Ciena (CIEN) Q2 2025 Earnings – Full Coverage

Thanks, Greg. Today, we delivered strong fiscal second quarter results, including revenue of $1.13 billion, which is at the high end of our guidance and demonstrates the strength both of our strategy and our execution. This performance reflects continued strong demand across all customer segments, geographic regions, and a diversified portfolio. Notably, revenue from cloud providers stood out as a key driver in Q2. Specifically, we achieved record direct cloud provider revenue in Q2 that comprised 38% of total revenue, growing 85% year-over-year and reaching more than $400 million in a single quarter for the first time, really highlighting the accelerating investments in AI infrastructure and our leadership in addressing this demand. Indeed, three of our top five customers this quarter were cloud providers, underscoring their sustained investments in AI infrastructure and network expansion. Over the past quarter, market dynamics have not only validated our previous assumptions about customer network infrastructure spend, but have also reflected an accelerating demand environment that continues to ramp and exceed our expectations. And we believe this strength is differentiated for us as the market continues to evolve in our direction. Accordingly, orders in the quarter were again significantly greater than revenue. And notably, we are on track for cloud provider orders to double in fiscal 2025 over last year as we benefit from the breadth and depth of our customer base in this critical segment. And I think this outstanding performance showcases our substantial market penetration in the AI-driven networking space where we remain a very trusted partner for a wide range of network operators who are investing to scale their infrastructure for high-speed data center and cloud connectivity, including for emerging applications and use cases. To address this growing demand, we are deploying the entirety of our portfolio, including optical systems and interconnects, routing and switching solutions, software and services. And as the global leader in high-speed connectivity, our WaveLogic technology remains a cornerstone of our competitive advantage. Specifically, our WaveLogic 6 Extreme 1.6T WAN technology maintains at least an 18 to 24-month competitive lead in the market. As our photonic line systems continue to be the de facto industry standard, demand for our reconfigurable line system (RLS) continues to increase. And our interconnects business is also ramping with tremendous activity and demand, including new awards with three additional major cloud providers this quarter alone. This momentum reflects the growing adoption of and demand for our 400 ZR and 800 ZR coherent pluggable solutions as well as our 1.6T coherent light solution, which we will be sampling by the end of calendar 2025 with commercial availability in the first half of calendar 2026. As cloud providers expand their data center architectures with scale-up and scale-out AI-related deployments, we are broadening and deepening our relationships with them. In fact, we're addressing new data center-related applications, a strategy that we've spoken publicly about over the last few months and where we recently secured two wins. The first is a very strategic win for an application involving the connection of regional GPU clusters, which is something the industry's been talking about for some time. For context, to support the massive scale and power requirements of AI training and inference traffic, data centers must become more distributed. And historically, these traffic flows were primarily inside the data center, but they are now across multiple data centers over graded distances that require high-capacity, low-latency links. With that, we are excited to report that our coherent 800 gig pluggables and RLS photonics have been selected by a global cloud provider who is investing in geographically distributed regional GPU clusters. We will start to recognize revenue from this incremental opportunity later this fiscal year and ramping into 2026. And as one of the first vendors to address this application and with our coherent optical technology ideally suited for this type of connectivity, we expect to see more of these types of opportunities emerge as cloud providers evolve their data center network architectures to support their AI strategies. The second win is for a focused application inside the data center for out-of-band network management. These networks operate separately from the main data traffic network and provide remote access to monitor and manage data center systems. We recently worked with a global cloud provider to co-develop a solution based on our existing technologies, and this is designed to significantly reduce the complexities of these networks and streamline the management of its large-scale data center operations. Now turning to service providers, it's now been several quarters of an improving trend line with service providers as their network investments in high-speed infrastructure become more durable and sustainable following a long period of underinvestment. We are seeing growth and strength across the board with service providers in core optical transport, routing and switching, software and services to address the connectivity needs of their own customer base and to support cloud providers' growing bandwidth demands. As a result, our business with tier one North American service providers gained momentum in Q2, and we also had several new customer wins in both the Americas and international regions including Europe. This momentum is driven in part by new fiber builds as well as Mofin. In fact, alongside the record performance of direct DCI in the quarter, we also achieved an all-time record for Mofin activity in the first half of fiscal 2025, which further demonstrates how we're supporting the strong nexus between service providers and cloud providers. I also want to touch on the momentum of our software business. I'll start with the Navigator network control suite, which is our multi-layer domain controller and provides a comprehensive set of capabilities to help network operators plan, provision, monitor, and troubleshoot their networks. Orders for Navigator increased significantly in the first half of fiscal 2025 by more than 30% year-over-year, driven by increased investment in the unique capabilities of this microservices-based and differentiated platform. Similarly, Blue Planet had a record performance in Q2, achieving its highest ever quarterly revenue at just under $30 million. This milestone reflects the success of our deliberate transformation efforts over the past couple of years, positioning Blue Planet to better serve our customers' digital transformation needs and journey. Today, Blue Planet is at the leading edge of several large provider projects, particularly as the industry incorporates AI and data-driven intelligence to drive transformation. Before I turn the call over to Jim, I'd summarize by saying that we are very encouraged by the strong activity across all segments of our business in the context of favorable market dynamics and an accelerating demand environment. We have strong momentum that we are confident will drive continued growth. In particular, we are very pleased with the validation from customers that we can strategically expand our market opportunity inside and around the data center where high-speed connectivity is absolutely critical. In the short term and as we've been talking about for some time, we are now seeing more AI traffic come out of the data center for training as I mentioned earlier and general monetization that's driving cloud traffic, and our set of technologies is ideally positioned to address these connectivity needs at scale. With that, Jim, can you please provide us with updates on our financial performance in Q2 as well as our outlook?

