Q4 2024 Ciena Corp Earnings Call

Good day and welcome to the Seattle fiscal 4th quarter and year-end 2024 financial results conference call.

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I would now like to turn the conference over to Greg Lam, Vice President of Investor relations. Please go ahead.

Thank you.

Good morning and welcome to Sienna's 2024 fiscal 4th quarter and year-end results conference call.

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

Scott McFeely, executive advisor, is also with us for Q&A.

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

Our comments today speak to our recent performance, our view on current market dynamics and drivers of our business as well as the discussion of our financial outlook.

Today's discussion.

Excuse me, includes certain adjusted or non-GAAP measures to as results of operations.

A reconciliation of these non-GAAP measures to our gap 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 a quarterly and annual guidance and our long-term targets, commentary on market dynamics and the discussion of our opportunities and strategy.

Are based on current expectations forecasts and assumptions regarding the company and its markets.

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

Assumptions relating to our outlook whether mentioned on this call or included in the investor presentation that we will post shortly after.

are an important part of such forward-looking statements, and we encourage you to consider them.

Our forward looking statements should also be viewed in the context of the risk factors detailed in our most recent 10Q filing.

And then

10K filing which we expect to file with the SEC by December 24th.

Sienna 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 allow for as much Q&A as possible today. Don't ask that you limit yourselves to one question and one follow up.

Before we get started, I wanted to remind everyone of our webinar entitled Expanding Leadership and Optical. She and the strategy for growth in AI and data center markets.

This can be found on the events and presentation page of the investors section of our website.

About the webinar and recorded Q&A have been very well received and should be helpful resources as you consider CN it's positioning andportunities.

With that, I'll turn it over to Gary.

Good morning, everyone.

Today we reported strong fiscal 4th quarter results, including revenue of 1.12 billion.

Notably, orders in the quarter were once again above revenue, representing the 2nd quarter in a row of book to bill above one.

And recall that we had expected orders to be below revenue when we spoke with you in September.

We had several significant achievements in the quarter. First and foremost, wave Logic 6 extreme became generally available. Locking in our position as the only provider of 1.6 terabit capable coherent modems in the market today.

Further extending technology leadership.

We also took revenue for Wave Logic 16E in Q4, having shipped to multiple customers, many of which have announced their trials and deployments, including Verizon, EU Networks, and One New Zealand.

Notably Q4 was our largest quarter ever for shipments of line systems.

Led by our next generation intelligent line system RLS.

Primarily to large cloud providers.

We also in the quarter continued to gain strong momentum with pluggables.

At the end of Q4, total shipments to date of Wave Logic 5 nano were more than 43,000.

And also in Q4, we announced our wave logic 6 nano 1.6 terabit coherent light pluggable.

Which is designed to optimize performance and efficiency of data center and campus networks as they scale to support traffic from growth in cloud, machine learning and AI.

Moving back to our Q4 financials we reported adjusted gross margin of 41.6, which was lower than expected due to a larger than typical provision for excess and obsolescence in our inventory. Jim will provide additional detail on this momentarily.

The full fiscal year we delivered revenues of $4 billion.

Also in both the 4th quarter and fiscal year, we had 2 10% customers.

A tier one North American service provider and a major cloud provider.

I think this is further evidence that purchasing patterns of North American service providers continue to improve.

With supply and demand coming into balance as they work through inventory buildup from prior periods.

During Q4, service provider orders in North America actually outpaced revenue for the first time in nearly 2 years.

Also, in addition to our 10% cloud customers in Q4, 4 of our top 10 customers for the year were indeed cloud providers.

Let me now touch on the broader market landscape and really what's driving our business today and going forward.

As always, bandwidth demand remains the most consistent driver for our business and growing at about 30% per year over the last couple of decades consistently.

With cloud and AI, now the lead drivers of demand, we believe bandwidth growth will rise above those historical levels over the coming years.

And to be clear, AI is not just a data center phenomenon.

To monetize the massive AI super cycle of compute investments.

Traffic is already flowing out of the data center and impacting all parts of the network today.

And we are beginning to see evidence of this in our business today in several ways across service providers and cloud providers.

Our strategy is to take full advantage of the growth of cloud and AI traffic across multiple network segments and is threefold.

First of all, we continue to extend our leadership and grow market share in our core business, inclusive of subsea, long haul metro DCI, and increasingly morphin opportunities.

Today, cloud providers are making significant investments in large scale infrastructure projects to support AI growth and deliver the necessary scaling and densification of fiber infrastructure across the network.

For this, they require a next generation of intelligent line systems like our RLS photonic platform and wavelength solutions such as wave server really to address the need for scalability, resilience, and automation.

