Earnings Call Transcript - CIEN Q2 FY2026

Operator

Hello everyone. Thank you for joining us and welcome to Siena's Fiscal Q2 2026 Financial Results Conference Call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. I will now hand the conference over to Greg Lamp, Vice President of Investor Relations. Please go ahead.

Gregg Lampf, Head of Investor Relations

Thank you, Tracy. Good morning, and welcome to Siena's 2026 Fiscal Second Quarter Conference Call. On the call today is Gary Smith, President and CEO, and Mark Graff, CFO. Scott McFeely, Executive Advisor, is also with us for Q&A. In addition to this call and the press release, we've posted to the Investors section of our website an accompanying investor presentation that reflects this discussion, as well as certain highlighted items from the quarter. Our comments today speak to our recent performance, our view on current market dynamics and drivers of our business, as well as discussions of our financial outlook. Today's discussion includes certain adjusted or non-GAAP measures of CM's results of operations. A reconciliation of these non-GAAP measures to our GAAP results is included in today's press release. Before turning the call over to Gary, I'll remind you that during this call we'll be making certain forward-looking statements. Such statements, including our quarterly and annual guidance, commentary on market dynamics, and the discussion of our opportunities and strategy, are based on current expectations, forecasts, and assumptions regarding a company and its markets, which include risks and uncertainties that could cause actual results to differ materially from the statements discussed today. Assumptions relating to our outlook, whether mentioned on this call or included in the investor presentation that we posted earlier, are an important part of such forward-looking statements, and we encourage you to consider them. Our forward-looking statements should also be viewed in the context of risk factors detailed in our most recent 10-K and our forthcoming 10-Q. Sienna assumes no obligation to update the information discussed in this conference call, whether as a result of new information, future events, or otherwise. As always, we'll allow for as much Q&A as possible today, though we do ask that you limit yourselves to one question and one follow-up. With that, I'll turn the call over to Gary.

