Good day and thank you for standing by. Welcome to the Ciena Announces Reporting Date and Web Broadcast for Fiscal Fourth Quarter and Year-end 2021 Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. Operator Instructions: Please be advised that today’s conference is being recorded. Operator Instructions: I would now like to hand the conference over to Gregg Lampf, Vice President of Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to Ciena’s 2021 fiscal fourth quarter and year-end review. On the call today is Gary Smith, President and CEO; and Jim Moylan, CFO. Scott McFeely, our Senior Vice President of Global Products and Services, 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 in the quarter and fiscal year. 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 detailed 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 and long-term financial targets, discussion of market opportunities and strategy, and commentary about the impact of COVID-19 and supply constraints 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. These statements should be viewed in the context of the risk factors detailed in our most recent 10-Q filing and in our upcoming 10-K filing. Our 10-K is required to be filed with the SEC by December 29th, and we expect to file by that date. Ciena assumes no obligation to update the information discussed in this conference call, whether as a result of the new information, future events or otherwise. As always, we will allow for as much Q&A as possible today. So, we ask that you limit yourselves to one question and follow-up. This call is being recorded and will be available for replay on the Investors page of our website, shortly after the call is concluded. With that, I’ll turn the call over to Gary.

Thanks, Gregg, and good morning, everyone. Today, we reported strong fourth quarter and full fiscal year 2021 results. This performance further demonstrates our continued ability to successfully navigate challenging market conditions and to deliver on the objectives and financial outlook we laid out as we entered the year, including annual revenue growth of 2.5%, which was at the high end of our expectations; fiscal ‘21 adjusted gross margin of 48%, which exceeded our forecast; and adjusted operating margin of 16.8% for the full year, also above our original forecast. Revenue in the fourth quarter exceeded $1 billion for the first time, and came in higher than expected. Additionally, orders in the quarter were once again significantly higher than revenue. And with our third consecutive quarter of orders outpacing revenue, we have substantial momentum and increased confidence in the demand environment. We ended the year with our highest ever backlog of approximately $2.2 billion. We doubled our backlog of the year ago. This performance, I think, reflects our market leadership within a very strong demand environment. Specifically, the combination of our differentiated balance sheet, leading innovation and R&D capabilities, and deep and growing customer relationships around the globe give us a distinct strategic advantage in the industry. And of course, our people continue to amaze us with their resilience and kindness as they continue to perform at the absolutely highest levels. Moving to highlights from the fourth quarter and fiscal year. Our focused investments are in three key areas: optical, routing and switching, and software automation. And they are yielding great results. In optical, we continue to lead the market in high-capacity coherent technology. Q4 was a record quarter for WaveLogic 5 Extreme. We added 34 new customers, including 13 new logos and in all regions. Our total customer count for WaveLogic 5e is now 140 globally, and we’ve shipped nearly 25,000 optical modems to date. We also shipped our first customer orders in Q4 for our WaveLogic 5 Nano coherent pluggable optics. We had a strong quarter in routing and switching, and we continue to build momentum in this space. In Q4, we secured a dozen new wins, including significant multiyear deals with two of the largest U.S. Tier 1 service providers, one of which is for a nationwide 5G cell site router deployment. Additionally, we’ve now closed the deal with AT&T to acquire its Vyatta virtual routing and switching technology which will help strengthen our Adaptive IP capabilities and increase our exposure to certain 5G use cases. We also announced a partnership with Samsung to couple our xHaul solutions, next-gen MCP domain controller and services, with Samsung 5G core and RAN equipment to support global 5G networks. Moving to our software automation business. Blue Planet performed well in FY21, growing 23% in the year to deliver annual revenue of $77 million, which again was above the high end of our target range, as well as record