Q1 2025 Ciena Corp Earnings Call
Good day and welcome to the Sienna fiscal first quarter 2025 financial results Conference call all participants will be in listen only mode.
Speaker Change: Should you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question. You May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded I would now let's turn the conference over.
Gregg Lampf.
Gregg Lampf: Vice President of Investor Relations. Please go ahead.
Speaker Change: Thank you Michael Good morning, and welcome to Cna's 2025 fiscal first quarter conference call.
Gary Smith: On call today is Gary Smith, President and CEO and Jim Moylan CFO.
Speaker Change: Scott Mcfeely Executive advisor is also with us for Q&A.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Today's discussion includes certain adjusted or non-GAAP measures of <unk> results of operations. A reconciliation of these non-GAAP measures to our GAAP results is included in today's press release.
Gregg Lampf: 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 commentary on market dynamics and discussion of our opportunities and strategy are based on current expectations forecasts and assumptions regarding the company and its markets, which incur.
Gregg Lampf: Risks and uncertainties that could cause actual results to differ materially from the statements discussed today.
Gregg Lampf: Assumptions relating to our outlook whether mentioned on this call are included in the Investor presentation that we'll post shortly after an important part of such forward looking statements and we encourage you to consider them.
Gregg Lampf: All forward looking statements should also be viewed in the context of the risk factors detailed in our most recent 10-Q10-K excuse me in our 10-Q, which we expect to file with the SEC by this Thursday.
Gregg Lampf: 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 they'll ask that you limit yourselves to one question and one follow up.
Gregg Lampf: Also in case, there's a slightly longer pause unusual during Q&A. Please note that our team is in two different locations for this call with that I will turn the call over to Gary.
Gary Smith: Thank you and good morning, everybody.
Gary Smith: Today, we delivered strong fiscal first quarter results, including revenue of 1.07 billion adjusted gross margin of $44 seven and adjusted EPS of 64 cents per share.
Gary Smith: Positive demand dynamics drove very strong order flow in the quarter.
Gary Smith: Significantly direct orders from cloud providers, well half of overall orders in Q1.
Gary Smith: And we've had our strongest back to back quarters of orders from service providers in over two years.
Gary Smith: This outstanding performance reflects balanced growth and strong momentum across all aspects of our business as we execute our strategy to take full advantage of the growth of cloud and AI traffic.
Gary Smith: Yeah.
Gary Smith: Since speaking with you last in mid December we've seen a continuation of the positive demand dynamics that we've been discussing in recent quarters.
Gary Smith: This is playing out across our primary customer segments and geographies and in both our foundational business and market expansion opportunities.
Gary Smith: The rapid expansion and distribution about AI training and inferencing infrastructure is driving global investments in ultra scalable high performance networks operated by both service providers and cloud providers.
Gary Smith: And as the global leader in high speed connectivity, we are best positioned to partner with them on these critical infrastructure builds to help scale and monetize their networks.
Gary Smith: So as we continue to execute our strategy and take full advantage of these opportunities.
Gary Smith: We remained focus on extending our leadership in growing market share in our core businesses inclusive.
Inclusive of subsea long haul metro Dci and motion opportunities.
Gary Smith: And growing our addressable market into adjacencies, particularly inside on around the data center over time as well as in Metro routing all areas, where our foundational optical technologies and leadership provide us significant competitive advantage.
Gary Smith: Okay.
Gary Smith: To best understand how our investments are fully aligned with these market dynamics and our customers' priorities, we believe that viewing our business through the lens of a major customer segments provides the most insight.
Gary Smith: So let's start with service providers.
Gary Smith: Okay.
Gary Smith: The supply and demand dynamics that we experienced in previous periods continue to come into balance and we believe service to provide our inventory digestion impacts are largely now complete.
Gary Smith: Accordingly, we saw our ongoing improvement in Q1 in revenue and orders with North America, leading the way and international markets continuing to show positive progress.
Gary Smith: Service provider revenue in Q1 increased 14% year over year, comprising approximately 51% of total revenue.
Gary Smith: Clearly these customers once again investing to scale their networks, specifically for the anticipated increase in cloud traffic, a new AI workloads, including for most of and opportunities with the cloud providers.
Gary Smith: We've now seen a couple of quarters with an improving service provide a trend line and we believe these positive service provider spending dynamics will continue moving forward.
Gary Smith: Moving now to cloud providers.
Gary Smith: We continue to broaden and deepen our relationships with cloud customers in Q1 total direct cloud revenue comprised 32% of the total revenue with five cloud providers and our top 10 customers for the quarter.
Gary Smith: AI is the key driver of scaling and provisioning these high speed networks to support increased bandwidth demand.
Gary Smith: And enable the monetization of AI today, and well into the future.
Gary Smith: We expect these to be large, long-term investment plans over many years to come, as evidenced by the strong CAPEX plans and strategic commentary that most cloud providers have recently announced relating to networks.
Gary Smith: Turning to the critical technologies that required by both our service provider and cloud provider customers, we are seeing broad-based momentum again across our portfolio.
Gary Smith: Wave Logics 6 Xtreme is often an incredibly strong start in the marketplace, gaining momentum with customers who seek increased capacity and reduced space and power requirements in their networks.
Gary Smith: In Q1, we added 20 new customers for WaveLogic 6E, and we continue to ship our WaveLogic 5 solution. In Q1, we reach more than 1,600 WaveLogic modem shipped worldwide, 160,000.