Gary B. Smith, CEO

Thanks, Greg, and good morning, everyone. Our Q2 performance was once again very strong, reflecting our continued technology leadership, our deep customer relationships, and the strength of our business model. In the quarter, we grew the business 40% year-on-year with revenues of $1.57 billion. We expanded adjusted gross margin to 44.9%, and we nearly quadrupled the year-ago adjusted earnings per share to $1.64. And I'd remind everybody that we delivered these results while navigating unprecedented demand and a constrained supply environment. With the combination of a strong and growing backlog driving strong visibility fueled by AI-led demand from both cloud and service providers, coupled with our leading technology portfolio, we are well-positioned to gain share and deliver long-term value to our customers and our owners. The breadth and depth of our portfolio positions us to intersect this market growth as AI drives new opportunities across the WAN and in and around the data center. Our portfolio spans systems, interconnects, software, and, of course, services. Specifically, systems includes our optical systems as well as our routing and switching platforms. Interconnects is comprised of modules for inter and intra data center connectivity, inclusive of our WaveLogic modems and pluggables, as well as co-packaged optics and critical technology components that serve as foundational network building blocks and of course our software and services which helps customers install automate operate and optimize their networks at scale taken together Siena's portfolio delivers our customers innovative products to meet a wide variety of high-speed connectivity solutions in the WAN and in and around the data center with an unmatched competitive offering. So since we spoke to you last in March, the largest hyperscalers have increased their 2026 capital expenditures with indications of continued expansion into 2027 and beyond. Given the priority to monetize somewhat constrained compute investments, we expect an increasingly largely larger proportion of that spend will be directed towards network infrastructure importantly service providers are also reinvesting in network infrastructure after several years this is creating net new opportunities with service providers across long-haul metro and managed optical fiber networks or mofen in fact they were up 28 percent for us year on year. Simply put, all customers are prioritizing high capacity, low latency, and high speed connectivity, underpinned by the need to transport data for AI, including model training, data ingestion, and inference. To that end, our latest view is that the addressable market will approximately double over the next several years to roughly 50 billion by 2029. And to be clear, this significant market growth includes our traditional WAN markets and the high growth markets in and around the data center, both of which we've been strategically investing into in recent years. With that, let me add some color on how these dynamics are driving the demand for our line systems specifically. The first generation of our intelligent line system, our RLS platform, set the standard for high-speed, low-latency, and power-efficient connectivity. The large global install base of RLS have given us years of deep insights into technology requirements, as well as significant operational expertise and integration experience across both cloud and service provider environments. The resulting collaboration from these experiences has directly informed the development of our next-generation intelligent line system, the RLS Hyperrail. This is a multi-rail solution developed for both the leading hyperscalers and service providers to specifically address the growing capacity and efficiency demands for data center interconnect, scale across architectures, and inferencing. Co-created with multiple hyperscalers and built on an innovative photonic design, RLS hyperrail supports multiple fiber pairs in parallel over hundreds of kilometers using advanced amplification. The result is significantly higher density with materially improved space and power efficiency, which is particularly important at intermediary amplifier sites where space and power is limited. Notably this morning, I am pleased to announce that we've been awarded the industry's first multi-rail order from a leading hyperscaler, validating early market demand for our RLS hyperrail platform, and cementing Siena's position as the industry standard. We are also engaged in discussions with multiple additional hyperscalers, neoscalers, and service providers both domestically and internationally who continue to lean in and show a level of interest which is exceeding our expectations to touch on our data center out-of-band management solution or decom which combines products from our routing and switching portfolio with our industry-leading pond technology decom as you can see is ramping extremely well which contributed to the 88% year-on-year revenue growth in our routing and switching segment we are also expanding the customer base in addition to meta we've received initial orders from a second hyperscaler customer and lab qualifications are progressing well with a third hyperscaler customer as AI is driving demand for our systems it is also creating momentum across our interconnects portfolio and we are pleased to share with you that we recently secured a new win with a major hyperscaler for our high performance coherent modules. These will be deployed in scale across in both metro and long-haul DCI networks, supporting both WAN and in and around the data center applications. This technology solution was developed in close collaboration with the customer and marks a competitive takeaway win. I also believe it is evidence of our strategy to leverage our systems capability into modules and component forms and addresses the broad range of consumption models that our technology can address. We continue to see strong demand from hyperscalers for our 400 gig and 800 gig pluggables, and we remain on track to more than double our pluggable revenue from 2025. Additionally, we have another first win with a major switch OEM to use our market-leading wave logic 5 and 6 nano plugs this again is a demonstrable further proof point of extending go-to-market and consumption models for our technology we will continue expanding our interconnects portfolio with strong momentum behind our nubis assets across both scale-up and scale-out use cases first nitro our linear re-driver we receive the final chip back and it is performing extremely well and therefore we are on track for general availability this summer. Turning to Vesta 206.4T, the optical engine for CPO use cases, over the past 90 days we've seen increased industry momentum and demand for open ecosystems, reinforcing our hypothesis and the strategic value of the Nubis acquisition. Given the breadth and depth of our portfolio, Sienna is uniquely positioned as the only focused supplier of high-speed connectivity solutions, enabling our customers to deploy across multiple use cases with best-in-class technology, software, and services, from complete systems to modules to components. Before I close, I want to touch briefly on customer co-creation, which we've talked about in the last few quarters and referenced several times today. It is a meaningful differentiator for Sienna, exemplifying the trust that customers place in both our innovation leadership and our ability to execute complex programs across multiple technology generations. Customers bring us in early on new requirements and architectures and they trust us for engineering systems insights and to innovate new approaches that help evolve their networks the resulting solutions are fit for purpose and deployable both at scale and upon pace on launch it sharpens our roadmap decisions increases win rates gives us visibility into demand and builds highly differentiated expertise people processes and capabilities and that's reflected in our growing market momentum the bottom line is our deep customer relationships and our sustainable technology leadership support our confidence in continued share gains durable growth and increasing profitability over the next several years with that I'll turn it over to mark to walk through the quarter's financial results and our outlook mark thank you

