Ciena Corporation Aktie

Hello, everyone, and thank you for joining. This is Marc Graff, Ciena's Chief Financial Officer. Today, I'll update you on the journey we've been on for the past few years, the amazing results we've achieved and our plans and financial objectives through 2029.

It was a little more than a year ago when Ciena laid out its near-term financial goals, namely structurally improving gross margins, driving towards world-class working capital and having a focused capital allocation strategy. I'm happy to report we've made excellent progress against all 3 of these objectives as they have been the core on delivering the fundamentals for Ciena's business model.

You've seen gross margins improve by over 200 basis points year-on-year through an aggressive cost reduction program, pricing actions and accretive product mix. These dynamics are sustainable and have reset our gross margin base to solidly mid-40s. Our working capital management has been a focus not only for financial hygiene, but also to power the growth of the company. We have the resources to fund our growth over the long term and to ensure that our capital is deployed to meet growing customer needs while reinforcing efficiencies such as cash conversion cycles.

Lastly, we have a disciplined capital allocation framework that focuses on investing in our current leadership portfolio as its top priority and maintaining an eye to inorganic opportunities as our second priority. Being the only pure-play optical systems and interconnect solution provider and a leader in the industry is the result of decades of deliberate investment decisions, trade-offs and execution to meet this extraordinary market opportunity.

Lastly, when capital is generated beyond these needs, we are committed to returning it to our owners, which over the last 5 years has averaged over 100% of free cash flow. And the results speak for themselves. Since 2024, revenue has grown an average of 27% to our current $6.4 billion 2026 guidance. Operating margins have expanded by 1,100 basis points over the same time frame and earnings per share have more than tripled.

And it's this earnings potential that we are unleashing. We have tripled our earnings per share with only the 27% revenue CAGR. We're able to deliver these results because we're the only pure-play optical systems and interconnect provider on the planet, and that allows us massive leverage for both research and development and go-to-market activities.

These impressive results have been gated only by industry supply. As we've talked previously, we are seeing an acceleration in the demand for optical systems and interconnects as customers realize that network is the unlock to monetizing AI investments. Over the past 2 years, we've seen orders, a proxy for unconstrained demand, double from '24 to '25 and increase at least another 50% into 2026.

Yet revenue, a proxy for supply in a constrained environment has increased only 27% on average over the past 2 years. As a result, over the same period, backlog has more than doubled from '24 to '25 and again from '25 to '26 to an expected $10 billion exiting 2026. Clearly, there is not a demand issue. What is clear is the need for the industry to accelerate its capacity requirements for a number of years to catch up to demand.

And while it's typically seen as a negative indicator, industry lead times need to compress in order to establish a healthier balance between supply and demand, effectively providing a cash unlock to a growing backlog. And based on our latest outlooks, we don't see a balanced supply-demand environment returning before 2028. So as it applies to our directional outlook for 2027, we see a very similar dynamic occurring, namely demand outstripping supply.

We continue to believe that we'll exit the fiscal year with at least a 50% growth in orders to yield a minimum $10 billion in backlog, which covers our 2027 revenue outlook and starts to build the 2028 revenue base. As importantly, we have secured the supply to enable at least a 30% revenue growth going into 2027.

Our supply chain team has pulled all the levers to ensure that we can deliver this floor and position Ciena for upside as additional supply may become available. In fact, we believe that we have secured supply to meet demand to extend the 30% trend through 2029, yielding a 2029 revenue target of approximately $14 billion. With customer commitments and long-term supply agreements, our revenue will exceed what we believe the top 4 hyperscalers' CapEx growth rate to be.

Additionally, the competitiveness of our portfolio will enable continued share gains and exceed the TAM growth rate, driven primarily by our optical systems such as Hyper-Rail and WaveLogic 6e and accelerated by the massive growth in our interconnect portfolio of plugs, DCOM modules and the beginning of the CPO/NPO product ramps. And we have requested supply commits for '28 and '29 to exceed these growth rates.

The next 3 years will be an inflection point for the company as it cements its leadership position in the traditional and AI WAN and establishes its footprint inside the data center. While our ambitions are great inside the data center, we have taken a relatively modest approach to 2029 revenue from newer product lines like CPO/NPO and Coherent-Lite.

As Brodie and Dino reinforced, the move to optical within the data center is accelerating and Ciena leads the industry in optical connectivity expertise. So these products could provide significant upside to our baseline assumptions as the markets and applications develop for them. Together, there is $11 billion of 2029 TAM for these new markets in which we can participate. We are not relying only on growing revenue to drive profitability. We believe that we can achieve 50% gross margins by 2029, underwritten by our industry leadership.

First, as I've talked about previously, we have made excellent progress on pricing and term discussions with our customers that extend over the next 3 years. We'll see these actions start to impact 2027 and annualize for the remainder of the 3-year period. Second, we'll see improved unit costs as new products like WaveLogic 6n, our 800-gig plug, continue to ramp to mature volumes. And our engineering efforts to reduce product costs through both design and technology improvements continue to be an active investment.

Last and perhaps most exciting is our evolving product portfolio, delivering increased value, allowing structural improvements to our margins. Products like RLS Hyper-Rail and DCOM that deliver meaningful TCO advantages and modules and components that have improved margin profiles underwrite structural improvements to our margins. With our ability to deliver more value to the market, we are also seeing the benefits of our business model take hold.

On top of gross margin improvements that I've just discussed, we are able to get significant leverage from our R&D investments in optical technology across multiple product lines. This reusable engineering model proliferates leadership discoveries that can be productized for multiple use cases. This creates an enormous amount of operating leverage for the company.

On top of that, we see expanding leverage from our go-to-market efforts as well. As our largest customers are multi-segment, multi-use case customers, we're able to deepen the co-creation and co-development efforts, while growing revenue, creating additional leverage. Taken together, gross margin improvements and increased operating leverage, we see a path to an operating margin of 32% to 35% by 2029.

Our earnings strength is directly translating to improving what is an already strong balance sheet. With the completion of the 2026 convertible debt issuance, we have the strategic financial capability to continue to invest in the business, while taking advantage of inorganic opportunities. And with the scale that we are seeing in the business, we will continue to generate significant amounts of cash from operations with an expectation of approximately quintupling or 5x cash generated from operations.

In addition, with the growth of earnings, I expect that we'll take our already low net leverage ratio down to 0 or even below, which begs the question, what are we doing with all this capital? Ciena has a history of being a thoughtful and deliberate steward of our owners' capital, and that trend will continue. As I noted before, our first priority is to invest in the organic opportunities of the business, such as next generation of WaveLogic technologies, new material systems and products that compete inside the data center.

In fact, we are currently estimating that we'll invest somewhere between $2.5 billion and $3 billion in R&D over the next 3 years. Second, we're constantly looking across the ecosystem for technologies and talent that will accelerate our market leadership. You've seen us take decisive action with our Nubis acquisition, which has positioned us well for expanding inside the data center.

And with our recently announced $200 million Ciena Ventures fund, we'll take an even more active stand to seek out those opportunities. In total, our balance sheet has given us the flexibility of a BB+ rating and roughly $20 billion of M&A capacity to deploy. Lastly, once our organic and inorganic opportunities have been captured, we'll return excess capital to our owners. Over the past 5 years, we've returned a cumulative 108% of our free cash flow to our owners.

Moving forward, we are committed to returning a minimum average of 70% of free cash flow back to our shareholders, barring any major M&A activity. Overall, we're excited about the opportunities to generate leading returns for our owners. It's against this backdrop that we are realigning our reporting segments. It has been 7 years since we adjusted our reporting structure, and the business has dramatically changed over that time frame.

First, we've seen the rise of the hyperscalers and AI as a major demand driver. Second, our product portfolio has become even more optically focused. Third, our opportunity inside the data center represents a new growth frontier with our interconnects portfolio. And last, but certainly not least, this new structure simplifies our ability to communicate with the investment community, while increasing the transparency of our different segments.

Specifically, we'll report 4 segments that align to our $52 billion 2029 TAM. Optical Systems with an estimated $21 billion TAM growing at roughly an 18% CAGR through 2029 will include our line systems, WaveLogic and Waveserver systems as well as the Navigator control suite. Our Interconnect portfolio will include the coherent plugs, DCOM or data center out-of-band management, our Nitro and Vesta products from the Nubis acquisition as well as optical and electrical components.

This segment is expected to grow at an average annual rate of 95% through 2029 to a TAM of $17 billion. Our Global Services segment will now include the platform software services revenue and is expected to grow 15% with a 2029 TAM of $2 billion. Finally, we've combined our non-DCOM routing and switching business with Blue Planet into Routing and Other with a 2029 TAM of $12 billion and a CAGR of 2%. We're excited about this new structure that will take effect with fiscal '27 and be first reported with the Q1 '27 results.

So, pulling it all together, we are committed to a step function improvement in our financial model. Our 3-year revenue target will be a 30% CAGR through 2029, achieving a $14 billion revenue level at roughly 50% gross margins. After 15% to 18% operating investments, our business model's leverage will accelerate our operating margins to the mid-30s with a free cash flow margin expected to be approximately 20%.

And finally, we expect our adjusted tax rate to remain in the 20% range. As you can see, we are translating revenue growth into massive earnings power. To sum it all up, Ciena is in an excellent position to continue and, in fact, to increase our earnings power, leading to sustained returns for our owners' investments. We are committed to building on and extending our market share in these growing optical markets.

We believe the inevitability of the data center opticalization plays to our strengths as both an optical systems expert and a trusted partner to global hyperscalers, neoscalers and service provider customers. The foundation of our pure-play optical systems and interconnects business model will drive significant earnings expansion as the world moves from copper and electrons to fiber and photons. We're absolutely committed to being good stewards of our owners' capital by investing first in the business and returning excess capital to our owners. Put simply, Ciena and its owners are positioned to enjoy increasing profits and returns. Thank you.

Hello, everyone. Thank you for joining us, and welcome to the Ciena Fiscal Q3 2026 Financial Results Call. [Operator Instructions]

I will now hand the conference over to Gregg Lampf, Vice President, Investor Relations. Gregg, please go ahead.

Thank you, Jennifer. Good morning, and welcome to Ciena's 2026 Fiscal Third Quarter Conference Call. On the call today is Gary Smith, President and CEO; and Marc Graff, CFO. Scott McFeely, Executive Advisor is also with us for Q&A.

In addition to this call and the press release, we've posted to the Investors section of our website an accompanying investor presentation that reflects this discussion as well as certain highlighted items from the quarter. Our comments today speak to our recent performance, our views on current market dynamics and drivers of our business as well as a discussion of our financial outlook. Today's discussion includes certain adjusted or non-GAAP measures of Ciena's results of operations. A reconciliation of these non-GAAP measures to our GAAP results is included in today's release.

Before turning the call over to Gary, I'll remind you that during this call, we'll be making certain forward-looking statements. Such statements, including our quarterly and annual guidance, commentary on market dynamics and discussion of opportunities and strategy are based on current expectations, forecasts and assumptions regarding the company and its markets, which include risks and uncertainties that could cause actual results to differ materially from the statements discussed today. Assumptions relating to our outlook, whether mentioned on this call or included in the investor presentation that we posted earlier today are an important part of such forward-looking statements, and we encourage you to consider them. Our forward-looking statements should also be viewed in the context of the risk factors detailed in our most recent 10-K and our forthcoming 10-Q. Ciena assumes no obligation to update the information discussed in this conference call, whether as a result of new information, future events or otherwise.

As always, we'll offer as much Q&A as possible today, though we ask that you limit yourselves to one question and one follow-up.

Now I'll hand the call over to Gary.

Thanks, Gregg, and good morning, everybody. Today, we reported record financial results across the board that we demonstrated outstanding third quarter performance, including revenues of $1.7 billion, another quarterly record and up 37% year-on-year. Adjusted operating margin of 22.5%, exceeding guidance was more than doubling year-on-year and the highest ever achieved for the company. Our adjusted earnings per share are up 215% year-on-year to a record $2.11.

We delivered results in the context of an extraordinary industry demand environment that continues to accelerate. We continue to see strong momentum in customer demand and order flow, with a Q3 book-to-bill ratio that was significantly greater than 1, which resulted in a substantial quarterly increase in our backlog. And we also expect backlog to grow at an even greater rate in Q4. In fact, just 1 quarter -- sorry, 1 month into this quarter, we are approaching a level of orders booked equal to the entirety of Q3. As a result, we are currently projecting to exit fiscal 2026 with over $10 billion in backlog. Overall, our outstanding Q3 performance reflects Ciena's essential role in the fundamental re-architecting of network infrastructure.

And looking at these industry dynamics, I would remind everybody that we remain in the very early stages of a multiyear, highly durable network investment era. This is springboarding and caused by the large and growing investments in data center infrastructure. AI is starting to build on the previous eras of communications, including those driven first by the Internet and then by the cloud, but it is doing so at a massive scale. As a result, AI is currently driving and will continue to drive significant increases in both bandwidth connectivity demand and network traffic growth.

In that context, high-speed, low-latency optical connectivity has become a critical enabler to not only operationalizing the AI-driven investments in the network and the data center, but also monetizing those investments over time. And because of the increasing demands for higher capacity, faster speed, greater density, improved reliability, reduced space and lower power and cost, optics have become the indispensable element for next-generation AI architectures. And this is manifesting across all 3 of our primary markets. First, you call it the traditional network or the wide area network, the WAN, encompasses the network backbone, network edge and network operations. It includes optical connectivity for long haul, subsea, metro regional applications that people are familiar with. And it has also been impacted by AI in a number of ways. From challenges of fiber availability in the backbone to quality of service demands at the edge to the requirements of automation to address the increasing complexity of network operations.

Second is a market that we are referring to as AI WAN. It includes both data center interconnect or DCI for the WAN backbone and scale across currently used for distributed training across data centers and subsequently to be used for inferencing. Here, the fundamental challenges are related to power caused by the increasing GPU compute capacity and energy load required to train large language models at scale and the high volume, low power demands of deploying modems at much greater scale. The third is, of course, the data center themselves, which includes the fabric connectivity domains of scale up and scale out as well as data center operations. And as AI continues to drive up the data rates and bandwidth requirements inside the data center, new optical technologies and applications are required to provide the needed improvements in capacity and density for short-reach low-power connections.

Given the acceleration and projected increase in the compounding waves of spend on network infrastructure across these markets, we continue to believe that the total addressable market for our business will effectively double over the next 3 years, growing from approximately $25 billion today to approximately $50 billion by 2029. Moreover, given our growing competitive advantages, we expect our share of that TAM to continue to increase over that time frame. More specifically, Ciena's long-established technology leadership in optical networking positions us to capture a growing share of wallet as optical connectivity expands its role throughout the WAN and inside the data center. Across generations of Coherent technology, Ciena's first-to-market benchmarks have set the bar for the industry and continue to do so. Ciena was the first to commercialize coherent optics decades ago, and we continue to lead the industry in optical innovation, backed by very focused R&D deep expertise and proven deployment at scale.

Moving forward, performance gains will increasingly depend on precisely these capabilities. Because of our leadership position and value proposition, we've developed a high degree of competitive differentiation across our portfolio, with the clearest proof being the customer adoption that we're seeing across our portfolio in each of the primary market segments. So starting with both the traditional WAN market, as I outlined, and the AI WAN. Today's market dynamics are driving higher adoption rates for our WaveLogic 6 Extreme platform, which after 18 months is still the only 1.6 terabit, high-performance modem on the market today. Notably, its ramp has already exceeded that of our prior generation WaveLogic 5e.

Separately, customer adoption and scaling of our intelligent line systems remains exceptionally strong. RLS is basically the industry standard in disaggregated optical line systems where Ciena's first mover advantage has driven a leading installed base where roughly we have 70% market share. In addition to serving cloud providers and service providers in the network backbone and cloud providers for DCI in the AI WAN, RLS is the industry's first system deployed for scale-across applications. And the next generation of RLS Hyper-Rail is our second generation of RLS and represents our sixth generation of photonic line systems leadership. Co-created with the hyperscalers, it dramatically increases the density of existing optical amplifier infrastructure and as such, is purpose-built to address the needs to distribute AI training workloads in data centers across greater distances. With customer orders ramping, we remain on track for initial customer standardization for RLS Hyper-Rail by the end of 2026, and scaling to material revenue as we move throughout 2027.

Turning to our interconnects portfolio. We're applying our optical leadership to a growing portfolio of connectivity solutions that address surging bandwidth demands inside and around the data center and the performance limitations, of course, of today's short-reach technologies. Starting with our WaveLogic 5 Nano pluggable optics, we are seeing strong market adoption as we continue to ramp into production volume. In fact, in Q3, we shipped more than twice the volume of 800 ZR plugs than in the previous quarter. In addition, during the quarter, we made strong progress with the components portion of our interconnect portfolio. We are seeing strong market receptivity to Nitro, a linear redriver for active copper cable solutions. And I'm pleased to report that we received sample orders from several anchor customers in the ecosystem for Vesta, our open co-packaged optical or CPX solution. This represents another important step towards the commercialization of our open ecosystem approach towards short-reach data center optics. And we believe this is gaining meaningful industry momentum. Most importantly, with potential customers. As in any new growth sector, our CPX business will continue to strengthen over time with revenue expected to begin in 2027 and ramping into 2028.

And finally, it's worth noting that last quarter, we announced a significant win with a major hyperscaler that integrates our WaveLogic 6e coherent technology into their own platform. This solution goes well beyond the modem and combines our DSP, drivers, TIAs and Coherent expertise into a complete module that will be deployed broadly across the customer's global optical network via their own optical platform. I think this win demonstrates our ability to deliver for our customers across multiple consumption models with our best-in-class portfolio, and this represents a significant takeaway from a component competitor.

At the highest level, the current and future waves of AI-driven demands on bandwidth and network traffic will require industry-leading high-speed optical connectivity. We remain focused on managing the business with this long-term view, supported by durable demand, a broad set of co-creation opportunities and customer design wins robust orders and a backlog that extends well into fiscal 2028. Looking forward, the strength of our market position and the breadth of our portfolio provides us with growing confidence and visibility into a multiyear runway of growth, operating leverage and increasing profitability. As a result and to add to this level of confidence, we recently secured a significant increase in customer commitments that extend through 2029.

At the same time, as Marc will discuss in a few moments, we've also secured incremental supply capacity for critical component optical components to service that multiyear demand. So in summary, Ciena's unmatched combination of leading optical technologies, incumbency, portfolio breadth and deep expertise across systems, components, software and services gives us a powerful and sustainable competitive advantage. And really as the only pure-play optical systems and interconnect vendor operating at scale, we are uniquely positioned to convert AI-driven demand into durable top line growth with increasing operating leverage and earnings power over multiple years, delivering differentiated value for our customers and our shareholders.

With that, I'll hand the call over to Marc for an update on our financials and our outlook.

Thank you, Gary, and good morning, everyone. As Gary just discussed, our focus is on delivering strong financial performance while ensuring security of supply and manufacturing capacity necessary to support the significant multiyear demand in front of us. Within that context, we continue to make excellent progress against our 3 financial priorities.

First, let me discuss our progress on gross margin. We achieved 46.4% adjusted gross margin this quarter, which was positively impacted by the treatment of tariff refunds by about 70 basis points. Even without the tariff impact, gross margin achieved the top end of guidance, reflecting disciplined cost execution, favorable mix and pricing discipline. Our midterm goal is to structurally position the company to achieve mid-40s gross margins. With our results over the past several quarters, we are confident that we have reset our margin baseline to this mid-40s goal. But as we've said over the past year, the mid-40s goal was a waypoint, not the final destination. We have the cost structure and leadership portfolio to expand gross margins further over the next few years.

Second, as we balance the investments to support the growth of our business, working capital remains a focus. While our cash conversion has taken a step back quarter-on-quarter, the overall trend is positive relative to the year ago results. We've invested working capital to support slightly higher inventory levels and to increase revenue through the quarter. Even with these investments, we've generated $116 million in free cash flow. Third is capital allocation. We continue to take meaningful steps to improve the operational and financial efficiency of the business. Our June convertible debt issuance achieved 2 specific goals. First, it lowered our cost of capital with a 5-year 0 coupon instrument at an economic conversion premium of 114% from which we retired our 5.5% interest term loan.

Second, it provided the capital to help secure supply over the next 3 years. We maintain strategic flexibility as a result and have $2.8 billion in cash and equivalents at the end of Q3. Our capital investments this year have increased capacity sufficient to support RLS, plug and Waveserver revenue growth, all over 60% year-to-date. Additionally, we continue to return capital to our shareholders in Q3. We repurchased 356,000 shares for an aggregate price of $172 million, reflecting the acceleration associated with the convert deal. Lastly, we expect to be on the high end of our capital expenditure range of $250 million to $275 million.

Now let's move to the quarterly results in more detail. As Gary noted in his opening remarks, revenue achieved $1.67 billion at the top end of our guidance, an increase of 37% year-on-year and another quarterly record. Our total combined optical networks revenue, including interconnects, grew over 45% year-on-year, supported by over 55% growth for both our RLS and Waveserver systems. Our interconnects more than doubled year-on-year, while our direct cloud provider revenue grew over 80%. Our in and around the data center percent of revenue has quadrupled year-to-date, well ahead of our committed 3x growth from the beginning of the year. We had 2 customers that each contributed more than 10% of revenue. And lastly, we exited Q3 with an $800 million increase in backlog to $8.5 billion.

Orders continue to accelerate, as Gary noted, 1 month into the quarter, we have booked nearly as much demand as all of Q3 and expect to end the year with more than $10 billion in backlog. As I noted earlier, adjusted gross margin was 46.4% exceeding the top end of our guidance by 90 basis points and up 450 basis points year-on-year. Q3 adjusted operating expense was $400 million, coming in at the low end of our guide and driving a record adjusted operating margin of 22.5%, 250 basis points over our guide and more than doubling the year ago results. Adjusted EPS reached $2.11 more than triple the year-ago figure and achieving a new record level for the company.

Now let's move to guidance for the last quarter of the year. In Q4 '26, we expect to deliver revenue of $1.75 billion, plus or minus $50 million, raising the full year midpoint to $6.42 billion, up $120 million from last quarter. With this revenue guide, we expect to increase our market share in the combined optical systems and plug market by about 4 points to approximately 30%. We expect adjusted gross margins of 45%, plus or minus 50 basis points, bringing the year to a similar range, a raise of 50 basis points from last quarter. Adjusted operating expense will be roughly $415 million, plus or minus $10 million, with our annual OpEx at 1.6, slightly down from the June guide. All told, we expect to drive an adjusted operating margin of approximately 20%, plus or minus 50 basis points, bringing the full year to between 20% and 21% and exceeding the 20% annual figure for the first time in the company's history.

