Drill Down Earnings, Ep. 478: Ciena Q3 earnings – ($CIEN) – A Deep Dive with Cory Johnson

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Cory Johnson (0:34)

Welcome to Drill Down. We have quarterly results from Ciena, that giant in the world of telecommunications and networking equipment. It's one of the 50 most important companies in technology. Says me, Cory Johnson, Chief Market Strategist, Epistrophy Capital Research. We look at the 50 most important companies in technology. Increasingly, there's a lot of telecom and optical. Telecom. This is a telecom company. It's an important telecom company, but it's all about AI and all about data centers right now. And Ciena is certainly part of that. Ciena builds the coherent optics and the line systems if you want to move data between and around data centers. They transport everything from AI.

Well, everything is happening in the AI build out. All the information is happening there. Quite often, Ciena servers, Ciena devices, Ciena routers are using, not servers, but routers, are moving information through these Ciena devices to other Ciena devices to connect AI infrastructure. And hyperscalers increasingly that are geographically separated from the GPUs they want to have connect to each other, again, are using these sort of single training fabrics. The company Ciena has gone from being a telco supplier to an AI data center supplier. And so the growth dynamics of this company now are all about AI. So what did Q3 show us? Well, it showed us better than Wall Street estimates. I've already told you more about this stock than the knuckleheads on TV probably know, but 1.67 billion in revenues, $2.11 in earnings per share was better than Wall Street estimates. A beat, yeah, so what? This is optical-driven revenue growth and happening at a 37% year-over-year clip. And yeah, they still got a lot of telecom in their business, but increasingly selling to the hyperscalers. They talked kind of cryptically on a conference call about some hyperscaler deal that they closed in the quarter. Not that many hyperscalers, only one's gonna be good. But a very strong quarter from Ciena. Now, the stock market didn't like this, but I'm gonna tell you what the results are, and you can tell me what the stock market should have done. Because eventually, the performance of the company is more important than what the stock market does on any given day, and the stock market performance will be driven by the performance of the company. Operating margins getting a lot better. You know, two years ago, we were looking at this company two and a half years ago, that was putting up operating losses. Now it's doing 18% operating margin, and margins are just getting better and better and better almost every quarter consecutively.

Revenue blend. So yeah, there's a lot of services in here. Service is not growing so much, we'll show you that in a second, but selling stuff is the main part of their business, 83% of revenues. And that's a strong sign here, because services follow that to some degree. And, you know, what we've seen with all the optical companies we've been talking about, you know, I like to talk about these companies, whether it's Coherent or Lumentum, or Applied Optical Electronics, or Fabrinet, among them.

Cisco, well, Ciena, they signed, they're talking about supply agreements and capacity, not about customers as much, or they're talking about customers too. But look, when you're talking about not having enough ability to get supply, it means you're in a really hot market. And that's where these guys are right now. So they signed some long-term supply agreements running all the way through 2029

And they say they're able to push price increases, even though they're adding supply on here, and they expect their margins to get better and better. Now, I mentioned the product growth is surging 42% on a year-over-year basis. Really strong here in terms of selling products and services also increasing at 16%, but nowhere near as fast as products. Their global services revenue, I should say, it's not nothing, was very strong in the quarter.

And their installation services in particular were a big driver in the quarter. And the gear that they're shipping is installed and carrying traffic as soon as it ships practically. So they're putting the stuff in and turning it on and making sure that they're getting the revenues from these things right away. I should also mention that the loan decliner in their business with their Blue Planet Automation Software and Services, that was down 17% in a year over year basis. But fundamentally, products growing at 42%, so it's going to grow as a percentage of revenues because services are only growing at 16%. Now when we dig into exactly what's happening here with their different kinds of products, Optical Networking is the thing right now for this company. Not routing and switching, which is 9% of revenues or platform and services is 6%.