Ciena continued to grow its routing and switching segment in its fourth quarter, and gained share in the optical equipment market despite continued fallout from supply chain issues.
The company reported results for the quarter this week, which included $1.13 billion in revenue. According to CEO Gary Smith, Ciena shipped more hardware across its portfolio “than ever before” during that period.
Ciena increased its global market share in optical equipment by more than five percentage points compared to last year, Smith said during earnings, which he noted puts Ciena in a “stronger position” than its pre-pandemic market share.
He touted the “record quarter” for Ciena’s WaveLogic 5 Extreme, a coherent optical solution capable of transmitting and receiving up to 800G of network traffic on a single wavelength.
Driven by cloud provider network expansions, the company surpassed 100,000 total WaveLogic 5e modems shipped. “And as WaveLogic 5 success continues, WaveLogic 6 is of course building momentum, including orders from a large subsea customer and a strategic win and adoption with a cloud provider in Q4,” said Smith.
In routing and switching, Ciena ended the year with more than $500 million in annual revenue. It added 14 new routing and switching customers in the fourth quarter, adding to over 300 in total.
Smith told investors that Ciena expects to grow faster in the routing and switching segment over the next several years than in its optical business. “I still believe that we will be able to take some share in optical,” he said. “But we have a large share now, and the ability to continue to take share is a bit limited.”
Supply chain issues still impacting optical market
While there have been “no major changes to industry dynamics,” Smith said one variable that remains uncertain is orders from its service provider customers in North America.
As noted in a recent Dell’Oro report, supply chain constraints in the region in 2021 and 2022 led to elongated lead times, which resulted in advanced order volumes in the optical equipment market. This year saw supply chain issues improve, leading to a digestion period for service providers in the North American market sitting on excess inventory.
“Service providers generally, are beginning to or working through their inventory, they're all at various stages of progress,” said Smith. “I think the uncertain one on precise timing is really the larger North American Tier 1 service providers.” Although, he added “some are actually in very good shape.”
The expectation is that North America’s optical market will return to normal order patterns eventually.
Ciena’s assumption is the return to a “normal book-to-revenue and order flow,” will happen in mid-2024, which is not far from Dell’Oro Analyst Jimmy Yu’s estimate that the period of inventory digestion could last at least another two to three quarters.
“Capacity growth and traffic growth continues to be very robust for the service providers. Certainly not an issue of budget frankly either, it's really just some of these larger ones just absorbing and being able to get deployments of the stuff that we've shipped to them,” Smith added.
According to Dell'Oro, Ciena is one of the manufacturers that managed to keep growing in North America's optical equipment market this year. But considerably, the manufacturer still had a backlog of orders totaling over $4 billion at the end of the first quarter in 2023.
Q4 financials
Ciena CFO James Moylan said despite expectations that service provider order patterns will improve through 2024, the timing and volume of that improvement remains uncertain. “Taking these factors into consideration, we will guide to a slightly wider than typical range of revenue in fiscal year '24,” he told investors.
For the full fiscal year 2023, Ciena’s revenue of $4.39 billion was a 21% increase over fiscal 2022. Adjusted operating expenses for the year totaled $1.33 billion, which Moylan claimed was “precisely” as Ciena had planned.
Ciena projected revenue growth in fiscal year 2024 to be in a range of 1% to 4%. Moylan noted that in the current environment, “optical industry growth estimates for 2024 are currently being updated by industry analysts.”
The company provided a new set of long-term targets for the three-year period from 2024 to 2026, where it expects average annual revenue growth of approximately 6% to 8%.
“Based on what we've seen from those sources and our own assessment, we believe the prevailing expectation is for largely flat market revenue in 2024,” said Moylan.