And in fact we support every major cloud provider with our RLS platform, which we co-designed with our cloud provider customers and is now their line system of choice.

On service providers, we have won every major next generation optical infrastructure RFP recently issued by North American service providers.

Proving that a coherent optics and optical systems are increasingly the de facto choice in these advanced network architectures as well.

This is in part in the service provider world driven by the increase in 2 significant opportunities for them.

Moan and multi-cloud networks.

As a reminder with Moffin service providers are building dedicated private optical networks for cloud providers.

Enabling them to quickly extend their reach and better service customer demand.

For multi-cloud networks service providers are building out the robust networks that connect to and between cloud providers, enterprises and other service providers.

Secondly, we aim to grow our addressable market.

Into adjacencies where our foundational optical technologies provide a significant competitive advantage.

And let me start with data center applications, which is a significant growth opportunity for Siena with respect to AI within the metro data center campus as well as over time inside the data center itself for our interconnects portfolio.

As a general industry term.

Interconnect, so really the infrastructure technologies that provide the critical connectivity between and within data centers.

And include both pluggables and component technologies.

This is an area where we are once again collaborating directly with cloud providers just as we did very successfully with RLS.

help them address their data center traffic flows.

A large near term opportunity for our interconnects portfolio exists around the data center or in the metro data center campus for coherent technology.

By this we mean opportunities beyond our traditional DCI capabilities.

That extend into campus and shortre applications.

Typically in the 2 to 20 kilometer range.

are pluggables including our recently announced 1.6 terabit coherent light are a strong technology fit for these applications.

In the coming years, we will also expect to see coherent optics begin playing a role inside the data center.

Where we can address this need with our interconnects portfolio in the form of plugs and components as legacy IMDD technology begins to reach certain limitations.

We are obviously recognized as having the world's leading coherent technology, and we are therefore incredibly well positioned to drive its adoption.

And capture these future opportunities as they materialize.

We also anticipate growing opportunities in metro routing and broadband access again leveraging our optical expertise and foundation.

In the metric Metro IP and optical convergence, this will become essential for some service providers to achieve greater scale and cost efficiencies.

And our coherent routing solution is ideally suited to address these needs.

In broadband access as public funding and deployments begin to materialize in the next few years. Pond technologies like our industry first pluggable OLT will be key to offering customers more deployment flexibility and scale.

On the last dimension of our strategy is really around operational transformation.

As service providers continue to evolve in the cloud and AI era. They are accelerating their digital transformation strategies in order to automate and optimize their network and service life cycle operations.

planet had its strongest ever financial performance in FY 24, including several key wins for which initial deployments helped drive a strong increase in revenue in the second half.

We are confident this momentum will continue.

Before handing over to Jim,

I'd summarize by saying that we are incredibly confident in our future, both in terms of our technology leadership position.

And the industry dynamics that are playing to our strengths.

Specifically, we have been investing to address long term opportunities, particularly those associated with the growth of cloud and AI.

And these investments are proving to be fully aligned with market dynamics and our customers' priorities, both now and into the future.

As a result,

We expect to deliver accelerated revenue growth and improved operating leverage over the next few years.

With that, I'll hand it over to Jem for a more detailed readout of our financial performance in Q4 and FY 24, as well as our outlook for next year and an update on our 3 year targets, Jim.

Thanks Gary.

Good morning, everyone.

Before I get into the financials, I want to emphasize what Gary just said.

First

We are seeing very positive market dynamics, including powerful trends in cloud and AI.

Second, our commitment to investment in innovation has given us industry, technology leadership and key product areas. Finally, our TAM is expanding as we attack new market opportunities. All of this gives us a very high level of confidence in our future.

And we believe that our performance in the fiscal 4th quarter is an indication of that momentum.

Specifically, we reported Q4 revenue of $1.12 billion and our book to bill was above one.

In fact, book to bill was above one for the entire second half of fiscal 2024 and our backlog grew by approximately $150 million for this period.

This resulted in an ending backlog of $2.1 billion at the end of the year.

And we are off to a very strong start in orders for Q1.

Adjusted gross margin in Q4 was 41.6%. This reflects a $39 million charge for excess and obsolescence are ENO as we call it.

our inventory.

This is higher than typical for quarter.

And this incremental amount accounted for an approximately 200 basis points reduction in our Q4 adjusted gross margin.

This charge is the result of a combination of factors.

First, forecast product mix changes now reflect a greater proportion of cloud-related business.

Secondly, our supply chain transformation initiative, which we've talked about over the past few quarters, including new systems and processes has given us better visibility into our inventory positions across the supply chain.