Now let me address the topic of supply more closely. Gary described an unprecedented durable demand environment with backlog now into 2028. To ensure our ability to service this demand, we've taken decisive steps to strengthen our supply security and to increase our output. In recent weeks, we finalized long-term agreements that secure supply of certain key components through 2029, including incremental capacity for those key components that will enable us to support growing customer demand. This extends the investments we've made for this year to drive 35% revenue growth. We continue to invest upstream to drive security of supply to meet and eventually bring into balance the demand backlog. As a result, we expect to see a reduction in cash from cash from operations in Q4 as investments are disbursed to support these agreements.

At the same time, we continue to make progress in the value exchange discussions with our customers. In addition to price discussions, these conversations are increasingly focused on the alignment of various demand terms and conditions with the capacity required to support them. With this ongoing momentum and improved visibility into future demand, we believe it's prudent to provide early direction for fiscal 2027. As we see it today, we expect to deliver another record year with revenue growing a minimum of 30% year-on-year yielding at least $8.3 billion to $8.4 billion in revenue, with supply-driven upsides. Our investments in capacity and supply allow us to accelerate absolute revenue growth from '25 to '26 and now into '27.

At these levels, we expect to again increase our market share in optical systems and plugs in fiscal 2027. We expect gross margins to be at least between 45% and 46%. And we expect to achieve fiscal 2027 adjusted operating margin between 25% and 27%, posting yet another record in profitability and serving as yet another proof point for the earnings potential of Ciena's model. Again, this is our preliminary view of 2027 and we'll provide an update when we report our Q4 results in December. In the interim, we look forward to continuing the dialogue in a few weeks' time in Ottawa at our Investor Forum, the content from which will be posted on our investor website afterwards.

To close out, Q3 was a testament to the strength of Ciena's technology leadership, customer engagements and supply resiliency in the face of unprecedented multiyear demand. The execution of our business model has driven an acceleration of our earnings in Q3 in 2026, and we now believe into '27 and beyond.

With that, operator, we'll now take questions from our sell-side analysts.

Thank you. We will now begin the question-and-answer session. [Operator Instructions]

Your first question comes from the line of George Notter with Wolfe Research. Please go ahead.

Congrats on the terrific results here. I guess I wanted to start just by, you mentioned value exchange on the call. Certainly, I think you mentioned prices as well as alignment of demand terms and conditions. Could you just talk a little bit more about what's going on there? Any sense for what price increases might look like? Any sense for what terms and conditions might be looking like in terms of the context of value chain exchange?

George, it's Marc. Thanks for the question. I'll take it kind of in 2 parts. On the pricing piece, we've had conversations with customers across different product lines. And we've gotten to a space where we would expect, depending on the customer and the product line anywhere between, call it, high single digits types of price increases to something in the range of high teens, low 20s type of price increases. And what's remarkable, and I think you'll appreciate this, George, is some of that will selectively hit backlog, right? So I think we've made really good progress there.

The second pillar in terms of conditions is really a 2-way discussion. The first is we're on the hook to make sure that we deliver what we say we're going to deliver, but we expect the reciprocity of that from the customer side as well. And so we've covered those aspects. We've talked a little bit about payment terms. We've talked a little bit about fill rates and things like that. So we're trying to make it a pretty holistic conversation in terms of that value exchange. and not just have a conversation about price. Because just like we're looking for supply security. Our customers are looking for supply security from us as well. And it's something that we feel pretty confident that with the supply agreements that we can fulfill.

Got it. Super. And then I know that there were some price increases. I think earlier in the year last year, just around tariffs. Is that something that's flowing into the model now? I know that in the past, you guys weren't -- you were not repricing backlog certainly, but is that something that's helping the gross margin now? Any sense there?

Yes. It's -- this is Marc again, George. It's relatively neutral. We're not putting margin on top of tariffs, right? If we get $10 of tariffs, we kind of pass on that $10 of tariffs. What we saw in Q1 was kind of -- or I'm sorry, in Q3 was kind of a onetime accounting adjustment for those tariff refunds that we don't expect to continue moving forward. And that gave us about 70 points -- 70 basis points of uplift. But moving forward, I would say the tariff impact, again, under today's current regime, is relatively neutral. We're monitoring pretty closely some of the impacts that are coming out of the new Canadian tariff regime. That could have an impact of, call it, $10-ish million a quarter. But again, we're still trying to work through the mitigation actions that we've got associated with that.

Your next question comes from the line of Tal Liani with Bank of America. Please go ahead.

Gary, if I told you 3 years ago that you're going to grow 30% with 26% margin, you would have asked to drink the same thing I'm drinking. So the question I have is about backlog. So your backlog is doubling this year, and it grows even faster than revenues. Your revenues are growing fast, and it grows even faster than revenues. I'm trying to understand the early ordering portion of the backlog, the maybe customers are buying ahead just because of supply constraints. I'm not -- it's not a concern. I just want to understand kind of get understanding of how backlog could behave in 2027. That's the reason for my question.

Okay. I think it's almost entirely just driven by a function of lead times. The demand is absolutely there. And just to sort of illustrate that. Marc gave an early indication of what we think our guidance is for the euro just a really directional indication for next year, it would be greater than that if supply was greater. I mean that sort of, I think, summarizes it.

We've got -- we think at least a $10 billion backlog as we leave this year. And in the midpoint of what Marc was talking about, you're looking at revenues of 8.3, 8.4 as sort of baseline for us for next year, it would be greater than that if we had more supply. And so the demand is absolutely there. You look at our installation services, they're up 35% for the year. And as soon as we can ship it, it's installed and carrying traffic.

Yes. Tal, maybe I'll just add maybe a little bit more context here. If you look back all the way back to 2024, our orders, call that demand doubled from '24 to '25. From '25 to '26, we're expecting another 50% increase. And as you rightly noted, backlog is doubling across all 3 of those years from '24 to '25 was a double from '25 to '26 is a double. And so what we're really constrained with is the industry needs to add a significant amount of capacity to keep up with that demand. And so we think it's going to be a multiyear journey before we see that supply and demand get back into balance and multiyear. So we don't see that happening before '28 at all. And so I think you'll see a very similar constrained dynamic going into '27 and likely into '28.

Got it. And any -- if I can just ask a follow-up. Any color on customer composition, meaning hyperscalers, I understand. What about smaller hyperscalers, meaning new clouds and new hyperscalers like Oracle? So without names of customers, but can you discuss your ability to kind of grow the customer list over time? And where is the demand?

Yes. About 50% of our business is now hyperscalers directly. But increasingly, I think to your point, we're seeing the sort of neoscalers, umbrella of neoscalers, which covers multitude of different business models, et cetera. We are very focused on that space. They are leaning very much into networking now and they are securing networks on MOFN deals. They're beginning to put their own fiber in when they can get it. and we are taking more than our fair share of that market as it grows. So we are very focused on addressing that market, both in the U.S. and globally. We're seeing that in certain parts of the world where these neoscalers are investing in the networking. So I think as we go through '27 and '28, that will become an increasingly important part of our business.

Your next question comes from the line of Meta Marshall with Morgan Stanley.

Great. A couple of questions. Maybe just following up on George's question. Just in terms of some of these new arrangements that you guys are having with -- or discussions that you're having with customers, is some of those -- are some of those pricing adjustments dependent on time line of delivery like in terms of if you can deliver 6 months earlier, you can capture high single digits versus a mid-single-digit price adjustment? Just trying to get a sense of whether there's any kind of escalators in there? And then second question, just as you guys look to assure more supply, have you qualified additional suppliers at this point? Or is this largely reaching long-term agreements with existing suppliers?

Yes. Thanks, Meta. It's Marc. So on your first question in terms of escalators, we really haven't built those in, like the price increases that we've talked about aren't necessarily performance-based per se. They will cut in as more and more backlog from those orders becomes a bigger part of our revenue. So I wouldn't say that it's performance related. Once we agree to those price increases, it's really around when we deliver it, they'll pay for it.

In terms of qualifying new suppliers, yes, that is part of our supply resiliency strategy that we're driving. We've got our typical providers that are in the table that you know very well, but we are looking at expanding both the type -- the numbers of suppliers that we have as well as we're constantly looking at new technologies to satisfy the same type of functionality. So we're taking both a quantity as well as a technology perspective to our supply chain.

Your next question comes from the line of Joseph Cardoso with JPMorgan.

I'll share my congrats as well on the results and guidance here. Maybe another backlog question and more on the composition of it. As we think about the portfolio offerings that you guys have and maybe the several irons in the fire that you guys are trying to address, where are you seeing the strong demand inflection as we were entering the back half of the fiscal year? And as a second part to that, it's great to hear that you're seeing visibility now into '28, but any color you can provide on the weighting of orders coming in for '27 versus '28, essentially, just trying to get a better understanding of how much of '27 is already covered versus what is building for '28 now? And then I have a follow-up.

So the first part of that question, Joe, thank you, is really we're seeing broad demand across the portfolio and you'd say characterized as being line systems, both in terms of the existing RLS and Hyper-rail. We've got a number of new wins for hyper rail that we're beginning to -- will begin to ramp up during '27. So there are a lot of infrastructure going in for that, I mean, and think scale across, not entirely, but predominantly are the deployments for that, that's driving it.

And then on the modem side, we shared some of the statistics that you're seeing for WaveLogic 6. We doubled output, it's already at this point, exceeding 5e in terms of its adoption. And I think that, again, just talks to the need for high-speed distance for these kinds of applications. So we're seeing it on the modem side. And of course, we're seeing it on the infrastructure of line systems. We're also seeing that both in terms of MOFN deals globally as well to support this expansion, particularly markets like India and the Middle East. And certain parts of Asia where the hyperscalers are leaning into provisioning of extension of their networks. Submarine as well, massive build-outs going on across the global submarine market, where we have #1 market share in the world. So we're seeing that across it, Joe.

And in terms of the profile of the backlog, we've got -- as you said, we'll probably have about $10 billion plus backlog as we go into 2027. We cannot satisfy basically all of the requirements that they would take to deliver all of that in '27.

Joseph, the vast majority of that $10 billion comes with the customer request date, that's actually in '27, meaning that they would take it if we could give it to them. So you -- 2 questions. The backlog covers most of the '27 guide.

Your next question comes from the line of Ruben Roy with Stifel.

Yes. Gary, for the first question, I wanted to maybe drill into the performance optics discussion and sort of the consumption model that compared to the systems model. Can you -- is that a bespoke arrangement with 1 customer? Are you productizing this consumption model as you go forward? And I guess, as you think about that longer term, and how that sits in the interconnect family, if you could talk a little bit about the margin structure as that consumption model starts to build.

Ruben, it's Scott. So first of all, I kind of ask the question in 2 different angles about how I heard it from you. First of all, the performance modem portfolio, the WaveLogic Extreme family, if you like, WaveLogic 5 and then WaveLogic 6. It's obviously very broadly deployed solution within our systems business. So we have a lot of deployments out there on extreme volumes. The specific opportunity you're referring to, though, of taking that and offering it up in a different consumption model is bespoke relationships with individual customers. We have 2 examples of that today. One that was a recent announcement last quarter.

It's certainly something that we don't shy away from. We made the technology available. However, our customers want to consume it. But in those examples, those are very, very unique in terms of how those customers want to deploy them, so they're kind of custom development for them. And the relationship we have with those customers reflects that.

Okay. And then as a quick follow-up for Marc, sorry if I missed this, Marc, but with the 25% to 27% operating margin guidance for '27 or first look at '27, that implies, I think, roughly flat to maybe up a little bit, operating expenses. If you could just walk us through sort of the mechanics around operating expense as you look out into fiscal '27, that would be helpful.

Yes. No problem, Joe. We haven't really closed in yet. We're kind of in the middle of our annual planning process. But the puts and takes that you should kind of be thinking about is this year, we'll spend roughly, call it, $1.6 billion. Keep in mind that $1.6 billion includes a bunch of onetime variable compensation that a year ago, we were telling you it was going to be about $1.5 billion. We're at $1.6 billion, mostly because of that variable comp. We're going to reinvest that onetime. So that's -- when you say it's about flat, all the folks sitting around the table here are looking at $100 million more of investment that they get regardless of the performance of the company. So we are reinvesting those onetime things.

And I think you'll also see there'll be a little bit more investment in some of the activities, particularly around line systems as we continue to grow that business and invest in our interconnect portfolio.

Your next question comes from the line of Ryan Koontz with Needham & Co.

Great. In light of some of the politics around data center construction and the like, which I know weighs on investor minds a lot and it's a lot of the broader sector around. How do you feel about the pace of catch-up of your WAN projects relative to data center construction? Do you feel like you've got visibility independent of pacing of data centers in that light? Maybe you can comment on that, Gary.

Yes. No, listen, it's a great topical question. I would say that as we talk to the hyperscalers and we talk about durability of demand and their long-term view and the rest of it in getting long-term agreements with them and commitments. So part of that, one of the comments that was made to me was basically that if they stopped building data centers tomorrow, Gary, you probably wouldn't notice for 2 years. Meaning, they've already got these data centers out there, and they need connectivity and they're not going to strand the assets. And secondly, they've got data centers that they must increase the network capacity to.

And so largely, what we've got in backlog here and what we've got visibility to going forward is really the data centers that are already there. And particularly, you've got a lot of international expansion as well. And it's really the refresh of the GPUs in these data centers that are already there that require massive amounts of additional connectivity. And bear in mind, we have a unique insight into this because we've got #1 market share in data center connectivity before all of this AI expansion began. So we have got the connection to most of the data centers around the world. A lot of what we're seeing is the expansion and increasing of that capacity and connectivity to enable the refreshing of the GPUs, et cetera. And you've also got all of the inference and agentic stuff in front of us.

So Ryan, certainly, for the next couple of years, we think we're largely immune from what may or may happen with the pacing of new data centers.

That's great. And maybe as a follow-up, any commentary on the product mix here as you've seen like in the most recent quarter or maybe recent bookings in terms of shift of line systems versus pluggables and transponders, any commentary there?

Yes, maybe I'll jump in and others can add color, Ryan. So as I think through what we've seen, particularly over the last 12 months, I think we've seen our plugs and our line systems, particularly RLS, really grow at much higher than corporate average growth rates, right? I think I mentioned plugs and RLS together as part of our optical piece growing 45%. So you kind of see how that's becoming a bigger piece of the pie. One of the things that from a margin perspective that we're seeing is, as our DCOM solution really starts to increase over the last year. That's really driven pretty accretive dynamic for us moving forward. We expect that to continue. And then obviously, as we add Hyper-Rail, that's going to be another accretive motion for us.

And so I think what you're seeing is the optical piece of our portfolio really driving a bunch of the growth for the company. And then obviously, we've got the DCOM piece, which is shown in route and switch, really in the early part of its ramp as well.

I think, Ryan, I mean, a dynamic that's been going on since 2024. We're just seeing more and more demand for line systems, meaning more fibers are getting it. And those are getting lit with coherent optics of all flavors, whether it be plugs or performance optics consumed in Waveserver. And all those, to Marc's point, are up well north of the 35% or 37% that we're reporting as a corporate average. And that's going to continue, we think, going into the foreseeable future. The DCOM piece is a great adder, but it's a bit lumpy because of the concentration of the customers. So from quarter-to-quarter DCOM will come and go. But it's a net new add for us.

Your next question comes from the line of Tim Long with Barclays.

Appreciate it. Two for me as well. Maybe first, if we could dig a little deeper into Hyper-Rail, I mentioned it a few times here on the value-add side and ramp. Just kind of update us on -- it sounds like a few customers, but where are we in the demand profile? And how quickly could we see the ramp of this product? And kind of just to remind us on the economics versus like more the RLS prior generation. And then the follow-up would be on just the pure telco business, maybe ex [indiscernible], if you could just talk a little bit about the durability of that business in the past, that's been a little bit more cyclical. So just curious of the outlook on just the pure telco piece.

Yes. I'll start on Hyper-Rail, Tim, and then others can jump in. We're on track for getting that product to standardization by the end of this calendar year, and you'll see the ramp starting in and that ramp in '27 will be to several hundred million dollars, right? So we're looking at that as a pretty meaningful ramp for us. Yes. The back story on that is it probably could be faster if we get more components, right? So obviously, we're working day and night on that.

From an economics perspective, relative to RLS, I think the team has done a fantastic job of improving the margins over the last 4 to 8 quarters on RLS to get us to a pretty decent margin profile. Hyper-Rail will be a step function on top of that. And with the size of the ramp and the opportunity that we think is coming through with hyper rail, and the economics of that, it's going to be accretive to the company as a whole once we get into '27, '28, '29. So we're really looking forward to getting Hyper-Rail out there. And I think our customers are placing quite a few orders that's represented in that $10 billion of backlog that we expect at the end of the year.

And on service provider growth, it's actually quite difficult to separate it from a lot of the MOFN activity that's going on. And we know the MOFN activity is high. But I'd say there's 2 things going on with the service provider piece. One, it is growing anyway because I think there's been underinvestment in optical infrastructure in the last 5 years. And you've got the service providers returning to drive out infrastructure for optical infrastructure. and you've also got this MOFN piece. And you've seen that phenomenon now, certainly in North America.

If you go back about 18 months, it was very much an international phenomenon. But now with training and the rest of it, we're seeing that very much so in North America. And that is driving a lot of the -- particularly the wholesale market in the U.S. and the wholesale carriers that specialize in that, we're seeing very strong growth in that space. and we expect that to continue. Markets like India, particularly for MOFN, we're seeing explosive growth in provisioning of MOFN networks for multiple Hyper-Railers in places like India, Japan, I would also highlight and then certain parts of the Middle East. So we expect to see good, steady service provider growth continue over the next few years, irrespective of the MOFN phenomenon.

Your next question comes from the line of Simon Leopold with Raymond James.

Jeff Koche in for Simon. I really wanted to ask on -- first question on the software business. It doesn't really appear like the web-scale RLS deployments are a driver here. Is that like kind of the right interpretation? Is that because they have their own solutions? And to that end, like how do you win the RLS deals if it's not like a management platform take play? I have a follow-up.

Scott here. Yes. I mean, your hypothesis that there's less off-box software components in a web-scale deal in general, not just an AI deal, is valid. That's a fair statement. However, having said that, to your second question, don't take that comment to mean that the only thing these guys are buying is merchant hardware from us because the value that they get is much broader than that. and whether it's submarine networks, their existing backbone, their DCI networks are their scale across networks, the statement is true across the piece they're getting -- yes, the hardware platform, but some very sophisticated on-box software capabilities that is embedded into their back office system that has an awful lot of intelligence in it. protection mechanism, et cetera, to allow them to deliver to their SLAs.

They're getting planning tools and deployment tools, they're getting link engineering tools. They're getting a global across the world service capability to turn these things on, preposition them, preconfigure them and turn them on a set of skills that we've developed with them and their relationships for more than a decade now. So just because we're not selling as much off-box software components to service providers don't conclude, therefore, it's just like a commodity hardware sale. It's apart from that.

Great answer. So maybe just with that in mind, can you maybe give a little bit of color on how the gross margins are for that business and maybe how they're changing just maybe even just relative to the average.

You're talking about the software, the off-box software?

For the line system. For the line of systems.

Yes. So as I said previously with Tim, we've seen really good improvements in the RLS gross margins over the last 2, 3 years. And I expect that to continue, and those are approaching what I would call the corporate average. As we move into the next-generation Hyper-Rail, the economics get significantly better, right? And so those will be above the current corporate average. And I would expect with the size of opportunity that we have with Hyper-Rail over the next couple of years, that will be accretive.

Terrific. Terrific. And then if I could just do another follow-up on the interconnect business and really just inside the data center. We know that Google you hear like Google is looking to deploy 2.4 terabit Coherent-Lite solution for CPUs. Maybe talk about -- are you in those deals? Are you being evaluated? What's your take there? And what's your take on optical circuit switching? Is that a product that Ciena would explore?

Yes. So a couple of things. There's a couple of questions there. The Coherent moving inside the data center, we said for a long time now that we think that's a trend that is inevitable, and it's going to happen, and we're committed to that. We absolutely believe in the Coherent-Lite market. We think the right intercept for that for the general market is at 3.2 terabits. And we think we'll be in a great position to be a leader in that in that market.

In terms of OCS. We love OCS because it is part of the continuation of more optics inside the data center. And it will drive actually adoption of coherent inside that data center faster than without OCS in our belief system. So that's all good news. That's a separate answer whether or not we're going to jump into the OCS market ourselves, and we're not going to comment on plans, make any product announcements or that on the call today.

We're going to move on to one last question.

Your last question comes from the line of Tim Savageaux with Northland Capital Markets.

Congrats on the results and especially the guide, and that's kind of the focus of my question, which is along several lines, the case for accelerating revenue growth in fiscal '27 looks particularly strong. Whether we're talking about anecdotal commentary, backlog, hyper rail scale across, which will be my focus on my follow-up. And I know you sort of termed this as an initial guide, but I'd be interested in your commentary on the prospects for delivering accelerating revenue growth in fiscal '27. I know you mentioned supply as a constraint. And maybe what things might look like if that constraint were relaxed a bit.

Yes. Tim, it's Marc. I think you kind of answered your own question. As we look at it -- and you're right, we are early, right? And typically, we wouldn't do this. But as we look at the demand -- or the dynamics that we're seeing in the market, we thought it was prudent to give our owners and the investment community, at least some initial thoughts on what we think the floor will be going into 2027.

But as you rightly pointed out, all of our focus right now is on how do we get more supply to get to get more of that demand. And as Gary said and Scott said as well, if we could get more demand, we would unwind that $10 billion of backlog faster right? And that 8.3 to 8.4 that we talked about is the floor would be higher. And so from an absolute dollar terms, we think we are accelerating the growth from '24 to '25 to '26 and into '27, excuse me, but it's really going to be dependent on that supply. And a year ago, when we did this for the first time, we said we thought '26 would grow 17% and here we are at 35%. Now I'm not suggesting that my 30% in the year is going to be 60%, right, because we're in obviously a different supply environment. But we want to make sure that we give you guys a floor and make sure that we can achieve at least that number that we give you while we continue to work on supply.

Great. And as a quick follow-up on scale across, I mean, to what extent is that maybe even the primary driver of growth in '27? And I'd be interested in your reaction so some pretty extraordinary comments from suppliers and competitors about dynamics and scale across, I think Cisco talking about 14x the port count versus traditional DCI and some pretty spectacular comments from Lumentum as well. Maybe we can sharpen the focus on the scale across opportunity, how you see that TAM having maybe increased in recent quarters?

