Good morning and welcome to Ciena's Fiscal Fourth Quarter 2023 Financial Results Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. 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 2023 fiscal fourth quarter and year-end results conference call. On the call today is Gary Smith, President and CEO; and Jim Moylan, CFO. 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 from the quarter and the 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 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 will be making certain forward-looking statements. Such statements including our quarterly and annual guidance and our long-term financial outlook and discussion of market 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'll post shortly after 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 filing and in our upcoming 10-K filing which will be filed with the SEC by December 29th. 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'll 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 very strong fiscal fourth quarter results including revenue of $1.13 billion, and adjusted gross margin of 43.7%. Our team has been executing exceptionally well. And in Q4, we shipped more hardware across our portfolio than ever before. For the full fiscal year, we delivered revenue of $4.39 billion, a 21% increase over fiscal 2022, which as you can expect drove very strong market share gains. We also drove a 43% increase in adjusted annual EPS. Notably in FY'23 revenue for our routing and switching portfolio also increased 27% year-over-year. I think a strong demonstration of the momentum within this element of our expanded addressable market. Before I continue, I want to be absolutely clear that our Q4 performance, our commentary about market dynamics and the outlook we are providing today is very consistent with what we said last quarter and indeed as we moved through most of fiscal 2023. There have been no major changes to industry dynamics, including that demand remains incredibly strong as evidenced by high levels of customer activity and engagement across all segments and regions. The single variable that remains uncertain today is the precise timing around the flow of new orders aligning with reduced lead times from our service provider customers, particularly those in North America. And as a reminder, supply chain constraints led to elongated lead times, which resulted in large advanced order volumes. In fiscal 2023, a faster than anticipated improvement in lead times is requiring some customers to digest the large amounts of equipment ordered in prior periods. I would also note that the cloud providers were really the first to experience this dynamic and are very clearly the first who have worked through it. In fact, orders from our cloud provider customers as well as our total orders were up once again in Q4. And we strongly believe that what we're seeing with cloud providers is a leading indicator. Service providers will similarly return to normal order patterns in the coming quarters. That belief combined with strong fundamental demand, our leading innovation and customer relationships as well as our outsized backlog which we're still carrying, we enter fiscal 2024 very confident in our ability to continue to grow faster than the market and to take share. So moving to some highlights across the portfolio. In Optical Networking, we continue to extend our leadership from both a market share and technology perspective. In fact, we increased our global market share in optical by more than five percentage points on a year-on-year basis, which actually puts us in an even stronger position than our pre-pandemic market share. Looking ahead, we will be first-to-market yet again with our next generation 1.6 terabit WaveLogic 6 in mid-2024. We intend to press down on this technology advantage as competitors have launched only 1.2 terabit alternatives. In Q4 specifically for optical, it was a record quarter for both WaveLogic 5 Extreme and 6500 RLS driven by cloud provider