Why Ciena Wants More Non-Telco Customers


By: Mary Jander

Ciena Corp. (NYSE: CIEN) credited a focus on non-telco web-scale companies for solid fiscal Q1 2020 results on Thursday.

“The diversification across our business combined with our technology leadershop, including our fifth-generation, 800-gig Wavelogic modem technology — that is available today — continue to set us apart in the market,” said CEO Gary Smith on a conference call with financial analysts this morning.

Ciena reported quarterly revenue of $832.9 million, up 7% from last year’s quarter. Non-GAAP net income was $81.7 million, or $0.52 per diluted common share. Last year’s quarterly earnings were $52.8 million, or $0.33 per diluted common share.

Webscale Diversity

As CEO Smith mentioned in his remarks today, Ciena is focused on keeping ahead of market trends — including selling to so-called web-scale providers. These would include commercial cloud providers (such as Amazon, Google, Microsoft, et al) as well as purveyors of Internet content (such as Akamai) and data center services (such as Equinix).

While telcos are still important segment for Ciena, it's generally believed that traditional carriers have fallen behind in digital transformation. Meanwhile, the growing number of cloud-based service providers have demands for capacity, orchestration, automation, and virtualization that seem unlimited. This is where Ciena is aiming its newer wares, including the 800-Gbit/s WaveLogic 5 optical networking platform, the Manage, Control and Plan (MCP) domain controller set of software interfaces and services, a new set of routers optimized for 5G, and the Blue Planet virtualized orchestration products.

Clearly, Ciena hopes its compelling optical gear will help outpace a flat rate of web-scale customer sign-ons, as customer cloud build-outs gain momentum. During this quarter, web-scalers accounted for 35% of total revenue. While that’s down from 41% a couple of quarters ago. Nevertheless, Ciena predicts that Q2 2020 will see an uptick in web-scale deals worldwide.

Ciena shaved $30 million off guidance of $875 million to $905 million for next quarter, which execs say should cover market and supply chain problems related to the coronavirus. And CEO Smith contends that Ciena’s reliance on Chinese resources is limited and indirect. Several supply chain providers could be affected by trade and virus issues, but Ciena has no direct R&D, manufacturing, or other facilities in the PRC.

This could be important, as Ciena execs today acknowledged they expect to continue to attract customers who want to switch to a vendor with fewer dependencies in China. Still, Ciena does rely on a few of the same suppliers everyone else does, and those suppliers are being adversely affected by trade and virus woes.

Battle for the Edge

Ciena’s earnings reveal some important strengths, but competition is increasing as the role of edge networking increases in cloud computing. Suppliers such as Cisco and Nokia are working on their own chips — Cisco via its Silicon One project and Nokia through its planned acquisition of Elenion.

Which brings up a final point. Ciena pleased Wall Street by announcing higher than expected gross margins, indicating that it is executing efficiently in the highly specialized optical space in which it competes. “Gross margin provided the biggest surprise,” wrote analyst Simon Leopold of Raymond James in a note today. “Ciena had forecast a 42-44% gross margin for F1Q20 and for FY20. Ciena achieved a gross margin beat with a presumably unfavorable hardware product mix with help from software.”

All told, Ciena's products and strategies appear to aim solidly at the realities of today's cloud markets. The company will continue to give competitors a few tough challenges, particularly this coming year.

At close of trading today, Ciena shares were priced at 42.88+1.26 (+3.03%).web-scale service providers.