Gary Smith: Confirming the wave logic portfolio was the foundation for world class network backbones for the AI and cloud economy, both terrestrial and subsea.
Gary Smith: and our Intelligent Line Systems, including our RLS Photonic Platform and Waveserva Wave Length Solution.
Gary Smith: are designed for the type of traffic and applications that are emerging and are the preferred choice for both service providers and cloud provoked customers alike.
Gary Smith: In fact, we have nearly a hundred total customers now for RLS and more than 400 total for Wavesurber.
Gary Smith: Importantly our Interconnects portfolio is gaining traction and represents the substantial growth opportunity for us moving forward, particularly in the context of AI within the Metro Data Center campus and in the future inside the Data Center itself.
Gary Smith: As a reminder, Interconnect is a general industry term to describe the infrastructure technologies that provide the connectivity between and within data centers. It includes both pluggables and component technologies.
Gary Smith: Demand for our high-performing, best-in-class pluggables is strong and growing. Q1 was our highest orders quarter yet for pluggables as we continue to take share in this fast-growing market.
Gary Smith: We are also on track for general availability of our 800 gig wave logic 6 nano-pluggable solution in the first half of this calendar year, and expect deployments later in the calendar year for Metro DCI use cases.
Gary Smith: The WaveLogic Six Nanotechnology also supports the industry's first 1.60 coherent light solution for 2km to 20km campus applications.
Gary Smith: which will also be productized for deployment in the 2020-26 timeframe.
Gary Smith: In fact, we will also be showing the first live 1.6T coherent light solution demonstration at the upcoming OSC conference in San Francisco in early April . And we will be hosting investor meetings to provide further details about our ongoing R&D efforts in this area.
Gary Smith: Before handing over to Jim, I'd summarised by saying that as the global leader in high speed connectivity for both systems and the underlying technology.
Gary Smith: We are incredibly well positioned to partner with customers, to address rapidly increasing bandwidth demands driven by cloud connectivity and AI.
Gary Smith: As a result, we have strong momentum across our business, which is driving balanced growth and providing a solid visibility and confidence in our future.
Jim: Jim, can you now take us through a more detailed readout of our financial performance in Q1 as well as our outlook? Jim.
Thanks, Gary. Good morning, everyone.
Jim: As Gary mentioned, we delivered strong fiscal first quarter financial results. Total revenue in Q1 was $1.07 billion. This included two 10% plus customers, one cloud provider and one service provider.
Jim: Adjusted Gross Margin was 44.7%. Driven by a few non-recurring events, including software
Jim: Q1-adjusted operating expense was $347 million with respect to profitability measures in Q1. We delivered adjusted operating margin of 12.3%.
Jim: Adjusted Net Income of $94 million and adjusted EPS of 64 cents.
Jim: In addition, we generated $104 million in cash from operations. Adjusted EBITDA was $156 million.
Jim: We continue to target the repurchase of approximately $330 million total in fiscal year 25.
Gary Smith: Turning to some additional highlights from the quarter, as Gary mentioned, we had a great quarter in optical. We have 25 total customers for WaveLogic 6 Extreme.
Gary Smith: including large service providers like Lumen, it's just a lot, Korea Telecom, Southern Cross, and Vocus, as well as several of the major cloud provider customers that are planning to standardize on this technology.
Speaker Change: We remain the only vendor in the market with a 1.6 terabit WAN solution and expect to hold that lead in this next generation of optical technology for at least two years.
Speaker Change: and Pluggable Momenta, most strong in Q1, putting us well on track to at least double our revenue this year from fiscal 2024.
David Vogt, David Vogt,
Speaker Change: In routing and switching, Q1 revenue was $93 million, up 17% sequentially.
Speaker Change: The total cannot for our adaptive IP customers is now 390, including nearly 40 added during the first quarter.
Speaker Change: and we are winning new customers for our coherent routing solution, including international service providers and enterprise customers.
Speaker Change: Other portfolio highlights from Q1 include, Platt Forum Software and Services, including Navigator had another good quarter, with revenue of 6% year-over-year.
Blue Planet Quarterly Revenue Nearly Doubled Year Over Year
Farning now to guns.
Speaker Change: Before I talk about the guide, I will say that we are certainly aware of the potential for disruption in U.S. and the international economy, given the prospect of additional tariffs and retaliatory actions.
Speaker Change: However, we firmly believe that bandwidth demand will continue to grow through this period.
Speaker Change: Given the fluidity and uncertainty surrounding the situation, our God does not include the effects if any of additional tariffs.
Speaker Change: For the fiscal second quarter, we expect to deliver revenue in a range of $1.05 billion to $1.13 billion.
Speaker Change: We expect Q2-adjusted gross margin to be in the low 40% range.
Speaker Change: and we expect adjusted operating expense to be approximately $355 million.
Speaker Change: We are very encouraged by the strength in our business and the continuation of positive demand dynamics across all of our segments.
Speaker Change: and we are very confident in our well-established position as the global leader in high speed connectivity as both our service provider and cloud provider customers invest at scale and monetize their networks in the AI era.
Speaker Change: with that momentum. Though it's still early in the year, we are increasingly confident that we can deliver revenue growth toward the high end of our 8% to 11% guidance range for fiscal 2025.