Yes, Tim, I think it's a major driver of demand. And we were the first out there with the first scale across piece that came out of the data center. So we've got good visibility to it. I concur with most of the industry comments that's gone on to it. I think, it's excuse the pun, it is at a massive scale, and it's just beginning. That's the point I would make is we're just beginning to roll out the first connectivity between these data centers. It is almost entirely North American, U.S. based, and we're just beginning to link the first few data centers for a couple of hyperscalers to it. And that's all in front of us. So yes, it's a massive driver to it.

But I also -- we're also seeing just a general increase in connectivity around the data centers as well. The agentic stuff is beginning to flow, particularly on the submarine cables. And the inference traffic, we also think is a big step function. It's mainly in front of us. So everywhere you look, basically, Tim, you're looking at compounding waves of applications and traffic growth that we'll just build on top of each other because even the scale across which is really predominantly now on training, started off with synchronous training. You're going to get asynchronous training as well. You're also going to get large amounts of inference cascading into that as well. So massive amounts of connectivity between these data centers in front of us. And we're only just at the early innings of that. And we are incredibly well positioned to it, having the leading platform for Hyper-Rail, RLS was an industry standard. We have about 70% of that market share, and we expect that to continue with Hyper-Rail and this next generation and the leading modem technology we can basically move bits faster and longer than anybody else in the world. And that's a super valued critical element that will enable this.

Thanks, Tim, for the question. Thanks, Gary. We look forward to seeing everyone over the next several weeks at a very busy schedule. Thanks for your time this morning.

This concludes today's call. Thank you for attending. You may now disconnect.

Hello, everyone. Thank you for joining us, and welcome to Ciena's Fiscal Q2 2026 financial results conference call. [Operator Instructions]

I will now hand the conference over to Gregg Lampf, Vice President of Investor Relations. Please go ahead.

Thank you, Tracy. Good morning, and welcome to Ciena's 2026 Fiscal Second Quarter Conference Call. On the call today is Gary Smith, President and CEO; and Marc Graff, CFO. Scott McFeely, Executive Adviser, is also with us for Q&A.

In addition to this call and the press release, we posted to the Investors section of our website, an accompanying investor presentation that reflects this discussion as well as certain highlighted items in the quarter. Our comments today speak to our recent performance, our view on current market dynamics and drivers of our business as well as discussions of our financial outlook.

Today's discussion includes certain adjusted or non-GAAP measures of Ciena's results of operations. A reconciliation of these non-GAAP measures to our GAAP results is included in today's press release.

Before turning the call over to Gary, I'll remind you that during this call, we'll be making certain forward-looking statements. Such statements, including our quarterly and annual guidance, commentary on market dynamics and the discussion of our opportunities and strategy, are based on current expectations, forecasts and assumptions regarding the company and its markets, which include risks and uncertainties that could cause actual results to differ materially from the statements discussed today. Assumptions relating to our outlook, whether mentioned on this call or included in the investor presentation that we posted earlier, are an important part of such forward-looking statements, and we encourage you to consider them.

Our forward-looking statements should also be viewed in the context of risk factors detailed in our most recent 10-K and our forthcoming 10-Q. Ciena assumes no obligation to update the information discussed in this conference call whether as a result of new information, future events or otherwise. As always, we'll allow for as much Q&A as possible today, though we do ask that you limit yourself to one question and one follow-up.

With that, I'll turn the call over to Gary.

Thanks, Gregg, and good morning, everyone. Our Q2 performance was once again very strong, reflecting our continued technology leadership, our deep customer relationships and the strength of our business model. In the quarter, we grew the business 40% year-on-year, with revenues of $1.57 billion. We expanded adjusted gross margin to 44.9%, and we nearly quadrupled the year ago adjusted earnings per share to $1.64. And I'd remind everybody that we delivered these results while navigating unprecedented demand and a constrained supply environment. With the combination of a strong and growing backlog driving strong visibility fueled by AI-led demand from both cloud and service providers, coupled with our leading technology portfolio, we are well positioned to gain share and deliver long-term value to our customers and our owners.

The breadth and depth of our portfolio positions us to intersect this market growth, as AI drives new opportunities across the WAN and in and around the data center. Our portfolio spans systems, interconnect software, and of course, services. Specifically, systems includes our optical systems as well as our routing and switching platforms. Interconnect is comprised of modules for inter and intra data center connectivity, inclusive of our WaveLogic modems and pluggables as well as co-packaged optics and critical technology components that serve as foundational network building blocks. And of course, our software and services, which helps customers install, automate, operate and optimize their networks at scale. Taken together, Ciena's portfolio delivers our customers innovative products to meet a wide variety of high-speed connectivity solutions in the WAN and in and around the data center, with an unmatched competitive offering.

So since we spoke to you last in March, the largest hyperscalers have increased their 2026 capital expenditures, with indications of continued expansion into 2027 and beyond. Given the priority to monetize somewhat constrained compute investments, we expect an increasingly larger proportion of that spend will be directed towards network infrastructure. Importantly, service providers are also reinvesting in network infrastructure after several years. This is creating net new opportunities with service providers across long-haul metro and managed optical fiber networks or MOFN. In fact, they were up 28% for us year-on-year.

Simply put, all customers are prioritizing high capacity, low latency and high-speed connectivity, underpinned by the need to transport data for AI, including model training, data ingestion and inference. To that end, our latest view is that the addressable market will approximately double over the next several years to roughly $50 billion by 2029. And to be clear, this significant market growth includes our traditional WAN markets and the high-growth markets in and around the data center, both of which we've been strategically investing into in recent years.

With that, let me add some color on how these dynamics are driving the demand for our line system specifically. The first generation of our intelligent line system, our RLS platform, set the standard for high speed, low latency and power efficient connectivity. The large global installed base of RLS have given us years of deep insights into technology requirements, as well as significant operational expertise and integration experience across both cloud and service provider environments. The resulting collaboration from these experiences has directly informed the development of our next-generation intelligent line system, the RLS hyper-rail. This is a multi-rail solution developed for both the leading hyperscalers and service providers to specifically address the growing capacity and efficiency demands for data center interconnect, scale across architectures and inferencing.

Co-created with multiple hyperscalers and built on an innovative photonic design, RLS hyper-rail supports multiple fiber pairs in parallel over hundreds of kilometers using advanced amplification. The result is significantly higher density with materially improved space and power efficiency, which is particularly important at intermediary amplifier sites where space and power is limited.

Notably this morning, I am pleased to announce that we've been awarded the industry's first multi-rail order from a leading hyperscaler, validating early market demand for our RLS hyper-rail platform and cementing Ciena's position as the industry standard. We are also engaged in discussions with multiple additional hyperscalers, neoscalers and service providers, both domestically and internationally, who continue to lean in and show a level of interest which is exceeding our expectations.

I also want to touch on our data center out-of-band management solution or DCOM, which combines products from our routing and switching portfolio with our industry-leading PON technology. DCOM, as you can see, is ramping extremely well, which contributed to the 88% year-on-year revenue growth in our Routing and Switching segment. We are also expanding the customer base. In addition to Meta, we've received initial orders from a second hyperscaler customer, and lab qualifications are progressing well with a third hyperscaler customer.

As AI is driving demand for our systems, it is also creating momentum across our interconnects portfolio. And we are pleased to share with you that we recently secured a new win with a major hyperscaler for our high-performance Coherent modules. These will be deployed in scale across in both metro and long-haul DCI network, supporting both WAN and in and around the data center applications. This technology solution was developed in close collaboration with the customer, and marks a competitive takeaway win. I also believe it is evidence of our strategy to leverage our systems capability into modules and component forms, and addresses the broad range of consumption models that our technology can address.

We also continue to see strong demand from hyperscalers for our 400 gig and 800 gig pluggables, and we remain on track to more than double our pluggable revenue from 2025. Additionally, we have another first win, with a major switch OEM to use our market-leading WaveLogic 5 and 6 nano plugs. This, again, is a demonstrable further proof point of extending go-to-market and consumption models for our technology.

We will continue expanding our interconnect portfolio with strong momentum behind our Nubis assets across both scale-up and scale-out use cases. First, Nitro, our linear redriver. We received the final chip back, and it is performing extremely well. And therefore, we are on track for general availability this summer.

Turning to Vesta 200 6.4T, the optical engine for CPO use cases. Over the past 90 days, we've seen increased industry momentum and demand for open ecosystems, reinforcing our hypothesis and the strategic value of the Nubis acquisition.

Given the breadth and depth of our portfolio, Ciena is uniquely positioned as the only focused supplier of high-speed connectivity solutions, enabling our customers to deploy across multiple use cases with best-in-class technology, software and services, from complete systems to modules, to components.

Before I close, I want to touch briefly on customer co-creation, which we've talked about in the last few quarters and referenced several times today. It is a meaningful differentiator for Ciena, exemplifying the trust that customers place in both our innovation leadership and our ability to execute complex programs across multiple technology generations. Customers bring us in early on new requirements and architectures, and they trust us for engineering systems insights and to innovate new approaches that help evolve their networks. The resulting solutions are fit for purpose and deployable both at scale and upon pace on launch.

For Ciena, it sharpens our road map decisions, increases win rates, gives us visibility into demand and build highly differentiated expertise, people, processes and capabilities, and that's reflected in our growing market momentum. The bottom line is our deep customer relationships and our sustainable technology leadership support our confidence in continued share gains, durable growth and increasing profitability over the next several years.

With that, I'll turn it over to Marc to walk through the quarter's financial results and our outlook. Marc?

Thank you, Gary, and good morning, everybody. Thanks for joining us this morning. As Gary noted, Q2 was another testament to strong execution meeting robust demand. Consistent with industry views that demand will remain strong for at least the next few years, we are focusing our resources to secure supply and manufacturing capacity to deliver for both our customers and our owners. Our Q2 results demonstrate the progress made against our financial priorities, while simultaneously growing the business.

First, to gross margin. We achieved an adjusted gross margin of 44.9% in Q2 due to focused efforts on engineering cost reductions, mix and price optimizations. We continue to see a path towards margin expansion based in part on our technology leadership in hyper-rail and DCOM, the ramp of our interconnects and components business and value exchange opportunities. Our discipline in managing working capital has also borne fruit. Most notably, our cash conversion cycle has improved by 20 days since Q1 on faster inventory turns and better payables execution. This helped contribute to free cash flow of $219 million or 13.9% of revenue and a cash balance of $1.4 billion.

Finally, we are deliberately and responsibly allocating our owners' capital. We continue to invest in the business organically to capture new opportunities, such as developing RLS hyper-rail. We're also extending our product line to different customer use cases, such as data center out-of-band management with our PON technology. Lastly, we are making key investments, both with capital and operating expenses, to secure supply for the future demand. We remain on track to spend $250 million to $275 million of CapEx. All this while we continue to return capital to our shareholders through our stock buyback, returning $83 million in Q2 at an average price of $371 per share.

Going into more details on our Q2 results. As Gary noted at the top of the call, revenue reached $1.57 billion, up 40% year-on-year and $71 million over our guidance, setting another quarterly record. Our optical networking business grew 42% over Q2 '25, driven by strong demand for our RLS and Waveserver product lines, both up over 55% year-on-year. Our routing and switching business grew 88%, primarily due to the ramp of DCOM, as Gary mentioned earlier, and deployment continues at pace. And our direct cloud customer revenue grew 70% over the year ago period, with service providers growing 28%. Of particular note, our India service provider revenue more than doubled year-on-year, reflecting strong demand for MOFN deployments. We had 2 customers, both cloud providers, contribute more than 10% of our revenue.

As I noted earlier, Q2 adjusted gross margin was 44.9%, exceeding our guidance by 90 basis points, and up 4 full percentage points from a year ago period. Q2 adjusted operating expense was $398 million, driving an adjusted operating margin of 19.5%, exceeding the midpoint of our guide by over 100 basis points. OpEx was elevated in Q2 on higher variable compensation due to strong year-to-date performance on revenues and orders. Otherwise, OpEx is meeting our expectations. Adjusted EPS was $1.64, nearly 4x the year ago figure, demonstrating the strong profit generating capability of our business model.

Before I provide our updated full year and Q3 2026 guidance, I'd like to take a moment to comment on the demand and supply environment. In Q2, our backlog increased more than $600 million sequentially to $7.7 billion, reflecting strong demand for our products and our leadership in the market, and we expect to exit the year with even higher backlog. The combination of customer collaboration, a growing services business, robust order flows and high-quality backlog provides us with excellent visibility into 2027.

Against this demand backdrop, which has been noted across the industry, we continue to see an imbalance of supply not keeping pace with demand. We are navigating these challenges as well as evidenced by our strong performance and ability to increase our outlook over the past couple of quarters. We are working with both our supply partners and customers to ensure we can serve our large and growing backlog. Specifically, we are driving to achieve a greater balance as we make the investments with our suppliers needed to ensure supply security, while focusing on economic optimization opportunities with our customers.

Now on to guidance. In Q3 2026, we expect to deliver revenue of approximately $1.625 billion, plus or minus $50 million, and an adjusted gross margin of 45%, plus or minus 50 basis points, and adjusted operating expenses of approximately $410 million, plus or minus $10 million, resulting in an operating margin of 19% to 20%.

Based on our first half performance and continued ability to manage through a supply-constrained environment, we are once again in a position to raise our guidance for fiscal '26. We now expect to deliver revenue for the fiscal year of $6.3 billion, plus or minus $100 million, raising our midpoint growth to 32% year-on-year. We expect our fiscal 2026 gross margin to be between 44.5% and 45%. And we expect fiscal 2026 operating expenses of approximately $1.61 billion, plus or minus $20 million, due to higher variable compensation and additional investments in supply security. And we now expect '26 operating margin of 19%, plus or minus 50 basis points.

In conclusion, we had another record quarter as market dynamics continue in Ciena's favor. Visibility remains strong, well beyond our historical norms, supported by significant backlog, multiphase customer programs and our co-creation activities, and we are confident that strength will continue into 2027. We see durable and robust demand underscored by the network's critical role in enabling AI and supported by the doubling of our TAM by 2029. We have proven success, translating increased demand into higher earnings per share on the back of a strong business model and operational execution. We are confident in our ability to bring value to our customers and drive EPS growth for our owners over the next several quarters.

And before I turn it over to questions, I'd like to take a moment to recognize a meaningful milestone. This call marks Gary's 100th earnings call and 25th year as CEO. With passion, a relentless customer focus and a deep belief in Ciena's team members, he's guided Ciena through significant industry transformations. As a result, today, we find ourselves in the enviable position of leading the industry in high-speed connectivity at exactly the moment the world needs it most. On behalf of Ciena's employees around the globe, congratulations, Gary, and thank you for your continued leadership.

With that, we'll take questions from our sell-side analysts.

[Operator Instructions] Your first question comes from the line of Samik Chatterjee with JPMorgan.

Congrats on 25 years. Maybe just for the first one, can you talk about the multi-rail win that you are announcing with the first hyperscaler customer? What are you seeing in terms of deal size or deployment intent from them? Is that tracking relative to your -- how is that tracking relative to your expectations? And are the other discussions or engagements you have of a similar nature related to the first hyperscaler? Maybe anything you can share in terms of when -- how should we think about maturity of revenue in the near term as well on that front? And I have a follow-up.

Thank you, Samik. I appreciate that. Let me take the first part of that. I think getting an early win on this, which with the co-collaboration that we had with these hyperscalers, it's a strategic decision for them given the nature of the deployment. It really enables specifically, very high-intensity training across much greater distances with greater amplification and density. So therefore, it is a very strategic decision on their part to standardize on hyper-rail. And that will begin to be rolled out as we go through '27. And obviously, in terms of sizing, they vary. But given the nature of them, they are all hundreds of millions over multiple years. And we are engaged with most of the major players in hyperscalers on discussions for this, progressing extremely well, and we're a little ahead of where we thought we'd be from an adoption point of view.

Got it. Got it. And a quick one for Marc. Marc, maybe from an OpEx perspective, operating expense perspective, you did start the year thinking it's more flat with some of the actions that you have taken last year. This increase in the operating expense outlook for the year, which is going hand-in-hand with the increase with your revenue outlook as well, can you just parse through that? How much of that is variable compensation versus maybe investments of some sort? And how does that change? How you're thinking about a long-term OpEx trajectory for the company as well?

Yes. Thanks, Samik. Yes, I would say 90% of that increase is really driven by the higher performance than we were expecting at the beginning of the year of both orders and revenue. So as that scales, and I would expect variable compensation to scale as well.

All that said, the strength of our model continues to deliver that operating leverage. So if you kind of compare where we were at the beginning of the year to where we are now, we're increasing that operating leverage even with the increase in variable comp.

The rest of that delta is really around making sure that we're increasing the supply security for the demand that we're seeing. It's -- I would say that's 10-ish percent of that spend. Moving forward, I would expect us to continue to generate operating leverage and grow revenue significantly faster than OpEx, and you'll see that in further strengthening of EPS over time.

Your next question comes from the line of Simon Leopold with Raymond James.

So I mean maybe I'm mute? Can you hear me?

We can hear you now.

Can you hear me?

Yes, we do.

Okay. Sorry, I wasn't on mute. I swear. Just a quick one. If you could just give us the double click on the 10% customers. And the question I wanted to ask is a little bit of elaboration on your pricing strategy in that you've got substantial backlog. I'm wondering, one, are you able to raise price in the backlog? And how are you juggling your rising input costs versus your ability to raise product price? And how does your price hikes factor into your growth? Anything -- any insight we could get there in this kind of inflationary environment, I'd appreciate that.

Yes. No, I appreciate it, Simon. So first, in your question around the 2% or the 2 10% customers. As I said in the remarks, both cloud providers. Together, they are about 1/3 of the revenue for Q2. So we can't get into the names, but I'll leave you guys to hypothesize on who those are.

On the gross margin and the pricing piece, we purposely are using this term value exchange because as we think through the supply-demand dynamics, we're trying to balance a couple of things. One is, obviously, how do we continue to expand our margin, how we make sure we're driving the right investment into securing that supply. But I also want to make sure that the other working capital activities are being taken care of, and you saw the improvement in cash conversion.

So as we think about that, nothing is off the table. So we are having conversations with all of our customers around how do we balance the supply chain risk because we are making additional commitments with our suppliers to ensure that's secure supply. We're working with them to optimize which products they take out of our portfolio and making sure we've got good fill rates and we're driving what they require. And yes, we're looking at pricing opportunities across all of our products.

I think the team has done a phenomenal job of taking what we see as some inflationary inputs and being able to, through really good engineering work, cost to reduce those to kind of mitigate the impacts. And you're seeing that. And I think this is our third guide for the year. We've raised gross margin each of the 3 quarters. And so I think you're seeing the fruits of that. I expect, as we continue to go through time, we have increasing confidence in being able to expand our margin, both at the gross level and at the operating level, for the reasons I talked about in the script.

Your next question comes from the line of Amit Daryanani with Evercore ISI.

Perfect. Two as well. I guess, first one, Gary, I think you spoke about in your opening comments about how the TAM could double essentially by fiscal '29 or get to at least $50 billion, I think. I think that would imply a 25%, 26% CAGR from where we are right now roughly. Could you just maybe break out and talk about how much of that TAM expansion is in and around the data center versus traditional [ van ]? And then how do we think about Ciena's ability to pick up share in that scenario?

Yes. Thank you, Amit. Yes, if you look at the sort of doubling of it, you're right about the overall growth rate, and you think about that as being -- scale across is driving a lot of that. And probably by the time we get to '29, we expect that to be about an $8 billion to $10 billion market, and that would be part of an overall long-haul metro optical transport WAN-type market of probably in excess of about $20 billion. So you can see that is a large part of it. And then you've got things like the interconnect market, which obviously is opening up in our various offerings into there. So it's obviously a confluence of those.

And again, I would stress that [ TAM ], and that's evolving very quickly as we're all seeing. We obviously think in our areas, particularly like across, we can continue to take share with things like hyper-rail and the technologies we have from a modem point of view and then deploying them inside and around the data center. Obviously, as we go into the -- inside the data center, you've got some large markets there where we are the new entrants, but we believe that we can take share with our technology, and we're seeing evidence of that.

Got it. Perfect. And then maybe just a follow-up on the DCOM side. I mean if I think about this 88% growth you folks had in routing and switching, is that really all DCOM driven? Or maybe there's a way to think about DCOM versus what the baseline routing and switching business did? And then really when you think of the DCOM opportunity, do you think it's a durable multiyear attached business? Or is it more of a onetime out-of-band refers that you're benefiting from? Just kind of maybe frame of how big it is and how durable this could be.

I would say that DCOM is a large part of the growth in routing and switching. But even if you took that out, routing and switching had pretty good growth as well outside of the DCOM piece. We think that DCOM is a multiyear, multifaceted application within the hyperscalers and potentially, outside of the hyperscalers as well. We're obviously seeing that with our anchor customer in Meta. It's proving to be much larger and much wider, broader expansion than we'd anticipated.

We're actually engaged with a couple of other hyperscalers. We got orders from another hyperscaler. And they all have slightly different applications for it, but it's certainly not one and done. It's going to be an evolving application that we see growing and we think -- again, it's very early days, but maybe $1 billion to $2 billion to $3 billion by the time we get to '29 is the total TAM. So this is a very important part of the inside the data center strategy for Ciena.

Perfect. Congrats on the nice numbers here.

Your next question comes from the line of Sean O'Loughlin with TD Cowen.

First time, long time. I wanted to ask one1 on the competitive environment for both scale across and maybe the more traditional land. I think your share position is well established, but do you see any of these tech transitions coming up, whether it's the more true GPU to GPU connections on the scale across or whether it's hyper-rail? Does any of that change the competitive landscape with either the traditional competitors in that market or from the sort of bottoms up side where component vendors are potentially moving up in the systems?

Yes. First of all, Sean, welcome to the party. Nice to hear your voice. Scott here. In the short term, looking back in the rearview mirror, we've certainly seen consolidation on the system -- system competitor landscape, and that's been successfully happening at a pace slower than we would have liked, but it certainly has been happening consistently over the last decade, and it's really gotten down to a few folks that have the capability and scale to address the needs of these large customers.

In terms of the other side of the coin, which is sort of folks coming into -- or trying to come into the systems space from the component vendor, there are certain folks that have done that and tried to do that in the past. It's a very difficult journey, in our opinion. I mean, the moat that's there from a system vendor perspective, people think of technology components, but it's a lot deeper than that. It's how do you put those individual components together into an end-to-end system that spans thousands of kilometers and make it sing in an economic way for our customers. It's the software that goes around the control of that. It's the integration of the back office systems. It's the services to be able to service these networks 24/7, 365 days a year around the world. It's a big step function. And we've been doing that for decades, and it's -- we think it's a significant competitive advantage against that segment.