And finally, we've had during this period of supply chain.

disturbance we've enjoyed extended lead times and that has had an effect on our ability to match demand with supply.

Q4 adjusted operating expense was $355 million.

With respect to profitability measures in Q4, we delivered adjusted operating margin of 10%.

Adjusted net income of $79 million and adjusted EPS of 54 cents.

In addition,

We generated $349 million in cash from operations in the quarter.

cash flow was $266 million.

And quarterly adjusted Ibida was $137 million.

During Q4, we repurchased approximately 2.1 million shares for $132 million. This completed $1 billion share repurchase program which was authorized by our board in 2021.

As you saw in October, our board has authorized another $1 billion share repurchase program which we plan to execute over the next 3 fiscal years.

Respect for the full fiscal year performance, annual revenue was $4.0 billion.

Adjusted gross margin was 43.6%.

And adjusted opex totaled $1.36 billion.

On profitability for the fiscal year.

Adjusted operating margin was 9.7%.

Adjusted net income was $266 million and adjusted EPS was $1.82.

In addition, free cash flow and fiscal year 24 was $378 million.

And adjusted Ebida was $481 million for the year.

Strength of our balance sheet remains a significant differentiator.

As we ended the year with approximately $1.33 billion in cash and investments, inventory was $820 million at the end of the year, down nearly $120 million for the quarter and approximately in line with what we expected at the start of the year.

Now turning to guidance.

With respect to the long term, we have previously described our long-term average annual revenue growth target of 6 to 8% as being our best view of the future.

For all the reasons we've discussed on this call.

We're very confident that our business going forward and therefore are providing a new set of long term targets for the three-year period encompassing fiscal 2025 2027.

We are seeing plans for strong Capex investments by our cloud provider customers as they continue to invest in networks to support AI training and increasingly influencing.

And we expect service providers patterns to continue to improve. Their inventory is basically at normal levels, and we believe their orders and actual consumption are coming into balance.

Accordingly, we now expect average annual revenue growth of approximately 8% to 11% over the next three years.

We will also drive operating leverage to the combination of higher gross margin.

And moderation of the rate of our opex growth.

We are targeting adjusted operating margin of 15% to 16% for fiscal year 2027.

And we expect to generate meaningful annual free cash flow over the next 3 years of approximately 55 to 60% of adjusted operating income.

Moving to fiscal year 2025. We expect revenue growth in fiscal year 25 to also be in the range of 8% to 11%.

We expect gross margin for the full year to be in a range of 42 to 44% with quarterly gross margins starting in the low 40s and approaching the mid 40% range as we exit the year.

This reflects our expectation for product mix to be more heavily weighted toward line systems earlier in the year and more balanced as we exit the year.

We expect adjusted operating expense.

In fiscal 25 to average 350 to $360 million per quarter.

We expect quarterly adjusted opex to start slightly lower.

In the first half and increase throughout the year to reach that average for the year.

Finally, in, in the year we plan to repurchase approximately $330 million in shares under our recently authorized plan.

Finally, with respect to Q1.

We expect to deliver revenue in a range of 1.01 billion to $1.09 billion.

Adjusted gross margin in the low 40s range and adjusted operating expense of approximately $350 million.

In conclusion, as we look ahead, we believe the increasing influence of cloud and AI will continue driving bandwidth growth growth across the network.

And we are ideally positioned to.

support that demand.

We continue to invest in leveraging our optical leadership to grow our core business while expanding our market opportunities.

A combination of positive market trends and technology leadership gives a strong confidence in our ability to deliver accelerated revenue growth and improved operating leverage in the coming years.

With that, I'll try to call over to Q and A with questions from our analysts operator.

We will now begin the question and answer session.

To ask a question, you may press star and one on your touchtone phone.

If you were 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.

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

the first question today comes from Amit Daani with Evercore.

Please go ahead.

Um, good morning, everyone. Thanks for being my question, um, you know, I guess maybe just to stop with the, the fiscal 25 died for 8 to 11% growth, extremely impressive. We're studying what folks are looking for, uh, maybe, you know, you folks would just help us understand how do you see the cloud market versus North America telco versus international kind of stacking up. You just dig into a little bit on what's embedded in this 8 to 11% assumption across the segments that would be helpful.

Uh, hi, let me, let, let me start with that. I would say that, you know, my first sort of comment to it we're seeing, you know, as we, we said a little bit in the prepared comments.

You know, we're seeing the service provider first of all, market come into balance in terms of supply and demand, and that's manifesting you know, as orders we saw that in Q3. We saw it in Q4, and we're seeing it in Q1 now, so I think the, you know, the stability of that market will steadily improve, and we've got good visibility to that.

