Good day and thank you for standing by. Welcome to the Ciena Fiscal Fourth Quarter and Year-End 2022 Results. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Gregg Lampf, Vice President of Investor Relations. Please go ahead.

Thank you, Katherine. Good morning and welcome to Ciena’s 2022 fiscal fourth quarter and year-end review. On the call today is Gary Smith, President and CEO and Jim Moylan, CFO. Scott McFeely, our Senior Vice President of Global Products and Services is also with us for Q&A. -- : Before turning the call over to Gary, I will remind you that during this call we will be making certain forward-looking statements. Such statements, including our quarterly and annual guidance and long-term financial outlook, discussion of market opportunities and strategy and commentary about impacts of supply chain constraints on our business and results are based on current expectations, forecasts and assumptions regarding the company and its markets, which include certain risks and uncertainties that could cause actual results to differ materially from the statements discussed today. Assumptions relating to our outlook, whether mentioned on this call or included in the investor presentation that we will post shortly after, are an important part of such forward-looking statements and we encourage you to consider them. Our forward-looking statements should also be viewed in the context of the risk factors detailed in our most recent 10-Q filing and in our upcoming 10-K filing. Our 10-K is required to be filed with the SEC by December 28 and we expect to file by that date. Ciena assumes no obligations to update the information discussed in this conference call, whether as a result of new information, future events or otherwise. As always, we will allow for as much Q&A as possible today. I will ask that you limit yourselves to one question and one follow-up. With that, I will turn the call over to Gary.

Thanks, Gregg and good morning everyone. Today, we reported strong fiscal fourth quarter results, including higher-than-expected revenue of $971 million and adjusted gross margin of 45.2%. This performance reflects the benefit of some favorable supply chain dynamics that occurred in the second half of the quarter, including that we received more integrated circuits than expected from certain suppliers and that we were also able to procure more parts in the open market than originally projected. These developments enabled us to ship more products to customers in the quarter, especially modems, which also had a positive impact on both revenue and margin. For the full fiscal year, we delivered revenue of $3.63 billion, essentially flat with fiscal 2021, due entirely to the challenging supply chain conditions that we encountered during the year. Despite the difficult supply environment in fiscal ’22, we saw robust demand from customers across our segments, regions and applications, as evidenced by annual order growth of 26% and a backlog of greater than $4 billion as we exited the year. Our results across FY ’22, including the strong finish in Q4, demonstrate the continued volatility and unpredictable nature of the current supply dynamics. With respect to supply, overall, we are seeing ongoing signs of gradual improvement. The majority of our suppliers are delivering to their current committed lead times and volumes are slowly increasing. And we also expect continued improvements in these areas as we move through fiscal 2023. We are also starting to benefit from the various mitigation steps that we have taken over the last year or so. As a reminder, these include product engineering redesigns and qualification of alternative components designed to minimize the impact of supply chain challenges on our customers. At the same time, the unpredictable performance of specific vendors for a relatively…

Thanks, Gary. Good morning, everyone. As Gary mentioned, we delivered a very strong Q4 performance. Revenue came in at $971 million, well above the midpoint of our guide. This revenue result speaks to the durability of demand and the clear need by our customers for more equipment faster. Importantly, it illustrates what can happen when we get more of the components that have been in the shorter supply and which have most severely gated our deliveries to customers. Additionally, it reflects some benefit of additional production capacity brought on with our investments, which helped us to deliver our largest shipments month in history in October. Q4 adjusted gross margin was strong at 45.2%, reflecting a favorable product mix as well as lower-than-expected incremental supply and logistics costs in the quarter. Adjusted gross margin in the quarter benefited from the greater-than-expected supply of key components allowing us to deliver more modems. Clearly, availability of components and the performance of our vendors play a disproportionate role in our quarterly mix of deliveries. Q4 adjusted operating expense was as expected at $313 million. With respect to profitability measures, in Q4, we delivered adjusted operating margin of 13%, adjusted net income of $91 million and adjusted EPS of $0.61 per share. In addition, in Q4, our adjusted EBITDA was $154 million. Cash used in operations was $14 million. We continue to build inventory of certain components in Q4 while we wait for delivery of those components that are the most constrained. We also experienced a back-end loaded quarter, which caused accounts receivable to increase. With respect to our performance for the full fiscal year, annual revenue was $3.63 billion. As Gary mentioned, we ended the year with $4.2 billion in backlog, slightly below where we ended in Q3, but still nearly double our backlog…