Great. And then just a quick follow-up on the gross margin side. The full year guide, 44.5% to 45%, to get to that in my model, at least, I have to downtick a little bit in the fourth quarter. Is there a message there? Or is that -- am I reading the tea leaves too closely there?

Yes. Sean, it's Marc. Yes, I think you might be reading a little too much into that. As we think through Q4, there's still 90 days to go before we get there, and we're really paying attention to a couple of things in the supply chain, right? Obviously, one is mix. The other is, as the industry continues to be constrained, we're trying to be prudent about some inflationary pressures. I wouldn't read too much into the implied Q4 yet. Let's get through Q3 and then we can talk more specifically about that here in 90 days.

Yes. Loud and clear. And congrats, Gary.

Your next question comes from the line of George Notter with Wolfe Research.

It's Taran Katta on for George. I was just curious about any traction you're seeing on the coherent light side? Maybe any incremental use cases? I would love to hear anything there.

Yes. So first of all, the coherent light is an opportunity we still see in the future. As the need for high-bandwidth communications increases, the distances of the current technology shrink and shrink and shrink. So coherent is going to find its way closer to the 4 walls of the data center. And our belief system actually is ultimately inside the data center. The vehicle for doing that would be a lighter version of coherent with the industry as you said, coherent light. We still see that as an opportunity that's going to intersect the marketplace, we believe, sort of late 2027 into '28 at data rates of 1.6 and 3.2 terabits. And our portfolio road map reflects that as shaped by our conversations with the lead cloud providers, and we can talk more about the technology in the future.

Great. And then what are you seeing on the NEO cloud side in terms of demand? How should we think about size opportunity? It sounds like you guys are starting to see more traction there as well.

Yes. Let me take that. I mean the neoscaler piece covers a very wide range of different kinds of organizations and customers. We are leaning into that. We're seeing great opportunities around them leaning into the network piece. Clearly, the neoscalers are looking to invest in the network piece, and they're doing that through either shared networks, MOFN. Some of them they're driving themselves. We have significant wins in most of the major neoscalers, so we are rolling out networks for them. Difficult to kind of size that right now, but we think that's a particularly good growth for us over the next 2 to 3 years, for sure.

One of the interesting dynamics and the engagements that we've had with them also is that they're trying to go fast, and they're trying to go fast, not necessarily staffed up some of the larger folks that have gone before them. So we're seeing great services opportunities there as well, which is a nice business for us.

Your next question comes from the line of Ruben Roy with Stifel.

Ruben? Ruben?

You may want to move on and come back to Ruben.

Sorry, can you hear me?

Okay, there we go.

Yes. Now we can, yes.

Okay. Gary, I got a bunch of questions on hyper-rail. I wanted to come back to something you said about hundreds of millions of dollars over multiple years. I think you're saying that you're a bit ahead of adoption expectations. But can you help us understand the deployment pace, especially sort of how I think about sort of co-development with some of the hyperscalers, et cetera? Is this sort of lumpy project-based type of revenue rec? Or do you think it will be sort of more linear as you think about the next couple of years on multi-rail or hyper-rail, specifically?

On multi-rail, specifically, yes. I mean, we think it starts in '27, and we think it will be linear. And we think by that point, we'll be doing it with multiple hyper-railers and also service providers, too. There's some very large service providers, particularly those that are exposed to the wholesale MOFN-type market, where this kind of technology is absolutely transformative for them. So we think starting in '27, that will provide nice linear growth for us for the next few years, frankly. And given the scale that you're talking about on -- and this is not just training, that is obviously the sort of killer app for this because what it enables is greater density over greater distances and it enables different training models.

And when you think about the constraint that is on compute right now, generally speaking, the networks have to go to the compute. Therefore, you're seeing -- in addition to the demand that we've seen so far, I think we're beginning to see even an increased demand because the networks got to go to compute. And when you think about that in the training context, the timing of us coming out with this hyper-rail co-created with the hyperscalers, it could not be better.

And then in addition to the training, you're just talking about very long distance, high-density, low-latency, super intelligent line systems for cloud, for connecting data centers. And we've obviously talked about the training piece. You're seeing the beginning of all the inference and agentic AI, which will drive essentially cloud growth as well. And that infrastructure right now is based on RLS. That is the industry standard. So we're leveraging our expertise and technology there into hyper-rail.

Yes. Maybe just to add on, Ruben, this is Marc. Obviously, we're at $0 of revenue for hyper-rail until we introduce that later this year. But you'll see a meaningful uptick in revenue in '27 as a result of hyper-rail.

Great. Maybe as a quick follow-up, Marc, on the commentary on OpEx growth, and you're already at 19.5% adjusted operating margin on the revenue guide. Can you maybe talk about longer-term signposts? Maybe how you're thinking about potential upside from there on operating margins as you continue to see some of this new revenue come into the model starting next year?

Yes. I'm not going to really get into 2027 or maybe at this point, Ruben. But how I dimension this is we've got pretty strong backlog. We're leaving Q2 at [ 7 7 ]. I said we're going to increase that throughout the rest of this year going into 2027. We've got a pretty good map in terms of how we're going to expand gross margins in front of us. And I think what you'll see is continued operating leverage as we go into 2027 and beyond.

So I think when you put all that together, the power of our business model, you're going to see a pretty meaningful EPS acceleration as we go through the next several years. And as we get closer to the end of the year, we'll give you a little more dimensioning on what we think that OpEx is going to be. But again, I would count on more operating leverage.

Your next question comes from the line of Meta Marshall with Morgan Stanley.

Congratulations. Just in terms of -- a couple of questions for me. First is just on supply chain. I think in the past, you've had more availability on the pluggable side versus the system side. But if you could just kind of give any update into where you're seeing kind of the greatest tightness?

And then just on the gross margin leverage, you obviously spoke to kind of the steps that are being taken to kind of work around designs. But just in terms of kind of the ramp of the pluggables business, just how much of that is contributing to kind of the gross margin pickup we saw?

Yes. Meta, it's Marc. On the supply chain piece, yes, I mean, again, the team is doing a wonderful job, I think, of using our engineering prowess to cost reduce some of that. As we think about those things that are probably most constrained, we do have some constraints on modem, so typically like CDMs, but what's really helping us on the modem side of the business is we're the most vertically integrated supplier in the industry. And so we're able to buffer some of those supply chain challenges on the modem side.

On the system side, you've heard a lot of people talk about the laser pump or the pump lasers that go into our amplifiers and into the line systems. That's something that we continue to work kind of on a daily basis across our supply chain. And those are things, as we make those investments and we put capacity in place and we're thinking about the longer-term discussions we're having with those suppliers, that's a lot of where we're spending our time. And again, I would say the team is doing a wonderful job even on just getting more units into the door so that we can sell them. As soon as we get them, they're going out the door, which has allowed us to meet and beat the revenue expectations for the year.

On the gross margin leverage, I think there's a couple of things that are going on here. One is you've heard me talk a lot about the engineering cost reductions, which I think, again, the team is doing a great job on. We are having conversations, both with the supply chain on how we optimize those costs as well as with our customers on how we do that value exchange that I talked about earlier. And it's across -- it's beyond just price, although obviously, that's on the table. We're also looking at how do we balance the supply risk with our customers and our suppliers. How do we make sure we get terms so that we can manage our working capital a little more tightly. So I think we're looking across the entire scope of not just price in terms of gross margin, but how do we improve the foundation of the entirety of the business.

Got it.

Oh, sorry, I totally forgot your plug question. Sorry about that. Sorry, I get so excited about gross margin.

On the plug piece, as we said, we're driving -- we expect to double our total plug revenue. At this point in time, I don't think we're seeing plugs have either a hugely negative or a hugely positive impact on our gross margin. It's obviously a component as we think about mix, but I'm not too hung up right now on the impacts of our plugs, although I am pretty pleased with the trajectory of the business.

Your next question comes from the line of Adrienne Colby with Citi.

I was hoping you could provide some more color on the service provider side. You're clearly seeing some strength in the MOFN business. I'm interested what you're seeing outside of India? And in the past, you've had a greater than 10% customer that was a service provider. I'm interested if that just dropped off because of the strength in hyperscalers or if there's some other dynamics you'd call out with service provider?

Yes. Thank you, Adrienne. Yes, as we talked about, service providers overall, were about 28% up year-on-year. I think what you're seeing there is 2 dynamics. One is they basically have underinvested in their optical infrastructure for the last -- frankly, the last 5 years. They've been very preoccupied with 5G investments. That's obviously now tailing off. And they are looking at putting their optical infrastructure up to date, and that's a development that we're seeing across the service provider landscape across the globe. The second dynamic we're seeing is really the sort of MOFN piece, which is managed optical fiber networks built explicitly for hyperscalers and for cloud players in various countries. So we're seeing both of those dynamics come into play.

We think it's multiyear and very durable because as omnipotent as some of the hyperscalers are, it's tough for them to be everywhere across the globe and also the last mile in various countries, and there's regulatory issues around that as well. So that ecosystem of partnership and opportunity for service providers, I think they are leaning into when we are the beneficiary of that.

I mean when you step back from all of this, it's really about the network. And generally speaking, in the context of AI and what needs to happen, it's actually under invested in for the last few years. And so across the service provider landscape, you're seeing that cascade through as well.

Yes. Maybe just to add on to that, Adrienne. You mentioned the MOFN piece. I would say across all of our service providers at 28% growth is a pretty fair representation on average of what that group is doing, both the wholesale guys who are very exposed to MOFN and those that aren't necessarily exposed to MOFN.

And then on your question about the 10% customer, it's just math, right? Those hyperscalers are just growing at such a huge rate that they kind of cross out the others that aren't growing at that pace.

Your next question comes from the line of Tim Long with Barclays.

One question and then a follow-up. Maybe on the question -- Marc, do you want to handle this one. Backlog orders continue to be really strong. It sounds like they're going to be strong through the rest of the year. Maybe just talk a little bit about how you see that backlog playing out over the next few years in the context of -- we saw this post-COVID and it wasn't necessarily the most smooth downtick in backlog and recognition of revenues for a lot of the companies in the industry. So maybe if you can just touch on that?

And then second, this definitely too, Marc. If you could touch on multi-rail. I think this is something in the past you've talked about being one of the really key areas for value exchange. So now that you're getting this to the contract level, can you talk a little bit about the profitability, gross margin profile? It sounds like this is adding a lot of value for the customers. So it might be one of the products that could have a bigger step function up in profitability for Ciena.

Tim, thanks for the questions. First on backlog, I think I would first say, it's a pretty different dynamic than we've seen after the COVID hangover. What we're seeing right now is a couple of things. One is because of the service engagements that we have and the co-collaboration that we have with each of these hyperscalers, we've got really good insight into what's going in the ground. And these things are going into the ground. They're not going into warehouses, which I think was part of the issue that we saw during the COVID era. So first and foremost, we know it's being deployed.

I think the second thing I would tell you is, if we could deliver that backlog in 2026, they would take it, right? And so we sometimes get questions of, oh, hey, is this forward ordering? I actually think it's the exact opposite, right? It's actually pushing out. And if they could get that product in 2026 this year, they would, and they turned that into revenue. In fact, we get quite a bit of feedback from our customers, as you can imagine that. If we could deliver more networking capability, they'd be able to increase their revenue. So I think the dynamic is very different. And just to kind of dimension that 7.7, about [ 6 4 ] of that is hardware roughly, and we would expect about 80% of that to be delivered in the next 12 months, right? So just kind of thinking through our confidence in the delivery and how that turns into bookable revenue.

And Tim, just like looking in the rear view mirror and the lessons from the COVID experience. Signs that we were seeing during COVID of inventory buildup in our customers' warehouses, requests for pushing out their desired delivery dates or order cancellations, we are seeing absolutely none of that right now. In fact, quite the opposite.

Yes. And then on your second question, Tim, around multi-rail. Yes, a couple of things. If you start with RLS, the single rail product, over the last couple of years, we've made amazing strides in improving the margin accretion of RLS, the single rail. As we go into hyper-rail, it is a step function elevation in what we think the accretion is going to be from hyper-rail.

And so you've kind of got 2 things that are happening. We think hyper-rail is going to be a bigger component of our revenue. And we think that component of revenue is going to be a much better margin for us. So I would expect as this thing ramps in '27 and beyond, that is going to provide good margin expansion at the company level, which is why we keep talking about that as part of our road map to get past that way point we've been talking about in terms of gross margin.

I'd say the early commercial conversations, including the orders that we've taken, have proven to be consistent with our expectations about that value exchange.

Your next question comes from the line of Karl Ackerman with BNP Paribas.

Two questions, if I may. First, to follow up on the multi-rail. As cloud providers transition to multi-rail, does that continue to tilt the tail towards 2/3 line systems versus pluggables, where you have a more entrenched position?

And then second, is there a way to size the linear drive opportunity for you with Nubis as demand for active copper cables expands?

Yes. Let me take the first one, Karl. As you think about multi-rail, and again, I'll do the comparison with the single rail, RLS. Yes, if you think about single rail RLS in a scale across environment, that's about, call it, 100 kilometers. As you extend that, right, and you use hyper-rail that has the intermediary amplifier sites, I would expect the photonics component of that thousand kilometers to be 4 to 5x of the photonics component of that 100-kilometer radius. So I think we are going to see a shift in photonics mix as you get to longer distances for scale across an AI backbone and long haul. So yes, I think your intuition is right.

On the Nubis on the redriver piece, we do think that there's some competitive advantages that being in the active copper cable gives us over AEC. We've talked about that in terms of [ 4x ] the distance are getting up to 4 meters and being about 90% of the power consumption. In terms of sizing that, for 2026, it's not going to be meaningful. As we get into '27 and into '28, you'll start to see that product ramp. We're not getting into exactly how big we think that is right now, but we expect that to be accretive going into '27 and '28.

And just a reminder on the Nitro piece, to that, it's really -- the analogy is it's a silicon model, it's a shift model. So the revenue is interesting, but what's more interesting actually is the margin levels on that in terms of the business model.

Thank you all. We appreciate you all joining us this morning. Look forward to catching up over the coming days and weeks. Thank you all, and we'll see you soon.

And this concludes our conference. Thank you for attending. You may now disconnect.

Good day, and welcome to Ciena's Fiscal First Quarter 2026 Financial Results Conference Call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Gregg Lampf, Vice President of Investor Relations. Please go ahead.

Thank you, Dave. Good morning, and welcome to Ciena's 2026 Fiscal First Quarter Conference Call. On the call today is Gary Smith, President and CEO; and Marc Graff, CFO. Scott McFeely, Executive Adviser, is also with us for Q&A. In addition to this call and the press release, we've posted to the Investors section of our website an accompanying investor presentation that reflects this discussion as well as certain highlighted items from the quarter.

Our comments today speak to our recent performance, our view on current market dynamics and drivers of our business as well as a discussion of our financial outlook. Today's discussion includes certain adjusted or non-GAAP measures of Ciena's results of operations. A reconciliation of these non-GAAP measures to our GAAP results is included in today's press release.

Before turning the call over to Gary, I'll remind you that during this call, we'll be making certain forward-looking statements. Such statements, including our quarterly and annual guidance, commentary and market dynamics and the discussion of our opportunities and strategy are based on current expectations, forecasts and assumptions regarding the company and its markets, which include risks and uncertainties that could cause actual results to differ materially from the statements discussed today.

Assumptions relating to our outlook, whether mentioned on this call or included in the investor presentation that we posted earlier today are an important part of such forward-looking statements, and we encourage you to consider them. Forward-looking statements should also be viewed in the context of the risk factors detailed in our most recent 10-K and our forthcoming 10-Q. Ciena assumes no obligation to update the information discussed in this conference call, whether as a result of new information, future events or otherwise.

As always, we'll allow for as much Q&A as possible today, but we ask that you limit yourself to one question and one follow-up. With that, I'll turn the call over to Gary.

Thanks, Gregg, and good morning, everyone. Today, we reported strong fiscal first quarter financial performance. We delivered revenue of $1.43 billion in the quarter, our highest ever and at the top end of our guidance, reflecting strong execution across the business.

Demand is incredibly strong with exceptional order activity in the quarter. This, along with long-term planning conversations with customers, gives us confidence in the durability of demand and our ability to drive growth as we move through the year and into 2027 and beyond.

Adjusted gross margin came in at 44.7%, which was ahead of expectations, and we continue to drive increased profitability. Illustrated in part by our adjusted earnings per share of $1.35, which is more than double our EPS in Q1 of last year. These record results reflect Ciena's market leadership and reinforce our role as a critical provider of the high-speed optical systems and interconnects that enable AI workloads to scale and to be monetized. In fact, we are taking meaningful share of the increases in AI-driven connectivity spend as customers trust our technology leadership, deep collaboration and proven execution.

To this end, we believe 2025 will ultimately stand out as one of our strongest years of market share gains, and we believe it will be even stronger in 2026. With our recent inclusion in the S&P 500, we may have new listeners on the call, so allow me to begin with a brief summary of our business.

At the highest level, Ciena is the global leader in high-speed connectivity. We built solutions that move enormous amounts of data across cities, data center campuses, countries and oceans, quickly, reliably and at massive scale. Through industry-leading optical systems and interconnect solutions, along with automation software and services, we power the world's most advanced networks, helping service providers, cloud companies, hyperscalers, governments and enterprises meet explosive connectivity demands, especially in an increasingly AI-driven world.

Our foundational business has always been to address connectivity needs in the wide area network, or WAN, spanning subsea, long haul, data center interconnect or DCI. We remain the undisputed global leader in this domain. Today, much of this business is driven by the continued adoption of cloud services across our global customer base and the network infrastructure required to support them.

It is also increasingly fueled by the rise of large-scale AI data centers that need to be interconnected with DCI solutions linking data centers across campuses, regions and continents. Additionally, service providers around the world have begun reinvesting in their optical transport infrastructure, alongside autonomous networking capabilities, both to support surging AI-driven traffic growth across their networks and to improve operating efficiencies.

And service providers and cloud provider customers are increasingly working together to deliver connectivity through managed optical fiber networks or MOFN as they navigate regulatory requirements and capacity needs in the U.S. and in other new and emerging geographies around the world. By way of example, our orders in India were up 40% year-over-year, reflecting ongoing high demand specifically for MOFN in that country.

Together, we view these as structural multiyear demand drivers that reinforce the critical need to serve WAN connectivity requirements, fueling both our growth and continued momentum. We expect revenue from the MOFN application will continue to be an important contributor to overall service provider growth going forward and we are uniquely well positioned to further strengthen our leadership in high-speed WAN connectivity for service providers, cloud providers and the growing group of neoscalers from whom we saw increased momentum in the quarter for both direct and MOFN related design wins.

In parallel to this, we are focused on the significant expansion of our addressable market opportunities in and around the data center. It is now well understood that cloud providers are investing heavily in data centers to deliver on both the current and future promises of AI. In just the last few weeks, we've seen announcements from the 4 largest global hyperscalers that outlined a step function increase in their 2026 CapEx to more than $600 billion in aggregate, driven by infrastructure needs related to AI training and inference workloads at massive scale. These build-outs involve several areas of opportunity for Ciena, not only in the WAN, but increasingly in and around the data center, including scale across, scale out, scale up and our unique data center out-of-band management solution or DCOM.

I'll start first to discuss the scale across, which is really an application supported in part by our interconnects portfolio, which is emerging as AI data centers grow in size, and begin to hit power and space limitations. To overcome these constraints, customers are distributing compute across multiple sites and using high-speed performance optical networks to interconnect, effectively creating one single AI training environment that operates across distance.

We believe that we are in the very early stages of this wave of opportunity, and we are already experiencing extraordinary demand with 3 hyperscalers choosing to use our optical solutions for their training applications across distance, which we've talked to you about in recent quarters. And all 3 hyperscalers are significantly ramping including additional orders for multiple additional clusters from the first hyperscaler we announced in Q3 2025.

We are addressing this demand for scale across solutions with our RLS platform, the de facto industry line system standard for cloud providers as well as our 800 ZR pluggable optics. To underscore this, we realized a second consecutive record quarter for RLS shipments and revenue. We expect to expand our role in scale across applications with the introduction of our new RLS hyper-rail solution.

Hyper-rail delivers an order of magnitude increase in fiber density within existing rack footprints, helping customers scale traffic while reducing and, in some cases, avoiding costs and complexity associated with adding substantial numbers of [ amplify huts ]. The solution developed in close collaboration with our hyperscaler and service provider customers represents another inflection point for Ciena, and we expect to be first to market again.

In fact, we will be demoing the first prototype of our hyper rail system at the [ OFC ] trade show in a few weeks' time. This solution we expect will begin standardization at the end of '26 and will ramp in 2027, allowing us to capture share and incremental value as these distributed AI training expands across regional clusters and moves to further distances.

In addition to scale across, we see meaningful opportunities inside the data center, including the scale-out connectivity between racks and scale-up connectivity within racks. As we know, the physics of copper inside the data center is reaching its limits. While there will be a place for copper solutions with shorter distance scale-up interconnects, network architectures will include more optical co-packaged interconnects.

And over time, as data rates and bandwidth requirements continue to increase, coherent optical connections will overtake [ IMDD-ones ] for shorter reaches to address going capacity volumes inside the data center. And as the world's leading high-speed connectivity company, we are investing meaningfully to intersect these important use cases, and we continue to demonstrate progress towards our in and around the data center growth objectives. And our expanding interconnect portfolio, including ZR and ZR plus pluggables and optical components is well positioned to address the rising power and space constraints associated with those evolving scale-up and scale-out architectures.

We've just reached an important milestone with our first product introduction following the [ Nevis ] acquisition last fall, which addresses scale out and scale up needs. Last week, we announced the Vesta [ 200 6.40 ] optical engine, which is the industry's first high-density, low-power open ecosystem, pluggable CPO solution. Samples of the Vesta product will be available in calendar Q2 2026, and we are actively discussing Vesta, as you'd expect with our cloud provider customers and partners and we're excited to be showcasing it at OFC again in a few weeks' time.

For scale-up opportunities inside the rack, where XPUs are getting faster and driving heat and power concerns we are advancing the [ Nitro ] linear redriver technology also from our [ Nevis ] acquisition. We believe this is a critical element to active copper cabling solutions, which extend the distance that signals can travel and reduce power by up to 80% versus [ AEC ] type solutions. We also expect samples of the Nitro redriver to be available in calendar Q2 2026.

Finally, our data center out-of-band management or DCOM solution continues to represent another significant opportunity inside the data center. Leveraging our XGS-GPON and routing and switching platforms, DCOM was initially designed with Meta to meet hyperscale provisioning and configuration requirements. We continue to work with them and are engaged in technical discussions with 2 other major global hyperscalers.

