Ciena Corp

NYSE:CIEN

Earnings Call Transcript 2021-Q4

[Operator]

Good day and thank you for standing by. Welcome to the Ciena Announces Reporting Date and Web Broadcast for Fiscal Fourth Quarter and Year-end 2021 Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to Gregg Lampf, Vice President of Investor Relations. Please go ahead.

[Gregg Lampf, VP, IR]

Thank you. Good morning, and welcome to Ciena’s 2021 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.

In addition to this call and the press release, we have posted to the Investors section of our website an accompanying investor presentation that reflects this discussion as well as certain highlighted items in the quarter and fiscal year.

Our comments today speak to our recent performance, our view on current market dynamics and drivers of our business as well as a discussion of our financial outlook. Today’s discussion includes certain adjusted or non-GAAP measures of Ciena’s results of operations. A detailed reconciliation of these non-GAAP measures to our GAAP results is included in today’s press release.

Before turning the call over to Gary, I’ll remind you that during this call, we’ll be making certain forward-looking statements. Such statements, including our quarterly and annual guidance and long-term financial targets, discussion of market opportunities and strategy, and commentary about the impact of COVID-19 and supply constraints are based on current expectations, forecasts and assumptions regarding the Company and its markets, which include risks and uncertainties that could cause actual results to differ materially from the statements discussed today. These statements should 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 29th, and we expect to file by that date.

Ciena assumes no obligation to update the information discussed in this conference call, whether as a result of the new information, future events or otherwise. As always, we will allow for as much Q&A as possible today. So, we ask that you limit yourselves to one question and follow-up. This call is being recorded and will be available for replay on the Investors page of our website, shortly after the call is concluded.

With that, I’ll turn the call over to Gary.

[Gary Smith, President and CEO]

Thanks, Gregg, and good morning, everyone.

Today, we reported strong fourth quarter and full fiscal year 2021 results. This performance further demonstrates our continued ability to successfully navigate challenging market conditions and to deliver on the objectives and financial outlook we laid out as we entered the year, including annual revenue growth of 2.5%, which was at the high end of our expectations; fiscal ‘21 adjusted gross margin of 48%, which exceeded our forecast; and adjusted operating margin of 16.8% for the full year, also above our original forecast.

Revenue in the fourth quarter exceeded $1 billion for the first time, and came in higher than expected. Additionally, orders in the quarter were once again significantly higher than revenue. And with our third consecutive quarter of orders outpacing revenue, we have substantial momentum and increased confidence in the demand environment.

We ended the year with our highest ever backlog of approximately $2.2 billion. We doubled our backlog of the year ago. This performance, I think, reflects our market leadership within a very strong demand environment. Specifically, the combination of our differentiated balance sheet, leading innovation and R&D capabilities, and deep and growing customer relationships around the globe give us a distinct strategic advantage in the industry. And of course, our people continue to amaze us with their resilience and kindness as they continue to perform at the absolutely highest levels.

Moving to highlights from the fourth quarter and fiscal year. Our focused investments are in three key areas: optical, routing and switching, and software automation. And they are yielding great results.

In optical, we continue to lead the market in high-capacity coherent technology. Q4 was a record quarter for WaveLogic 5 Extreme. We added 34 new customers, including 13 new logos and in all regions. Our total customer count for WaveLogic 5e is now 140 globally, and we’ve shipped nearly 25,000 on modems to date. We also shipped our first customer orders in Q4 for our WaveLogic 5 Nano coherent pluggable optics.

We had a strong quarter in routing and switching, and we continue to build momentum in this space. In Q4, we secured a dozen new wins, including significant multiyear deals with two of the largest U.S. Tier 1 service providers, one of which is for a nationwide 5G cell site router deployment. Additionally, we’ve now closed the deal with AT&T to acquire its Vyatta virtual routing and switching technology which will help strengthen our Adaptive IP capabilities and increase our exposure to certain 5G use cases. We also announced a partnership with Samsung to couple our xHaul solutions, next-gen MCP domain controller and services, with Samsung 5G core and RAN equipment to support global 5G networks.

Moving to our software automation business. Blue Planet performed well in FY21, growing 23% in the year to deliver annual revenue of $77 million, which again was above the high end of our target range, as well as record bookings a year ago. Some of the market wins in the year for Blue Planet including British Telecom, Vodafone [indiscernible] as well as a major U.S. Tier 1 service provider and large U.S. MSO.

I also want to highlight our global services business, which grew 7% year-over-year, with revenue growth across each of our service categories and a 95% customer satisfaction rating in 2021. And also, as part of that, really advancing a key part of our strategy, we landed major network migration wins, including 3 U.S. Tier 1 service providers and an international Tier 1 service provider.

Shifting to diversification in our business across both, customers and regions. Our top 10 customers for the year, including 3 U.S. service providers, 2 international service providers, 1 MSO and all 4 major web-scalers, strong illustration of the continued diversity in our business. And in fact, our non-telco revenue was 41% of total revenues for the year. Also of note, in FY21, we had more than $1 billion in orders from web-scale customers.