Mark Graff, CFO

Gary and good morning everybody thanks for joining us this morning as Gary noted Q2 was another testament to strong execution meeting robust demand consistent with industry views that demand will remain strong for at least the next few years we are focusing our resources to secure supply and manufacturing capacity to deliver for both our customers and our owners our Our Q2 results demonstrate the progress made against our financial priorities while simultaneously growing the business. First to gross margin. We achieved an adjusted gross margin of 44.9% in Q2 due to focused efforts on engineering cost reductions, mix, and price optimizations. We continue to see a path towards margin expansion based in part on our technology leadership in hyperrail and DCOM, the ramp of our interconnects and components business, and value exchange opportunities. Our discipline in managing working capital has also borne fruit. Most notably, our cash conversion cycle has improved by 20 days since Q1 on faster inventory turns and better payables execution. This helped contribute to free cash flow of $219 million or 13.9% of revenue and a cash balance of 1.4 billion dollars. Finally, we are deliberately and responsibly allocating our owners capital. We continue to invest in the business organically to capture new opportunities such as developing RLS Hyperrail. We are also extending our product line to different customer use cases such as data center out-of-band management with our PON technology. Lastly, we are making key investments, both with capital and operating expenses, to secure supply for the future demand. We remain on track to spend $250 to $275 million of capex. All this while we continue to return capital to our shareholders through our stock buyback, earning $83 million in Q2 at an average price of $371. Going into more details on our 2-2 results, as Gary noted at the top of the call, revenue reached $1.57 billion, up 40% year-on-year and $71 million over our guidance, setting another quarterly record. Our optical networking business grew 42% over 2-2-25, driven by strong demand for our RLS and Waveserver product lines, both up over 55% year-on-year. Our routing and switching business grew 88%, primarily due to the ramp of DCOM, as Gary mentioned earlier, and deployment continues at pace. Direct cloud customer revenue grew 70% over the year-ago period, with service providers growing 28%. Of particular note, our NDS service provider revenue more than doubled year-on-year, reflecting strong demand for MoFIN deployments. We had two customers, both cloud providers, contribute more than 10% of our... As I noted earlier, Q2 adjusted gross margin was 44.9%, exceeding our guidance by 90 basis points and up four full percentage points from a year ago period. Q2 adjusted operating expense was $398 million, driving an adjusted operating margin of 19.5%, exceeding the midpoint of our guide by over 100 basis points. OpEx was elevated in Q2 on higher variable compensation due to strong year-to-date performance on revenues and orders. Otherwise, OpEx is meeting our expectations. Adjusted EPS was $1.64, nearly 4x the year-ago figure, demonstrating the strong profit-generating capability of our business model. Before I provide our updated full year in Q3 2026 guidance, I'd like to take a moment to comment on the demand and supply environment. In Q2, our backlog increased more than $600 million sequentially to $7.7 billion, reflecting strong demand for our products and our leadership in the market. And we expect to exit the year with even higher backlog. The combination of customer collaboration, a growing services business, robust order flows, and high-quality backlog provides us with excellent visibility into 2027. Against this demand backdrop, which has been noted across the industry, we continue to see an imbalance of supply, not keeping pace with demand. We are navigating these challenges well, as evidenced by our strong performance and ability to increase our outlook over the past couple of quarters. We are working with both our supply partners and customers to ensure we can serve our large and growing backlog. Specifically, we are driving to achieve a greater balance as we make the investments with our suppliers needed to ensure supply security while focusing on economic optimization opportunities with our customers. Now on to guidance. In Q3-2026, we expect to deliver revenue of approximately $1.625 billion, plus or minus $50 million, and an adjusted gross margin of 45%, plus or minus 50 basis points, and adjusted operating expenses of approximately $410 million, plus or minus $10 million, resulting in an operating margin of 19 to 20%. Based on our first-half performance and continued ability to manage through a supply-constrained environment, we are once again in a position to raise our guidance for Fiscal 26. We now expect to deliver revenue for the fiscal year of $6.3 billion plus or minus $100 million, raising our midpoint growth to 32% year-on-year. We expect our fiscal 2026 gross margin to be between 44.5% and 45%. We expect fiscal 2026 operating expenses of approximately $1.61 billion plus or minus $20 million due to higher variable compensation and additional investments in supply security. And we now expect 26 operating margin of 19% plus or minus 50 basis points. In conclusion, we had another record quarter as market dynamics continue in Siena's favor. Visibility remains strong, well beyond our historical norms, supported by significant backlog, multi-phase customer programs, and our co-creation activities. And we are confident that strength will continue into 2027. We see durable and robust demand underscored by the network's critical role in enabling AI and supported by the doubling of our TAM by 2029. We have proven success translating increased demand into higher earnings per share on the back of a strong business model and operational execution. We are confident in our ability to bring value to our customers and drive EPS growth for our owners over the next several years. And before I turn it over to questions, I'd like to take a moment to recognize a meaningful milestone. This call marks Gary's 100th earnings call and 25th year as CEO. With passion, a relentless customer focus, and a deep belief in Ciena's team members, he's guided Ciena through significant industry transformations. As a result, today we find ourselves in the enviable position of leading the industry in high-speed connectivity at exactly the moment the world needs it most. On behalf of Sienna's employees around the globe, congratulations, Gary, and thank you for your continued leadership. With that, we'll take questions from our certified analysts.

