Earnings Call Transcript
CIENA CORP (CIEN)
Earnings Call Transcript - CIEN Q1 2024
Operator, Operator
Good day and welcome to Ciena's Fiscal First Quarter 2024 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.
Gregg Lampf, Vice President of Investor Relations
Thank you, Dave. Good morning and welcome to Ciena's 2023 fiscal first quarter conference call. On the call today is Gary Smith, President and CEO; and Jim Moylan, CFO. Scott McFeely, Executive Advisor 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 from the quarter. Our comments today speak to our recent performance, our view on current market dynamics and drivers of our business as well as a discussion of our financial outlook. Today's discussion includes certain adjusted or non-GAAP measures of Ciena's results of operations. A reconciliation of these non-GAAP measures to our GAAP results is included in today's press release. Before turning the call over to Gary, I'll remind you that during this call we 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 important part of such forward-looking statements and we encourage you to consider them. Our forward-looking statements should also be viewed in the context of the risk factors detailed in our most recent 10-K and our 10-Q which will be filed with the SEC today. 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. As a reminder we will be hosting investor group meetings with the sell side at OFC later this month. We look forward to seeing many of you in San Diego. With that, I'll turn it over to Gary.
Gary B. Smith, President and CEO
Thanks, Greg, and good morning, everyone. As you've seen from the press release today, we reported strong fiscal first quarter results, including revenue of $1.04 billion and adjusted gross margin of 45.7%. Our Q1 performance also included very strong profitability metrics, with quarterly adjusted operating margin of 13.2% and adjusted EPS of $0.66. Additionally, we generated $250 million in free cash flow within the quarter. The drivers of bandwidth demand remain strong, and we believe very durable, and network traffic is increasing as a result. We remain incredibly focused on growing our business and capturing additional market share. Specifically, we are taking advantage of bandwidth growth and cloud adoption trends to extend our leadership in optical and to expand our addressable market, particularly in metro routing and broadband access. Fundamental to these growth ambitions is the expansion of our relationship with cloud providers as they rapidly grow their global networks. Reflecting these expanded relationships, in Q1 non-Telco revenue accounted for over 54% of our total revenues. And of that, direct cloud provider revenue was $346 million in the quarter, up 38% year-over-year, and both of our 10% customers in the quarter were, in fact, cloud providers. Orders from cloud providers were also up year-over-year in Q1, and we continue to secure new deals with all of the major players in this segment. In Q1, for example, we had a significant design win for our 400G ZR Plus pluggables with a very large cloud provider, which we plan to begin shipping and taking revenue on later this year. We were also recently selected by a major cloud provider as their primary vendor for its future global architecture based on our RLS platform. So it is very clear that we've been broadening our engagement with cloud providers, including discussion around how we can leverage our leading innovation as AI becomes a growing driver of traffic and a great opportunity for us. In fact, with more than 50% market share in data center interconnect, we are incredibly well positioned to benefit as more data centers are built, and when AI traffic flows begin to come out of those data centers. We are also developing solutions for inside the data center, a whole new market for us, based on our next generation pluggables family as existing technologies are unlikely to satisfy the rapidly increasing requirements for this critical application space. This momentum really exemplifies the strong confidence we have in our position with cloud providers and our belief that we will have a very strong 2024 with them as we continue to expand these important long-term relationships. However, at the same time, the normalization of order volumes from our service provider segment is not materializing as we expected. We were very clear in our commentary last quarter that our fiscal 2024 financial performance would be largely determined by the timing and magnitude of order flow from our service provider customers, particularly those in North America. More specifically, we expected to see orders from these customers begin to increase significantly in Q2, but as we sit here today, it is taking longer than we and many in the industry anticipated for these customers to absorb their high levels of inventory. This is in part due to difficulties installing and deploying equipment, including site readiness and access to fiber, which is limiting their placement of new orders and the absorption of existing inventories. In addition, in other parts of the world, we are seeing some caution driven largely by macroeconomic concerns that are contributing to lower than