bookings a year ago. Some of the market wins in the year for Blue Planet include British Telecom, Vodafone, as well as a major U.S. Tier 1 service provider and large U.S. MSO. I also want to highlight our global services business, which grew 7% year-over-year, with revenue growth across each of our service categories and a 95% customer satisfaction rating in 2021. And also, as part of that, really advancing a key part of our strategy, we landed major network migration wins, including 3 U.S. Tier 1 service providers and an international Tier 1 service provider. Shifting to diversification in our business across both, customers and regions. Our top 10 customers for the year, including 3 U.S. service providers, 2 international service providers, 1 MSO and all 4 major web-scalers, are a strong illustration of the continued diversity in our business. And in fact, our non-telco revenue was 41% of total revenues for the year. Also of note, in FY21, we had more than $1 billion in orders from web-scale customers. We also performed well once again in the submarine segment, gaining more than 2% market share year-over-year, bringing our SLTE market share to the mid-50s. And finally, international growth was also strong, led by EMEA and India, which each grew at 13% year-over-year. Overall, secular demand remains very strong, driven by increasing bandwidth needs, the shift to the cloud, and also the focus on edge applications as well as digital transformation and a growing need for network automation. And we continue to take full advantage of our leading position to address these network priorities. And we’re making forward investments in our portfolio and go-to-market resources that are aligned to these trends and longer-term opportunities. As an example, we are leveraging our optical expertise to offer a new architectural approach to address next-gen Metro and Edge use cases, where we are investing to expand our total addressable market in this growing market from about $13 billion overall currently to roughly $22 billion over the next several years. I would also like to highlight the development of critical assets in software automation, including network layer automation with MCP. This is our microservices-based domain controller that has now been adopted by the vast majority of our customers around the world. Also, our differentiated software or our Adaptive IP approach, and this can be deployed as embedded in our routing and switching portfolio on white boxes or virtually. And finally, our multi-vendor Blue Planet services automation software, which is now deployed at 30 of the largest global carriers around the world to help drive their digital transformation efforts. These software elements are delivering unique innovation to the marketplace and expanding our relationships with customers. Our overall software business currently constitutes less than 10% of our total revenue. We do see this growing over time as we expand both the adoption and application, and move to more recurring and subscription-based models. Of course, the strong secular demand for bandwidth and automation remains challenged by the global supply chain constraints in the current environment, and we continue to believe that these supply challenges are likely to persist through at least the middle of calendar 2022. And to be clear, supply conditions are adversely impacting product costs, availability and lead times, as well as our overall supply chain operations. We expect these variables to affect our gross margin as well as the level and timing of revenue during fiscal ‘22. And we’ve obviously incorporated all of these elements and considerations into our guidance accordingly. However, as you can see from our performance to date, we continue to manage these challenges well. And while we are obviously not immune, we expect to continue to outperform others in this regard going forward. In fact, we’ve entered fiscal year ‘22 with increased confidence and visibility. And in a moment, Jim will provide our outlook for FY22, which we believe will be a year of outsized revenue growth for Ciena. And that is driven by several factors, including: number one, strong order flow and additional visibility to short-term customer purchasing decisions; number two, overall, a return to historical customer spending levels to address the continued bandwidth demand, following about two years of slow investment due to the pandemic; and thirdly, and more uniquely to Ciena, increased monetization of wins, both those that we’ve secured over the past couple of years as well as new awards. Jim will also provide a new set of long-term targets that we are confident in providing now, given the positive demand environment and strength of our business and overall financial position. Jim?

