think about it in the context of the sort of six state.

<unk>.

I think we will continue overall to take market share in optical I think theres no question about that but obviously, we'll get into a point, where we've got a large market share and it's a bit of the sort of.

Lower of large numbers, you're not going to take five percentage points each year, but we're augmenting that growth with our Tam expansion in the key areas around around routing and switching which gives us even greater confidence in diversity about our.

Ability to grow going forward.

Thank you thanks for taking my questions.

Thanks, Mike.

The next question comes from Amit <unk> with Evercore.

Please go ahead.

Good morning, everyone. Thanks for taking my question I have one follow up as well. So I guess first one I would love to understand on the cloud side, you folks are talking about a fairly good bit of strength in the quarter up it was really stronger than expected to continue next year can you just talk about specifically because of our product portfolio said what is driving the strength in cloud.

And if you actually see any signs of AI centric infrastructure tailwind benefiting your business already.

We are saying in the cloud players.

Growth around that all dimensions of the business and we have quite a broad relationship with them. So we're seeing it in sort of data center interconnect into the metro into their long haul with things like <unk>.

We're also seeing it in submarine.

Whether investing significantly around the globe and also in that country expansions, we're working closely with them in a number of markets, where they don't necessarily take the fiber themselves, but they partner with a local carrier we're seeing a lot of those opportunities and of course, we're incredibly well placed to.

Participate in that I would single out places like India for that.

It's the fastest growing internet market in the world and you've got the cloud providers all.

<unk> been very aggressive in investing in that so you think about it in overall terms for the year. They are up over 50% for us in revenue. We're also seeing an improved order flow from them and again the point I would make is it's across multifaceted applications.

And on <unk>.

<unk>.

Applications with the cloud place.

Oh gosh.

Got it up and then.

Maybe then just to go back to the full year guide that you folks have provided a 1% to 4% revenue growth until you understand the macro environment is sitting in telco side.

Is there a way to think about how does that growth breakdown across the different geographic when you.

And I know North America seems to be the one place that somewhat weaker for you, but when you look back historically when you've had this digestion period with.

The North American companies.

Is it a one quarter phenomenon or do you think it could be longer given.

How much product they entail.

Through the pandemic just any color on how does growth breakdown across deals and then what are the digestion timeframe look like as you go forward. Thank you.

As we look into 'twenty four we think that we will particularly be growing in the international space will have a higher growth rate in average there.

Americas is probably lower than the GCN will follow.

When those two that's how we think about it as we.

Entering the year.

The other part of your question around what would be the digestion and I'm really sort of honing in on sort of North America tier ones.

I think it was sort of use overused word in the last couple of years unprecedented around the sort of whiplash of supply chain.

And you can see listen our revenues were up 21%. So that's a lot of equipment for these cloud providers and service providers to Digest I think the cloud players were the first to see the issue and are clearly coming out the other side, we're seeing signs that many of the service providers are coming out the other side of this but it's really the precise.

Timing of that we think it's probably mid year and I think as we said we talked about this last quarter and I think what we said last quarter was another couple of quarters of digestion on the on the tier ones.

I think that's probably.

Our view that we still maintain so sort of.

Midway through our fiscal year as we start to come out of our Q2 into Q3, we expect them to get to back to collectively to normal order cycles.

Perfect. Thank you.

Thank you.

The next question comes from Tullow Liana <unk> with Bank of America. Please go ahead, yes.

Yes, hi, good morning.

First just.

Would you mind to repeat your revenue growth targets for next year.

We have an internal disagreement here of about what you said the sign we need.

Yeah.

I want to ask a question about.

Your participation or the impact of your business on the carrier efforts to reduce spending so we're seeing kind of Nokia losing share because of the migration to open ran in the core.

Carriers are trying to adopt new technologies that are much lower in spending or require much less spending. So so their capex to revenue ratio can go down over time.

In that kind of environment over the next few years, what are the implications for Sienna and what are the areas where.

You would be exposed to these efforts and what are the areas that there is no exposure. Thanks.

Just to be clear.

We got to revenue.

Looking for to be in a range of 1% to 4% up.

Perfect got it Q1 to be 980 million to 1.6 billion. That's what we said in mid <unk> gross margin in both cases.

In terms of the second part of your well the main question Tal in terms of the service providers.

What we're seeing from them is exactly as you say theyre trying to optimize as usual there.

