Q1 2026 Ciena Corp Earnings Call

March 5, 2026

Operator: Good day. Welcome to Ciena's Fiscal Q1 2026 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the Star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star, then 1 on a touch-tone phone. To withdraw your question, please press Star and then 2. Please note this event is being recorded. I would now like to turn the conference over to Gregg Lampf, vice president of investor relations. Please go ahead.

Speaker #1: Good day, and welcome to CIENA's Fiscal First Quarter 2026 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0.

Speaker #1: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on a touchtone phone.

Speaker #1: To withdraw your question, please press star, and then 2. Please note this event is being recorded. I would now like to turn the conference over to Gregg Lampf, Vice President of Investor Relations.

Speaker #1: Please go ahead.

Speaker #2: Thank you, Dave. Good morning, and welcome to CIENA's 2026 Fiscal First Quarter Conference Call. On the call today is Gary Smith, President and CEO, and Marc Graff, CFO.

Gregg Lampf: Thank you, Dave. Good morning and welcome to Ciena's 2026 fiscal Q1 Conference Call. On the call today is Gary Smith, President and CEO, and Marc Graff, CFO. Scott McFeely, Executive Advisor, is also with us for Q&A. In addition to this call and the press release, we've posted to the investor section of our website an accompanying investor presentation that reflects this discussion as well as certain highlighted items from the quarter. Our comments today speak to our recent performance, our view on current market dynamics and drivers of our business, as well as a discussion of our financial outlook. Today's discussion includes certain adjusted or non-GAAP measures of Ciena's results of operations. A reconciliation of these non-GAAP measures to our GAAP results is included in today's press release.

Speaker #2: Scott McFeely, Executive Advisor, is also with us for Q&A. In addition to this call and the press release, we've 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 #2: 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 #2: Today's discussion includes certain adjusted, or non-GAAP, measures of Ciena's results of operations. A reconciliation of these non-GAAP measures to our GAAP results is included in today's press release.

Speaker #2: 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 the discussion of our opportunities and strategy, are based on current expectations, forecasts, and assumptions regarding the company and its markets.

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 this, excuse me, 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 posted earlier today, 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 10-K and our forthcoming 10-Q.

Speaker #2: 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 posted earlier today, are an important part of such photologic statements, and we encourage you to consider them.

Speaker #3: Our photologic statements should also be viewed in the context of the risk factors detailed in our most recent 10-K and our forthcoming 10-Q. CIENA assumes no obligation to update the information discussed in this conference call, whether as a result of new information, future events, or otherwise.

Gregg Lampf: Ciena assumes no obligation to update the information discussed in this conference call, whether as a result of new information, future events, or otherwise. As always, we'll allow for as much Q&A as possible today, though we ask that you limit yourselves to one question and one follow-up. With that, I'll turn the call over to Gary.

Speaker #3: As always, we'll allow for as much Q&A as possible today, though we ask that you limit yourselves to one question and one follow-up. With that, I'll turn the call over to Gary.

Speaker #2: Thanks, Gregg. And good morning, everyone. Today we reported strong fiscal first quarter financial revenue of $1.43 billion in the quarter, our highest ever, and at the top end of our guidance, reflecting strong execution, across the business.

Gary Smith: Thanks, Gregg, and good morning, everyone. Today, we reported strong fiscal Q1 financial performance. We delivered revenue of $1.43 billion in the quarter, our highest ever, and at the top end of our guidance, reflecting strong execution across the business. Demand is incredibly strong, with exceptional order activity in the quarter. This, along with long-term planning conversations with customers, gives us confidence in the durability of demand and our ability to drive growth as we move through the year and into 2027 and beyond. Adjusted gross margin came in at 44.7%, which was ahead of expectations. We continued to drive increased profitability, illustrated in part by our adjusted earnings per share of $1.35, which is more than double our EPS in Q1 of last year.

Speaker #2: Demand is incredibly strong. With exceptional order activity in the quarter. This, along with long-term planning conversations with customers, gives us confidence in the durability of demand and our ability to drive growth as we move through the year and into 2027 and beyond.

Speaker #2: Adjusted gross margin came in at 44.7%, which was ahead of expectations. And we continue to drive increased profitability. Illustrated, in part, by our adjusted earnings per share of $1.35, which is more than double our EPS in Q1 of last year.

Speaker #2: These record results reflect Ciena's market leadership and reinforce our role as a critical provider of the high-speed optical systems and interconnects that enable AI workloads to scale and to be monetized.

Gary Smith: These record results reflect Ciena's market leadership and reinforce our role as a critical provider of the high-speed optical systems and interconnects that enable AI workloads to scale and to be monetized. In fact, we are taking meaningful share of the increases in AI-driven connectivity spend as customers trust our technology leadership, deep collaboration, and proven execution. To this end, we believe 2025 will ultimately stand out as one of our strongest years of market share gains. We believe it will be even stronger in 2026. With our recent inclusion in the S&P 500, we may have new listeners on the call. Allow me to begin with a brief summary of our business. At the highest level, Ciena is the global leader in high-speed connectivity.

Speaker #2: In fact, we are taking meaningful share of the increases in AI-driven connectivity spend as customers trust our technology leadership, deep collaboration, and proven execution.

Speaker #2: To this end, we believe 2025 will ultimately stand out as one of our strongest years of market share gains, and we believe it will be even stronger in 2026.

Speaker #2: With our recent inclusion in the S&P 500, we may have new listeners on the call, so allow me to begin with a brief summary of our business.

Speaker #2: At the highest level, CIENA is the global leader in high-speed connectivity. We build solutions that move enormous amounts of data across cities, data center campuses, countries, and oceans, quickly, reliably, and at massive scale.

Gary Smith: We build solutions that move enormous amounts of data across cities, data center campuses, countries, and oceans quickly, reliably, and at massive scale. Through industry-leading optical systems and interconnect solutions, along with automation software and services, we power the world's most advanced networks, helping service providers, cloud companies, hyperscalers, governments, and enterprises meet explosive connectivity demands, especially in an increasingly AI-driven world. Our foundational business has always been to address connectivity needs in the wide area network or WAN, spanning subsea, long-haul, metro, and data center interconnect or DCI. We remain the undisputed global leader in this domain.

Speaker #2: Through industry-leading optical systems and interconnect solutions, along with automation software and services, we power the world's most advanced networks. Helping service providers, cloud companies, hyperscalers, governments, and enterprises meet explosive connectivity demands.

Speaker #2: In an AI-driven world, our foundational business has always been to address connectivity needs in the wide area network, or WAN, spanning subsea, long-haul, metro, and data center interconnect, or DCI.

Speaker #2: We remain the undisputed global leader in this domain. Today, much of this business is driven by the continued adoption of cloud services, across our global customer base, and the network infrastructure required to support them.

Gary Smith: Today, much of this business is driven by the continued adoption of cloud services across our global customer base and the network infrastructure required to support them. It is also increasingly fueled by the rise of large-scale AI data centers that need to be interconnected with DCI solutions linking data centers across campuses, regions, and continents. Additionally, service providers around the world have begun reinvesting in their optical transport infrastructure alongside autonomous networking capabilities, both to support surging AI-driven traffic growth across their networks and to improve operating efficiencies. Service providers and cloud provider customers are increasingly working together to deliver connectivity through managed optical fiber networks, or MOFN, as they navigate regulatory requirements and capacity needs in the US and in other new and emerging geographies around the world.

Speaker #2: It is also increasingly fueled by the rise of large-scale AI data centers, that need to be interconnected with DCI solutions linking data centers across campuses, regions, and continents.

Speaker #2: Additionally, service providers around the world have begun reinvesting in their optical transport infrastructure, alongside autonomous networking capabilities. Both to support surging AI-driven traffic growth across their networks and to improve operating efficiencies.

Speaker #2: And service providers and cloud provider customers are increasingly working together to deliver connectivity through managed optical fiber networks, or MOFN. As they navigate regulatory requirements and capacity needs in the US and in other new and emerging geographies around the world.

Speaker #2: By way of example, our orders in India were up 40% year over year, reflecting ongoing high demand specifically for MOFN in that country. Together, we view these as structural, multi-year demand drivers that reinforce the critical need to serve WAN connectivity requirements fueling both our growth and continued momentum.

Gary Smith: By way of example, our orders in India were up 40% year-over-year, reflecting ongoing high demand specifically for MOFN in that country. Together, we view these as structural, multi-year demand drivers that reinforce the critical need to serve WAN connectivity requirements, fueling both our growth and continued momentum. We expect revenue from the MOFN application will continue to be an important contributor to overall service provider growth going forward. We are uniquely well-positioned to further strengthen our leadership in high-speed WAN connectivity for service providers, cloud providers, and the growing group of neoscalers from whom we saw increased momentum in the quarter for both direct and MOFN-related design wins. In parallel to this, we are focused on the significant expansion of our addressable market opportunities in and around the data center.

Speaker #2: We expect revenue from the MOFN application will continue to be an important contributor to overall service provider growth going forward. And we are uniquely well positioned to further strengthen our leadership in high-speed WAN connectivity for service providers, cloud providers, and the growing group of neoscalers, from whom we saw increased momentum in the quarter for both direct and MOFN-related design wins.

Speaker #2: In parallel to this, we are focused on the significant expansion of our addressable market opportunities in and around the data center. It is now well understood that cloud providers are investing heavily in data centers to deliver on both the current and future promises of AI.

Gary Smith: It is now well understood that cloud providers are investing heavily in data centers to deliver on both the current and future promises of AI. In just the last few weeks, we've seen announcements from the four largest global hyperscalers that outlined a step function increase in their 2026 CapEx to more than $600 billion in aggregate, driven by infrastructure needs related to AI training and inference workloads at massive scale. These build-outs involve several areas of opportunity for Ciena, not only in the WAN, but increasingly in and around the data center, including scale across, scale out, scale up, and our unique data center out-of-band management solution, or DCOM.

Speaker #2: In just the last few weeks, we've seen announcements from the four largest global hyperscalers that outlined a step-function increase in their 2026 CAPEX to more than $600 billion in aggregate.

Speaker #2: Driven by infrastructure needs related to AI training and inference workloads at massive scale. These build-outs involve several areas of opportunity for Ciena—not only in the WAN, but increasingly in and around the data center, including scale across, scale out, scale up, and our unique data center out-of-band management solution, or DCOM.

Speaker #2: I'll start first by discussing scale across, which is really an application supported in part by our interconnects portfolio and is emerging as AI data centers grow in size and begin to hit power and space limitations.

Gary Smith: I'll start first to discuss the scale across, which is really an application supported in part by our Interconnects portfolio, which is emerging as AI data centers grow in size and begin to hit power and space limitations. To overcome these constraints, customers are distributing compute across multiple sites and using high-speed performance optical networks to interconnect them, effectively creating one single AI training environment that operates across distance. We believe that we are in the very early stages of this wave of opportunity, we are already experiencing extraordinary demand, with three hyperscalers choosing to use our optical solutions for their training applications across distance, which we've talked to you about in recent quarters. All three hyperscalers are significantly ramping, including additional orders for multiple additional clusters from the first hyperscaler we announced in Q3 2025.

Speaker #2: To overcome these constraints, customers are distributing compute across multiple sites and using high-speed, performance optical networks to interconnect them, effectively creating one single AI training environment that operates across distance.

Speaker #2: We believe that we are in the very early stages of this wave of opportunity. And we are already experiencing extraordinary demand with three hyperscalers choosing to use our optical solutions for their training applications across distance, which we've talked to you about in recent quarters.

Speaker #2: And all three hyperscalers are significantly ramping. Including additional orders for multiple additional clusters from the first hyperscaler we announced in Q3 2025. We are addressing this demand for scale across solutions with our RLS platform that de facto industry line system standard for cloud providers.

Gary Smith: We are addressing this demand for scale across solutions with our RLS platform, the de facto industry line system standard for cloud providers, as well as our 800ZR pluggable optics. To underscore this, we realized a second consecutive record quarter for RLS shipments and revenue. We expect to expand our role and scale across applications with the introduction of our new RLS HyperRail solution. HyperRail delivers an order-of-magnitude increase in fiber density within existing rack footprints, helping customers scale traffic while reducing, and in some cases avoiding, costs and complexity associated with adding substantial numbers of amplifier huts. The solution, developed in close collaboration with our hyperscaler and service provider customers, represents another inflection point for Ciena, and we expect to be first to market again.

Speaker #2: As well as our 800ZR pluggable optics. To underscore this, we realized a second consecutive record quarter for RLS shipments and revenue. We expect to expand our role in scale across applications with the introduction of our new RLS Hyper Rail solution.

Speaker #2: Hyper rail delivers an order of magnitude increase in fiber density within existing rack footprints. Helping customers scale traffic while reducing and in some cases avoiding costs and complexity associated with adding substantial numbers of amplifier huts.

Speaker #2: The solution developed in close collaboration with our hyperscaler and service provider customers represents another inflection point for CIENA. And we expect to be first to market again.

Speaker #2: In fact, we will be demoing the first prototype of our hyper rail system at the OFC trade show in a few weeks' time. This solution we expect will begin standardization at the end of '26 and will ramp in 2027.

Gary Smith: In fact, we will be demoing the first prototype of our HyperRail system at the OFC trade show in a few weeks' time. This solution, we expect, will begin standardization at the end of 2026 and will ramp in 2027, allowing us to capture, share, and incremental value as these distributed AI training expands across regional clusters and moves to further distances. In addition to scale across, we see meaningful opportunities inside the data center, including the scale-out connectivity between racks and scale-up connectivity within racks. As we know, the physics of copper inside the data center is reaching its limits. While there will be a place for copper solutions with shorter distance scale-up interconnects, network architectures will include more optical co-packaged interconnects.

Speaker #2: Allowing us to capture share and incremental value as these distributed AI trainings expand across regional clusters and move to further distances. In addition to scale across, we see meaningful opportunities inside the data center, including the scale-out connectivity between racks and scale-up connectivity within racks.

Speaker #2: As we know, the physics of copper inside the data center is reaching its limits. While there will be a place for copper solutions with shorter-distance scale-up interconnects, network architectures will include more optical co-packaged interconnects.

Gary Smith: Over time, as data rates and bandwidth requirements continue to increase, coherent optical connections will overtake IMDD ones for shorter reaches to address going capacity volumes inside the data center. As the world's leading high-speed connectivity company, we are investing meaningfully to intersect these important use cases. We continue to demonstrate progress towards our in and around the data center growth objectives. Our expanding interconnects portfolio, including ZR and ZR plus pluggables and optical components, is well-positioned to address the rising power and space constraints associated with those evolving scale up and scale out architectures. We just reached an important milestone with our first product introduction following the Nubis acquisition last fall, which addresses scale out and scale up needs.

Speaker #2: And over time, as data rates and bandwidth requirements continue to increase, coherent optical connections will overtake IMDD ones for shorter reaches, to address going capacity volumes inside the data center.

Speaker #2: And as the world's leading high-speed connectivity company, we are investing meaningfully to intersect these important use cases. And we continue to demonstrate progress towards our in and around the data center growth objectives.

Speaker #2: And our expanding interconnects portfolio, including ZR and ZR Plus pluggables and optical components, is well positioned to address the rising power and space constraints associated with those evolving scale-up and scale-out architectures.

Speaker #2: We've just reached an important milestone with our first product introduction following the Nubis acquisition last fall, which addresses scale out and scale up needs.

Gary Smith: Last week, we announced the Vesta 206.4T optical engine, which is the industry's first high-density, low power, open ecosystem, pluggable CPO solution. Samples of the Vesta product will be available in calendar Q2 2026. We are actively discussing Vesta, as you'd expect, with our cloud provider customers and partners. We're excited to be showcasing it at OFC again in a few weeks time. For scale up opportunities inside the rack, where XPUs are getting faster and driving heat and power concerns, we are advancing the Nitro linear redriver technology, also from our Nubis acquisition. We believe this is a critical element to active copper cabling solutions, which extend the distance that signals can travel and reduce power by up to 80% versus AEC-type solutions.

Speaker #2: Last week, we announced the Vesta 206.4T optical engine, which is the industry's first high-density, low-power, open ecosystem pluggable CPO solution. Samples of the Vesta product will be available in calendar Q2 2026.

Speaker #2: And we are actively discussing Vesta as you'd expect with our cloud provider customers and partners. And we're excited to be showcasing it at OFC again in a few weeks' time.

Speaker #2: For scale up opportunities inside the rack, where XPUs are getting faster and driving heat and power concerns, we are advancing the nitro linear redriver technology, also from our Nubis acquisition.

Speaker #2: We believe this is a critical element to active copper cabling solutions, which extend the distance that signals can travel and reduce power by up to 80% versus AEC type solutions.

Gary Smith: We also expect samples of the Nitro redriver to be available in calendar Q2 2026. Finally, our data center out-of-band management or DCOM solution continues to represent another significant opportunity inside the data center. Leveraging our XGS-PON and routing and switching platforms, DCOM was initially designed with Meta to meet hyperscale provisioning and configuration requirements. We continue to work with them and are engaged in technical discussions with two other major global hyperscalers. Let me summarize by emphasizing that demand in Q1 2026 was unprecedented, reflected in very strong order intake and a meaningfully higher backlog. We executed well and demonstrated strong performance on both the top and bottom lines. This exceptional demand was broad-based across service providers, hyperscalers, and an expanding set of neoscalers.

Speaker #2: We also expect samples of the nitro redriver to be available in calendar Q2 2026. Finally, our data center out-of-band management, or DCOM solution, continues to represent another significant opportunity inside the data center.

Speaker #2: Leveraging our XGSG PON and routing and switching platforms, DCOM was initially designed with Matter to meet hyperscale provisioning and configuration requirements. We continue to work with them and are engaged in technical discussions with two other major global hyperscalers.

Speaker #2: Let me summarize by emphasizing that demand in Q1 '26 was unprecedented. Reflected in very strong order intake and a meaningfully higher backlog. We executed well and demonstrated strong performance on both the top and bottom lines.

Speaker #2: This exceptional demand was broad-based across service providers, hyperscalers, and an expanding set of neoscalers. Opportunity continues to build in waves, from our traditional and expanding WAN business to multiple applications in and around the data center.

Gary Smith: Opportunity continues to build in waves from our traditional and expanding WAN business to multiple applications in and around the data center. Furthermore, to monetize AI for both training and inference workloads, the latter of which represents another significant growth vector still in its infancy, the foundational requirement is, again, high-speed connectivity. These dynamics, combined with our deep collaborative customer relationships that improve our long-term visibility, plus our continued focus on execution, give us increased confidence for multi-years of strong growth and profitability ahead. With that, I'll turn over to Mark to cover our financial performance and guidance in more detail. Thank you, Mark.

Speaker #2: Furthermore, to monetize AI for both training and inference workloads, the latter of which represents another significant growth vector, still in its infancy, the foundational requirement is again high-speed connectivity.

Speaker #2: These dynamics combined with our deep collaborative customer relationships that improve our long-term visibility, plus our continued focus on execution, give us increased confidence for multi-years of strong growth and profitability ahead.

Speaker #2: With that, I'll turn over to Mark to cover our financial performance and guidance in more detail. Thank you, Mark. Thank you, Gary. And thanks, everybody, for joining the call this morning.

Marc Graff: Thank you, Gary, and thanks everybody for joining the call this morning. As Gary noted, demand remains robust and has been, in fact, increasing. We are focusing our resources to not only strengthen our financial results, but also to secure near and long-term supply and manufacturing capacity to deliver for both our customers and our owners. The results delivered in Q1 are a testament to the progress we are making and will continue to make. With that, I'd like to update progress against our financial priorities previously discussed. We continue to make progress to our next milestone of 45% gross margin, as witnessed by our 44% gross margin performance in Q1. Q1 results benefited from product mix, inclusive of contributions from incremental demand for capacity infills, the execution of cost reductions, and early progress on advancing the value exchange with our customers.

Speaker #2: As Gary noted, demand remains robust and has, in fact, been increasing. We are focusing our resources to not only strengthen our financial results but also to secure near- and long-term supply and manufacturing capacity to deliver for both our customers and our owners.

Speaker #2: The results delivered in Q1 are a testament to the progress we are making and will continue to make. With that, I'd like to update progress against our financial priorities previously discussed.

Speaker #2: We continue to make progress toward our next milestone of 45% gross margin, as witnessed by our 44% gross margin performance in Q1. Q1 results benefited from product mix, inclusive of contributions from incremental demand for capacity infills, the execution of cost reductions, and early progress on advancing the value exchange with our customers.

Marc Graff: Longer term, an improving price environment, new product inflections like HyperRail, and focused cost optimization all provide opportunities to deliver improved gross margins. Our balance sheet continues to be a source of strength with working capital improving, driven by cash from operations yielding $228 million in Q1, a decrease in cash conversions of three days, and inventory turns growing to 3.2 times. With respect to capital allocation, we're taking a balanced, disciplined approach, prioritizing R&D to advance our technology leadership in the fastest-growing segments of the market and to drive product velocity, all while holding OpEx levels approximately flat to 2025, delivering significant operating leverage. We are investing our CapEx to expand capacity, scale output, and meet rapidly growing demand. In Q1, capital expenditures were $74 million, inclusive of the accelerated capacity investments.

