Ciena beat its estimates in both EPS and revenue, which raises the question of whether operators are moving more to a “capacity-biased” model of network architecture even without a complete picture of how such a model could be optimized, or how it could contribute to improved profits in the long run.
An interesting jumping-off point for this is a quote from Gary Smith, the CEO: “…the networks today are more ready than before for a step function and capacity to support demand.” Ciena attributes a lot of its success to the faster-than-usual adoption of its latest product, WaveLogic 5, which is an 800G solution. Capacity is not only the philosophical basis for networking, the quest for capacity is arguably the fundamental driver in network infrastructure spending.
Transport is essential, but it’s the bottom layer of a stack that converts raw optical capacity into connectivity and services. Why, then, is Ciena beating on revenue and EPS when vendors higher in that stack, closer to the real buyer of the capacity, are reporting misses? There are a number of reasons, some pedestrian and some interesting.
One pedestrian reason is that you have to establish transport in order to offer services. Anything that introduces new geographies, new facilities, is going to have to be a termination point for optical transport. That gives players like Ciena an early chance to pick a seat at the infrastructure-project table.
Another non-strategic point is that, as Smith says, WaveLogic 5 is in a class by itself in optical transport, so the head-to-head competitive posturing that higher-level vendors have to deal with is much reduced, or absent, for Ciena. If you can get an 800G product that’s market-proven, and you’re seeing the usual industry trend toward higher and higher bandwidth demand, why not swing for the seats (to stay with our “seats” theme), equipment-wise?
Getting a bit more strategic, Ciena’s ability to supply the top-end transport gear combines with the natural desire of buyers to have a single-vendor transport architecture, to give Ciena a good shot at account control in the transport area. Remember that priority seating guarantee that WaveLogic 5 could offer? Ciena can use it to save seats for other Ciena products, and the bigger piece of the deal you can cover, the more indispensable you become. It also lets you afford to keep dedicated account resources in play, further improving your control of accounts.
More strategic yet is the opportunity to use account control and customer credibility to climb out of pure optical into the packet layer. Ciena reported “…several new wins in Q3 for our Packet business. We now have more than a dozen customers for our Adaptive IP solutions, including Telefónica UK and SK Telink, which we announced in Q3.” Network budgets for carrier infrastructure are, to a degree, a single food source in an ecosystem full of predators. One way to maximize your own position in that situation is to steal food from others, and Adaptive IP can steal lower-level (Ethernet-like) connectivity budget from the router vendors.
Adaptive IP is also a bridge to the Blue Planet operations/orchestration software. Ciena had a mobile-operator Blue Planet win in Q3, demonstrating that it can use its transport position to bridge upward into network operations and automation. This, IMHO, is an important step toward delivering on the positioning story of network-as-a-service (NaaS), which is all about creating agile transport to steal functionality from higher layers, and router vendors.
I’ve been critical of Ciena’s ability to deliver on its Adaptive IP and Blue Planet stories, but it seems like they’re doing a bit better at that. Part of the improvement, according to operators, is the result of operator concerns that old network-building paradigms are hurting profit per bit. Part, according to some operators I’ve talked with, is due to the fact that Ciena is doing a bit better in positioning their assets. Their story isn’t perfect, particularly for situations where a prospective buyer gets the story first from website collateral, but it’s improved.
This is important to Ciena, because their earnings and EPS beats can’t disguise the fact that overall optical transport spending is under considerable pressure because of the coronavirus and lockdown. As Smith says that buyers are finding “they can run their networks a little hotter.” That defers investment in infrastructure, but of course all bad things, like all good things, “must end someday.” What Ciena has to be thinking about now is what the rest of the vendors in the network stack are thinking about, which is “What happens when things get back to normal?”
Transport is inevitable. Are operators and other transport consumers offering a temporary priority to this layer because it is so fundamental, and will they then overspend, relatively, in this network layer and at this point in time? If so, normalcy won’t necessarily mean a big uptick for the optical layer. The other higher-layer vendors might then see their numbers go up, and with that see themselves better positioned at the infrastructure-spending table.
Ciena now needs to manage the transition to normalcy. They have to enhance their packet-optical and Blue Planet stories further, spread the net of marketing wide to open a dialog with those who aren’t currently engaged, and with the higher-layer planners of the buyers they already have. Smith, on the earnings call, acknowledges that Ciena may have seen the uptick toward normalcy earlier than higher-layer vendors did, simply because those vendors were at a higher layer and networks have to build upward. They have to expect the other layers will see the uptick eventually, and they have to compete for eyeball share then, as well as now.
What Ciena still lacks is that net of marketing. It’s not surprising that companies who sell to a relatively small number of enormous customers through gigantic deals would rely more on sales, but in periods of change, lack of a strong marketing/positioning strategy puts a lot of burden on the sales force, and it’s particularly dangerous when you have to engage with new companies, or new people in the same company.
If there’s an agile packet optics function that somehow lives between transport and IP, and if that layer can work with transport to simplify IP, then it has value to the buyer. If that layer can be definitively and tightly coupled to transport, then vendors like Ciena reap that value in the form of sales. If the layer floats without an anchor, then the more aggressive vendors are likely to grab it up, and nobody’s likely to think an optical vendor is aggressive, either in technical evolution or marketing effectiveness.
Transformation isn’t confined to optics or transport. You can see the router vendors contending with the pressure to define a new infrastructure model, and that same pressure will impact the transport layer eventually. That it’s impacting other layers now means that people Ciena doesn’t ordinarily engage with have already gotten those seats I’ve mentioned time and again in this blog. Their views will inevitably impact Ciena’s deals, and so Ciena needs to spread its message to them, and clarify their role in that future infrastructure model for all.