Speaker Change: Also, for the year, we continue, as we said last quarter, to expect adjusted gross margin to be in the 42% to 44% range for the year and adjusted operating expense average $350 to $360 million per quarter.
Speaker Change: In closing, I'll say that the strength of orders across all our market segments and verticals indicates that our position in the market continues to improve.
Speaker Change: Our lead in technology, which we believe is sustainable, coupled with the depth and breadth of our customer relationships, sets Ciena up nicely for long term growth.
Michael, we'll now take questions from the sales side analyst.
We will now begin the question and answer session.
Speaker Change: To ask a question, you may press star then one on your telephone keypad. If you are using a speaker phone, please pick up your handset before pressing the keys.
Speaker Change: If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time we'll pause momentarily to assemble our roster.
Atif Malik: The first question comes from Atif Malik with City. Please go ahead.
Atif Malik: Hi, it's Adrienne Colby for Authors. Thank you for taking a question.
Atif Malik: I was hoping we could talk about the dynamics you were seeing in the cloud service provider.
Atif Malik: Segment. Interested in what the linearity of the order trends were in the quarter, if you saw any kind of a pause or a shift or signs that cloud customers are rethinking some of their strategy for the year. Thank you.
Did you want to, I'd take that.
Atif Malik: We've seen very solid order growth really around accelerating demand across multiple cloud players. We saw no linearity at all around that, in fact we're probably seeing an increase.
Atif Malik: in demand, which is actually continued right now into Q2. We've actually started Q2, another way of addressing your question here is saying...
Q2, we've started super strong with cloud providers.
Atif Malik: and we expect that to continue. The fundamentals around that dynamics are driven by a multitude of things. One is machine-to-machine learning, we see expansion opportunities there, particularly in North America.
Atif Malik: where, you know, there's a need to basically, they can't get all the power and computing one space.
Atif Malik: therefore it has to link up to multiple data centers requiring low latency high bandwidth solutions, and then globally just the increase in cloud traffic and move to inference.
Atif Malik: to link up all of these data centers, requires a very large scale-up and build of submarine systems, metro across the global landscape.
Atif Malik: We have seen absolutely no yielding in that at all. In fact, I describe it as an acceleration. And when you think about it...
Atif Malik: They need to connect these data centers if they're going to monetize any of this. And in fact, if we get more proliferation of reasoning models, that's just going to drive more traffic, frankly.
Gary Smith: One thing I'd add to that Gary is in a more general sense.
Speaker Change: Our orders for the quarter were more than double over the last year during the same quarter and well above our revenue and about half of those orders were cloud. So just accentuates the comments that Gary made.
Thank you [inaudible]
Thank you.
Mayta Marshall: The next question comes from Meta Marshall with Morgan Stanley . Please go ahead.
Great, thanks. Maybe to start with, just in terms of...
Speaker Change: The right kind of scaled infrastructure and connectivity to be able to take advantage of this because this traffic is now really another way to simply think about it matter is this stuff is now beginning to come outside of the data center. Both in terms of training and in terms of inference and just the general growth in cloud traffic.
Mayta Marshall: And I think.
Speaker Change: That's going to be a very consistent over.
Mayta Marshall: I think the next few years.
Mayta Marshall: And on the tariff situation.
Mayta Marshall: As you can appreciate it is very fluid and dynamic there've been lots of changes.
Mayta Marshall: Decisions lots of changes to decisions made on tariffs over the last few weeks, we've certainly been very busy looking at how we will mitigate the tariffs if and when they come into play and we do have a resilient supply chain that allows for this kind of mitigation depending upon the shape of the ultimate tariffs will work with <unk>.
Mayta Marshall: Customers for reimbursement of tariffs. So we just didn't put it in there we'll give you a view of that when and if we have certainty.
Speaker Change: Okay, great. Thank you.
Matt: Thank you Matt.
Speaker Change: The next question comes from Amit <unk> with Evercore. Please go ahead.
Speaker Change: Good morning, Thanks for taking my question I guess, maybe just to start on gross margins. Jimmy said I mentioned there was some one time benefits in the in the Jan quarter, you folks had so could you just talk about very strong performance in gross margins in the Jan quarter sort of what drove that upside and what were the things that we're perhaps non reoccurring they were not sustained in <unk>.
Speaker Change: <unk>.
Speaker Change: Yes.
Speaker Change: Thank you can appreciate from past quarters that gross margin is difficult for us to call. It precisely because there are any number of things that can happen during a quarter that can that are unexpected in this most recent quarter. We had several unexpected one time events, including some software events that drew.
Speaker Change: Give it up.
Speaker Change: We also had a good performance on the supply chain in terms of overheads. So all of those things were good and we did greatly exceed the number we put out for you.
Speaker Change: This quarter, we don't expect those effects to occur to recur in Q2, we are returning to our guide of low <unk> for Q2 remember we said at the beginning of the year. The first half of the year was going to be in the low <unk> second half of the year was going to be toward the mid <unk> and we ended up the year at 42% to 40.
Speaker Change: 3%, we still believe that to be true.
Speaker Change: Over the long term, we are hopeful that margins will improve.
Speaker Change: Fair enough and then.
Speaker Change: If I kind of step back and think about your commentary around auto growth in the cloud demand. It all seems like up into the right.