Speaker #2: Longer term, in improving price environment, new product inflections like HyperRail and focused cost optimization all provide opportunity to deliver improved gross margins. Our balance sheet continues to be a source of strength, with working capital improving driven by cash from operations yielding $228 million in Q1, a decrease in cash conversions of three days, and inventory turns growing to 3.2 times.

Speaker #2: With respect to capital allocation, we're taking a balanced, disciplined approach prioritizing R&D to advance our technology leadership in the fastest growing segments of the market and to drive product velocity.

Speaker #2: All while holding OPEX levels approximately flat to 2025, delivering significant operating leverage. We are investing our CAPEX to expand capacity, scale output, and meet rapidly growing demand.

Speaker #2: In Q1, capital expenditures were $74 million. Inclusive of the accelerated capacity investments. For context, this is approximately 2 to 3 times our average CAPEX over the last 12 quarters.

Marc Graff: For context, this is approximately 2 to 3 times our average CapEx over the last 12 quarters. Let me take a moment to comment on the industry supply and its impact on Ciena. As you've heard from many others in the industry over the last few weeks, the supply landscape remains challenging. To be blunt, our revenue in Q1 would have been higher but for these constraints. Our close relationships with customers give us early visibility into their demand and our need to expand capacity to address it. We've been working with partners to scale by way of 2 key initiatives. First, we continue to partner with contract manufacturers with respect to their manufacturing capacity and output expansion, which is yielding strong results.

Speaker #2: Let me take a moment to comment on the industry's supply and its impact on CIENA. As you've heard from many others in the industry over the last few weeks, the supply landscape remains challenging.

Speaker #2: To be blunt, our revenue in the first quarter would have been higher but for these constraints. Our close relationships with customers give us early visibility into their demand and our need to expand capacity to address it.

Speaker #2: We've been working with partners to scale by way of two key initiatives. First, we continue to partner with contract manufacturers with respect to their manufacturing capacity and output expansion.

Marc Graff: Second, we are deeply engaged with component vendors, which is where more of the industry challenges exist to secure and expand supply, including through responsible long-term purchase commitments. As shown by our Q1 results, we are navigating this supply environment well and are investing to expand capacity. However, we expect demand will continue to outstrip supply at least for the next several quarters. Turning to Q1, as Gary noted, revenue reached $1.43 billion, up 33% year-over-year and a quarterly record for the company. Our optical revenue was up over 40% year-over-year, led by Waveserver and RLS product lines, each of which were up over 80% from the year ago period. We had three greater than 10% customers, including two global cloud providers and one Tier One North American service provider with strong MOFIN activity.

Speaker #2: Which is yielding strong results. Second, we are deeply engaged with component vendors which is where more of the industry challenges exist to secure and expand supply including through responsible long-term purchase commitments.

Speaker #2: As shown by our Q1 results, we are navigating the supply environment well and our investing to expand capacity. However, we expect demand will continue to outstrip supply at least for the next several quarters.

Speaker #2: Continuing turning to Q1, as Gary noted, revenue reached $1.43 billion up 33% year over year and a quarterly record for the company. Our optical revenue was up over 40% year over year led by wave server and RLS product lines each of which were up over 80% from the year-ago period.

Speaker #2: We had three greater than 10% customers including two global cloud providers and one tier-one North American service provider with strong MOFIN activity. Regarding backlog, as Gary discussed, our order intake has been incredibly strong over the past 90 days.

Marc Graff: Regarding backlog, as Gary discussed, our order intake has been incredibly strong over the past 90 days, leading to a new record by a significant margin. Given this extraordinary nature of the demand, we want to share with you that backlog has increased by approximately $2 billion this quarter to exit Q1 at approximately $7 billion. In fact, nearly all new orders we are taking now will be for fulfillment in fiscal 2027, providing ongoing confidence in our outlook. As a result, we expect backlog to continue to grow throughout the year. Rounding out Q1. Adjusted operating expense met expectations, leading to an adjusted operating margin of 17.9%, 190 basis points over the midpoint of our December guide.

Speaker #2: Leading to a new record by a significant margin. Given this extraordinary nature of the demand, we want to share with you that backlog has increased by approximately $2 billion this quarter to exit Q1 at approximately $7 billion.

Speaker #2: In fact, nearly all new orders we are taking now will be for fulfillment in fiscal 2027. Providing ongoing confidence in our outlook. As a result, we expect backlog to continue to grow throughout the year.

Speaker #2: Rounding out Q1, adjusted operating expense met expectations leading to an adjusted operating margin of 17.9%, $190 basis points over the midpoint of our December guide.

Marc Graff: We achieved adjusted net income of $197 million in the quarter, which delivered an adjusted EPS of $1.35 more than double a year ago. We exited the quarter with a cash balance of $1.4 billion after purchasing approximately 400,000 shares for $81 million under the current repurchase authorization. Before I discuss our Q2 and updated 2026 outlook, I'd like to make a few comments on tariffs. As you know, on 20 February, the Supreme Court struck down the IEEPA tariffs originally implemented in March 2025. As previously stated, these tariffs have been immaterial to our financial results. While we have noted this ruling as a subsequent event in our forthcoming 10-Q, it has not had any impact to our reported results.

Speaker #2: We achieved adjusted net income of $197 million in the quarter which delivered an adjusted EPS of $1.35 more than double a year ago. We exited the quarter with a cash balance of $1.4 billion after purchasing approximately 400,000 shares for $81 million under the current repurchase authorization.

Speaker #2: Before I discuss our Q2 and updated 2026 outlook, I'd like to make a few comments on tariffs. As you know, on February 20th, the Supreme Court struck down the AIPA tariffs originally implemented in March 2025.

Speaker #2: As previously stated, these tariffs have been immaterial to our financial results. And while we have noted this ruling as a subsequent event in our forthcoming 10-Q, it has not had any impact on our reported results.

Marc Graff: The administration has announced a new global tariff replacement tariff under a separate legal authority, with final rates still pending. Based on current information, we believe that these developments will have an immaterial effect on our business. Obviously, we are monitoring new developments and working closely with customers and suppliers to assess any future impacts. Now, with respect to our view for the remainder of the fiscal year and Q2. Given the current dynamics, we are now expected to deliver revenue for fiscal 2026 between $5.9 and 6.3 billion, essentially raising our year-over-year growth rate from 24% to 28% at the midpoint of the range. We believe this range appropriately balances the strong market demand with ongoing industry supply conditions.

Speaker #2: The administration has announced a new global replacement tariff under a separate legal authority with final rates still pending. Based on current information, we believe that these developments will have an immaterial effect on our business.

Speaker #2: Obviously, we are monitoring new developments and working closely with customers and suppliers to assess any future impacts. Now, with respect to our view for the remainder of the fiscal year and Q2.

Speaker #2: Given the current dynamics, we are now expected to deliver revenue for fiscal 2026 between $5.9 and $6.3 billion. Essentially raising our year-over-year growth rate from 24% to 28% at the midpoint of the range.

Speaker #2: We believe this range appropriately balances the strong market demand with ongoing industry supply conditions. Given our Q1 results and the expectations for Q2, we expect our 2026 gross margin to be between 43 and a half and 44 and a half percent, 1 point above our December guide, and 130 basis improvement above 2025.

Marc Graff: Given our Q1 results and the expectations for Q2, we expect our 2026 gross margin to be between 43 and a half and 44 and a half %, 1 point above our December guide and 130 basis improvement above 2025. With the first half exceeding our expectations and the supply challenges we are actively managing, we now expect first half and second half gross margins to be roughly equivalent. We now expect adjusted operating expenses of approximately $1.52 to $1.53 billion, resulting in an adjusted gross operating margin of 17 and a half to 19 and a half %. This small difference in OpEx is really due to the stronger demand environment. In Q2 of 2026, we expect to deliver revenue in the range of $1.5 billion ±$50 million.

Speaker #2: With the first half exceeding our expectations, and the supply challenges we are actively managing, we now expect first-half and second-half gross margins to be roughly equivalent.

Speaker #2: And we now expect adjusted operating expenses of approximately $1.52 to $1.53 billion resulting in an adjusted gross operating margin of 17 and a half to 19 and a half percent.

Speaker #2: This small difference in OPEX is really due to the stronger demand environment. In Q2 of '26, we expect to deliver revenue in the range of $1.5 billion plus or minus $50 million.

Marc Graff: Adjusted gross margins between 43.5% and 44.5%. An adjusted operating expense of approximately $375 million to $390 million will result in an adjusted operating margin of 17.5% to 18.5%. To conclude, we had a strong start to fiscal 2026. Demand for our technology is robust and durable. We see multiple waves of opportunity ahead, from continued AI training to expanding inference workloads, both domestically and internationally, to new HyperRail solutions and faster interconnects inside the data center as higher speed requirements come online. We continue to offer market-leading innovative technology that uniquely enables AI, both in the WAN and in and around the data center. We continue to thoughtfully allocate shareholder capital to deliver value to both our customers and our owners.

Speaker #2: Adjusted gross margins between 43 and a half and 44 and a half percent, and adjusted operating expense of approximately $375 million to $390 million will result in an adjusted operating margin of 17.5 to 18.5 percent.

Speaker #2: To conclude, we had a strong start to fiscal 2026. Demand for our technology is robust and durable. We see multiple waves of opportunity ahead.

Speaker #2: From continued AI training to expanding inference workloads, both domestically and internationally, to new hyper-real solutions and faster interconnects inside the data center as higher-speed requirements come online.

Speaker #2: We continue to offer market-leading, innovative technology that uniquely enables AI both in the WAND and in and around the data center. And we continue to thoughtfully allocate shareholder capital to deliver value to both our customers and our owners.

Marc Graff: Given all these opportunities, we're confident our momentum will extend beyond 2026. With that, we'll now take questions from the sell-side analysts.

Speaker #2: Given all these opportunities, we're confident our momentum will extend beyond '26. With sell-side analysts.

Operator: We will now begin the question-and-answer session. To ask a question, you may press Star, then one on your touchtone phone. If you are 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 and then two. Our first question comes from Amit Daryanani with Evercore ISI. Please go ahead.

Speaker #1: We will now begin the question and answer session. To ask a question, you may press star, then one, on your touchstone phone. If you are using a speakerphone, please pick up your handset before pressing the keys.

Speaker #1: If at any time your question has been addressed and you would like to withdraw your question, please press star and then two. Our first question comes from Amit Daryani with Evercore ISI.

Amit Daryanani: Yep, thanks for taking my question. I guess I have two from my side. You know, one of the things, just on the gross margin side, really impressive performance in the first half of the year, despite some of the supply chain issues you folks are having, and I think mix was slightly negative. Just spend some time on, like, what are the upside levers on gross margins that are helping you out? Are you seeing a shift in pricing at this point whatsoever? That would be really helpful to kinda understand.

Speaker #1: Please go ahead.

Speaker #3: Yep. Thanks for taking my question. I guess I have two from my side. One of the things—just on the gross margin side—really impressive performance in the first half of the year despite some of the supply chain issues you folks are having.

Speaker #3: And I think mixed with slightly negative. Just spent some time on what are the upside levers on gross margins that are helping you out?

Speaker #3: And are you seeing a shift in pricing at this point whatsoever? That would be really helpful to kind of understand.

Marc Graff: Sure. Hey, Amit. It's Marc. Yeah, I agree. We had a very strong performance. We're quite happy with the $44.7 that we printed this morning. It's really driven by a couple of things, right? We saw customers requiring increased capacity, both in hyperscalers and in service providers, that increased their infill rates. We got quite a bit of tailwind from that. Secondly, I think the engineering team has done a wonderful job of engineering cost reductions into our products that's really kinda separate from the supply chain activities that you're seeing us increase revenue with. Between those two things, I think we're really seeing some good tailwinds. You know, moving forward, I think we've got a few more levers that we're going to start working through. You mentioned price increases.

Speaker #4: Sure. Hey, Amit. It's Mark. I agree. We had a very strong performance. We're quite happy with the 44.7 that we printed this morning. And it's really driven by a couple of things, right?

Speaker #4: We saw customers requiring increased capacity, both in hyperscalers and in service providers. That increased their infill rates. And so we got quite a bit of tailwind from that.

Speaker #4: Secondly, I think the engineering team has done a wonderful job of engineering cost reductions into our products. That's really kind of separate from the supply chain activities that you're seeing us increase revenue with.

Speaker #4: So between those two things, I think we're really seeing some good tailwinds. Moving forward, I think we've got a few more levers that we're going to start working through.

Speaker #4: You mentioned price increases. One of the things that we're trying to do is really balance the price increases with our share position in the market.

Marc Graff: One of the things that we're trying to do is really balance the price increases with our share position in the market. I think what you've seen is we've been able to increase our gross margin as well as increase our share. I think we're doing a really good job of balancing those two things. I think moving forward, you'll see even more aggressive cost reductions. The price increases that we talked about at the end of last year, those really haven't started to fully kick in until the second half of the year. I think that creates additional tailwinds for us. All in all, again, I think we're making really good progress towards that 45% waypoint, and you should see that throughout the year.

Speaker #4: And I think what you've seen is we've been able to increase our gross margin as well as increase our share. And so I think we're doing a really good job of balancing those two things.

Speaker #4: I think moving forward, you'll see even more aggressive cost reductions and then the price increases that we talked about at the end of last year; those really haven't started to fully kick in until the second half of the year.

Speaker #4: So I think that creates additional tailwinds for us. So all in all, again, I think we're making really good progress towards that 45% waypoint.

Speaker #4: And you should see that throughout the year.

Amit Daryanani: Got it. If I could just follow up, you know, how do you see the pluggables market, especially with 800 gig ramping up through fiscal 2026 and 2027? If you just maybe compare and contrast a bit about your position in 400 versus 800, that would be helpful as you go into next, into the next cycle. Thank you.

Speaker #1: Got it. And if I could just follow up, how do you see the pluggables market, especially with 800 gig ramping up through fiscal '26 and '27?

Speaker #1: And if you could just maybe compare and contrast a bit about your positioning in 400 versus 800, that would be helpful as you go into the next cycle.

Speaker #1: Thank you.

Scott McFeely: Yeah. Amit, it's Scott. we've seen pluggable revenue increase sort of period over period, and we've talked in the past about our interconnect business and went from 2024 to 2025, that doubling, that's sort of in the rearview mirror. we talked about it as a major portion of our inside and around the data center with our aspirations to triple that this year, and we're well on track for that. we do see significant growth from a competitive perspective, as we've talked about in the past, through choices that we made to focus early introduction of the technology in the last generation more on our systems business and our pluggable business because that was the bigger opportunity.

Speaker #5: Yeah. I mean, it's Scott. So we've seen over period. And we've talked in the past about our interconnect business. And when we went from 2024 to '25, that doubling.

Speaker #5: That's sort of in the rearview mirror. And then we've talked about it as a major portion of our inside and around the data center with our aspirations to triple that this year.

Speaker #5: And we're well on track for that. So we do see significant growth from a competitive perspective as we've talked about in the past. Through choices that we made to focus early introduction of the technology in the last generation, more on our systems business and our pluggable business because that was the bigger opportunity.

Scott McFeely: We weren't necessarily first movers in that market, that, you know, probably cost us some share, and it probably cost us actually, frankly, some margin dollars. That's not the case in the 800 gig. We're first to market there, and 800 gig's moving quite along. I will say, though, and I just wanna make sure people understand this, is that we're talking about capacity adds across the portfolio. It's not just pluggables. Marc mentioned the growth that we're seeing on Waveserver. You know, if you wanna be the strategic supplier to particularly the web scalers, they have networks that span campuses, metros, national networks, submarine networks. You have to have all the things in the toolkit, and we're seeing increases across all those components, system business, and pluggables.

Speaker #5: We weren't necessarily first movers in that market. So that probably cost us some share and probably cost us actually, frankly, some margin dollars. That's not the case in the 800 gig.

Speaker #5: We're first to market there, and 800 Gig is moving quite along. Now, I will say, though, and I just want to make sure people understand this, is that we're talking about capacity adds across the portfolio.

Speaker #5: It's not just pluggables. Mark mentioned the growth that we're seeing on Wave Server. If you want to be the strategic supplier to particularly the web scalers, they have networks that span campuses, metros, national networks, submarine networks.

Speaker #5: You have to have all the things in the toolkit. And we're seeing increases across all those components: system, business, and pluggables.

Amit Daryanani: Thanks, Amit.

Gary Smith: Thanks, Amit.

Speaker #6: Thanks, Amit.

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

Speaker #1: And the next question comes from Simon Leopold with Raymond James. Please go ahead.

Jeff Kocheisen: Yeah, thanks, guys. Jeff Kocheisen for Simon Leopold. Just a couple housekeeping items. Can you give RPO for the quarter and the % of the $7 billion backlog that's product? Then, while you're doing that, maybe you could just give the % of sales that are ZR pluggables for the quarter. Then I guess my second follow-up would be, what % of the telco revenue is now MOFN and how did traditional telco grow? Thank you.

Jeff Koche: Yeah, thanks, guys. Jeff Kocheisen for Simon Leopold. Just a couple housekeeping items. Can you give RPO for the quarter and the % of the $7 billion backlog that's product? Then, while you're doing that, maybe you could just give the % of sales that are ZR pluggables for the quarter. Then I guess my second follow-up would be, what % of the telco revenue is now MOFN and how did traditional telco grow? Thank you.

Speaker #4: Yeah. Thanks, guys. Jeff Kocin for Simon. So just a couple of housekeeping items. Can you give RPO for the quarter and the percentage of the $7 billion backlog that's product?

Speaker #4: And then, while you're doing that, maybe you could just give the percentage of sales that are ZR pluggables for the quarter? And then, I guess my second follow-up would be: what percentage of the telco revenue is now MOFIN, and how did traditional telco grow?

Marc Graff: Well, there's quite a few questions in there, Jeff, let me start. You know, if you think about the backlog, I think right now roughly 80% is, you know, products and software, and the rest, you know, I think about is as services. Yeah, we're not gonna really disclose the % of pluggable revenue in the quarter. You know, as Scott said, you know, we expect that to triple year-on-year, and we're on track to deliver the 800 pluggable ramp that we talked about. Sorry, I lost track of all your questions. What else did you have?

Speaker #4: Thank you.

Speaker #3: Yeah. There's quite a few questions in there, Jeff. So let me start. If you think about the backlog, I think right now, roughly 80% is products and software.

Speaker #3: And the rest I'd think about as services. Yeah. We're not going to really disclose the percent of pluggable revenue in the quarter. So as Scott said, we expect that to triple year on year.

Speaker #3: And we're on track to deliver the 800 pluggable ramp that we talked about. Sorry, I lost track of all your questions. What else did you have?

Jeff Kocheisen: Yeah, just what RPO and then percentage of telco that's MOFN.

Jeff Koche: Yeah, just what RPO and then percentage of telco that's MOFN.

Speaker #4: Yeah. RPO and then percentage of telco that's MOFIN.

Gary Smith: Why don't I take the percentage of, on the MOFN thing for you, Marc? By the way, I would say the interconnect is somewhat of a proxy for, at this stage, for pluggables to some extent. We clearly disclose all of that. I would say, you know, you're looking at about 10% to 15% of our service provider business being MOFN. We have visibility to, you know, a fair amount of it, but not all of it. You know, we partner with them on, with service providers on identifying some of these particular build-outs, and we're seeing a good steady ramp in that. You know, you're seeing service provider growth, you know, I think in Q1, year-over-year is like 22%.

Speaker #5: Why don't I take the percentage on the MOFIN thing for you? By the way, I would say the interconnects are somewhat of a proxy at this stage for pluggables to some extent.

Speaker #5: So, we clearly disclose all of that. I would say you're looking at about 10 to 15 percent of our service provider business being MOFIN.

Speaker #5: We have visibility to a fair amount of it, but not all of it. We partner with the one with service providers on identifying some of these particular build-outs.

Speaker #5: And we're seeing a good steady ramp in that. You're seeing service provider growth. I think in the first quarter, you're going to use like 22%.

Gary Smith: I think, you know, of that, growth rate, MOFN is a, is a big contributor to it. I think overall, it's gonna be about 10% to 15% of our total service provider business.

Speaker #5: I think of that, growth rate MOFIN is a big contributor to it. But I think overall, it's going to be about 10 to 15 percent of our total service provider business.

Marc Graff: Then RPO, you know, if you think about RPO as a percent of the orders that we took in Q1, Jeff, you should be thinking, you know, roughly 60%.

Speaker #3: And then RPO, if you think about RPO as a percent of the orders that we took in Q1, Jeff, you should be thinking roughly 60%.