[Operator Instructions]

We’re also aware of a technical issue with the Q&A line. We’re resending a link to the cell setters for you to be able to access that way.

Our first question comes from Meta Marshall with Morgan Stanley. Your line is open.

Hi, this is Karan Juvekar on from Morgan Stanley. Congratulations on the results. And I guess just first question being, as you’ve seen supply chain loosen up a bit in the second half of the quarter, have you seen any changes to maybe customer conversations, maybe with conversations with customers that have moved to other vendors or maybe just generally at a high level, any incremental hesitation around macro and maybe any purchasing patterns?

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In the supply chain stuff side that Gary mentioned it, we got more supply of components than we were expecting in the second half of the quarter. And that was across the board, but particularly important was those constrained components also we saw more supply. We also have more success in procuring those in the open broker market as well. And given the investments that we've talked about in the past around building up a bigger manufacturing capacity so we can turn those components into finished goods faster, that came into play significantly in our month of October. And I think Jim mentioned, our biggest shipment month ever.

Got it. Okay. That's very helpful. And then just a quick follow-up on maybe just quantifying or just any idea on how much of a benefit in the quarter the price increases was? And maybe how should we expect that to trend sequentially to Q1? Anything we should expect, an uptick sequentially? Or how we should think about that?

Still not seeing a ton of effect of that price increase in Q4. We did not see it. As we look into our backlog, it is there. It's fully encompassed in our guide. And without giving a number, I'll just say that it's in the single-digit percentages ranges.

Okay. Thank you.

Thank you.

Thank you. Our next question comes from Paul Silverstein with Cowen. Your line is open.

-- : The other related question, again, from your comments, it sounds like not an issue, but given via the Corning, CommScope's commentary, a lot of which seem to be specific to AT&T, but perhaps other Tier 1s as well, it doesn't sound like you're seeing weakness, but I want to ask you the question.

Look, let me take the first part of that, Paul. Listen, there's been a lot of volatility with sort of whipsawing in supply and demand at any one moment in time and any given account. If we're sharing with others, then they're obviously going to try and get supply from who they can. I would say, overall, and we are also taking new accounts as well. Overall, I mean, I think the order demand and the performance in Q4 kind of speaks for itself. And we expect very strong share gains, which are really built into our backlog and our guidance for the year. So our share gain is in our orders, and customers have voted. And they continue to migrate towards the best technology at scale, which is what Ciena has. Take part of that question, do you want to?

Our outlook for all of our major customers is good, and our order volume is good. We're not seeing any sign of weakness in AT&T or any of our major customers.

All right. And Gary, just to be clear, going back to the share gain commentary, if you have lost in certain situations share because of inability to deliver, you're telling us that's not among Tier 1s or it's not something you think is...

We've not lost any major customers whatsoever during this. And if there are particular, one moment in time someone shipped more than we have into that, we think that is transitory given the demand characteristics that we're seeing and engagement with these customers.

Just to be clear though, Paul, we did see a relatively small number of cancellations in the quarter, probably the same dynamics that Gary is talking about. But that number has been overshadowed by the strong demand that we see overall. And whatever share we might have lost in any account, I'm confident that we will get it back over the coming quarters and years.

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So we had a very strong performance both in terms of revenue and in terms of order intake. It was well over $1 billion. We're continuing as we work with them in FY ’23, we expect to shift revenue significantly more to GCN than we did last year. And that's a combination of orders that we've got in the backlog and other orders that we're about to get. So it varies between the various players there. But overall, we see pretty strong demand as they continue to focus on building out their networks.

