Ciena Stockpiles Chips to Meet Robust Demand

Market demand is high for optical networking equipment, though it’s taking some time to deliver the goods, said officials at Ciena Corp. (NYSE: CIEN) during the company’s earnings report this morning.

It was a mix of good and not-so-good news: For the first fiscal quarter of 2022, Ciena posted revenues of $844.4 million, up 11.5% year-over-year. That was in line with expectations Ciena set on a preview call February 15, but slightly below analyst expectations. Adjusted net income was $72.6 million, or 47 cents per diluted common share, compared to adjusted net income of $81.3 million, or 52 cents per share, last year.

Analysts on today’s call seemed concerned about reduced margins: Adjusted gross margin was 46.2%, down from 48% during last year’s first quarter. Adjusted operating margin was 11.8%, down from 14.6% last year. It didn't help that tech stocks were getting hit over general fears, including the war in Ukraine. By mid-afternoon, Ciena shares finished the day at $58.76, down $7.18 (11%).

Supply Chain Upsides

CEO Gary Smith blamed supply chain disruptions and rising costs for the shift in revenues and the pressured margins. But he said the company has been taking action to reduce its backlog, which topped $3 billion last quarter, and the news for the second half of the year will be good.

“We made decisions roughly nine months ago to place significant orders with our suppliers to meet our expectations for a strong second half,” said Smith on today’s call.

Those expectations come from customers revealing their own market demands in order to give Ciena advance warning to stockpile components. “Long-term secular demand is very strong, driven by the acceleration of cloud adoption and traffic growth and the desire to get higher capacity and more bandwidth closer to the end user,” Smith said.

What’s In Store at Ciena

Ciena said its core optical business remains strong. Still, though the company’s high-end 6500 packet optical switch grew 20% year-over-year, demand for its converged packet optical platforms overall, which account for 64.1% of sales, grew 5.5%. Routing and switching gear, which comprises 10.1% of revenue and includes next-generation metro and edge gear, grew 33%.

But the most dramatic growth of all was in platform software and services, which grew 46% year-over-year. And Ciena’s Blue Planet Automation software and services grew 25%. Clearly, there’s a major demand for products that help control and automate high-speed optical networks from the core to the edge. Those products are likely to see more growth in the coming months.

Officials insist that the second half of fiscal 2022 will release backlog sufficiently to raise revenue expectations by at least 10% next quarter. But operating expenses will go up to $300 million from $290 million in the first quarter, and adjusted gross margin will fall between 42% and 44%. Bottom line? Ciena’s earnings were a mixed bag containing a few gems that could brighten results later this year.