Coming on top of that, which is, you know, driving the growth, uh, you know, outsized growth for both this year and beyond, it's really the cloud traffic cloud and AI layering on top of that of that service provider base. So I would say the service provider strength absolutely in in in North America, we are seeing steady improvements in Europe and international markets, places like India, and then it's the cloud and AI uh growth.

On top of that, we're beginning to see dedicated capacity from machine to machine and we're beginning to see the buildouts beyond that as well to deal with things like inference and, and a longer distance training. Um, so that, that's really what's driving, you know, the perspective over the next 1 to 3 years.

Got, got it. That, that's really helpful, uh, you know, and then if I just got to focus on this gross marks and the obsolescence risk impact that you folks had in the quarter, uh, just

just say that out loud. I is there any risk that's a little bit more of that to happen in Q1 as well, or you think that issues well behind you at this point. And then, you know, as I think about the gross margin improvement, uh, in fiscal 25, uh, starting that you do, you want to be on, uh, yeah, how much of that improvement is mixed normalizing versus revenue leverage kind of kicking in if there's a way to parse that out, that'll be helpful. Thank you.

Yes, I mean at first I'd say that we typically have these ENO charges. It's just the function of the lead times that we have to buy our components under and the forecast we're getting from customers and sometimes all of that changes. So we, we typically had 10 or $12 million a quarter. I think this quarter was, uh, certainly influenced by several things that we don't think are repeatable. We have a new forecast. We don't do the long term 3 forecast every quarter, uh, we.

Do a complete transformation of our supply chain, and that's we now have extremely good visibility into where all this is, so we don't expect this to recur. We think that our charges are going to go back down to the sort of normal level that I described.

With respect to the second question, it's, it's all about mix and um.

There are many dimensions of mix, but the most important dimension of mix is the system as opposed to the capacity ads in our revenue for a quarter as we've said our uh reconfigurable line system is really becoming an industry standard.

across both cloud providers and service providers and so we are selling a lot of it now that speaks to the future very positively because you have to populate these line systems over time, and when they do get populated, that will be a higher gross margins. So the trend in our gross margins should be up during this year and even next year and the following years.

Perfect. Thank you and congrats on a nice set of numbers here.

Thanks a.

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

Thanks for taking the question. I, I first wanted to see if you could maybe unpack a little bit of the trending between your direct cloud sales and then the uh the manage optical fiber network trend Moin, uh, what, what I'm wondering here is is.

It is, what, what drives an operator to choose one option over the other and how do you see, if at all, a divergence between those two buying patterns. Thank you.

Yeah, first of all, I mean, let me start by saying that

The cloud providers much prefer.

To go direct to us and build out their own networks.

But there are places where they can't, including some countries where they're restricted by regulations to do so.

But we've seen in the past.

I guess a year or so, 6 months that this trend of MOI.

Uh, and other forms of asking service providers to build their capacity has increased a bit, and it's because they're simply doing the service the cloud providers are simply doing so much that they can't do it all and help so they're going to service providers to do movements even in the US, for example.

Yeah, that's absolutely right, and, and uh we see it, Simon, in

Um, you know, we see it obviously in our results, but we also see it in a number of bid activities out there around the MoA network. It's just the, the fact of it is they're trying to go so fast, then the cloud providers that they have to push on every tool in their toolbox, um, build direct where they can open where, where they can augment and in some countries, obviously that's their only choice is to move the network based.

Thanks. And then just as a follow up, um, I appreciate you you told us a little bit about the 10% customers um for the fiscal year and the quarter. What's your thinking on customer concentration in the, in the forecast for fiscal 25, uh, what are you assuming? Do you expect, uh, a similar top two, or do you expect, uh, uh, basically more uh diversification in the next fiscal year, any, any color you can offer on how that's trending. Thank you.

Yeah, we have, uh.

I guess we have 4 customers.

Two service providers and 2 cloud providers that

In any given quarter can be a 10% customer and they move around a little bit, but I, I personally don't think the combination of uh or or is it just the makeup of our 10% customers is gonna change a lot. It's going to be, you know, 1 or 2 a quarter, maybe 3, we've had 3 in the past, but I don't think it's going to change. But the actual customer that it is will change.

Thank you.

the next question comes from George Natter with Jeffrey. Please go ahead.

Hi guys, thanks very much. Um, I was thinking about your guidance for uh gross margins, 42 to 44%, I think for fiscal 25, but when I adjust for ENO, um, looking at fiscal 24, I, I get you guys at about 44.5% gross margin.

