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Optical/IP

COVID-19 slowing network operator capex, warns Ciena

Optical giant Ciena warned that service providers are slowing down spending on their network due to the pandemic and that the situation won't improve for several more quarters.

The company's warning combined with some general tech sector malaise to spark a Wall Street selloff among several equipment vendors to service providers, including optical equipment supplier Infinera, network design and deployment company Extreme Networks and network testing firm Viavi.

"Late in the fiscal third quarter, we began to see some of the effects of COVID-19 manifest in our business to a greater degree than anticipated, as well as increased economic uncertainty," Ciena CEO Gary Smith said Thursday during his company's quarterly conference call with analysts, according to a Seeking Alpha transcript of the event. "Specifically, we began to experience a meaningful slowdown in orders and a softening of our outlook. I would stress that the decline is broad based across our service provider's customers globally whose spend now appears to have been somewhat front-end loaded in the calendar year, resulting in lower orders in our third quarter from a number of our large customers in this segment."

Smith explained that COVID-19 is affecting the buildout of operators' networks by making it more difficult for technicians to install equipment inside of buildings, and that the pandemic's affect on the wider enterprise sector – including on retail and travel specifically – is also causing operators to slow their overall network capital expenditures (capex).

"Customer's ability and willingness to move forward with new business initiatives is constrained," he said.

Smith added that, as a result, Ciena is seeing service providers running their networks "hotter" than previously, meaning they're handling more traffic with less excess capacity as a way to reduce their expenses.

AT&T and Verizon are among Ciena's biggest customers.

Finally, Smith suggested the slowdown will eventually stretch across the entire industry, affecting all vendors.

"You will be hearing this from our competitors, peers and even customers frankly," he said. "Since this phenomenon really occurred late in our quarter and specifically in the last month of the quarter, it might not have been evident to them [Ciena's competitors] at the time they did their earnings. We believe this is very broad and everyone will be talking about this over the next several quarters. We have the kind of global stability that others don't quite have, particularly with global service providers which is where this is focused. And so I think that's why we're seeing it a bit earlier than others."

However, some Wall Street analysts sought to temper Ciena's warning.

"The company says it believes it is the first to see the downturn. However, we think it might actually be among the last. It also may be seeing a steeper decline than peers due to the strength earlier in the year from its Tier 1-heavy customer base," wrote the Wall Street analysts at MKM Partners in a note to investors following the release of Ciena's fiscal third quarter earnings Thursday, adding that Ciena's new outlook for its fiscal fourth quarter is down 15% year over year.

The analysts at B. Riley FBR argued that Ciena is seeing the effects of "front loaded" spending by AT&T and Verizon in the first half of 2020 compared with the second half, as well as slowdowns among its webscale customers and its customers in India.

The B. Riley FBR analysts agreed that Ciena's troubles might not necessarily affect the wider market.

"We believe Infinera, Extreme Networks and Viavi already warned or went through a COVID-related slowdown in 1H," the B. Riley FBR analysts wrote in their own note to investors early Friday. "For example, Infinera management, during its 1Q earnings call, warned about a possible COVID-related slowdown in 2H, prompting us to reduce our 2020/2021 revenue estimates by 6%/3%, respectively. Meanwhile, Extreme Networks and Viavi already went through COVID-related slowdown in 1H."

They added: "We believe the main difference in timing between Ciena versus Extreme Networks/Viavi has to do with lead times, as Ciena's lead times are significantly greater than Extreme Networks and Viavi."

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

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