Jeff Kocheisen: Great. Thanks, guys.

Jeff Koche: Great. Thanks, guys.

Gary Smith: Yeah.

Speaker #4: Great. Thanks, guys.

Operator: The next question comes from Ruben Roy with Stifel. Please go ahead.

Speaker #1: Yeah. And the next question comes from Ruben Roy with Stifel. Please go ahead.

Saad Siddiqui: Hey, guys, this is Saad staying on for Ruben Roy. I guess just sort of digging into and following up on the last set of questions around backlog. You know, you guys have gone from $5 billion last quarter to $7 billion this quarter. I think you just said 80% of the $7 billion is products and software. If I just apply that 80% to the $5 billion, that's implying $1.6 billion in product and software growth, which, you know, loose math and loose assumptions there. I'm thinking through, okay, last quarter, you said Meta expanded their DCOM engagement, the RLS customer expanded. There are a couple more hyperscalers added on, and we're talking hundreds of millions per opportunity, as you've mentioned.

Saad Quddus: Hey, guys, this is Saad staying on for Ruben Roy. I guess just sort of digging into and following up on the last set of questions around backlog. You know, you guys have gone from $5 billion last quarter to $7 billion this quarter. I think you just said 80% of the $7 billion is products and software. If I just apply that 80% to the $5 billion, that's implying $1.6 billion in product and software growth, which, you know, loose math and loose assumptions there. I'm thinking through, okay, last quarter, you said Meta expanded their DCOM engagement, the RLS customer expanded. There are a couple more hyperscalers added on, and we're talking hundreds of millions per opportunity, as you've mentioned.

Speaker #7: Hey, guys. This is the head staying on for Ruben Roy. I guess just sort of digging into and following up on the last set of questions around backlog, you guys have gone from $5 billion last quarter to $7 this quarter.

Speaker #7: I think you just said 80% of the $7 billion is product and software. And so if I just apply that 80% to the 5, that’s implying $1.6 billion in product and software growth, which—loose math and loose assumptions there.

Speaker #7: So then I'm thinking through, okay, last quarter, you said Meta expanded their DCOM engagement. The RLS customer expanded. There were a couple more hyperscalers added on.

Speaker #7: And we're talking hundreds of millions per opportunity, as you've mentioned. So could you just help us bridge the gap and perhaps provide some color as to what the incremental here is relative to the expansions that were announced last quarter, or the new hyperscalers that were announced?

Saad Siddiqui: Could you just help us bridge the gap and perhaps provide some color as to what the incremental here is relative to the expansions that were announced last quarter or the new hyperscalers that were announced?

Saad Quddus: Could you just help us bridge the gap and perhaps provide some color as to what the incremental here is relative to the expansions that were announced last quarter or the new hyperscalers that were announced?

Gary Smith: Yeah, I would say that, you know, first of all, it's very broad demand that we're seeing. You know, it's very strong on service providers, submarine, MOFN, and obviously hyperscalers. I would also say hyperscalers in their various applications, 'cause I think the point to note is we have very broad relationships with most of them now across multiple applications, submarine cable, long haul, metro, in and around the data center, and with things like DCOM inside the data center as well. Basically, if you look at all of those from an order point of view, they were all up and to the right. I think that's sort of systemic around the drive of the traffic outside the data center now. You're seeing growth in cloud, general cloud, you're seeing inference, you're seeing this new market of training now emerge.

Speaker #5: Yeah. I would say that first of all, it's very broad demand that we're seeing. It was very strong on service providers, submarine, MOFIN, and obviously hyperscalers.

Speaker #5: And I would also say hyperscalers in their various applications because I think the point to note is we have very broad relationships with most of them now across multiple applications.

Speaker #5: Submarine cable, long haul, metro, in and around the data center, and with things like DCOM inside the data center as well. So basically, if you look at all of those from an order point of view, they were all up and to the right.

Speaker #5: And I think that sort of systemic around the drive of the traffic outside the data center now. So you're seeing growth in cloud, general cloud.

Speaker #5: You're seeing inference. You're seeing this new market of training now emerge. As I said in my comments, we've now got three hyperscalers deploying us for training.

Gary Smith: As I said in my comments, you know, we've now got three hyperscalers deploying us for training, and we're at the very, very early stages of that. You put all of that together and that, you know, yields the incredible demand that we saw in Q1. As Marc said, you know, despite the fact that we're ramping our capacity for delivery as seen in our results, demand is gonna continue, we believe, to outstrip our ability to supply, and that's gonna continue for, you know, we believe this year. We're gonna end up with a larger backlog than we have right now as we, as we turn the year, despite the fact that we're ramping our capacity, you know, strongly throughout the year and obviously through 2027 and 2028.

Speaker #5: And we're at the very early stages of that. So you put all of that together and that yields the incredible demand that we saw in Q1.

Speaker #5: And as Mark said, despite the fact that we're ramping our capacity for delivery, as seen in our results, demand is going to continue, we believe, to outstrip our ability to supply.

Speaker #5: And that's going to continue for we believe this year. And so we're going to end up with a larger backlog than we have right now as we turn the year.

Speaker #5: Despite the fact that we're ramping our capacity strongly throughout the year and obviously through 27 and 28.

Marc Graff: Yeah. The one thing I just maybe want to clarify a little bit for you, that 80% is across the entire $7 billion of backlog, not just the $2 billion increment. You can kinda look through the, you know, where we ended Q4 to where we're ending Q1 and back into, I think, the information you need.

Speaker #3: Yeah. And the one thing I just maybe want to clarify a little bit for you. That 80% is across the entire $7 billion of backlog, not just the $2 billion increment.

Speaker #3: So you can kind of look through the where we ended Q4 to where we're ending Q1 and back into I think the information you need.

Saad Siddiqui: I think I got you there. The $2 billion was simply coming from the incremental, as you're saying, but I assumed 80% was sustained through last quarter as well, which may not be the case, is what I'm understanding. On the follow-up, maybe just touching on what Amit had asked at the start of the call around pricing. How much of pricing increase is currently baked into backlog relative to volume?

Saad Quddus: I think I got you there. The $2 billion was simply coming from the incremental, as you're saying, but I assumed 80% was sustained through last quarter as well, which may not be the case, is what I'm understanding. On the follow-up, maybe just touching on what Amit had asked at the start of the call around pricing. How much of pricing increase is currently baked into backlog relative to volume?

Speaker #7: Yeah. I think I got you there. The $2 billion was simply coming from the incremental as you're saying. But I assume the 80% was sustained through last quarter as well, which may not be the case is what I'm understanding.

Speaker #7: On the follow-up, maybe just touching on what Ahmed had asked at the start of the call around pricing. How much of pricing increases currently baked into backlog relative to volume?

Marc Graff: Yeah. We're probably not gonna give you that number specifically. As we disclosed in Q4, right, the pricing increases that we talked about were really on the new orders. Because we had such a, you know, a big backlog at the time, most of that was gonna be seen in the second half. You should expect those price increases to show up in Q3 and Q4.

Speaker #3: Yeah. We're probably not going to give you that number specifically as we disclosed in Q4, right? The pricing increases that we talked about were really on the new orders.

Speaker #3: And because we had such a big backlog at the time, most of that was going to be seen in the second half. So you should expect those price increases to show up in Q3 and Q4.

Scott McFeely: Okay, thank you.

Saad Quddus: Okay, thank you.

Marc Graff: You bet.

Speaker #7: Okay. Thank you.

Operator: The next question comes from Meta Marshall with Morgan Stanley. Please go ahead.

Speaker #3: You bet.

Speaker #1: And the next question comes from Meta Marshall with Morgan Stanley. Please go ahead.

Meta Marshall: Great. Thanks for taking the question and congrats on the quarter. Maybe just on, you know, impressive operating leverage that you guys are getting out of the business and just where are you finding kind of those levers to keep OpEx flat, as I assume, you know, bonus plans need to reset. There's obviously a lot of projects that you're working on with various hyperscalers. Second, did you mention whether there were any 10% customers within the quarter? Just a small note. Thanks.

Speaker #8: Great. Thanks for taking the question and congrats on the quarter. Maybe just on impressive operating levers that you guys are getting out of the business and just where are you finding kind of those levers to keep Opex flat as I assume bonus plans need to reset?

Speaker #8: There's obviously a lot of projects that you're working on with various hyperscalers. And then second, just for did you mention whether there were any 10% customers within the quarter that just a small myth?

Marc Graff: Yeah. Hey, Meta Marshall. On OpEx, the first part of your question, you know, we were able to hold OpEx flat year-over-year, really for three reasons. The first is, if you recall last year, each quarter, it seemed we were increasing our OpEx guidance to take into account the increased performance that we were doing last year. We basically reset that, we were able to scoop that increment and reinvest that back into the business. That's one. Two is, you'll recall, we announced a small RIF, somewhere between 4% and 5% of the population. We've been able to harvest those savings and reinvest into the business. You'll recall that we ceased further investment in our 25G PON activity.

Speaker #8: Thanks. Bye.

Speaker #3: Yeah. Hey, Meta. So on Opex, the first part of your question, we were able to hold Opex flat year on year really for three reasons.

Speaker #3: The first is if you recall last year, each quarter, it seemed we were increasing our Opex guidance to take into account the increased performance that we were doing last year.

Speaker #3: We basically reset that and we were able to scoop that increment and reinvest that back into the business. So that's one. Two is you'll recall we announced a small riff somewhere between 4 and 5 percent of the population we've been able to harvest those savings and reinvest into the business.

Speaker #3: And then you'll recall that we ceased further investment in our 25-gig pond activity. So those three things we're able to scoop those up, reinvest them back into the business.

Marc Graff: Those 3 things, we were able to scoop those up, reinvest them back into the business, and that met our needs year-over-year. Nominally, that's how we got to that flat OpEx and the, you know, to be honest, quite impressive operating leverage. On the 10% customers, we had 3. We had 2 hyperscalers and 1 tier one North America service provider that, you know, is pretty exposed to MOFIN.

Speaker #3: And that met our needs year on year. And so nominally, that's how we got to that flat Opex and the to be honest, quite impressive operating leverage.

Speaker #3: On the 10% customers, we had three. We had two hyperscalers and one tier one North America service provider that is pretty exposed to MOFIN.

Meta Marshall: Great. Thank you.

Marc Graff: You bet.

Operator: The next question comes from Karl Ackerman with BNP Paribas. Please go ahead.

Speaker #8: Great. Thank you.

Operator: The next question comes from Karl Ackerman with BNP Paribas. Please go ahead.

Speaker #3: You bet.

Speaker #1: And the next question comes from Carl Ackerman with BNP Paribas. Please go ahead.

Karl Ackerman: Yes. Thank you. I have two. Marc, I suppose both of them for you. Could you speak to the duration of this accelerated CapEx spending, which seems driven by enhanced visibility you now see extending over a multi-year period? For my follow-up, you also spoke about more aggressive cost reductions to support margins. I'm curious if you could expand on that and whether that relates primarily to further outsourcing to the EMS partners or if there are other things we should consider. Thank you.

Speaker #9: Yes. Thank you. I have two. Mark, I suppose both of them for you. Could you speak to the duration of this accelerated CapEx spending, which seems driven by enhanced visibility you now see extending over a multi-year period?

Speaker #9: And for my follow-up, you also spoke about more aggressive cost reductions to support margins. I'm curious if you could expand on that and whether that relates primarily to further outsourcing to the EMS partners or if there are other things we should consider.

Marc Graff: Yeah. Let me take those, and on the second one, maybe Scott can add some more color here. On the duration of CapEx, you'll remember, you know, in our December call, we talked about we doubled our CapEx year-over-year, and within that doubling of CapEx, 50% of that or we were increasing our productive CapEx by 50%, right? Really think about working with our contract manufacturers to expand their manufacturing capacity. Now, obviously that's got some lead time, right? We're investing through the year, and we expect that increase in capacity to start showing up towards the end of the year. The intent was really to set up a 2027 plan for us, right?

Speaker #9: Thank you.

Speaker #3: Yeah. So let me take those. And on the second one, maybe Scott can add some more color here. So on the duration of CapEx, you'll remember in our December call, we talked about we doubled our CapEx year on year.

Speaker #3: And within that doubling of CapEx, 50% of that or we were increasing our productive CapEx by 50%, right? So really think about working with our contract manufacturers to expand their manufacturing capacity.

Speaker #3: Now, obviously, that's got some lead time, right? And so we're investing through the year. And we expect that increase in capacity to start showing up towards the end of the year.

Speaker #3: And the intent was really to set up a 2027 plan for us, right? And I'm not going to go into 2027 yet. But the intent is to invest in '26 and to realize the benefits in 2027.

Marc Graff: I'm not gonna go into 2027 yet, but the intent is to invest in 2026 and to realize the benefits in 2027. That's one. Two, on the cost reductions, I wouldn't say that it's more outsourcing to EMS folks. I think our engineering and product teams are really looking at the cost components of the products and looking at different materials, different solutions, and trying to drive a lot of those costs out. I'd also remind you that we've got the most vertically integrated supply chain, and that drives, you know, a lot of both cost advantage for us, but I would say right now, more importantly, supply stability.

Scott McFeely: I'm not gonna go into 2027 yet, but the intent is to invest in 2026 and to realize the benefits in 2027. That's one. Two, on the cost reductions, I wouldn't say that it's more outsourcing to EMS folks. I think our engineering and product teams are really looking at the cost components of the products and looking at different materials, different solutions, and trying to drive a lot of those costs out. I'd also remind you that we've got the most vertically integrated supply chain, and that drives, you know, a lot of both cost advantage for us, but I would say right now, more importantly, supply stability.

Speaker #3: So that's one. Two, on the cost reductions, I wouldn't say that it's more outsourcing to EMS folks. I think our engineering and product teams are really looking at the cost components of the products and looking at different ways to drive a lot of those costs out.

Speaker #3: I'd also remind you that we've got the most vertically integrated supply chain. And that drives a lot of both cost advantage for us, but I would say right now, more importantly, supply stability.

Marc Graff: Between those two things, I think, you know, as I said, we're starting to see, you know, the ability to increase revenue as well as bring in, you know, a little better cost profile. I don't know, Scott, if you've got something to add.

Speaker #3: And so between those two things, I think, as I said, we're starting to see the ability to increase revenue as well as bring in a little better cost profile.

Scott McFeely: Yeah. I think on the cost reduction piece, I sort of think of it as three levers. One is, we're driving a lot more volume through the machine. We do have some fixed costs, so you get a tailwind there. That's the probably one to get your mind around. On the engineering aspects or design aspects that Marc talked about, think of it as a couple of things. Number one is where you don't change the function of a product, you're going after the cost base of it. That can be through more vertical integration, that could be through substituting parts for different parts, that could be opening up your supply chain to multiple other sources. We're pushing on all of those levers, by the way.

Speaker #3: I don't know, Scott, if you've got something to add.

Speaker #9: Yeah. I think on the cost reduction piece, I sort of think of it as three levers. One is we're driving a lot more volume through the machine.

Speaker #9: And we do have some fixed costs. So you get a tailwind there. That's probably one to get your mind around. On the engineering aspects or design aspects that Mark talked about, think of it as a couple of things.

Speaker #9: Number one is where you don't change the function of a product, but you're going after the cost base of it. And that can be through more vertical integration.

Speaker #9: That could be through substituting parts. For different parts, that could be opening up your supply chain to multiple other sources. And we're pushing on all of those levers, by the way.

Scott McFeely: The other piece of the design stuff is as you go from generation to generation, where you are changing the function of the product, you get back to those price value conversations with the customers and, you know, sticking more dollars into our pocket as we do those transitions, and those are going on all the time to some degree. The third piece, and we can talk a lot about it's not along the lines that you said, where we're depending more on the EMS's, but we are constantly looking at that supply chain design that, the whole ecosystem design and trying to optimize that to get costs out of it as well. It's not the engineering design, but the supply chain design. We're pushing on all those. you know, that's why you're seeing the results you're getting.

Speaker #9: The other piece of the design stuff is as you go from generation to generation where you are changing the function of the product, you get back to those price-value conversations with the customers and sticking more dollars into our pocket as we do those transitions.

Speaker #9: And those are going on all the time to some degree. The third piece, and we can talk a lot about it, it's not all on the lines that you said where we're depending more on the EMSs, but we are constantly looking at that supply chain design that the whole ecosystem design and trying to optimize that to get costs out of it as well.

Speaker #9: So it's not the engineering design, but the supply chain design. And we're pushing on all of those. And that's why you're seeing the results you're getting.

Scott McFeely: We're getting the teams doing a good job executing on those. There's more in the future.

Speaker #9: We're getting the teams doing a good job executing on those. And there's more in the future. Very clear. Thank you.

Gary Smith: Very clear. Thank you.

Karl Ackerman: Very clear. Thank you.

Marc Graff: Thank you.

Operator: The next question comes from George Notter with Wolfe Research. Please go ahead.

Speaker #8: Thank you.

Speaker #1: And the next question comes from George Nauder with Wolf Research. Please go ahead.

George Notter: Hi, guys. Thanks very much. I was curious about your comments about, you know, progress with the value exchange with customers. Like, obviously, you know, you're raising pricing. I know it's gonna come through later in the year as you eat down the backlog. Just stepping back and thinking about the space, you've got higher memory costs, you've got component suppliers that are being really aggressive on price. They're repricing their own backlogs. It just seems like it's an environment where you guys could be more aggressive on price and even perhaps reprice your own backlog. I'm just curious, like, why not be more aggressive here given the supply demand dynamics and what's going on in the supply chain? Thanks a lot.

Speaker #10: Hi, guys. Thanks very much. I was curious about your comments about the progress with the value exchange with customers. Obviously, you're raising pricing I know it's going to come through later in the year as you eat down the backlog.

Speaker #10: But just stepping back and thinking about the space, you've got higher memory costs. You've got component suppliers that are being really aggressive on price.

Speaker #10: They're repricing their own backlogs. It just seems like it's an environment where you guys could be more aggressive on price and even perhaps reprice your own backlog.

Speaker #10: So I'm just curious, why not be more aggressive here given the supply-demand dynamics and what's going on in the supply chain? Thanks a lot.

Gary Smith: Yeah, George. Yeah, this is Gary. Yes, I mean, you know, we've talked a lot about the good things that we're doing, you know, to manage our margins and the rest of it, including, you know, the value balancing. It is a balance to it all. That's what we're trying to strike as we go through this. I mean, you're seeing it translate into improved financial performance in all dimensions. You know, market share gains, revenue, gross margin improvement, and operating leverage. We're seeing that. It's a confluence of things. You know, Scott talked about some of the cost reduction stuff, and Marc talked about, you know, the value exchange. You know, all of those things are happening and are getting weaved into the business over time.

Speaker #11: George, yeah. This is Gary. Yes. I mean, I think you we've talked a lot about the good things that we're doing. To manage our margins and the rest of it, including the value rebalancing.

Speaker #11: But it is a balance to it all. And that's what we're trying to strike as we go through this. I mean, you're seeing it translate into improved financial performance in all dimensions.

Speaker #11: Market share gains, revenue, gross margin improvement, and operating leverage. We're seeing that. And it's a confluence of things. Scott talked about some of the cost reduction stuff.

Speaker #11: And Mark talked about the value exchange. All of those things are happening and are getting weaved into the business over time. As you know, we take a very long-term view of how we run the business.

Gary Smith: As you know, we take a very long-term view of how we run the business. I think we see this as a multi-year opportunity for us. We'll strike a balance between those challenges of supply chain, you know, because you've got a lot of shortages going on right now as well, which we're navigating through pretty well. You know, it's the confluence of those things that result in the in the approach that we're taking. Marc, I don't know whether you've got any-

Speaker #11: And I think we see this as a multi-year opportunity for us. And we'll strike a balance between those challenges of supply chain because you've got a lot of shortages going on right now as well, which we're navigating through pretty well.

Speaker #11: So it's the confluence of those things that result in the approach that we're taking. Mark, I don't know whether you've got any.

Marc Graff: No, I think, yeah, Gary said it well. Pricing is a lever, George, but we're also looking at, you know, can we improve cash conversion? Can we get better terms and conditions? Can we get longer term purchasing commits, you know, with maybe some more non-cancellable, less risky terms as we satisfy this, you know, this quite large backlog? We are not taking pricing off the table, so I just, you know... We should say that, and you're right, we are seeing some cost increases coming from the supply chain, and we're in early days of having those conversations with customers, so I don't wanna get too far into that. I think we're trying to pull on all the levers and, you know, overall, I'm pretty pleased with the progress we're making so far across the board.

Speaker #3: No, I think—yeah, Gary said it well. Pricing is a lever, George, but we're also looking at can we improve cash conversion? Can we get better terms and conditions?

Speaker #3: Can we get longer-term purchasing commits with maybe some more non-cancelable, less risky terms as we satisfy this quite large backlog? We are not taking pricing off the table.