network expansions. During the quarter, WaveLogic 5e surpassed 100,000 total modems shipped, making it the most widely deployed 800 gig solution in the market. WaveLogic 6 is of course building momentum, including orders from a large subsea customer and a strategic win and adoption with a cloud provider in Q4. In routing and switching, we continue to grow our share as a challenger in this market, ending the year with greater than $500 million in annual revenue. We added 14 new routing and switching customers in Q4 alone, and we now have more than 300 in total. During the quarter, we received initial orders for the WaveRouter, our industry-first converged metro platform, which became generally available in Q3. We announced last week that we are partnering with Flex to add new US-based manufacturing capabilities for our unique NextGen pluggable optical line terminals and our optical network units, as broadband access is a key part of our addressable market expansion strategy over time. We're very excited to support the Department of Commerce's broadband equity adoption and deployment the BEAD program to ensure our customers can meet the Build America, Buy America requirements of this program. Also in Q4, Blue Planet had a good quarter with $20 million in revenue. As some of you may have seen, we've just recently announced a new collaboration with BT Group, which is using Blue Planet solutions to automate the orchestration and delivery of network services. Lastly, our Global Services segment had a record quarter in Q4, with revenue of $150 million, an increase of 20%, driven by installation and deployment services, which again is a positive leading indicator of service providers' ability to consume product. Taking a perspective around customer segments, clearly we had a record quarter with cloud providers as they continue to invest in data center interconnect for their traditional business and begin to provision their networks for AI-related traffic. Indeed, our WaveLogic leadership continues to be particularly highly valued by this critical customer segment. Orders from cloud providers were up once again over the prior quarter. Significantly for the first time, our two 10% customers in Q4 were both cloud customers. Also in the quarter, Direct Cloud Provider revenue accounted for 35% of total revenue, the highest percentage ever. For the fiscal year, Direct Cloud Provider revenue grew 57% reaching $1.2 billion or 27% of total revenue. The fundamental demand drivers for our business remain incredibly strong. Over the past 20 years, the 30% plus annual growth in bandwidth demand has been driven by many mega-trends, like the monetization of the internet, the move to the cloud, and mobile digital transformation. We have been the leader in servicing that demand for bandwidth with our leading technology. It is becoming increasingly clear that over the next several years AI will be a catalyst for continued strong bandwidth growth. We are incredibly well-positioned to address these opportunities across our portfolio and from our customer relationship perspective. We have industry-leading optical technology to high-speed delivery at the edge to network automation. We will continue executing on our strategy to be the best-in-class innovator in optical bringing to market leading innovations like WaveLogic 6 while expanding our market opportunities in routing and switching. Specifically in that, we will continue investing in our portfolio to address higher growth areas in converged metro core, PON, and virtual routing, where we are already winning deals and taking market share. In summary, we delivered an outstanding year in fiscal 2023, gaining significant market share and further advancing our leadership position. We are well-positioned to continue to grow faster than the market driven by our leading innovation, and the diversity and strength of our customer relationships. With that, I'll turn it over to Jim who will provide more details on our results as well as our business outlook. Jim?

