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Suppose provide chain points are waning? Speak to Ciena CEO Gary Smith…, Entry Evolution


Sep 1, 2022

Additionally heading south is Ciena’s share worth: It initially took a 9.2% hit to $46.05 in pre-market buying and selling, however following the corporate’s earnings convention name (extra on which beneath), the hit was much less extreme, with the seller’s share worth buying and selling down by 3.9% at $47.93. 

It doesn’t assist traders’ nerves that, as Smith factors out in his earnings press launch remarks, the availability chain points are going to hamper Ciena’s means to ship merchandise to its prospects throughout the present quarter too, which ends in late October, earlier than easing after that, so there may be additional ache to return. 

So issues is likely to be trying higher for Cisco when it comes to element sourcing however not a lot for Ciena. (It’s value noting additionally that Cisco’s share worth has taken a tumble previously couple of weeks since its constructive spike off the again of Cisco’s earnings report and Robbins’s feedback and is now buying and selling at $44.72.)  

And, in fact, Cisco and Ciena should not have the identical portfolios, regardless that they’re rivals within the optical and packet router markets: Cisco’s primary enterprise is in routing and it’s notable that Ciena’s gross sales droop was in its converged packet optical product line, whereas its routing and switching unit reported a 70% 12 months on 12 months improve in gross sales to $109.2m, so the element challenges seem to restricted to specific components of the expertise provide chain.

However these are all short-term challenges – what in regards to the larger, long-term image?

Properly, as they are saying in sports activities, “type is non permanent, class is everlasting”. When Smith references “unprecedented demand”, it’s not with out motive: Ciena is extremely regarded for its optical networking expertise and is second within the world market solely to Huawei, which has the distinct benefit of getting a lot of the huge Chinese language market sewn up. 

As well as, Ciena has confirmed itself not solely within the telco sector but in addition within the demanding hyperscaler market (which generates 20% of its revenues) in addition to with giant cable community operators, governments and huge enterprises. The experience wanted to fulfill the calls for of all these markets isn’t developed in a single day and doesn’t look like on the wane: Subsequently it appears extremely unlikely that Ciena will lose prospects and far enterprise due to its present provide chain points, so long as it will possibly appease these prospects and ship on its assurances that the state of affairs will enhance quickly. On the corporate’s earnings convention name at this time, Smith made it clear that Ciena shouldn’t be seeing any contract cancellations and that orders proceed to return in. He additionally claimed that Ciena is transport extra gear proper now than any of its direct rivals within the optical advertising and marketing sector.

And he pressed residence the purpose that demand from prospects continues to be extremely robust. Right here’s what Smith needed to say:

“Regardless of provide chain challenges and elongated lead occasions, robust secular demand traits present no indicators of abating. And we stay assured that the elemental macro drivers propelling this demand are sturdy over the long run… These embody 5G, cloud and automation, along with infrastructure spending, residential broadband funding, and alternatives to displace Huawei. Mixture of the secular drivers and our market management, together with our expertise, funding capability and world scale, is driving continued strong demand from prospects in each absolute and relative measures. In reality, we had almost 60% order development in our final 4 quarters versus the identical prior 4 quarter interval. In Q3, particularly, orders outpaced income by greater than 30% and we proceed to develop our backlog, which is now effectively over $4 billion, and we mission additional development in our backlog…  As we convert this massive backlog to income and proceed to win new enterprise and a powerful demand surroundings, we’ve got confidence in persevering with to realize market share [as] the availability chain challenges ameliorate.”

And what in regards to the provide chain challenges?

“Difficult provide chain situations persist… At a excessive degree, the vast majority of our suppliers are delivering to their guarantees, albeit [with] prolonged lead occasions, and we’re additionally beginning to see greater volumes, and that is in keeping with current market commentary that pointed to some indicators of enchancment within the total provide surroundings. Nonetheless, we’ve got not too long ago been challenged by the unpredictable efficiency of particular distributors and their related componentry. Once we spoke to you after our second quarter, our outlook for the rest of the 12 months mirrored commitments made to us by our suppliers in early June, which a really small variety of them didn’t want. Particularly, within the second half of our Q3, we skilled substantial delays and decrease than anticipated element deliveries from this very small group of suppliers… primarily [impacting] sure built-in circuit elements that symbolize a really small fraction of our total supplies. Nonetheless, these delays and decommits impede our means to construct and ship completed items and methods, corresponding to modems for our prospects… this comparatively small variety of low-cost, low-value elements is holding up a disproportionate quantity of income, primarily for our optical modems… [some] of the availability dynamics have continued into our fiscal fourth quarter and are anticipated to negatively impression our present quarters outcomes… We stay very targeted on our investments and actions to minimise the impression of those challenges on our prospects,” added Smith.

So the problems persist and prospects are annoyed, understandably so, as a result of it has a knock-on impact on their deployment and repair plans. 

However these prospects are coping with a trusted and constant administration crew at Ciena. Smith has been the corporate’s CEO for greater than 21 years and there’s a motive for that. Through the years, he has presided over shifting market situations and has constantly known as out the difficult occasions, speaking how and why Ciena can come out the opposite facet in a constructive method, and time and time once more he has been confirmed proper. That’s why he’s nonetheless the CEO (and a really effectively paid one at that).

One of many issues Smith usually factors out, as he did once more at this time, is that the demand drivers for what Ciena presents aren’t going away: Knowledge visitors volumes are nonetheless rising at a mind-boggling tempo and, in the end, these information packets must be moved around the globe’s networks, and that occurs over high-capacity optical transport networks. The necessity for what Ciena does isn’t going away and whereas it will possibly proceed to be a category act and really aggressive with its primary rivals – Huawei, Nokia, ZTE, Infinera, Cisco, Fujitsu, ADVA and extra – the business can anticipate to see Ciena’s gross sales numbers and share worth to go up once more within the close to future.

Smith has been on this rollercoaster earlier than…

– Ray Le Maistre, Editorial Director, TelecomTV

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