Let me summarize by emphasizing that demand in Q1 '26 was unprecedented, reflected in very strong order intake and a meaningfully higher backlog. We executed well and demonstrated strong performance on both the top and bottom lines. This exceptional demand was broad-based across service providers, hyperscalers and an expanding set of neoscalers. Opportunity continues to build in waves from our traditional and expanding WAN business to multiple applications in and around the data center.

Furthermore, to monetize AI for both training and inference workloads, the latter of which represents another significant growth vector still in its infancy, the foundational requirement is, again, high-speed connectivity. These dynamics, combined with our deep collaborative customer relationships that improve our long-term visibility plus our continued focus on execution, give us increased confidence for multi years of strong growth and profitability ahead. With that, I'll turn over to Marc to cover our financial performance and guidance in more detail. Thank you, Marc.

Thank you, Gary, and thanks, everybody, for joining the call this morning. As Gary noted, demand remains robust and has been, in fact, increasing. We are focusing our resources to not only strengthen our financial results but also to secure near- and long-term supply and manufacturing capacity to deliver for both our customers and our owners. The results delivered in Q1 are a testament to the progress we are making and will continue to make.

With that, I'd like to update progress against our financial priorities previously discussed. We continue to make progress to our next milestone of 45% gross margin as witnessed by our 44% gross margin performance in Q1. Q1 results benefited from product mix inclusive of contributions from incremental demand for capacity infills, the execution of cost reductions and early progress on advancing the value exchange with our customers. Longer term, an improving price environment, new product inflections like hyper rail and focused cost optimization all provide opportunities to deliver improved gross margins.

Our balance sheet continues to be a source of strength with working capital improving driven by cash from operations, yielding $228 million in Q1, a decrease in cash conversions of 3 days and inventory turns growing to 3.2x. With respect to capital allocation, we're taking a balanced, disciplined approach prioritizing R&D to advance our technology leadership in the fastest-growing segments of the market and to drive product velocity, all while holding OpEx levels approximately flat to 2025, delivering significant operating leverage.

We are investing our CapEx to expand capacity, scale output and meet rapidly growing demand. In Q1, capital expenditures were $74 million, inclusive of the accelerated capacity investments. For context, this is approximately 2 to 3x our average CapEx over the last 12 quarters.

Let me take a moment to comment on the industry's supply and its impact on Ciena. As you've heard from many others in the industry over the last few weeks, the supply landscape remains challenging. To be blunt, our revenue in the first quarter would have been higher but for these constraints. Our close relationships with customers give us early visibility into their demand and our need to expand capacity to address it.

We've been working with partners to scale by way of 2 key initiatives. First, we continue to partner with contract manufacturers with respect to their manufacturing capacity and output expansion, which is yielding strong results. Second, we are deeply engaged with component vendors, which is where more of the industry challenges exist to secure and expand supply, including through responsible, long-term purchase commitments. As shown by our Q1 results, we are navigating the supply environment well and are investing to expand capacity. However, we expect demand will continue to outstrip supply at least for the next several quarters.

Continuing -- turning to Q1. As Gary noted, revenue reached $1.43 billion, up 33% year-over-year and a quarterly record for the company. Our optical revenue was up over 40% year-over-year, led by Waveserver and RLS product lines, each of which were up over 80% from the year-ago period. We had 3 greater than 10% customers, including 2 global cloud providers and on Tier 1 North American service provider with strong MOFN activity.

Regarding backlog. As Gary discussed, our order intake has been incredibly strong over the past 90 days, leading to a new record by a significant margin. Given this extraordinary nature of the demand, we want to share with you that backlog has increased by approximately $2 billion this quarter to exit Q1 at approximately $7 billion. In fact, nearly all new orders we are taking now will be for fulfillment in fiscal 2027, providing ongoing confidence in our outlook. As a result, we expect backlog to continue to grow throughout the year. Rounding out Q1.

Adjusted operating expense met expectations, leading to an adjusted operating margin of 17.9%, 190 basis points over the midpoint of our December guide. We achieved adjusted net income of $197 million in the quarter, which delivered an adjusted EPS of $1.35, more than double a year ago. We exited the quarter with a cash balance of $1.4 billion after purchasing approximately 400,000 shares for $81 million under the current repurchase authorization.

Before I discuss our Q2 and updated 2026 outlook, I'd like to make a few comments on tariffs. As you know, on February 20, the Supreme Court struck down the [ EPA ] tariffs originally implemented in March 2025. As previously stated, these tariffs have been immaterial to our financial results. And while we have noted this ruling as a subsequent event in our forthcoming 10-Q, it has not had any impact to our reported results.

The administration has announced a new global replacement tariff under a separate legal authority with final rates still pending. Based on current information, we believe that these developments will have an immaterial effect on our business. Obviously, we are monitoring new developments and working closely with customers and suppliers to assess any future impacts.

Now with respect to our view for the remainder of the fiscal year and Q2. Given the current dynamics, we are now expected to deliver revenue for fiscal 2026 between $5.9 billion and $6.3 billion, essentially raising our year-over-year growth rate from 24% to 28% at the midpoint of the range. We believe this range appropriately balances the strong market demand with ongoing industry supply conditions.

Given our Q1 results and the expectations for Q2, we expect our 2026 gross margin to be between 43.5% and 44.5% and 1 point above our December guide and 130 basis improvement above 2025. With the first half exceeding our expectations and the supply challenges we are actively managing, we now expect first half and second half gross margins to be roughly equivalent.

And we now expect adjusted operating expenses of approximately $1.52 billion to $1.53 billion, resulting in an adjusted gross operating margin of 17.5% to 19.5%. This small difference in OpEx is really due to the stronger demand environment. In Q2 of '26, we expect to deliver revenue in the range of $1.5 billion, plus or minus $50 million. Adjusted gross margins between 43.5% and 44.5% and adjusted operating expense of approximately $375 million to $390 million will result in an adjusted operating margin of 17.5% to 18.5%.

To conclude, we had a strong start to fiscal 2026. Demand for our technology is robust and durable. We see multiple waves of opportunity ahead from continued AI training to expanding inference workloads, both domestically and internationally, to new hyper rail solutions and faster interconnects inside the data center as higher speed requirements come online.

We continue to offer market-leading innovative technology that uniquely enables AI and both in the WAN and in and around the data center. And we continue to thoughtfully allocate shareholder capital to deliver value to both our customers and our owners. Given all these opportunities, we're confident our momentum will extend beyond '26. With that, we'll now take questions from the sell-side analysts.

[Operator Instructions]. Our first question comes from Amit Daryanani with Evercore ISI.

I guess I have 2 from my side. One of the things just on the gross margin side, really impressive performance in the first half of the year despite some of the supply chain issues you folks are having, and I think mix was slightly negative. Just spend some time on like what are the upside levers on gross margins that are helping you out? And are you seeing a shift in pricing at this point whatsoever? That would be really helpful to kind of understand.

Sure. Hi, it's Marc. I agree. We had a very strong performance, and we're quite happy with the 44.7% that we printed this morning. And it's really driven by a couple of things, right? We saw customers requiring increased capacity both in hyperscalers and in service providers that increased their infill rates. And so we got quite a bit of tailwind from that.

Secondly, I think the engineering team has done a wonderful job of engineering cost reductions into our products. That's really kind of separate from the supply chain activities that you're seeing us increase revenue with. So between those 2 things, I think we're really seeing some good tailwinds.

Moving forward, I think we've got a few more levers that we're going to start working through. You mentioned price increases. One of the things that we're trying to do is really balance the price increases with our share position in the market. And I think what you've seen is we've been able to increase our gross margin as well as increase our share. And so I think we're doing a really good job of balancing those 2 things.

I think moving forward, you'll see even more aggressive cost reductions and then the price increases that we talked about at the end of last year, those really haven't started to fully kick in until the second half of the year. So I think that creates additional tailwinds for us. So all in all, again, I think we're making really good progress towards that 45% way point, and you should see that throughout the year.

Got it. And if I could just follow up, how do you see the pluggables market, especially with 800 gig ramping up through fiscal '26 and '27? And if you could just maybe compare contrast a bit about your positioning in 400 versus 800, that would be helpful as you go into the next cycle.

Yes. Amit, this is Scott. So we've seen pluggable revenue increase sort of period-over-period, and we've talked in the past about our interconnect business. And when we went from 2024 to '25, that doubling, sort of in the rearview mirror. And then we talked about it as a major portion of our inside and around the data center with our aspirations to triple that this year, and we're well on track for that.

So we do see significant growth from a competitive perspective, as we've talked about in the past, through choices that we made to focus early introduction of the technology and the last generation more on our systems business and our [indiscernible] business because that was the bigger opportunity. We weren't necessarily first movers in that market. So that probably cost us some share, and it probably cost us actually, frankly, some margin dollars. That's not the case in the 800 gig. We're first to market there and 800 gig is moving quite along.

Now I will say, though, and just -- I want to make sure people understand this is that we're talking about capacity adds across the portfolio. It's not just pluggables. Marc mentioned the growth that we're seeing on Waveserver. If you want to be the strategic supplier to particularly the web scalers, they have networks that span, campuses, metros, national networks, submarine networks, you have to have all the things in [indiscernible]. And we're seeing increases across all those components, system business and pluggables.

And the next question comes from Simon Leopold with Raymond James.

Jeff Koche in for Simon. So just a couple of housekeeping items. Can you give RPO for the quarter in the percentage of the $7 billion backlog that's product? And then while you're doing that maybe you could just give the percentage of sales that are ZR pluggables for the quarter? And then I guess my second follow-up would be what percentage of the telco revenue is now MOFN and how did traditional telco grow?

Yes. There's quite a few questions in there, Jeff. So let me start. If you think about the backlog, I think right now, roughly 80% is products and software and the rest I think about as services. Yes. We're not going to really disclose the percent of pluggable revenue in the quarter. So as Scott said, we expect that to triple year-on-year, and we're on track to deliver the 800 pluggable ramp that we talked about. Sorry, I lost track of all your questions. What else did you have?

RPO and then percentage of telco that's MOFN.

Why don't I take the percentage of -- on the MOFN [indiscernible] for you. By the way, I would say the interconnect is somewhat of a proxy for -- at this stage for pluggables to some extent. So we clearly disclose all of that. I would say you're looking at about 10% to 15% of our service provider business being MOFN.

We have visibility to a fair amount of it, but not all of it. We partner with them on -- with service providers on identifying some of these particular build-outs. And we're seeing a good steady ramp in that. You're seeing service provider growth, I think, in the first quarter, you know it's like 22%. I think of that growth rate, MOFN is a big contributor to it. But I think overall, it's going to be about 10% to 15% of our total service provider business.

And then RPO, if you think about RPO as a percent of the orders that we took in Q1, Jeff, you should be thinking roughly 60%.

And the next question comes from Ruben Roy with Stifel.

This is [ Sang ] on for Ruben Roy. I guess just sort of digging into and following up on the last set of questions around backlog. You guys have gone from $5 billion last quarter to $7 billion this quarter. I think you just said 80% of the $7 billion is products and software.

And so if I just apply that 80% to the $5 billion, that's implying $1.6 billion in product and software growth, which loose math and loose assumptions there. So then I'm thinking through, okay, last quarter, you said Meta expanded their DCOM engagement, the RLS customer expanded. There are a couple more hyperscalers added on, and we're talking hundreds of millions per opportunity, as you've mentioned. So could you just help us bridge the gap and perhaps provide some color as to what the incremental here is relative to the expansions that were announced last quarter, the new hyperscaler [indiscernible]?

Yes. I would say that, first of all, it's very broad demand that we're seeing. It was very strong on service providers, submarine, MOFN and obviously, hyperscalers. And I would also say hyperscalers in their various applications because I think the point to note is -- we have very broad relationships with most of them now across multiple applications, submarine cable, long haul, metro, in and around the data center and with things like DCOM inside the data center as well.

So basically, if you look at all of those from an order point of view, they were all up and to the right. And I think that's sort of systemic around the drive of the traffic outside the data center now. So you're seeing growth in cloud, general cloud, you're seeing inference. You're seeing this new market of training now emerge.

As I said in my comments, we've now got 3 hyperscalers deploying us for training and we're at the very early stages of that. So you put all of that together and that yields the incredible demand that we saw in Q1. And as Marc said, despite the fact that we're ramping our capacity for delivery as seen in our results, demand is going to continue, we believe, to outstrip our ability to supply and that's going to continue for -- we believe this year. And so we're going to end up with a larger backlog than we have right now as we turn the year despite the fact that we're ramping our capacity strongly throughout the year and obviously through '27 and '28.

Yes. And the one thing I just maybe want to clarify a little bit for you. That 80% is across the entire $7 billion of backlog, not just the $2 billion increment. So you can kind of look through the -- where we ended Q4 or we're ending Q1 and back into, I think, the information you need.

Yes, I think I got you there. I was -- the $2 billion was simply coming from the incremental as you're saying, but I assume that 80% was sustained through last quarter as well, which may not be the case is what I'm understanding. On the follow-up, maybe just touching on what Amit had asked at the start of the call around pricing. How much of pricing increases currently baked into backlog relative to volume?

Yes. We're probably not going to give you that number specifically. As we disclosed in Q4, right? The pricing increases that we talked about were really on the new orders. And because we had such a big backlog at the time, most of that was going to be seen in the second half. So you should expect those price increases to show up in Q3 and Q4.

The next question comes from Meta Marshall with Morgan Stanley.

Congrats on the quarter. Maybe just on impressive operating levers that you guys are getting out of the business. And just where are you finding kind of those levers to keep OpEx flat as I assume bonus plans need to reset? There's obviously a lot of projects that you're working on with various hyperscalers. And then second, just for -- did you mention whether there were any 10% customers within the quarter. Is that just a small bit?

Yes. Meta, so on OpEx, the first part of your question, we were able to hold OpEx flat year-on-year really for 3 reasons. The first is, if you recall last year, each quarter, it seemed that we were increasing our OpEx guidance to take into account the increased performance that we were doing last year. We basically reset that and we were able to scoop that increment and reinvest that back into the business. So that's one.

Two is, you'll recall we announced a small risk somewhere between 4% and 5% of the population. We've been able to harvest those savings and reinvest into the business. And then you'll recall that we ceased further investment in our 25 gig PON activity. So those 3 things, we're able to scoop those up, reinvest them back into the business, and that met our needs year-on-year. And so nominally, that's how we got to that flat and the -- to be honest, quite impressive operating leverage. On the 10% customers, we had 3. We had 2 hyperscalers and 1 Tier 1 North America service provider that is pretty exposed to MOFN.

And the next question comes from Karl Ackerman with BNP Paribas.

Yes. I have 2. Marc, I suppose both of them are for you. Could you speak to the duration of this accelerated CapEx spending, which seems driven by enhanced visibility you now see extending over a multiyear period? And for my follow-up, you also spoke about more aggressive cost reductions to support margins. I'm curious if you could expand on that and whether that relates primarily to further outsourcing to the EMS partners or if there are other things we should consider?

Yes. So let me take those. And on the second one, maybe Scott can add some more color here.

So on the duration of CapEx, you'll remember in our December call, we talked about -- we doubled our CapEx year-on-year. And within that doubling of CapEx, 50% of that we were increasing our productive CapEx by 50%, right? So really think about working with our contract manufacturers to expand their manufacturing capacity.

Now obviously, that's got some lead time, right? And so we're investing through the year and we expect that increase in capacity to start showing up towards the end of the year. And the intent was really to set up a 2027 plan for us, right? And I'm not going to go into 2027 yet. But the intent is to invest in '26 and to realize the benefits in 2027. So that's one.

Two, on the cost reductions, I wouldn't say that it's more outsourcing to EMS folks. I think our engineering and product teams are really looking at the cost components of the products and looking at different materials, different solutions and trying to drive a lot of those costs out.

I'd also remind you that we've got the most vertically integrated supply chain, and that drives a lot of both cost advantage for us, but I would say right now, more importantly, supply stability. And so between those 2 things, I think, as I said, we're starting to see the ability to increase revenue as well as bring in a little better cost profile. I don't know, Scott, if you've got something to add.

Yes. I think on the cost reduction piece, I sort of think of it as 3 levers. One is we're driving a lot more volume through the machine. And we do have some fixed costs, so you get a tailwind there. That's the [ problem ] you wanted to get your mind around.

On the engineering aspects or design aspects that Marc talked about, think of it as a couple of things. Number 1 is you don't change the function of a product, but you're going after the cost base of it, and that can be through more vertical integration. That could be through substituting parts. For different parts that could be opening up your supply chain to multiple other sources and we're pushing on all of those levers, by the way.

The other piece of the design stuff is as you go from generation to generation, where you are changing the function of the product. You get back to those price value conversations with the customers and sticking more dollars into our pocket as we do those transitions. And those are going on all the time to some degree.

The third piece I said, and we didn't talk a lot about it. It's not all on the lines that you said, where we're depending more on the EMS. But we are constantly looking at that supply chain design that the whole ecosystem design and trying to optimize that to get cost out of it as well. So it's not the engineering design, but the supply chain design, and we're pushing on all those. And that's why you're seeing the results you're getting and the team is doing a good job executing on those, and there's more in the future.

And the next question comes from George Notter with Wolfe Research.

I was curious about your comments about progress with the value exchange with customers like obviously, you're raising pricing. I know it's going to come through later in the year as you eat down the backlog. But just stepping back and thinking about the space, you've got higher memory costs, you've got component suppliers that are being really aggressive on price, they're repricing, their own backlogs.

It just seems like it's an environment where you guys could be more aggressive on price and even perhaps reprice your own backlog. So I'm just curious like why not be more aggressive here given the supply-demand dynamics and what's going on in the supply chain?

George, yes, this is Gary. Yes, I mean I think you -- we've talked a lot about the good things that we're doing to manage our margins and the rest of it, including the value we balance in, but it is a balance to it all. And that's what we're trying to strike as we go through this.

I mean you're seeing it translate into improved financial performance in all dimensions. Market share gains, revenue, gross margin improvement and operating leverage, we're seeing that. And it's a confluence of things. Scott talked about some of the cost reduction stuff. Marc talked about the value exchange. All of those things are happening and are getting weaved into the business over time.

As you know, we take a very long-term view of how we run the business. And I think we see this as a multiyear opportunity for us, and we'll strike a balance between those challenges of supply chain because you've got a lot of shortages going on right now as well, which we're navigating through pretty well. So it's the confluence of those things that result in the approach that we're taking. Marc, I don't know whether you got any ...

No. I think Gary said it well. Pricing is a lever, George, but we're also looking at can we improve cash conversion? Can we get better terms and conditions? Can we get longer-term purchasing commits with maybe some more noncancelable, less risky terms as we satisfy this quite large backlog?

We are not taking pricing off the table. So I just -- we should say that. And you're right, we are seeing some cost increases coming from the supply chain and we're in early days of having those conversations with customers. So I don't want to get too far into that. But I think we're trying to pull on all the levers. And overall, I'm pretty pleased with the progress we're making so far across the board.

Got it. So anything new competitively? Obviously, the competitive environment is, I guess, more benign than it has been in recent years. You've had some consolidation among competitors. Anything new in terms of their behavior on pricing or terms or just general competitiveness in the space?

No, in a sort of -- on the sort of WAN business, I think you articulate the environment well there. I mean we were fortunate because we've got such close relationships with the hyperscalers to get out of front as Marc said, around the capacity and component supply to that, which is showing up in our growth rate.

So we're able to stay out ahead of that, and we took market share in '25, and I think we'll take even more market share in '26. This is all really now about -- we're on our next generation of line systems with the [ hyperal ], we're on a next generation of modem technologies in their various forms. So our competitive position continues to improve there.

Obviously, as you get in and around the data center, particularly inside of it, it's a different set of competitors. It's a different set of dynamics. What we bring to the table there is our leading high-speed connectivity technology and our systems knowledge, frankly, and translating that into the component purchase, we believe is meaningful. And we've got a lot of the hyperscalers sort of leaning in with us on that.

But it is a different ecosystem and environment. We've got new and different competitors there, some of which are very large. So we don't underestimate that, but we think we're coming from a position of strength and uniqueness around our optical technology is you're really looking at the opticalization if that's a word, of the data center as they move from the electrical stuff runs out of steam from a physics point of view.

And we're starting to pick off some of those applications where that's most pronounced. DCOM, I think, is a decent example of that. We've got the new technology that we announced in market from the new bit acquisition. So that's going to be a different set of competitors for us.

And the next question comes from Tal Liani with Bank of America. We'll move on to the next Tim Long with Barclays.

This is Alyssa Shreves on for Tim. I just had 2 quick ones. Were you seeing any dynamic in the quarter with the order growth? Was there any trend in customers trying to get ahead of pricing actions? Or was it really just underlying demand kind of driving the growth there? And then I had a follow-up.

Pure underlying demand across the board, not driven by sort of pricing thresholds or anything. It's -- there's so much demand for capacity out there across the board. Service providers have not invested in their optical infrastructure for about 5 years. We've been so preoccupied with 5G, et cetera, that there's an underinvestment in the optical infrastructure in the world, and you're seeing very strong growth from the service providers and MOFN activity as well. And then you've got hyperscalers with the across training, clustering, new market for optical. That's really ramping pretty significantly. And then you've got the sort of inside the data center optical moves as well. So across the board, Alyssa.

That's helpful. And then just a quick one on APAC. The orders for India in the quarter were really strong. Could we kind of expect the region to be driving APAC this year just given kind of last year was more mediocre growth in the region, and it was down the prior year? Just should we kind of accept a step change now with India?

I think that India will probably be very, very strong and robust this year, largely driven by MOFN. Obviously, it's the fastest-growing Internet market in the world. All of the hyperscalers are leaning in and playing there. And because of the regulatory environment, et cetera, they have to really partner with local folks and service providers to provision their optical networks.

So I think that's going to be very sustainable. We're seeing an uptick in the amount of projects there. I would say, overall, we're going to see good growth out of Asia Pacific this year in a number of areas. I would also -- including Japan, I would say that, that is largely driven by 2 things. One, my point earlier on about service providers have largely underinvested in optical in the last 5 years. So that's beginning to play a part in it. Second part of it is the increase in MOFN activity in the whole Asia Pacific area and submarine cable being a part of that, too.

The next question comes from Tal Liani with Bank of America.

I got so excited. I broke my headset.

Understandable.

Yes. I have a question about the risk of early ordering or -- what we are seeing in every cycle is that when there are constraints, customers start ordering much, much earlier and that creates big increases in backlog and then declines. How can you manage it? So I'm sure you probably don't know if there is or to what extent, but is there any way you can manage early ordering through pricing the way Cisco does it or any other way in order to mitigate the phenomenon like -- so you don't have the -- what we have had like in 2022 or 2023, whenever we had the previous cycle.