Thanks, Gary. Good morning, everyone. Ciena delivered very strong Q4 results. Revenue came in at $1.129 billion and adjusted gross margin was strong at 43.7%, reflecting a favorable product mix as well as improvements in component costs in the quarter. Q4 adjusted operating expense was $338 million. With respect to profitability measures, in Q4, we delivered adjusted operating margin of 13.8%, adjusted net income of $111 million and adjusted EPS of $0.75. In addition, in Q4 adjusted EBITDA was $179 million. Cash from operations was $196 million and free cash flow was $173 million, driven by a $140 million reduction in inventory. We repurchased approximately 4.2 million shares for $189 million completing the $250 million repurchase targeted for the year. With respect to performance for the full fiscal year, annual revenue was $4.39 billion. We drove adjusted gross margin of 43.5% for the year. Adjusted OpEx for fiscal year '23 totaled $1.33 billion, precisely as we planned. Moving to profitability, the adjusted operating margin in fiscal 2023 was 13.1% and adjusted EPS was $2.72. Free cash flow for fiscal 2023 was $62 million. The strength of our balance sheet is a significant differentiator, particularly in this uncertain environment, and we ended the year with approximately $1.25 billion in cash and investments. Inventory ended at $1.05 billion, down roughly $140 million from Q3, but somewhat higher than we expected due to a shift in product mix delivered to customers. We expect inventory to come down by $250 million to $300 million by the end of the year. Now turning to guidance. We will be giving new three-year revenue targets today. To start, however, I want to compare and contrast the targets we gave last year at this point in time to the new three-year targets for fiscal '24 through fiscal '26. You'll recall that last year we provided a three-year revenue compound annual growth rate of 10% to 12% through fiscal year '25. We made it clear then that 10% to 12% revenue growth is not our long-term sustainable rate of growth. However, we provided that target knowing that fiscal year '23 would be a year of outsized growth and that we would return thereafter to our long-term trend of 6% to 8% annual growth. Fiscal year '23 followed three years of low annual revenue growth due to the unprecedented set of dynamics that resulted from the global pandemic and the subsequent supply chain challenges. Given that our revenue performance in fiscal year '23 was outsized, as expected, and with confidence in our ability to continue leveraging our market and technology leadership going forward, we believe that we remain on track to be in that 10% to 12% revenue CAGR for the three years ending in fiscal year '25. With that, as we look ahead, we believe it's valuable to look at a period that excludes the outsized growth in fiscal year '23 in order to provide a more accurate reflection of our anticipated average growth rate going forward. Accordingly, today we are providing a new set of long-term targets for the three-year period encompassing fiscal years '24, '25, and '26. We believe that we are well-positioned to deliver strong top-line growth and profitability for the long-term. With that, we expect average annual revenue growth of approximately 6% to 8% for the next three years, which is consistent with the growth rates we have delivered over the long-term whether for the past three, five, ten or even longer years. All of this reflects our confidence in the fundamental demand drivers for our business. We expect to leverage those opportunities by continuing to lead in optical while expanding our addressable market in routing and switching. Additionally, with respect to operating margin, we continue to focus on driving leverage from our operating model. Accordingly, we are targeting to achieve adjusted operating margin of 15% to 17% for fiscal year '26. As we think about fiscal year '24 specifically, I want to reinforce a few points. As Gary stated, the fundamental demand drivers for our industry, including the growth in bandwidth demand remains strong. As expected, we enter 2024 with $2.6 billion in backlog, which is still outsized both on a relative and an absolute basis over twice our historical levels in absolute dollars. We have begun to see both increased spend and plans for a strong 2024 CapEx by our cloud provider customers. We believe that the recent increase in orders from cloud customers is a leading indicator that service providers' order patterns will improve in the coming quarters. However, as Gary stated earlier, current service provider order flow is low, particularly in North America, as these customers continue to work through relatively high levels of inventory. While we expect service provider order patterns to improve as we move through 2024, the timing and volume of that improvement remains uncertain. Taking these factors into consideration, we will guide to a slightly wider than typical range of revenue in fiscal year '24. Accordingly, we expect our revenue growth in fiscal year '24 to be in a range of 1% to 4%. Within this environment, optical industry growth estimates for 2024 are currently being updated by industry analysts. Based on what we've seen from those sources and our own assessment, we believe the prevailing expectation is for largely flat market revenue in 2024. Given our diversification, leading position and differentiation, we expect to take share and to grow revenue faster than the market. With respect to gross margin for fiscal year '24, we expect it to be in the mid-40% range with some variability by quarter, but generally reflecting the positive impacts of improving supply chain conditions. For operating expense in fiscal year '24, we intend to continue investing strategically, both to advance our leadership position in our core markets and to expand our addressable market in key growth areas, including converged metro core and broadband access. Therefore, we expect adjusted operating expense to average $355 million per quarter in fiscal '24. This number may vary by quarter, and we expect OpEx to start slightly lower and increase throughout the year. Finally, as we improve our net working capital by reducing inventory levels throughout the year, we expect to generate significant cash in fiscal '24. We believe that we will generate free cash flow of at least $400 million during the year. We also plan to repurchase another $250 million in Ciena shares under our $1 billion board approved plan. With respect to Q1'24, we expect to deliver revenue in a range of $980 million to $1.06 billion, adjusted gross margin in the mid-40s percentage range, and adjusted operating expense of approximately $350 million. In conclusion, our strong Q4 and fiscal year results underscore our industry leadership driven by our technology advancements across our portfolio and a diverse customer base. Looking ahead, we anticipate a return to normalized order patterns as we go through 2024, and foresee AI as a growing driver of bandwidth growth. We are confident in our ability to seize market opportunities and to deliver profitable growth as we combine our leadership in optical with our continued investments to expand capabilities to address new markets in routing and switching.

