Ciena's Q4 2025 Earnings Call: Contradictions in Gross Margin Trajectory, Hyperscaler Revenue Timing, Cloud Demand Predictability, and Services Business Strategy

Date of Call: Month DD, YYYY

Financials Results

• Revenue: $1.35B for Q4, up 20% YOY; $4.77B for full year, up 19% YOY
• EPS: $0.91 per diluted share for Q4, up 69% YOY; $2.64 per diluted share for full year, up 45% YOY
• Gross Margin: 43.4% in Q4, 90 bps above midpoint of guide; 42.7% for full year
• Operating Margin: 13.2% in Q4, up 250 bps sequentially and 320 bps YOY; 11.2% for full year, up 150 bps YOY

Guidance:

• Revenue for fiscal 2026 expected to be approximately $5.7B to $6.1B (midpoint ~24% growth).
• Gross margin for fiscal 2026 expected to be 43%, plus or minus 1 point.
• Adjusted operating margin for fiscal 2026 expected to be 17%, plus or minus 1 point.
• Adjusted operating expense for fiscal 2026 expected to be flat at ~$1.52B.
• Capital expenditures for fiscal 2026 expected to be $250M to $275M.
• Share repurchase of ~$330M expected under 2024 authorization.
• Q1 revenue expected in range of $1.35B to $1.43B, with adjusted gross margin between 43% and 44%, and operating margin of 15.5% to 16.5%.

Business Commentary:

* Record Revenue and Earnings Growth: - Ciena reported record fiscal fourth quarter and full year revenue of $1.35 billion and $4.77 billion, respectively. - Q4 earnings per share were $0.91, up 69% year-over-year, and full year EPS was $2.64, up 45% from fiscal 2024. - The revenue and earnings growth were driven by sustained investment in high-speed connectivity technologies and strong demand across both cloud and service provider customers.

• Strong Demand from Cloud Providers:
• Orders from cloud providers were very strong, contributing significantly to the growing backlog, which ended the year at $5 billion.
• Cloud providers are focused on scaling their networks due to rapid traffic growth, which requires significant investment in AI-related infrastructure.

• This demand was driven by the underinvestment in networks by cloud providers in the past and the current need to scale global networks for AI operations.

• Increased Demand from Service Providers:

• Service provider orders grew nearly 70% for the year, with the top 3 service providers' revenue from '24 to '25 growing 16%.
• Service providers are reinvesting in transport infrastructure after years of digesting inventory and are focused on 5G and managed optical fiber networks (MOFN).

• The demand was fueled by AI-driven enterprise cloud demand and the need for MOFN by hyperscalers.

• Expansion in In and Around Data Center Opportunities:

• Ciena's in and around data center opportunities grew threefold from 2024 to 2025, contributing significantly to the 2026 expected growth rate.

• The growth was driven by cloud providers investing in distributed AI data center training clusters, necessitating high-capacity, low-latency connectivity solutions.

• Gross Margin and OpEx Management:

• Q4 adjusted gross margin was 43.4%, exceeding the high end of the guide by 90 basis points.
• Ciena achieved flat OpEx for fiscal 2026 while investing in new opportunities, driven by higher revenue and software mix, and through constructive pricing discussions with customers.

Sentiment Analysis:

Overall Tone: Positive

• Strong performance with record quarterly and annual revenue; accelerating demand from cloud and service providers; robust and durable demand expected; confidence in AI-driven dynamics and market leadership; raised fiscal 2026 guidance due to accelerated demand; positive outlook for continued growth and market share gains.

Q&A:

• Question from Ruben Roy (Stifel): How much of the new use cases (scale across, DCOM) are included in the updated fiscal 2026 guidance versus existing growth?
  Response: All new opportunities are included in the guidance, with in-and-around data center revenue tripling from low single digits to low double digits as a percent of total revenue.

• Question from Ruben Roy (Stifel): Can you provide more detail on the scale across wins with new hyperscalers, including revenue or bandwidth metrics?
  Response: Multiple hyperscalers have adopted the architecture; deals are in the hundreds of millions each, but specific quantification is not uniform as traffic demand for training is just beginning to ramp.

• Question from Simon Leopold (Raymond James): What is the expected timeline for the two new hyperscaler scale across wins to impact numbers, and what is the longer-term project cadence?
  Response: Revenue from all three hyperscalers is expected to begin in fiscal 2026, with the major ramp projected for 2027 and 2028 as infrastructure scales.

• Question from Simon Leopold (Raymond James): Can you break down the 10% revenue customers disclosed for Q4?
  Response: The three 10% customers included one U.S. cloud provider, one international cloud provider, and AT&T; collectively they represented just under 44% of Q4 revenue.