Thanks, Gary. Good morning, everyone. We delivered a solid Q4 performance. Total revenue in the quarter was $1.04 billion, somewhat above our expectations. It is an important milestone; it is the first ever $1 billion revenue quarter for Ciena, and there will be many more to come. And orders in the quarter significantly exceeded revenue. Q4 adjusted gross margin was 46.3%, which was within our guidance range, and reflects the dynamics we highlighted last quarter, primarily the impact of increased supply and logistics costs as well as increased monetization of new wins. Adjusted operating expense in the quarter was $307 million due to higher variable comp as a direct result of extremely strong order book at the end of the year. With respect to profitability measures, in Q4, we delivered adjusted operating margin of 16.8%, adjusted net income of $132.7 million and adjusted EPS of $0.85. In addition, in Q4, our adjusted EBITDA was $199 million, and cash from operations was $255 million. Also in Q4, we repurchased approximately 494,000 shares for $26.7 million for a total of approximately 1.7 million shares repurchased in fiscal ‘21. Regarding our performance for the full fiscal year, annual revenue was $3.62 billion, which was at the high end of our annual guidance range. As Gary mentioned, we ended the year with $2.2 billion in backlog. Adjusted gross margin was very strong for the year at 47.9%. And adjusted OpEx for fiscal ‘21 totaled $1.13 billion, largely as we expected. Moving to profitability. Adjusted operating margin in fiscal 2021 was 16.8%, at the high end of our guidance range, and adjusted EPS was $2.91. Free cash flow for fiscal 2021 was very strong at $162 million, or almost 75% of adjusted operating income. Our balance sheet remains a significant competitive differentiator. We ended the year with approximately $1.7 billion in cash and investments. Looking to the full fiscal year, we believe fiscal year ‘22 will be a year of outsized growth for our business. We have strong visibility to our near-term opportunities, including a record backlog in the year. Customer spending has returned to historical levels, following two years of lower investments due to the pandemic and related economic uncertainty. More pronounced for us and unique to Ciena in fiscal year ‘22 is that we are now monetizing our new wins and see increasing numbers of deployments for significant deals that we secured over the past couple of years as well as some new awards. Accordingly, we expect to grow our revenue in fiscal year 2022 in the range of 11% to 13%. With respect to gross margin, we expect the dynamics that we saw in the previous quarter to continue. And specifically the impact of automotive supply chain challenges that are manifesting significant cost increases and higher logistics costs will continue. Increased monetization of multiple new wins with initial performance and rollouts will also help our gross margins. Accordingly, we believe that our gross margin for fiscal year ‘22 will be in the range of 43% to 46%. For operating expense, we intend to continue investing strategically in our business, in particular, in our routing and switching and software automation portfolios to leverage our opportunities in these growing addressable markets. Therefore, we expect adjusted operating expense at an average of $300 million per quarter in fiscal ‘22. As always, this number will vary quarter-to-quarter, and is expected to start a bit lower and increase through the year. We expect adjusted operating margin in fiscal ‘22 to be in the range of 15% to 16%. In addition, during fiscal ‘22, we will be making investments in inventory and accounts receivable in order to continue mitigating the impact of the ongoing supply chain challenges. As a result, we expect that our free cash flow in fiscal ‘22 will be 50% to 60% of adjusted operating income. For the coming quarter, Q1 ‘22, we expect to deliver revenue in a range of $870 million to $910 million, adjusted gross margin in the 43% to 46% range, and adjusted operating expense of approximately $290 million. As Gary mentioned, strong secular demand is driving solid business gains and greater visibility for us, which puts us in a position to resume providing longer-term financial targets. Three-year targets are the best indication of our long-term view of the industry, and what to expect from Ciena over the next three years. Overall, we believe that we are well positioned to continue to deliver a combination of top line growth, profitability and cash flows. We believe the most important indicators of our performance and progress are revenue and cash flow. On the top line, we expect industry growth to return to low-single-digit levels in line with recent expectations, and particularly after 2022, we intend to continue to maintain market share as we have over the last decade. Beginning in fiscal ‘23, we expect to resume annual revenue growth in the range of approximately 6% to 8%. With respect to adjusted earnings per share, as we return to historical revenue growth and continue to focus on driving increased profitability in our business, we expect our EPS to resume growth. Specifically, we expect to grow our adjusted earnings per share in the 10% range over the next several years. Also, as part of our long-term outlook, beginning fiscal ‘24 we are targeting annual free cash flow generation of approximately 75% to 85% of adjusted operating income over the next few years. Finally, with respect to operating margin, we continue to focus on driving leverage from our operating model; in particular, growing our operating expense more slowly than expected revenue will enable us to increase profitability. As a result, we are targeting to achieve adjusted operating margin of 17% to 18% for fiscal ‘24. With our strong balance sheet and our expectations for cash generation over the next several years, we are now in a position to increase significant return of capital to our shareholders. We previously announced the program to repurchase up to $500 million of our common stock. We were not able to complete those purchases by the end of fiscal ‘21, largely due to the pandemic and the resulting industry and market dynamics. Today, we announced that our Board of Directors has authorized a new arrangement to repurchase up to $1 billion of common stock. Under this new authorization, we’ve also announced our intent to enter into a $250 million accelerated share repurchase arrangement, or ASR, whereby we will make up the unused portion of our previous repurchase authorization. Final settlement for the ASR is expected to be completed in the second quarter of fiscal ‘22. Following completion of the ASR, timing of the remaining $750 million purchases will be based on our stock price, general business and market conditions, our liquidity, the cash flow and other factors. Our intent is to fully utilize the repurchase authorization by the end of fiscal 2022. We expect the financing program to be funded with cash on hand or cash from operations. This new share repurchase authorization and ASR represent the next phase of our cash deployment, and demonstrate our commitment to return capital to shareholders while maintaining a meaningful liquidity balance. In closing, we delivered very strong fiscal fourth quarter and fiscal 2021 results despite supply chain challenges. With continued market leadership and a very strong demand environment, as well as significant backlog going into the year, we are confident for another strong performance in fiscal ‘22, including outsized revenue growth. For the longer term, our differentiated financial position will enable continued investments in innovation to address new edge applications through routing and switching technologies and digital transformation with our growing software automation portfolio. And we are in a strong position to return capital to our shareholders, and we intend to do so. Operator, we’ll now take questions from sell-side analysts.