We will now begin the question-and-answer session. The first question comes from Samik Chatterjee with JPMorgan. Please go ahead.

Hi. Thank you for taking my questions. Based on the information you've provided, particularly regarding the guidance, could you clarify the 1% to 4% growth rate you're projecting for next year? What factors are you considering in this guidance? It seems like you have more confidence in cloud growth, but I'm curious about other sectors like telco and cable. Could you share your insights on those areas? For instance, are you anticipating a decline in telco revenue next year? Any additional information on other customer sectors would be appreciated. I have a follow-up as well. Thank you.

Yes, Samik, if I sort of answer by sort of what we feel is going to be strong and we have visibility to good visibility, I think is cloud, submarine, and India are three large elements that I would say we feel positive about both in terms of backlog and on pipeline and activity. Service providers generally are beginning or working through their inventory, they're all at various stages of progress to that. I think the uncertain one on precise timing is really the larger North American Tier 1 service providers. Our view on timing for the conversion to a normal book-to-revenue and order flow is that it would be mid-year, which I think is consistent with what you've probably heard from a number of different companies around the industry. There's a lot of absorption they took in 2023, and some are actually in very good shape. Our underlying demand is strong, as capacity growth and traffic growth continue to be very robust for the service providers. It’s certainly not an issue of budget, it's really just some of these larger ones absorbing and being able to get deployments of the equipment we've shipped to them.

Okay. Got it. And if I have a follow-up, a bit more longer-term question, I mean, you issued the guide for 6% to 8%, which is really consistent with what you've done historically, and one of the key investor concerns I hear around that long-term growth trajectory is really the acceleration of the pluggables market or the impression there of that pluggables market is accelerating and Ciena doesn't really replicate the share it has on systems when it comes to pluggables. When you think about sort of where your share against has come from particularly as you highlighted robust share gains, how do you think about that 6% to 8% growth impact of pluggables? And are there any offsets where you're gaining more share than you have historically to provide offsets? Any color there. Thank you.

I would just comment on the pluggable piece. We've sort of been having this conversation over the last three or four years, and it's taken a lot longer for pluggables, you know, the 400 ZR. You've still got a lot of inventory of the stuff that's already been shipped. When pluggables happen, we think we're very well placed for that both with customer relationships and with leading technology, so we see that more as an opportunity than a threat. Even 400 ZR will obviously be in market with the WaveLogic 6 variant onto the 800 ZR as well. We believe we will take more than our fair share of that market. In the context of the 6% to 8%, there's no question that we will continue overall to take market share in optical. But obviously, we're getting to a point where we've got a large market share, and at some level, you're not going to take five percentage points each year. However, we're augmenting that growth with our TAM expansion in the key areas around routing and switching, which gives us even greater confidence and diversity about our ability to grow going forward.

Thank you. Thanks for taking my questions.

Thanks, Samik.

The next question comes from Amit Daryanani with Evercore. Please go ahead.

Good morning, everyone. Thanks for taking my question. I have one and a follow-up as well. So, I guess, first one I would love to understand on the cloud side up, you folks are talking about a fairly good bit of strength in the quarter; it was really strong and then expected to continue next year. Can you just talk about specifically based on the product portfolio set what is driving the strength in cloud? And if you actually see any signs of AI-centric infrastructure tailwinds benefiting your business already.

We are seeing in the cloud players, growth around there, all dimensions of the business and we have quite a broad relationship with them. So we're seeing it in sorts of data center interconnect into the metro, into their long haul with things like Waveserver. We're also seeing it in submarine where they're investing significantly around the globe, and also in their country expansions. We’re working closely with them in a number of markets where they don't necessarily take the fiber themselves but partner with the local carriers. We’re seeing a lot of those opportunities; and of course we're incredibly well-placed to participate in that. Places like India are the fastest growing internet market in the world, and cloud providers are being very aggressive in their investments there. Think about it in overall terms for the year, they are up over 50% for us in revenue. We're seeing improved order flow from them, and the point I would make is it's across multifaceted applications and product applications with the cloud players.

Got it. And then maybe if I just go back to the full-year guide that you folks have provided on the 1% to 4% revenue growth and totally understand the macro-environment you're sitting in help aside. Is there a way to think about how does the growth breakdown across the different geographies for you? And I know North America seems to be the one place that's somewhat weaker for you, but when you look back historically, when you've had these digestion periods with the North American company, is it a one, two quarter phenomenon or do you think it could be longer given how much product they took through the pandemic? Just any color on how does growth breakdown across geos and then what is the digestion timeframe looks like as you go forward? Thank you.

As we look into '24, we think that we will particularly be growing in the international space; we'll have a higher growth rate than average there. The Americas is probably lower and the GCN will probably be in between those two. That's how we think about it as we enter the year.

The other part of your question around, you know, what would be the digestion. I'm really honing in on sort of North America Tier 1s. I think it was sort of overused word in the last couple of years 'unprecedented' around the whiplash of the supply chain. Our revenues were up 21%, so that’s a lot of equipment for these cloud providers and service providers to digest. I think the cloud players were the first to see the issue and are clearly coming out the other side. We are seeing signs that many of the service providers are coming out the other side of this, but it's really the precise timing of that. We think it's probably mid-year, and I think as we said, another couple of quarters of digestion for the Tier 1s. We expect them to get collectively to normal order cycles as we start to move through our Q2 into Q3.