Speaker #3: So I just we should say that. And you're right. We are seeing some cost increases coming from the supply chain. And we're in early days of having those conversations with customers.

Speaker #3: So I don't want to get too far into that. But I think we're trying to pull on all the levers and overall, I'm pretty pleased with the progress we're making so far across the board.

George Notter: Got it. Super. Anything new competitively? Obviously, you know, the competitive environment is, I guess more benign than it has been in recent years. You've had some consolidation among competitors. Anything new in terms of their behavior on pricing or terms or, just general competitiveness in space? Thanks.

Speaker #10: Got it. Super. And anything new competitively? Obviously, the competitive environment is, I guess, more benign than it has been in recent years. You've had some consolidation among competitors.

Speaker #10: Anything new in terms of their behavior on pricing or terms or just general competitiveness in the space? Thanks.

Gary Smith: In a sort of, you know, on the sort of WAN business, I think you know, you articulate the environment well there. I mean, we were fortunate because we've got such close relationships with the hyperscalers to get out of front, as Mark said, around the capacity and component supply to that which is showing up in our growth rate. You know, we're able to stay out ahead of that, and we took market share in 25, and I think we'll take even more market share in 26. This is all really now about, you know, we're on our next generation of line systems, you know, with the HyperRail. We're on our next generation of modem technologies in their various forms. You know, our competitive position continues to improve there.

Speaker #11: No. And sort of on the sort of WAN business, I think you articulate the environment well there. I mean, we were fortunate because we've got such close relationships with the hyperscalers to get out of front, as Mark said, around the capacity and component supply to that, which is showing up in our growth rate.

Speaker #11: So we were able to stay out ahead of that. And we took market share in '25. And I think we'll take even more market share in '26.

Speaker #11: This is all really now about and we're on our next generation of line systems with the Hyper Rail. We're on our next generation of modem technologies in their various forms.

Speaker #11: So our competitive position continues to improve there. Obviously, as you get in and around the data center, particularly inside of it, it's a different set of competitors.

Gary Smith: Obviously, as you get in and around the data center, particularly inside of it's a different set of competitors, it's a different set of dynamics. What we bring to the table there is our leading high speed, you know, connectivity technology and our systems knowledge, frankly. Translating that into the component purchase, we believe, is meaningful. We've got a lot of the hyperscalers who are leaning in with us on that. It is a different ecosystem and environment. We've got new and different competitors there, some of which are very large, so we don't underestimate that. We think we're coming from a position of strength and uniqueness around our optical technology is...

Speaker #11: It's a different set of dynamics. What we bring to the table there is our leading high-speed connectivity technology and our systems knowledge, frankly. And translating that into the component purchase, we believe, is meaningful.

Speaker #11: And we've got a lot of the hyperscalers sort of leaning in with us on that. But it is a different ecosystem and environment. We've got new and different competitors there, some of which are very large.

Speaker #11: So we don't underestimate that. But we think we're coming from a position of strength. And uniqueness around our optical technology is, you're really looking at the opticalization—if that's a word—of the data center.

Gary Smith: You know, you're really looking at the opticalization, if that's a word, of the data center as they move from, you know, the electrical stuff runs out of steam from a physics point of view. You know, we're starting to pick off some of those applications where that's most pronounced. You know, DCOM, I think, is a decent example of that. We've got the, you know, the new technology that we announced in market from the, from the Nubis acquisition. You know, that's gonna be a different co-set of competitors for us.

Speaker #11: As they move from the electrical stuff runs out of steam from a physics point of view and we're starting to pick off some of those applications where that's most pronounced.

Speaker #11: Decom, I think, is a decent example of that. We've got the new technology that we announced in market from the Nubis acquisition. So that's going to be a different set of competitors for us.

George Notter: Thank you.

Gary Smith: Thanks, George.

Speaker #10: Thank you.

Operator: The next question comes from Tal Liani with Bank of America. Please go ahead.

Speaker #11: Thanks, George.

Speaker #12: And the next question comes from Tal Leonie with Bank of America. Please go ahead.

Marc Graff: Tal, are you there? You might be on mute. Tal? All right. We will.

Speaker #13: Tal, you there? You might be on mute. Tal? All right. We will.

Operator: We'll move on to the next, Tim Long with Barclays. Please go ahead.

Speaker #12: We'll move on to the next, Tim Long with Barclays. Please go ahead.

Marc Graff: Go ahead.

Alyssa Shreeve: Hi, this is Alyssa Shreeve on for Tim Long. I just had two quick ones. Were you seeing any dynamic in the quarter with the order growth, was there any trend in customers trying to get ahead of pricing actions, or was it really just underlying demand kind of driving the growth there? I had a follow-up.

Alyssa Shreves: Hi, this is Alyssa Shreeve on for Tim Long. I just had two quick ones. Were you seeing any dynamic in the quarter with the order growth, was there any trend in customers trying to get ahead of pricing actions, or was it really just underlying demand kind of driving the growth there? I had a follow-up.

Speaker #14: Go ahead.

Speaker #15: Hi, this is Alyssa Shreves on for Tim. I just had two quick ones. Were you seeing any dynamic in the quarter with the order growth?

Speaker #15: Was there any trend in customers trying to get ahead of pricing actions, or was it really just underlying demand kind of driving the growth there?

Gary Smith: pure underlying demand, you know, across the board, you know, not driven by sort of, you know, pricing thresholds or anything. There's so much demand for capacity out there across the board. Service providers have not invested in their optical infrastructure for about 5 years. You know, they've been so preoccupied with 5G, et cetera, that, you know, there's an underinvestment in the optical infrastructure in the world, and you're seeing very strong growth from the service providers and MOFN activity as well. You've got hyperscalers with the across training, clustering new market for optical that's really ramping pretty significantly. You've got the sort of, you know, inside the data center optical moves as well. Across the board, Elisa.

Speaker #15: And then I had a follow-up.

Speaker #11: Pure underlying demand across the board. Not driven by sort of pricing thresholds or anything. There's so much demand for capacity out there across the board.

Speaker #11: Service providers have not invested in their optical infrastructure for about five years. They've been so preoccupied with 5G, etc., that there's an underinvestment in the optical infrastructure in the world.

Speaker #11: And you're seeing very strong growth from the service providers. And MOFAN activity as well. And then you've got hyperscalers with the across-training clustering new market for optical.

Speaker #11: That's really ramping pretty significantly. And then you've got the sort of inside-the-data-center optical moves as well. So, across the board, Alyssa.

Alyssa Shreeve: Okay. That's helpful. Just a quick one on APAC. The orders for India in the quarter were really strong. Should we kind of expect the region to be driving APAC this year, just given kind of last year was more you know, mediocre growth in the region, and it was down the prior year. Just, should we kind of accept a step change now with India?

Alyssa Shreves: Okay. That's helpful. Just a quick one on APAC. The orders for India in the quarter were really strong. Should we kind of expect the region to be driving APAC this year, just given kind of last year was more you know, mediocre growth in the region, and it was down the prior year. Just, should we kind of accept a step change now with India?

Speaker #15: Okay. That's helpful. And then just a quick one on APAC, the orders for India in the quarter were really strong. Should we kind of expect the region to be driving APAC this year?

Speaker #15: Just given kind of last year was more media growth in the region, and it was down the prior year. Should we kind of expect a step change now with India?

Gary Smith: I think that India will probably, you know, be very, very strong and robust this year, largely driven by MOFN. It's the fastest-growing internet market in the world. You know, all of the hyperscalers are leaning in and playing there. Because of the regulatory environment, et cetera, they have to really partner with local folks and service providers to, you know, provision their optical networks. I think that's gonna be very sustainable. We're seeing an uptick in the amount of projects there. I would say overall, we're gonna see good growth out of Asia Pacific this year, in a number of areas. You know, including Japan. I would say that is largely driven by two things.

Speaker #11: I think that India will probably be very, very strong and robust this year. Largely driven by MOFAN. Obviously, it's the fastest growing internet market in the world.

Speaker #11: You've got all of the hyperscalers are leaning in and playing there and because of the regulatory environment, etc., they have to really partner with local folks and service providers to provision their optical networks.

Speaker #11: So I think that's going to be very sustainable. We're seeing an uptick in the amount of projects there. I would say overall, we're going to see good growth out of Asia-Pacific this year.

Speaker #11: In a number of areas, I would also including Japan, I would say that that is largely driven by two things. One, my point earlier on about service providers have largely underinvested in optical in the last five years.

Gary Smith: One, my point earlier on about service providers have largely underinvested in optical in the last 5 years, so that's beginning to play a part in it. Second part of it is the increase in MOFN activity in the whole Asia Pacific area, and submarine cable being a part of that too.

Speaker #11: So that's beginning to play a part in it. Second part of it is the increase in MOFAN activity in the whole submarine cable being a part of that too.

Alyssa Shreeve: Great. Thank you so much.

Alyssa Shreves: Great. Thank you so much.

Gary Smith: Thank you.

Speaker #15: Great. Thank you so much.

Operator: The next question comes from Tal Liani with Bank of America. Please go ahead.

Speaker #11: Thank you.

Speaker #12: And the next question comes from Tal Leonie with Bank of America. Please go ahead.

Tal Liani: Hi, guys. This time you hear me?

Gary Smith: Yes. Hi, Tal.

Marc Graff: Yes. Hey, Tal.

Speaker #16: Hi, guys. This is Tommy Herme.

Tal Liani: I got so excited, I broke my headset.

Speaker #17: Yes. Hi, Tal.

Speaker #16: I got so excited, I broke my headset. I.

Gary Smith: Understandable.

Tal Liani: Like, you know. Yes. I have a question about the risk of early ordering or what we're seeing in every cycle is that when there's constraints, customers start ordering much earlier, and that creates big increases in backlog and then declines. How can you manage it? I'm sure you probably don't know if there is or to what extent, but is there any way you can manage early ordering through pricing the way Cisco does it or any way, any other way in order to mitigate the phenomenon like so you don't have the, what we've had like in 2022 or 2023 whenever we had the previous cycle?

Speaker #17: Understandable.

Speaker #16: I like it. Yes. I have a question about the risk of early ordering or what we're seeing in every cycle is that when there are constraints customers start ordering much, much earlier and that creates big increases in backlog and then declines how can you manage it?

Speaker #16: So I'm sure you probably don't know if there is or to what extent, but is there any way you can manage early ordering through pricing the way Cisco does it or any way any other way in order to mitigate the phenomenon like so you don't have the what we've had like in 2022 or 2023 whenever we had the previous cycle?

Gary Smith: Yeah, Tal, that's a good question. I mean, first of all, I think having suffered through that, you know, we're suitably sensitized to it, and we learned some lessons through that. One of which is visibility into things like installation and what are they actually doing and when with the equipment. I would say that, you know, the dynamic here, the service providers is good, steady growth. We have good visibility into that and what they're doing with it. So I... You know, they were the main folks that were, you know, having the challenges around the ordering piece. The hyperscalers, I think we have deep collaborative relationships with them. They're our biggest service customers as well. You saw our installation services were up 42% in the quarter.

Speaker #11: Yeah. Tal, that's a good question. I mean, first of all, I think having suffered through that we're suitably sensitized to it. And we learned some lessons through that.

Speaker #11: One of which is visibility into things like installation and what are they actually doing and when with the equipment. I would say that the dynamic here the service providers is good, steady growth.

Speaker #11: We have good visibility into that and what they're doing with it. So and they were the main folks that were having the challenges around the ordering piece.

Speaker #11: The hyperscalers—I think we have deep collaborative relationships with them. They're our biggest service customers as well. And you saw our installation services were up 42% in the quarter.

Gary Smith: That gives us, and we have unique visibility into what they're doing and deploying across the board there. You know, given the scale of this is deep and collaborative relationships with them around precisely what are they trying to do where. That gives us good confidence and visibility in the way we structure our agreements with them. You know, given these lead times and the rest of it, which they're mindful of, I think we have great assurance, another way of saying this, in the quality of our backlog.

Speaker #11: That gives us, and we have, unique visibility into what they're doing and deploying across the board there. So given the scale of this, this is deep and collaborative relationships with them around precisely what are they trying to do where.

Speaker #11: And so that gives us good confidence and visibility in the way we structure our agreements with them given these lead times and the rest of it which they're mindful of.

Speaker #11: I think we have great assurance another way of saying this in the quality of our backlog.

Marc Graff: Yeah. I think the only thing that I'd probably add, Tal, is, you know, when we talked about value exchange, part of that is, you know, making sure we've got the right terms and conditions in place so that we don't get stuck, you know, holding the bag. I'm not. We've not really seen a lot of people pushing back on that.

Speaker #18: Yeah. I think the only thing that I'd probably add, Tal, is when we talked about value exchange, part of that is making sure we've got the right terms and conditions in place so that we don't get stuck holding the bag.

Speaker #18: And I'm not we've not really seen a lot of people pushing back on that.

Tal Liani: Got it. I mean on margins. The risk is that in times like that, the component pricing will keep going up, and you start to see it. It started with memory. We start to see it now with other companies, or other types of components. What can you do going forward? What can you do in order to mitigate the future risk? I understand that what you're doing now and how you're trying to mitigate the current risk, but are there any, like, forward pricing or forward purchase commitments, et cetera, you can take in order to mitigate the future increase in component pricing? What are you trying to do, or how are you trying to address it?

Speaker #16: Got it. Second question is I mean, on margins. The risk is that in times like that, the component pricing will keep going up. And you start to see it.

Speaker #16: It started with memory. We start to see it now with other companies. Or other types of components. What can you do going forward? What can you do in order to mitigate the future risk?

Speaker #16: I understand that you're what you're doing now and how you're trying to mitigate the current risk. But are there any forward pricing or forward purchase commitments, etc., you can take in order to mitigate the future increase in component pricing?

Speaker #16: Or what are you trying to do? Or how are you trying to address it?

Marc Graff: Yeah. This is Jim Moylan. Yeah, I think there's, again, we keep coming back to this word balance. I think we are, you know, really focused on ensuring that we've got the secure supply to satisfy the demand that we're looking at. And we're locking in the pricing as we know it today with our component suppliers and the contract manufacturing folks. All that said, right, there is still future risk of, you know, them re-repricing their backlog. We are having conversations both on, you know, our supplier side as well as on the customer side, so that we're not getting, you know, squeezed in the middle. But again, it's the balance of pricing and supply on one side and pricing and share on the other.

Speaker #18: Yeah, this is Mark Tal. Yeah, I think there's—again, we keep coming back to this word 'balance.' I think we are really focused on ensuring that we've got the secure supply to satisfy the demand that we're looking at.

Speaker #18: And we're locking in the pricing as we know it today with our component suppliers and the contract manufacturing folks. All that said, right, there is still future risk of them repricing their backlog.

Speaker #18: And we are having conversations both on our supplier side as well as on the customer side so that we're not getting squeezed in the middle.

Speaker #18: But again, it's the balance of pricing and supply on one side and pricing and share on the other. And I think given the results that you've seen and the basis of our raise, I'm feeling pretty comfortable that we're striking those right tones.

Marc Graff: I think given the results that you've seen and, you know, the basis of our raise, I'm feeling pretty comfortable that we're striking those right tones.

Gary Smith: Got it. Great. Thank you.

Tal Liani: Got it. Great. Thank you.

Marc Graff: You bet.

Speaker #16: Got it. Great. Thank you.

Operator: The next question comes from Atif Malik with Citi. Please go ahead.

Speaker #18: You bet.

Speaker #12: And the next question comes from Atif Malik with Citi. Please go ahead.

Adrienne Colby: Hi, it's Adrienne Colby for Atif. Thank you for taking the question. I wanted to ask another one about gross margin. With the 800 ZR pluggables ramping in the latter part of the year and also with the pricing increases kicking in, why wouldn't we see gross margin expansion in the second half?

Speaker #15: Hi, it's Adrian Colby for Atif. Thank you for taking the question. I wanted to ask another one about gross margin. With the 800ZR pluggables ramping in the latter part of the year, and also with the pricing increases kicking in, why wouldn't we see gross margin expansion in the second half?

Marc Graff: Yeah, I mean, you know, look, the guide that we gave was a good range based on what we see from the product mix and from the, you know, supply chain challenges that we're trying to work through. Again, that balance that I talked about before. You know, from our seat right now, we think that's a pretty responsible guide. As we make more progress, we'll give you guys updates.

Speaker #18: Yeah. I mean, look, the guidance that we gave was a good range based on what we see from the product mix and from the supply chain challenges that we're trying to work through.

Speaker #18: Again, that balance that I talked about before. From our seat right now, we think that's a pretty responsible guide. As we make more progress, we'll give you guys updates.

Adrienne Colby: Great. That's helpful. Thank you. Just as a follow-up, I was wondering if you could provide some more color on the momentum that you're seeing with neoscalers, maybe just in the relative size of the opportunities, if most of that's falling in cloud direct versus MOFIN.

Speaker #15: Great. That's helpful. Thank you. And then just as a follow-up, I was wondering if you could provide some more color on the momentum that you're seeing with new scalers maybe just in the relative size of the opportunities if most of that's falling in Cloud Direct versus Mofin.

Gary Smith: Yeah. We're seeing, you know, obviously an emerging ramp here around a bunch of the, you know, loosely called sort of neoscalers, which encompasses, you know, a fair range of different players. You know, it's I would say largely right now MOFIN orientated, you know, given the capital expenditures, time to market for them, et cetera. What is clear from it all is that the network is now a real priority for them. I think, you know, that plays through to the hyperscalers too. You know, there's been such a maniacal focus and continues to be obviously on things like power, GPU accessibility, et cetera, et cetera. Now it's really about the network. The traffic is beginning to come out of the network, both for inference and for training. The neoscalers are obviously seeing that too.

Speaker #11: Yeah. We're seeing obviously a an emerging ramp here around a bunch of the loosely called sort of neoscalers which encompasses a fair range of different players.

Speaker #11: It's, I would say, largely right now Mofin-orientated, given the capital expenditures, time to market for them, etc. But what is clear from it all is that the network is now a real priority for them.

Speaker #11: And I think that plays through to the hyperscalers too. There's been such a maniacal focus and continues to be obviously on things like power, GPU accessibility, etc., etc.

Speaker #11: Now it's really about the network. The traffic is beginning to come out of the network both for inference and for training. And the neoscalers are obviously seeing that too.

Gary Smith: They're leaning in on the network. Now, we're also beginning to see some of them wish to have control of some of that network as well and do their own builds. We're, you know, we're cautious about that approachment, given, you know, the financial structure of some of those neoscalers, not all of them. We are seeing, you know, across the board of the neoscalers leaning in on the whole network requirements, largely, really, Adrienne, currently going for MOFIN.

Speaker #11: So, they're leaning in on the network. Now we're also beginning to see some of them wish to have control of some of that network as well, and do their own builds.

Speaker #11: Where we're cautious about that approachment given the financial structure of some of those neoscalers. Not all of them. But we are seeing across the board of the neoscalers leaning in on the whole network requirements.

Speaker #11: Largely, really, kind of Adrian currently going for Mofin.

Operator: Thank you. We will take one other question today. Thank you.

Speaker #19: Thank you. We will take one other question, Dave.

Gary Smith: Thank you.

Operator: The next question comes from Ryan Koontz with Needham & Company. Please go ahead.

Speaker #11: Thank you.

Speaker #12: And the next question comes from Ryan Koontz with Needham and Company. Please go ahead.

Ryan Koontz: Great. Thanks. You touched on scale across a bit. It seems like we're very early in that this momentum around that area. You maybe expand on those projects, you know, where we are in terms of a rough count and how your visibility is improving there relative to backlog and specific scale across projects? Thank you.

Speaker #19: Great. Thanks. You touched on scale across a bit. It seems like we're very early in that this momentum around that area. Can you maybe expand on those projects?

Speaker #19: Where are we in terms of a rough count, and how is your visibility improving there relative to backlog and specific scale across projects? Thank you.

Gary Smith: You know, I. Hi, Ryan. I, you know, we shared that, I think it was in Q3, we announced the first large hyperscaler rollout. We've actually seen during the course of this quarter, additional sites being added to that. Again, I would say all of these currently that we're seeing are in North America, which is, you know, I think to be expected. We've added two more hyperscalers to that are also, you know, rolling this out. I think we're in the very, very early stages of this. In talking with them, though, you know, the plans are, large and expansive, as you'd expect, for just the scale of what they're trying to do here is absolutely enormous. You know, we're at the very early innings of this whole training, clustering.

Speaker #11: Hi, Ryan. We shared that I think it was in Q3 we announced the first large rollout we've actually seen during the course of this quarter.

Speaker #11: Additional sites being added to that. Again, I would say all of these currently that we're seeing are in North America, which is, I think, to be expected.

Speaker #11: We've added two more hyperscalers to that. That are also rolling this out. I think we're in the very, very early stages of this. And in talking with them though, the plans are large and expansive as you'd expect for just the scale of what they're trying to do here is absolutely enormous.