Network that spans the whole sort of financial model and frankly overall from that we're incredibly well placed when you think about we've got the leading technology with spectral efficiency.

Which is a massive sort of cost save before them.

By the way, we've got leadership, there now and we're about to extend that with wave logic six so the timing of that could could not be better if I think about it architecturally the biggest costs are around their whole metro infrastructure, which they are looking to simplify and again from an architectural point of view adaptive.

<unk> plays incredibly well into that its a much more simplified lower cost architecture, and we've already had significant wins with them and they will be rolled out over the course of the next two to three years. So.

As I step back from this absorption.

Short term absorption issue, we've got I actually feel quite bullish around the tier one service providers, particularly in North America Perversely.

Given the short term dynamic because of exactly the dynamic that you're talking about.

We've been first to market with every generation of optical technology and each generation of optical technology represents a step function down in terms of cost per unit of bandwidth. So thats clearly a.

Great.

Benefit for.

Their efforts to restrained capex and we'll come out with one six terabits this year so.

I would also add a sort of comment around because I've seen some of the stuff around concern around their budgets and the rest of it.

Clearly, what you're seeing in North America as they are coming to the end of the Rand spend on five G that is tailing down.

So they've got an opportunity to reduce their overall opex, but it's really capex, rather, but it's really around what are they going to spend it on NII and I feel quite bullish around their spending on taking cost out into their metro and transport networks and just to mention one other trend that.

They are really focused on is the whole concept of sustainability, meaning power and again each generation of wave logic technology provides a much lower power footprint and we're contributing to that as well. So frankly, our development plays right into their needs which is why.

Why we have been able to do so well in that market.

Okay. Thank you.

Thanks, Tom.

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

Hi, Thanks. This is <unk> on for Morgan Stanley.

First question I guess.

How should we think about the telco versus non telco customer mix as we go across.

Next year.

It would be fair to say generally flat sequentially from <unk>.

Fourth quarter levels, just as service provider remains a little constrained and then I guess as that service provider spend does come back towards the mid year or towards the end of the year I guess, how should we think about a more normalized run rate contribution from here.

I think I think you will see service provider the mix I think will from an order point of view will.

Skew more towards the service providers as they come back in to the second half still expect very strong order flow from from cloud, but if I look at it overall I do think the service provider it will come back to a little more of the normalized balance, but I do think but.

Cloud is now a larger part of our business sort of direct and I think it might not continue at the levels. It at right now in absolute percentage share terms with service providers.

But I think the service providers will come back stronger in the second half.

So it'll be blended this year is another way of saying that.

Yes, Okay that makes a lot of sense and then just one more one follow up so I know.

<unk> ended up a little bit higher than you were expecting.

And you mentioned just shift of product mix. The customers is there any more detail you can give and maybe on that 250 to 300 million number you gave for next year on inventories coming down the linearity of that across next year would be helpful.

Yes.

On the question of the inventory level really it reflects the different customers make changes in their request to deliveries as we move through the quarter. Its very common they do it very often.

And frankly, if if it goes if our mix shifts from service providers to <unk> during the quarter that results in higher levels of fixed.

Finished goods inventory, we saw that as we came through 2023, we believe that as we move through fiscal year 'twenty for that a lot of that movement inside of their delivery dates is going to settle down and so we think that our finished goods inventory in particular will.

Come down during the year.

To a level that much more closely.

As in the level of what we've done in the past now I said, we're going to reduce our inventory inventory about $250 million to $300 million a year that will be generally pro rata across the year.

Okay.

<unk>.

Thank you.

The next question comes from Ruben Roy with Stifel.

Please go ahead.

Yes. Thank you Gary I had a question in the prepared remarks, you made a comment about cloud customers beginning TV networks for AI traffic and wondering.

As you get closer to your cloud customers and you start thinking about AI traffic.

<unk> two <unk>.

Historical bandwidth growth would you say when you say at this point that AI traffic would be incremental to sort of that 30% plus growth that we've seen historically the reason I ask Athena just in the context of the 6% to 8%.

Longer term growth returned to normalized growth doesn't seem like AI traffic would be incremental but I'm just wondering how youre thinking right now.

No listen.

That's a great question I mean, I think let me give you a sort of perspective on what we're seeing right now.

We're beginning to have the sort of first conversations around with the cloud providers, where they're placing orders on us in advance of anticipation for some of the cloud traffic.

I would say that.

That working on the applications outside of sort of the chat.