Thanks. Perfect. Thank you.

Thank you.

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

Yes, hi, good morning. First, just would you mind to repeat your revenue growth targets for next year? We have an internal disagreement about what you said, we need a clarification. I want to ask a question about your participation or the impact of your business on the carrier efforts to reduce spending. So we're seeing kind of Nokia losing share because of migration to OpenRAN, and core carriers are trying to adopt new technologies that are much lower in spending or require much less spending so their CapEx to revenue ratio can go down over time. In that kind of environment over the next few years, what are the implications for Ciena? What areas would be exposed to these efforts, and which areas would have no exposure? Thanks.

Just to be clear, Tal, we guided revenue for '24 to be in a range of 1% to 4% up. We guided Q1 to be $980 million to $1.06 billion, that's what we said, and mid-40s gross margin in both cases.

In terms of the service providers, what we're observing is that they are focused on optimizing their networks, spending, and financial models. From our perspective, we are in a strong position because we have leading technology with spectral efficiency, which significantly reduces their costs. We are about to enhance that with WaveLogic 6, making the timing very favorable. The primary expenses for them revolve around their metro infrastructure, which they aim to simplify. Our Adaptive IP technology aligns perfectly with that as a more streamlined, cost-effective architecture. We have already achieved notable successes with them, and these will be implemented over the next two to three years. When I consider the current challenges, I actually feel quite optimistic about the Tier 1 service providers, especially in North America, due to the considerations you've mentioned.

We've been first to market with every generation of optical technology. Each generation represents a step function down in terms of cost per unit of bandwidth, which is clearly a great benefit for their efforts to restrain CapEx. We're coming out with 1.6 terabits this year; we're following that path.

Tal, I would also add that, regarding concern around budgets, clearly what you're seeing in North America is they're coming to the end of their RAN spend on 5G, and that is tailing down. They have an opportunity to reduce their overall CapEx, but it's really about where to allocate that spend. I feel quite bullish about their spending, particularly related to taking costs out into their metro and transport networks.

Okay, thank you.

Thanks, Tal.

The next question comes from Karan Juvekar with Morgan Stanley. Please go ahead.

Hi. Thank you. This is Karan Juvekar on for Morgan Stanley. So I guess the first question, how should we think about the telco versus non-telco customer mix as we go across next year? Would it be fair to say generally flat sequentially from fourth-quarter levels just as service provider remains a little constrained? And as that service provider spend does come back towards mid-year or towards end of the year, how should we think about a more normalized run-rate contribution from here?

You know, I think you will see service provider, from an order point of view skew more towards the service providers as they come back in the second half. We still expect very strong order flow from cloud. Overall, I do think the service provider will come back to a little more of the normalized balance, but I do think cloud is now a larger part of our business sort of direct. While service providers will come back stronger in the second half, it will be blended this year.

That makes a lot of sense. I have one more follow-up. I noticed that inventories ended up slightly higher than expected. You mentioned a shift in product mix to customers. Can you provide more detail on that? Also, regarding the $250 million to $300 million figure you mentioned for next year on inventories decreasing, it would be helpful to understand how that will progress throughout the year.

On the inventory level, it reflects the different customers, make changes in their requests for deliveries. As we move through the quarter, it's very common. If our mix shifts from service providers to GCNs during the quarter, that results in higher levels of finished goods inventory. We believed that as we move through fiscal year '24, a lot of that movement inside of their delivery dates is going to settle down. Our finished goods inventory will come down during the year to a level that is much more closely aligned with what we've done in the past. We're going to reduce our inventory about $250 million to $300 million a year; that will be generally pro rata across the year.

Okay, helpful. Thank you.

Thank you.

Thank you.

The next question comes from Ruben Roy with Stifel. Please go ahead.