Um, I hear what you're saying in terms of the mix shift of new systems versus line cards, but I think what you're telling us is this is gonna be, you know, uh, the heaviest mix towards new systems that you guys have have ever been at in terms of a company is that is that the right interpretation here or is there just conservatism in the guide or what can we learn on on that front? Thanks.

Is absolutely going to be the heaviest concentration of line systems next year, particularly in the first two quarters that we have seen.

It is becoming an industry standard, George. The cloud providers and the service providers want this line system. It, it offers the best combination of capability.

Um

The scalability and being able to handle the massive volumes that are needed as the network demand continues.

Got it. OK, and then the other one I had was um just on headcount, um, so I've got my math correct. I think you guys took head count down, uh, a pretty good chunk sequentially, first time we've seen headcount come down by this magnitude in a very long time. Am I, am I looking at that correctly and if so, what's driving that? Thanks a lot guys.

I remember about mid-year, um, when we took our revenue call down we also took our opex down so we um we did that by a combination of terminations and dropping our plans for adding head count and so our head count did take a a drop as we move through the year. We don't expect next year's head count is going to grow significantly. However, Opex will be up mainly because we're not paying out 100% under our.

of compensation plans this year and we expect to pay out 100% next year and also there's a merit increase in there. So those are the two big reasons why our opex is up from the uh.

From 24 to 25.

Great. Super, thanks very much. Congrats on the results.

George.

the next question comes from Meta Marshall with Morgan Stanley. Please go ahead.

Great thanks um just as you were thinking about the 3 year, I guess I just wanted to get a sense of, you know, how are you judging customers' ability to kind of install all of this um equipment kind of as quickly as kind of they're purchasing it, um, you know, maybe particularly on the part of the telcos where we've seen kind of some some limits before kind of in their ability to install um maybe that's as the first question and then the second question is.

You know, as we look at kind of the opex step up, you know, I know you guys have made some meaningful investments kind of in routing over the past couple of years. Just how are you judging some of those investments maybe versus some of the more uh nearer term kind of opportunities you're seeing with the cloud. Thanks.

Hey, Ma, that's, that's a very good question around, you know, because it does talk to, you know, the ability of both service providers and cloud players to absorb, you know, I deploy all of this, all of this equipment, um, and I think we've got much closer over the last 2 to 3 years, you know, given all of the supply chain imbalances and the rest of it to exactly how are they consuming it and deploying.

We've also ramped our services capability in that time too, and from a service provider point of view, we are doing more of those deployments than ever. We are very close to the major tier one service providers and we're a critical part of their deployment services, so we have good visibility, and number 2, we're helping them ramp.

Um

We're also doing that with the cloud providers, uh, and that may not be, you know, something that's, that's well known and understood. Obviously you're talking about installations around the globe, very complicated submarine cables and different countries around the world with service provider combinations as well, so quite complicated. We are project managing some of those for them, and we're actually deploying and helping with the planning on many of the

uh providers as well. So again, we have good visibility, and B, we're helping accelerate, uh, those, those network deployments and particularly as Jim talked about.

We're seeing, um, you know, an uptick in the whole line or automated line uh deployments.

That we've never seen before to this scale and the first half of the year, particularly which will weigh on margins in the first half, but it's a good news story and that we're laying track for the future with it, so I think we have good visibility and, and we, we're confident in the capability of them to deploy.

Second part of the question in terms of in terms of operating expenses, as you know, during the course of the last few years of the both COVID supply chain whiplash, we've continued to invest in this kind of architecture and the technology that we're rolling out now, so I think as I think about the next few years outside of uh as Jim said, you know, expenses in terms of cost of living expenses. It's really about operating leverage now. We've made the investments, we've got the tech

technology coming to market at the right time. Now it's about over the next 1 to 3 years driving operating leverage which gets us back to that 15 to 16% operating margin.

And the great news is that as a result of these investments we have the best optical technology, the best line system and the best operating system so uh we've we've successfully invested in our growth rate for the next 3 years reflects that.

Great, thanks so much.

The next question comes from David Boyce with UBS.

Please go ahead.

Great, thanks guys for taking my questions too, if I may, maybe Gary, I missed it earlier, but wanted to ask about the longer term opportunities specifically with Shortre coherent which you talked about whether it's in campus or inside the data center, can you kind of help better under help us better understand sort of the timing and the magnitude of this opportunity and if I would assume some of that revenue opportunities is embedded in the rolling 3 year guide, and I'll give you my second comment as well or question. Um, I heard, you know, Jim mention operating leverage, um, in the out years and

to go back to George's question. Should we expect Gross margin expansion, higher in fiscal 26 and fiscal 27 as well to support that 15 to 60% operating margin, uh, in the out here that you laid out earlier. Thank you.