We also performed well once again in submarine segment, gaining more than 2% market share year-over-year, bringing our SLTE market share to the mid-50s. And finally, international growth was also strong, led by EMEA and India, which each grew at 13% year-over-year.

Overall, secular demand remains very strong, driven by increasing bandwidth needs, the shift to the cloud, and also the focus on edge applications as well as digital transformation and a growing need for network automation. And we continue to take full advantage of our leading position to address these network priorities. And we’re making forward investments in our portfolio and go-to-market resources that are aligned to these trends and longer-term opportunities.

As an example, we are leveraging our optical expertise to offer a new architectural approach to address next-gen Metro and Edge use cases, where we are investing to expand our total addressable market in this growing market from about $13 billion overall currently to roughly $22 billion over the next several years.

I would also like to highlight the development of critical assets in software automation, including network layer automation with MCP. This is our micro services-based domain controller that has now been adopted by the vast majority of our customers around the world. Also, our differentiated software or our Adaptive IP approach, and this can be deployed as embedded in our routing and switching portfolio on white boxes or virtually. And finally, our multi-vendor Blue Planet services automation software, which is now deployed at 30 of the largest global carriers around the world to help drive their digital transformation efforts.

These software elements are delivering unique innovation to the marketplace and expanding our relationships with customers. Our overall software business currently constitutes less than 10% of our total revenue. We do see this growing over time as we expand both, the adoption and application, and move to more recurring and subscription-based models.

Of course, the strong secular demand for bandwidth and automation remains challenged by the global supply chain constraints in the current environment, and we continue to believe that these supply challenges are likely to persist through at least to the middle of calendar ‘22. And to be clear, supply conditions are adversely impacting product costs, availability and lead times, as well as our overall supply chain operations. We expect these variables to affect our gross margin as well as the level and timing of revenue during fiscal ‘22. And we’ve obviously incorporated all of these elements and considerations into our guidance accordingly. However, as you can see from our performance to date, we continue to manage these challenges well. And while we are obviously not immune, we expect to continue to outperform others in this regard going forward.

In fact, we’ve entered fiscal year ‘22 with increased confidence and visibility. And in a moment, Jim will provide our outlook for FY22, which we believe will be a year of outsized revenue growth for Ciena. And that is driven by several factors, including: number one, strong order flow and additional visibility to short-term customer purchasing decisions; number two, overall, a return to historical customer spending levels to address the continued bandwidth demand, following about two years of slow investment due to the pandemic; and thirdly, and more uniquely to Ciena, increased monetization of wins, both those that we’ve secured over the past couple of years as well as new awards. Jim will also provide a new set of long-term targets that we are confident in providing now, given the positive demand environment and strength of our business and overall financial position. Jim?

[Jim Moylan, CFO]

Thanks, Gary. Good morning, everyone.

We delivered a solid Q4 performance. Total revenue in the quarter was $1.04 billion, somewhat above our expectations. It is an [indiscernible] it is the first ever $1 billion revenue quarter for Ciena, and there will be many more to come. And orders in the quarter significantly exceeded revenue. Q4 adjusted gross margin was 46.3%, which was within our guidance range, and reflects the dynamics we highlighted last quarter, primarily the impact of increased supply and logistics costs as well as increased monetization of new wins. Adjusted operating expense in the quarter was $307 million due to higher variable comp as a direct result of extremely strong order book at the end of the year.

With respect to profitability measures, in Q4, we delivered adjusted operating margin of 16.8%, adjusted net income of $132.7 million and adjusted EPS of $0.85. In addition, in Q4, our adjusted EBITDA was $199 million, and cash from operations was $255 million. Also in Q4, we repurchased approximately 494,000 shares for $26.7 million for a total of approximately 1.7 million shares repurchased in fiscal ‘21.

Regarding our performance for the full fiscal year, annual revenue was $3.62 billion, which was at the high end of our annual guidance range. As Gary mentioned, we ended the year with $2.2 billion in backlog. Adjusted gross margin was very strong for the year at 47.9%. And adjusted OpEx for fiscal ‘21 totaled $1.13 billion, largely as we expected.

Moving to profitability. Adjusted operating margin in fiscal 2021 was 16.8%, at the high end of our guidance range, and adjusted EPS was $2.91. Free cash flow for fiscal 2021 was very strong at $162 million [ph] or almost 75% of adjusted operating income. Our balance sheet remains a significant competitive differentiator. We ended the year with approximately $1.7 billion in cash and investments.

Looking to the full fiscal year, we believe fiscal year ‘22 will be a year of outsized growth for our business. We have strong visibility to our near-term opportunities, including a record backlog in the year. Customer spending has returned historical levels, following two years of lower investments due to the pandemic and related economic uncertainty. More pronounced for us and unique to Ciena in fiscal year ‘22 is that we are now monetizing our new wins and see increasing numbers of deployments for significant deals that we secured over the past couple of years as well as some new awards. Accordingly, we expect to grow our revenue in fiscal year 2022 in the range of 11% to 13%.

