During the summer of 2015, fibeReality published the following article: “Ciena’s Last Chance to Fulfill its Destiny” in which we asserted: “…Ciena can either finally resolve to fully execute as an optics player to ensure its survivability – or it can continue to go down a path of not fully embracing its legacy by looking to get into other markets outside of its core competency….” At its last quarterly earnings conference, we believe the President and CEO, Gary Smith, came as close as he would allow himself, to make it clear that the firm intends to remain an optical company moving forward. In our opinion, it may have even been a demonstration of not just the vendor’s growth becoming “mature.”
We suspect that the “Nortelization” of Ciena, at least in this situation, played a positive role. The Canada-based contingent, which has the most influence over the company’s direction, wants to ensure itself of continuing control by putting out a three-year roadmap, which will result in relatively little shakeup of the status quo. Therefore, Smith said the following: “We've seen plenty of evidence in the last 10 years that this generalist model… notion of end-to-end bundling, and the rest of it, simply does not work and is not sustainable.”
Nevertheless, both Smith and CFO, Jim Moylan, could not seem to help themselves by continuing to argue the indefensible, such as the supposed stability of prices, especially in recent years, particularly with the hyperscale data center operators becoming large buyers of gear. Of course, moving forward, it may increasingly be the case that pricing becomes less volatile as both Huawei Technologies and Ciena turn out to be more of a duopoly in the world optical business.
It was also somewhat of a relief that the characterization of “a $50 million opportunity for the modem business” was as “simply a placeholder,” and that “it might not turn out to be anything.” Although we continue to anticipate that there would be comparatively little business at the higher data rate for a long time, we were quite concerned about the willingness to give away a key differentiator on the system side.
Actually, it is quite possible that Ciena is taking a page out of the playbook of the hyperscale players in finding new ways to exploit the optical components suppliers. While Ciena can maintain full control of any actual sales of these modules, such as by refusing to open up the application programming interfaces, etc., it could still benefit from the funding of its three partners, including for enhanced integration and for other sophisticated technological developments. Maybe Finisar realized the system vendor’s intention all along and decided to stay out of the mix.
The one definite exception appears to be the short-reach idea, which obviously involves Microsoft. It would be yet another extension of the same strategy of the software behemoth using pluggables at 400G, as it has in the past with both 10G and 100G, but it would certainly not involve a direct competitor of Ciena.
Ciena’s quite conservative expectations for growth should be obtainable, as it is remains protected from Chinese encroachment in its home market, as Infinera may be destined to become a shell of itself, and despite protestations to the contrary by the top leadership of being in three other businesses, as an enduring focus on optics makes it more nimble than other large players in achieving additional international penetration. The very modest projections also should prevent any hyperventilation from occurring before the end of each quarter, which would perhaps otherwise result in making deals that are maybe not in the company’s long-term interests. The strategic plan also gives it cover for the period of time it will probably take before the next spurt in the marketplace, barring an aberration – supporting Verizon’s aggressive 5G wireless rollout.
[written by Mark Lutkowitz]