Yeah, let me take the second part first, and uh the answer is yes, we do expect that our margins will improve to, you know, something approaching historical numbers that that will get us to 15 to 16%.

That along with operating leverage will get us to the 15 to 16% operating margin that we predicted.

Yeah, and then David, if you think about um our opportunities outside of our system business. It starts with our coherent plugs, um, you know those are seeing significant ramp in the back part of this year and we expect it to grow in 25 and that really speaks to sort of the metro DCI opportunities that we, we really didn't have exposure to historically, so that's new incremental business for us stepping, you know, closer in and around the data center from there we've been saying for some time now we do believe that.

coherent technologies will have a play there uh in the future as data rates go up, um, and their, and their reach requirements expand a little bit. We think the next opportunity is in the campus, so think about that as the 2 to 20 kilometers type type range and our Wave Logic 6 technology or Waveogic 6 nano has that.

Uh, coherent light or LR capability is the industry talks about in it at that DSP is sampling today. We would expect to be um in customers' networks late in 25 with, with that and start to see the revenue flow into our P&L in 26, so that piece of it is is included in our long term targets beyond that, we do see that trend continuing to be inside the data center if the data rates increase, that is a little bit from a timeline perspective a little.

beyond our 3 year guide.

Thanks Scott. Thanks, Jim, helpful.

The next question comes from a Mali with city. Please go ahead.

Hi, it's Adrian Colby for Oti. Thank you for the question. I was hoping to go back to margins. I was wondering if you could comment about strategic opportunities for supply chain or portfolio optimization if there's an opportunity for incremental benefits, um, over the summer one of Santa's partners commented on an expanding relationship so interested if there's a a potential benefit to margins there.

Yeah, I mean, I think uh we're we're constantly looking at our supply chain to see how we, we optimize it, I think, um, the reality of the last few years has been, um, you know, one where we were in a constrained environment from a supply chain perspective, um, that has actually gotten in the way of us getting at our typical cost reduction activities, uh, fact that we have been carrying a bit of elevated inventory as well, um, has, has been a headwind in that dimension. We do expect as we go through 25 and and further into our

3 year plan that we'll get back on to our typical year over year cost reduction activities, uh, and that will absolutely help in uh the margin expansion that Jim talked about.

As will scale by the way.

Thank you and as a quick follow up can you comment on exposure to tariffs, uh, with the incoming administration, uh, I know that you, you, you use a lot of third party um contract manufacturers, but you know, even if you can just talk about it qua qualitatively, that would be helpful.

That's what I'd say is that this is entirely speculative because we don't have a new administration yet, and we don't know exactly what they're going to do. We have not factored into our numbers any effect from tariffs.

Uh, we do have uh exposure to terrorists from Mexico on Mexico, I should say, and if that were to happen, we'll have to work hard to mitigate the effects.

Thank you.

Yeah.

The next question comes from Ruben Roy with people. Please go ahead.

Yes, thank you, um, I just had, uh, one question, I guess, a quick follow up for either uh Gary or uh or Scott, um, and just following along, uh, some of your previous questions around um you know, the data center or cloud service provider contribution to revenue, um, Gary had mentioned, uh, in and around coherent and coherent light optics, you know, the plugs and components, and I think the component part of it is more of a recent, um, you know, potential road map, uh, extension. So just wondering if you.

lower than your medium term. Thank you.

Yeah, I think, uh, two parts to it. One is sort of the spaces where we play today, um, obviously, you know, um, some of the industry, um, likes to have a an insurance policy I'll call it where they can.

Procure finished goods, systems from us, some would prefer to disaggregate that and buy it in another way, um, we've been very clear with those that set of customers that we are willing to transact, um, as they see fit. The reality of it is today, um, uh, all of them have actually preferred to buy finished goods from us.

Um, now that finished goods can come in the form of systems or uh as we've seen in the second half of the year, uh, plugs sold independently from our systems as well, so they they are today, uh, taking advantage of our optical technology in both of those forms, lugs are in in systems as we go further towards the data center, uh, and ultimately, as I said, get inside the data center, it's, it's more and more of a buying pattern for those for those consumers.

want to consume as components and we're we're capable and willing to do that.

But as we sit here today it's not not part of our revenue.

Got it. Thanks, Scott. I guess, um, just for a quick follow up on that, you know, in terms of we've been hearing more about DCI and and contribution to revenue can, can you just give us a quick comment on, you know, competitive environment. Are you seeing, you know, kind of competitive modules, um, you know, becoming, I, I guess, more prevalent, um, you know, in the bake offs or are, are, is that not the case?