With respect to gross margin, we expect the dynamics that we saw in the previous [ph] quarter to continue. And specifically the impact of automotive supply chain challenges that are manifesting significant cost increases and higher logistics speeds will continue. And increased monetization of multiple new wins with initial performance [ph] and rollouts will also help our gross margins. Accordingly, we believe that our gross margin for fiscal year ‘22 will be in the range of 43% to 46%.

For operating expense, we intend to continue investing strategically in our business, in particular, in our routing and switching and software automation portfolios to leverage our opportunities in these growing addressable markets. Therefore, we expect adjusted operating expense at average $300 million per quarter in fiscal ‘22. As always, this number will vary quarter-to-quarter, and is expected to start a bit lower and increase through the year. We expect adjusted operating margin in fiscal ‘22 to be in the range of 15% to 16%.

In addition, during fiscal ‘22, we will be making investments in inventory and accounts receivables in order to continue mitigating the impact of the ongoing supply chain cages. As a result, we expect that our free cash flow in fiscal ‘22 will be 50% to 60% [Technical Difficulty]. For the coming quarter, Q1 ‘22, we expect to deliver revenue in a range of $870 million to $910 million, adjusted gross margin in the 43% to 46% range, and adjusted operating expense of approximately $290 million.

As Gary mentioned, strong secular demand is driving solid business gains and greater visibility for us, which puts us in a position to resume providing longer-term financial targets. Three-year target is the best indication of our long-term view of the industry, and what to expect from Ciena over the next three years.

Overall, we believe that we are well positioned to continue to deliver a combination of top line growth, profitability and cash flows. We believe the most important indicators of our performance and progress are revenue and cash flow. On the top line, we expect [Technical Difficulty] in line with recent [Technical Difficulty] and particularly in 2022, we intend to continue to maintain market share as we have over the last decade.

Beginning in fiscal ‘23, we expect to resume annual revenue growth range of approximately 6% to 8%. With respect to adjusted earnings per share, as we return to historical revenue growth and continue to focus on driving increased profitability in our business, we expect our EPS to resume growth. Specifically, we expect to grow our adjusted earnings per share in the [Technical Difficulty]. Also, as part of our long-term outlook, beginning ‘24 [ph] we are targeting annual free cash flow generation of approximately 75% to 85% of adjusted operating income over the next few years.

Finally, with respect to operating margin, we continue to focus on driving leverage from our operating model, in particular, growing our operating expense [Technical Difficulty] expected revenue will enable us to increase profitability. As a result, we are targeting to achieve adjusted operating margin of 17% to 18% for fiscal ‘24.

With our strong balance sheet and our expectations for cash generation over the next several years, we are now in a position to increase significant return of capital to our shareholders. We previously announced the program to repurchase up to $500 million of our common stock. [Technical Difficulty] completing those purchases by the end of fiscal ‘21. [Technical Difficulty] year due to the pandemic and the resulting industry and market dynamics.

Today, we announced that our Board of Directors has authorized a new arrangement to repurchase up to $1 billion of common stock. Under this new authorization, we’ve also announced our intent to enter into a $250 million accelerated share repurchase arrangement, or ASR, whereby we will more than make up the unused portion of our previous repurchase authorization. Final settlement for the ASR is expected to be completed in the second quarter of fiscal ‘22.

Following completion of the ASR market, timing of the remaining $750 million purchases will be based on our stock price, general business and market conditions, our liquidity, the cash flow and other factors. Our intent is to fully utilize the repurchase authorization by the end of fiscal 2022. We expect the finance program with cash on hand or cash [Technical Difficulty] operations. This new share repurchase authorization and ASR represent the next phase of our cash deployment, and demonstrate our commitment to return capital to shareholders while maintaining a meaningful liquidity balance.

In closing, we delivered very strong fiscal fourth quarter and ‘21 results despite challenges, supply chain conditions. With continued market leadership and a very strong demand environment, as well as significant backlog going into the year, we are confident for another strong performance in fiscal ‘22, including outsized revenue growth. For the longer term, our differentiated financial position will enable continued investments in innovation to address [Technical Difficulty] new edge applications through routing and switching technologies and digital transformation with our growing software automation portfolio. And we are in a strong position to return capital to our shareholders, and we intend to do so.

Operator, we’ll now take questions from sell-side analyst.

[Gregg Lampf, VP, IR]

Before we start the Q&A, we recognize there are some audio quality issues with the webcast. Please note that all of this information is on the earnings presentation, including our guidance, and we’d be happy to clarify anything that you like during Q&A.

[Operator]

[Operator Instructions] Your first question comes from the line of Rod Hall with Goldman Sachs.

