Story Stocks^®

Ciena (CIEN +2%) is trading higher after it reported a solid EPS beat for Q3 (Jul) this morning. Revenue for the telecom equipment company fell 11.8% yr/yr to $942.3 mln, but that was nicely above analyst expectations and above the mid-point of prior guidance of $880-960 mln. The highlight may have been the guidance. Ciena is known for guiding lower on the call, but today it guided Q4 (Oct) revs in-line at $1.06-$1.14 bln.

• Ciena said that order flow in Q3 was strong, largely driven by cloud providers and it finished the quarter with a book to bill ratio above one. Ciena sees this as a positive sign that the market is moving in the right direction with the gap between supply and inventory absorption narrowing. Ciena also noted that bandwidth demand continues to be strong, particularly with the anticipated rise in AI-driven network traffic and increased cloud adoption.
• It is important to understand that Ciena has two main types of customers: cloud companies and service providers (SPs).
  • Starting with cloud providers, Ciena says they are clearly leading the charge in building out their networks to support growth in cloud and AI related traffic. They are investing in their network architectures from subsea cables to long haul routes to data center connectivity. In Q3, Ciena secured new wins with major cloud provider customers and is seeing a growing opportunity among an expanding set of cloud players, including data center operators and companies that offer a range of cloud applications and cloud infrastructure services.
  • On the service provider side, Ciena said its pipeline continues to increase and it's winning significant deals, including many new logos. In North America, purchasing patterns of SPs are coming back into more of a normal range although the recovery remains gradual and will take several more quarters to play through completely. However, Ciena sees clear evidence of improvement.
  • With respect to international SPs, Ciena says cautious spending persists, particularly in Europe, related to macro and geopolitical concerns as well as industry structure issues. As a result, the recovery in order volumes from international SPs are likely to lag that of their North American counterparts.

Bottom line, we think investors are pleased with Ciena's Q3 results and particularly its Q4 guidance. After guide downs in recent quarters, we will take in-line guidance as a win. Also, the commentary on the call was a bit more upbeat than usual. Bigger picture, Ciena has often described FY24 as a transition year following a few years with whipsaw events: the pandemic that led to supply chain challenges and a subsequent snapback resulting in outsized growth in FY23. It sounds like Ciena will get back to longer term +6-8% CAGR revenue growth in FY25 with current consensus at +8%.