Ciena’s stock price is also heading south: it first suffered a 9.2% hit to $46.05 in premarket trading, but after the company’s earnings conference call. company (more on that below), the hit was less severe, with the seller’s share price falling. 3.9% to $47.93.
It doesn’t help investors’ nerves that, as Smith points out in his earnings press release remarks, supply chain issues will also hamper Ciena’s ability to deliver products to its customers over the course of the current quarter, which ends at the end of October, before easing after that, so there is still pain to come.
Things could therefore improve for Cisco in terms of component supply, but not so much for Ciena. (Also worth noting that Cisco’s stock price has fallen over the past two weeks since peaking positive following Cisco’s earnings report and comments from Robbins and is now trading at 44.72. $.)
And, of course, Cisco and Ciena don’t have the same portfolios, even though they are rivals in the optical and packet router markets: Cisco’s core business is routing and it’s worth noting that the fall in Ciena’s sales were in its converged packet optical product line, while its routing and switching unit saw a 70% year-over-year sales increase to $109.2 million, challenges components therefore appear to be limited to particular parts of the technology supply chain.
But these are only short-term challenges – what about the long-term big picture?
Well, as they say in sports, “form is temporary, class is permanent”. When Smith refers to “unprecedented demand”, it’s not without reason: Ciena is highly regarded for its optical networking technology and is second in the global market only to Huawei, which has the distinct advantage of have a large part of the huge Chinese market sewn.
Additionally, Ciena has a proven track record not only in the telecommunications industry but also in the demanding hyperscaler market (which generates 20% of its revenue) as well as with major cable network operators, governments and large enterprises. The expertise needed to meet the demands of all these markets has not grown overnight and does not appear to be on the decline, so it seems highly unlikely that Ciena will lose customers and much business due to its current supply chain issues, as long as it can appease those customers and provide assurance that the situation will soon improve. During the company’s earnings conference call today, Smith made it clear that Ciena sees no contract cancellations and orders continue to pour in. He also claimed that Ciena currently ships more hardware than any of its direct competitors in the optical marketing industry. .
And he insisted that customer demand is still incredibly strong. Here’s what Smith had to say:
“Despite supply chain challenges and extended delivery times, strong secular demand trends show no signs of slowing. And we remain confident that the macroeconomic fundamentals driving this demand are sustainable over the long term… These include 5G, cloud, and automation, in addition to infrastructure spending, residential broadband financing, and opportunities to displace Huawei.The combination of age-old drivers and our market leadership, including our technology, investment capacity and global scale, drive continued robust customer demand, both in absolute and relative terms.In fact, we have seen nearly 60% order growth over the our last four quarters compared to the same four-quarter period prior. In the third quarter, specifically, orders exceeded revenues by more than 30% and we continue to grow our backlog, which is now well over $4 billion, and we expect further growth in our backlog…As we convert this significant backlog in revenue and continue to win new business and a strong demand environment, we are confident to continue to gain market share [as] supply chain challenges are improving.
And what about supply chain challenges?
“Tough supply chain conditions persist… At a high level, the majority of our suppliers are delivering on their promises, although [with] extended lead times, and we’re also starting to see higher volumes, which is consistent with recent market commentary that has highlighted some signs of improvement in the overall supply environment. However, we have recently been challenged by the unpredictable performance of specific vendors and their associated components. When we spoke to you after our second quarter, our outlook for the rest of the year reflected the commitments made to us by our suppliers in early June, which a very small number of them did not need. Specifically, during the second half of our third quarter, we experienced significant delays and lower-than-expected component deliveries from this very small group of suppliers…primarily [impacting] certain integrated circuit components which represent a very small fraction of our overall materials. However, these delays and divestments hamper our ability to build and deliver finished products and systems, such as modems for our customers…this relatively small number of low-cost, low-value components retains a disproportionate amount of revenue, primarily for our optical modems… [some] supply dynamics continued in our fiscal fourth quarter and should negatively impact our current quarter results… We remain very focused on our investments and actions to minimize the impact of these challenges on our customers,” added Smith.
So issues persist and customers are frustrated, which is understandable as it has a ripple effect on their deployment and service plans.
But these customers are dealing with a reliable and cohesive management team at Ciena. Smith has been the company’s CEO for over 21 years and there’s a reason for that. Over the years, he’s presided over changing market conditions and consistently called out tough times, explaining how and why Ciena can come out on the other side in a positive way, and time and time again, he’s been right. That’s why he’s still the CEO (and a very well paid one at that).
One of the things that Smith often points out, as he did again today, is that the demand drivers for what Ciena offers are not going away: data traffic volumes continue to grow at breathtaking pace and ultimately these data packets have to be moved over global networks, and this is happening over high capacity optical transport networks. The need for what Ciena does isn’t going away and while it may continue to be a class act and highly competitive with its major rivals – Huawei, Nokia, ZTE, Infinera, Cisco, Fujitsu, ADVA and more – the industry can expect to see Ciena’s sales numbers and share price recover in the near future.
Smith has been on this roller coaster before…
– Ray Le Maistre, Editorial Director, TelecomTV