Operator

We will now begin the question and answer session. As a reminder, please limit yourself to one question and one follow-up. If you would like to ask a question, please press star and the number one to raise your hand. To withdraw your question, press star one again. We do ask that you pick up your handset when asking a question to allow for optimum sound quality. If you're muted locally, please remember to unmute your device. Please stand by now while we compile the Q&A roster. Your first question comes from the line of Samik Chatterjee with J.P. Morgan. Your line is open.

Samik Chatterjee, Analyst — J.P. Morgan

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

Gary B. Smith, CEO

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

Samik Chatterjee, Analyst — J.P. Morgan

A quick one for Mark, maybe from an OPEX perspective, operating expense perspective, you did start the year thinking it's more flat with some of the actions that you had taken last year, the increase in the operating expense outlook for the year, which is going hand in hand with the increase with your revenue outlooks as well. Can you just parse through that? How much of that is variable compensation versus maybe investments of some sort, and how does that change? how you're thinking about a long-term OPEX trajectory for the company as well yeah thanks

Mark Graff, CFO

to me yeah now I would say 90% of that increase is really driven by the higher performance than we were expecting at the beginning of the year of both orders and revenue so you know if that scales and I would expect you know variable compensation to scale as well you know all All that said, the strength of our model continues to deliver that operating leverage. So if you compare where we were at the beginning of the year to where we are now, we're increasing that operating leverage even with the increase in variable comp. The rest of that delta is really around making sure that we're increasing the supply security for the demand that we're seeing. Yeah, I would say that's 10-ish percent of that spend. Moving forward, I would expect us to continue to generate operating leverage and grow revenue significantly faster than OPEX, and you'll see that in further strengthening of EPS over Thanks, Nick.

Operator

Your next question comes from the line of Simon Leopold with Raymond James. Your line is open. Please go ahead.

Simon Leopold, Analyst — Raymond James

so I mean you may be on mute you hear me you know you hear me okay sorry I wasn't on mute I swear just a quick one if you could just give us the double click on the 10% customers and the question I wanted to ask is a little bit of elaboration on your pricing strategy in that you've got substantial backlog I'm wondering, one, are you able to raise price in the backlog? And how are you juggling your rising input costs versus your ability to raise product price? And how does your price hike factor into your growth? And anything, any insight we could get there in this kind of inflationary environment,

Mark Graff, CFO

I'd appreciate that. Thank you. Yeah, no, I appreciate it, Simon. So first on your question around the two percent or the two ten percent customers uh you know as i said in the remarks both cloud providers together they're about a third of the revenue um for q2 uh so i you know we can't get into the names but i'll i'll leave you guys to hypothesize on who those are um you know on on the gross margin and and the the pricing piece you know we we purposely are using this term value exchange, because as we think through the supply-demand dynamics, we're trying to balance a couple of things. One is, obviously, how do we continue to expand our margin? How do we make sure we're driving the right investment into securing that supply? But I also want to make sure that the other working capital activities are being taken care of, and you saw the improvement in cash conversion so as we think about that nothing is off the table so we are having conversations with all of our customers around how do we balance this supply chain risk because we are making additional commitments with our suppliers to ensure that's a secure supply we're working with them to optimize you know which products they take out of our portfolio and making sure we've got good fill rates and and we're driving what they require and yeah we're looking at pricing pricing opportunities across all of our products I think the team has done a phenomenal job of taking what we see as some inflationary inputs and being able to through really good engineering work cost reduce those to kind of mitigate the impacts and you're seeing that in you know I think this is our you know our third guide for the year we've raised gross margin each of the three quarters and so i think you're seeing the fruits of that um i expect as we continue to go through time you know our we have increasing confidence in being able to expand our margin both at the gross level and at the operating level for the for the reasons i talked about in the script Thank you.