[Rod Hall, Goldman Sachs]

Yes. Hi, guys. Thanks for the question. I guess, I wanted to dig into this guidance for next year. I mean it’s very strong relative to what we had expected. And I wonder if you could talk a little bit about some of the drivers within that. I know the cell site routing seems like a really big opportunity. I don’t know, Gary, if you think that goes beyond this just this one installation or not, curious how big hyperscale is in that. So, that’s kind of the first question. Can you give us more color on what’s driving that growth? And then, I have one follow-up for you as well.

[Gary Smith, President and CEO]

Yes. Rod, thank you. I would describe it as sort of -- it’s the monetization of new wins that have sort of been on hold for a couple of years, plus the new wins that we’re seeing. And the cell site router opportunity, I think we’ve secured in this last quarter, the two large service providers in North America for our switching and routing portfolio. So, I think this is -- I view this as just the start, quite frankly. So, we’re very encouraged by the opportunities that we’re seeing there. And I think if you step back from those specific things to Ciena, which is really the new business, and the portfolio, the new innovations in the portfolio we’re seeing carriers return to sort of a catch-up on their capacity builds, basically get into more normalized views around the modernization of their network. And I think you’re also seeing, Rod, a step function increase in overall traffic demand. So, it’s a blend of all of those things.

I would also mention in terms of the order book, some of that is -- customers wishing to get security of supply in this environment. So, it’s a blend of all of those dynamics. But, I think the secular demand for the industry, I think, is very positive. And I think our own particular position is unique around the wins that we’ve had in the last few years and you’re beginning to see that flow through.

[Rod Hall, Goldman Sachs]

Okay, great. And then, my follow-up, Gary, was on the software comment you made. You said it was below 10%. I wonder, is it -- by saying that, do you mean it’s close to 10%, or is it quite a bit below? I’m just curious how big that software element is now in the revenue stream.

[Gary Smith, President and CEO]

Yes. So, that’s the sort of three elements that I outlined. And I think the last year, it’s about 8.5% if you put it all together. And we -- I highlight that because I think we’re focused on growing that in absolute dollar terms and over time, as a percentage of our overall revenue, so Blue Planet, MCP and the Adaptive IP.

[Operator]

Your next question comes from the line of Paul Silverstein with Cowen and Company.

[Paul Silverstein, Cowen and Company]

Jim, can I ask you to just repeat the long-term guidance? I was having trouble hearing you, my apologies. My question is what gross margin, operating margin have been on a normalized basis? How much of an impact are you getting from supply chain? And I assume as your routing and switching business grows that that’s going to have a positive impact on gross margin and operating margin. Anything you can say on that? And what type of growth are you expecting there? And I’ve got one follow-up to that. Thank you.

[Jim Moylan, CFO]

A lot of questions in there, Paul. Let me [Technical Difficulty] the last one first, which is routing and switching. We do believe that routing and switching overall will provide accretion to our gross margins as we move through time. And we do expect routing and switching to grow as a percentage of our revenue. With respect to what our profitability might have been. What I’ll say is that the last time we gave sort of run rate gross margins was right before COVID. We said that they were centered around 45%. And I still believe that to be true. And that 45% or so, call it, 44% to 46%, represents a run rate percentage of new business in our revenue stack. So, that’s what I’d say. You can kind of base on our guidance for the year, which is 43% to 46%, you can sort of get somewhere close to what we think the effect of the supply chain challenges will be this coming year.

And just I’ll just summarize our long-term targets. What we said was we expect the industry will return post ‘22 to a sort of a low-single -- mid-single digits growth rate, not going to be that different from that in ‘22, by the way. But our growth rate, we think, will return to the rate that we’ve seen historically for a long time, which is 6% to 8% range, which will reflect a continued taking the market share. We also said that we expect our adjusted EPS will grow in the 10% range over the next several years now. We get some other metrics, but those are the key ones we believe, and you can always check the presentation for you.

[Paul Silverstein, Cowen and Company]

I appreciate that. And my follow-up, it doesn’t appear from the numbers, but I’ll ask the question. Are you seeing any impact from zero in particular as well as open line systems? What type of impact are you seeing? Obviously, it’s just at the award stage, but any concerns?

[Scott McFeely, SVP, Global Products and Services]

Yes. Paul, this is Scott. On the ZR piece, I don’t think our perspective has changed since the last time we spoke. We really think it’s -- the starting of the event is really 2022. So no, we’re not seeing any impact in the short term on that. And as you may note in the press release, we shipped our ZR plugs to the marketplace from a commercial perspective and certainly expect to participate in that market opportunity as it comes to fruition. Open line systems, that’s a game that we’ve been planning for some time, and we’ve actually benefited from, by the way, some technology leadership, both on the line system side and on the coherent modem side in whatever consumption models our customers want to choose is a good thing for us. So, no negative impact on our open line systems.

[Paul Silverstein, Cowen and Company]

Scott, just to be clear, when you see no impact from ZR, we all know they’re just starting to ship. You’re not seeing meaningful awards by whether web-scale or traditional service providers.