Before we start the Q&A, we recognize there are some audio quality issues with the webcast. Please note that all of this information is on the earnings presentation, including our guidance, and we’d be happy to clarify anything that you like during Q&A.

Operator Instructions: Your first question comes from the line of Rod Hall with Goldman Sachs.

Yes. Hi, guys. Thanks for the question. I guess, I wanted to dig into this guidance for next year. I mean it’s very strong relative to what we had expected. And I wonder if you could talk a little bit about some of the drivers within that. I know the cell site routing seems like a really big opportunity. I don’t know, Gary, if you think that goes beyond this just this one installation or not, curious how big hyperscale is in that. So, that’s kind of the first question. Can you give us more color on what’s driving that growth? And then, I have one follow-up for you as well.

Yes. Rod, thank you. I would describe it as the monetization of new wins that have been on hold for a couple of years, plus the new wins that we’re seeing. The cell site router opportunity, I think we secured in this last quarter the two large service providers in North America for our switching and routing portfolio. So I view this as just the start, quite frankly. We’re very encouraged by the opportunities that we’re seeing there. If you step back from those specifics to Ciena, which is really the new business and the portfolio, the new innovations in the portfolio, we’re seeing carriers return to catching up on their capacity builds and move toward more normalized views around modernization of their network. I think you’re also seeing, Rod, a step function increase in overall traffic demand. It’s a blend of all of those things. I would also mention in terms of the order book, some of that is customers wishing to get security of supply in this environment. So it’s a blend of all of those dynamics. I think the secular demand for the industry is very positive, and our particular position is unique around the wins we’ve had in the last few years and you’re beginning to see that flow through.

Okay, great. And then, my follow-up, Gary, was on the software comment you made. You said it was below 10%. I wonder, by saying that, do you mean it’s close to 10%, or is it quite a bit below? I’m just curious how big that software element is now in the revenue stream.

Yes. So that’s the sort of three elements that I outlined. And I think last year it was about 8.5% if you put it all together. I highlight that because we are focused on growing that in absolute dollar terms and, over time, as a percentage of our overall revenue, through Blue Planet, MCP and the Adaptive IP.

Your next question comes from the line of Paul Silverstein with Cowen and Company.

Jim, can I ask you to just repeat the long-term guidance? I was having trouble hearing you, my apologies. My question is what gross margin, operating margin have been on a normalized basis? How much of an impact are you getting from supply chain? And I assume as your routing and switching business grows that that’s going to have a positive impact on gross margin and operating margin. Anything you can say on that? And what type of growth are you expecting there? And I’ve got one follow-up to that. Thank you.

A lot of questions in there, Paul. Let me address the last one first, which is routing and switching. We do believe that routing and switching overall will provide accretion to our gross margins as we move through time. And we do expect routing and switching to grow as a percentage of our revenue. With respect to what our profitability might have been. What I’ll say is that the last time we gave sort of run rate gross margins was right before COVID. We said that they were centered around 45%. And I still believe that to be true. And that 45% or so, call it, 44% to 46%, represents a run rate percentage of new business in our revenue stack. So, that’s what I’d say. You can kind of base on our guidance for the year, which is 43% to 46%, you can sort of get somewhere close to what we think the effect of the supply chain challenges will be this coming year. And just I’ll just summarize our long-term targets. What we said was we expect the industry will return post ‘22 to a low-single-digit growth rate. Our growth rate, we think, will return to the rate that we’ve seen historically for a long time, which is the 6% to 8% range, which will reflect continued market share gains. We also said that we expect our adjusted EPS will grow in the approximately 10% range over the next several years.

