Lumentum's warnings drag at Ciena

Optical component vendor Lumentum this week warned investors that it will miss its earnings expectations by a wide margin. Specifically, the company said it expects revenues in its current quarter of between $380 and $384 million, down from its prior expectations of between $430 and $460 million.

"Late in our fiscal 2023 third quarter, a network equipment manufacturer who represented more than 10% of our fiscal second quarter revenue informed us that due to their inventory management, they would not take the shipments we had originally projected for the quarter," Alan Lowe, Lumentum's CEO, said in a statement. "This shortfall is the primary reason that our fiscal 2023 third quarter revenue will be below the low end of our prior guidance range."

Lumentum's stock fell roughly 10% on the news, to around $46 per share.

According to several financial analysts, the culprit appears to be Ciena. "We believe the leading telco customer behind Lumentum's sales shortfall was Ciena," wrote the financial analysts at Raymond James in a note to investors.

Figure 1: (Source: Pavel Kapish/Alamy Stock Photo)

Ciena last month reported that it counted fully $4.2 billion in equipment orders that it has yet to deliver. That figure is up from around $1.2 billion before the start of the Covid-19 pandemic. "Backlog has far exceeded historical levels," explained Gary Smith, Ciena's CEO, during his company's quarterly conference call in early March, noting that Ciena would begin working to reduce that backlog.

Push-outs

So why did Ciena stop ordering optical components from its supplier, Lumentum? "We believe one of the reasons for the seemingly sudden cuts is that Ciena, along with many other vendors in the supply chain, saw order push-outs from hyperscalers in March," wrote the financial analysts at Rosenblatt Securities in a note to investors Wednesday.

Others agree.

"Hyperscaler spending trends have been weakening," the Raymond James analysts noted.

Such commentary dovetails with recent developments among big tech companies like Microsoft, Amazon and Meta, which have all embarked on cost-cutting layoffs in recent months after having staffed up to handle Internet traffic spikes during the pandemic.

Nonetheless, the analysts generally argued that Lumentum's warning isn't entirely a surprise, given Ciena's efforts to reduce its equipment backlog. "While we envisioned the risk of slowing demand as customers reduce inventory, the miss was larger and sooner than we anticipated," the Raymond James analysts wrote of Lumentum.

Ciena, for its part, sought to reassure investors rattled by Lumentum's news. Ciena "is reaffirming guidance for its fiscal second quarter and full year 2023. In addition, the company is reaffirming its previous statements with respect to both the demand environment and the normalization of backlog and inventory dynamics," the company wrote in a release Thursday morning following a 5% fall in its share price.

The ultimate reasons driving the wiggling among Ciena, Lumentum and other optical suppliers are not entirely clear. Hyperscale web companies like Amazon and Meta may lower their spending on data center components following years of massive investments. But telecom companies too may be partly to blame; after all, several fiber companies, including AT&T and Frontier Communications have stepped back from some of their initial buildout plans. On the other hand, Ciena and others have been winning business from operators moving away from China's Huawei as a supplier.

The situation will likely become clearer in the weeks to come as players across the industry report their first quarter results.

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— Mike Dano, Editorial Director, 5G & Mobile Strategies, Light Reading | @mikeddano