Speaker #11: So we're at the very early innings of this whole training clustering. I would say that what we're also observing is their architecture all of these hyperscalers we talk about homogeneously they aren't.

Gary Smith: I would say that, you know, what we're also observing is, you know, all of these hyperscalers. We talk about them homogeneously. They aren't. They have very different business models. They have very different architectures, both inside the data center to some extent, and certainly outside from a networking point of view. Their training varies as well. You know, I think you've got lots of different variables in there in terms of distance, capacity, speed, et cetera. They all want low latency, and they all want super high speed. You're seeing a lot of variables about how they are clustering this. I think, you know, as again, I would say we're at the very early, very early stages of this, Ryan.

Speaker #11: They have very different business models. They have very different architectures both inside the data centers to some extent and certainly outside from a networking point of view.

Speaker #11: Their training varies as well. And so I think you've got lots of different variables in there in terms of distance, capacity, speed, etc. They all want low latency.

Speaker #11: And they all want super high speed. But you're seeing a lot of variables about how they are clustering this. And I think as again I would say we're at the very early stages of this Ryan.

Ryan Koontz: Really helpful. Thank you. Thanks for that, Gary. One last question on DCOM here. You know, great early move here. It seems like you've got a big lead in this opportunity to bring PON to out-of-band. Do you feel like that space is defensible for you, and how do you sustain a competitive advantage there? Thank you.

Speaker #12: Really helpful. Thanks for that, Gary. One last question on DCOM here. Great early move here. Seems like you've got a big lead in this opportunity to bring PON to Ativand.

Speaker #12: Do you feel like that space is defensible for you? And how do you sustain a competitive advantage there? Thank you.

Gary Smith: Yeah, I think, you know, there's a number of elements to that sustainability. I think it's deep collaboration, first off, and understanding in intimacy the application. Obviously Meta were incredibly helpful in instigating that. But there is, you know, different use cases. They are slightly different in the different hyperscalers, but I think the defendability of it is, you know, we're very vertically integrated into it. We own the sort of core technology, and it's the software that we're putting on that as well. We're kinda uniquely positioned about that. We think it's the combination of all of those elements: the collaboration, the vertical integration, the uniqueness and high speed of it, and then all of our software integration capability, and also, by the way, installation, which we're also doing.

Speaker #11: Yeah. I think there's a number of elements to that sustainability. I think it's deep collaboration first off and understanding in intimacy the application. And obviously Metha, we're incredibly helpful in instigating that.

Speaker #11: But there is different use cases. They are slightly different in the different hyperscalers. But I think the defendability of it is we're very vertically integrated into it.

Speaker #11: We own the sort of core technology. And it's the software that we're putting on that as well. We're kind of uniquely positioned about that.

Speaker #11: So we think it's the combination of all of those elements, the collaboration, the vertical integration, the uniqueness and high speed of it. And then all of our software integration capability.

Speaker #11: And also, by the way, installation. Which we're also doing. It's the confluence of those things. We think it's quite defendable.

Gary Smith: It's the confluence of those things provide. You know, we think it's quite defendable.

Saad Siddiqui: Really helpful, Gary. Thank you.

Ryan Koontz: Really helpful, Gary. Thank you.

Speaker #12: Really helpful, Gary. Thank you.

Operator: This concludes our question and answer session. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect. Good day. Welcome to Ciena's Fiscal First Quarter 2026 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the Star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star, then 1 on a touch-tone phone. To withdraw your question, please press Star, then 2. Please note this event is being recorded. I would now like to turn the conference over to Gregg Lampf, vice president of investor relations. Please go ahead.

Operator: This concludes our question and answer session. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Operator: Good day. Welcome to Ciena's Fiscal First Quarter 2026 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the Star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star, then 1 on a touch-tone phone. To withdraw your question, please press Star, then 2. Please note this event is being recorded. I would now like to turn the conference over to Gregg Lampf, vice president of investor relations. Please go ahead.

Speaker #1: Disconnect. Good day, and welcome to Ciena's Fiscal First Quarter 2026 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0.

Speaker #1: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on a touchtone phone.

Gregg Lampf: Thank you, Dave. Good morning and welcome to Ciena's 2026 fiscal Q1 conference call. On the call today is Gary Smith, President and CEO, and Marc Graff, CFO. Scott McFeely, Executive Advisor, is also with us for Q&A. In addition to this call and the press release, we posted to the investor section of our website an accompanying investor presentation that reflects this discussion, as well as certain highlighted items from the quarter. Our comments today speak to our recent performance, our view on current market dynamics and drivers of our business, as well as a discussion of our financial outlook. Today's discussion includes certain adjusted or non-GAAP measures of Ciena's results of operations. A reconciliation of these non-GAAP measures to our GAAP results is included in today's press release.

Speaker #1: Please go ahead.

Speaker #2: Thank you, Dave. Good morning, and welcome to CIENA's 2026 Fiscal First Quarter Conference Call. On the call today are Gary Smith, President and CEO, and Marc Graff, CFO.

Speaker #2: 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 #2: Today's discussion includes certain adjusted, or non-GAAP, measures of CIENA's results of operations. A reconciliation of these non-GAAP measures to our GAAP results is included in today's press release.

Speaker #2: Before turning the call over to Gary, I'll remind you that during this call we'll be making certain phone-looking statements. Such statements, including our quarterly and annual guidance, commentary on market dynamics, and this—excuse me—the discussion of our opportunities and strategy, are based on current expectations, forecasts, and assumptions regarding the company and its markets.

Speaker #2: 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 posted earlier today, are an important part of such forward-looking statements, and we encourage you to consider them.

Speaker #3: Our forward-looking statements should also be viewed in the context of the risk factors detailed in our most recent 10-K and our forthcoming 10-Q. Ciena assumes no obligation to update the information discussed in this conference call, whether as a result of new information, future events, or otherwise.

Speaker #3: As always, we'll allow for as much Q&A as possible today, though we ask that you limit yourselves to one question and one follow-up. With that, I'll turn the call over to Gary.

Speaker #4: Thanks, Gregg. And good morning, everyone. Today we reported strong fiscal first quarter financial performance. We delivered revenue of $1.43 billion in the quarter, our highest ever, and at the top end of our guidance, reflecting strong execution, across the business.

Speaker #4: Demand is incredibly strong, with exceptional order activity in the quarter. This, along with long-term planning conversations with customers, gives us confidence in the durability of demand and our ability to drive growth as we move through the year and into 2027 and beyond.

Speaker #4: Adjusted gross margin came in at 44.7%, which was ahead of expectations. And we continue to drive increased profitability. Illustrated in part by our adjusted earnings per share of $1.35, which is more than double our EPS in Q1 of last year.

Gary Smith: These record results reflect Ciena's market leadership and reinforce our role as a critical provider of the high-speed optical systems and interconnects that enable AI workloads to scale and to be monetized. In fact, we are taking meaningful share of the increases in AI-driven connectivity spend as customers trust our technology leadership, deep collaboration, and proven execution. To this end, we believe 2025 will ultimately stand out as one of our strongest years of market share gains, and we believe it will be even stronger in 2026. With our recent inclusion in the S&P 500, we may have new listeners on the call, so allow me to begin with a brief summary of our business. At the highest level, Ciena is the global leader in high-speed connectivity.

Speaker #4: These record results reflect CIENA's market leadership and reinforce our role as a critical provider of the high-speed optical systems and interconnects that enable AI workloads to scale and to be monetized.

Speaker #4: In fact, we are taking meaningful share of the increases in AI-driven connectivity spend, as customers trust our technology leadership, deep collaboration, and proven execution.

Speaker #4: To this end, we believe 2025 will ultimately stand out as one of our strongest years of market share gains, and we believe it will be even stronger in 2026.

Speaker #4: With our recent inclusion in the S&P 500, we may have new listeners on the call, so allow me to begin with a brief summary of our business.

Gary Smith: We build solutions that move enormous amounts of data across cities, data center campuses, countries, and oceans quickly, reliably, and at massive scale. Through industry-leading optical systems and interconnect solutions, along with automation software and services, we power the world's most advanced networks, helping service providers, cloud companies, hyperscalers, governments, and enterprises meet explosive connectivity demands, especially in an increasingly AI-driven world. Our foundational business has always been to address connectivity needs in the wide area network, or WAN, spanning subsea, long-haul, metro, and data center interconnect, or DCI. We remain the undisputed global leader in this domain. Today, much of this business is driven by the continued adoption of cloud services across our global customer base and the network infrastructure required to support them.

Speaker #4: At the highest level, CIENA is the global leader in high-speed connectivity. We build solutions that move enormous amounts of data across cities, data center campuses, countries, and oceans, quickly, reliably, and at massive scale.

Speaker #4: Through industry-leading optical systems and interconnect solutions, along with automation software and services, we power the world's most advanced networks—helping service providers, cloud companies, hyperscalers, governments, and enterprises meet explosive connectivity demands.

Speaker #4: Especially in an increasingly AI-driven world, our foundational business has always been to address connectivity needs in the wide area network, or WAN—spanning subsea, long-haul, metro, and data center interconnect, or DCI.

Speaker #4: We remain the undisputed global leader in this domain. Today, much of this business is driven by the continued adoption of cloud services, across our global customer base, and the network infrastructure required to support them.

Gary Smith: It is also increasingly fueled by the rise of large-scale AI data centers that need to be interconnected with DCI solutions linking data centers across campuses, regions, and continents. Additionally, service providers around the world have begun reinvesting in their optical transport infrastructure alongside autonomous networking capabilities, both to support surging AI-driven traffic growth across their networks and to improve operating efficiencies. Service providers and cloud provider customers are increasingly working together to deliver connectivity through managed optical fiber networks, or MOFN, as they navigate regulatory requirements and capacity needs in the US and in other new and emerging geographies around the world. By way of example, our orders in India were up 40% year-over-year, reflecting ongoing high demand specifically for MOFN in that country.

Speaker #4: It is also increasingly fueled by the rise of large-scale AI data centers that need to be interconnected with DCI solutions linking data centers across campuses, regions, and continents.

Speaker #4: Additionally, service providers around the world have begun reinvesting in their optical transport infrastructure, alongside autonomous networking capabilities, both to support surging AI-driven traffic growth across their networks and to improve operating efficiencies.

Speaker #4: And service providers and cloud provider customers are increasingly working together to deliver connectivity through managed optical fiber networks, or MOFN, as they navigate regulatory requirements and capacity needs in the US and in other new and emerging geographies around the world.

Speaker #4: By way of example, our orders in India were up 40% year over year, reflecting ongoing high demand specifically for MOFN in that country. Together, we view these as structural, multi-year demand drivers that reinforce the critical need to serve WAN connectivity requirements, fueling both our growth and continued momentum.

Gary Smith: Together, we view these as structural, multi-year demand drivers that reinforce the critical need to serve WAN connectivity requirements, fueling both our growth and continued momentum. We expect revenue from the MOFN application will continue to be an important contributor to overall service provider growth going forward, and we are uniquely well-positioned to further strengthen our leadership in high-speed WAN connectivity for service providers, cloud providers, and the growing group of neoscalers from whom we saw increased momentum in the quarter for both direct and MOFN-related design wins. In parallel to this, we are focused on the significant expansion of our addressable market opportunities in and around the data center. It is now well understood that cloud providers are investing heavily in data centers to deliver on both the current and future promises of AI.

Speaker #4: We expect revenue from the MOFN application will continue to be an important contributor to overall service provider growth going forward. And we are uniquely well positioned to further strengthen our leadership in high-speed WAN connectivity for service providers, cloud providers, and the growing group of neoscalers from whom we saw increased momentum in the quarter for both direct and MOFN-related design wins.

Speaker #4: In parallel to this, we are focused on the significant expansion of our addressable market opportunities in and around the data center. It is now well understood that cloud providers are investing heavily in data centers to deliver on both the current and future promises of AI.

Gary Smith: In just the last few weeks, we've seen announcements from the four largest global neoscalers that outlined a step function increase in their 2026 CapEx to more than $600 billion in aggregate, driven by infrastructure needs related to AI training and inference workloads at massive scale. These build-outs involve several areas of opportunity for Ciena, not only in the WAN, but increasingly in and around the data center, including scale across, scale out, scale up, and our unique data center out-of-band management solution or DCOM. I'll start first to discuss the scale across, which is really an application supported in part by our interconnects portfolio, which is emerging as AI data centers grow in size and begin to hit power and space limitations.

Speaker #4: In just the last few weeks, we've seen announcements from the four largest global hyperscalers that outlined a step-function increase in their 2026 CAPEX to more than $600 billion in aggregate.

Speaker #4: Driven by infrastructure needs related to AI training, and inference workloads at massive scale. These buildouts involve several areas of opportunity for CIENA, not only in the WAN but increasingly in and around the data center, including scale across, scale out, scale up, and our unique data center out-of-band management solution, or DCOM.

Speaker #4: I'll start first to discuss the scale across, which is really an application supported in part by our interconnect portfolio, which is emerging as AI data centers grow in size and begin to hit power and space limitations.

Gary Smith: To overcome these constraints, customers are distributing compute across multiple sites and using high-speed performance optical networks to interconnect them, effectively creating one single AI training environment that operates across distance. We believe that we are in the very early stages of this wave of opportunity, and we are already experiencing extraordinary demand, with three hyperscalers choosing to use our optical solutions for their training applications across distance, which we've talked to you about in recent quarters. All three hyperscalers are significantly ramping, including additional orders for multiple additional clusters from the first hyperscaler we announced in Q3 2025. We are addressing this demand for scale across solutions with our RLS platform, the de facto industry line system standard for cloud providers, as well as our 800 ZR pluggable optics. To underscore this, we realized a second consecutive record quarter for RLS shipments and revenue.

Speaker #4: To overcome these constraints, customers are distributing compute across multiple sites and using high-speed, performance optical networks to interconnect them, effectively creating one single AI training environment that operates across distance.

Speaker #4: We believe that we are in the very early stages of this wave of opportunity, and we are already experiencing extraordinary demand, with three hyperscalers choosing to use our optical solutions for their training applications across distance, which we've talked to you about in recent quarters.

Speaker #4: And all three hyperscalers are significantly ramping. Including additional orders for multiple additional clusters from the first hyperscaler we announced in Q3 2025. We are addressing this demand for scale across solutions with our RLS platform that de facto industry line system standard for cloud providers.

Speaker #4: As well as our 800ZR pluggable optics. To underscore this, we realized a second consecutive record quarter for RLS shipments and revenue. We expect to expand our role and scale across applications with the introduction of our new RLS Hyper Rail solution.

Gary Smith: We expect to expand our role and scale across applications with the introduction of our new RLS HyperRail solution. HyperRail delivers an order of magnitude increase in fiber density within existing rack footprints, helping customers scale traffic while reducing, and in some cases, avoiding costs and complexity associated with adding substantial numbers of amplifier huts. The solution, developed in close collaboration with our hyperscaler and service provider customers, represents another inflection point for Ciena, and we expect to be first to market again. In fact, we will be demoing the first prototype of our HyperRail system at the OFC trade show in a few weeks time. This solution we expect will begin standardization at the end of 2026 and will ramp in 2027, allowing us to capture, share, and incremental value as these distributed AI training expands across regional clusters and moves to further distances.

Speaker #4: Hyper rail delivers an order of magnitude increase in fiber density within existing rack footprints, helping customers scale traffic while reducing and, in some cases, avoiding costs and complexity associated with adding substantial numbers of amplifier huts.

Speaker #4: The solution developed in close collaboration with our hyperscaler and service provider customers represents another inflection point for Ciena, and we expect to be first to market again.

Speaker #4: In fact, we will be demoing the first prototype of our hyper rail system at the OFC trade show in a few weeks' time. This solution we expect will begin standardization at the end of '26, and will ramp in 2027.

Speaker #4: Allowing us to capture share and incremental value as these distributed AI training expands across regional clusters and moves to further distances. In addition to scale across, we see meaningful opportunities inside the data center, including the scale-out connectivity between racks and scale-up connectivity within racks.

Gary Smith: In addition to scale across, we see meaningful opportunities inside the data center, including the scale-out connectivity between racks and scale-up connectivity within racks. As we know, the physics of copper inside the data center is reaching its limits. While there will be a place for copper solutions with shorter distance scale up interconnects, network architectures will include more optical co-packaged interconnects. Over time, as data rates and bandwidth requirements continue to increase, coherent optical connections will overtake IMDD ones for shorter reaches to address going capacity volumes inside the data center.

Speaker #4: As we know, the physics of copper inside the data center is reaching its limits. While there will be a place for copper solutions with shorter distance scale-up interconnects, network architectures will include more optical co-packaged interconnects.

Speaker #4: And over time, as data rates and bandwidth requirements continue to increase, coherent optical connections will overtake IMDD ones for shorter reaches, to address growing capacity volumes inside the data center.

Gary Smith: As the world's leading high-speed connectivity company, we are investing meaningfully to intersect these important use cases, and we continue to demonstrate progress towards our in and around the data center growth objectives. Our expanding interconnects portfolio, including ZR and ZR+ pluggables and optical components, is well positioned to address the rising power and space constraints associated with those evolving scale-up and scale-out architectures. We just reached an important milestone with our first product introduction following the Nubis acquisition last fall, which addresses scale-out and scale-up needs. Last week, we announced the Vesta 206.4T optical engine, which is the industry's first high-density, low-power, open ecosystem, pluggable CPO solution.

Speaker #4: And as the world's leading high-speed connectivity company, we are investing meaningfully to intersect these important use cases. And we continue to demonstrate progress towards our in and around the data center growth objectives.

Speaker #4: And our expanding interconnect portfolio, including ZR and ZR+ pluggables and optical components, is well positioned to address the rising power and space constraints associated with those evolving scale-up and scale-out architectures.

Speaker #4: We've just reached an important milestone with our first product introduction following the Nubis acquisition last fall, which addresses scale-out and scale-up needs. Last week, we announced the Vesta 206.4T optical engine, which is the industry's first high-density low-power open ecosystem pluggable CPO solution.

Gary Smith: Samples of the Vesta product will be available in calendar Q2 2026. We are actively discussing Vesta, as you'd expect, with our cloud provider customers and partners, and we're excited to be showcasing it at OFC again in a few weeks time. For scale-up opportunities inside the rack, where XPUs are getting faster and driving heat and power concerns, we are advancing the Nitro linear redriver technology, also from our Nubis acquisition. We believe this is a critical element to active copper cabling solutions, which extend the distance that signals can travel and reduce power by up to 80% versus AEC-type solutions. We also expect samples of the Nitro redriver to be available in calendar Q2 2026. Finally, our data center out-of-band management, or DCOM solution, continues to represent another significant opportunity inside the data center.

Speaker #4: Samples of the Vesta product will be available in calendar Q2 2026. And we are actively discussing Vesta, as you'd expect, with our cloud provider customers and partners.

Speaker #4: And we're excited to be showcasing it at OFC again in a few weeks' time. For scale-up opportunities inside the rack, where XPUs are getting faster and driving heat and power concerns, we are advancing the nitro linear redriver technology, also from our Nubis acquisition.

Speaker #4: We believe this is a critical element to active copper cabling solutions, which extend the distance that signals can travel and reduce power by up to 80% versus AEC-type solutions.

Speaker #4: We also expect samples of the Nitro redriver to be available in calendar Q2 2026. Finally, our data center out-of-band management, or DCOM, solution continues to represent another significant opportunity inside the data center.

Gary Smith: Leveraging our XGS-PON and routing and switching platforms, DCOM was initially designed with Meta to meet hyperscale provisioning and configuration requirements. We continue to work with them and are engaged in technical discussions with two other major global hyperscalers. Let me summarize by emphasizing that demand in Q1 2026 was unprecedented, reflected in very strong order intake and a meaningfully higher backlog. We executed well and demonstrated strong performance on both the top and bottom lines. This exceptional demand was broad-based across service providers, hyperscalers, and an expanding set of neoscalers. Opportunity continues to build in waves, from our traditional and expanding WAN business to multiple applications in and around the data center. Furthermore, to monetize AI for both training and inference workloads, the latter of which represents another significant growth vector still in its infancy, the foundational requirement is, again, high-speed connectivity.

Speaker #4: Leveraging our XGSG PON and routing and switching platforms, DCOM was initially designed with Meta to meet hyperscale provisioning and configuration requirements. We continue to work with them and are engaged in technical discussions with two other major global hyperscalers.

Speaker #4: Let me summarize by emphasizing that demand in Q1 '26 was unprecedented. Reflected in very strong order intake and a meaningfully higher backlog. We executed well and demonstrated strong performance on both the top and bottom lines.

Speaker #4: This exceptional demand was broad-based across service providers, hyperscalers, and an expanding set of neoscalers. Opportunity continues to build in waves, from our traditional and expanding WAN business to multiple applications in and around the data center.