Michael, before we do that, I'd just like to take a moment to acknowledge and recognize Jim's upcoming retirement. Given today will be his last earnings call with us all. And as you know, for the past 18 years and an incredible 70 earnings calls, Jim has been an incredible partner and member of our executive team with a lengthy list of significant contributions to the growth and the performance of our business. We will certainly miss Jim's leadership and his wealth of knowledge. But importantly as well, and I think I speak for all of you who know him on the call as well, we'll miss his wit, his warmth, and his humor that makes working with him such a joy. So while we'll be sad to see him go later this summer, we all wish him the very best in his well-deserved retirement.

That was a pretty comprehensive question. Thank you, Sumi. In direct answer to the first part of that, I think we saw strong order flows in Q1 that continued in Q2 and probably accelerated in Q2. And the activity, I'd say two things about it: one, service providers' nice steady increase has underpinned all of that, and I think that's very sustainable and durable. And then the cloud, I think we're seeing a step function here in demand. We're seeing cloud growth in terms of traffic flows, and then we're seeing these incremental opportunities as well that are emerging. This regional GPU cluster one that I talked about specifically today is really incremental to our thought process for the year. And I would also say that that momentum both on service providers and on the cloud players is continuing into Q3. So this exceeds our expectations for the year. I think given this notion around traffic coming out of the data center to both do training and for monetization, we are beginning to see that for sure in addition to these other applications. So at this stage, obviously it's early to predict next year and the three-year piece. I think it's reasonable to assume that given the step function in demand, we will revise the three-year guidance when we get to the end of this year. Obviously not appropriate to do that now, but I think what's behind your question there, Sami, is, is this a long-term trend? And I think the answer to that is absolutely yes.

The other thing I would just add to all of that is, Si, given what we're seeing around the dynamics of demand and how sustainable that is, given what Jim and Scott have talked around the gross margin mix being a bit of a headwind in the short term for us, we're confident we'll get through that. We've done that before. That makes us even more confident in our operating margin targets for getting into those mid-teens as we get to 27. And I think we'll see continued improvement both in the second half of this year and also in 26 on the journey.

As I'm sure you can appreciate, obviously we don't want to get ahead of ourselves into giving detailed guide for 26, but clearly with the kind of dynamics that we're seeing, Simon, I think about it: you've got a broadening application base. I talked about the GPU clusters earlier and the inside the data center focused application there. And you've also got a broadening amount of cloud providers. We've had significant new wins over the first half of the year. More and more of these cloud providers, not just the large four, are now really leaning into the network. And so I think you've got a broadening set of players and you've got a deepening set of applications, which obviously gives us confidence in the sustainability and durability of it. And given the magnitude of this scale out, we've got very good visibility with a number of them about their long-term plans, and we're also co-creating with them as well. So that gives us increased visibility and confidence as we go forward.

Yes. Quick answer to that is yes. I mean, given the scaling demand, we're not going to be able to, and a lot of it is scheduled for out further because of the size and scale of it. So we're certainly going to be going into 2026 with an increased backlog. I think that's where you're going with this, and that's absolutely a reasonable assumption. We are ramping our supply chain pretty strongly, and we started that last year and we're continuing to increase that. So we can address that because we do think it's very sustainable and we've got good visibility to it. So we are going to go into 2026 even with the increase to 14% growth in the year, we're still going to be leaving the year with a larger backlog than when we entered it. That's for sure.