Operator

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

Amit Daryanani, Analyst — Evercore ISI

Your line is open. Please go ahead. Thanks for taking my question. I have two as well. I guess first one, Gary, I think you spoke about in the opening comments about how the TAM could double essentially by fiscal 29 or get to at least 50 billion, I think. I think that would imply a 25%, 26% CAGR from where we are right now, roughly. Could you just maybe break out and talk about how much of that TAM expansion is in and around the data center versus traditional VAM? And then how do we think about CNN's ability to pick up share in that scenario?

Gary B. Smith, CEO

Yeah, thank you, Amit. If you look at the sort of doubling of it, you're right about the overall growth rate. And you think about that as being, you know, scale across is driving a lot of that. And probably, you know, by the time we get to 29, we expect that to be, you know, about an eight, eight, ten billion dollar market. You know, and that would be part of an overall long haul metro optical transport WAN type market of, you know, probably in excess of about 20 billion. So you can see that, you know, is a large part of it. and then you've got things like the interconnect market which obviously is is opening up and our various offerings into there so it's it's obviously uh a confluence of those and again i would stress that's am and that's evolving very quickly as we're all seeing um you know we we obviously think in our areas particularly like across we can continue to take share with things like hyper rail and the technologies we have from a modem point of view and then deploying them inside and around the data center. Obviously, as we go inside the data center, you've got some large markets there where we are the new entrants, but we believe that we can take share with our technology and we're seeing evidence of that.

Amit Daryanani, Analyst — Evercore ISI

Got it. Perfect. Maybe we'll just follow up on the DCOM side. I mean, if I think about this 88% growth you folks had in routing and switching, is that really all DECOM-driven, or maybe there's a way to think about DECOM versus what the baseline routing and switching business did? And then really, when you think of the DECOM opportunity, do you think it's a durable multi-year attached business, or it's more of a one-time, out-of-back refresh that you're benefiting from? Just kind of maybe frame of how big it is and how durable this could be. Thank you very much.

Gary B. Smith, CEO

I would say that, you know, the DCOM is a large part of the, you know, the growth in routing and switching. But even if you took that out, routing and switching had pretty good growth as well, you know, outside of the DCOM piece. We think that DCOM is a multi-year, multi-faceted application within the hyperscalers and potentially outside of the hyperscalers as well. We're obviously seeing that with our anchor customer in Meta. It's proving to be much larger and much wider, broader expansion than we'd anticipated. We're actually engaged with a couple of other hyperscalers. We've got orders from another hyperscaler. And they all have slightly different applications for it, but it's certainly not one and done. It's going to be an evolving application that we see growing. You know, and we think, again, it's very early days, but, you know, maybe one to two to three billion by the time we get to 29 is the total TAM. So, you know, this is a very important part of the inside the data center strategy for Ciena.

Amit Daryanani, Analyst — Evercore ISI

Perfect. Thank you. Congrats on some nice numbers here. Thank you, Amit.

Operator

Your next question comes from the line of Sean O'Loughlin with TD Cohen. Your line is open. Please go ahead.

Sean O'Loughlin, Analyst — TD Cohen

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

Speaker 13

First of all, Sean, welcome to the party. Nice to hear your voice. In the short term, looking back in the rearview mirror, we've certainly seen because it's really gotten down to it. In terms of the other side of that and tried to do that in the past, it's a very difficult journey in our opinion. I mean, the moat from a system vendor perspective, but it's a lot deeper than that. It's, you know, how do you put those, you know, individual components? It's the integration in the back office system. It's the services to be able to service these networks 24-7, 365 days a year around the world. It's a big step function, and, you know, we've been doing that for decades.

Sean O'Loughlin, Analyst — TD Cohen

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

Mark Graff, CFO

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

Sean O'Loughlin, Analyst — TD Cohen

Loud and clear. Thanks a lot, guys, and congrats, Gary. Thank you, Sean.

Operator

Your next question comes from the line of George Nauter with Wolf Research.