[Scott McFeely, SVP, Global Products and Services]

No. I think, the game on that really starts in 2022.

[Operator]

Your next question comes from the line of George Notter with Jefferies LLC.

[George Notter, Jefferies LLC]

Congratulations on the terrific results and guidance. I guess, I wanted to ask about your market share opportunities. You certainly are implying that you’ll take continued share. I think Huawei, obviously, is one of the opportunities out there. What are you seeing in terms of new wins competitively against them? What are you seeing in terms of the opportunity to mine out the installed base? Any additional color you could provide would be great. Thanks.

[Gary Smith, President and CEO]

Yes. George, it’s Gary. I mean, I would say, efforts around that have been ongoing for a while. We’ve seen this dynamic. And really, it’s around two regions. It’s Europe and India. And what we have seen in both of those regions, even during last year, we’ve seen an ongoing move to migrate their dependency, these carriers away from Huawei on the optical transport side and in other areas. And we’re getting more than our fair share of that. The fact that we saw good growth in Europe and India, some of that is absolutely directly attributable to that move. And we think that’s going to continue over the next one to three years. And as I said, we’re taking more of our fair share of that, George.

[Scott McFeely, SVP, Global Products and Services]

The other thing I’d say, George, is that you see market share gains in our revenue numbers. We actually see them quite a bit before that. We see them at the contract awards. We see them in our order book. And all that’s been going on in our business over the last couple of years. And particularly, if you look at our backlog at the beginning of this year, it’s $2.2 billion. It’s hundreds of millions higher than we’ve ever seen it. Of course, some of that is visibility to future orders, but it reflects the fact that we have been taking market share, and it’s going to show up in our revenue this year in ‘22.

[Operator]

Your next question comes from the line of Tim Long with Barclays.

[Tim Long, Barclays]

Thank you. I was hoping we could talk a little bit about the web-scale business, was down a bit sequentially in the quarter. I’m assuming that’s kind of lumpiness. So if you can just touch on that as well as the $1 billion in orders is good. That’s -- for the year, it looks like, whatever, 1.2 or so book-to-bill. It seems other in the web-scale world are seeing doubling plus of orders, so probably more growth. So, is there something going on there where maybe it’s a little less forward ordering than maybe some of the networking folks are seeing?

And then, as a follow-up, if you can just touch on Asia, with India up, Asia still under a little bit of pressure. Can you talk about what’s going on in the other parts of the Asia theater? Thank you.

[Gary Smith, President and CEO]

Let me take web-scale first. I would [Technical Difficulty] quarter just one thing. I think, during the year, I think the supply chain stuff weighed a little bit on revenues in that space, but we certainly maintained share as expected. I would say the fact that we had all four web scalers for the first time in our top 10 customers, it’s a testament to the position that we have there, and more than $1 billion in orders is a significant milestone from them. And a lot of the -- and that features in our backlog as well. So, we have good visibility into the year. And we expect actually web-scale -- in the guidance that Jim gave for our overall business with the web-scale growth in ‘22 will probably be above that corporate average, if that’s helpful to you. And we’ve got very good visibility into that.

In terms of other parts of Asia, India, we expect to -- again, I would make the same comment actually about India. I think that will grow faster than our corporate average as well. Other parts of Asia, a little more challenging to us. I think Australia, New Zealand, I think, will have a very good ‘22. We’ve had a couple of new wins there and new customers for us. Japan continues to be challenging, but we additionally have had a couple of new wins there. One of them was the large Tier 1 there. So, I think over time, our position in Japan over the next probably 18 months or so will improve. Obviously we’re not focused on China. The rest of Asia I think has been a bit of a challenge. And, I think that the pandemic continues to weigh on a lot of those countries.

[Tim Long, Barclays]

Okay. Thank you.

[Gary Smith, President and CEO]

And also it’s also Huawei’s sort of home-turf, and they’re not under much pressure there, as they are in Europe for example and India. So, that’s part of it.

[Tim Long, Barclays]

Okay. Makes sense. Thank you.

[Gary Smith, President and CEO]

Thank you.

[Operator]

Your next question comes from the line of Simon Leopold, with Raymond James.

[Simon Leopold, Raymond James]

Thank you very much for taking the question. Two as well. First, I want to understand what actions you may be taking in terms of the prices to your customers. Whether you’re planning on or have made adjustments? And if so, how successful have you been in getting any price increases stick -- pass on the higher input cost. And then I have got a follow up please.

[Jim Moylan, CFO]

Yes. So, I mean I think our perspective is really driven by a lot of that stuff we just absorbed in the normal bumps and moves of supply chain in the ecosystem. But, I think elements to this which everybody is seeing, the cost environment, we do not think it’s transitory. I’d split it into two elements. There’s all the expedite fees and logistics and the restatement, [ph] eventually that mitigate. But, some of these costs from a chip point of view, we do not see that being transitory. I would say, we’re actively engaged with our customers on how best to navigate this from a partnership point of view and how do we do that in an equitable way. We don’t expect any of those dialogs to really impact FY22, largely because we’ve got such a large backlog already, but we are engaged -- we are engaged with our customers on that.