Okay, let me take the second part of that and then I'll pass to Scott to give you more on the architectural side. I would say that we've been engaged with multiple players over this kind of architecture where because of power and space constraints, they cannot get all of the GPUs in a single data center. So this is the first one that we've seen, and we believe one of the first deployments like that, and it's just a couple of the regions and it is hundreds of millions of dollars of both 800 gig pluggables and line system. So in terms of sizing, it's pretty material, and this is one player just beginning to roll this piece out. So this is a very sizable and substantial opportunity for us.

Yeah, I think over time the opportunity we believe is big enough that there'll be multiple vendors at play, but with our leadership in coherent and as we've said, RLS being the de facto standard for line systems, we are certainly going to get our unfair share or the bulk of the early move on this piece. So we're quite excited about it. We've been working on it with the lead customer for some time around looking at the feasibility and super focused on delivering to it.

Yeah. If you think about the software assets that we've got that are strategically embedded on the service provider side, you've got Navigator around the main piece, which is a complete microservices-based architecture. And then as you know, we had a lot of learning around Blue Planet being a microservices software platform for OSS. And I think we're seeing a lot of momentum now on the Blue Planet side. We're very focused on things like the inventory, confederation of inventory. And you think about that strategically, you basically get to have the data set within these service providers of what is out there. And really without that, it's very difficult to have agentic AI if you haven't understood what the whole inventory of your network is. So we believe we are uniquely placed to be able to leverage that into the future. And that's what we're focused on developing and engaging with a number of very large service provider customers on. We've got a great position in a number of those large service providers, and we've got the right architecture that will scale up for that. It's early days, but basically we're in a tremendous position from a relationship and a trusted partner point of view and from an architecture point of view, Reuben, to really leverage that into something where we become the de facto data management that allows and facilitates that AI.

Yeah. On the routing and switching side, Meta, I think it's almost completely aligned with the service provider journey. And my own view of what's happened with service providers over the last few years is they've really underinvested in a lot of their core infrastructure because they've been very focused on first COVID, then supply chain whiplash and challenges around that, and then 5G where they've had to invest enormous amounts of money and capital and focus on 5G, and that's largely not worked out from a profit generating point of view. So I think we're at a point now where they're returning to a very sustainable, scalable investment thesis, and that includes routing and switching. And I think the two go hand in hand, and with the service provider uptick that we're seeing, we're seeing now investment in new routing and switching applications and a number of new wins. So that's encouraging for us, and I think that will absolutely continue. To your point about EFNI, which I think is a very important point for a couple of reasons. One, the increased shipments, we've got really good visibility to what's happening with those shipments, and we are the EFNI partner for a lot of our large customers including the cloud customers. So we have good visibility to what's happening, and I will say that that's in balance and the need for EFNI is going to go up exponentially similar to the ramping of our supply chain and demand, and we're seeing a lot of activity across the board for EFNI both in service providers and in the cloud obviously to help install this massive amount of investment over the next few years.

Yeah, we're seeing a lot of Mofin activity in India. It's not translated to a massive amount of revenues yet, but we've taken the orders and it will. We're seeing Mofin activity throughout the globe, and I think it just goes hand in hand with the whole cloud buildout. They can't build everywhere with their own network, so it's augmented by these Mofin opportunities. We've seen that in North America as well. There's been some large announcements around some of the larger carriers partnering there with Lumen and Zayo, etc. We're seeing that reflected in pretty much all parts of the globe. Asia outside of India, we're beginning to see that in Europe. We're seeing activity. It's the largest amount of activity that we've seen, and it really just goes hand in hand with the overall strategic plans for these cloud providers.

Yep.

Yeah, that's a good point, Tim. I'd say overall, let me start with the sort of four known hyperscalers as it were. We're seeing increases in all four, step function increases in all four cloud players directly with us and also through things like Mofin as well. So it's all consistent with that. And then we're seeing them, and I think it's a sort of hierarchical flow is how I think about it. They've been very focused obviously on power and GPUs and scaling all of that. Now it's about scaling it out and it's now about the network, and they're very focused, all of them, on making sure that the network does justice to all this massive investment that's gone on in compute. So I think this is the phase that we're entering now, and that's why we're seeing it across all of the hyperscalers. As you say, it's lumpy. Some are leaning in more than others, but they're all showing a step function increase in the importance of the network. And then you've got a whole other set of players as well that has expanded out from a cloud point of view that are now leaning in on the network. So you've got a broadening out. It's not just the large four anymore. It's a much larger group of players that are now recognizing that if they're going to monetize and optimize their GPU investments, it's all about the network. And that's why we think it's very diversified, durable, and sustainable. And it's all about high-speed connectivity. That's really what it's about.

Thank you. Thank you everyone for listening.

Thank you, Jim. Thank you, everyone. We look forward to connecting with you over the next few weeks.