George Notter, Analyst — Wolfe Research

your line is open please go ahead hey guys turn caught on for george um i was just curious about any traction you're seeing on the coherent light side maybe any incremental use cases

Speaker 13

would love to hear anything there first of all they you know coherent light is an opportunity we still see uh increases um you know the distances coherent is going to find its way closer to the four walls of the data center and in our belief system the vehicle for doing that we still see that as an opportunity great and then what do you think on the

George Notter, Analyst — Wolfe Research

neoclub side in terms of demand how should we think about sizing that opportunity it sounds like you guys are starting to see more traction there as

Gary B. Smith, CEO

well yeah let me let me let me take that I mean you know the neo Scala piece covers a very you know wide range of different kinds of organizations and customers you know we are leaning into that we're seeing great opportunities is around them leaning into the network piece. Clearly, the neoscalers are looking to invest in the network piece, and they're doing that through either shared networks, MoFen. Some of them, they're driving themselves. We have significant wins in most of the major neoscalers, so we are rolling out networks for them. Difficult to kind of size that right now, but we think that's a particularly good growth for us over the next over the next two to three years for sure one of the interesting dynamics

Speaker 13

and the engagements that we've had with them also is that I know they're trying to go fast we're seeing great services thank you guys so much your next question comes from the line of

Operator

Ruben Roy with Stiefel your line is open please go ahead Ruben you may want to move on and come

Tim Long, Analyst — Barclays

back to moving hi sorry can you hear me yes now we can yeah okay yeah hi thanks um gary got a

Gary B. Smith, CEO

bunch of questions on hyperrail i wanted to come back to um something you said about hundreds of millions of dollars um over multiple years i think you're saying that you're a bit ahead of adoption expectations but can you help us understand the deployment pace um especially you know sort of how i think about you know sort of co-development with some of the hyperscalers etc is this sort of lumpy project-based type of revenue rec or do you think it'll be you know sort of more linear as you think about the next couple years on on multi-rail or hyper rail specifically on

Gary B. Smith, CEO

multi-rail specifically yeah we i mean we think you know it starts in 27 uh and we think it'll be linear uh and we think by that point we'll be doing it with multiple uh hyper railers and also service providers too there's some very large service providers particularly those that are exposed to the wholesale mofen type market where this kind of technology is is absolutely you know transformative for them so we think starting in 27 that will provide nice linear growth for us for the next for the next few years frankly and given the scale that you're talking about on and this is not just training. That is obviously the sort of killer app for this, because what it enables is greater density over greater distances, and it enables different training models. And when you think about the constraint that is on compute right now, generally speaking, the networks have to go to the compute. Therefore, you're seeing, you know, in addition to the demand that we've seen so far, I think we're beginning to see even an increased demand because the network's got to go to compute. And when you think about that in the training context, the timing of us coming out with this hyperrail co-created with the hyperscalers, it could not be better. And then in addition to the training, you're just talking about very long distance, high density, low latency, super intelligent line systems, you know, for cloud. for, you know, connecting data centers. And, you know, we've obviously talked about the training piece. You're seeing the beginning of all the inference and agentic AI, which will drive, you know, essentially cloud growth as well. And that infrastructure, you know, right now is based on RLS. That is the industry standard. So we're leveraging our expertise and technology there into HyperRail. Yeah, maybe just to add on, Ruben, this is Mark.

Mark Graff, CFO

but you know obviously we're at zero dollars of revenue for hyper rail until we great uh thanks

Gary B. Smith, CEO

for all that detail maybe as a quick follow-up mark on the um compare on opex growth and you know you're already at uh 99.5 adjusted operating margin uh on the revenue guide can you maybe talk about longer term signposts maybe how you're thinking about uh potential upside from there on operating margins as uh you know you continue to see some of this new revenue you come into

Mark Graff, CFO

the bottle starting next year. Yeah I'm not going to really get into 2027 or you know maybe beyond that at this point Reuben but you know how I how I dimension this is you know we've got pretty strong backlog you know we're leaving Q2 at 7.7. I said we're going to you know increase that throughout the rest of this year going into 2027, we've got a pretty good map in terms of how we're going to expand gross margins in front of us. And I think what you'll see is continued operating leverage as we go into 2027 and beyond. So I think when you put all that together, the power of our business model, you're going to see a pretty meaningful EPS acceleration as we go through the next several years. And, you know, as we get closer to the end of the year, we'll give you a little more dimensioning on what we think that OpEx is going to be. But again, I would

Operator

count on more. Thank you. Your next question comes from the line of Mehta Marshall with

Speaker 10

Morgan Stanley. Your line is open. Please go ahead. Great. And congratulations. Just in terms of a couple of questions for me. First is just on supply chain. You know, I think in the past you've had more availability on the pluggable side versus the system side. But if you could just kind of give any update into, you know, where you're seeing kind of the greatest tightness. And then just on, you know, the gross margin leverage, you obviously spoke to kind of the steps that are being taken to kind of, you know, work around designs, but just in terms of kind of the ramp of the pluggables business, just how much of that is contributing to kind of the gross margin pickup we saw. Thanks.