Yes, thank you. Gary, I had a question, in the prepared remarks, you made a comment about cloud customers beginning to provision networks for AI traffic. I'm wondering, as you get closer to your cloud customers and you start thinking about AI traffic relative to historical bandwidth growth, would you say at this point that AI traffic would be incremental to the 30% plus growth that we've seen historically? The reason I ask is just in the context of the 6% to 8% longer-term growth return to the normalized growth; it doesn't seem like AI traffic would be incremental, but I'm just wondering how you're thinking about that.

That's a great question. We're beginning to have conversations around with the cloud providers, where they're placing orders on us in anticipation for cloud traffic. They are working on various applications outside of the current versions that are out there, and no one particularly has insight into what the model for that will be from a traffic flow perspective. But we're all of the view that at some point all of that has got to come out of the data center to get monetized. No one really has the ability to model that out accurately. But we understand it will be significant. When we talk about 6% to 8%, none of that is actually taken into account because we can't model that. I personally believe it will drive traffic growth higher, which has historically been in that 30%. The timing of it is uncertain, but I'd estimate it may happen toward the end of '24 or into '25 when the applications emerge.

One industry analyst recently came out with a view of a higher growth rate by, you know, 5% to 6% in terms of bandwidth demand as a result of AI.

So close to like 40%, going up from 30% to 40%.

I appreciate the detail both of you. And for a quick follow-up, I think Samik asked about the pluggables earlier. I was just wondering again, as you get closer to cloud customers, are they starting to ask you about optics inside of the data center? I'm asking that at the European Optical Conference; there was a lot of discussion around coherent light, and just wondering how you're thinking about potential opportunities as you go forward.

No, I think as we've talked, we are very bullish around the opportunity to intercept. The data center, particularly with AI, is where we have no exposure right now. The timing will likely come around 2025. There is a significant inflection point happening in all of the conversations we're having with them regarding coherent light that should create perfect applications for them. We are the world’s leader in coherent technology. We do see an intercept into that and we're investing in that as Jim has said. A variant of WaveLogic 6 will absolutely be focused on inside the data center applications. We've not taken that into significant consideration in our current projections due to the timing factor, but it's a massive opportunity for us further out.

Thank you.

Thanks, Ruben.

The next question comes from Alex Henderson with Needham. Please go ahead.

Thanks. I wanted to go back to Tal's question, but with a very different spin on it. It strikes me that the decision to move to Ericsson and downplay Nokia was a function of the absolute horrific performance of the 5G core, which isn't working properly in almost any location. As a result, they can't drive the improved functionality that the 5G core would deliver, like network slicing and other elements that drive revenue differentials for the largest Tier 1s. Does that aggregate to a reduction in CapEx across the board or do they shift spending away from 5G into other necessities like optical? Or does it mean they cut optical spending along with reduced CapEx?

I believe, Alex, that they have spoken about the fact their spend on RAN is coming down. Specifically, I don't know what's driving that in terms of the performance of the 5G core. All we've heard from our customers indicates their spending outside RAN is expected to remain flat as we move into '24, and that their spend with us is going to be flat to maybe slightly up, so we don’t foresee a major effect from any of their decisions on RAN today.

Thanks. Second question is on the inventory side. A number of companies have been forced to take some inventory write-downs as a result of the significant build-up in inventory over the last couple of years. I didn't hear any mention of that with you guys. Have you absorbed any inventory write-downs built into the numbers, offset with improved pricing or is it just improved pricing? Can you provide some sense of the magnitude of price reduction in the quarter? How do you think that plays out as you get your supply chain back into normal conditions?

We don’t see any material risks to a significant inventory write-off. We do a very careful evaluation of our inventory down to the component level, comparing it with demand in each of our products and components built into those products. We don’t feel there's any risk of a significant inventory charge. We have excess and obsolete charges in the range of $4 million to $6 million each quarter, and we expect that to continue. The margin situation is driven primarily by our mix and a bit of component cost reduction because we are no longer buying as much from the broker market as we did last year and earlier this year. We expect an improvement in that as we go into next year, which is why we're confident in guiding to the mid-40s in gross margin range.

Great. Thank you and great execution. You guys did a superb job. Thanks.

Thank you. Appreciate it.

The next question comes from George Notter with Jefferies. Please go ahead.

Hi, thanks a lot, guys. Maybe just to continue on the gross margin question. I was impressed by this quarter's gross margins given the much higher mix of cloud provider revenue and the big spike up in services revenue. Can you provide more context on what was going on this quarter with respect to gross margins? Was there something underlying there? I know you said favorable product mix, but I’d love more detail.