expected order volumes from service providers in certain international geographies, particularly Europe. Our current view based on our discussions with customers is that we now expect a recovery in order patterns from service providers to occur more gradually over the next few quarters. And Jim will speak shortly about how we expect this to impact our business outlook, but I want to emphasize that we and our customers view these dynamics as temporary. And to be clear, we are confident in the durability of the underlying demand drivers in the industry and our ability to continue to take share and grow over the mid to longer term. In fact, there are several key highlights from our Q1 performance that really illustrate the strength of these fundamental demand drivers. In Optical, we continue to take share and remain the undisputed leader across virtually every domain, including Metro, DWM, DCI, Submarine, and Long Haul. During Q1, we added 11 new customers for WaveLogic 5 Extreme, bringing our total customer count to 270. And to date, we've shipped more than 115,000 WaveLogic 5E modems. Waveserver had a record quarter in Q1 with more than $250 million in revenue, reflecting 34% growth year-over-year. Quarterly revenue doubled year-over-year for our reconfigurable line system or RLS platform with eight new customers in the quarter, bringing the total to nearly 70. And for our WaveLogic 5 Nano, 400 ZR, and ZR Plus pluggables, we gained 19 new customers in the quarter and now have a total of 86 customers. Looking ahead in Optical, we're already taking orders for WaveLogic 6 Extreme, the industry's first and only 1.6 terabit solution, which will become generally available this summer. In fact, we've already announced two of these wins, Southern Cross and Vocus. Further, WaveLogic 6 Nano, our next generation pluggables family will feature products such as 800G ZR in the latter half of calendar 2024. In Routing and Switching, where we've been making both organic and inorganic investments, we continue to execute our strategy to expand our total addressable market into faster growing markets. In Q1, we had double-digit revenue growth year-over-year for the combination of our 3000 and 5000 series platforms. Our 8100 continues to gain traction as we scale our Metro and Coherent routing capabilities. And we now have more than 50 customers around the globe for this platform. We continue to build momentum with this portfolio, including our WaveRouter platform, of which we are building additional form factors to address a wider range of applications over time. Other portfolio highlights for Q1 include, notably another very good quarter for platform software and services with 22% revenue growth year-over-year and 9% sequentially. We also saw 13% revenue growth year-over-year in our global services business, primarily driven by another strong quarter for installation and deployment, which really illustrates our role and visibility in helping our service provider customers work through some of their near-term absorption challenges. In summary, we delivered a strong performance in our fiscal first quarter. Our technology leadership position has never been better, and we will continue to improve. Our customer engagements remain focused on helping them meet the growing demand for bandwidth, digitally transform their operations, and monetize their networks faster. We remain very confident in the opportunities ahead and in the execution of our long-term strategy. With that, I'll turn it over to Jim, who will provide details on the quarter's results as well as our business outlook, particularly in the context of the current service provider order dynamics.
James E. Moylan, Jr., CFO
Thanks, Gary. Good morning, everyone. As Gary stated, we delivered very strong fiscal first quarter financial results. Total revenue in Q1 was $1.04 billion, adjusted gross margin was 45.7%, reflecting a favorable product mix. Q1 adjusted operating expense was $337 million, a bit lower due to delays in certain internal projects and lower sales incentive compensation. With respect to profitability measures, in Q1 we delivered strong results, including adjusted operating margin of 13.2%, adjusted net income of $97 million, and adjusted EPS of $0.66. In addition, we generated $266 million in cash from operations. Adjusted EBITDA in Q1 was $160 million. Finally, we ended the quarter with approximately $1.5 billion in cash and investments. Inventory levels came down $66 million from Q4, and we repurchased approximately 690,000 shares for $32 million during the quarter. We are continuing to target the repurchase of $250 million total during the year. As we turn to guidance, I want to reinforce a few points. Most importantly, the fundamental demand drivers of our business, including growth in bandwidth demand, remain very strong. Bandwidth demand has grown at 25% to 30% per year for decades and, with AI applications imminent, shows no signs of slowing. We continue to grow our business and gain share with cloud providers in connection with their network expansion and data center infrastructure build-outs. Our deep relationships and engagements with service provider customers continue to position us well in