Mark Graff, CFO

Yeah. Hey, it's Mark. On the supply chain piece, yeah, I mean, again, the team's doing a wonderful job, I think, of, you know, using our engineering prowess to cost reduce some of that. As we think about those things that are probably most constrained, you know, we do have some constraints on modems, so typically like CDMs, but what's really helping us on the modem side of the business is we're the most vertically integrated supplier in the industry and so we're able to buffer some of the supply chain challenges on the modem side. On the system side you know you've heard a lot of people talk about you know the laser pump or the pump lasers that go into our amplifiers and into the line systems. That's something that we continue to work kind of on a daily basis across our supply chain and those are things is you know we make those investments and we put capacity in place and we're thinking about you know the longer term discussions we're having with those suppliers that's a lot of where we're and again I would say the team's doing you know a wonderful job even on just getting more units into the door so that we can sell them as soon as we get them they're they're going out the door which has allowed us to you know on the gross margin leverage you know I think there's a couple of things that that are going on here one is you've heard me talk a lot about the engineering cost reductions which I think again the team is doing a great job on we are having conversations both with the supply chain on how we optimize those costs as well as with our customers on how we do that value exchange that I talked about earlier you know and and it's across it's beyond just price although obviously that's on the table. You know, we're also looking at how do we balance the supply risk with our customers and our suppliers. How do we make sure we get terms so that we can, you know, manage our working capital a little more tightly. So I think we're looking across the entire scope of not just price in terms of gross margin, but how do we improve the foundation of the entirety. Got it. Thanks. Sorry about that. Excited about gross margin. You know, on the The plug piece, you know, as we said, we're driving, you know, we expect to double our total plug revenue. At this point in time, I don't think we're seeing plugs have either a hugely negative or a hugely positive impact on our gross margin. You know, it's obviously a component as we think about mix, but I'm not too hung up right now on the impacts of our plugs, although I am pretty pleased with the trajectory of the business.

Operator

great thank you so much all right yeah sorry about that your next question comes from the line of adrian colby with city your line is open please go ahead question i was hoping you could

Adrian Colby, Analyst — Citi

provide some more color on the service provider side um you're clearly seeing some strength in the molten business i'm interested what you're seeing outside of india and in the past you've had a greater than 10 customer that was a service provider i'm interested if that just dropped off because of the strength in hyperscalers or if there's some other dynamics you'd call out with service provider.

Gary B. Smith, CEO

Yes, thank you, Adrian. Yeah, as we talked about, service providers overall were about 28% up year-on-year. I think what you're seeing there is two dynamics. One is they basically have underinvested in their optical infrastructure for the last, frankly, the last five years. You know, they've been very preoccupied with 5G investments. That's obviously now, you know, tailing off, and they are looking at putting their optical infrastructure up to date. And that's a development that we're seeing across the service provider landscape across the globe. The second dynamic we're seeing is really this sort of Mofun piece, which is, you know, managed optical fiber networks built explicitly for hyperscalers and for cloud players in various countries. So we're seeing both of those dynamics come into play. We think it's multi-year and very durable because, you know, as omnipotent as some of the hyperscalers are, it's tough for them to be everywhere across the globe and also the last mile in various countries, and there's regulatory issues around that as well. So, you know, that ecosystem of partnership and opportunity for service providers, I think they are leaning into and we are the beneficiary of that. I mean, when you step back from all of this, it's really about the network. And generally speaking, in the context of AI and what needs to happen, it's actually underinvested in for the last few years. And so, you know, across the service provider landscape, you're seeing that cascade through as well.