Yes, Tal, that's a good question. I mean, first of all, I think having suffered through that we're suitably sensitized to it, and we learned some lessons through that. One of which is visibility into things like installation and what are they actually doing and when with the equipment. I would say that the dynamic here, the service providers is good, steady growth. We have good visibility into that and what they're doing with it. So -- and they were the main folks that were having the challenges around the ordering piece.

The hyperscalers, I think we have deep collaborative relationships with them. They're our biggest service customers as well. And you saw our installation services were up 42% in the quarter. That gives us -- and we have unique visibility into what they're doing and deploying across the board there.

So given the scale of this, this is deep and collaborative relationships with them around precisely what are they trying to do where and so that gives us good confidence and visibility in the way we structure our agreements with them. Given these lead times and the rest of it, which they're mindful of, I think we have great assurance, another way of saying this, in the quality of our backlog.

Yes. I think the only thing that I'd probably add, Tal, is when we talked about value exchange, part of that is making sure we've got the right terms and conditions in place so that we don't get stuck holding the bag, and I'm not -- we've not really seen a lot of people pushing back on that.

Got it. Second question is, I mean, on margins. The risk is that in times like that, the component pricing will keep going up. And you start to see if it started with memory, we start to see it now with other companies or other types of components.

What can you do going forward? What can you do in order to mitigate the future risk? I understand that you're -- what you're doing now and how you're trying to mitigate the current risk. But are there any like forward pricing or forward purchase commitments, et cetera, you can take in order to mitigate the future increase in component pricing? Or what are you trying to do? Or how are you trying to address it?

Yes. This is Marc, Tal. I think there's -- again, we keep coming back to this word balance. I think we are really focused on ensuring that we've got the secure supply to satisfy the demand that we're looking at and we're locking in the pricing as we know it today with our component suppliers and the contract manufacturing folks.

All that said, right, there is still future risk of them repricing their backlog. And we are having conversations both on our supplier side as well as on the customer side, so that we're not getting squeezed in the middle. But again, it's the balance of pricing and supply on one side and pricing and share on the other.

And I think given the results that you've seen and the basis of our raise, I'm feeling pretty comfortable that we're striking those right tones.

The next question comes from Atif Malik with Citi.

It's Adrienne Colby for Atif. I wanted to ask another one about gross margin. With the 800 ZR pluggables ramping in the latter part of the year and also with the pricing increases kicking in, why wouldn't we see gross margin expansion in the second half?

Yes. I mean look, the guide that we gave was a good range based on what we see from the product mix and from the supply chain challenges that we're trying to work through, again, that balance that I talked about before. From our seat right now, we think that's a pretty responsible guide. As we make more progress, we'll give you guys updates.

Great. That's helpful. And then just as a follow-up, I was wondering if you could provide some more color on the momentum that you're seeing with neoscalers, maybe just on the relative size of the opportunities if you move to that falling in [ Cloud Direct ] versus MOFN.

Yes. We're seeing, obviously, an emerging ramp here around a bunch of the loosely call sort of neoscalers, which encompasses a fair range of different players. It's, I would say, largely right now, MOFN orientated, given the capital expenditures, time to market for them, et cetera. But what is clear for mid-all is that the network is now a real priority for them. And I think that plays through to the hyperscalers, too. There's been such a maniacal focus and continues to be, obviously, on things like power, GPU, accessibility, et cetera, et cetera.

Now it's really about the network. The traffic is beginning to come out of the network, both for inference and for training. And the neoscalers are obviously seeing that, too. So they're leaning in on the network. Now we're also beginning to see some of them wish to have control of some of that network as well and do their own builds. We're cautious about that approachment given the financial structure of some of those neoscalers, not all of them. But we are seeing across the board of the neoscalers leaning in on the whole network requirements, largely really [indiscernible], Adrienne, currently going for MOFN.

Thank you. We will take one other question today.

The next question comes from Ryan Koontz with Needham & Company.

You touched on scale across a bit. It seems like we're very early that this momentum around that area. Can you maybe expand on those projects where we are in terms of a rough count and what -- how your visibility is improving there relative to backlog and specific scale across projects?

Ryan, we shared that -- I think it was in Q3, we announced the first large hyperscaler rollout. We've actually seen during the course of this quarter, additional sites being added to that. Again, I would say all of these currently that we're seeing are in North America which is, I think, to be expected. We've added 2 more hyperscalers to that, that are also rolling this out.

I think we're in the very, very early stages of this. And in talking with them, though, the plans are large and expensive as you'd expect for just the scale of what they're trying to do here. It's absolutely enormous. So we're at the very early innings of this whole training clustering.

I would say that what we're also observing is the -- all of these hyperscalers, we talk about them homogeneously, they aren't. They have very different business models. They have very different architectures, both inside the data center to some extent and certainly outside from a networking point of view. The training varies as well. And so I think you've got lots of different variables in there in terms of distance, capacity, speed, et cetera. They all want low latency and they all want super high speed. But you're seeing a lot of variables about how they are clustering this. And I think again, I would say we're at the very early stages of this, Ryan.

Really helpful. One last question on DCOM here. great early move here. It seems like you've got a big lead in this opportunity to bring PON to out of band. Do you feel like that space is defensible for you? And how do you sustain a competitive advantage there?

I think there's a number of elements to that sustainability. I think it's deep collaboration first off and understanding in intimacy the application. And obviously, Meta, we're incredibly helpful in instigating that. But there is different use cases. They are slightly different in the different hyperscalers, but I think the defendability of it is we're very vertically integrated into it.

We own the sort of core technology. And it's the software that we're putting on that as well. We're kind of uniquely positioned about that. So we think it's -- the combination of all of those elements, the collaboration, the vertical integration, the uniqueness and high speed of it and then all of our software integration capability. And also, by the way, installation, which we're also doing. It's the confluence of those things -- we think it's quite defendable.

This concludes our question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Welcome to Needham's 20th Annual Growth Conference. I'm Ryan Koontz, I cover the communications and networking sector here at Needham. Really happy to be joined by Ciena today. We've got David Rothenstein, SVP and Chief Strategy Officer. Welcome, David.

Welcome, Ryan. Thank you.

Yes. David's had a really, really busy day. We're going to push him across the finish line here.

[ You ] coveted 3:45 in the afternoon slot.

Yes. Well, let's start kind of high level where you guys started last year when you came in and then finished up, I mean, what a year, you came in, guided 8% to 11% growth, ended up delivering 19%, just incredible. I mean, can you walk us through maybe what changed during the year in your business that drives that kind of outperformance?

Yes. Thanks, Ryan. It was a great year. And you're right, we did have the high-class problem of having to continue to take up our revenue guidance throughout the year. I wish I had that problem every year.

It really, in a word, it was driven by AI, which is not going to be a surprise to anyone really across our customer segments and across our portfolio. Service providers rebounded quite nicely after a few years of digesting accumulated inventory, working through having invested in other areas of the network. But really, this past year was driven heavily by the cloud providers both the hyperscalers and now this kind of new group of neoclouds or Neoscalers coming online.

And what happened was they found themselves needing to build out more AI training clusters and the connectivity infrastructure to support them. They found that, they had too, had underinvested in data centers and networks as a result, there's a hypercompetitive intensity amongst them to build out. They've got strong real sustainable business models, and they're spitting out collectively hundreds of billions of dollars of free cash flow. And then -- and ultimately, they need to figure out a way to monetize their investments. So you put all that together and it's resulted in demand that was and continues to be almost unprecedented.

Yes. And within the segment categories, your optical systems business was the real star there, I think over -- well over 20% growth. Within that, I assume that's transponders, line systems and now the new pluggables are a big part of the mix of big growth?

Yes, everything. So yes, it was a strong year of growth in terms of our optical systems business, which encompasses everything that you talked about across the portfolio, which is, of course, our traditional core business in the WAN, really strong year. And our objective in that space is to continue to lead and in terms of technology, innovation, revenue growth and, of course, in market share.

And in terms of market share, we had a very strong year last year. If you look at the global optical market and you exclude China for a moment, we're over 30% market share now, kind of a record high for us and we expect that share to actually grow this year.

Amazing. And a lot of that driven by cloud, of course, the cloud customer base was up over 50% year-over-year. These hyperscale CapEx numbers this year or -- sorry, in '25 are leaning towards 70% growth. I mean much of that spending -- that 7% growth in spend is inside the data center. And so here you are, you guys are primarily playing, connecting data centers. It sounds like, as you mentioned, kind of some catch-up going on here in maybe under investing in the necessary optimal infrastructure to meet the performance needs and then deliver the services that they need to do?

Yes. I think that's changing very quickly. I mean there's been no shortage of ink spilled about what the hyperscalers are doing in terms of distributing AI training workloads and building out data center and GPU compute clusters. That is for sure. But I don't think one can ignore the fact that ultimately, in order to monetize these investments, that traffic is going to have to leave the data center and mold out into the WAN, where it's going to be monetized. And that's -- we're starting to see the shift in focus spend purely from training the large language models with a massive computational demands to actually deploying them for real-world applications for inferencing. So you put all that together, plus you've got, frankly, an existing network architecture and optical physical infrastructure not going to be adequate to capture the projected network traffic growth in bandwidth demand, then it's all a recipe for yes, data centers, yes, data center connectivity, but also the WAN, right? And we saw it in '25. We're going to be seeing it this year, and we'll be seeing it, we think, for the next several years.

Yes. Can you walk us through a little bit the history of the Metro DCI opportunity where you guys -- we're a modest participant I think in compact modular and it shifted to pluggables and you guys weren't there and you showed up late, but really started hammering some nails in and boy, I mean, it really took off. Maybe walk us through a little history there for folks who probably don't fully appreciate what you guys have accomplished in two short years.

Yes. No. Thanks. So for many years, there was, I suppose, this existential question about plugs and pluggable transceivers and how that was going...

Yes. It's going to cannibalize everything.

Cannibalize our existing optical systems business, and that really and quite obviously has not taken place. We've been providing metro data center interconnect solutions for over a decade to the hyperscalers. But really for us, the first foray into it was with the 400ZR plug. We were admittedly a little bit late to the market relative to some of the competition. And there were those who kind of wrote our epitaph on pluggable transceiver market. And then a funny thing happened, which is that we came close to running the table, we won 400ZR business with three of the four hyperscalers. It wasn't because we're nice guys, it was because we provided a very effective value proposition of what we believe are outstanding performance specifications relative to the competition and of course, total cost of ownership relative to that.

So regardless of when we entered the market, we are doing very well there. You're right. In two years, we've grown the market very well. We believe we've got somewhere in the range of 15% market share. They're coming out of this past year. We doubled the business last year to just under $170 million, and we expect it to continue to grow quite well going forward. And now we've got in the market our 800ZR pluggable transceiver, which is much earlier to market than the previous generation. We have more experience in terms of design and cost reductions, managing the supply chain. And then we've got it obviously instantiating other applications that I'm sure we'll talk about like scale across.

So you're right. In a few short years, we've taken what was a nascent business into something that's very additive to our overall top line.

Yes. And where is this from a profitability perspective? I mean, you're obviously delivering volume. Where are you on profitability of kind of getting the ZR to approach corporate norm margins?

Yes. So 400ZR, because of the time-to-market issue and the competitive dynamics is still dilutive to corporate average margins with 800ZR for all the reasons that I mentioned. We look at '26 this current year as a really important inflection point for us to drive a ramp of production volume for this product of a scale at which we've never done in any product before, just given that the size of what we're talking about which will be a really important proxy for, of course, quality, yield and cost. And as we do so, we believe we'll be able to bend the cost curve ahead of price erosion and get the margin profile at or above corporate average.

And your performance wise, you feel really strong about where you are relative to the two main other competitors there, Cisco and Marvell?

We feel very good about the performance characteristics of ZR, which given the application really focuses, yes, on capacity of course, but also things like power, space, latency and, of course, cost.

Right. And power what -- back in history, power was what you were known for with your DSPs but look what you did.

Correct. So it is a -- when we talk about extrapolating and taking our expertise in high-speed interconnect, it's a great example of how we do that.

Yes, outstanding. So now in general, with the cloud business, now you're supplying short-reach pluggables, metro, long haul, subsea, transponders, line systems. I mean, wow. Any idea to kind of share you have across the cloud in optical? It's got to be 50% plus.

I do. So what we've said is, as I said, on market share, kind of global optical [ writ ] large across segments, it's over 30% for cloud providers, the best we can tell, and there's very quickly blurring of the lines across applications here. And there's obviously the MOFN business that they outsource effectively the connectivity to the service providers, but we report through them. There's subsea where they are driving. But again, purchase through the service providers and other consortia. I would say, certainly on a direct DCI business, which is the clearest picture I can give you is -- yes, 50%, I think good earmark there for us.

Yes. Impressive. Let's unpack MOFN a little bit. A little bit of history. What is it? Why is it? And is it really a material part of your business to you and will be going forward?

So it's absolutely a growing part of our business. I think it's a really interesting dynamic. So we talk about MOFN -- just to level set, it's -- we love our acronyms. It's Managed Optical Fiber Networks and the cloud providers, the hyperscalers, and now also the neoscalers would much prefer to build out and own and operate their own network infrastructure. But in many cases, either they can't regulatorily, like in India, they're prohibited from owning and operating networks. And in many cases, including in the U.S. from a monetary and an opportunity cost standpoint, they're doing other things. So effectively, MOFN is a managed wholesale service where the cloud providers effectively outsource WAN connectivity to service providers. right? Lumen being a great example of a North American service provider who has done a fantastic job at driving MOFN business. And one of the large hyperscalers is running a lot of capacity over there, fiber infrastructure. And so that business has also grown well right now. We have over 30 MOFN wins around the world.

In terms of material part of our business, it was sub-10% this past year, but growing. It grew about 150% year-over-year in '25, and we expect it will continue to grow and it's also a really nice indicator for international business, right? You've got the wholesalers out there who are doing an incredible job, whether it's Colt or EU networks, Arelion, Zayo who are doing a fantastic job at selling capacity in this dynamic, but also some of the international service providers who are getting the benefit in locations and geographies that really we haven't thought about too much. So North Asia and Japan and Korea, in the ASEAN market, in Middle East, we're seeing an increasing number of MOFN wins. And so you see really the hyperscalers are trying to drive their footprint globally for fairly obvious reasons.

And that fulfillment model looks like the hyperscaler specifies it and the telco buys it at that spec or generally...

Yes. So we sell it to a service provider, and so we reported and we talk about it in the context of that. But we do think about it as being indirectly driven by cloud providers and we think about subsea in largely the same way. So if you think about it this way, the direct data center interconnect business is around 35 or so percent of revenue going to 40%. And then what they drive the hyperscalers indirectly through both MOFN and subsea that together approaches 50% of our revenue.

Yes, exactly. Another area really exciting that happened this year, I didn't see coming was your PON win inside the data center for Ativan.

You didn't see it coming? Why not?

I did not. And I'm a PON guy going back 30 years. Walk us through kind of what that is, how it came to be, and how do you think about it going forward?

Yes. One of your peers accused that of being a lottery win for me which sounds a little bit dramatic but I think it's a good example in the industry, sometimes it's okay to be a combination of lucky and good. So here, what you have is we acquired XGS or 10-gig PON technology from the acquisition of Tibit and that was really intended to be in my business case, application design for enterprise and residential, PON.

Pluggable PON.

Pluggable PON. And just to be clear, PON, passive optical networking, there's no active componentry, powered componentry in the field. So significantly lower, obviously, power cost with the same reliability and scalability when you're splitting into 36 or 64 homes.

And so what we've done here and we codesigned this application with Meta that was announced was repurposing this PON technology in the data center context. So what it does is out of band data center management has existed for a long time, that's effectively, a way to provide outside of the main data center networking -- network rather, it provides secure remote access on a separate network to do remote access and troubleshooting of the data center systems. Today, that is an Ethernet-based solution. So in every rack in a data center, you've got one rack unit Ethernet switch and a console server, right, depending upon what you're actually doing. Which, again, given the size of the racks and the volume of them, even small amounts of power and space draw can have a massive force multiplier effect.

So what DCOM is you take our PON technology, wrap it in our router with our overall multilayer domain control, and you've got a replacement for that Ethernet base solution, which is significantly lower in power, space, cost, while the same weather performance benefits. And so we've rolled that out. We're deploying that with Meta right now for their greenfield data centers. So far, the value proposition has proven out in the market, and they are looking at expanding the usage of DCOM in their data centers. A big open question is, at some point, they think about using it to retrofit brownfield or existing data centers. They have not yet made that decision and we are in advanced technical discussions with two other hyperscalers for the DCOM application, which is not proprietary to be clear. And just like with everything, we're not going to win 100% of any of that business, but we'll get -- we think we're in a very strong position to win well more than our fair share of that application, which we weren't even talking about a year ago. So we've come a long way on that very quickly.

And your software system, I think, did some deep integration with all their back office, so to speak, of how to operate a data center?

Absolutely. Having Navigator, which is the multilayer domain control kind of the systems and software wrapper around the hardware solution is a competitive differentiator.

Yes, absolutely. Let's shift a little bit here. In terms of looking forward, AI, the inflection in AI demand, traditional cloud versus AI, do you have visibility in your customers where your products are going in terms of cloud versus AI infrastructure? Do you allocate projects on that basis?

We don't really don't get orders that say, "Hey, this is demarked for an AI training cluster" versus a traditional cloud infrastructure running over a clause fabric that -- we don't get like that.

And so I couldn't give you -- I think where you were going to go is, can I give you a percentage split of traditional versus AI, no I can't. What I can tell you more qualitatively is that a significant percentage of demand is AI-driven. And I say that not just because of the discussions that we're having with our customers who are kind of giving us demand signals driven almost directly from their AI and ML teams, but also from applications like scale across right, which is a repurposing of our reconfigurable line system, our ZR plug or our high performance optics in a modem, again with Navigator around it as they're distributing the training workloads across clusters further and further apart because of the computational demand and, of course, the power constraints.

And so we are getting greater line of sight as we're seeing more of that instantiated and scaled across locations like scaled computational demand and, of course, the power constraints. And so we are getting greater line of sight as we're seeing more of that instantiated and scale across applications. And we think that percentage increase will only continue to grow.

Yes. So you've guided to fiscal '26 to 23.5% there at the midpoint. Clearly, a lot of this is coming from your cloud customers. This is really just AI pressing on the gas pedal here that's driving a lot of that acceleration? I'm sure the balance of your business is healthy and growing. But is the big chunk of hyper growth coming from AI?

I think that's a very fair statement, right? I mean at 24% at the midpoint over 19% last year, double digit -- anytime you get double-digit growth, anytime you're at 20% or above, it's something to really keep an eye out for. The demand, not just signals, but what we're getting in terms of design wins, orders flow, which continues to be strong backlog. So we just finished the year, we did $7.8 billion of orders over $4.8 billion in revenue, ending the year with over a $5 billion backlog and these are kind of astronomical numbers. And we see the demand continuing to accelerate for all the reasons that we've talked about.

So can supply keep up?

Not yet. But the industry is very well aware. This is really, as I spent the day talking with folks, this is not an issue of demand for Ciena right now. The issue for Ciena and really a large part of our sector of telecom is supply capacity. So what you're seeing is an optical industry and a supply chain that is being outstripped by demand and is frankly struggling to catch up. But we're not unaware of these dynamics, and we injected incremental capital into the supply chain last year that enabled us to achieve the growth last year, and we've said we're going to effectively double our CapEx intensity specifically this year to increase supply capacity on our high running products.

Scaled across being?

Being one of them. But not the only one. So you're talking about RLS, WaveLogic 6e, the high performance next-gen modems and the ZR plug. So scaled across is one application. But in the WAN with our traditional metro DCI backbone as well, we see that playing out. So overall, we feel really good about where things are and where they're going.

So the non-scale across business also is performing well?

Absolutely. Yes.

Great. It's broad.

It is broad.

Great. And talking about the neocloud. So these guys are late on the scene. I don't think of them as the most sophisticated buying best-of-breed. Maybe they're starting to get there soon. But where are they in their evolution of -- obviously, they have a lot of money. And where are they in terms of investing the way they need to invest to compete with hyperscales?

Yes. I mean, so we've got this group of whether you call them neoclouds or neoscalers that have come on to the scene, really because the hyperscalers simply can't deliver enough. I mean just to call it what it is. This is another one of those cases where I think we tend to love our nomenclature. It is not a homogeneous set of businesses. When we talk about neoclouds, that encompasses everything from cloud and enterprise service providers to AI and cloud infrastructure specialists, data center providers, colo operators, enterprises. So it's cutting across all of those guys and they're coming on quickly, right?

So we have 12 neoscaler customers right now, one of whom was actually a top 10 customer last year, right? One neoscaler was a top 10 last year, which is kind of incredible when you think about it. And I think it's going to be interesting to see how that segment plays out. I think there will be some degree of consolidation, not all will be successful over the course of time. That can't be -- there's too many of them. But like everything, we're placing our bets on those who we think are going to be successful and I'm not going to give you names unless you want to have me nod. But overall, we feel really good about that segment.

And if you think about the neoscalers plus the 4 major hyperscalers, we see a CapEx growth rate of like 20% over the next 5 years through the end of the decade. You can do your own math, if the CapEx this past year was $600 billion, now you're pushing $1 trillion of CapEx exiting this decade, which is staggering.

Yes, totally. Let's shift to some green shoots in terms of new products and categories you guys are active in, which is also super impressive. Let's start with my favorite, which is multi-rail. These are the amplification huts over long-haul routes. Walk us through kind of what that is, when it comes, why are you in that business?

So the way to think about multi-rail is that with the changes that AI is driving, as I said, it's not just affecting data centers and training workloads in the data centers. It's affecting the WAN as well. And really how it affects the WAN is that the existing network architecture and even the physical infrastructure of the optical systems that has served the industry and the world well for the past several decades, will not be sufficient by definition, will not have sufficient capacity to capture the projected growth in network traffic and bandwidth demand. That's just a fact. That's just not me saying it.

And so multi-rail or hyper rail is an application that we are developing with the cloud providers right now that effectively says, is there a way to densify the existing optical amplifier architecture allowing for multiple fiber pairs and for more capacity, but over a share or a common photonic layer. So you're adding more capacity in the same or lower power and space envelope, which is kind of the holy grail of performance specification.

Yes. So we see hyper rail as being -- this is -- would be RLS again, a line system with coherent optics running above it. We see this as being a real interesting opportunity. One analyst has sized kind of the overall scale across multi-rail opportunity like a $10 billion multiyear opportunity. It's a first stab at it, I don't know what the actual number is. But if you believe in scale across, multi-rail is only going to serve to accelerate those dynamics.

And multi-rail is a refresh of these huts that are every 800 kilometers on these long-haul routes?