I appreciate that. And my follow-up, it doesn’t appear from the numbers, but I’ll ask the question. Are you seeing any impact from ZR in particular as well as open line systems? What type of impact are you seeing? Obviously, it’s just at the award stage, but any concerns?

Yes. Paul, this is Scott. On the ZR piece, I don’t think our perspective has changed since the last time we spoke. We really think the market entry point is really 2022. So no, we’re not seeing any impact in the short term on that. And as you may note in the press release, we shipped our ZR pluggables to the marketplace from a commercial perspective and certainly expect to participate in that market opportunity as it comes to fruition. Open line systems, that’s a game that we’ve been planning for some time, and we’ve actually benefited from, by the way, some technology leadership, both on the line system side and on the coherent modem side in whatever consumption models our customers want to choose is a good thing for us. So, no negative impact on our open line systems.

Scott, just to be clear, when you say no impact from ZR, we all know they’re just starting to ship. You’re not seeing meaningful awards by either web-scale or traditional service providers?

No. I think the game on that really starts in 2022.

Your next question comes from the line of George Notter with Jefferies LLC.

Congratulations on the terrific results and guidance. I guess, I wanted to ask about your market share opportunities. You certainly are implying that you’ll take continued share. I think Huawei, obviously, is one of the opportunities out there. What are you seeing in terms of new wins competitively against them? What are you seeing in terms of the opportunity to mine out the installed base? Any additional color you could provide would be great. Thanks.

Yes. George, I mean, I would say, efforts around that have been ongoing for a while. We’ve seen this dynamic. And really, it’s around two regions. It’s Europe and India. And what we have seen in both of those regions, even during last year, we’ve seen an ongoing move to migrate carriers away from Huawei on the optical transport side and in other areas. And we’re getting more than our fair share of that. The fact that we saw good growth in Europe and India, some of that is absolutely directly attributable to that move. And we think that’s going to continue over the next one to three years. And as I said, we’re taking more of our fair share of that, George.

The other thing I’d say, George, is that you see market share gains in our revenue numbers. We actually see them quite a bit before that. We see them at the contract awards. We see them in our order book. And all that’s been going on in our business over the last couple of years. And particularly, if you look at our backlog at the beginning of this year, it’s $2.2 billion. It’s hundreds of millions higher than we’ve ever seen it. Of course, some of that is visibility to future orders, but it reflects the fact that we have been taking market share, and it’s going to show up in our revenue this year in ‘22.

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

Thank you. I was hoping we could talk a little about the web-scale business, which was down a bit sequentially in the quarter. I’m assuming that’s just lumpiness. Could you touch on that and on the $1 billion in orders? For the year it looks like about a 1.2 book-to-bill. It seems others in the web-scale world are seeing more than doubling of orders, so probably more growth. Is there something going on where there is less forward ordering than some of the networking folks are seeing? As a follow-up, could you touch on Asia: India is up, but Asia overall is still under a bit of pressure. What is happening in the other parts of the Asia region? Thank you.

Let me take web-scale first. During the year, I think supply chain issues weighed a little on revenues in that space, but we certainly maintained share as expected. The fact that we had all four web scalers for the first time among our top 10 customers is a testament to our position there, and more than $1 billion in orders is a significant milestone from them. Much of that appears in our backlog as well, so we have good visibility into the year. In the guidance that Jim gave for our overall business, web-scale growth in 2022 will probably be above the corporate average, if that’s helpful. And we’ve got very good visibility into that. In terms of other parts of Asia, India I would make the same comment about India: I think it will grow faster than our corporate average as well. Other parts of Asia are a little more challenging. I think Australia and New Zealand will have a very good 2022; we’ve had a couple of new wins and new customers there. Japan continues to be challenging, but we’ve had a couple of new wins there too, including a large Tier 1. So I think over time our position in Japan will improve over the next 18 months or so. Obviously we’re not focused on China. The rest of Asia has been a bit of a challenge, and the pandemic continues to weigh on many of those countries.