GPT versions that are out there now that working obviously on all of these various applications and I don't think antibody, particularly as any sort of insight into what the Ruben what the model for that will be from a traffic flow point of view.

But I think we're all of the view that at some point all of that is going to come out of the data center to get monetized.

And it's it's no one really has the ability to sort of model that out, but we know it's big.

None of that when we talk about sort of 6% to 8% none of that has really taken that into account because we cant we cant kind of.

Model that but I think it's going to be.

My personal opinion, it's going to take traffic growth up which is classically been in the sort of 30%.

It's going to take that up and so I think when will that be the timing of it in exactly the model of it don't know, but might be my personal gas would be and the 24 coming into 25. When you start to see these additional applications come out of the data center, but we really havent modeled.

Being able to model that in our in our projections.

One of the industry analysts did come out recently with a view of a higher growth rate by five or 6% in terms of bandwidth demand as a result of AI so close.

40% going up from 30 to 40.

I appreciate the detail both.

FERC quick follow up I think Sonic asked about the plug holes earlier and I was just wondering again as you get closer to cloud customers are they starting to ask you about opex inside the data center and I'm asking that at the European Optical conference. There was a lot of discussion around coherent lightens, just wondering kind of how youre thinking about potential opportunities inside as you go forward.

No.

Because we as we've sort of talked.

We are very bullish around the opportunity to intercept as you think about what's going on in the data center, particularly with AI and the rest of it traffic growth is going up dramatically inside the data center, where we have no exposure to that right now and I think the timing for that is probably as we get to 'twenty five.

Things like that but I think there is.

An inflection point there from all of the conversations we're having with the more coherent coherent light as you described really should bed into the perfect application for them.

Clearly, we're the world's leader in coherent technology, and we do see an intercept into there and we're investing in that as Jim has said we are doing a variance of wave logic six that will absolutely be focused on the inside the data center applications now again.

We modeled that into our given it's sort of a 25 opportunity we've not really taken a consideration of that right now into the three year through your guide, but that clearly.

Is a massive opportunity for us.

Further out.

Thank you.

Thanks Reuben.

The next question comes from Alex Henderson with Needham.

Please go ahead.

Thanks.

I wanted to go back to.

Charles question, but.

We're a different spin on it.

It strikes me that the.

The decision to move to Ericsson and downplay Nokia was a function of the.

Absolute terrific performance of the <unk> core which is working properly.

And almost any location and as a result, the inability therefore too.

Drive out the.

Improved.

<unk> functionality that the <unk> core would deliver such as network slicing and and other elements that are really driving revenue differential.

For the largest tier ones.

And in turn that's created a situation where they can't monetize five G. The way they had expected and as a result of that are cutting back capex on five G. Because they can't get it to work properly now the question I've got for you is.

Does that result in an aggregate reduction in capex across the board or.

Do they say, yes, I need to fix five G core and that in turn means I need to take some time to do that and let's shift spending away from <unk> into other areas that are necessities like optical.

Or does it mean that they cut optical spending as well as they are under pressure given the lack of monetization.

Okay.

I believe Alex that they have spoken about the fact that their spend on brand is coming down now I don't know whats driving that in terms of the performance of <unk> core I, just don't know, but what everything.

Everything we've seen publicly and everything that we've heard from our customers is that they are spending other than ran is going to be sort of flattish as we move into 'twenty four and that their spend with us is going to be flat to maybe a little bit up so.

That's what we know from what we see in the industry and what we see from our customers I don't it's hard to know how they're going to allocate all of that but we don't see a big effect from any of their decisions on Rand today.

Second question is on the inventory side.

A number of companies.

Been forced to take some inventory write downs as a result of.

The very large build of inventory that's happened over the last couple of years.

I didn't hear any mention of that with you guys have you actually absorb some inventory.

Write downs that are.

Built into the numbers and offset them with improved pricing or is just improved pricing and can you give us some sense of what the magnitude of the reduction in prices.

In the quarter and how you think that plays out as we go forward.

In time, and you get your supply chain back to normal conditions.

The first thing I'd say is we don't see any material risks to a big inventory write off we do a very careful look at our inventory down to the component level compare it to demand in each of our products and to the components that are built into those products and so we don't feel that there is a material risk of it.

Big inventory charge, we do every quarter, we have what we call excess and obsolete charges in the range of $4 million to $6 million.

And we think that will continue as far as the.

