Ciena's Q3 2025 Earnings Call: Contradictions Emerge on Gross Margin Outlook, Cloud Revenue Sustainability, and Service Provider Roles

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

Date of Call: None provided

Financials Results

• Revenue: $1.22B, up 8% sequentially and ~30% YOY; above the top end of guidance
• EPS: $0.67 adjusted EPS, up 60% sequentially and 91% YOY
• Gross Margin: 41.9% adjusted, ~90 bps above guidance; benefited from lower net tariffs
• Operating Margin: 10.7% adjusted, up ~270 bps YOY

Guidance:

• Q4 revenue expected at $1.24B–$1.32B.
• Q4 adjusted gross margin expected at 42%–43% (Q2 was the floor; improving sequentially).
• Q4 adjusted OpEx expected at $390M–$400M.
• Q4 to include ~$90M non-cash IPR&D charge and ~$20M restructuring (both adjusted out).
• FY26 revenue growth of ~17% YOY (similar to FY25).
• FY26 gross margin ~43% ±1 ppt.
• FY26 OpEx flat vs FY25 at ~$1.5B.
• Operating margin target of 15%–16% now expected in FY26 (pulled in by one year).
• Tariff impacts expected to be immaterial.
• Plan to repurchase ~$85M of shares in Q4 (FY total ~$330M).

Business Commentary:

• Revenue Growth and AI Integration:
• Ciena reported revenue of $1,220,000,000 for Q3, exceeding the top end of their guidance.

• The growth was driven by strong demand for AI workloads and cloud traffic, leading to a significant increase in orders.

• Cloud Provider and Service Provider Dynamics:

• Cloud providers continue to invest heavily in AI, with orders set to exceed revenue, marking a new quarterly record.

• This demand is attributed to the need to interconnect data centers for AI applications, benefiting from Ciena's portfolio, including WaveLogic Technologies and the RLS platform.

• Investment in High-Speed Connectivity:

• Ciena's interconnectibles business saw a 140% year-on-year increase, with plans to double again in FY 2026.

• The growth is driven by the increasing demand for high-speed connectivity solutions in cloud and service provider networks.

• Gross Margin Improvement:

• Ciena achieved an adjusted gross margin of 41.9% in Q3, a 90 basis points higher than expected.

• The improvement was driven by benefits from sales of previously reserved material and reduced tariff impacts.

• Strategic Investment Alignment:

• Ciena shifted strategic investments from residential broadband access to coherent optical systems and interconnect solutions.
• This strategic realignment is aimed at prioritizing high-growth areas of the business where demand and opportunity are more pronounced.

Sentiment Analysis:

• Management reported a “really strong quarter,” with revenue above guidance and adjusted EPS up 91% YOY. Orders set a new quarterly record and were “considerably above revenue.” They expect ~17% growth in FY26 and pulled in the 15%–16% operating margin target to 2026. Backlog provides visibility into 2026, and gross margins are improving from the Q2 floor.

Q&A:

• Question from George Notter (Wolfe Research): How does industry consolidation and your competitive position affect gross margins and pricing power going forward?
  Response: With an 18–24 month tech lead and improved industry structure, Ciena expects steady gross margin expansion and will pursue a fair value exchange (firmer pricing) as scale and cost reductions take hold.

• Question from Samik Chatterjee (JPMorgan): How large and when is the Neoscaler opportunity, and how does it factor into the FY26 guide and mix?
  Response: Neoscalers are an incremental growth vector already in the FY26 outlook; mix remains roughly ~50% cloud with service providers rising via MOFN and AI edge, supported by strong backlog visibility.

• Question from Meta Marshall (Morgan Stanley): How much of gross margin upside is mix vs. internal initiatives, and what was the tariff benefit?
  Response: Margin improvement reflects scaling and cost reduction in pluggables/RLS, with Q4 GM guided to 42%–43% and FY26 ~43%±1; tariffs added ~20–30 bps of the Q3 beat.

• Question from Reuben Roy (Stifel): Clarify “scale across” vs. Coherent Lite opportunity and plans for residential broadband.
  Response: Scale-across training networks need performance optics (RLS + 800G 6-nano) due to distance/power constraints; Coherent Lite revenue is still expected from 2027; Ciena will support existing broadband but cease 25G/100G PON development to prioritize AI networking.

• Question from Simon Leopold (Raymond James): How is the DCI opportunity different, and what drove router/switching outperformance?
  Response: New DCI is a dedicated, low-latency training network (RLS + 800ZR) expected to proliferate; routing growth stems from SP spend recovery, coherent routing deployments, and DCOM inside data centers.

• Question from Tim Long (Barclays): Can interconnect pluggables double again next year without new wins, and details on the large training-network ramp and margin impact?
  Response: Pluggables are up 20% qoq and ~140% YOY with customers in the tens; backlog underpins doubling in 2025 and likely again in 2026. The training-network has orders in-house for one region, small Q4 rev, ramping in Q1/Q2 FY26; scale supports margin gains already baked into guidance.

• Question from Tim Savageaux (Northland Capital Markets): WaveLogic 6E traction and any supply constraints?
  Response: 6E added 11 customers (total ~60) with port shipments doubling sequentially; standardizing across major hyperscalers; supply is tight but capacity investments support planned growth and shortening lead times into 2026.

• Question from Amit Daryanani (Evercore): Will cloud accelerate in FY26, and does co-development imply share gains?
  Response: Both cloud and SPs should grow with mix roughly similar; co-developed solutions (RLS, DCOM) deepen hyperscaler ties and should expand share over time.

• Question from David Voigt (UBS): What is DCOM’s scale and what drives FY26 confidence—backlog or sustained orders?
  Response: DCOM is hundreds of millions with one hyperscaler and ramping; FY26 confidence is primarily backlog-driven as supply converts orders to revenue, complemented by healthy SP demand.

• Question from Karl Ackerman (BNP Paribas): Why not reach 15% operating margin next year given mix tailwinds?
  Response: Ciena now expects 15%–16% operating margin in FY26 (accelerated by one year), driven by revenue growth, improving gross margins, and flat OpEx.

• Question from Ryan Koontz (Needham): Status of optical vertical integration and any NA share benefits from Nokia/Infinera consolidation?
  Response: Ciena is highly vertically integrated in optical modems while leveraging third parties for flexibility; it is benefiting from both competitive takeaways and SP infrastructure spend recovery, aided by its 18–24 month tech lead.