Speaker Change: Wondering if you could kind of stack that up against your April quarter Guide, which I think is calling for revenue growth of low single digits, 2% sequentially.
Speaker Change: What should I think historically it tends to be up more like six 7% mid to high single digits. So maybe just talk about the guide for April seems to be a little bit lower than normal seasonality. Despite some very positive commentary on orders and cloud from your side.
Speaker Change: I would respond to that this was amit.
Speaker Change: We used to have a reasonably predictable seasonality in our order and revenue flow when our business was service providers now our businesses.
Speaker Change: <unk> have driven by cloud providers and their order flow and the resulting revenue is more a function of what projects. They are working on at any point in time as opposed to annual seasonality. So my own feeling is that you shouldn't compare year over year here that much in terms of overall.
Speaker Change: Revenue you should look at the trend and as you know we are calling 8% to 11% for this year and actually we're going to.
Speaker Change: Tend towards the higher end of the quarter for the year.
Speaker Change: The other thing I would say I may add is obviously, we had we've said we've had strong order flow is obviously greater than one much greater than one and our backlog continues to increase so I think we're setting up for a strong for a strong second half as well and just just to clarify one point the guide.
Speaker Change: For the year on the gross margin is 42 to 44 in total.
Gary Smith: Thank you Gary I misspoke.
Speaker Change: Okay.
Speaker Change: Great. Thank you.
Speaker Change: Thank you.
Speaker Change: The next question comes from semi chatter G with J P. Morgan. Please go ahead.
Speaker Change: Hi, Thanks for the question. This is Joe Cardoso on for Sonic I guess first one from my end as Youre thinking about the updated full year outlook for revenue I guess is there any change in terms of how youre thinking about the composition between customer verticals that you serve and maybe more specifically in terms of.
Speaker Change: Guiding our raising the guide here is there a specific customer vertical that is tracking ahead of your plans relative to 90 days ago or is this more broad based in terms of what youre seeing across the verticals and the trends Youre seeing and then I have a quick follow up thank you.
Yeah, Let me let me let me take that first and then Jim Jim Jim May add I would say what's driving the.
Speaker Change: The increase for the year I would say that.
Speaker Change: Two things, one I think increasing confidence around the service provider.
Speaker Change: The recovery, we've seen multiple data points around that and it's quite broad, but I think Ravi in terms of getting to the upside that's largely all cloud.
Speaker Change: Thus largely cloud I mean, we've got increasing confidence of service providers are going to do what we thought they would do in terms of the recovery, which is pretty broad based and I think the additional pace that would take it closer to.
Speaker Change: Higher end of our range is really driven by cloud.
Speaker Change: Got it. Thank you and then for my follow up I'm. Just curious if we can get an update on how you're seeing the <unk> opportunity unfold for the year. It's anecdotally it kind of sounds like you guys are more confident around the revenues here at least doubling for the year. So just curious is that fair in terms of seeing a better demand in terms of 90 days ago and the.
Speaker Change: Then as you think about the expectations for the year any way to kind of size. The contribution between how much is coming from nano fibers in terms of what you're embedding into the outlook.
Speaker Change: I think Jim I think I mentioned in the comments, we had record order flows plugging holes in the quarter and I think we're increasingly seeing as plug a bold move towards.
Speaker Change: Higher speeds that really plays into into our portfolio. So I think we've said we expect it to double for the year.
Speaker Change: Sure.
Absolutely.
Scott Mcfeely: Well on well on track to doing that Scott is there any other.
Speaker Change: Anything else you'd add.
Speaker Change: Okay.
Speaker Change: Yeah. That's helpful. Thanks first of all I think.
Speaker Change: We are seeing growing momentum and we expect that momentum to accelerate as the demand for higher higher speed plausible.
Speaker Change: It becomes a reality with the introduction of <unk> six and the 800 gig per plug and beyond that one six terabits. So we're pretty bullish about that and our ability to gain share in that space and a reminder, that that is incremental opportunity for us.
As a company.
Speaker Change: And then following on from that we do see a continued march of coherent technologies being.
Speaker Change: Being.
Speaker Change: The preferred option in different parts of the network we've seen it in the Wan for many years, we've seen it now in Metro Dci for the last couple of seasons and we firmly believe we're going to see that in the campus the 2% to 20 kilometers space.
Speaker Change: Over the next couple of years and being the leaders in coherent that sets us up well for that.
Speaker Change: Your question on wavelength Dubai versus wave logic six.
Speaker Change: What we've done this many generations over in terms of coherent coherent technologies that always takes a couple of years for the latest and greatest technology coming.
Speaker Change: Out of the out of the machine to become the dominant.
Speaker Change: Volume contributor so we would expect wave logic five to be the volume dominant contributed through 2025.
Speaker Change: We do however, those new technologies are that are the.
Speaker Change: The vehicle that we use to compete for new business. So it's incredibly important in terms of winning new footprint. It just takes a while for it to become the volume contributor.
Speaker Change: No understood and then I appreciate all the color guys. Thank you.
Thanks, Jeff.
Simon Leopold: The next question comes from Simon Leopold with Raymond James. Please go ahead.
Simon Leopold: Thanks for taking the question.
Speaker Change: I understand that.
Simon Leopold: Fluid change by the minute some days.
Speaker Change: But I guess, what I'm trying to get a better understanding of this I feel like your supply chain and contract manufacturer relationships have been re engineered somewhat on changing apart from tariffs. So if you could help us in understanding maybe what.