Speaker #4: Furthermore, to monetize AI for both training and inference workloads—the latter of which represents another significant growth vector, still in its infancy—the foundational requirement is, again, high-speed connectivity.

Gary Smith: These dynamics, combined with our deep collaborative customer relationships that improve our long-term visibility, plus our continued focus on execution, give us increased confidence for multiyears of strong growth and profitability ahead. With that, I'll turn over to Marc to cover our financial performance and guidance in more detail. Thank you, Marc.

Speaker #4: These dynamics combined with our deep collaborative customer relationships that improve our long-term visibility plus our continued focus on execution give us increased confidence for multi-years of strong growth and profitability ahead.

Marc Graff: Thank you, Gary. Thanks everybody for joining the call this morning. As Gary noted, demand remains robust and has been, in fact, increasing. We are focusing our resources to not only strengthen our financial results, but also to secure near and long-term supply and manufacturing capacity to deliver for both our customers and our owners. The results delivered in Q1 are a testament to the progress we are making and will continue to make. With that, I'd like to update progress against our financial priorities previously discussed. We continue to make progress to our next milestone of 45% gross margin, as witnessed by our 44% gross margin performance in Q1. Q1 results benefited from product mix, inclusive of contributions from incremental demand for capacity infills, the execution of cost reductions, and early progress on advancing the value exchange with our customers.

Speaker #4: With that, I'll turn it over to Mark to cover our financial performance and guidance in more detail. Thank you, Mark.

Speaker #2: Thank you, Gary. And thanks, everybody, for joining the call this morning. As Gary noted, demand remains robust and has been in fact increasing. We are focusing our resources to not only strengthen our financial results but also to secure near and long-term supply and manufacturing capacity to deliver for both our customers and our owners.

Marc Graff: Longer term, an improving price environment, new product inflections like HyperRail, and focused cost optimization all provide opportunities to deliver improved gross margins. Our balance sheet continues to be a source of strength, with working capital improving, driven by cash from operations yielding $228 million in Q1, a decrease in cash conversions of three days, and inventory turns growing to 3.2 times. With respect to capital allocation, we're taking a balanced, disciplined approach, prioritizing R&D to advance our technology leadership in the fastest-growing segments of the market and to drive product velocity, all while holding OpEx levels approximately flat to 2025, delivering significant operating leverage. We are investing our CapEx to expand capacity, scale output, and meet rapidly growing demand. In Q1, capital expenditures were $74 million, inclusive of the accelerated capacity investments.

Speaker #2: Longer term, in improving price environment, new product inflections like hyperrail and focused cost optimization all provide opportunity to deliver improved gross margins. Our balance sheet continues to be a source of strength, with working capital improving driven by cash from operations yielding 228 million dollars in Q1, a decrease in cash conversions of three days, and inventory turns growing to 3.2 times.

Speaker #2: With respect to capital allocation, we're taking a balanced, disciplined approach, prioritizing R&D to advance our technology leadership in the fastest-growing segments of the market and to drive product velocity.

Marc Graff: For context, this is approximately 2 to 3 times our average CapEx over the last 12 quarters. Let me take a moment to comment on the industry supply and its impact on Ciena. As you've heard from many others in the industry over the last few weeks, the supply landscape remains challenging. To be blunt, our revenue in the Q1 would have been higher but for these constraints. Our close relationships with customers give us early visibility into their demand and our need to expand capacity to address it. We've been working with partners to scale by way of 2 key initiatives. First, we continue to partner with contract manufacturers with respect to their manufacturing capacity and output expansion, which is yielding strong results.

Speaker #2: In Q1, capital expenditures were 74 million dollars, inclusive of the accelerated capacity investments. For context, this is approximately 2 to 3 times our average CAPEX over the last 12 quarters.

Speaker #2: Let me take a moment to comment on the industry's supply and its impact on Ciena. As you've heard from many others in the industry over the last few weeks, the supply landscape remains challenging.

Marc Graff: Second, we are deeply engaged with component vendors, which is where more of the industry challenges exist to secure and expand supply, including through responsible long-term purchase commitments. As shown by our Q1 results, we are navigating this supply environment well and are investing to expand capacity. However, we expect demand will continue to outstrip supply at least for the next several quarters. Turning to Q1, as Gary noted, revenue reached $1.43 billion, up 33% year-over-year, and a quarterly record for the company. Our optical revenue was up over 40% year-over-year, led by Waveserver and RLS product lines, each of which were up over 80% from the year ago period. We had three greater than 10% customers, including two global cloud providers and one tier one North American service provider with strong MOFIN activity.

Speaker #2: As shown by our Q1 results, we are navigating this supply environment well and our investing to expand capacity. However, we expect demand will continue to outstrip supply at least for the next several quarters.

Speaker #2: Continuing turning to Q1, as Gary noted, revenue reached 1.43 billion dollars up 33% year over year in a quarterly record for the company. Our optical revenue was up over 40% year over year led by wave server and RLS product lines each of which were up over 80% from the year ago period.

Speaker #2: We had three greater-than-10% customers, including two global cloud providers and one Tier 1 North American service provider, with strong MOFIN activity. Regarding backlog, as Gary discussed, our order intake has been incredibly strong over the past 90 days.

Speaker #2: Leading to a new record by a significant margin. Given this extraordinary nature of the demand, we want to share with you that backlog has increased by approximately 2 billion dollars this quarter to exit Q1 at approximately 7 billion dollars.

Speaker #2: Rounding out Q1, adjusted operating expense met expectations leading to an adjusted operating margin of 17.9%, 190 basis points over the midpoint of our December guide.

Marc Graff: We achieved adjusted net income of $197 million in the quarter, which delivered an adjusted EPS of $1.35 more than double a year ago. We exited the quarter with a cash balance of $1.4 billion after purchasing approximately 400,000 shares for $81 million under the current repurchase authorization. Before I discuss our Q2 and updated 2026 outlook, I'd like to make a few comments on tariffs. As you know, on 20 February 2025, the Supreme Court struck down the IEEPA tariffs originally implemented in March 2025. As previously stated, these tariffs have been immaterial to our financial results. While we have noted this ruling as a subsequent event in our forthcoming 10-Q, it has not had any impact to our reported results.

Speaker #2: We achieved adjusted net income of 197 million dollars in the quarter which delivered an adjusted EPS of $1.35 more than double a year ago.

Speaker #2: We exited the quarter with a cash balance of 1.4 billion after purchasing approximately 400,000 shares for 81 million dollars under the current repurchase authorization.

Speaker #2: As previously stated, these tariffs have been immaterial to our financial results. And while we have noted this ruling as a subsequent event in our forthcoming 10Q, it has not had any impact to our reported results.

Marc Graff: The administration has announced a new global replacement tariff under a separate legal authority, with final rates still pending. Based on current information, we believe that these developments will have an immaterial effect on our business. Obviously, we are monitoring new developments and working closely with customers and suppliers to assess any future impacts. Now with respect to our view for the remainder of the fiscal year and Q2. Given the current dynamics, we are now expected to deliver revenue for fiscal 2026 between $5.9 and $6.3 billion, essentially raising our year-over-year growth rate from 24% to 28% at the midpoint of the range. We believe this range appropriately balances the strong market demand with ongoing industry supply conditions.

Speaker #2: Given the current dynamics, we are now expected to deliver revenue for fiscal 2026 between 5.9 and 6.3 billion dollars. Essentially raising our year over year growth rate from 24% to 28% at the midpoint of the range.

Marc Graff: Given our Q1 results and the expectations for Q2, we expect our 2026 gross margin to be between 43.5% and 44.5%, 1 point above our December guide and 130 basis improvement above 2025. With first half exceeding our expectations and the supply challenges we are actively managing, we now expect first half and second half gross margins to be roughly equivalent. We now expect adjusted operating expenses of approximately $1.52 to $1.53 billion, resulting in an adjusted gross operating margin of 17.5% to 19.5%. This small difference in OpEx is really due to the stronger demand environment. In Q2 of 2026, we expect to deliver revenue in the range of $1.5 billion ± $50 million.

Speaker #2: With the first half exceeding our expectations and the supply challenges we are actively managing, we now expect first half and second half gross margins to be roughly equivalent.

Speaker #2: And we now expect adjusted operating expenses of approximately 1.52 to 1.53 billion dollars resulting in an adjusted gross operating margin of 17 and a half to 19 and a half percent.

Speaker #2: This small difference in OPEX is really due to the stronger demand environment. In Q2 of '26, we expect to deliver revenue in the range of 1.5 billion plus or minus 50 million dollars.

Speaker #2: Adjusted gross margins between 43 and a half and 44 and a half percent and adjusted operating expense of approximately 375 million to 390 million will result in an adjusted operating margin of 17.5 to 18.5 percent.

Speaker #2: To conclude, we had a strong start to fiscal 2026. Demand for our technology is robust and durable. We see multiple waves of opportunity ahead.

Speaker #2: From continued AI training to expanding inference workloads both domestically and internationally, to new hyper-rail solutions and faster interconnects inside the data center as higher speed requirements come online.

Speaker #2: We continue to offer market leading innovative technology that uniquely enables AI both in the WAND and in and around the data center. And we continue to thoughtfully allocate shareholder capital to deliver value to both our customers and our owners.

Marc Graff: Given all these opportunities, we're confident our momentum will extend beyond 2026. With that, we'll now take questions from the sell-side analysts.

Operator: We will now begin the question-and-answer session. To ask a question, you may press star then one on your touch-tone phone. If you are 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 and then two. Our first question comes from Amit Daryanani with Evercore ISI. Please go ahead.

Speaker #2: Given all these opportunities, we're confident our momentum will extend beyond '26. With that, we'll now take questions from the sell side analysts.

Amit Daryanani: Yep. Thanks. I'll take my question now. I guess I have two from my side. You know, one of the things, just on the gross margin side, really impressive performance in the first half of the year, despite some of the supply chain issues you folks are having, and I think mix was slightly negative. Just spend some time on, like, what are the upside levers on gross margins that are helping you out, and are you seeing a shift in pricing at this point whatsoever? That would be really helpful to kinda understand.

Speaker #1: Please go ahead.

Speaker #3: Yep. thanks for picking my question. I, I guess I have two from my side. you know, one of the things, just on the gross margin side, really impressive performance in the first half of the year despite some of the supply chain issues you folks are having.

Speaker #3: And I think mixed with slightly negative. Just spent some time on, like, what are the upside levers on gross margins that are helping you out?

Marc Graff: Sure. Hey, Amit. It's Marc. Yeah. I agree. We had a very strong performance, and we're quite happy with the 44.7 that we printed this morning. It's really driven by a couple of things, right? We saw customers requiring increased capacity, both in hyperscalers and in service providers, that increased their infill rates. We got quite a bit of tailwind from that. Secondly, I think the engineering team has done a wonderful job of engineering cost reductions into our products. That's really kinda separate from the supply chain activities that you're seeing us increase revenue with. Between those two things, I think we're really seeing some good tailwinds. You know, moving forward, I think we've got a few more levers that we're going to start working through. You mentioned price increases.

Speaker #3: And are you seeing a shift in, pricing at this point whatsoever? that would be really helpful to kind of understand.

Speaker #4: Sure. Hey, hey, Amit. It's Mark. you know, I, I, I agree. We had a very strong performance and we're quite happy with the 44.7 that we printed this morning.

Speaker #4: and, and it's really driven by a couple of things, right? We saw customers requiring increased capacity both in hyperscalers and in service providers that increased their infill rates.

Speaker #4: And so we got quite a bit of tailwind from that. Secondly, I think the engineering team has done a, a wonderful job of engineering cost reductions, into our products.

Speaker #4: That's really kind of separate from the supply chain. Activities that, that you're seeing us, increase revenue with. So between those two things, I think we're really seeing some, some good tailwinds.

Marc Graff: One of the things that we're trying to do is really balance the price increases with our share position in the market. I think what you've seen is we've been able to increase our gross margin as well as increase our share. I think we're doing a really good job of balancing those two things. I think moving forward, you'll see even more aggressive cost reductions. The price increases that we talked about at the end of last year, those really haven't started to fully kick in until the second half of the year, so I think that creates additional tailwinds for us. All in all, again, I think we're making really good progress towards that 45% waypoint, and you should see that throughout the year.

Speaker #4: You know, moving forward, I think we've got a few more levers that we're going to start working through. You, you mentioned, price increases. One of the things that we're trying to do is really balance the price increases with our share, position in the market.

Speaker #4: And I think what you've seen is we've been able to increase our gross margin, as well as increase our share. And so I think we're doing a really good job of balancing those two things.

Speaker #4: I think moving forward, you'll see even more aggressive cost reductions. and then the price re the price increases that we talked about at the end of last year, those really haven't started to fully kick in until the second half of the year.

Amit Daryanani: Got it. If I could just follow up, you know, how do you see the pluggables market, especially with 800 gig ramping up through fiscal 2026 and 2027? If you could just maybe compare and contrast a bit about your position in 400 versus 800, that would be helpful as you go into the next cycle. Thank you.

Speaker #4: So I think that creates additional tailwinds for us. so all in all, again, I think we're making really good progress towards that 45% waypoint.

Speaker #4: And you should see that throughout the year.

Speaker #1: Got it. And if I could just follow up, you know, how do you see the pluggables market, especially with 800 gig ramping up, through fiscal '26 and '27?

Marc Graff: Yeah, Amit. It's Scott. We've seen pluggable revenue increase sort of period over period, and we've talked in the past about our interconnect business and when we went from 2024 to 2025, that doubling, that's sort of in the rearview mirror. We talked about it as a major portion of our inside and around the data center with our aspirations to triple that this year, and we're well on track for that. We do see significant growth from a competitive perspective, as we've talked about in the past, through choices that we made to focus early introduction of the technology in the last generation more on our systems business than our pluggable business 'cause that was the bigger opportunity.

Scott McFeely: Yeah, Amit. It's Scott. We've seen pluggable revenue increase sort of period over period, and we've talked in the past about our interconnect business and when we went from 2024 to 2025, that doubling, that's sort of in the rearview mirror. We talked about it as a major portion of our inside and around the data center with our aspirations to triple that this year, and we're well on track for that. We do see significant growth from a competitive perspective, as we've talked about in the past, through choices that we made to focus early introduction of the technology in the last generation more on our systems business than our pluggable business 'cause that was the bigger opportunity.

Speaker #1: And if you could just maybe compare and contrast a little bit about your position in 400 versus 800, that would be helpful as you go into the next cycle.

Speaker #1: Thank

Speaker #5: Yeah. I mean, it's, Scott. So we, we've seen pluggable, revenue increase sort of period over period. And we've talked in the past about our interconnect business.

Speaker #5: And when we went from 2024 to '25, that doubling—that's sort of in the rearview mirror. And then we've talked about it as a major portion of our inside and around the data center, with our aspirations to triple that this year.

Speaker #5: And we're well on track for that. So, we do see significant growth from a competitive perspective, as we've talked about in the past, through choices that we made to focus—early introduction of the technology in the last generation—more on our systems business and our pluggable business, because that was the bigger opportunity.

Marc Graff: We weren't necessarily first movers in that market, so that, you know, probably cost us some share and it probably cost us actually, frankly, some margin dollars. That's not the case in the 800 gig. We're first to market there, and 800 gig's moving quite along. I will say though, I just wanna make sure people understand this, is that we're talking about capacity adds across the portfolio. It's not just pluggables. Marc mentioned the growth that we're seeing on Waveserver. You know, if you wanna be the strategic supplier to particularly the web scalers, they have networks that span campuses, metros, you know, national networks, submarine networks. You have to have all the things in the toolkit, we're seeing increases across all those components, system business, and pluggables.

Speaker #5: We weren't necessarily first movers in that market. So that, you know, probably cost us some share and probably cost us actually, frankly, some margin dollars.

Speaker #5: that's not the case in the 800 gig. we're, we're first to market. there, and 800 gig's moving quite along. Now, I will say, though, and, just want to I want to make sure people understand this is that, we're talking about capacity adds across the portfolio.

Speaker #5: It's not just pluggables. Mark mentioned the growth that we're seeing on Wave Server. you know, if you if you want to be the strategic supplier to particularly the web scalers, they have market they have networks that span, campuses, metros, you know, national networks, submarine networks.

Amit Daryanani: Thanks, Amit.

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

Speaker #5: You have to have all the things in the toolkit. And we're seeing increases across all those components—system, business, and pluggables.

Jeff Kocheisen: Yeah. Thanks, guys. Jeff Kocheisen for Simon Leopold. Just a couple housekeeping items. Can you give RPO for the quarter and the percentage of the $7 billion backlog that's product? While you're doing that, maybe you could just give the percentage of sales that are ZR Pluggables for the quarter. I guess my second follow-up would be, what percentage of the telco revenue is now MOFIN, and how did traditional telco grow? Thank you.

Jeff Koche: Yeah. Thanks, guys. Jeff Kocheisen for Simon Leopold. Just a couple housekeeping items. Can you give RPO for the quarter and the percentage of the $7 billion backlog that's product? While you're doing that, maybe you could just give the percentage of sales that are ZR Pluggables for the quarter. I guess my second follow-up would be, what percentage of the telco revenue is now MOFIN, and how did traditional telco grow? Thank you.

Speaker #4: Thanks, Amit.

Speaker #1: And the next question comes from Simon Leopold with Raymond James. Please go ahead.

Speaker #4: Yeah. Thanks, guys. Jeff Kocin for Simon. so just a couple of housekeeping items. Can you give RPO for the quarter and the percentage of the $7 billion backlog that's product?

Speaker #4: And then, while you're doing that, maybe you could just give the percentage of sales that are that are ZR pluggables for the quarter and, and then I guess my second follow-up would be, what percentage of the telco revenue is now MOFIN and how did traditional telco grow?

Marc Graff: Yeah. Well, there's quite a few questions in there, Jeff, let me start. You know, if you think about the backlog, I think right now roughly 80% is, you know, products and software, and the rest, you know, I'd think about as services. Yeah. We're not gonna really disclose the percent of pluggable revenue in the quarter. You know, as Scott said, you know, we expect that to triple year-on-year, and we're on track to deliver the 800 pluggable ramp that we talked about. Sorry, I lost track of all your questions. What else did you have?

Speaker #4: Thank you.

Speaker #6: Yeah. Well, th-th-there's quite a few questions in there, Jeff. So let me—let me start. You know, if you think about the backlog, I think right now, roughly 80% is, you know, products and software.

Speaker #6: And the rest, you know, I, I think about as, as, services. yeah. We're, we're, we're not gonna really disclose the, the percent of pluggable, r-revenue in, in, in the quarter.

Speaker #6: So, you know, w as Scott said, you know, we expect that to triple year on year. And we're on track to deliver the, the 800 pluggable ramp that, that we talked about.

Jeff Kocheisen: Yeah, just, what RPO and then percentage of telco that's MOFIN?

Jeff Koche: Yeah, just, what RPO and then percentage of telco that's MOFIN?

Gary Smith: Why don't I take the percentage of on the MOFIN thing for you, Marc? By the way, I would say the interconnect is somewhat of a proxy for, at this stage, for pluggables to some extent. We clearly disclose all of that. I would say, you know, you're looking at about 10% to 15% of our service provider business being MOFIN. We have visibility to, you know, a fair amount of it, but not all of it. You know, we partner with them on with service providers on identifying some of these particular build-outs, and we're seeing a good, steady ramp in that. You know, you're seeing service provider growth, you know, I think in Q1, year-over-year it was like 22%.

Speaker #6: sorry. I, I lost track of all your questions. What, what, what else did you have?

Speaker #4: Yeah. So what RPO, and then percentage of telco—that's, that's MOFIN.

Speaker #5: W-w-w-why don't I take the percentage of, o-on the MOFIN thing for you? By the way, I would say the interconnects is somewhat of a proxy for, at this stage, for pluggables to, to some extent.

Speaker #5: So we, we clearly disclose all of that. I would say, y-you know, you're looking at about 10 to 15 percent of our service provider business being MOFIN.

Speaker #5: We have visibility to, you know, a fair amount of it but not all of it. You know, we, we partner with, with the mon, with service providers on identifying some of these particular buildouts.

Gary Smith: I think, you know, of that growth rate, MOFIN is a big contributor to it. I think overall, it's gonna be about 10% to 15% of our total service provider business.

Speaker #5: And we're seeing a good steady ramp in provider growth. You know, I think in the first quarter, you're gonna use like 22%. I think, you know, of that, growth rate i MOFIN is a is a big contributor to it.

Marc Graff: Then RPO, you know, if you think about RPO as a percent of the orders that we took in Q1, Jeff, you should be thinking, you know, roughly 60%.

Speaker #5: But I think, overall, it's going to be about 10 to 15 percent of our total service provider business.

Jeff Kocheisen: Great. Thanks, guys.

Jeff Koche: Great. Thanks, guys.

Speaker #4: And then RPO—you know, if you think about RPO as a percent of the orders that we took in, in Q1, Jeff, you should be thinking, you know, roughly 60%.