opportunities across both optical and routing and switching domains. However, we remain in a period of uncertainty which has come about as a result of the whiplash effects on industry supply chains caused by shortages of key components, elongated lead times, huge orders by customers in response, and inventory builds of networking gear by our customers. They are working down this inventory and things are getting better. However, it is taking longer than we and many in the industry anticipated for Tier One service providers in North America to work through these high levels of inventory. Additionally, we are seeing increased caution from certain European service providers related to macro concerns. All of this is largely consistent with what our customers, competitors, and suppliers have been reporting in recent weeks and months. We continue to believe that these dynamics are temporary and currently expect to see orders improvement over the next few quarters. Taking all of these factors into consideration, we are adjusting certain elements of our annual guidance for fiscal 2024. We now expect revenue for fiscal 2024 to be in a range of $4.0 billion to $4.3 billion, down from our previous expectations of 1% to 4% growth over fiscal 2023. With respect to adjusted growth margins in fiscal 2024, we continue to expect it to be in the mid-40s range with some variability by quarter. For adjusted operating expense, we intend to continue investing strategically, both to advance our leadership position in our key markets and to expand our addressable market in key growth areas. However, taking into account our current revenue outlook for the year, we are now planning for operating expense to average $340 million to $345 million per quarter in fiscal year 2024, down from our previous guidance of $355 million per quarter. With respect to Q2, we expect to deliver revenue in a range of $850 million to $930 million, adjusted gross margin in the low 40 percentage range, given expected product mix and lower volumes in the quarter, and adjusted operating expense of approximately $340 million to $345 million. Finally, we are updating our three-year financial targets. As a reminder, given the severity and duration of the rebalancing of supply and consumption, our fiscal 2023 was a year of outsized revenue growth, over 20%, and well above our historical growth rate of 6% to 8%. Our outlook today is that, for these same reasons, our fiscal 2024 revenue growth rate will be substantially lower than the historical rate. Given this revised view, using our updated fiscal year revenue outlook of $4 billion to $4.3 billion as a baseline year, we believe that 6% to 8% CAGR best represents our long-term growth rate. In summary, the industry is experiencing some near-term headwinds as our customers recover from the supply chain challenges that they've seen in recent years, but demand continues to grow at least at the historical 25% to 30% annual rate. The underlying demand drivers, which now include AI, ensure that this growth will continue well into the future. Our leading technology and focus on growing our portfolio to address new markets, as well as our deep relationships with both service providers and cloud providers, position us extremely well to address the evolving network priorities of our customers. We expect to continue growing our market share and to deliver profitable growth over the long-term.
Operator, Operator
The first question comes from Samik Chatterjee with J.P. Morgan. Please go ahead.
Samik Chatterjee, Analyst
Thank you. Thanks for taking my questions. Maybe for the first one, if I can just ask for a bit more color on the order patterns you're seeing both on the telco and the web scale side. I mean, any color on the sequential order trends there because from the commentary of the Q2 guide at least, it does appear like telco orders probably were a lot worse than you were expecting, but any more color there in terms of the magnitude of the sequential order trends between those two verticals that you're seeing? And I have a follow-up. Thank you.
James E. Moylan, Jr., CFO
Yeah, just Samik, let me try to describe the dynamics here. We've just gone through Q1, which is historically a relatively low orders quarter for us, but they came in about where we expected and are slowly improving. But the premise for our guide for this year was our view based on everything we had heard at the time that Tier 1 service providers would be working through their inventory at a faster rate and would begin to normalize their ordering patterns by Q2. That was our premise for our plan and for our guide. What's happening is that it is taking them longer to work through their inventories. There are all sorts of issues too with respect to fiber, with respect to site readiness, with respect to labor, and all of this is causing them to take longer to work through the inventory that they have accumulated over the last year and a half. Let me make it clear though that they are working down their inventory and things are getting better. We do expect higher orders in Q2, but we do not think now that they're going to be at the level that would enable us to reach our Q2 guide and our full-year guide.