Speaker Change: Closure to Mexico, and how you envision this changing because I believe youre moving more to southeast Asia. So so any way to sort of quantify the risk if the tariff stick as they are today and what else is going on in your supply chain reengineering. Thank you.
Speaker Change: We've designed our supply chain for resilience. So we have the capability to manufacture in a lot of different places just about all of our products.
Speaker Change: Our supply chain comes from Mexico, Thailand, Canada, India, I think that list them all for now and we do have a concentration today in Mexico in Thailand, but we do have the capability to move that around depending upon what the shape of the ultimate tariffs are.
Simon Leopold: Thanks Simon.
A couple of things to know climate on the just to follow on from Jim a couple of things to note in terms of the architecture of the supply chain.
Simon Leopold: We've taken steps over the last couple of years to take <unk>.
Simon Leopold: Direct control over our component in feed into that supply chain. So that we have the flexibility to direct it to different.
Speaker Change: Locations and contract manufacturers around the world to take advantage of the resilience that Jim talked about.
And just a reminder, I think many of you know because we had the conversation in the past, but our architecture, we own all the test assets. So we have the ability to.
Speaker Change: Invokes that flexibility over time.
Speaker Change: And move in a.
Speaker Change: <unk>.
Speaker Change: Production around the world.
Speaker Change: Obviously, it's shorter time intervals, where we have existing capacity for the for a for a given product.
Speaker Change: And that time intervals.
Lengthened if we have to go to a new location, but we do have that capability.
Speaker Change: Yes, thank you that assignment.
Speaker Change: B.
Speaker Change: I was going to say Simon wouldn't be useful for us to quantify these exposures because.
Speaker Change: It is very dynamic and we have the ability to move things around.
Speaker Change: So as I said, when we have certainty about the effects of these tariffs we will update you as appropriate.
Speaker Change: Thank you very much.
Speaker Change: Okay.
Speaker Change: Thanks, John The next question comes from Tal Leone with Bank of America. Please go ahead.
Speaker Change: Hi.
Speaker Change: Had a few small questions kind of.
Speaker Change:
Speaker Change: What are the applications for wave logic why is it growing and.
Speaker Change: Where do you see it in the network and the second question is about plausible.
Speaker Change: Can you same question kind of.
Is it because as the growth because of the launch of 800 gig or is it in 400 gig and are you taking share from Cisco the market share data shows that Cisco was very very strong in 400 gig. So can you give us a little bit more on <unk> and I have one little question, Indiana.
Speaker Change: Yes.
Speaker Change: Scott.
Speaker Change: So first of all.
Speaker Change: Starting with our traditional core strengthen our business and.
Speaker Change: Long haul submarine Metro regional networks, we're seeing tremendous demand for increased traffic on those networks driven by all of the cloud and AI dynamics that we've talked about.
Speaker Change: On the call, we see it coming at us in terms of demand for wavelength and various different forms whether it'd be a plug of bowls are embedded in our systems and we see it in tremendous demand for lighting, new fibers with our with our <unk>.
Speaker Change: Your line systems in particular next generation one Ross.
Speaker Change: The first place where we're seeing it from an application set perspective.
Speaker Change: Place for US is around the Metro Dci space and remember that wasn't if you go back four or five years that wasn't really the domain of coherent technologies.
Speaker Change: The fact of way to deliver it.
Speaker Change: That's where the plug able opportunity.
Speaker Change: Has really possible coherent opportunity has.
Speaker Change: <unk> really been over the last couple of seasons, we serve that with her wave logic, five and we weren't first to market with that technology, but we have had a growing share and if you look at the Q4 reports you see our share substantially growing and we think that's going to grow substantially over 2000, and 2025, and we will continue to grow as the data right.
Speaker Change: <unk> go from 400 gig as you mentioned 800 gig or one six eventually there as well.
Speaker Change: So that's here now that is really mostly net new business for us because we never really had exposure in the past that metro Dci use case looking.
Speaker Change: Looking more into the future, we do see that continuing to March of coherent being relevant to their high speed data interconnect. The next place that's going to hit.
Speaker Change: We've been saying this for a while but no others in the industry have joined us in saying it is in the 2% to 20 kilometer campus data center interconnect, which has not been coherent in the past we would expect.
Speaker Change: To start seeing revenue in our business in 2026 on that use case and those those all of that is included in our three year guide.
Speaker Change: We have a further belief system beyond that that that March of coherent is not going to stop at the walls of the data center that is going to bleed into the datacenter as bandwidth rates increase in the technical challenge of servicing those bandwidth rates.
Speaker Change: It gets it gets larger.
Speaker Change: That's a little bit farther out in the future.
Speaker Change: We do believe that that is going to happen and we being the leaders in coherent that will benefit us, but from a timing perspective, it's a little bit beyond what our three year guidance.
Speaker Change: Hopefully that helps in terms of.
Speaker Change: Perfect. Thanks for the.
Speaker Change: Elaborated the answer.
Speaker Change: So this is last year was a big year like a big quarter same quarter last year was the quarter for service growth this quarter, and <unk>, 5% and I see that the growth kind of decelerated throughout the year 12, and $5 three and a half two and a half now what's what are the trends in services.
Speaker Change: Okay.