That's right. So you've got in-line amplifier huts, the ILAs, every 80 to 100 kilometers in the long-haul network in the U.S., for example and yes, that's to regen the signal along the way. There's only so far it can go along to amplify the signal. And each hut costs around $1.5 million to $2 million to go build. And so densifying the existing roughly 16 fiber pairs in a hut to 64 or 256 fiber pairs enables them to address that capacity growth without having to rebuild an entire new fiber infrastructure.

Yes, incredible. How about taking Coherent inside the data center into the campus and the [indiscernible] opportunity inside the data center. You're taking your existing DSPs, respinning those for the specialized opportunity inside the data center.

That's right. So our belief system is like much like what happened in the WAN at 100 gig, where Coherent overtook IMDD as the predominant technology mode, we believe the same thing is going to happen inside and around the data center as data rates increase.

With PAM4?

Right. [indiscernible] the PAM4 single modulation scheme [indiscernible]. And our belief system is the first battleground for Coherent against IMDD will be in the metro campus data center, kind of the 2- to 20-kilometer application and that's where Coherent light comes in where we take our WaveLogic 6 Nano, the 800ZR plug, and we tune it down. We dropped some of the heavier functionality like forward-arrow correction hence, why it's called Coherent light. And it competes in that case against PAM4 in that application.

What I would say is there's still strong customer engagement there. What I would say is we're now thinking that market opportunity is pushed out somewhat less because of the perceived efficacy and more because, frankly, the hyperscalers are spending more of their time, money and effort on higher performance optics for scale across.

Yes. It's a bigger problem.

It's a bigger problem for them to have right now, so they're diverting their efforts there. We still think Coherent will play there in Metro campus. And then more importantly, over time, particularly likely at 3.2T, Coherent will play a meaningful role what relative to PAM4 inside the four walls of the data center. So that's kind of one big prong of our inside the data center strategy is having Coherent take it, but it's not the only one.

And Nubis is your other big play?

[ That's great man ]. There's another one. So kind of beyond Coherent inside on our own, which includes certainly some of our constituent components of the ASIC, DSP, our high-speed SerDes, the multi signal converters. We also acquired Nubis and the thinking behind that acquisition was we believe that multiple technologies will coexist peacefully or not in the data center for many years to come. And we want to have a role to play across all of those.

And so I already mentioned coherent. But what Nubis has is two sets of products that are ultracompact, low power, electrical and optical interconnect solutions for scale up and scale out applications inside the data center. And so with the linear redriver, which is the optic fiber cable solution that extends the reach by 4x to 4 meters within the same low power and low latency and then the [ best ] the linear optical engine, which when paired with the SerDes, a third party, for our, we believe we'll be a competitively differentiated co-packaged or near packaged optics solution inside the data center for scale out applications. With that, we will have now, we believe a complete set of solutions across electrical, optical, IMDD, co-packaged and then Coherent.

And what was the timing there of the new Nubis products?

Both products are scheduled to be generally available this year.

So trials next year or maybe...

I would expect customer trials at least for linear driver by the end of this year and kind of moving to material revenue in '27 for both.

Great. Impressive. A couple of quick hitters on the finance side. If we get some questions from the audience, maybe gross margins, supply constraints, pricing power, lots of puts and takes. You've guided flat. Walk us through some of those puts and takes. Some would say, why can't you get better margins in this environment? I know you've got costs going up, trying to be a good supplier to your customers, what -- walk us through your thoughts.

Yes. So on gross margin, we've guided this year to 43%, plus or minus 100 bps and you're right, Ryan, there are, as always, puts and takes or headwinds and tailwinds, however you describe them.

So the headwinds in terms of what we see as kind of being the limiter a bit are really twofold. The first of which is the ramp to production volume of our 800ZR plug, as I said, that is the biggest ramp of any product we've ever done, and it's going to take some time for us to get there. It's going to pressure margins, for example, in Q2 as we start moving to real production volume there. And the second headwind really is higher input pricing from elements of our component supply chain.

Yes. Across the whole portfolio, really?

Yes. It's impacting certain products more than others, but it's a function of demand continuing to outstrip supply.

Industry supply?

Yes. Industry supply. So resetting of some of the pricing, including some of the backlog that we have with some of those suppliers. So those are two headwinds and why you wouldn't see a higher margin this year.

Tailwinds are once we get on the backside of ramping 800ZR and RLS to production volume, there are benefits of scale. We are getting better at the design cost reductions and supply rebalancing. And there's also, what I would call, constructive engagements with our customers on a more fair value exchange, which could take a number of different forms, given industry dynamics. And so we've given the guide for this year, but our overall view of margins really hasn't changed, which is we see a path in the near -- in the next few years toward a mid-40s gross margin as waypoint for us.

Yes. Great. You mentioned supply chain concerns. Any areas you point out that are painful -- some of the most painful pain points?

I think this is very different from 2022 when there were -- the real long pole was power management integrated circuits.

The analogs.

The analogs. Yes, this is very different. This is really more of the specialized optical components, some of the external laser sources. And I want to be clear that it is not related to the indium phosphide wafer issue that AXT talked about recently, that's not -- we're not being limited by that. But there is an industry shortage of supply of external laser sources, including ITLAs in the industry right now. Some of the other optical components like the coherent driver modulators, some of the gold boxes you may have heard about, those are kind of the longer poles for the industry, not just Ciena right now. But again, we're not ignoring those issues and are actively looking to address them.

Are you taking the action to in-source this supply?

In some cases, yes. Right? As always, for us, it's like we do with M&A, it's a build partner by analysis. And we've done vertical integration organically historically. We've done it through partnerships, and we've done it through acquisition.

Yes. On the OpEx line, you guys guided to keep that flat year-over-year despite this tremendous growth. I mean that's probably the most mind-blowing stat, I think, of all. Can you share a little bit about how you guys are doing that? I mean nobody does that.

It -- that was the reaction we got for a lot of people. We're guiding 24% up on revenue and flat OpEx isn't really done. And I want to be really clear on this point as well. We are not doing that at the expense of R&D investment. In fact, year-over-year R&D investment for us is going to increase. The way we've been able to do that is -- well, it's a function of a few things. One, when we say flat year-over-year, 2025 last year had a higher than typical incentive -- variable incentive compensation because of the performance that we did. But as importantly, we are taking real steps from a transformation standpoint to drive operational efficiencies in our business, and we're at the early stages of doing so. And we've also taken some portfolio decisions to rebalance and reallocate investment, including away from applications like broadband access. That's enabled us to not only reinvest more into R&D, but also hold OpEx flat. And that includes the acquisition of Nubis.

Yes, super impressive.

[indiscernible] next year.

We'll not. Got just a couple of minutes, anybody have a question they want to lob in before we finish up here? Great. That's okay.

Let's talk competition. You have Nokia, Infinera combination. They're probably going to go through some issues, but the Infinera guys are kind of ending up on top there. So in terms of running organizations and leadership spots. So what do you expect to come with that? And you obviously have Cisco, who's always there.

Yes. So the way we think about the competitive landscape is, I would say, the optical systems business in the WAN, the field has thinned considerably. For those of us who have been doing this a long time. And you're right, outside of Huawei, who still exists and still does very well. We're really looking at us and Nokia with the combination of Infinera. And then what I would say about that combination is we competed very effectively against both when they were stand-alone companies and we continue to compete effectively with them now as a combined company. They have some work to do, I think, in terms of integration and portfolio rationalization, but they're a big, well-resourced competitor who we don't take lightly.

In terms of Cisco, clearly, they have been doing quite well with Acacia, really defocused and deprioritizing optical systems [ writ ] large for quite some time. So we see them more in terms the pluggable and merchant modem market than anything else. And then you've got, as we moved -- as we talked about kind of to shorter distance applications, a different set of competitive dynamics. You've got some of the larger players like Broadcom and Marvell. And in some cases, we compete with, in some cases, it's a bit complementary. And that competitive landscape will continue to evolve over time.

Yes. Fascinating. Any quick thoughts on M&A? I mean the Nubis was very intriguing and seems like a great fit. But any thoughts on the philosophy around M&A forward?

I do have a philosophy on M&A. Look, we are a serial acquirer, we're not going to be doing 20 deals a year, but we have done a lot, and we'll continue to do more deals. The way I think about M&A, it's really one leg of the stool of capital allocation with organic R&D, return of capital and M&A being the three. We, I think, have been very thoughtful deployers of capital on an organic basis. But why we do M&A? To bolster our position in the core business, to accelerate our position in the adjacent business, fill in gaps from a technology or go-to-market standpoint, drive cost and revenue synergies or ideally some combination of all of the above. And that was behind the Nubis acquisition and a lot of the ones we've done in the past.

Yes. That's exciting. Any last thoughts in terms of questions you heard today, what do you think is investors are not getting exactly right and asking a lot of questions about it?

I think it's hard not to be accused of exaggeration when we talk about industry dynamics and the kind of demand that we're talking about across the portfolio, across these market and technology applications and use cases. I don't think -- and I'm not blaming anyone, I'm still getting my head around it. We're still getting our heads around it as a business. I think the market is still maybe not fully appreciating the speed and the scale of these dynamics, which for those of us who have been doing this for a long time, are wholly unprecedented to anything we've seen in the past three decades.

Yes. Exciting stuff. Well, thanks very much, David.

Good morning, and welcome to Ciena's Fiscal Fourth Quarter and Year-End 2025 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Gregg Lampf, Vice President of Investor Relations. Please go ahead.

Thank you, Drew. Good morning, and welcome to Ciena's 2025 Fiscal Fourth Quarter and Year-end Results Conference Call. On the call today is Gary Smith, President and CEO; and Marc Graff, CFO. Scott McFeely, Executive Adviser, is also with us for Q&A.

In addition to this call and the press release, we have posted to the Investors section of our website an accompanying investor presentation that reflects this discussion as well as certain highlighted items for the fiscal quarter and year-end.

Our comments today speak to our recent performance, our view on current market dynamics and drivers of our business as well as a discussion of our financial outlook. Today's discussion includes certain adjusted or non-GAAP measures of Ciena's results of operations. A reconciliation of these non-GAAP measures to our GAAP results is included in today's press release.

Before turning the call over to Gary, I'll remind you that during this call, we'll be making certain forward-looking statements. Such statements including our quarterly and annual guidance, commentary on market dynamics and discussion of our opportunities and strategy are based on current expectations, forecasts and assumptions regarding the company and its markets, which include risks and uncertainties that could cause actual results to differ materially from the statements discussed today.

Assumptions relating to our outlook, whether mentioned on this call are included in the investor presentation that we posted earlier today, are an important part of such forward-looking statements, and we encourage you to consider them.

Our forward-looking statements should also be viewed in the context of the risk factors detailed in our most recent 10-Q and in our upcoming 10-K filing. Ciena assumes no obligation to update the information discussed in this conference call, whether as a result of new information, future events or otherwise. As always, we will allow for as much Q&A as possible today, though we ask that you limit yourselves to one question and one follow-up.

With that, I'll turn the call over to Gary.

Thanks, Gregg, and good morning, everyone. Today, we reported record fiscal fourth quarter and full year revenue of $1.35 billion and $4.77 billion, respectively. These records are a direct result of our sustained, purposeful investment and focus on leading high-speed connectivity technologies, together with disciplined execution and deep collaboration with our customers.

Combined, these advantages have positioned and will continue to position Ciena to deliver value in the AI ecosystem, serving both cloud and service provider customers for many years to come. And our progress in driving value from our operating model is also reflected in Q4 earnings per share of $0.91, up 69% year-over-year and full year EPS of $2.64, up 45% from fiscal 2024.

And lastly, we generated record orders for the year of $7.8 billion, which resulted in our entering this year, again, with record backlog. These strong results really underscore our overall market leadership position as well as the ramping broad-based demand across our business. And to this point, I'd like to provide some insights into what we believe to be robust and durable demand over the next several years.

Firstly, we continue to see accelerating demand from our cloud customer providers. And that includes the large hyperscalers and the emerging neoscaler segment that we talked with you about last quarter. In fact, cloud providers today are as focused on scaling their network as they are on their access to power.

Orders from cloud providers are very strong, and ramping across our portfolio and they constitute a substantial portion of our growing backlog. It's important to note that this accelerating demand is being driven by several dynamics. And as counterintuitive as it may seem, the cloud providers largely actually underinvested in their networks to date, particularly relative to other areas of AI infrastructure.

The major hyperscalers who are seeing rapid traffic growth not only have the capital to invest but also have real sustainable business models that are currently constrained by the need to dramatically scale their global networks. These cloud providers cannot and do not intend to strengthen their significant investments in AI-related data center infrastructure.

And I would stress that, that traffic needs to leave the data center to be monetized and operationalized, and we are their strategic technology partner for those network requirements. Secondly, demand from our service provider customers continues to grow steadily as they, too, reinvest in their transport infrastructure after years of digesting accumulated inventory and also be focused on other areas of their networks, most notably and specifically 5G.

In addition, service providers' businesses are also being fueled by AI through the enterprise cloud demand and specifically cloud providers need for managed optical fiber networks or MOFN. And as a proof point here, we have recently won and are working to deploy a large MOFN project in India with 2 service providers for a major hyperscaler. Additionally, in the quarter, we have secured multiple major MOFN wins in other regions, including several in new and emerging geographies for our business.

And as a result of these dynamics, service provider orders were up nearly 70% for the year. And in fact, our top 3 service providers revenue from '24 to '25 grew 16%. Due to the increasing momentum across both cloud and service providers, Ciena's optical market share has continued to grow and extend our overall leadership, adding 2 points year-to-date, and we expect further gains clearly in 2026.

In order to address this accelerating demand, we are committed to increasing investments and working with our supply chain partners to scale the business. With product delivery lead times extending in the face of this unprecedented demand, we are proactively expanding our capacity to ensure our ability to timely meet our customers' demands. Indeed, this has already yielded results for fiscal '25 as we delivered double our initial revenue growth expectations for the year. Marc will discuss how we are stepping up investments to support demand and the expanding opportunities we expect over the coming years.

The simple truth is that AI continues to drive network expansion across all our customer segments, and the scale of investment currently underway is massive and accelerating faster than anything we or indeed the industry have seen to date. I would also mention that unlike the COVID-inspired supply-demand imbalance, we are seeing this demand be installed and leveraged for real near-term revenue opportunities at our customers as evidenced by accelerated implementation services that increased in revenue by 34% in fiscal '25.

With that, I'd like to take a moment to share our sort of broader perspectives on the AI opportunity as it relates to high-speed connectivity. As bandwidth continues to grow inside the data center and as this traffic flows out of the data center, AI inference models are moving closer to the network edge. And for the reasons that I mentioned earlier, we will continue to expand our existing leadership and addressable market in high-speed connectivity in the WAN.

In addition to the wide area network, we're also seeing a significant addressable market opportunity in the -- in and around the data center. It is, I think, well understood that cloud providers are investing heavily in data centers to deliver on the current and future promises of AI. Many third parties are estimating capital spending of more than $7 trillion through the end of the decade in all AI-related infrastructure. And this is obviously necessitating the need for both training and inference workloads at massive scale.

As a result of the massive growth in AI workloads and to address growing power and space constraints, cloud providers are planning and building distributed AI data center training clusters or AI factories, which require multiple clusters to act as one. In fact, along with those power and space constraints, the ability of the cloud providers and specifically the major hyperscalers to scale their global networks is becoming the critical long pole in the tent for them to operationalize AI for both training and inference purposes.

Within these data center environments, there are 3 key connectivity requirements to scale up within a data center rack, to scale out between racks in a data center, and finally, to scale cross between geographically distributed data centers, which must operate at the highest levels of performance with super high capacity and the lowest latency possible.

With our innovation and time-to-market leadership in high-speed connectivity solutions, our position could not be better to fulfill this critical demand. This growing AI-driven opportunity for Ciena is what we refer to as in and around the data center. In fact, our in and around the data center opportunities grew threefold from '24 to '25 and are a major contributor to our '26 expected growth rate.

We have proactively invested in our portfolio to intersect this growing market segment and with a few notable examples. First is our interconnects portfolio, comprising both our power and space savings ZR and ZR+ pluggables and our optical components. We expect Interconnect to play a meaningful role in scale up, scale out and, in fact, scale across workloads.

In fiscal year '25, we surpassed our target of more than doubling FY '24 pluggable revenue, reaching revenue of more than $168 million. In the quarter, our WaveLogic 6 nano 800-gig pluggables are shipped for initial revenue. And since the end of the quarter, we have shipped 800 ZR plugs to 3 additional cloud providers for testing and certification.

And with regard to components, we address the cloud providers preferred disaggregated consumption model with our high-speed Coherent and other industry-leading WaveLogic technologies including a DSP, Curtis, and other high-speed analog and electro optical components. In addition, our components business now includes the electrical and optical interconnect solutions from our acquisition of Nubis Communications. The Nubis technologies and expertise will help us address the scale-up and scale-out opportunities inside the data center. We're excited to have the Nubis team as part of Ciena and are on track to GA first products in fiscal '26.

And as we've previously noted, as technology advances and data rates increase, the components portion of our Interconnects portfolio primarily represents revenue opportunities beyond fiscal '26. In addition to our Interconnects portfolio, as market needs continue to evolve, driven by AI, we're seeing new architectural applications arise in and around the data center with 2 recent cloud provider use cases, I think, of particular note.

First use case is the scale across architecture, linking geographically dispersed AI training clusters using our market-leading RLS photonic line system, wave servers and Interconnects portfolio. This is an opportunity we discussed over the past couple of quarters, where a large hyperscale is linking to 2 regional data centers to build an AI backbone. I'm pleased to report that this hyperscaler is now extending this architecture to more locations.

Additionally, I am pleased to announce that 2 more major hyperscalers have chosen our optical solutions for their scale across training applications as well. The second use case is out of the network management. Ciena's unique DCOM solution leverages our XGS-PON and other routing and switching products and was initially designed with Meta to meet hyperscale requirements. Today, I'm pleased to announce that our DCOM business with Meta has expanded as they plan to deploy in multiple new data centers.

Also, we're engaged in advanced technical discussions with additional hyperscalers to deploy this DCOM solution in their data centers. I'd like to briefly acknowledge here that the scale across and DCOM wins are just the most recent AI-related use cases to materialize for us in recent months. They are great examples of how we co-create and productize with market-leading solutions to address critical customer scaling requirements. And we fully anticipate continuing to develop additional innovative solutions with our customers as they monetize AI across the various architectures.

Before I turn it over to Marc, I really want to reiterate that as we leave Q4 and indeed the entirety of 2025, we have absolute conviction that the positive market dynamics and our technology leadership provides us with increasing confidence that the durability of demand and our business and financial trajectory are very strong.

I'll now hand it over to Marc for a closer look at our Q4 and fiscal '25 performance and outlook. Marc?

Thank you, Gary, and thank you to everyone for joining the call this morning. Before I review the specific results for Q4 and the full year, I'd like to provide an update on the priorities I outlined in the last earnings call, specifically gross margin performance, working capital management and capital allocation.

First, gross margin performance. You have seen that our Q4 gross margin sequentially improved and exceeded the high end of our guide by 90 basis points. This was largely due to higher revenue and software mix. We have had constructive discussions with our customers to improve fair value exchange with those improvements appearing in late '26 given the large backlog entering the year. Additionally, we are navigating through particular headwinds from ramping NPI products and rising input costs as supply becomes further constrained due to fast-growing demand. All told, I expect year-over-year gross margin improvements with second half margins being higher than first half margins.

Second, working capital management. We have improved our cash conversion cycle by 34 days sequentially, largely on faster collections and improved inventory days. In fact, our inventory turns improved by 0.4 of a turn. We left the year with $1.4 billion in cash after generating $371 million in cash from operations in Q4 and free cash flow of $326 million.

With respect to capital allocation, we completed the first year of our most recent $1 billion stock repurchase authorization, repurchasing approximately $330 million for the year at an average price of $83.34. We invested $140 million in capital expenditures in the business focused on developing the next generation of leading products and enabling capacity to nearly double our 2025 growth rate.

We also completed the cash purchase of Nubis, supplementing our interconnect portfolio to service the end portion of in and around the data center opportunity. We have also reallocated resources that will allow the company to meet the growth challenges ahead with new business processes and technology rationalization.

Finally, let me turn to operating leverage. We will hold to our commitment of flat OpEx in 2026, while investing in new opportunities for our interconnect portfolio.

Now let me turn to the specifics of our Q4 and full year performance. As Gary noted, Q4 revenue reached $1.35 billion, up 20% year-over-year and $70 million above the midpoint of our guide. For the year, annual revenue was up 19% to $4.77 billion, a new record. Q4 was strong across all lines of business. Specifically, our optical business was up 19% year-over-year, driven by strength in RLS, which was up 72% year-over-year.

Our routing and switching business grew 49% year-over-year, with the 3,000 and 5,000 series product revenue doubling on a combined basis with the DCOM opportunity driving much of this growth. Global Services had a strong quarter, growing 25% year-over-year driven largely by advisory and enablement and installation and implementation services, which grew 53% and 45% year-over-year, respectively.

I'd also like to note that Blue Planet had a very successful year, achieving $34 million of revenue in the quarter, a record $115 million in fiscal '25 and achieving full year profitability. We had 3 10% revenue customers in Q4, including 2 global cloud providers and 1 Tier 1 North American service provider.

We are exiting the year with about $5 billion of backlog, of which, approximately $3.8 billion is hardware and software with the remaining being software services. This backlog supports a large share of our fiscal '26 revenue expectations, and we see indications of strong demand continuing into '27 and beyond, giving us exceptional visibility and confidence in our outlook and medium-term expectations.

Adjusted gross margin in Q4 was 43.4%, 90 basis points above the midpoint of our guide, driven by higher revenue and software mix. For the year, adjusted gross margin was 42.7%. We continue to mitigate most of the impacts of tariffs as we currently constructed and the net impact of tariffs are immaterial to our bottom line. We continue to monitor the situation and work closely with both our supply chain and customers as necessary.

Q4 adjusted operating expense was approximately $409 million and $1.51 billion for the year. Excluding the higher incentive compensation, we achieved in-line OpEx for the quarter and underspent slightly for the year, reflecting our ongoing disciplined approach and operational efficiency. This led to Q4 adjusted operating margin of 13.2%, up 250 basis points sequentially and 320 basis points year-over-year.

Operating margin for the year reached 11.2%, 150 basis points from fiscal '24. We achieved EPS of $0.91, up 69% year-over-year with annual adjusted EPS of $2.64, up a healthy 45%. Finally, cash from operations was $371 million in the quarter. For the year, free cash flow reached $665 million after $140 million in capital expenditures.