You know, I think, I think on the, uh, let me separate it out from the, the parts of the network where we see um data center interconnect, um, you know, in in longer reaches so outside of sort of the metro kind of campus area. I don't think the competitive dynamics have changed their, um, at all, um, we, we continue to have uh outside share there with a largely because of our relationships around the world and our technology leadership.

And that is consumed in, you know, in our, in our line systems that is consumed in products like our wave server and that, you know, continues to show uh increased, you know, market share, uh, period over period. The place that's um, you know, we're, we're, we're relatively new to, uh, in terms of gaining market share is in the uh in the Metro DCI area, so think of it, you know, less, less than 100 kilometers.

Um, we typically haven't been a player there or not a large player there, uh, with our Wave Logic 5 plugs that we introduced into the market a couple of seasons ago. We've become an increasing player there and where we shipped, as we said in the in the script, uh, over 43,000 plugs into that application and it's growing rapidly. We had a very strong Q4 there and um you know from a from a 25 perspective we expect to continue to take share in that application.

And we will be introducing, of course, the 1st 800 gig uh plug into that market and then, uh, you know, we've been fortunate enough to win the early competitive bids that are out there for that technology and we'll, we'll be taking revenue on that generation in 25 as well.

Very helpful thank you.

The next question comes from Sami Chatterjee with JP Morgan. Please go ahead.

Hi, um, thanks for taking my questions and congrats on the results and the guide, um, I guess if I can start off with the fiscal 25 guide and I'm just sort of ball parking here you know in terms of 10% revenue growth, uh, which implies orders and revenue should be around this sort of 1.1.

Billion level every quarter that you did in 4Q, um.

how maybe if you can sort of talk about the interplay between how you're thinking about interplay between orders and backlog here through the year because um I are you assuming that you continue to sort of build backlog through the year and typically your orders do sort of pick up towards the back half of the year so if that happens, do you have more upsight for the then I will follow up. Thank you.

We, we feel really good about water intake for the year, first of all, and it started off very strong for the first, you know, 67 weeks of this quarter. Now, it's hard to predict what's going to happen to our backlog. If you go back historically, before all of the extended lead times and the supply chain disruption. Our lead time, I mean, our backlog at any point in time was roughly 1.5 quarters. That, that's just a rough way of, of uh describing it and

There was a lot of stuff in there, including long-term service contracts, etc.

During the uh supply chain situation, it went up to, you know, uh, 4 quarters of revenue and it's come back down to something like, uh, you know, a little over 1.5 times, maybe 1.6, uh, uh, quarters of revenue.

We, we're just not sure what's gonna happen to backlog. It's going to depend upon what our lead times are, how customers behave and all of that. And so, you know, I, I think it's gonna become less important, frankly, for you to look at our backlog, and more important for you to consider what's happening with our order flow in our in our revenue. So what I'd say is we don't know the answer to your question. So, but uh we do expect really good orders for this year.

To make the other thing that I would add to that, and you're seeing it, you know, manifest to some extent in our guide for Q1 is we typically have seasonality in Q1, you know, um, I think it talks to the new dynamic where we're increasingly more indexed towards the cloud players and the service providers who are, are quite generally seasonal around our Q1.

And I think you know we're seeing strong water flows in Q1. You've seen the revenue guide for uh for Q1 as well. Now whether that continues into the next 3 years, but I do expect, you know, less seasonality, uh, in, in the business, uh, generally speaking, because of our increasing exposure to cloud and AI traffic growth.

Just one on a related comment on this. It's not directly related, but it's certainly part of the mix. We did have a pretty significant reduction in inventory this past year. We think inventory will go down again this year, but by a smaller number, maybe 50 to $100 million. We are on a track to getting to in uh inventory turns of 4 to 4.5 times. That's not gonna happen by the end of this year, potentially by the end of 26, we'll be at.

That point.

Got you.

and for my follow up if I can just um ask you on slide then I was looking at some of the damn, um, addressable market assumptions that you have and was curious on two things one, I mean, as much as, um, you're seeing actually bandwidth growth and you have a lot more revenue coming from the market expansion opportunities that you're pursuing. Why isn't sort of the estimate for core business addressable market going higher it is indicated to be 2% as it was before. Why aren't we seeing?

more of an uplift in the core business market and then it seems like your addressable market expansion keyboards uh came down by about a few percentage points because of a reduction of about 2 billion, so maybe if you can just pass out the impact there as well. Thank you.

What I would say is that I think it is possible that our base business grows faster than that. It depends upon how much

Artificial intelligence flows extend through the service provider networks, and we don't know the answer to that. And I should say the cloud provider networks as well. But those numbers we take from industry analysts. We don't develop them ourselves. And it's very much in keeping with what they've said in the past. It's so, it's a base business is a

Sort of a low to mid single digit growth business.