Speaker Change: Generally speaking our services business has grown and it's grown.
Speaker Change: Roughly correlated to the optical growth.
Speaker Change: I would say that we've had a lot of opportunities to help our cloud providers, most recently and building out their networks because they don't necessarily have all the resources to do all of the building and implementation that they need in order to get their networks right. So we're very happy with.
Speaker Change: Our services business and we think it's going to grow for the future all of the sequential movements are basically just noise.
Speaker Change: One thing I would sorry tell one thing I'd just add to that is we are seeing an uptick.
Speaker Change: I know there's a.
Speaker Change: Flowed through the revenues, yet probably but and.
Speaker Change: <unk> services.
Speaker Change: Both as Jim said for the cloud players and also the service providers. So it is a bit of a sort of a proxy for.
Speaker Change: The consumption and increase of the build outs of the networks is the ramp in our installation services.
Speaker Change: So Jim the.
Speaker Change: The range for a year over year growth in the last four quarters was very very big.
Speaker Change: From 2% to 12%. So that's a good assumption for us for a kind of steady state growth and good morning all.
Speaker Change: Mountains and valleys, what's a good assumption for services growth annual annual growth.
Speaker Change: I Wouldnt use any particular quarter, what I would use is generally speaking our services revenue is going to grow approximately as our optical business grows over time.
Speaker Change: Like in any given quarter grow faster or slower given what's going on with particular projects, but I don't think it's a bad proxy whatever your assumptions about optical growth to use the same for services growth.
Speaker Change: Got it okay. Thank you.
Tom: Thanks, Tom.
Tim Long: The next question comes from Tim Long with Barclays. Please go ahead.
Hi, Good morning. This is <unk> on for Tim long.
Tim Long: Question on the service provider business now.
Speaker Change: With the kind of gradual recovery you've seen in service provider can you talk about that medicine opportunities. There should we still expect this to be.
Tim Long: Kind of around 10% to 15% of telco.
Tim Long: Just trying to get any color there and then just a quick question on India. How are you guys viewing.
Tim Long: Recovery this year upside there.
Tim Long: Thank you.
Tim Long: Hello.
Speaker Change: But most of them. We've generally said certainly in the last sort of 12 to 18 months.
Speaker Change: Probably about 10% plus of our service provider business.
Speaker Change: I think that's going to increase over the next 18.
Speaker Change: 18 months, we're seeing.
Speaker Change: A real expansion and opportunity around the globe for these build outs, which is very consistent with.
Speaker Change: With the cloud players wanting to build out the global network capabilities and that's encompassing submarine.
Speaker Change: Encompass in a lot of geographies around the World Europe Middle East Asia.
Speaker Change: So I would expect that to increase over time, you said, 10% to 15.
Speaker Change: Could even potentially say over the next 18 months or so could could be as high as.
Speaker Change: 10% to 20.
Speaker Change: <unk>.
Speaker Change: Given the activity that we're.
Speaker Change: We are saying and they want to participate.
Speaker Change: And the ecosystem build out of this and there are large parts of the world where.
Speaker Change: For various reasons the cloud players don't want to have the regulatory challenges of a license et cetera.
Speaker Change: And they need to provide the right kind of capacity to enable that business.
Speaker Change: Connectivity to data center, and all consumers and so I think this is a multi year.
Speaker Change: Expansion on motion and on.
Speaker Change: On India.
Speaker Change: As you say, it's been a couple of years of kind of digestion.
Speaker Change: Move to five G. I think we're now seeing.
Speaker Change: An improving pipeline there of build out some of that again.
Speaker Change: To your question is driven by <unk> and a lot of cloud activity in India fastest growing internet market.
Speaker Change: In the world and so we feel pretty bullish around India and would expect it to be up for the year by the time we.
Speaker Change: We've come out of Q4.
Speaker Change: Thank you so just add that we have we have great.
Speaker Change: <unk> with all of the three or four major operators in India, and I think that will be.
Speaker Change: A real source of growth for us over the next few years.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: The next question comes from Ruben Roy with Stifel. Please go ahead.
Speaker Change: Thank you Gerry maybe to stick with the international service provider theme I was wondering if you have some updated thoughts for us on.
Speaker Change: The Huawei potential for Huawei replacement.
Speaker Change: Across various geographies now that inventories have normalized and supply chains of normalized any any updates there it sounds like there might be some movement. So just wondering if that's at all.
Speaker Change: If there are any assumptions.
Speaker Change: With that replacement cycle.
Speaker Change: Your next three year outlook.
Speaker Change: Okay.
Speaker Change: And I think we've always said this the greatest opportunity really is in Europe and that remains the case.
Speaker Change: It is a multiyear opportunity. This is sort of they have a lot of infrastructure here, it's integrated into their back office and there is not the obvious sort of free cash flows immediately to be able to report that stuff out. So you've got operational issues, you've got capital issues et cetera and thats.
Speaker Change: What's taken.
Speaker Change: Taken a long time.
Speaker Change: I think just by its very nature.
Speaker Change: So I think.
Speaker Change: You've still got a multi year opportunity in front of us around the Huawei replacement.
Speaker Change: All seeing it happen, we are winning those deals more than our fair share of that particularly in Europe, and I think that's going to be a tailwind for us.
Speaker Change: The service providers recover over the next one to three years.
Speaker Change: Thank you, Gary and I had a follow up for Scott I think.