Gary B. Smith, President and CEO
Samik, to your point on the cloud, that sort of contrasts with the cloud, which you saw the numbers in Q1, we were up 38% year-over-year. We expect to see that continue to be strong throughout and good order flows throughout the year. Obviously, we've grown tremendously there; I think it's 50-odd percent growth last year. We're not going to see that kind of growth, but we're going to have a very solid year in the web scale.
Samik Chatterjee, Analyst
Okay, got it. For my follow-up, can I clarify something, Jim? You mentioned the long-term growth guidance from the previous quarter, which was for fiscal 2024 to 2026 at 6 to 8. It seemed like you were reiterating that guidance, but I didn't quite understand what you meant with the updated long-term guide you provided.
James E. Moylan, Jr., CFO
Yeah, if you think about what we said at the beginning of the year, we said 6 to 8 over three years, and that was starting off with a lower growth rate in 2024, which implied perhaps a slightly higher growth rate in the later years. We're now saying that you should, if you're doing a three-year forecast for us, you should take fiscal 2024 as your base and assume a growth rate of 6% to 8%. Now, that sounds like a guide; we're not trying to guide for 25 right now, it could well be better than that, we hope it will be, but we think for modeling purposes, it's as good a guess as any.
Operator, Operator
The next question comes from Amit Daryanani with Evercore. Please go ahead.
Amit Daryanani, Analyst
Good morning, thanks for taking my questions as well. You know, maybe to start with, the updated guide at this point sort of implies that you have a very steep ramp in the back half of the year for Q3 and Q4, I think almost implying like mid-teen sequential growth for the back half. Can you just talk about what gives you the confidence that you can get that kind of growth given the down-tick you just offered to your telco customers? And then maybe an extension of this, if the orders from these telco customers don't materialize the way you expect, is the risk more that you're at the low end of the guide or how do I think of that dynamic as well?
Gary B. Smith, President and CEO
Yeah, hi Amit. Yes, it's clearly a step function into the second half that we actually thought we'd start in Q2. We are seeing the orders as Jim said, you know, this is not a sort of binary event. We are seeing progress in the absorption, inventory going down, and we are seeing a gradual increase in the service provider orders. That sort of gives us confidence and obviously, we have deep partnerships with these guys and we're installing some of the equipment as well. So we particularly in North America where we have insight into it. I think the other dynamic that we're in a better position now is people have released their budgets and their budgets really haven't changed. As I think most people have seen, CAPEX has not changed at all amongst most of the major carriers for this year and their intent is absolutely there. But what we've got greater insight into now is the planning and timing of those installations. As we've turned the year, the budgets have been released. We're now sitting in early March. We do have a better visibility into it than we did and it's not as much of a step function, if you will, Amit, as we'd anticipated before. And that's where we've best reflected the change in the guide.
Amit Daryanani, Analyst
Got it. That's really helpful. And then if I could just follow up, cloud continues to perform extremely well for you folks. I am wondering if there is an element of some of the AI demand that's trying to come into your numbers right now or do you think the AI opportunity is still much more of a future narrative, but it's not impacting your numbers right now, let's just understand what drives the cloud trend and if you have time to see some AI benefit already?
Gary B. Smith, President and CEO
I would say we're not really seeing a significant impact from AI traffic with the various offerings like Gemini and GPT. That is generating some interest, but not enough to create a noticeable change. Our understanding is that the monetization of the broader dimensions of AI is still to come. Companies are investing heavily in computing and figuring out how to monetize those investments, which will eventually benefit the network. So, what we're experiencing is essentially steady cloud growth, and I believe that acceleration is evident. The SaaS companies are thriving, which is another indication of this trend. We observed strong network deployments last year, and that was primarily about cloud. However, I don't think we're seeing the anticipated AI impact reflected in the current numbers yet.
Amit Daryanani, Analyst
Great, thank you.
Gary B. Smith, President and CEO
Thanks, Amit.
Operator, Operator
The next question comes from Tal Liani with Bank of America. Please go ahead.