[Simon Leopold, Raymond James]

And then, a follow-up…

[Jim Moylan, CFO]

Simon, if we are able to share these costs, it won’t affect the current backlog. It will affect orders going forward, just to make that point to you.

[Simon Leopold, Raymond James]

On the follow-up, Gary mentioned web-scale growing faster, India, but you didn’t mention the cable TV vertical, which in the fourth quarter was really strong. And we’ve been observing some spending shifts in that vertical. How are you thinking about your cable TV market in your 2022 guidance? Thank you.

[Jim Moylan, CFO]

We’re going to have a good year with the MSOs, but we have very, very strong, particularly with our biggest customer there, which is Comcast. And they -- we’re in a good deal with them. We’re just not going to see the kind of growth rate in that vertical that we’re going to see across our business in ‘22.

[Gary Smith, President and CEO]

What I would add to that, I think from a specific -- from a Blue Planet point of view, we had two additional MSO wins for the Blue Planet that we’ll begin to roll out into the year. So, we’ve got a pretty good footprint now from Blue Planet, mainly on the inventory side across a number of those large cable companies.

[Operator]

Your next question comes from the line of Jim Suva with Citigroup.

[Jim Suva, Citigroup]

My question is regarding some of the countries, like India and Australia. It seems like during COVID they are coming back a little bit later than other parts of the world, just given the timing of when COVID hit those societies. Is it fait to say that your growth outlook in those is not only higher than corporate average, but also kind of multiyear sustainable, as I believe some of those countries kind of put spending in infrastructure on pause during COVID a lot more than others? If you can just kind of talk a little bit about that.

[Gary Smith, President and CEO]

Yes. Jim, I think it doesn’t ebb and flow depending on some of -- particularly India. India’s gone through a number of challenges, some of which pre-COVID were industry based. I do believe that they’ve dug out from that. Obviously, they had this sort of a wave of COVID, which really dampened down demand. But, we’re seeing a [Technical Difficulty] market share in India. And I think if I look at it from an RFP and an order point of view, we’ve actually grown share in India during the last 18 months, even during that period. [Technical Difficulty] in some of these territories [Technical Difficulty] has largely gone on [Technical Difficulty] why we’ve got new wins in addition to the stuff that we had [Technical Difficulty] I think we feel very positive about some of these territories. And I would agree, I think this is a multiyear dynamic. Obviously, everybody’s supply constrained right now. But, as I look over the next one to three years, feel very bullish about Australia, New Zealand, India, and longer term, I think our position in Japan as well where that’s going to take a little more rebuilding.

[Operator]

Your next question comes from the line of Amit Daryanani with Evercore.

[Amit Daryanani, Evercore]

I have two questions as well. The first one, maybe when I think of this 11% to 13% guide -- revenue guide for fiscal ‘22, I think you talked about web-scale Asia doing better. I was wondering if you could just touch on what are you seeing in North America and Europe just from a geo basis, in the context of the guide for fiscal ‘22.

[Gary Smith, President and CEO]

I would say that Europe I think will also be probably above our average corporate average. So then you hit the question, what did not above that corporate average? I guess, you’re going to that point. And that would be North America. And it’s mainly -- the lot of big numbers and also we’ve got such a large market share in North America across the board. But, we do expect growth in North America. Let me be clear about that. But I think the dynamics in Europe -- and I’d say, there’s two dynamics in Europe. One is, they basically have underfunded their infrastructure for a period of time. This is way prior to COVID. And then, in COVID, obviously, it’s affected like everybody else. But -- so, I think in Europe -- and then you’ve got the Huawei dynamic there as well, which you don’t really have in North America. There’s not much -- what is being taken out. So, I think we do expect a good year in North America for sure. And I look at the number of wins that we’ve had that will help drive that. But I think Europe will have another strong year in ‘22.

[Amit Daryanani, Evercore]

Perfect. And then, if I could just follow up. I think when you kind talked about the long-term guide, you kind of said we expect the industry to grow low single digits. And I think that’s the same assumption you have for fiscal ‘22, if I’m not mistaken. It’s a clear implication of your share gains are much more outsized in fiscal ‘22 versus what you think happens beyond that. Is that fair? I guess, my question is, why do you think these outsized share gains that you have this year are a onetime phenomena versus perhaps something that’s more enduring and durable, i.e.,…

[Gary Smith, President and CEO]

I would -- let me describe it as this. I think you’ve got a bit of a catch-up. We’ve had a bit of a backlog of wins that have not now deployed [ph] or monetized. And I think that’s now beginning to turn into revenue, albeit slower than everybody anticipated because of the supply chain. But I think it is a bit of a catch-up here, and I think it is somewhat unique to Ciena. I think, the market rate overall is probably going to be in the single -- low single digits for ‘22. And I expect that to -- further out you get, more difficult to tell. But if you look over the sort of ‘23, ‘24, I would expect it to be similar. And I would expect us to continue to take share, which is why you get into that sort of 6% to 8% on that. If you look at it over the last sort of decade, that kind of number is -- that kind of dynamic and structure is what we’re seeing play out. And I don’t expect that to be any different. And we’re also -- potentially, as we’ve said, opening up our TAM in the switching and routing, which I think will be helpful to reinforce our outsized growth.

