Ciena's Q3 2025 Earnings Call: Contradictions Emerge on Cloud Revenue, Margins, Neo-Scaler Market, and Order Backlog

The above is the analysis of the conflicting points in this earnings call

Date of Call: September 04, 2025

Financials Results

• Revenue: $1.22B, up 8% sequentially and nearly 30% YOY
• EPS: $0.67 (adjusted), up 60% sequentially and 91% YOY
• Gross Margin: 41.9% (adjusted), 90 bps above guidance
• Operating Margin: 10.7% (adjusted), up 270 bps YOY

Guidance:

• Q4 revenue $1.24B–$1.32B.
• Q4 adjusted gross margin 42%–43%; margins improved since Q2 bottom.
• Q4 adjusted OpEx $390M–$400M driven by incentive comp.
• Q4 GAAP-only charges: ~$90M noncash IPR&D write-off (25G PON) and ~$20M restructuring (4–5% headcount).
• Tariff impact expected immaterial under current regime.
• FY26 revenue growth about 17% YOY.
• FY26 adjusted gross margin ~43% ±1 pt.
• FY26 OpEx flat with FY25 (~$1.5B).
• Operating margin target 15%–16% achieved in FY26.
• Interconnect revenue expected to at least double again in FY26.

Business Commentary:

* Strong Financial Performance: - Ciena reported Q3 2025 revenue of $1.22 billion, exceeding the top end of their guidance. - Quarterly adjusted EPS increased by 60% sequentially and 91% year-on-year. - The growth was driven by broad-based demand across cloud and service provider segments and increased investment in AI infrastructure.

• Investment in AI and Data Center Infrastructure:
• Ciena secured significant new wins with hyperscalers, including an industry-first project for training and connecting regional GPU clusters, with initial revenue shipments underway.
• The company's Interconnects portfolio is expected to double year-over-year in 2025 and potentially more in FY 2026, driven by demand from cloud providers and service providers.

• This growth is due to the critical role AI network infrastructure plays in connecting data centers to end customers for training and inference.

• Supply Chain and Margin Improvement:

• Ciena achieved an adjusted gross margin of 41.9% in Q3, 90 basis points above guidance, primarily due to benefits from sales of previously reserved material and reduced net tariff impacts.
• The company is focused on structurally improving gross margins by optimizing supply chain strategies and product design for long-term cost reductions.

• This improvement is expected to continue, with guidance for Q4 gross margins between 42% and 43%, indicating further margin expansion.

• Service Provider Engagement and Network Investments:

• Service providers accounted for three of Ciena's top five customers in Q3, driven by investments in core infrastructure and managed optical fiber networks (MOFN).
• The company is aligning strategic investments to focus on its Coherent Optical Systems, Interconnects, and Coherent Routing, reflecting the growing importance of service provider investment in AI infrastructure.
• This shift is due to increasing demand from cloud providers and the role service providers play in delivering AI to the edge.

Sentiment Analysis:

• Revenue above guidance ($1.22B); adjusted EPS up 91% YOY. Orders were “considerably above revenue” and a new quarterly record. Backlog provides visibility into 2H26; FY26 revenue growth guided ~17% with improving gross margins and operating margin pulled in to 15%–16% for FY26. Management cites strong AI-driven demand across cloud and service providers.

Q&A:

• Question from George Notter (Wolfe Research): How do industry consolidation and your tech lead affect gross margins and pricing power going forward?
  Response: Ciena expects steady gross margin expansion from the Q2 floor, driven by product leadership (18–24 month lead), supply optimization, and firmer value-based pricing.

• Question from Samik Chatterjee (JPMorgan): How big is the neo-scaler opportunity and how does it factor into FY26; how will the mix versus telcos/cloud change?
  Response: Neo-scalers are incremental and included in FY26 outlook; hyperscalers (incl. neo) remain ~50% of mix with service providers (notably MOFN) rising; backlog supports visibility.

• Question from Meta Marshall (Morgan Stanley): What drove gross margin upside—mix vs. internal initiatives—and how much benefit from tariffs?
  Response: Margins benefited from scaling pluggables/RLS lowering unit costs; tariff clarity added ~20–30 bps; despite 20% sequential plug growth and strong RLS, margins improved; WL6 transition aids further.

• Question from Ruben Roy (Stifel): Clarify the ‘scale across’ opportunity vs. coherent light; and plans for residential broadband/PON.
  Response: Scale across uses RLS + WL6 Nano 800G ZR for long distances; coherent light still expected, with revenue likely starting in FY27. Broadband will be supported but future 25G/100G PON development is halted to prioritize optical/AI.

• Question from Simon Leopold (Raymond James): How is the new DCI use case different and what drove routing/switching outperformance?
  Response: New DCI is a dedicated AI training interconnect (shorter distance, low latency) using RLS + 800G pluggables; routing strength from SP recovery, coherent routing in aggregation, and DCOM inside data centers.

• Question from Timothy Long (Barclays): Can interconnect pluggables double again without new wins; and details on the large AI training-network ramp and margin impact?
  Response: Customer base is in the tens; backlog/orders already support doubling in FY25 and likely FY26. The training-network deal is multiple hundreds of millions, small Q4 rev, ramping in Q1–Q2 FY26; scale benefits support margin outlook (FY26 ~43% ±1).

• Question from Timothy Savageaux (Northland Capital Markets): Update on WaveLogic 6 customer traction and any supply constraints.
  Response: WL6e added 11 customers to 60 total; ports doubled sequentially; standardizing across major hyperscalers. Supply is tight but improving with investments; capacity expanding through 2026.

• Question from Amit Daryanani (Evercore ISI): Will cloud accelerate in FY26 and are co-developed solutions improving share?
  Response: Both cloud and SP should grow; SP mid-single digits with MOFN/AI edge keeps mix similar. Co-development (RLS, DCOM) with hyperscalers is expanding Ciena’s share.

• Question from David Vogt (UBS): Size and ramp of DCOM and what underpins confidence in FY26 guidance—backlog vs. new orders?
  Response: DCOM is hundreds of millions at one customer, ramping through FY26. FY26 confidence stems mainly from elevated backlog converting as supply expands, plus sustained SP demand.

• Question from Karl Ackerman (BNP Paribas Exane): With strong module growth and wins, why not reach 15% op margin next year?
  Response: They will: 15%–16% operating margin is now expected in FY26, pulled forward by one year via improving gross margins and flat OpEx.

• Question from Ryan Koontz (Needham & Company): How vertically integrated are you at the optical layer, and are you seeing U.S. share gains amid Nokia/Infinera consolidation?
  Response: Ciena is highly vertically integrated in optical modems while flexibly using third-party parts; it’s seeing both competitive share wins and benefit from SP capex recovery, aided by an 18–24 month tech lead.