Christmas has arrived early for Ciena's shareholders, with an overloaded sleigh of optical surprises driven by a grinning Gary Smith. The boss of the US equipment maker would have been in festive spirits after dropping off goods that fetched $1 billion for the first time ever in a quarter: Ciena's share price shot up 15.6% as investors were left slack jawed by the update for the final three months of the fiscal year. Since mid-October, it has risen 38%.

The headline quarterly figures included 59% growth in net profit, to about $103 million, on top of a 26% increase in sales, to roughly $1.04 billion. Customers that had put spending on hold during the pandemic, running their networks like a racing car badly in need of a tire change, have suddenly pulled into the Ciena pit lane and opened their wallets.

Figure 1: Ciena's share price ($) (Source: Google Finance)

Smith could also boast deals with major clients – a "dozen wins," in his words, included multiyear contracts with two of the big US operators. One is for the nationwide deployment of routers to 5G cell sites. A tie-up with Samsung, the South Korean equipment giant, also looks commercially valuable. Under that, Ciena is to bolt its transport technologies to Samsung's 5G core and radio access network products.

"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," Smith explained to analysts trying to figure out the mechanics. "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."

Huawei pain is our gain

Buoyant demand is not the only reason for Ciena's good fortune. Highly regarded for its optical expertise, the company has claimed to be far ahead of its competitors when it comes to the latest technologies, including 800G systems. WaveLogic 5 Extreme, Ciena's brand name for that 800G product, now has 140 customers and has shipped 25,000 modems. All that has translated into an uptick in market share. The current unpopularity of China's Huawei in certain regions has also brought additional business for Ciena.

"It's Europe and India," explained Smith. "And what we've seen in both of those regions, even during last year, is an ongoing move to migrate their dependency away from Huawei on the optical transport side and in other areas. And we're getting more than our fair share of that." Ciena's boss expects this effective swap-out to continue for about three more years.

The management outlook for next year is rosy, with a forecast that sales will rise 11% to 13% after they grew just 2.5% for the whole of 2021. A huge order backlog of about $2.2 billion has built up – "hundreds of millions higher than we've ever seen it," according to Scott McFeely, Ciena's senior vice president of global products and services. That explains much of the confidence about 2022 and even 2023, when growth of 6% to 8% is expected.

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The Grinch that stole a bit of the Christmas spirit was the components crunch that continues to hurt all equipment makers to varying degrees. Smith thinks it will persist into the middle of the 2022 calendar year, with an impact on "product costs, availability and lead times." It partly explains why guidance for profitability was less bullish. Ciena is forecasting a gross margin of 43% to 46%, down from 47.9% for 2021, and an operating margin of 15% to 16%, compared with 16.8% for the recent fiscal year.

Still, the company believes it has coped with supply chain challenges better than many other hardware firms, and equity analysts who track the stock see potential for a stronger performance than Ciena expects. "In our view, management set conservative margin targets, likely leaving room for upside," said Michael Genovese of WestPark Capital in a research note issued today. "We recommend owning Ciena in 2022 as the US Tier 1 telcos re-focus on being network providers and webscale providers such as Meta significantly increase infrastructure spend."

The seasonal good cheer from the American manufacturer is also good news for suppliers such as Lumentum, said Dave Kang, an analyst with B. Riley Securities. Rather like Genovese, his main concern seems to be over margin contraction resulting from "elevated supply chain costs and revenue mix." At the low end of its guidance, operating profits would be slightly lower than Ciena managed last year. For now, shareholders remain upbeat.

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— Iain Morris, International Editor, Light Reading