[Operator]

Your next question comes from the line of Samik Chatterjee with JP Morgan.

[Samik Chatterjee, JP Morgan]

Hi. Thanks for taking my question. I guess, we’re just stuck with Jim. I know you mentioned some headwinds to cash conversions I think next year, if I heard you right. But as you return to a more normal level of growth post fiscal ‘22, I think you’ll be generating about $400 million, $500 million of cash. Why shouldn’t -- I mean, given the needs for deployment of cash that you have, I don’t see any major M&A requirements that you had done, unless you’re thinking of any -- why shouldn’t we be thinking that these share repurchases can be or the cash -- shareholder returns can be as much as 100% of free cash flow with the strong balance sheet that you highlighted? And I have a follow-up, please.

[Jim Moylan, CFO]

Yes. What I’d first say is that we would like to consider good M&A transactions. And we’ve been -- you can’t see it because it’s in our offices, but we’ve been very active, been thinking about things. We just have not been able to find something that worked for us. We hope to be able to do that. So, that’s why we’re going to keep very good [Technical Difficulty] and a strong balance sheet. But I would say this that you’re right. We’re going to be [Technical Difficulty] several years. And if we can’t [Technical Difficulty] either in the business or in M&A, then you can probably expect to see more share repurchases.

[Samik Chatterjee, JP Morgan]

Got it. And for my follow-up, just going back again to the long-term guide beyond FY22, the 6% to 8%, that’s a rough, largely similar to what you had pre-pandemic for your long-term guide as well. But, if you can share any thoughts about how similar or dissimilar is that in composition to how you thought about it pandemic? Is there more growth coming out of telcos or is there may be less share gain in certain verticals, just how to think about how similar or dissimilar it is to pre-pandemic levels?

[Gary Smith, President and CEO]

I would say, broadly, from [Technical Difficulty] I would say international growth would be -- so pretty much as we talked about in ‘22, I would expect that to continue, largely a function we’ve got such a large market share in North America. It will grow, but it’s more difficult to do that [Technical Difficulty] I also think that web-scale will be fantastic opportunity for us over the medium to longer term and this time talking about that. So, I would expect that a lot of that growth to be from international and from web-scale and further diversification of the customer base.

[Jim Moylan, CFO]

Also routing and switching. That’s a great opportunity for us. We’ve said that our TAM increased from around $13 billion to $22 billion because of this convergence of optical and RE [ph] technology and our routing and switching investments and engagements are going to increase our revenue over the next several years [Technical Difficulty].

[Operator]

Your next question comes from the line Alex Henderson with Needham.

[Alex Henderson, Needham]

Could you just repeat the order backlog that you have? And is that primarily a product backlog?

[Jim Moylan, CFO]

$2.2 billion. It is products and services. Some very small portion of that -- small, low hundreds of millions is services and maintenance that will continue beyond fiscal ‘22. So, the vast bulk of that backlog will be delivered in fiscal ‘22.

[Alex Henderson, Needham]

What do you think your normalized backlog would be if you were in a normal environment, and how much of that is outsized backlog?

[Gary Smith, President and CEO]

Yes. Scott will address this. But we talked about that internally. The business really -- because of the COVID situation and what quickly followed, which was a supply chain imbalance, the way the ordering pattern of our customers that would occur has changed. And Scott, do you want to address that as we’ve talked about it.

[Scott McFeely, SVP, Global Products and Services]

I think, Alex, if you look at it, couple of years [Technical Difficulty] the backlog grew from beginning in -- at the end of ‘21 by $1 billion. The environment going into ‘21, I wouldn’t say it was normal either. So that might have been a bit low, and going into ‘22 is probably a bit high. So somewhere in between there is the normalized rate. If you go back in historical numbers through pretty much last decade, we sort of entered the year typically somewhere between 30% and 35% of the annual revenue plan in backlog. So, that may give you some indication of what sort of normal state is. I personally think we’ll be living in this new environment where we have longer visibility, and therefore, more backlog for quite a while, probably through all of 2022.

[Alex Henderson, Needham]

Yes. So, the primary reason I’m asking these questions is I wanted to get at the mechanics of how the backlog normalizes. So, over the course of CY22 -- FY22, do we see a book-to-bill start to run below 1 and therefore the backlog start to trim lower, or do you expect in your guidance that the backlog stays at elevated levels, and we don’t bring that down? I mean if I’m looking at the backlog, it’s 61% of your total trailing revenues and 75% of product revenue. So, it’s a very large backlog. What’s the mechanics for normalizing that? And does it happen all in ‘22, or do we actually end up with a large chunk of that backlog being realized in 2023, in which case the guide seems conservative for ‘23?