I also say that we have over the past few years developed a much deeper and more strategic relationship with those web-scale customers, who are driving so much of what’s going on in our industry. And so we’re very excited by the fact we’re engaged with them by much more than just plain data center conditions. And hopefully, we will be able to tell you about some of that stuff as we move through time.

Guys, can I ask for a clarification on one thing? For those of us who remember your acquisition continue to back in 2004, which was as identical to your acquisition of Tibit as two deals could be. And correct me if I’m wrong, but there is nothing left to contain employees, revenue, nothing. Now I recognize that was a copper DSL-based solution. The market is incredibly different. This is optical. Maybe that’s the answer. That is just a very different environment and you’re a very different company than you were 15 plus years ago. But any lessons learned from that deal?

Well, I think you answered the question on that, Paul. I think you’re absolutely right. We’re a much different company. We’ve got much greater scale. And I think the complementary nature within the switching and routing technology that we have is – the context of it is very different because we can wrap all that stuff around. And the customer relationships that we have. We’re now the largest player by quite a large way in the space that we’re in. And those relationships have been developed and matured. And we think now that with bringing on Benu and Tibit, it really provides an excellent complement to the portfolio that we’ve already got.

And to be clear, Paul, it’s approaching 20-years, so…

Thanks.

Katherine, we are ready for the next question.

Our next question comes from Samik Chatterjee with JPMorgan. Your line is open.

Great. Thanks for taking my question. I had a couple, and maybe if I can start with the gross margin outlook here. Jim, the gross margin outlook that you’re providing, I don’t know if you can walk us through a bit more of the puts and takes because it does sound like with the revenue, out sized revenue growth you’re expecting, you should have a bit more leverage to the gross margin, particularly with most of the sort of new product shipping at that time. But maybe help me understand sort of any pressures, and also sounds like your sort of pressures from a supply logistics perspective are going down. So we would have expected a higher number. Maybe walk me through the puts and takes, and I have a follow-up. Thank you.

Yes. The big driver of our gross margin is mix of products, and we do have sort of a continuum of margins. Typically, the early parts of projects we’re laying down line systems or we do that at lower gross margin. When we fill those line systems with capacity, we’re putting in cards or modems, which are higher margins. That’s just the way the business works. It helps our customers get through the early less than fully loaded conditions in their network. So that’s the way it works. This year or in 2023, our expectation is that our mix will shift pretty significantly toward line systems. That’s why we made the comment that we’re talking about starting to ship on some of our new wins that we’ve had over the past year. So that’s what’s going on in our gross margin, and we will see how it comes out, but that’s our expectation. We do think that the exception costs will ease in terms of the percentage margin effects. But they are still going to be there, and that’s going to impact gross margin. What we’ve said is that, that probably cost us 400 basis points or something like that last year. And it’s going to cost us something like that, although maybe a little less in ‘23. And finally, I’ll make the point that we are totally outsourced in terms of our manufacturer. And so our cost per unit is mostly variable. We don’t have a lot of fixed cost in our gross margin. We do have some, and that helps when we get our volumes. But the biggest part of our cost structure is variable and varies per volume.

Got it. And for my follow-up, if I can sort of ask you about what’s sort of embedded in terms of supply improvement in your fiscal ‘23 revenue guide? Because when we look at sort of – even the average of 3Q and 4Q, you’re above $900 million run rate, and you’re expecting that to go north of $1 billion. Is that generally as you talked about more predictability from your suppliers, and the upside there could be being able to buy more from the open market? I’m just trying to understand what’s embedded in the guide for supply? And what sort of downside or upside to that number can come from? Thank you.