Okay. Thank you.

And also it’s also Huawei’s sort of home-turf, and they’re not under much pressure there, as they are in Europe for example and India. So, that’s part of it.

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

Thank you very much for taking the question. Two as well. First, I want to understand what actions you may be taking in terms of the prices to your customers. Whether you’re planning on or have made adjustments? And if so, how successful have you been in getting any price increases to stick — pass on the higher input cost. And then I have got a follow up please.

Yes. So, I mean I think our perspective is really driven by a lot of that stuff we just absorbed in the normal bumps and moves of supply chain in the ecosystem. But, I think elements to this which everybody is seeing, the cost environment, we do not think it’s transitory. I’d split it into two elements. There’s all the expedite fees and logistics and the restatement eventually that will mitigate. But, some of these costs from a chip point of view, we do not see that being transitory. I would say, we’re actively engaged with our customers on how best to navigate this from a partnership point of view and how do we do that in an equitable way. We don’t expect any of those dialogs to really impact FY22, largely because we’ve got such a large backlog already, but we are engaged with our customers on that. If we are able to share these costs, it won’t affect the current backlog. It will affect orders going forward, just to make that point to you.

And then, a follow-up, Gary mentioned web-scale growing faster, India, but you didn’t mention the cable TV vertical, which in the fourth quarter was really strong. And we’ve been observing some spending shifts in that vertical. How are you thinking about your cable TV market in your 2022 guidance? Thank you.

We’re going to have a good year with the MSOs, but we have a very, very strong relationship, particularly with our biggest customer there, which is Comcast. We’re in a good deal with them. We’re just not going to see the kind of growth rate in that vertical that we’re going to see across our business in ‘22.

What I would add to that, I think from a specific point of view, from Blue Planet, we had two additional MSO wins for Blue Planet that we’ll begin to roll out into the year. So, we’ve got a pretty good footprint now from Blue Planet, mainly on the inventory side across a number of those large cable companies.

Your next question comes from the line of Jim Suva with Citigroup.

My question is regarding some of the countries, like India and Australia. It seems like during COVID they are coming back a little bit later than other parts of the world, just given the timing of when COVID hit those societies. Is it fair to say that your growth outlook in those is not only higher than corporate average, but also kind of multi-year sustainable, as I believe some of those countries kind of put spending in infrastructure on pause during COVID a lot more than others? If you can just kind of talk a little bit about that.

Yes, Jim, I think it doesn’t ebb and flow depending on some of the territories, particularly India. India has gone through a number of challenges, some of which were industry-based before COVID, and I believe they’ve recovered from those. They also experienced a wave of COVID that dampened demand, but we’re seeing a strong market share position there. Looking at RFPs and orders, we’ve actually grown share in India over the last 18 months, even during that period. The timing in some of these territories has largely been on hold, which is why we’ve secured new wins in addition to our existing business. We feel very positive about these territories and agree this is a multiyear dynamic. Everyone is supply constrained right now, but over the next one to three years I feel very bullish about Australia, New Zealand, and India, and longer term about Japan, which will take a bit more rebuilding.

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

I have two questions as well. First, regarding the 11% to 13% revenue guide for fiscal 2022, you mentioned web-scale and Asia are doing better. Could you comment on what you are seeing in North America and Europe from a geographic standpoint in the context of that guide?

I would say Europe will probably be above our corporate average. That raises the question of what will be below the corporate average, and that would be North America, mainly because of its size and our current share position there. However, we do expect growth in North America. To be clear, I see two dynamics in Europe. First, they have underfunded their infrastructure for a long time, well before COVID. Then COVID impacted them like everyone else. Also, there is the Huawei dynamic in Europe, which you don't really see in North America. We expect a good year in North America, helped by the number of wins we've had, but Europe should have another strong year in 2022.