• Question from Atif Malik (Citi): Is there an acceleration in adoption for Nubis products (CPO, NPO) as previously expected?
  Response: Engagement with multiple opportunities has increased since the acquisition, with linear retimer products seeing a 2026 opportunity and optical products more aligned with 2027 and beyond.

• Question from Atif Malik (Citi): What is driving the sustainable 17% operating margin outlook apart from laser integration?
  Response: Cost reductions from ramping 800G pluggables (improved yield economics) and benefits from pricing discussions with customers, expected to materialize in late fiscal 2026.

• Question from George Notter (Wolfe Research): What are the main supply constraints and what is being done to address them?
  Response: Primary constraint is on photonics/optical components; increased capital expenditures (~50% up) to secure supply and expand capacity to support demand through 2026 and into 2027.

• Question from George Notter (Wolfe Research): What are current average lead times?
  Response: Lead times vary by product; they have extended but are being managed through capacity investments; confidence in delivering the 24% growth guide for the year, with expectations lead times may ease by late 2027.

• Question from Tal Liani (Bank of America): What drove the massive increase in growth guidance from 8% to ~24%, and do you now have good visibility?
  Response: Close proximity to hyperscaler customers provided early insight into demand, leading to significant orders ($7.8B in 2025) and sell-out conditions in Q1. The cloud providers' realization of network as a gating item has created durable demand visibility.

• Question from Tal Liani (Bank of America): Will gross margin follow a similar cyclical pattern as past cycles, given the cloud and pluggables mix?
  Response: Expect steady margin expansion multi-yearly rather than sharp cyclical swings, driven by foundational customer value recognition and sustained investment in networks; sequential improvement expected, exiting 2026 better than first half.

• Question from Samik Chatterjee (JPMorgan): Are new clouds engaging on scale across, and what are the margin implications?
  Response: Scale across is currently driven by large hyperscalers; new neoscalers may follow later. Early deployments involve new line systems and pluggables, which are margin headwinds, but margins are expected to improve with volume and yield gains.

• Question from Samik Chatterjee (JPMorgan): What visibility exists for fiscal 2027, and does the long-term growth guide still hold?
  Response: The previous 8-11% long-term growth guide is off the table; focus is on 2026. Momentum is expected to continue into 2027, supported by multi-year scale across wins and new in-and-around data center opportunities.

• Question from Timothy Long (Barclays): Can you scale the DCOM opportunity and its role in moving inside the data center?
  Response: DCOM with Meta is a multiyear, hundreds-of-millions opportunity; expansion into new data centers and engagements with other hyperscalers provide an entree into the data center alongside other initiatives like Nubis and scale across.

• Question from Timothy Long (Barclays): How sustainable is the telco/MOFN business over the next few years?
  Response: Sustainable mid- to single-digit growth is expected as service providers reinvest in transport after years of underinvestment; AI-driven MOFN demand is adding to this, with international and North American ramps.

• Question from Ryan Koontz (Needham): How has product mix changed in the cloud segment over the last 12 months?
  Response: Mix has shifted significantly towards line systems (e.g., for scale across), 800G pluggables, and DCOM; this architecture-heavy approach was not fully projected in prior planning.

• Question from Ryan Koontz (Needham): What industry constraints (fiber supply, permitting, labor) are cloud customers facing?
  Response: Tight relationships with fiber providers (e.g., Corning) are helping scale capacity; Ciena's optical services organization is increasingly engaged to facilitate deployment, representing a growth opportunity.

Contradiction Point 1

Gross Margin Trajectory and Outlook

This is a significant strategic and financial forecast contradiction. The narrative shifts from a clear, confident path to mid-40s margins by a specific inflection point (Q2 bottom) to a "different cycle" with near-term headwinds and a steadier, longer-term path to the same target. This change in timeline and mechanism for margin recovery is critical for modeling future profitability.

1) What factors drove the significant guidance increase? 2) Will gross margins cycle higher with revenue this time, and what conditions are needed for a similar trend? - Tal Liani (Bank of America)

20251211-2025 Q4: The margin trajectory will be different this cycle. Near-term headwinds exist... However, the underlying demand is seen as more sustainable, leading to steady multi-year gross margin expansion rather than a sharp cycle. The target is to reach the mid-40s, viewed as a new waypoint. - Marc Graff(CFO)

How might industry consolidation affect your gross margin outlook? Could pricing become firmer or increase as the market consolidates? - George Notter (Wolfe Research)

2025Q3: This, combined with industry consolidation, supports the expectation to reach mid-40s gross margins over time, with Q2 marking the bottom and steady improvement expected. - Gary Smith(CEO)

Contradiction Point 2

Primary Gross Margin Pressure and Drivers

This is a substantive change in the diagnosed business pressure. The primary headwind shifts from being explicitly driven by demand for specific products (RLS systems and pluggables) to being driven by new product introductions (NPIs like 800G pluggables) and mix shifts. This changes the narrative around what is constraining margins and what will alleviate pressure.