Yes, Samik. So first of all, just starting with what we’re seeing in the environment today and a little bit in the rearview mirror. Things are getting better gradually. People are delivering more reliably to their commitments, and they are delivering more components to us period-over-period. You saw that in our Q4 results, and you’re seeing that in our Q1 guide. Looking forward, in terms of their commitments to us, they are committing more components to us going forward as well, and that’s factored into our guide. In addition to that, we talked in the past about a bunch of mitigation activities that we have control of, redesigning products to open up the aperture in terms of alternative design sources, building up a manufacturing capacity such that we can turn finished components and finished goods faster for our customers. All those things will benefit us in ‘23. And we’ve taken that into account as well as the learnings of the variability that we’ve seen to try to give you a balanced view of where we think we’re going to land from a supply and therefore, a revenue perspective in ‘23.

Specifically, we assume that supply chain dynamics do not worsen. Specifically, we believe that component suppliers will largely deliver on their current supply commitments. And we do not expect to encounter any substantial new decommits that we cannot mitigate, given all the work we’ve done in our R&D group.

Thanks, Samik. We appreciate the questions. Ready for the next question, Katherine.

Our next question comes from Alex Henderson with Needham & Company.

Great. Thanks. First question is on the mix assumptions for ‘23. Can you talk a little bit about the – you’ve talked about $4.2 billion in backlog, but underneath the surface of that is also your service business, which doesn’t show up in backlog but is related to additional shipments. So can you talk about the growth assumed in service versus product in the guide?

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So would your services then be a double-digit growth rate or a single-digit growth rate? I’m just trying to gauge the mix for the year.

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Right around 10% is probably the right answer. The second question I have for you is relative to the backlog. $4.2 billion in backlog is an enormous number. If I take 17% growth, that’s $617 million off of your ‘22 base. So how much do you think the backlog will work down? And if the backlog is still, say, I don’t know, $3 billion next year at the end of the year, doesn’t that imply continued outsized backlog going into ‘24 and ‘25 even?

Very hard to predict where our backlog is going to be next year. It’s going to be good, though. I can certainly expect that to be the case. Our backlog at the end of this year will depend upon what customer behavior is like, how our lead times change and of course, our deliveries during the year. So it’s just hard to predict that specific number on backlog, but it’s going to be good. Now we said we’re going to grow 10% to 12% average over the next 3 years, which implies higher than our previously stated growth for the long-term in fiscal ‘24 and ‘25, not a lot higher but somewhat higher.

Great. Thank you.

Thanks, Alex. Katherine, we are ready for the next question.

Our next question comes from George Notter with Jefferies. Your line is open.

Hi, guys. Thanks very much. Great to see the improvement in supply chain for you here. I was curious about what the expectations are for the Tibit and Benu acquisitions. I guess I’m wondering if they are a significant piece of your revenue expectations for January and then also for the full year. And then also curious about what kind of cost structure comes with those acquisitions. Thanks.

Yes. We don’t expect to close on Tibit until sort of towards the end of this quarter. And Benu is not large in terms of revenue. So really nothing significant in Q1. As we move through the year, we will see some from both of those, but it’s less than a couple of percentage points of our revenue. However, what it will do, the combination of those two acquisitions will help us as we attempt to build out our PON solutions and our position in that PON market. So, we are very excited by it. And as far as the OpEx, it’s in the sort of $20 million to $30 million of OpEx next year.

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Yes. Full year.

Okay, got it. Great. That makes sense. And then do you guys have a purchase commitment number out of curiosity for the end of the year?

We will get you that. I don’t have that right now, but I will get it to you, George.

Okay. Fair enough. Thanks guys. I appreciate it.

Thanks George.

One moment. Our next question comes from Simon Leopold with Raymond James. Your line is open.

Great. Thanks for taking the question. Just maybe first, a quick clarification on some of the metrics here. Gary, you said that backlog remained over $4 billion. I think last quarter, you talked about $4.4 billion. And I assume that certainly part of the whole sort of normalization process, we have got to begin to be working down backlog, so understandable. But I want to verify that backlog did come down by roughly $300 million to $400 million. And I assume orders this quarter were down year-over-year. Is that a metric you are able to share?