Now turning to guidance. Last quarter, our confidence and visibility due to AI-driven dynamics enabled us to atypically provide an early outlook for 2026. As we move into the new fiscal year for all the reasons Gary and I have discussed, those dynamics and the customer demand environment not only remain robust, they have accelerated. As a result, today, I'd like to update that guidance from September as our outlook has improved even from just a few months ago. We now expect revenue in fiscal '26 to be approximately $5.7 billion to $6.1 billion or nearly 24% annual growth at the midpoint versus the 17% growth rate discussed in September. We continue to expect gross margins for fiscal '26 to be in the range of 43%, plus or minus 1 point.

And as I mentioned earlier, we continue to work to mitigate input cost pressures through supply rebalancing, designing cost out and additional pricing actions over time. We expect the impact of these mitigation efforts will be realized in late fiscal '26. With these dynamics, we expect the margins to improve first half to second half as cost reductions and pricing actions take hold.

We expect adjusted operating expense in fiscal '26 to be flat at approximately $1.52 billion after accounting for the Nubis operating expenses post acquisition. With respect to operating margin, we previously advised an acceleration of our longer-term goal of 15% to 16% operating margin from '27 into 2026. We now expect fiscal '26 operating margins to improve further to 17% plus or minus 1 point.

Our capital expenditures for fiscal '26 are expected to be between $250 million and $275 million. This is higher than our typical capital intensity in order to invest in supporting expected robust demand in late 2026 and into 2027 as well as incremental costs for 3-nanometer mask sets.

In fiscal '26, we expect to repurchase approximately $330 million in shares under our 2024 stock repurchase authorization plan.

Finally, with respect to Q1 guidance, we expect to deliver revenue in the range of $1.35 billion to $1.43 billion, adjusted gross margin between 43% and 44% and adjusted operating expenses of approximately $380 million yielding an operating margin of 15.5% to 16.5%.

To conclude, Ciena had a strong 2025, and we are looking to an even stronger 2026. We are thoughtfully allocating our owners' capital to deliver value both to our customers and for our owners. We are singularly focused on executing our strategy and winning in the market.

And with that, let me turn it back to Gary.

Thank you, Marc. And let me reiterate those comments. We had an incredibly strong quarter in fiscal 2025, which we believe is a seminal one for Ciena, and one that provides a remarkable springboard for continued growth.

Our momentum continues to build. Our balance sheet have never been stronger and industry dynamics have never been more positive for Ciena. We are executing well and have high confidence we will continue to do so. We remain very focused on our strategy and continued to deliver the world's best high-speed connectivity, that really underpins today's AI-driven environment.

With that, we will now take questions from the sell-side analysts. Thank you.

[Operator Instructions] The first question comes from Ruben Roy with Stifel.

And congratulations, Gary and Marc, just great to see the progress here. So the first question, Marc, when we think about the guidance and the raise Gary talked about some of the new use cases and more hyperscalers looking at either scale across or also discussions around e-com with other hyperscalers. How much of that is in the new guidance versus just continued sort of growth across the existing relationships that you have?

And then the second question for Gary is just thinking about the new scale across opportunities, Gary, you gave us some metrics around the first wins in terms of either revenue or bandwidth and bandwidth measured in petabit. Are the discussions that you're having in the wins with the new hyperscaler similar? Or if you could maybe give us a little more detail on those, that would be great.

Yes. Ruben, this is Marc. Thanks for joining. In terms of how much of the new opportunities that Gary talked about are in the guide, they are all in the guide. If you think about the in and around data center, which many of the wins that Gary talked about include, we're seeing nearly a tripling of the percent of revenue from what we saw in 2025 of low single digits to the percent of revenue that we have in 2026 has got low double digits.

And so I think we've captured a lot of that. Obviously, we're continuing to work to satisfy all that demand. But you've seen -- it's all included in there, short answer.

Ruben, to the second question around the sort of models around the -- across piece. First of all, I'd say, there obviously, all of these hyperscalers are not sort of homogeneous around their business models and therefore, their network requirements reflect -- so they are different, notwithstanding, they all need to train.

So what we're seeing with the initial hyperscaler is obviously just expanding the amount of sites, and that will happen over multiple years. We've had 2 other hyperscalers now adopt our architecture. So we've got 3 out of the 4 hyperscalers have selected us for their scale across training models.

In terms of how -- quantifying how much they are, they are clearly hundreds of millions each but they are different in terms of their scale at this stage. But really, that's just -- we're just beginning to see the traffic come out of the data center for training around these regional backbones or clusters. We're just beginning to see that. And I don't think that there's going to be a cookie style sort of quantification of the traffic at this point.

The next question comes from Simon Leopold with Raymond James.

Great. Yes, I wanted to maybe expand a bit on the scale across outlook in particular. So you've gotten these 2 additionals that certainly earlier than we were expecting. I want to see if you can give us maybe a time line of when you would expect those 2 other hyperscalers to really kick into the numbers, how imminent that is?

And then maybe you could talk about sort of a longer-term cadence of scale across activity? Because I think when you first disclosed it, you talked about the initial customer, perhaps having opportunities of 8 or 9 kind of projects. So now that we see additional hyperscalers entering the fray, how would you look at it more broadly over the multiyear number of projects? That's question number one.

Question number 2 is hopefully the easiest one you'll get today. But if you could just break up the 10% disclosures, you said 2 cloud and an operator, if you can give us the detail that will ultimately be in your SEC filings. But if we could break that down, I'd appreciate it.

Simon, let me take the first part of that. In summary, I would expect us to take revenue for all 3 of these hyperscalers in '26 or begin to take revenue in '26. I think the large part of this is going to be scaling up in '27 and through '28.

I mean these are enormous amounts of scale and commitments around massive amounts of fiber between these data centers, which takes time from an infrastructure point of view. I believe we'll take revenue on all 3 during the course of this year. But Simon, I really see the ramp on this as we get to '27 and through '28. I mean this is going to be the backbone for these training models. I would also say, at this stage, it is all U.S. centric around the training models as well.

Yes. So Simon, let me hit your second question. The 3 plus 10% customers that we had in Q4, one was AT&T, you'll see that in the K. The other 2 were not being specific on who they were. But collectively, for Q4, those 3 coverage just under 44% of Q4's revenue.

And then for the full year, it was one cloud provider and one service provider that collectively -- and it was AT&T as a service provider. Collectively, for the year, they covered about 28% of our revenue.

Yes. Can you give us that split? So what each one was within that 44% in the quarter?

Yes, I'll have to get back to you, Simon. I don't have that specific in front of me.

The next question comes from Atif Malik with Citi.

Great job by the team. First one for Gary. Gary, on Nubis, in September, you talked about in the second half of '26 and early '27 adoption for CPO, NPO type products. Are you seeing an acceleration over there?

I would say that, yes, we're engaged with multiple opportunities with them. Obviously, we're waiting for first GA product, but we have a lot of market engagement, even prior to our acquisition with them, I would say that what we've seen since -- and this is early days, we only did the acquisition last quarter, but I think we've seen sort of accelerated interest now that they're part of a broader -- a broader company. Scott, do you want to?

Yes, just to remind you, they're sort of at a high level, 2 product families within Nubis portfolio, one is a linear retimer that is very effective in terms of extending the life of active copper cable. And we see that as an opportunity that will start in '26. The optical part of the portfolio, the second part of the portfolio, we see more as a '27 and beyond opportunity. But as Gary said, we're getting great feedback from customers on a bunch of different dimensions. First of all, the sort of open ecosystem approach to CPO.

Secondly, just the caliber of the team. And then I'd say more an internal reaction. And we -- one of the big things -- one of the big filters as we looked at this company was did we think they are a good cultural fit. And I'd say, 90 days in, we're absolutely thrilled with that.

Great. And as my follow-up, Marc, a nice view on gross margins and keeping OpEx discipline. You have talked about advantages from bringing lasers in-house. I'm wondering what else is driving sustainable outlook for operating margins of 17%?

Yes. So there's a couple of things that I would say. The first is one of the big things that we're working on in the first half of the year is ramping our 800-gig pluggables. And so as we ramp that, you basically get yield economics, which will lower the unit costs over time. And we expect that as we go through Q2, Q3 to Q4, we'll see significantly lower cost than we're seeing at the beginning of the year. So that would be the first aspect that I would say.

The second aspect is the conversations that we've had with a lot of our customers have yielded good results. And so -- once we get through the backlog that we're entering the year with a lot of those new orders will start to see the benefits of those pricing discussions. And so we would exit the year at a higher entry -- higher exit rate then we feel that we'll see in the first half of the year.

The next question comes from George Notter with Wolfe Research.

It seems like there's just obviously tons and tons of demand here. Could you give us more on what you're doing on the supply side of things. Just curious like what do you see as the supply constraints in the business? Is it fabing chips? Is it contract manufacturing? Like anything you can tell us on what those bottlenecks are and what you're doing to open those up would be great.

George, it's Marc. I'll start and then hand it over to Gary and Scott for more color. So a couple of things. You heard me talk about a pretty nice increase in our CapEx year-on-year. And within that, there's about a 50% increase in what we're doing to ensure that we could have more capacity to support what will really be end of year and into 2027 demand.

But what we're seeing is really a constraint on the photonics parts, right? And I would say optical parts in general. And we've worked really closely with our key suppliers, and I know you know who those are to make sure that we can secure supply. And the investments that we've made in 2025 actually yielded a doubling of the growth rate from what we expected a year ago, right? And so between that the level of vertical integration that we've got in just what we control as well as the investments that we're making in 2027, we're trying to support as much of that revenue as we possibly can through '26 and into '27.

And Marc, I'd add to that in terms of the constraints you talked about in terms of the industry optical component subsegment, if you like. An advantage that we have is a couple of advantages that we have, I think, relative to other peers. Number one is, we have a very tight relationship with the cloud providers. We have market share leadership there and a great set of relationships.

So even though the demand outstripped what everybody expected. I think we had the earliest view of that in the industry and therefore, our conversations with those industry components to started earlier than everybody else. So that gave us that gave us a benefit. I think as we've talked about in the past, we're more vertically integrated than anybody else. So to some degree, we we do have a little bit more control of our own destiny.

And part of the reason why in the last 90 days, we've been able to take 2026 out is the activity that we did in '25 that allowed us to double our growth perspective in '25 is carrying over into '26. So we're getting more confident in our ability to deliver to that demand as well.

Got it. And then one last one. What are lead times right now? Any sense for kind of what blended or average lead times would look like for you guys?

This is Gary. It really varies by specific product product areas. I mean, they're all generally -- in the optical infrastructure base, so sort of think scale across or LS, they have extended out, but it depends on the product grouping. What we're working on with -- as Marc and Scott said, we're confident -- if you look at the midpoint of our guide, which is what, 24% growth for this year. So that's the work as Scott said, we did kind of last year to increase capacity and component supply.

We're now working on towards the end of '26 and '27 and making sure that we're in a good position from that point of view. So hopefully, by the time we get to the end of year, we get to '27, lead times can come down a little. But we're seeing increase in demand, including order flows in Q1 being strong as well.

The next question comes from Tal Liani with Bank of America.

I have 3 questions. The first one is the sort of perspective. You guided before to 8% growth. And that -- you increased it multiple times, and now you're guiding for 30% growth for next quarter. That's a massive change. So you didn't have good visibility before for the growth. And the question I'm asking myself is, do you have now good visibility going forward. So can you take us through the historical perspective, meaning what happened over the last 4 or 5 quarters that drove up the growth, so much better than expectations. And you spoke a little bit about customer concentration, but what kind -- what happened that enabled this kind of growth? Maybe I'll stop here and then I'll ask my other questions after because they're more on the margin side.

Tal, it's Marc. I'll start and Gary can add in here. I think there's really a couple of dynamics that's going on. One is the close proximity that we have with our hyperscaler customers has really allowed us to get insight into what their demands are and how we plan for those demands. And they followed that demand up with pretty significant orders, right?

So I mean, you heard Gary talk about we achieved $7.8 billion of orders over 2025. As we look at what we're seeing in Q1, we're essentially sold out, right? If we had more supply, we'd be able to sell more. And so we've got really good visibility of what the next several quarters look like just because we've got those orders in place.

And then the last thing I'll say before Gary can chime in, is through 2025, I think our supply chain team has done quite a good job of squeezing every drop of blood from the stone that they can to drive that revenue. We're investing -- we invested in 2025. We're increasing that investment by about 50% through 2026, and we're seeing those annualization layers kind of help us drive higher revenue that for the year, we expect a midpoint growth of 24%. I don't know, Gary, if you have...

Yes, Tal, I would say sort of zooming out from this sort of big picture. I think everything Marc said that we've -- I think we've done a good job operationally of scaling it up quickly. I would say that what's behind that really with the cloud guys, just in general, is that I think early in the year there at the beginning of '25 as we're going to get through it was a realization that their networks needed to be scaled massively.

And now if you think about the sort of hierarchy of flow around long poles in the tent and focus areas, obviously, there's been tremendous focus in the context of AI infrastructure around GPUs, TPUs and getting access and scaling those up, power within the data centers, et cetera. I think you began to then see the network.

And that coincided with the need for backbone networks to train across multiple data centers and the increase they were seeing in inference traffic. Obviously, this is unchartered territory from a forecasting of a network perspective. But I think they're now coming up to speed very quickly that it's now about the network as the gating item. And I think there was a real realization of that in the first part of '25, and you're seeing that play through now. So that's the sort of context that I would offer on that.

And Tal, within that, if you go back a year or 18 months, we talked quite a bit about our belief system of optics and particularly, Coherent optics having a bigger and bigger role to play in the network inside and around the data center. And what we weren't sure of though, and we were averted about this, what we weren't sure about is the timing of when you see that inflection point. What's happened in that period is with the scale across network is you're seeing that inflection point, new use cases for Coherent optical high-speed connectivity.

Got it. My second question is on margins. In previous cycles, your margins shot up all the way to even 49%, even over 50%, if we go back a few years and cycles always had a direct impact on gross margin, like you always had a cycle in margin as well. This time, because it's coming in pluggables because it's coming in cloud, your margins are 43%, you're guiding to 43%, 43.5%. And the question is, is there a chance that the margin will also have a -- gross margin will also have a cycle with revenues or what needs to happen for the gross margin to have a similar cycle to revenues?

Yes. I think how I'd respond, Tal, is there's a couple of headwinds that we're seeing, at least in the near term, and I've talked about the 800 gig. So we're in an NPI phase of that product. So that's creating some headwinds that we expect to kind of normalize out through the end of the year.

The other piece is I think the customers are starting to see the value in what we're providing, both in space savings and power savings. And we're getting some benefit from that relative to the value that we're delivering. So I think between those 2 things, we're seeing that. And my sense is that, that's going to be more sustainable than the cyclicality that we've seen in the past because we're really starting to talk about foundation level of benefit that our customers are seeing.

And as Gary said, they're realizing that they've underinvested in the network, both on the cloud provider side and the service providers are catching up as well. And so I think we're going to see steady improvement to what we've described previously as our aspiration to get back to the mid-40s which at this point, we kind of view as a waypoint, not the end game. So I think we're on a steady track. You'll see sequential improvement, we'll exit the year better than we will perform in the first half of the year, but I'm pretty confident that we're going to see ongoing multiyear gross margin expansion.

Next question comes from Samik Chatterjee with JPMorgan.

Maybe for the first one, I had a question on scale across. And Gary, you mentioned the additional engagement with hyperscalers -- are you seeing any engagements yet from the new clouds on that front? Or would you expect most of that new cloud demand for scale across to come through the hyperscalers itself? And can you help us think about margin implications for scale across relative to like there's a heavy mix of client systems as well as capacity. So how should we think about margin implication of scale cross ramping here relative to your corporate average? And I have a quick follow-up.

Yes. I think largely, at this stage, the training scale across AI backbones is largely a purview of the large hyperscalers. And I think the neoscalers, there's a couple of them that are using the backlog, they're on the back of that for one of a better description. So I think it's -- this is largely right now given the frankly, the scale of it with the hyperscalers.

And I don't see that -- I think it's going to take a while for that to bleed through into the neoscalers. In terms of the deployment there. As Marc said, it's going to be this combination of next-generation line systems, RLS, which is also fairly recent into market and also with the 800-gig plugs as well. So yes, in the early stages, that's a sort of headwind from a margin point of view, which is why we're kind of guiding as we are. But as that -- as those platforms get more into volume, the yields improve and we get through that NPI phrase on both of those, then we'd have better margins as we exit the year. And of course, you've also got the benefits of just scale and volume as well.

Okay. And just for my follow-up. I mean, clearly, FY '26 is your guide largely covered by the backlog. When you look at now sort of the long-term guide that you provided of 8% to 11% growth, like how -- what level of visibility are you getting from your customers about fiscal '27? Are they sort of giving you more detailed plans for the out year just so that you can plan out capacity? And does that sort of imply that your growth rate sort of stays above the 8% to 11% level in sort of the out year as well?

Yes. Samik, it's Marc. A couple of things. One is, when we talked about the longer-term guide last quarter, we kind of took those off the table just because in the medium term, we're not very good at calling -- call it, the growth rates on the upside, right? So that 11% to -- 8% to 11%, I think, is off the table. We're not really talking to 2027 at this point. But I would say, overall, maybe qualitatively, we feel very strong going into '26. We think a lot of that momentum continues into 2027, and the proof point there is really the increase that we've seen in our CapEx for capacity, which is up 50% year-on-year.

I think the other thing you could obviously extrapolate out. We're not sort of guiding into '27 right now. We're just starting '26. But clearly, the dynamics have changed here. And that's why I said this is a sort of -- '25 was a seminal year for us in this regard.

I mean I think you're seeing multiple scale across wins that will -- they are -- by their very nature, they're going to be multiyear. So that gives us confidence in '27 and '28. The other thing I would say is that really a context of our optical WAN type business in around the data center to it. We're making tremendous amounts of investments and progress on the other dimensions there, we'll give sort of insight and around the data center, which are completely new markets for Ciena.

And the revenues to those are largely -- we're taking some now, we're making good progress, largely '27 and '28 plays. And specifically, Coherent inside the data center. That's all additional revenue to us in addition to all the things we've talked about right now. So that gives us confidence in the multi-year dimension to this.

The next question comes from Tim Long with Barclays.

Two questions for me as well. First, Gary, follow on which you were just talking about. Could you maybe talk a little bit about DCOM and see if you can somewhat scale that for us and good news that it's expanded with Meta and being tested at others. Could this be a type of technology that would really accelerate that move into inside the data center as it gives you kind of a each front?

And then second, on the telco side, I guess, the MOFN part and 5G currently, but tends to be a little bit more cyclical than probably what you're going to see from hyperscalers. How do you look about sustainability of that business over the next few years on the telco certificate side?

Yes. On the DCOM part of that, obviously, that was cocreated specifically with Meta over a period of time. And I think what we're seeing with that is the expansion of the opportunity within the data center piece to that. It saves power and space for them, which is absolutely critical. And we've seen an expansion even in '26. And you're talking hundreds of millions of dollars of this.

And as they refresh and build out new data centers, that's become part of their adopted architecture. So I think this, again, is going to be a multiyear opportunity within Meta. And I also think about these large hyperscalers really when you think now about the diversity of portfolio that we're dealing with them, they're really markets in their own right, given their size and scale. We're also, as you said, engaged deeply with 2 to 3 other hyperscalers around this kind of architecture. And I would expect to see wins during the course of the year and adoptions for additional cloud players for DCOM.

So -- and it gives us an entree point into the data center, together with Nubis, together with the scale across because that is actually even the scale across is actually installed inside the data center. So you put all those things together, and we're definitely under the tent here. And that's before the Nubis, which will start to deliver product in '26 and before the opportunity with Coherent inside the data center.

To your point on the telco piece, I think they've kind of been underinvested in transport, frankly, for the last 5 years, ever since COVID began. They didn't want to mess with their networks during COVID. Then you had the supply chain whiplash, and then you had this massive investment they all had to make in 5G, which largely has not yielded the financial terms that they anticipate. Now you're seeing, I think, a multiyear investment back into transport. They are largely underinvested in the networks. And I think whilst that's not at the rapid scale and growth rate of the cloud, I think it's nice, steady mid-digit kind of single-digit growth within the telco space. And I think that's quite sustainable.

What is amplifying that though is the AI traffic for things like MOFN. And you saw last year, hundreds of millions of dollars of our telco business was, in fact, MOFN, specifically for hyperscalers. And you saw it, typically, we've seen it internationally. We're also seeing it now in North America ramp up as well. So you put those 2 things together, and I think that gives us confidence around that telco, which is half our business currently, having nice sustained growth rates, albeit lower than the cloud players.

One more question, please.

And that question will come from Ryan Koontz with Needham.

Gary, maybe you can just take a step back and regarding your great growth you're seeing here in the cloud segment. How has your product mix changed over, say, the last 12 months? Obviously, a lot around scale across and RLS and DCI, where you're historically more of a long-haul and subsea player. Can you give us any kind of perspective there on the product mix?

Yes. I would say sort of we're laying more tracks at massive scale because it's -- than we would normally see. You've specifically seen that with scale across because they're laying the tracks down first. So the much higher proportion of line systems would be the initial take on that. Now that will then move to plugs. We're seeing, obviously, a very large ramp-up in our 800-gig plugs, which we think will be largely adopted amongst most of the hyperscalers. And that is a different mix than we've seen traditionally, and more intelligence on the line systems, then also you've seen traditionally because given the massive scale that they're going to need to put in with multiple fibers across it, then you're going to need to increase the intelligence and the scalability of the line systems. Pull that with DCOM, which, frankly, was a very quickly emerged as a portfolio offering. That was not projected into the '26 plan when we did that in our 3-year planning piece. So mix has changed quite a lot around that architecture.

Really helpful. And just a quick follow-up, if I could. Just around growth limiters outside of your control as it relates to fiber supply, permitting, labor and really putting these lanes in the ground. What kind of supply constraints are you seeing for the industry for your cloud customers?

I think the large -- the relationship with the fiber providers, people at Corning, et cetera, is very tight amongst the cloud players and the service -- particularly the wholesalers, people Lumin who publicly talked about that. So I think there's a lot of commitment to scale capacity. So we're seeing that -- we are seeing that happen.

The other thing I would say is it's a real opportunity for us because we have the largest optical support and services organization in the world. And we are increasingly engaged with the deployment of these. In fact, our largest service customer last year was a cloud provider for the first time. And we're now providing multiple services across the hyperscalers, and we see that as an area of tremendous growth to help to your point, facilitate the delivery of this infrastructure.

Thanks, Ryan, and thanks, everyone, for joining us today. We look forward to catching up with folks today and over the next week or so, happy holidays and happy New Year to all.

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