[Scott McFeely, SVP, Global Products and Services]

I actually think the -- one of the things that we probably need to change your mind around a little bit is sort of looking at a short-term period trying to figure out how much revenue moves from one to the other. Because in the old world, we used to go to a period and a relatively low proportion of that period’s revenue was actually in backlog, and then we had pretty fast conversion cycle. So, it made sense to ask the question of how much should you miss. Right now, we’re in a different world. The demand profile has given us long visibility. It’s a very significant portion of the delivered revenue in a short period of time. And therefore, you’re less dependent on new order book. I think we’re going to be living in that world for most if not all of ‘22.

So, what it does mean is, unlike in ‘21, where we said the demand dynamic was really what was shaping the timing of our revenue being back-end loaded, it’s going to be not the demand in this case. It’s going to be a similar shape to ‘21, but it’s going to be the supply environment that’s going to be the thing that’s shaping it. And so, you could naturally expect then with the revenue increasing as we go through the year, there is going to be a conversion to -- on the book to revenue ratio, the question you asked, whether it slips to being less than 1, we don’t know. But I think you’ll still see an oversized backlog relative to historical measures going into ‘23.

[Alex Henderson, Needham]

So, are you assuming a reduction in the book-to-bill because of the parts -- elements becoming more available over the course of the year? And when do you expect that to actually start to improve in the guide? That’s what I’m really trying to get at. Thank you.

[Scott McFeely, SVP, Global Products and Services]

I would say at this point because I don’t think -- it’s difficult to give you a precision in terms of the quarters. But I would say this. We do expect our book-to-bill in the year to be still greater than 1 on an annual basis. And we do expect the supply chain environment to largely persist through most of our fiscal ‘22. We think we will start to see some improvements in lead times as we get to the back end of the year. So that will probably change the ratios on the backlog to revenue in ‘23, but not back to sort of the historical norms.

[Operator]

Your next question comes from the line of Meta Marshall with Morgan Stanley.

[Meta Marshall, Morgan Stanley]

Great. A couple of questions for me. Maybe just a little bit more market-focused. Clearly, you’re seeing a strong web-scale order flow. And just what are you seeing in terms of that upgrade activity? Is it wholesale upgrades to WaveLogic 5, like we maybe saw with the 400-gig cycle, are you seeing more of a mix of speed being installed kind of in the data center? And then, maybe a little less of my question for fiscal ‘22, but you talked about there needing to be kind of a partnership with the service providers as you look towards making price increases. Just trying to get a sense of when you look at low- to mid-single digits in ‘23 and beyond kind of for the industry. Do you think that will be more pricing-driven or unit-driven, just in terms of how much of the price increases will be absorbed versus -- absorbed by the suppliers versus the service providers? Thanks.

[Scott McFeely, SVP, Global Products and Services]

I’ll try the first one, on the web-scale piece. So, as you know, we’ve got exposure to the web-scale in multiple sort of parts of their infrastructure, there are campus, metro data center interconnect. In some cases, there are sort of natural backbone networks, but certainly, a lot of activity around the submarine networks. I think in all three of those use cases, what we’re seeing is certainly capacity elements hit us in typically the most advanced state of the shelf technology as they try to introduce the lowest cost per bid, I think that’s because they can, but not all on WaveLogic 5 yet, but that transition is happening as we speak.

The second thing that we are seeing is expansions in terms of their reach. So, that comes at us in terms of new revenue builds, both in terms of photonics and WaveLogic modems. And then maybe a bit unique to us and the timing wise as we had talked in the past around new logo wins in that space that was significant, and you’re starting to see those come to revenue.

[Gary Smith, President and CEO]

Meta, on the other part of your question on the industry growth, whatever happens on the pricing environment, I don’t think that will have a major impact on the actual size of the growth, to be honest. Because I think wherever the pricing dynamics end up, I think, certainly from our point of view is that we will absorb the vast majority of the additional costs associated with the component piece. I just want to be clear, I do not think that will be able to be passed on to our customers. And that’s all encompassed in our guide. And I don’t think it will really impact ‘22 from a price increase point of view. But what I would say is, over time, as Jim alluded to our gross margin, if you look at the guidance we’ve given for the sort of three-year piece. I do think that we will be able through innovation, our own cost reductions, our vertical integration and mix and also our increased levels of software, exposure to the growth in routing and switching, that will help our gross margin. And as Jim said, it’s probably -- if you look at -- the baseline gross margin was somewhere between 44% and 46% right now, if you didn’t take into account these component increases.

[Gregg Lampf, VP, IR]

Thank you very much. And thanks, everyone, for your time today, your attention. We look forward to catching up with everybody today and the next few days. Happy holidays, everyone, and happy healthy New Year. Thank you.

[Operator]

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