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Thanks. And then in terms of my more substantive question, I wanted to see if you could elaborate on your thoughts on India as a market. I recall, I think it was 2018, it was I think, just over 9% of revenue and slowed down subsequently. It seems very evident that India has changed for the mobile infrastructure suppliers. I know you have got some operations there. If you could elaborate what you expect over the next one year to two years from that region. Thank you.

India has been a big market for us. It’s gone through some cycles, for sure. And I think – I guess what’s behind your question as well is it’s now with the whole sort of 5G commitments that everybody has made going through a very bullish cycle for the next couple of years. And we have number one market share in India, and we are very well positioned to take advantage of that growth. You are beginning to see that show up in the numbers. India, I think off a fairly low number relative to where it’s been. We are up about 30% year-on-year when a quarter change. And year-on-year in total is about 10% to 12% growth. So, you are beginning to see that come back. I would expect that to be an outsized growth driver for Ciena for the next one year to three years, absolutely.

And does it have a negative impact on your margin, because the RAN vendors all talk about great revenue, but then dilutive to gross margin, neutral to operating margin. You are in a different business. I just want to make sure folks understand what it means to you from a profitability perspective as well.

Generally speaking, the way they do their project builds, yes, they put line systems out, which is generally lower margin. And we will see a little bit of that, but they tend to build out quite quickly in terms of capacity. So, generally speaking, it’s not dilutive to our overall margins. It may sort of ebb and flow quarter-to-quarter whatever. But generally speaking, I mean it’s consistent with our overall margins there.

Great. I really appreciate that. Thank you.

While we are waiting for the next question, I got the answer to George’s question about purchasing commitments, it’s $2.6 billion.

Katherine, we are waiting for the next question once you are ready.

One moment. Our next question comes from Amit Daryanani with Evercore ISI. Your line is open.

Thanks for taking my question and my congrats. Maybe to start off with as you think about fiscal ‘23 guidance, which is fairly robust, can you just talk about how do you think growth across the different verticals? And obviously we see starts to going versus maybe a little bit slower, what’s that 16% to 18% top line growth?

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That’s really helpful, and just a follow-up. How should we think about the cash flow generation into fiscal ‘23? And sort of, I guess to some degree, do you think inventory levels at peak, and this has to trend lower? Just any parameters on how free cash flow would start up in ‘23 will be really helpful to understanding that. Maybe expanding that, you see a capital allocation evolving for that to hopefully improve next year.

Yes. We are not going to see an enormous amount of free cash flow in ‘23 partly because we are going to spend a couple of hundred million or so on acquisition of Tibit. Generally speaking, too, we don’t expect that our inventory level is going to decline sharply this year. We could be wrong. I hope we are wrong. That would mean we ship more than we expect to ship now. But we expect our inventory position to come down, just not as far as it will in subsequent years. So, without giving a number today, I can just say that we are not going to be in the free cash flow generation mode that we have been in, in past years. We will have free cash flow of course, but it’s just not going to be as big as it’s been.

Prefect. Thank you.

Thank you. Katherine, ready for next question.

Our next question comes from Jim Suva with Citi. Your line is open.

Given the backlog and your strong guidance for fiscal ‘23, can you comment a little bit about seasonality? I would assume that seasonality, I mean with COVID, it’s been a long time since we have normal seasonality. But could you comment about seasonality for fiscal ‘23? I would assume the backlog and supply makes seasonality kind of less relevant?

Yes. Jim, I would – yes, I mean that really is the answer to that. I think it is less relevant. It’s interesting that we are seeing even stronger order flows in the Q1 that we are in right now. And typically, it would be lower. So, I think because of all the whipsaw of demand over COVID and the supply chain, I think those dynamics have kind of been thrown up in the air. And I think it’s going to take a while before they kind of bed back down again, frankly, because people want to make sure that they are in the queue and that they are able to get the security of supply and even if it is further out. --:

If you take the midpoint in the year, 22%, which is a little higher than what we have experienced for the long period of time. So, that just sort of proves out what Gary is saying. It’s all about how fast we can get components and deliver to customers, not so much the typical seasonal order pattern.