Perfect. And then, if I could just follow up. I think when you kind of talked about the long-term guide, you kind of said we expect the industry to grow low single digits. And I think that’s the same assumption you have for fiscal ‘22, if I’m not mistaken. It’s a clear implication of your share gains are much more outsized in fiscal ‘22 versus what you think happens beyond that. Is that fair? I guess, my question is, why do you think these outsized share gains that you have this year are a one-time phenomena versus perhaps something that’s more enduring and durable, i.e.,…

I would describe it as this. I think you’ve got a bit of a catch-up. We’ve had a bit of a backlog of wins that have not yet deployed or monetized. And I think that’s now beginning to turn into revenue, albeit slower than everybody anticipated because of the supply chain. But I think it is a bit of a catch-up here, and I think it is somewhat unique to Ciena. I think the market rate overall is probably going to be in the low-single digits for ‘22. And I expect that further out you get, more difficult to tell. But if you look over ’23 and ’24, I would expect it to be similar. And I would expect us to continue to take share, which is why you get into that sort of 6% to 8% on that. If you look at it over the last decade, that kind of dynamic and structure is what we’re seeing play out. And I don’t expect that to be any different. And we’re also potentially, as we’ve said, opening up our TAM in switching and routing, which I think will be helpful to reinforce our outsized growth.

Your next question comes from the line of Samik Chatterjee with JP Morgan.

Hi. Thanks for taking my question. I guess we’re just stuck with Jim. I know you mentioned some headwinds to cash conversions next year, if I heard you right. But as you return to a more normal level of growth after fiscal 2022, I think you’ll be generating about $400 million to $500 million of cash. Why shouldn’t we? I mean, given the needs for deployment of cash that you have, and since I don’t see any major M&A requirements unless you’re thinking of any, why shouldn’t we be thinking that these share repurchases or other shareholder returns can be as much as 100% of free cash flow with the strong balance sheet that you highlighted? And I have a follow-up, please.

Yes. What I’d first say is that we would like to consider good M&A transactions. And we’ve been active evaluating opportunities. We just have not been able to find something that worked for us. We hope to be able to do that. So, that’s why we’re going to keep very good liquidity and a strong balance sheet. But I would say this that you’re right. We’re going to be cash generative over the next several years. And if we can’t find meaningful reinvestment either in the business or in M&A, then you can probably expect to see more share repurchases.

Got it. And for my follow-up, just going back again to the long-term guide beyond FY22, the 6% to 8%, that’s roughly similar to what you had pre-pandemic for your long-term guide as well. But, if you can share any thoughts about how similar or dissimilar is that in composition to how you thought about it pre-pandemic? Is there more growth coming out of telcos or is there maybe less share gain in certain verticals, just how to think about how similar or dissimilar it is to pre-pandemic levels?

I would say, broadly, similar. I would expect international growth to be a meaningful contributor, and web-scale to be a fantastic opportunity for us over the medium to longer term. So, I would expect a lot of that growth to be from international and from web-scale and further diversification of the customer base. Routing and switching is also a great opportunity for us; our TAM increased from around $13 billion to $22 billion because of the convergence of optical and routing technology and our routing and switching investments and engagements are going to increase our revenue over the next several years.

Your next question comes from the line Alex Henderson with Needham.

Could you just repeat the order backlog that you have? And is that primarily a product backlog?

$2.2 billion. It is products and services. Some very small portion of that, a small, low hundreds of millions, is services and maintenance that will continue beyond fiscal ‘22. So, the vast bulk of that backlog will be delivered in fiscal ‘22.

What do you think your normalized backlog would be if you were in a normal environment, and how much of that is outsized backlog?

Yes. Scott will address this. But we talked about that internally. The business really — because of the COVID situation and what quickly followed, which was a supply chain imbalance, the way the ordering pattern of our customers has changed.

I think, Alex, if you look at it over the last couple of years, the backlog grew and at the end of fiscal ‘21 the backlog was higher by about $1 billion. The environment going into ‘21, I wouldn’t say it was normal either. So that might have been a bit low, and going into ‘22 is probably a bit high. So somewhere in between there is the normalized rate. If you go back in historical numbers through pretty much last decade, we sort of entered the year typically somewhere between 30% and 35% of the annual revenue plan in backlog. So, that may give you some indication of what sort of normal state is. I personally think we’ll be living in this new environment where we have longer visibility, and therefore, more backlog for quite a while, probably through all of 2022.