Margin situation the margin situation is really driven by our mix and a bit of component.

Cost reduction.

Because of the fact that we are no longer buying as much from the broker market as we did last year and earlier this year by the way we do expect an improvement in that as we go into next year, which is why we're confident in guiding to the mid <unk> gross margin range.

And we think thats going to be.

Less than 100 basis points in terms of our cost next year, great. Thank you so much and great execution, you guys really.

Does it superb job thanks.

Thank you I appreciate it.

The next question comes from George Notter with Jefferies.

Please go ahead.

Alright, Thanks, a lot guys, maybe just to continue on the gross margin question I was pretty impressed by this quarter's gross margins given the much higher mix of cloud provider revenue and then also the big Spike up in services revenue and installation revenue can you talk about what was going on this quarter on gross margins is there something they are kind of underneath.

I know you said favorable product mix I think Jim also but.

More context, there would be great.

No. It's interesting George when you think about gross margins across our customer base. Although then if you look at the web scale versus the service providers. They are in very different businesses, but they are very big companies and they have choices and we have to compete for the business now we are fortunate.

Tim.

Blessed that we have the best optical gear in the world and that helps in the competition. So when you think about that across our customer base. The gross margins are not all that dissimilar, yes in particular applications or particular products. There are differences, but across the customer base. They are not all that different the big difference.

And our gross margin is really mix.

And that is particularly with respect to in the optical business line systems versus capacity adds in line systems are just by the nature of the way the business works, a lower gross margin capacity adds or higher.

As you remember we came into this year expecting a very high mix of.

<unk> line systems.

Sort of got to that mix, maybe not quite as high land systems mix as we thought.

And that's why our gross margin was impacted in addition to the couple of hundred basis points.

Component cost cost us as we move into next year I think we will have both probably a little improved mix again.

A lower amount of component costs. So we do expect an improvement in our gross margins next year.

Got it great and then just as a quick follow up.

Could you give us.

An update on delivery of the <unk> product I know I think you guys had said <unk> in the first half of next year, but can you just confirm that that's on track.

When do you expect customers to start testing the products.

Yep so.

Yes, it's absolutely on track.

We've got orders already.

We shared in some of the some of the prepared remarks, and we are beginning to engage with customers them coming into our into our lab too.

Various variants of it so as we turn the year here and get into.

Q1 further into Q1 Q2, we would expect.

Got to increase that engagement with customers.

So the release would be mid mid mid 'twenty four.

And we're on track for absolutely.

Thank you.

Thanks, George Thanks, George.

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

Thanks for taking the question.

Wanted to start off with the commentary you offered about growing faster than the market.

Sort of gloss over the fact that youre actually in more than one market.

And so I'd like to hear sort of your take on how.

The growth rates may be different in your assumptions for your yes.

Packet optical platforms versus the routing and switching segment.

Assuming youre going to see much faster growth.

Routing and switching.

Just wanted to see what what's baked into the overall guidance. Thanks.

Fair.

Simon I mean, what I would say, though is when you look at network gear, whether you're talking about optical our routing and switching the underlying growth rates are not terribly different.

Low to mid single digits, what's different for us is that with our expanded set of capabilities in routing and switching the tam or the available market, which is out there for us is growing so yes, we do expect to grow faster in routing and switching over the next year and over the next several years then.

We grow in our optical business.

I still believe that we will be able to take some share in optical but as Gary said earlier, we have a large share now and the ability to continue to take share is a bit limited will hold onto our share and grow it a bit, but where we expect to really show growth as routing and switching.

And that makes sense to me just to confirm that.

Given sort of your modest position in product cycles routing and switching could conceivably grow at a double digit rate in the fiscal year.

Within this forecast is that there.

Yes, yes.

That is absolutely fat so listen we expect to grow in optical notwithstanding the sort of industry analysts view that the market is flat, we will do better than the market. There's no doubt about that but I think routing and switching we'd expect to be double digit growth because it's also where the challenge of that as Jim said and it's the law of smaller numbers.

I mean, we're about half a billion dollars now in that routing and switching business. It grew about 27% last year and I don't think it will grow as much as that this year.

But we're almost we've still got a.

Fairly low market share there.

Yes no.

In line with what I was thinking so I appreciate the clarification that I don't think it's well appreciated which was the point of my question.

A follow up here is really getting getting an update on what you see particularly in Europe on the Huawei swaps.

