Ciena CEO: Prepare for the AI traffic wave

AI technology is eventually going to generate a massive wave of traffic across broadband networks, according to the CEO of optical networking supplier Ciena.

"Traffic growth has been between 20% and 40% per year very consistently for the last two decades," Ciena's Gary Smith told Light Reading.

But he said that record investments into data centers for AI services will ultimately result in more AI traffic traveling over US and international broadband networks. "It has to come out of the data center and onto the network," he said of AI data.

"Now, quite where it ends up being, who can know. ... As an exact percentage, a lot of people are working through that, including the cloud guys," Smith said of the rate of traffic growth over the next few years.

"But one would expect [AI data] to layer on top of that 30% growth, is the point I'm making," he said.

Smith cited cloud and AI bandwidth demands as driving Ciena's new fourth quarter results. The company reported revenue of $1.124 billion, above analyst expectations of around $1.103 billion. The company also said it expects average annual revenue growth of approximately 8% to 11% over the next three years.

Investors have taken notice. Ciena's shares spiked Thursday following the release of the company's fourth quarter results. Broadly, Ciena's shares are up almost 100% this year, to around $84 per share.

The traffic debate

Smith's comments on AI traffic are noteworthy in light of some data points showing a slowdown in the rate of growth in data traffic on global networks. For example, OpenVault recently reported that monthly average broadband data consumption in the third quarter inched up 7.2%, the lowest rate of growth seen since the company began reporting these trends in 2012. And in Ericsson's newest traffic report, Fredrik Jejdling, EVP and head of business area networks, said: "We see continued mobile network traffic growth but at a slower rate."

Indeed, some of the nation's biggest CDN providers – including Akamai, Fastly and Edgio – are struggling to come to terms with a historic slowdown in Internet traffic growth. Such companies operate the content delivery networks that convey video and other digital goodies online.

"In terms of traffic growth, it is growing very slowly – at rates that we haven't seen in the 25-plus years we've been in this business. So it's growing very, very slow," Akamai CFO Ed McGowan said recently. "It's just been a weak traffic environment."

But Smith, the Ciena CEO, rejected the notion that traffic growth rates are slowing.

"The cloud providers themselves are building bigger infrastructure and networks, and laying track for even greater growth in the future as more and more of that AI traffic comes out of the data center," he said. "So that's why we're predicting greater growth than normal over the next three years. It's early days for that traffic coming out of the data center, but I think we're seeing clear evidence around it."

Smith added: "So you're looking at an enormous step function in traffic flows over the next few years."

The upswing

Much of Ciena's current success is due to its sales of optical networking components to hyperscale companies like AWS and Google, which are working to build super-fast fiber networks in and around their data centers. Those data centers are where most AI computations happen.

But another big part of Ciena's business is focused on selling its gear to telecom network operators like AT&T and Verizon. And there too Ciena is seeing an upswing, at least in North America.

"For about the last two years [it's been] depressed ... And I think that's been a combination of absorption from the whiplash of supply and demand, remember that we had after Covid?" he said, referring to operators that slowed their equipment purchases in order to install the gear they stocked up on following pandemic-era traffic spikes. "We're now seeing them come out of that."

He continued: "In Q4, for the first time in two years, we saw our service provider orders in North America be greater than revenue. ... You've got that supply-demand piece coming back into balance."

Others are offering similar comments.

"There are signs of stabilization and improved momentum, leading to demand recovery starting in the December quarter and continuing into the second half of fiscal '25," Viavi CEO Oleg Khaykin said in November.

"Carrier spending has stabilized after a two-year underinvestment," wrote the financial analysts at B. Riley Securities in a note to investors following the release of Ciena's fourth quarter results. "The inventory correction cycle in the North American telecom market is over."

And some analysts expect international operators to resume spending starting next year.

"We forecast the optical transport market to return to growth in 2025 once the customer inventory correction phase ends in late 2024 and global economic conditions begin to improve in early 2025," wrote the analysts at Dell'Oro Group in a recent release.