Marc Graff: Yeah.

Operator: The next question comes from Ruben Roy with Stifel. Please go ahead.

Saad Siddiqui: Hey, guys, this is Saad staying on for Ruben Roy. I guess just sort of digging into and following up on the last set of questions around backlog. You know, you guys have gone from $5 billion last quarter to $7 billion this quarter. I think you just said 80% of the $7 billion is products and software. If I just apply that 80% to the $5 billion, that's implying $1.6 billion in product and software growth, which, you know, loose math and loose assumptions there. I'm thinking through, okay, last quarter you said Meta expanded their DCOM engagement, the RLS customer expanded. There are a couple more hyperscalers added on. We're talking hundreds of millions per opportunity, as you've mentioned.

Saad Quddus: Hey, guys, this is Saad staying on for Ruben Roy. I guess just sort of digging into and following up on the last set of questions around backlog. You know, you guys have gone from $5 billion last quarter to $7 billion this quarter. I think you just said 80% of the $7 billion is products and software. If I just apply that 80% to the $5 billion, that's implying $1.6 billion in product and software growth, which, you know, loose math and loose assumptions there. I'm thinking through, okay, last quarter you said Meta expanded their DCOM engagement, the RLS customer expanded. There are a couple more hyperscalers added on. We're talking hundreds of millions per opportunity, as you've mentioned.

Speaker #6: Great. Thanks, guys.

Speaker #1: Yeah. And the next question comes from Ruben Roy with Stifel. Please go ahead.

Speaker #7: Hey, guys. This is the head staying on for Ruben Roy. I guess, just sort of digging into and following up on the last set of questions around backlog, you know, you guys have gone from $5 billion last quarter to 7 this quarter.

Speaker #7: I think you just said 80% of the $7 billion is product. And, and software. And so if I just apply that 80% to the 5, that's implying 1.6 billion in product and software growth, which, you know, loose math and loose assumptions there.

Speaker #7: So then I'm, I'm thinking through, okay, last quarter, you said Meta expanded their DCOM engagement. The RLS customer expanded. There were a couple more hyperscalers added on.

Speaker #7: And we're talking hundreds of millions, per opportunity as you've mentioned. So could you just help us bridge the gap and perhaps provide some color?

Gary Smith: Yeah, I would say that, you know, first of all, it's very broad demand that we're seeing. You know, it's very strong on service providers, submarine, MOFIN, and obviously hyperscalers. I would also say hyperscalers in their various applications, 'cause I think the point to note is we have very broad relationships with most of them now across multiple applications, submarine cable, long haul, metro, in and around the data center, and with things like DCOM inside the data center as well. Basically, if you look at all of those from an order point of view, they were all up and to the right. I think that's sort of systemic around the drive of the traffic outside the data center now. You're seeing growth in cloud, general cloud. You're seeing inference. You're seeing this new market of training now emerge.

Speaker #7: as to what the incremental here is relative to the expansions that were announced last quarter or the new hyperscalers that were announced?

Speaker #5: Yeah. I, I, I would say that, you know, first of all, it's very broad demand that we're seeing. you know, it was very strong on service providers, submarine, MOFIN, and obviously hyperscalers.

Speaker #5: And I would also say hyperscalers in their various applications, 'cause I think the point to note is we have very broad relationships with most of them now across multiple applications.

Speaker #5: And I think that sort of, systemic around the drive of the traffic outside the data center now. So you're seeing growth in cloud, general cloud.

Speaker #5: You're seeing inference. You're seeing this new market of training now emerge. As I said in my comments, you know, we've now got three hyperscalers deploying us for training.

Speaker #5: And we're at the very, very early stages of that. So you put all of that together and that, you know, yields the, the incredible demand that we saw in, in Q1.

Speaker #5: And, and as Mark said, you know, despite the fact that we're ramping our, capacity for delivery, as seen in our results, demand is gonna continue we believe to outstrip our ability to supply.

Speaker #5: And that's gonna continue for, you know, w-w-we, we believe this year. And so we're gonna end up with a larger backlog than we have right now as we as we turn the year.

Marc Graff: Yeah. The one thing I just maybe wanna clarify a little bit for you, that 80% is across the entire $7 billion of backlog, not just the $2 billion increment. You can kinda look through the, you know, where we ended Q4 to where we're ending Q1 and back into, I think, the information you need.

Speaker #5: Despite the fact that we're ramping our capacity, you know, strongly throughout the year, and obviously through '27 and '28.

Speaker #4: Yeah. A-and, and the one thing I, I just maybe wanna clarify a little bit for you. That 80% is across the entire $7 billion of backlog, not just the 2 billion increment.

Saad Siddiqui: Yeah, I think I got you there. The $2 billion was simply coming from the incremental as you're saying, but I assumed 80% was sustained through last quarter as well, which may not be the case, is what I'm understanding. On the follow-up, maybe just touching on what Amit Daryanani had asked at the start of the call around pricing. How much of pricing increase is currently baked into backlog relative to volume?

Saad Quddus: Yeah, I think I got you there. The $2 billion was simply coming from the incremental as you're saying, but I assumed 80% was sustained through last quarter as well, which may not be the case, is what I'm understanding. On the follow-up, maybe just touching on what Amit Daryanani had asked at the start of the call around pricing. How much of pricing increase is currently baked into backlog relative to volume?

Speaker #4: So y-you can kinda look through the, you know, where we ended Q4 to where we're ending Q1 and, and, and back into I think the information you need.

Speaker #7: Yeah. I, I think I, I got you there. I was the 2 billion was simply coming from, from the incremental as you're as you're saying.

Speaker #7: But I assume the 80% was sustained through last quarter as well, which may not be the case is what I'm understanding. on the on the follow-up, maybe, maybe just touching on, what Ahmed had asked at the start of the call around, around pricing.

Speaker #7: how much of pricing increase is currently baked into volume?

Speaker #4: Yeah, or probably not going to give you that number specifically. As we disclosed in Q4, the pricing increases that we talked about were really on the new orders.

Saad Siddiqui: Okay. Thank you.

Saad Quddus: Okay. Thank you.

Marc Graff: You bet.

Operator: The next question comes from Meta Marshall with Morgan Stanley. Please go ahead.

Speaker #4: And because we had such a, you know, a big backlog at the time, most of that was gonna be, seen in the second half.

Operator: The next question comes from Meta Marshall with Morgan Stanley. Please go ahead.

Meta Marshall: Great. Thanks for taking the question, and congrats on the quarter. Maybe just on, you know, impressive operating levers that you guys are getting out of the business and just where are you finding kind of those levers to keep OpEx flat, as I assume, you know, bonus plans need to reset. There's obviously a lot of projects that you're working on with various hyperscalers. Then second, did you mention whether there were any 10% customers within the quarter? Just a small note. Thanks. Bye.

Speaker #4: So you should expect those price increases to show up in Q3 and Q4.

Speaker #7: Okay. Thank you.

Speaker #4: You bet.

Speaker #1: And the next question comes from Meta Marshall with Morgan Stanley. Please go ahead.

Speaker #8: Great. Thanks, for taking the question and congrats on the quarter. maybe just on, you know, impressive operating, leverage that you guys are getting out of the business and just where are you finding kind of those levers to keep Opex flat as I assume you know, bonus plans need to reset.

Speaker #8: There's obviously a lot of projects that you're working on with various hyperscalers. And then second, did you mention whether there were any 10% customers within the quarter?

Marc Graff: Yeah. Hey, Meta. On OpEx, the first part of your question, we were able to hold OpEx flat year-on-year really for three reasons. The first is, if you recall last year, each quarter, it seemed we were increasing our OpEx guidance to take into account the increased performance that we were doing last year. We basically reset that, and we were able to scoop that increment and reinvest that back into the business. That's one. Two is, you'll recall, we announced a small RIF, somewhere between 4 and 5% of the population. We've been able to harvest those savings and reinvest into the business. Then you'll recall that we ceased further investment in our 25G PON activity.

Speaker #8: that just a small myth. Thanks. Bye.

Speaker #4: Yeah. hey, Meta. so on Opex, the first part of your question, you know, we, we were able to hold Opex flat year on year really for three, three reasons.

Speaker #4: The first is if you recall last year, each quarter it seemed we were increasing our Opex guidance to take into account the, the increased, performance that we were doing last year.

Speaker #4: We basically reset that. And we were able to scoop that increment and reinvest that back into the business. So that's one. Two is you'll recall, we announced a, a, a small riff somewhere between 4 and 5 percent of the population we've been able to harvest those, those savings and reinvest into the business.

Marc Graff: Those three things, we were able to scoop those up, reinvest them back into the business, and that met our needs year-on-year. Nominally, that's how we got to that flat OpEx and the, you know, to be honest, quite impressive operating leverage. On the 10% customers, we had three. We had two hyperscalers and one tier one North America service provider that, you know, is pretty exposed to MOFIN.

Speaker #4: And then you'll recall that we ceased, further investment in our 25-gig pond, activity. So those three things we're able to scoop those up, reinvest them back into the business.

Speaker #4: And that met our needs year on year. And so nominally, that's how we got to that, that flat Opex and, and the, you know, to be honest, quite, quite impressive operating leverage.

Meta Marshall: Great. Thank you.

Marc Graff: You bet.

Speaker #4: on, the 10% customers, we had three. We had two hyperscalers and, one tier one North America, service provider that, you know, is, is pretty exposed to MOFIN.

Operator: The next question comes from Karl Ackerman with BNP Paribas. Please go ahead.

Karl Ackerman: Yes. Thank you. I have two. Marc, I guess it was both of them for you. Could you speak to the duration of this accelerated CapEx spending, which seems driven by enhanced visibility you now see extending over a multi-year period? For my follow-up, you also spoke about more aggressive cost reductions to support margins. I'm curious if you could expand on that and whether that relates primarily to further outsourcing to the EMS partners or if there are other things we should consider. Thank you.

Speaker #8: Great. Thank you.

Speaker #4: You bet.

Speaker #1: And the next question comes from Carl Ackerman with BNP Paribas. Please go ahead.

Speaker #9: Yes. Thank you. I have two. Mark, I suppose both of them for you. Could you speak to the duration of this accelerated CAPEX spending, which seems driven by, enhanced visibility you now see extending over a multi-year period?

Marc Graff: Yeah. Let me take those. On the second one, maybe Scott can add some more color here. On the duration of CapEx, you'll remember, you know, in our December call, we talked about we doubled our CapEx year-on-year, and within that doubling of CapEx, we were increasing our productive CapEx by 50%, right? Really think about working with our contract manufacturers to expand their manufacturing capacity. Now, obviously, that's got some lead time, right? We're investing through the year, and we expect that increase in capacity to start showing up towards the end of the year. The intent was really to set up a 2027 plan for us, right? I'm not gonna go into 2027 yet.

Speaker #9: Thank you.

Speaker #4: Yeah. so let me take those. And on the second one, maybe Scott can, can, add some more color here. So on the duration of CAPEX, you'll, you'll remember, you know, in our December call, we talked about we doubled our CAPEX year on year.

Speaker #4: And within that doubling of CAPEX, 50% of that or we were increasing our productive CAPEX by 50%, right? So really think about, working with our, our contract manufacturers to expand their manufacturing capacity.

Speaker #4: Now, obviously, that's got some lead time, right? And so we're investing through the year. And we expect that increase in capacity to start showing up towards the end of the year.

Marc Graff: The intent is to invest in 2026 and to realize the benefits in 2027. That's one. Two, on the cost reductions, I wouldn't say that it's more outsourcing to EMS folks. I think our engineering and product teams are really looking at the cost components of the products and looking at different materials, different solutions, and trying to drive a lot of those costs out. I'd also remind you that we've got the most vertically integrated supply chain, and that drives, you know, a lot of both cost advantage for us, but I would say right now, more importantly, supply stability.

Speaker #4: And the intent was really to set up a 2027 plan for us, right? And w—I'm not gonna go into 2027 yet. But the intent is to invest in '26 and to realize the benefits in 2027.

Speaker #4: So, so that's one. Two, on the on the cost reductions, I wouldn't say that it's more outsourcing, to EMS folks. I, I think our, our engineering and product teams are, are really looking at the cost components of the products and looking at different materials, different solutions, and trying to drive, a lot of those costs out.

Speaker #4: I, I, I, I'd also remind you that, we've got the most vertically integrated supply chain. And that drives you know, a, a lot of both cost advantage for us, but, but I would say right now, more importantly, supply stability.

Scott McFeely: Yeah, I think on the cost reduction piece, I sort of think of it as three levers. One is, we're driving a lot more volume through the machine, and we do have some fixed costs, so you get a tailwind there. That's the problem you want to get your mind around. On the engineering aspects or design aspects that Marc talked about, think of it as a couple of things. Number one is where you don't change the function of a product, but you're going after the cost base of it. That can be through more vertical integration, that could be through substituting parts for different parts, and that could be opening up your supply chain to multiple other sources. We're pushing on all of those levers, by the way.

Speaker #4: And so between those two things, I, I, I think you know, as I said, we're starting to see you know, the ability to increase revenue as well as bring in, you know, a little better cost profile.

Speaker #4: I don't know, Scott, if you've got something to add.

Speaker #7: Yeah, I think on the cost reduction piece, you know, I sort of think of it as three levers. One is we're driving a lot more volume through the machine.

Speaker #7: And we do have some fixed costs. So you get a, a, a tailwind there. That's the problem. I just wanna get your mind around.

Speaker #7: On the engineering aspects or design aspects, Mark talked about think of it as a couple of things. Number one is where you don't change the function of a product, but you're going after the cost base of it.

Scott McFeely: The other piece of the design stuff is as you go from generation to generation, where you are changing the function of the product, you get back to those price value conversations with the customers and, you know, sticking more dollars into our pocket as we do those transitions. Those are going on all the time to some degree. The third piece, we can talk a lot about it's not along the lines that you said, where we're depending more on the EMS's, but we are constantly looking at that supply chain design, that, the whole ecosystem design and trying to optimize that to get cost out of it as well. It's not the engineering design, but the supply chain design. We're pushing on all those. You know, that's why you're seeing the results you're getting.

Speaker #7: And that can be through more vertical integration. That could be through substituting parts. for different parts, that could be opening up your supply chain to multiple other sources.

Speaker #7: and we're pushing on all of those levers, by the way. The other piece of the design stuff is as you go from generation to generation where you are changing the function of the product, you get back to those price-value conversations with the customers.

Speaker #7: And, you know, sticking more dollars into our pocket as we do those transitions. And those are going on all the time to some degree.

Scott McFeely: We're getting the teams doing a good job executing on those. There's more in the future.

Speaker #7: the third piece, and we didn't talk a lot about it, it's not all on the lines that you said where we're depending more on the EMS EMSes.

Karl Ackerman: Very clear. Thank you.

Meta Marshall: Thank you.

Speaker #7: But we are constantly looking at that supply chain design that, the whole ecosystem design and trying to optimize that to get costs out of it as well.

Operator: The next question comes from George Notter with Wolfe Research. Please go ahead.

George Notter: Hi, guys. Thanks very much. I was curious about your comments about the, you know, progress with the value exchange with customers. Like, obviously, you know, you're raising pricing. I know it's gonna come through later in the year as you eat down the backlog. Just stepping back and thinking about the space, you've got higher memory costs, you've got component suppliers that are being really aggressive on price. They're repricing their own backlogs. It just seems like it's an environment where you guys could be more aggressive on price and even perhaps reprice your own backlog. I'm just curious, like, why not be more aggressive here given the supply-demand dynamics and what's going on in the supply chain? Thanks a lot.

Speaker #7: So it's not the engineering design, but the supply chain design. And we're pushing on all of those. And, you know, that's why you're seeing the results you're getting.

Speaker #7: We're getting the teams doing a good job executing on those, and there's more in the future.

Speaker #9: Very clear. Thank you.

Speaker #8: Thank you.

Speaker #1: And the next question comes from George Nauder with Wolf Research. Please go ahead.

Speaker #10: Hi, guys. Thanks very much. I was curious about your comments about, the you know, progress with the value exchange with customers. I, obviously, you know, you're raising pricing, I know it's gonna come through later in the year as you eat down the backlog.

Speaker #10: But just stepping back and thinking about the space, you've got higher memory costs. You've got component suppliers that are being really aggressive on price.

Gary Smith: Yeah, George. Yeah, this is Gary. Yes, I mean, I think you know, we've talked a lot about the good things that we're doing, you know, to manage our margins and the rest of it, including, you know, the value rebalancing. It is a balance to it all. That's what we're trying to strike as we go through this. I mean, you're seeing it translate into improved financial performance in all dimensions. You know, market share gains, revenue, gross margin improvement, and operating leverage. We're seeing that. It's a confluence of things. You know, Scott talked about some of the cost reduction stuff, Marc talked about, you know, the value exchange. You know, all of those things are happening and are getting weaved into the business over time.

Speaker #10: They're repricing their own backlogs. It just seems like it's an environment where you guys could be more aggressive on price and even, perhaps reprice your own backlog.

Speaker #10: So, I'm just curious—why not be more aggressive here, given the supply-demand dynamics and what's going on in the supply chain? Thanks a lot.

Speaker #7: Yeah, George, yeah. This is Gary. Ye-yes. I mean, I, I, I think you, you know, we've talked a lot about the good things that we're doing, you know, to manage our margins and the rest of it, including, you know, the value rebalancing.

Speaker #7: But, but it is a balance to it all, and that's what we're trying to strike as we go through this. I mean, you're seeing it translate into improved financial performance in all dimensions.

Gary Smith: As you know, we take a very long-term view of how we run the business, and I think we see this as a multi-year opportunity for us, and we'll strike a balance between those challenges of supply chain, you know. You've got a lot of shortages going on right now as well, which we're navigating through pretty well. you know, it's the confluence of those things that result in the approach that we're taking. Marc, I don't know whether you've got.

Speaker #7: You know, market share gains, revenue, gross margin improvement, and operating

Speaker #1: Leverage . We're seeing that , and it's a confluence of things . You know , Scott talked about some of the cost reduction stuff , and Mark talked about , you know , the the value exchange .

Speaker #1: You know , all of those things are happening and are getting weaved into the the business over time . As you know , we take a very long term view of how we run the business .

Marc Graff: No, I think, yeah, Gary Smith said it well. Pricing is a lever, George Notter, but we're also looking at, you know, can we improve cash conversion? Can we get better terms and conditions? Can we get longer term purchasing commits, you know, with maybe some more non-cancellable, less risky terms as we satisfy this, you know, this quite large backlog? We are not taking pricing off the table, so I just, you know... We should say that, and you're right. We are seeing some cost increases coming from the supply chain, and we're in early days of having those conversations with customers, so I don't wanna get too far into that. I think we're trying to pull on all the levers and, you know, overall, I'm pretty pleased with the progress we're making so far across the board.

Speaker #1: And I think we see this as a multi-year opportunity for us . And we'll strike . We'll strike a balance between those challenges of supply chain , you know , because you've got a lot of shortages going on right now as well , which we're navigating through pretty well .

Speaker #1: So , you know , it's the confluence of those things that result in the the approach that we're taking . Mark , I don't know whether you've got any .

Speaker #2: No , I think you know , Gary , Gary said it well , pricing is a lever , George . But we're also looking at , you know , we improve cash conversion .

Speaker #2: Can we get better terms and conditions . Can we get longer term purchasing commits with maybe some more non-cancelable , less risky terms as we satisfy this ?

Speaker #2: You know , this quite large backlog ? We are not taking pricing off the table . So I just , you know , we should say that .

Speaker #2: And you're right , we are seeing some some cost increases coming from the supply chain . And we're in early days of having those conversations with with customers .

Speaker #2: So I don't want to get too far into that . But I think we're trying to pull on on all the levers and , you know , overall , I'm pretty pleased with the progress we're making so far across the board .

Gary Smith: No, in a sort of, you know, on the sort of WAN business, I think you know, you articulate the environment well there. I mean, we were fortunate because we've got such close relationships with the hyperscalers to get out of front, as Marc said, around the capacity and component supply to that which is showing up in our in our growth rate. You know, we're able to stay out ahead of that, and we took market share in 25, and I think we'll take even more market share in 26. This is all really now about, you know, we're on our next generation of line systems, you know, with the HyperRAIL. We're on our next generation of modem technologies in their various forms. You know, our competitive position continues to improve there.

Speaker #3: Got it . Super . Anything new competitively ? Obviously the competitive environment is , I guess , more benign than it has been in recent years .

Speaker #3: You've had some consolidation among competitors . Anything new in terms of their behavior on on pricing or terms or just general competitive competitiveness in the space ?

Speaker #3: Thanks

Speaker #1: No , and I sort of , you know , on the sort of wan business I think you , you know , you articulate the environment well there .

Speaker #1: I mean , we were fortunate because we've got such close relationships with the hyperscalers to get out of front . As Mark said , around the capacity and component supply to that which is showing up in our in our growth rates .