1) Is the adoption timeline for CPO/NPO products accelerated following the Nubis acquisition? 2) What factors are driving the sustainability of the 17% operating margin? - Atif Malik (Citi)

20251211-2025 Q4: Near-term headwinds exist from NPIs (like 800G pluggables) and a shift in mix towards higher-value (power/space-saving) products. - Marc Graff(CFO)

Can you discuss the linearity of cloud customer orders this quarter and the growth's sustainability into fiscal 2026? Is the shift to pluggables and coherent light products a long-term headwind for gross margins? - Samik Chatterjee (JPMorgan)

2025Q2: Mix is the primary driver of quarterly gross margin. The current pressure from pluggables (at least $150M revenue target for FY25) and RLS systems is a headwind in the short term. - James E. Moylan(CFO)

Contradiction Point 3

Scale and Timing of Revenue from "Scale Across" Deals

This represents a major shift in the forecast for a key growth driver. The timeline for significant revenue contribution from major new hyperscaler deals is pushed out by nearly two years, from an "imminent" ramp in early 2026 to a major ramp in FY27/28. This directly impacts near-to-mid-term revenue projections.

1) When will the hyperscaler "scale across" wins impact revenue, and what's the projected timeline? 2) Can you break down the Q4 revenue contributions from the 2 cloud and 1 operator customers? - Simon Leopold (Raymond James)

20251211-2025 Q4: Revenue from the three hyperscalers... is expected to begin in FY26, but the major ramp will occur in FY27 and FY28 due to the massive infrastructure required. - Gary Smith(CEO)

1) Does doubling the interconnect pluggable business in 2026 require new customer wins? What is the current customer base breadth? 2) Can you detail the growth and margin implications for the large "scale across" win? - Timothy Long (Barclays)

2025Q3: Revenue recognition is just beginning in Q4, with a significant ramp expected in Q1/Q2 2026. - Gary Smith(CEO)

Contradiction Point 4

Cloud Demand Dynamics and Predictability

This is a significant change in the characterization of a core customer segment. The narrative shifts from describing cloud demand as highly variable and "project-based" with "no linearity" to describing it as providing "exceptionally high visibility" and "strong order flow." This affects confidence in the sustainability and predictability of a key revenue stream.

1) What drove the significant guidance increase? 2) Will gross margins improve with revenue growth this time, and what conditions are needed for a similar trend? - Tal Liani (Bank of America)

20251211-2025 Q4: Visibility is exceptionally high due to: 1) Close relationships with hyperscalers providing early insight, resulting in strong order flow (record $7.8B in FY25), and 2) Supply chain efforts and capacity investments made in FY25 that are now annualizing. - Marc Graff(CFO) & Gary Smith(CEO)

What are the cloud service provider segment dynamics, order trend linearity this quarter, and signs cloud customers are rethinking strategies? - Adrienne Colby (Citi)

2025Q1: We've seen **very solid and accelerating demand across multiple cloud players with no linearity**; demand has **continued into Q2, starting strong**... Increasing demand requires scaled infrastructure and connectivity, making traffic growth consistent for the next few years. - Gary Smith(CEO)

Contradiction Point 5

The Role and Growth Outlook of the Services Business

This indicates a strategic evolution in how the company frames a segment of its business. The portrayal shifts from Services growth being a correlated, "noisy" follower of optical growth to being characterized as a "major growth area" with a distinct, large customer base. This could signal a change in how the segment is prioritized and its expected contribution.

1) How has your cloud segment product mix changed year-over-year? 2) What external growth constraints exist (e.g., fiber supply, permitting)? - Ryan Koontz (Needham)

20251211-2025 Q4: Ciena's large optical services organization is increasingly engaged in deploying this infrastructure, with one major cloud provider becoming its largest service customer last year. This services business is seen as a major growth area. - Gary Smith(CEO)

What are WaveLogic's applications and key growth drivers? Is pluggable growth driven by the 800G launch or 400G adoption, and are you gaining market share from Cisco? What trends are shaping the Services business? - Tal Liani (Bank of America)

2025Q1: Services growth has been **correlative to optical growth**. Recent growth is aided by helping cloud providers build networks. Sequential movements are noise; future growth should be viewed in line with optical growth. - Jim Moylan(CFO)