So, the primary reason I’m asking these questions is I wanted to get at the mechanics of how the backlog normalizes. So, over the course of FY22, do we see a book-to-bill start to run below 1 and therefore the backlog start to trim lower, or do you expect in your guidance that the backlog stays at elevated levels, and we don’t bring that down? I mean if I’m looking at the backlog, it’s 61% of your total trailing revenues and 75% of product revenue. So, it’s a very large backlog. What’s the mechanics for normalizing that? And does it happen all in ‘22, or do we actually end up with a large chunk of that backlog being realized in 2023, in which case the guide seems conservative for ‘23?

I think one of the things that we probably need to change your mindset around a little bit is sort of looking at a short-term period trying to figure out how much revenue moves from one to the other. Because in the old world, we used to go to a period and a relatively low proportion of that period’s revenue was actually in backlog, and then we had a pretty fast conversion cycle. So, that made sense to ask the question of how much should you miss. Right now, we’re in a different world. The demand profile has given us long visibility. It’s a very significant portion of the delivered revenue in a short period of time. And therefore, you’re less dependent on new order book. I think we’re going to be living in that world for most if not all of ‘22. So, what it does mean is, unlike in ‘21, where we said the demand dynamic was really what was shaping the timing of our revenue being back-end loaded, it’s going to be the supply environment that’s shaping it. And so, you could naturally expect then with the revenue increasing as we go through the year, there is going to be a conversion. On whether book-to-bill will slip below 1, we don’t know. But I think you’ll still see an oversized backlog relative to historical measures going into ‘23.

Are you assuming a reduction in the book-to-bill because components become more available over the course of the year? And when do you expect that to actually start to improve in the guide? That’s what I’m really trying to get at. Thank you.

I would say at this point because it’s difficult to give you a precision in terms of the quarters, but I would say we do expect our book-to-bill in the year to be still greater than 1 on an annual basis. And we do expect the supply chain environment to largely persist through most of our fiscal ‘22. We think we will start to see some improvements in lead times as we get to the back end of the year. So that will probably change the ratios on the backlog to revenue in ‘23, but not back to sort of the historical norms.

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

Great. A couple of questions for me. Maybe just a little bit more market-focused. Clearly, you’re seeing a strong web-scale order flow. And just what are you seeing in terms of that upgrade activity? Is it wholesale upgrades to WaveLogic 5, like we maybe saw with the 400-gig cycle, are you seeing more of a mix of speed being installed kind of in the data center? And then, maybe a little less of my question for fiscal ‘22, but you talked about there needing to be kind of a partnership with the service providers as you look towards making price increases. Just trying to get a sense of when you look at low- to mid-single digits in ‘23 and beyond kind of for the industry. Do you think that will be more pricing-driven or unit-driven, just in terms of how much of the price increases will be absorbed versus the service providers? Thanks.

I’ll try the first one, on the web-scale piece. So, as you know, we’ve got exposure to the web-scale in multiple parts of their infrastructure: campus, metro data center interconnect, and in some cases backbone networks, and certainly a lot of activity around the submarine networks. In all three of those use cases, what we’re seeing is certainly capacity elements hitting the most advanced state-of-the-art technology as they try to introduce the lowest cost per bit, and that’s happening now, but not all on WaveLogic 5 yet — that transition is happening as we speak. The second thing that we are seeing is expansions in terms of their reach. So, that comes at us in terms of new revenue builds, both in terms of photonics and WaveLogic modems. And then maybe a bit unique to us and the timing wise as we had talked in the past around new logo wins in that space that were significant, and you’re starting to see those come to revenue.

Meta, on the industry growth and pricing, whatever happens on the pricing environment, I don’t think that will have a major impact on the actual size of the growth. From our point of view, we will absorb the majority of the additional costs associated with components in the near term. I do not believe those costs can be fully passed on to customers, and that’s all encompassed in our guidance. Over time, through innovation, our own cost reductions, vertical integration, and mix, plus increased software exposure and routing and switching, we expect that to help our gross margin. As Jim said, baseline gross margin was somewhere between 44% and 46% prior to these component increases.

Thank you very much. And thanks, everyone, for your time today, your attention. We look forward to catching up with everybody today and the next few days. Happy holidays, everyone, and happy healthy New Year. Thank you.

This concludes today’s conference call. Thank you for participating. You may now disconnect.