Could be higher in the future, but that's what they're saying, and we, we are OK with that. We can do very well in that context, another way of sort of get getting your head around that is that, you know, it's typically in our traditional business being about 2 to 3% growth, and yet we've grown at 6 to 8%.

Um, and I think we, you know, we continue to take share and we're confident we can continue to take share in into that business. I think the point I would make is that I think, you know, the, the other areas both within cloud build out and the moan piece are not really encapsulated in those numbers, frankly, from a from an outside analyst's point of view, um, because we're seeing, you know, way more overlay activity across both service providers and cloud infrastructure buildout.

as well, and I, I don't think that's really reflected in those external perspectives yet.

One other comment I'd make is, uh, remember these are industry analysts numbers and they're not our numbers per se, but uh with the slide indeed, uh,

Um, subsidies to the right. Uh, we still think they're coming. They've been allocated by the government and they're going to come, but they seem to continue to slide, which is not unexpected given the fact that there's a lot of work from the time the government allocates the money till it gets to the customers. We, they have taken pawn forecast down pretty meaningfully.

Over the next 2 or 3 years.

Thank you, thanks for the question.

The next question comes from Taani with Bank of America. Please go ahead.

Hi guys, um, I wanted just to ask about the margins. The, the orders you're talking about with cloud, um.

is the proportion of, of um luggables higher than historical. Uh, I'm just, uh, my question is if the

contribution of pluggables is gonna go up over the next few years.

Um, what needs to happen to offset.

The margin pressure. Is it true that they carry lower margin and one needs to happen to offset the margin pressure from pluggables.

Um, and that that's my first question. My second question is.

I'm trying to understand what drives I fully understand the cloud cloud deployments, I, I know everyone knows what drives deployments of your solutions.

I'm more struggling on the carrier side on the telco side they're, they're under such pressure of spending, and they talk about much lower spending cycle in the next few years. What, what drives their deployments. Thanks.

Y'all I address the plugs question. I would say that our plug margins today are a bit below our average margins. Um, but we're not at full ramp on those and we're selling Wave Logic 5 nano plugs. When we get to Wave Logic 6 nano plugs, and as we ramp our volumes, and by the way, we do believe that our pluggable volumes are going to uh increase pretty meaningfully next year, perhaps double.

And, uh, but as we get up to ramp, and as we get into Wave Logic 6 nano, the 800 gig ZR then we will get better margins on those. The other, the other thing to is, you know, take, taking a broader perspective on um those cloud providers and and the bandwidth demand that they're putting on us, it's coming at us in the form of our, our photonic line systems and wavelengths in their various different forms depending on where that bandwidth.

in the network so we see it in, you know, in, uh, longer reaches in our wave server product portfolio and we see it in the plugs by far the biggest.

Weight, if you like, in terms of the, the margin dynamic there is the line systems.

And on the, on the carrier spending to, uh, I, I would say this, I mean, our perspective is, you know, you've seen 2 years of very anemic spending and really underinvesting, running the networks hot.

Uh, by the service providers generally around the world. We're seeing that sort of come into balance from a supply demand point of view, but we're not expecting it to, you know, uh, we're expecting it to improve, certainly in North America and a little bit in Europe. We're not really expecting it to get back to the kind of levels of spend that it was.

We're not expecting that, which I think is consistent with, you know, your, your, your sort of perspectives to it. um, but you know, given the additional growth and and TAM expansions we've got, that's what's driving that's in the assumption there. What we are seeing with certain carriers around the world is more opportunities driven by cloud.

And that really is cloud, but the revenues go through, you know, from the service providers, so that is what's driving growth also with sort of multi-cloud type provisioning. You saw that with the Luman announcement this year. You've got carriers around the world taking these innovative kind of approaches, um.

So I do think that, you know, we're not expecting service provider, uh, spend to accelerate dramatically at all, but just to recover and get back into some kind of balance which we're seeing.

And then on top of that you've got the cloud uh growth that specific builds in Moan and into cloud that's driving the revenue there.

And remember they're the, they're the connection between the cloud and end users, whether it's enterprises or individuals, so they have to keep their networks uh viable and strong and, and grow their networks just to handle that demand.

As omnipotent as these cloud players are, they can't connect to everybody in the world.

I understand. Thanks.

This concludes our question and answer session. I would like to turn the conference back over for closing remarks.

Thank you everyone for joining us today. We, uh, we appreciate it. We look forward to catching up with uh everyone over the following days and weeks. Uh, don't forget that webinar and record a Q and A that I mentioned and uh happy holidays to everyone as well. Thank you.

The conference is now concluded.

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