Speaker #1: So , you know , we were we're able to stay out ahead of that . And we took market share in 25 . And I think we'll take even more market share in in 26 .

Gary Smith: Obviously, as you get in and around the data center, particularly inside of it's a different set of competitors, it's a different set of dynamics. What we bring to the table there is our leading high speed, you know, connectivity technology and our systems knowledge, frankly. Translating that into the component purchase, we believe is meaningful. We've got a lot of the hyperscalers who are leaning in with us on that. It is a different ecosystem and environment. We've got new and different competitors there, some of which are very large, so we don't underestimate that. We think we're coming from a position of strength and uniqueness around our optical technology is...

Speaker #1: This is all really now about you know , and we're on our next generation of line systems . You know with the hyper rail .

Speaker #1: We're on our next generation of modem technologies in their various forms . So you know , our competitive position continues to to improve .

Speaker #1: There . Obviously as you get in and around the data center , particularly inside of it , it's a different set of competitors .

Speaker #1: It's a different set of dynamics . What we bring to the table there is our leading high speed , you connectivity technology and our systems knowledge .

Speaker #1: Frankly , and translating that into the component purchase we believe is meaningful . And we've got a lot of the hyperscalers sort of leaning in with us on that .

Gary Smith: You know, you're really looking at the opticalization, if that's a word, of the data center as they move from, you know, the electrical stuff runs out of steam from a physics point of view. You know, we're starting to pick off some of those applications where that's most pronounced. You know, DCOM, I think is a decent example of that. We've got the, you know, the new technology that we announced in market from the Nubis acquisition. You know, that's gonna be a different set of competitors for us.

Speaker #1: But it is a different ecosystem and environment . We've got new and different competitors there , some of which are very large . So we don't underestimate that .

Speaker #1: But we we think we're coming from a position of strength and uniqueness around our optical technology . As you know , you're really looking at the optical ization , if that's a word of the of the data center , as they move from , you know , the electrical stuff runs out of steam from a physics point of view .

George Notter: Thank you.

Gary Smith: Thanks, George.

Speaker #1: And , you know , we're starting to pick off some of those applications where that's most pronounced . You know , I think is a decent example of that .

Operator: The next question comes from Tal Liani with Bank of America. Please go ahead.

Speaker #1: We've got the , you know , the new technology that we announced in market from the from the new BIS acquisition . So , you know , that's going to be a different set of competitors for us .

Marc Graff: Tal, are you there? You might be on mute. Tal? All right. We will.

Speaker #3: Thank you .

Operator: We'll move on to the next, Tim Long with Barclays. Please go ahead.

Speaker #1: Thanks , George .

Speaker #4: And the next question comes from Tal Leoni with Bank of America. Please go ahead.

Marc Graff: Go ahead.

Speaker #5: Are you there? You might be on mute, Tom. All right. We will...

Speaker #4: We'll move on to the next Tim Long with Barclays . Please go ahead .

Gary Smith: Pure underlying demand, you know, across the board, you know, not driven by sort of, you know, pricing thresholds or anything. There's so much demand for capacity out there across the board. Service providers have not invested in their optical infrastructure for about five years. You know, been so preoccupied with 5G, et cetera, that, you know, there's an under-investment in the optical infrastructure in the world, and you're seeing very strong growth from the service providers and MOFN activity as well. You've got hyperscalers with the across training clustering new market for optical that's really ramping pretty significantly. You've got the sort of, you know, inside the data center optical moves as well. Across the board, Elisa.

Speaker #6: Go ahead

Speaker #7: Hi , this is Alyssa Shreeves on for Tim . I just had two quick ones . Were you seeing any dynamic in the quarter with the order growth ?

Speaker #7: Was there any trend in customers trying to get ahead of pricing actions , or was it really just underlying demand kind of driving the growth there ?

Speaker #7: And then I had a follow up

Speaker #1: Pure underlying demand , you know , the board , you know , not driven by sort of , you know , pricing thresholds or anything .

Speaker #1: It's there's so much demand for capacity out there across the board . Service providers have not invested in their optical infrastructure for about five years .

Speaker #1: You know , they've been so preoccupied with 5G , etc. that , you know , there's an underinvestment in the optical infrastructure in the world , and you're seeing very strong growth from the service providers and and morphine activity as well .

Marc Graff: Okay. That's helpful. Just a quick one on APAC. The orders for India in the quarter were really strong. Should we kind of expect the region to be driving APAC this year, just given kind of last year was more you know, mediocre growth in the region and it was down the prior year. Should we kind of accept a step change now with India?

Speaker #1: And then you've got hyperscalers with the across training , clustering , new market for optical . That's really ramping pretty significantly . And then you've got the sort of , you know , inside the data center optical moves as well .

Speaker #1: So across the board Elisa

Gary Smith: I think that India will probably, you know, be very, very strong and robust this year, largely driven by MOFN. Obviously, it's the fastest-growing internet market in the world. You know, all of the hyperscalers are leaning in and playing there. Because of the regulatory environment, et cetera, they have to really partner with local folks and service providers to, you know, provision their optical networks. I think that's gonna be very sustainable. We're seeing an uptick in the amount of projects there. I would say overall, we're gonna see good growth out of Asia Pacific this year, in a number of areas. I would also. You know, including Japan. I would say that that is largely driven by two things.

Speaker #7: Okay . That's helpful . And then just a quick one on APAC , the orders for India in the quarter were really strong .

Speaker #7: Should we kind of expect the region to be driving APAC this year, just given last year was more media growth, mediocre growth in the region, and it was down the prior year?

Speaker #7: Just should we kind of accept a step with India ?

Speaker #1: I think that India will probably , you know , be very , very strong and robust this year , largely driven by morphine .

Speaker #1: Obviously, it's the fastest-growing internet market in the world. You've got all of the hyperscalers are leaning in and playing there.

Speaker #1: And because of the regulatory environment , etc. , they have to really partner with local folks and service providers to , you know , provision their optical networks .

Gary Smith: One, my point earlier on about service providers have largely underinvested in optical in the last five years, so that's beginning to play a part in it. Second part of it is the increase in MOFN activity in the whole Asia Pacific area, and submarine cable being a part of that too.

Speaker #1: So I think that's going to be very sustainable . We're seeing an uptick in the amount of projects there . I would say overall , we're seeing we're going to see good growth out of Asia Pacific this year in a number of areas .

Marc Graff: Great. Thank you so much.

Speaker #1: I would also , you know , including including Japan . I would say that that is largely driven by two things . One , my point earlier on about service providers have largely underinvested in optical in the last five years .

Gary Smith: Thank you.

Operator: The next question comes from Tal Liani with Bank of America. Please go ahead.

Tal Liani: Hi, guys. This time you hear me?

Gary Smith: Yes. Hi, Tal.

Speaker #1: So that's beginning to play a part in it . Second part of it is the increase in morphine activity in the whole Asia Pacific area .

Tal Liani: I got so excited, I broke my headset.

Gary Smith: Understandable.

Tal Liani: Like in... Yes. I have a question about the risk of early ordering, or what we are seeing in every cycle is that when there is constraints, customers start ordering much, much earlier. That creates big increases in backlog and then declines. How can you manage it? I am sure you probably don't know if there is or to what extent, but is there any way you can manage early ordering through pricing the way Cisco does it or any way, any other way in order to mitigate the phenomenon, like, so you don't have the, what we've had, like, in 2022 or 2023, whenever we had the previous cycle?

Speaker #1: And submarine cable being a part of that, too.

Speaker #7: Great. Thank you so much.

Speaker #1: Thank you .

Speaker #4: The next question comes from Tal Leone with Bank of America . Please go ahead .

Speaker #8: Hi guys . This time you hear me ?

Speaker #5: Yes . Hi , Tal .

Speaker #8: I got so excited, I broke my headset.

Speaker #1: Understandable .

Speaker #8: I can . Yes , I have a question about the risk of early ordering or what we're seeing in every cycle . Is that when there are constraints , customers start ordering much , much earlier and that creates big increases in backlog .

Speaker #8: And then declines . How can you manage it ? So I'm sure you probably don't know if there is or to what extent , but is there any way you can manage early ordering through pricing the way Cisco does it or any any way , any other way in order to mitigate the phenomenon ?

Speaker #8: Like so , you don't have the what we have had like in 2022 or 2023 , whenever we had the previous cycle .

Speaker #1: Yeah . Tal , it's a good question . I mean , first of all , I think having suffered through that , you know , we're suitably sensitized to it .

Speaker #1: And we learned some lessons through that , one of which is visibility into things like installation and what are they actually doing and when with the equipment .

Speaker #1: I would say that , you know , the dynamic here , the service providers is good , steady growth . We have good visibility into that and what they're doing with it .

Speaker #1: So I , you know , and they were the main folks that were , you know , having the challenges around the ordering piece , the hyperscalers , I think we have deep collaborative relationships with them .

Speaker #1: They're our biggest service customers as well . And you saw our installation services were up 42% in the quarter . That gives us and we have unique visibility into what they're doing .

Speaker #1: And deploying across the board . There . So , you know , given the scale of this , this is deep and collaborative relationships with them around precisely what are they trying to do ?

Speaker #1: Where . And so that gives us good confidence and visibility in the way we structure our agreements with them . You know , given these lead times and the rest of it , which they're they're mindful of , I think we have great assurance , another way of saying this in the quality of our backlog .

Tal Liani: Got it. Second question is, I mean on margins. The risk is that in times like that, the component pricing will keep going up. You start to see it. It started with memory. We start to see it now with other companies, or other types of components. What can you do going forward? What can you do in order to mitigate the future risk? I understand that what you're doing now and how you're trying to mitigate the current risk, but are there any, like, forward pricing or forward purchase commitments, et cetera, you can take in order to mitigate the future increase in component pricing? What are you trying to do, or how are you trying to address it?

Speaker #2: Yeah , I think the only thing that I'd probably add , Tal , is when we talked about value exchange , part of that is , you know , making sure we've got the right terms and conditions in place so that we don't get stuck .

Speaker #2: You know, holding the bag. And I'm not—we've not really seen a lot of people pushing back on that.

Speaker #8: Got .

Speaker #9: It .

Speaker #8: Second question is , is I mean , on margins , the the risk is that in times like that , the component pricing will keep going up and you start to see it .

Speaker #8: It started with memory . We start to see it now with other companies or other types of components . What can you do going forward ?

Marc Graff: Yeah. This is Martel. Yeah, I think there's, again, we keep coming back to this word balance. I think we are, you know, really focused on ensuring that we've got the secure supply to satisfy the demand that we're looking at, and we're locking in the pricing as we know it today with our component suppliers and the contract manufacturing folks. All that said, right, there is still future risk of, you know, them repricing their backlog. We are having conversations both on, you know, our supplier side as well as on the customer side, so that we're not getting, you know, squeezed in the middle. Like, again, it's the balance of pricing and supply on one side and pricing and share on the other.

Speaker #8: What can you do in order to mitigate the future risk ? I understand that you're what you're doing now and how you're trying to mitigate the current risk , but are there any forward pricing or forward purchase commitments , etc.

Speaker #8: What can you do in order to mitigate the future increase in component pricing? Or what are you trying to do? Or how are you trying to address it?

Speaker #2: Yeah , this is Mark . Tal . You know , I think there's again , we keep coming back to this word balance .

Speaker #2: I think we are , you know , really focused on ensuring that we've got the secure supply to satisfy the demand that we're looking at .

Speaker #2: And we're locking in the pricing as we know it today with our component suppliers and the the contract manufacturing folks . All that said , there is still future risk of , you them repricing their backlog .

Marc Graff: I think given the results that you've seen and, you know, the basis of our raise, I'm feeling pretty comfortable that we're striking those right tones.

Speaker #2: And we are having conversations both on , you know , our supplier side as well as on the customer side so that we're not getting squeezed , squeezed in the middle , but again , it's it's the balance of pricing .

Gregg Lampf: Got it. Great. Thank you.

Marc Graff: You bet.

Operator: The next question comes from Atif Malik with Citi. Please go ahead.

Speaker #2: And supply on one side . And pricing and share on on the other . And I think given the results that you've seen and you know , the basis of our raise , I'm feeling pretty comfortable that that we're striking those those right tones

Speaker #8: Great .

Speaker #9: Thank you .

Speaker #2: You bet .

Speaker #4: And the next question comes from Atif Malik with Citi. Please go ahead.

Marc Graff: I mean, you know, look, the guide that we gave was a good range based on what we see from the product mix and from the, you know, supply chain challenges that we're trying to work through. Again, that balance that I talked about before. You know, from our seat right now, we think that's a pretty responsible guide. As we make more progress, we'll give you guys updates.

Speaker #10: Hi , it's Adrian Kobe for Atif . Thank you for taking the question . I wanted to ask another one about gross margin with the 800 pluggable ramping in the latter part of the year , and also with the pricing increases kicking in , why wouldn't we see gross margin expansion in the second half

Speaker #2: Yeah . I mean , you know , look the the guy that we gave was was a good range based on what we see from the product mix and from the supply chain challenges that we're trying to to work through again , that , that balance that I talked about before , you know , from our seat right now , we think that's a pretty responsible guide as we make more progress , we'll give you guys updates

Gary Smith: Yeah. We're seeing, you know, obviously an emerging ramp here around a bunch of the, you know, loosely called sort of neoscalers, which encompasses, you know, a fair range of different players. You know, it's I would say largely right now MOFIN orientated, you know, given the CapEx, time to market for them, et cetera. What is clear from it all is that the network is now a real priority for them. I think, you know, that plays through to the hyperscalers too. You know, there's been such a maniacal focus and continues to be obviously on things like power, GPU accessibility, et cetera, et cetera. Now it's really about the network. The traffic is beginning to come out of the network, both for inference and for training. The neoscalers are obviously seeing that too.

Speaker #10: Great . That's helpful . Thank you . And then just as a follow up , I was wondering if you could provide some more color on the momentum that you're seeing with new scalers .

Speaker #10: Maybe just in the relative size of the opportunities, if most of that's falling in Cloud Direct versus Morphine.

Speaker #1: Yeah , we're seeing , you know , obviously a an emerging ramp here around a bunch of the , you know , loosely called sort of neo scalers , which you know , a fair range of different , different players .

Speaker #1: You know , it's it's I would say largely right now morphine orientated , you know , given the capital expenditures , time to market for them , etc.

Speaker #1: , but what is clear from it all is that the network is now a real priority for them . And I think , you know , that plays through to the hyperscalers to , you know , there's been such a maniacal focus and continues to be obviously on things like power , GPU accessibility , etc.

Gary Smith: They're leaning in on the network. Now, we're also beginning to see some of them wish to have control of some of that network as well and do their own builds. We're, you know, we're cautious about that approachment given, you know, the financial structure of some of those neoscalers, not all of them. We are seeing, you know, across the board of the neoscalers leaning in on the whole network requirements, largely, really, Adrienne, currently going for MOFIN.

Speaker #1: , etc. now it's really about the network . The traffic is beginning to come out of the network , both for inference and for training , and the neo scalers are obviously seeing that too .

Speaker #1: So they're leaning in on the network now . We're also beginning to see some of them wish to have control of some of that network as well , and do their own builds where , you know , we're cautious about that approach given , you know , the financial structure of of some of those neo scalers , not all of them , but we are seeing , you know , across the board of the neo scalers leaning in on the whole network .

Gregg Lampf: Thank you. We will take one other question today. Thank you.

Gary Smith: Thank you.

Operator: The next question comes from Ryan Koontz with Needham & Company. Please go ahead.

Ryan Koontz: Great. Thanks. You touched on scale across a bit. It seems like we're very early in that, this momentum around that area. Can you maybe expand on those projects, you know, where we are in terms of a rough count and how your visibility is improving there relative to backlog and specific scale across projects? Thank you.

Speaker #1: Network requirements largely really . Adrian currently going for often

Speaker #5: Thank you. We will take one other question, Dave. Thank you.

Speaker #4: The next question comes from Ryan Koontz with Needham and Company . Please go ahead

Gary Smith: You know, Hi, Ryan. You know, we shared that, I think it was in Q3, we announced the first large hyperscaler rollout. We've actually seen during the course of this quarter, additional sites being added to that. Again, I would say all of these currently that we're seeing are in North America, which is, you know, I think to be expected. We've added 2 more hyperscalers to that are also, you know, rolling this out. I think we're in the very, very early stages of this. In talking with them, though, you know, the plans are large and expansive, as you'd expect, just the scale of what they're trying to do here is absolutely enormous. You know, we're at the very early innings of this whole training clustering.

Speaker #11: Great . Thanks . You touched on scale across a bit . It seems like we're very early in that , that this momentum around that area .

Speaker #11: Can you maybe expand on those projects , you know , where we are in terms of a rough count and how your visibility is improving their relative to , to to backlog and specific scale across projects .

Speaker #11: Thank you .

Speaker #1: You know , hi , Ryan . I you know , we shared that I think it was in Q3 . We announced the first large hyperscaler rollout .

Speaker #1: We've actually seen during the course of this quarter , additional sites being added to that . Again , I would say all of these currently that we're seeing are in North America , which is , you know , I think to be expected .

Speaker #1: We've added two more hyperscalers to that , that are also , you know , rolling this out . I think we're in the very , very early stages of this .

Gary Smith: I would say that, you know, what we're also observing is You know, all of these hyperscalers, we talk about them homogeneously. They aren't. They have very different business models. They have very different architectures, both inside the data center to some extent, and certainly outside from a networking point of view. Their training varies as well. You know, I think you've got lots of different variables in there in terms of distance, capacity, speed, et cetera. They all want low latency, and they all want super high speed. You're seeing a lot of variables about how they are clustering this. I think, you know, as again, I would say we're at the very early stages of this one.

Speaker #1: And in talking with them , though , you know , the plans are large and expensive , as you'd expect for the just the scale of what they're trying to do here is absolutely enormous .

Speaker #1: So , you know , we're at the very early innings of of this whole training clustering . I would say that , you know what ?

Speaker #1: We're also observing is their architecture . You know , all of these hyperscalers , we talk about homogeneously , they aren't they are very different business models .

Speaker #1: They are very architectures , both inside the data center to some extent and certainly outside from a networking point of view . They're training varies as well .

Ryan Koontz: Really helpful. Thank you. Thanks for that, Gary. One last question on DCOM here. You know, great early move here. It seems like you've got a big lead in this opportunity to bring PON to out of band. Do you feel like that space is defensible for you, and how do you sustain a competitive advantage there? Thank you.

Speaker #1: And so , you know , I think you've got lots of different variables in there in terms of distance , capacity , speed , etc.

Speaker #1: They all want low latency and they all want super high speed. But you've seen a lot of variables about how they are clustering this.

Speaker #1: And I think , you know , as again , I would say we're at the very early , very early stages of this .

Gary Smith: Yeah, I think, you know, there's a number of elements to that sustainability. I think it's deep collaboration, first off, and understanding in intimacy the application. Obviously Meta were incredibly helpful in instigating that. There is, you know, different use cases. They are slightly different in the different hyperscalers, but I think the defendability of it is, you know, we're very vertically integrated into it. We own the sort of core technology, and it's the software that we're putting on that as well. We're kinda uniquely positioned about that. We think it's the combination of all of those elements, the collaboration, the vertical integration, the uniqueness and high speed of it, and then all of our software integration capability, and also, by the way, installation, which we're also doing.

Speaker #1: Ryan .

Speaker #11: Really helpful . Thank you . Thanks , Gary One last question on on Dicom here . You know , great early move here .

Speaker #11: It seems like you've got a big lead in this opportunity to bring porn to out of band . Do you feel like that space is defensible for you and how do you sustain a competitive advantage there ?

Speaker #11: Thank you .

Speaker #1: Yeah , I think , you know , there's a number of elements to that sustainability . I think it's deep collaboration , first off .

Speaker #1: And understanding in intimacy , the the application and obviously meta . Were were incredibly helpful in , in instigating that . But there is , you know , different use cases .

Speaker #1: They are slightly different in , the different hyperscalers . But I think the dependability of it is , you know , we're very vertically integrated into it .

Gary Smith: It's the confluence of those things. You know, we think it's quite defendable.

Speaker #1: We of core technology and it's the software that we're putting on that as well . We're kind of uniquely , uniquely positioned about that .

Gary Smith: It's the confluence of those things. You know, we think it's quite defendable.

Saad Siddiqui: Really helpful, Gary. Thank you.

Ryan Koontz: Really helpful, Gary. Thank you.

Speaker #1: So we think it's the combination of all of those elements: the collaboration, the vertical integration, the uniqueness, and the high speed of it.

Ryan Koontz: This concludes our question and answer session. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Operator: This concludes our question and answer session. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Speaker #1: And then all of our software integration capability . And also , by the way , installation , which we're also doing , it's the it's the confluence of those things provide , you know , we think it's quite defendable

Speaker #11: Really helpful, Gary. Thank you.

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