Yes.

It's really a job for.

A number of folks competing for that and some of your competitors have announced Huawei displacements I'd like to hear your take on how you see that playing out thank you.

When I think about Europe on the Huawei displacement I sort of bifurcate the Rand piece from the sort of what I'd call generally the sort of transport routing and switching piece to it.

See you on the brand has been a lot of.

Geopolitical pressure on to the <unk> and the rest of it and that's sort of well understood.

Think on the stuff that's already in the ground, there and Theres a significant share that they've got on the transport and routing and switching side and even broadband side as well.

That is going to take longer it's a multiyear <unk>.

<unk>, a because of the operational challenges of moving them across so what we're seeing most of the carriers is when they get to a certain inflection point, where they are going to make decisions around their next generation stuff or investments that is when they are making the change and we are seeing that.

In fact, we won recently and.

Scandinavia.

One player that exactly exactly that shift over on the transport.

So we are continuing to get more than our fair share there.

I think it will be a multi year program. So over the next two to three years as they change out their transport piece, but it's a great opportunity for us as there is no question about that but we're in.

I know everybody asked me what innings, we're in so I guess, we will use a baseball analogy for that show.

We're in about the third inning of that.

Great. Thanks for taking the questions.

Thanks, Simon will take one last question. Please.

Thank you.

Question will come from Michael Genovese with Rosenblatt. Please go ahead.

Great. Thanks, so much for the second time I'll just ask one question.

And I'll forego the follow up.

Appreciate you getting me in here.

When I look at the three year actually you know what I take that back I am asked that question.

But when I look at the three year guidance.

Yeah.

Six to eight with this year being lower.

That implies an acceleration.

Hearing about everything going on particularly more cloud the international opportunities and then getting into the data center with 800 G.

Yes.

About a year.

Im wondering if theres not any implication here.

That's a long term growth rate of the company has moved up slightly from six to eight it might not be prone to 12, but it might be higher than six to eight.

Do you have any thoughts on that.

Well, what I'd say is this.

As you just did the math clearly our guide for the year and our guide for the three years and plus higher growth rates in the two years after 'twenty four.

And that's.

And that's really because we are going to be hitting our stride in a couple of markets, including routing and switching and and pond. So both of those are going to drive very good growth rates. I also think that the Huawei displacement will start to gain some momentum as we move through the next couple of years. So.

Yes, we do believe that the two years following 24 will be higher beyond that what I'd say is we've given you three years, Mike that's a long time for us and we feel great about the future, but we're not willing to say, it's going to be higher than 6% to 8% beyond that.

Fair enough.

Sorry, guys, if you want to take that one.

No I was just going to reaffirm that obviously, if you do the math you're talking about accelerating growth once we get through this sort of absorption with the tier ones in North America. This year.

We feel very good around the out years not just for the reasons that Jim said, but you also got also got wave logic, six coming along here and its various variance as well so we should be firing on all cylinders here.

Okay Perfect and then finally just for that quick follow up I mean, just help us with the definition of mid forties.

I mean, theres mid Forty's Moon, 40 fiber or I guess, it could be a 44 as well could you just help us with.

How do you think about mid forties.

Let me get my Webster, Alan I don't know.

This year, we did 43 point something.

And what that message is intended to give you is that we're going to improve to a number that centers around 45, I'm not saying, there's going to be 45, I am saying that centers around 45.

Great. Thanks, very much guys.

Thanks, Mike.

Thanks, Mike. Thank you all for joining us today as we enter the holiday season in the new year, let's all hope for peace and goodwill. Thank you for joining us.

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

Yeah.

Yes.

Okay.

Yes.

[music].

Good morning, and welcome to Sienna's fiscal fourth quarter 2023 financial results Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad.

After todays presentation, there will be an opportunity to ask questions.

To ask a question you May press Star then one on your telephone keypad.

Withdraw your question. Please press Star then two.

Please note this event is being recorded.

Now I'd like to turn the conference over to Gregg Lampf Vice.

Vice President of Investor Relations.

Please go ahead.

Thank you Joe Good morning, and welcome to Cna's 2023 fiscal fourth quarter and year end results conference call.

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

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 excuse me of <unk> results of operations. A reconciliation of these non-GAAP measures to our GAAP results is included in today's press release.

Risks and uncertainties that could cause actual results to differ materially from the statements discussed today.