When you think about gross margins across our customer base, the web-scale versus service providers are in very different businesses; but they're both big players, and they have choices. We must compete for the business. We are fortunate to have the best optical gear in the world, which helps in the competition. Across our customer base, gross margins are not all that dissimilar, though, generally speaking. The major difference in our gross margin is really the mix, particularly in our optical business line systems versus capacity adds. When it comes to line systems, our gross margin is lower, while capacity adds are higher. As you remember, we came into this year expecting a very high mix of line systems, and that wasn't quite as high as we had anticipated, which impacted our gross margin. We expect an improved mix, as well as lower component costs next year.

Got it. Great. Just as a quick follow-up, could you give us an update on the delivery of the WaveLogic 6 product? I know you said GA in the first half of next year, but can you confirm that that's on track? Additionally, when do you expect customers to start testing the products?

Yes, it's absolutely on track. We've already received orders and are engaging customers as they come into our lab to view various variants of WaveLogic 6. As we turn the year and move into Q1 further into Q1, Q2, we expect to increase that engagement with customers. The release is set for mid-2024, and we’re confident about staying on track.

Great. Thank you.

Thanks, George.

Thanks, George.

The next question comes from Simon Leopold with Raymond James. Please go ahead.

Thanks for taking the question. I wanted to start off with the commentary you offered about growing faster than the market. I'm glossing over the fact that you're in more than one market. I'd like to hear your take on how the growth rates may differ in your assumptions for your Packet Optical platforms versus the Routing and Switching segment because I'm assuming you're going to see much faster growth from routing and switching. But just wanted to see what's baked into the overall guidance.

It's a fair question, Simon. When you look at network gear, whether it's optical or routing and switching, the underlying growth rates are not terribly different; they're in the low to mid-single digits. However, our expanded capabilities in routing and switching mean that the TAM available to us is growing. We expect routing and switching to grow faster than optical over the next year and several years. I still believe we can take share in optical, but we're also cognizant of a large current market share contributing to limitations in share growth. We plan to augment that growth from routing and switching.

To confirm, given your modest position and product cycles, routing and switching could conceivably grow at double-digit rates within this forecast, is that fair?

Yes, that is absolutely fair. We expect optical growth, even with the expectation of an analytical view that the market is flat. We will be growing faster than market norms; but I believe routing and switching will reflect double-digit growth, even moving beyond what we grew last year, as we are still at a lower market share in that realm.

Great. Appreciate your time.

Thanks, Simon.

We'll take one last question, please.

For the sake of time, I'll just ask one question. When I look at your three-year guidance, I take it back; I am going to ask that question. Regarding the three-year guidance of six to eight with this year being lower, that implies an acceleration. Hearing about everything going on, particularly more cloud, the international opportunities, and then getting into the data center with 800G in about a year, I wonder if the implication is that the long-term growth rate of the company has moved up slightly from 6% to 8%. It might not be 10% to 12%, but it could be higher than 6% to 8%. Do you have thoughts on that?

As you just did the math, our guidance for the year and the three years implies that higher growth rates in the two years following '24 are likely due to attaining our growth in several markets; including routing and switching and PON. We think Huawei displacement will gain momentum as we go through the next few years. We believe the two years following '24 will reflect higher performance. Beyond that, we'd be reticent to declare that we expect it will be higher than 6% to 8% beyond that.

Obviously, if you do the math, we’re talking about accelerating growth following the current absorption with the North American Tier 1s this year. We are optimistic regarding future years, not just for the reasons Jim mentioned. The introduction of WaveLogic 6 will also contribute significantly.

Quick follow-up to help with the definition of mid-40s; does mid-40s mean 45? It could be 44 as well. Could you clarify how you think about mid-40s?

If I get my Webster out, I don’t know. This year we did 43 point something. What I'm trying to convey is that we’re expecting to improve to a number that centers around 45. I'm not saying it will be exactly 45, but it centers around that number.

Great. Thanks so much, guys.

Thanks, Mike.

Thank you all for joining us today. As we enter the holiday season and the New Year, let's all hope for peace and goodwill. Thank you for joining us.

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