Speaker Change: And Scott kind of considering some of your commentary on kind of longer term potential opportunities inside the data center and it's been a lot of chatter in recent weeks and months around CPO and I assume we're going to hear more about that over the next several weeks.
Speaker Change: What are your thoughts there again thinking through sort.
Speaker Change: Sort of longer term prospects for C&I either.
Speaker Change: With transceivers or ingredients that makeup transceivers inside the datacenter CPO, an opportunity a threat or <unk>.
Speaker Change: Mutual thank you.
Speaker Change: Yes, Hi, Robyn Thanks for the question Yeah. So if you take step back and think of it whether it's CPO or various other different.
Speaker Change: Packaged opex <unk>.
Speaker Change: <unk> et cetera.
Speaker Change: That all speaks to the industry trying to innovate around solving the challenge of continued.
Speaker Change: The increase in demand for scale.
Speaker Change: And that scale and compute but also scale in terms of the high speed.
Speaker Change: Data Interconnects and clearly.
Speaker Change: No.
Speaker Change: Our.
Speaker Change: We're seeing that we're more interested in the high speed data interconnect piece of that.
Speaker Change: All of the applications that I talked about coherent sort of having an expanded market perspective, I don't think the CPO conversation has any impact at all on us.
Speaker Change: The CPO, we've never said by the way given that.
Speaker Change: Even given the march of coherent becoming more and more relevant.
Speaker Change: To the walls of the data center and inside it and instead, we never said Imdb, our direct detect was going to go away.
Speaker Change: CPO and the other is different flavors of it is.
Speaker Change: At a really high level as a repackaging of that <unk> technology to solve for the scale issue.
Speaker Change: We think there are going to be other challenges there as well and we think.
Speaker Change: Some of the component technology that we've had to solve for inside of coherent may have a play as people try to figure that out as well. So we see an opportunity to play both sides of the street coherent as it comes inside the data center and then as they try to solve some of these scale problems in the <unk> World. We have we have some value there as well those are conversations.
Speaker Change: Our stations that are ongoing none of that inside the data center stuff that was in our numbers right now right.
Speaker Change: Alright, Thanks, a lot for the detail Scott.
Speaker Change: The next question comes from Tim <unk> with Northland Capital markets. Please go ahead.
Tim Long: Hey, good morning.
Speaker Change: Couple of questions.
Speaker Change: I guess the first one on the competitive front I just love to get an update on given the closing of the Nokia and Infinera deal.
Speaker Change: Are you seeing anything.
Speaker Change: Changing competitively either on the cloud side or the service provider side of the market.
Speaker Change: Follow up.
Tim Long: Tim I would say that we've obviously.
Tim Long: <unk> competed with them separately and we've done extremely well.
Tim Long: With that and I think we're we think we're incredibly well positioned with competitive advantage and our multiyear technology advantage on both <unk> line systems and.
Tim Long: Micro services the main manager so having anything changes from that point of view.
Tim Long: Obviously, they've got the challenge of rationalizing the portfolio. So I think that's an opportunity for us.
Tim Long: As they as they try and <unk>.
Tim Long: Figure out the portfolio. So I think in the short term.
Tim Long: That's a good opportunity for us.
Great Thanks and.
Tim Long: I think Gary you mentioned that in terms of upside drivers for the year you felt there.
Tim Long: The cloud was really driving it but if you look at the dynamic in Q1, where you've got service provider up double digits synclinal down a little bit.
Tim Long: As you look at fiscal 'twenty fives, and look at that kind of low double digit growth, but you seem to be targeting.
Speaker Change: Is it possible that most of that comes from service provider. This year given the dynamics are that we are expecting to see a big ramp in cloud later in the year with such orders.
Tim Long: A little bit.
Tim Long: I would expect to see a big ramp in cloud.
Tim Long: So what were the assumptions going in you know kind of midpoint of that original guide was the service provider.
Tim Long: Sustained recovery and I think we're very confident about that now so tick that's one of the big assumptions.
Tim Long: I think.
Tim Long: Touched and I think the upside to the <unk>.
Tim Long: <unk> was always really around cloud.
And I think given the order flows and pipeline and activity that we're seeing.
Tim Long: Both on <unk> and add on direct I mean, the order flows in Q1.
Tim Long: Half hour orders directly from cloud so we're getting good visibility to that as they plan these global build outs.
Tim Long: So I would expect that to.
Tim Long: To come on strong in the next few quarters from a revenue point of view it absolutely will and I think it'll it'll form the.
Tim Long: Main elements around driving us to the high end of the range.
Speaker Change: Great. Thanks very much.
Tim Long: Okay.
Speaker Change: The next question comes from Ryan Koontz with Needham. Please go ahead.
Speaker Change: Great. Thanks for the question.
Speaker Change: We could double click for a minute on the strength out of North America, Asps, which really sounds like it got off to a strong kind of seasonally.
Speaker Change: Robust start here is that driven by just purely an improved spending environment or maybe are there specific programs our share gains that are driving the uptake.
Speaker Change: Yes, Brian I think we've had a number of design wins over the last couple of years that are now beginning to come to fruition with the major service providers in North America. So that is particular to US I think secondly, you have seen this dynamic.
Speaker Change: Round getting inventory in balance.
Speaker Change: I think over the last few quarters, that's cleaned itself up and so you are.