Mark Graff, CFO

Yeah, maybe just to add on to that, Adrian, you know, if you mentioned the MoFIN piece, I would say across all of our service providers, that 28% growth is a pretty fair representation on average of what that group is doing, both, you know, the wholesale guys who are very exposed to MoFIN and, you know, those that aren't necessarily. um and then on your question about the 10 customer it's just math right um those surface uh hyperscale the others that aren't thank you thank you your next question comes from the line of

Operator

tim long with barclays your line is open thank you please go ahead thank you yeah uh one question

Tim Long, Analyst — Barclays

and then a follow-up um maybe on the question mark you want to handle this one uh backlog orders continue to be really strong sounds like they're gonna be strong for the rest of the year maybe just talk a little bit about how you see you know that backlog you know playing out over the next few years in the context of you know we saw this post COVID and it wasn't necessarily the most smooth you know down taken backlog and recognition of revenues for a lot of the companies in the industry so maybe if you can just touch on that and then second this definitely to mark if you could touch on multi rail thanks for all the commentary there um i think this is something in the past you've talked about being one of the really key areas for value exchange so now that you're getting this to the contract level um can you talk a little bit about the profitability gross margin profile it sounds like this is adding a lot of value uh for the customers uh so it might be one of the products that you know could have a bigger step function up in profitability for Sienna. Thank you.

Mark Graff, CFO

Yeah, hey Tim, thanks for the questions. You know, first on backlog, you know, I think I would first say it's a pretty different dynamic than we've seen, you know, after the COVID hangover. You know, what we're seeing right now is a couple of things. One is because of the service engagements that we have and the co-collaboration that we have with each of these hyperscalers, we've got really good insight into what's going in the ground. And these things are going into the ground. They're not going into warehouses during the... First and foremost, we know it's being deployed. I think the second thing I would tell you is, if we could deliver that backlog in 2026, they would take it, right? And so we sometimes get questions of, oh, hey, is this forward ordering? I actually think it's the exact opposite. right? It's actually pushing out. And if they could get that product in 2026 this year, they would. And they'd turn that into revenue. In fact, we get quite a bit of feedback from our customers, as you can imagine, that if we could deliver more networking capability, they'd be able to increase their revenue. So I think the dynamic is very different. And just to kind of dimension in that 7.7, about 6.4 of that is hardware roughly, and we would expect about 80% of that to be delivered in the next 12 months, right? So just kind of thinking through, you know, our confidence.

Speaker 13

Tim, just like looking in the rearview mirror and the lessons from the COVID experience, you know, the signs that we were seeing during COVID of inventory buildup in our customers' warehouses, pushing out their desired delivery dates or order cancellations. we are seeing absolutely none of that right now. That's quite the opposite.

Mark Graff, CFO

Your second question, Tim, around multi-rail. Yeah, a couple of things. If you start with RLS, the single rail products, over the last couple of years we've made amazing strides in improving the margin accretion. As we go into hyper rail, it is a step function elevation. We've kind of got two things that are

Tim Long, Analyst — Barclays

Thank you very much.

Operator

Your next question comes from the line of Carl Ackerman with BNP Parrot Boss. Your line is open. Please go ahead.

Carl Ackerman, Analyst — BNP Paribas

Yes, thank you for suing me in. Two questions, if I may. First, to follow up on the multi-rail. As cloud providers transition to multi-rail, does that continue to tilt the TAM towards two-thirds line systems versus pluggables where you have a more entrenched position? And then second, is there a way to size the linear drive opportunity for you with NUBIS as demand for active copper cables expands? Thank you.

Mark Graff, CFO

Yeah, let me take the first one, Carl. As you think about multi-rail, and again, I'll do the comparison with the single-rail RLS. If you think about a single rail RLS in a scale across environment, that's about extend that kilometers to be 4 to 5x. I think we are going to see this on the redrive. I do think that there's some competitive advantages that being in the active copper cable gives us over AEC. We've talked about that in terms of 4x the distance or getting up to 4 meters and being about 90% of the power consumption. You know in terms of sizing that you know for 2026 it's not going to be meaningful as we get into 27 and into 28 you'll start to see that that product ramp. We're not getting into exactly how big we think that is right now but we expect that to be a creative. I just a

Speaker 13

reminder on on the nitro piece to that um it's really uh the analogy is it's it's a silicon model it's a chip model so you know the revenue uh is interesting but what's more interesting

Gregg Lampf, Head of Investor Relations

actually is the margin levels on that in terms of the business model that we will end yep you bet thank you all we appreciate you all joining us this morning forward to catching up over the coming days and weeks. Thank you all and we'll see you soon. And this concludes

Operator

our conference. Thank you for attending. You may now disconnect.