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I think it’s very difficult for us to predict that, to be honest. And that’s why I sort of shared with you what we are seeing in Q1. I actually think our backlog is going to go up in – coming out of Q1. Even though we have upped our shipment and our revenue guide for Q1, I think midpoint was 870. And I think we have just this morning shared midpoint would be about 950. Even with that, we still think we are going to add backlog coming out of Q1. So, I think it’s just a testament to the A, the strong demand characteristics that we are seeing across the board, and B, supply chain is improving, but lead times are still long.

Well, that’s very impressive. Thanks for the clarifications. Really appreciate it.

Thank you. Thanks Jim.

Katherine, ready for the next question please.

Okay. One moment. Our next question is from Catharine Trebnick with MKM Partners. Your line is open.

Thanks for taking my question. Excellent print. Can you describe the target markets you are specifically looking at with these two new acquisitions? It looks like you are trying to go more into the regional market, but just clarify that for me. And then thank you.

Catherine, the two acquisitions from a solution perspective, I will talk to our broadband access part of our portfolio, which is one of the key use cases we have talked to you about as part of our next-generation metro and edge TAM expansion. So, anybody building our next-generation fiber access solutions would be the target market. There is lots of activity. Of course, some rural broadband funding that speaks to your Tier 2 opportunity, but there are also Tier 1s around the world that are looking at their architecture for their fiber build-outs as well. And we are attacking both of those spaces.

And then how much does this lift your total addressable market? Thank you.

We were – we had indicated with our focus on next-generation metro and edge that our TAM expansion had basically almost doubled, and we had talked about that in the past. This really is a part of securing a stronger solution portfolio set to go after that already announced expanded TAM.

Alright. Thank you.

Catherine thanks.

Operator, we are ready for next question.

Yes, one moment. Our question comes from Mike Genovese with Rosenblatt Securities. Your line is open.

Great. Thanks a lot. I just wanted to clarify on the gross margin for this quarter that you reported, the strength. Was that really all mix towards modems, or was it supply chain improvement? Is there not only better supply, but is it more coming at a more reasonable price than before?

Mostly mix. We did see some improvement from expectations in our, what we call exception costs, which are a combination of logistics costs and the premium costs that we paid. It’s mostly mix.

Okay. And then just quickly, for this year, for ‘23, I didn’t really hear a gross margin outlook for the full year. I got a revenue outlook for the full year, but I mean should we think this year, 43.6, I want to model consistently for this year and is that fair?

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I guess I just missed that commentary, apologize. I will let somebody ask any question since a lot them already been asked. So, thanks very much.

Thanks Mike.

Katherine, we are ready to another one.

Our next question comes from David Vogt with UBS. Your line is open.

Great. Thanks guys for squeezing me in. I know we have danced around sort of the backlog and the strength of the business question, but I want to maybe take a longer term view and maybe pull back a little bit. If I look at your business back from, let’s say, fiscal ‘19 before COVID, and I kind of run it forward through your ‘25 guidance, I think at the high end of your 3-year plan would suggest that your business would have grown at a 6% CAGR, which is kind of consistent with your model. I mean is that the right way to think about it as we go through ‘23, ‘24 and ‘25, backlog normalizes, and we are back to sort of a normalized mid to slightly better growth dynamic for the overall business?

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Right. And maybe just a quick follow-up. I know you have talked about backlog being difficult to predict. But can you just share with us sort of what underpins the ‘24, ‘25 from a backlog perspective versus in-period orders and how you are thinking about that?

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Great. Thank you very much. Congrats guys.

Thank you.

Thank you, David and thank you everyone for joining us today. We appreciate the opportunity to speak with you. We wish you all happy holiday, and happy New Year. We are looking forward to connecting with you all over the next week or two weeks. Thank you. Have a good day.

This concludes today’s conference call. Thank you for participating. You may now disconnect.