Speaker Change: Now we're able to.
Speaker Change: Our recognized revenues and our new orders and I think box.
Speaker Change: Sort of all imbalance.
Speaker Change: And I think the third dynamic.
Speaker Change: They just haven't invested as much in infrastructure over the last few years and I think part of that is.
Speaker Change: They've been focused on five G.
Speaker Change: And that both in the U S and globally is now petering down and so they are now returning to look at their overall infrastructure automation of the networks and how do they sort of scale that to meet.
Speaker Change: The demands of things like <unk> and cloud expansion. So it's a <unk>.
Speaker Change: Multitude of dynamics that we're seeing some of which are just industry based some of which are <unk>.
Speaker Change: Particular, <unk> of some of the design wins that we've got and we pretty much now.
Speaker Change: The preferred.
Speaker Change: And all of the major tier one carriers in North America, and that's also playing into the strength.
Speaker Change: Okay. Thanks, a lot Seth thanks for that and with respect to your your broad exposure in cloud, which sounds like it's poised to season.
Speaker Change: Strong sequential growth through this year.
Speaker Change: Would you attribute that coming primarily from kind of the top four classic players or historically more recently you talked about.
Speaker Change: Strength out of the next year tier twos that are growing rapidly how would you characterize your growth there spot exposure.
Speaker Change: Yeah.
Speaker Change: Tough to think about these as tier twos as well.
Speaker Change: I think it's sort of there now.
Speaker Change: Now sort of pivot towards the network part of it which they've not been focused on before so I think a telling statistic, which folks might've. Matt is that we've now got five cloud providers and our top 10 customers for Q1, and I think that kind of illustrates the point that you're making around <unk>.
Speaker Change: Broadening out the amount of players that are investing in realizing that for them to optimize that position around AI and cloud that they've got to actually focus on the network from a delivery point of view and a monetization and you're seeing we've had a number of wins.
Speaker Change: And these new.
Speaker Change: Certainly well established large companies.
Speaker Change: But these newer wins that are focused on the network and so you've got an expanding group of players.
Speaker Change: And we've also got deepening relationships.
Speaker Change: With the with the major existing players as well.
Speaker Change: Think about the relationships we have its submarine it's metro.
Speaker Change: Long haul it's plug of bowls.
Speaker Change: Into the campus now with some of the plug of bowls.
Speaker Change: <unk>.
Speaker Change: The services aspect of it we're increasing our engagement around all of that so it's.
Speaker Change: It is both broader and deeper in the cloud market.
Gerry: It makes a lot of sense Gerry thanks.
Ron: Thank you Ron.
Speaker Change: Yeah.
Speaker Change: The next question comes from David <unk> with UBS. Please go ahead.
Speaker Change: Thank you, it's Andrew for David I wanted to ask a higher level of gross margin question. I think you said you expect it to move higher.
Speaker Change: Over time, and I think I expect it to move maybe 100 200 bps higher to get to your three year plan for your margins.
Speaker Change: What I'm thinking about is I'm wondering can.
Can I can I model and think about your gross margins moving higher over time as revenue scales and you get typical scale benefits or should I think about it more as something that.
Speaker Change: Goes sideways for a while and then in flex as your revenue shifts away from line systems.
Speaker Change: And so maybe the gross margin ramp in the three year model is more back half loaded I'm trying I'm trying to think through that.
Speaker Change: Yes, I'll answer that.
Speaker Change: Notwithstanding the fact that we had some unexpected one time effects in this most recent quarter.
Speaker Change: Our gross margin is most heavily influenced by mix.
Speaker Change: And typically we have a somewhat razor razorblade structure of pricing and gross margins as we put out the original line systems in photonics that set a lower gross margin as we add capacity to the lines at a higher gross margin and Thats. The way our business has worked for a long long time.
Speaker Change: It happens to be the fact that our Rls line system, which is the Nextgen line system, it's becoming an industry standard is really doing extremely well in the marketplace.
Speaker Change: Essentially all of the cloud providers are buying that most of the service providers are we'll buy it and so we have a very heavy.
Speaker Change: Percentage of Rls in our mix. We also are beginning to sell plugs and these are 400 ZR plugs there at a higher cost point than they will be going forward as we get production to scale and as we cost reduce those.
Speaker Change: <unk>. So we are experiencing a period of lower than trend gross margins, which will trend up over time I do expect that it will trend up from what we're calling for Q2 and I think as we move through time, we're going to get back to a more traditional balance between line systems.
Speaker Change: And capacity, which will naturally move our margins up so as you said.
Speaker Change: I think it's reasonable to expect something in the mid Forty's over the next couple of years, it's not going to happen. This year, probably not going to happen next year, but I think by the time you get out to 'twenty seven we shouldnt be in that range and where it goes through there who knows we'd like to get back to the mid Forty's and then we'll work on it to improve it.
Speaker Change: Thank you.
Speaker Change: Thank you everyone will be a question and answer session I would like to turn the conference back over to Greg Lang for any closing remarks.
Speaker Change: Thanks, Michael Thank you everyone for joining us today, we do look forward to seeing everyone. At OFC, we will be hosting as Gerry mentioned that a number of investor meetings through that conference and we look forward to seeing you also an event we are planning that Tuesday at $4 45 Pacific Thanks, and we'll speak to you all soon.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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