Assumptions relating to our outlook, whereas I mentioned on this call or included in the Investor presentation that we will post shortly after our important part of such forward looking statements and we encourage you to consider them.

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

As always we will allow for as much Q&A as possible today now ask that you limit yourself to one question and one follow up with that I'll turn the call over to Gary.

Thanks, Greg and good morning, everyone.

Today, we reported very strong fiscal fourth quarter results, including revenue of $1 3 billion and adjusted gross margin of 43, 7%.

Our team has been executing exceptionally well and in Q4, we shipped more hardware across our portfolio than ever before.

For the full fiscal year, we delivered revenue of $4 three 9 billion.

A 21% increase over fiscal 2022.

Which as you can expect drove very strong market share gains.

We also drove a 43% increase in adjusted annual EPS.

Notably in FY2023 revenue for our routing and switching portfolio also increased 27% year over year.

I think a strong demonstration of the momentum within this element of our expanded addressable market.

Yeah.

Before I continue.

I want to be absolutely clear that our Q4 performance.

Our commentary about market dynamics and the outlook. We are providing today is very consistent with what we said last quarter and indeed as we moved through most of fiscal 2023.

There have been no major changes to industry dynamics, including the demands remains incredibly strong.

As evidenced by high levels of customer activity and engagement across all segments and regions.

And as a reminder, supply chain constraints led to elongated lead times, which resulted in large advanced order volumes.

In fiscal 2023, a faster than anticipated improvement in lead times is requiring some customers to digest the large amounts of equipment ordered in prior periods.

I would also note that the cloud providers were really the first to experience this dynamic.

Very clearly the first tube have worked through it.

And in fact orders from our cloud provider customers as well as our total orders were up once again in Q4.

And we strongly believe that what we're seeing with cloud providers is a leading indicator.

And that service providers will similarly returned to normal order patterns in the coming quarters.

And that belief combined with strong fundamental demand, a leading innovation and customer relationships as well as our outsized backlog, which we're still carrying.

We enter fiscal 2020 full very confident in our ability to continue to grow faster than the market and to take share.

Yes.

So moving to some highlights across the portfolio.

In optical networking, we continue to extend our leadership from both a market share and technology perspective.

In fact, we increased our global market share in optical by more than five percentage points on a year on year basis.

Which in fact puts us in an even stronger position than our pre pandemic market share.

Looking ahead, we will be first to market yet again with our next generation one six terabyte wave logic six in mid 2024.

And we intend to press down on this technology advantage as competitors have launched only one two terabits alternatives.

In Q4, specifically.

Optical it was a record quarter for both wave logic five extreme on 6500, Rls driven by cloud provider network expansions.

During the quarter wave logic, Fyvie surpassed 100000 total modem shipped making it the most widely deployed 800 gig solution in the market.

And as wave logic five success continues wave logic six is of course building momentum, including orders from a large subsea customer and a strategic win in adoption with a cloud provider in Q4.

In routing and switching.

Continue to grow our share as a challenger in this market ending the year with greater than $500 million in annual revenue.

We added 14, new routing and switching customers in Q4 alone and now have more than 300 in total.

During the quarter, we received initial orders for wave router, our industry first converged metro platform, which became generally available in Q3.

And as some of you may have seen we announced last week.

Partnering with flex to add new U S based manufacturing capabilities for our unique nextgen plug able optical line terminals.

Yes.

And our optical network units are in use.

As broadband access is a key part of our addressable market expansion strategy over time.

We're very excited to support the department of Commerce is broadband equity adoption and deployment the bead program.

And to ensure our customers can make the build America buy America requirements of this program.

Also in Q4 Blue planet had a good quarter with $20 million in revenue.

And as some of you also may have seen we've just recently announced a new collaboration with BT group, which is using blue planet solutions towards the orchestration and delivery of network services.

And lastly, our global services segment had a record quarter in Q4 with revenue of $150 million an increase of 20%.

And interestingly, obviously, driven by installation and deployment services, which again is a positive leading indicator of service provider's ability to consume product.

Taking a perspective around customer segments.

Clearly, we had a record quarter with cloud providers as they continue to invest in data center interconnect for that traditional business and.

And begin to provision their networks for AI related traffic.

Indeed, our wave logic leadership continues to be particularly highly valued by this critical customer segment.

And as I mentioned orders from cloud providers were up once again over the prior quarter.

Significantly.

For the first time, 210% customers in Q4 will both cloud customers.