Tal Liani, Analyst
Yes, hi guys. How do we know that what we're seeing here in service providers is not structural, that it's in your comments you're talking about cyclical downturn that will recover absorption of inventory, when you talk to the carriers, they talk about a permanent decline in spending, their desire to spend less, are there any parts of their spending that could be more structurally down that could be replaced by something else or do you have really confidence that this is just cyclical?
James E. Moylan, Jr., CFO
Yeah, Tal, it's a good question and obviously one that we're super focused on. I would separate it out. I would say in North America, I do not believe there's a structural sort of issue to it. It's really about absorption, their CAPEX, what they want. Their intent is actually to spend more and absorb more, and I think with all the major service providers that is their intent. They want to catch up with their network builds. I do think that there is a reticence around 5G. Obviously, it's not been the monetization event for many carriers around the world that was anticipated, and I do think there's a curtailing of that spending, which my own personal belief, I think is structural. I do not think that will have a major impact on the transmission and infrastructure build. I mean, they're very focused on access and the build out there in North America. So I think, in total to it, I do not think there's a structural issue, notwithstanding my comments about 5G. Europe, I would think a little bit differently on. I think they have some inherent structural challenges there. You have 180 carriers in Europe. You have some tiny jurisdictions with multiple carriers, and that makes no economic sense. I do think that, A) you're seeing a bit of a downturn in the economy in certain key countries like Germany, which is hugely influential in Europe. I think they are more receptive to those kinds of challenges than the North American model, where the economy continues to do well. So I think there are, Tal, some structural issues associated with the European piece. And that's not new news. But they are more sensitive to the economic challenges.
Gary B. Smith, President and CEO
And India, we think, is still going up to the right. They're going to continue to build out their networks. We had a big year with India last year. We're going to be sort of flattish with them this year. But India is going to be a great place for us for a long time.
Tal Liani, Analyst
And we're not seeing any of that in Asia Pacific either, that sort of uncertainty?
James E. Moylan, Jr., CFO
Yeah, the one thing I would say, Tal, is the driver for our business is demand for bandwidth. And that has grown and continues to grow at very rapid rates. Now, the people who are building networks to manage that demand; really, the structure has somewhat changed towards the cloud providers. If you go back 10 years ago, they weren't buying any network gear. They're buying a significant part of it today. It's very possible that that could expand over time. If there is any shift, that would be the shift from service providers to cloud providers.
Tal Liani, Analyst
Certainly in the long haul.
James E. Moylan, Jr., CFO
Yes.
Operator, Operator
Your next question comes from Simon Leopold with Raymond James. Please go ahead.
Unidentified Analyst, Analyst
Yeah, hi, thanks guys. This is Jeff Cojian for Simon. So I was just hoping you can maybe hash out the strength in Europe this quarter, maybe how that reconciles with your comments on the weeks maybe the weakening macro outlook there? And as well as like Huawei swaps or displacement opportunities; it sounds like it's going really well in India? Thank you.
James E. Moylan, Jr., CFO
Yes, I'll deal with the first part. Our regional report reflects the region into which we deliver equipment. It doesn't necessarily reflect the type of customer. So the big jump in deliveries into Europe were driven by cloud providers, not the service providers in Europe. The Huawei thing, there's still an opportunity ahead for us. Now the whole supply chain and COVID situation was actually a benefit to Huawei because they had gear. And service providers really wanted to stick with the status quo. They didn't necessarily want to build out stuff. And so for a combination of those two reasons, Huawei did pretty well over the last two years. The desire of Western economies to reduce their dependence upon China in general, and Huawei in particular, has not abated. We think that once we get through all of this dynamic of supply chain and everything else that happened over the last few years, their desires will advance themselves in substitution of Huawei. We're seeing it in some places already, in the Nordics, particularly in some places in Southern Europe. But we think it's going to continue.
Unidentified Analyst, Analyst
Great, thank you. For my follow-up, there's been a lot of discussion about the intra data center opportunity for Coherent technology. Can you help us understand how it could be cost-effective or when it might be, and share your thoughts on the timing and size of that opportunity? Thank you.
James E. Moylan, Jr., CFO
A way to think about it is that as the flow rates between GPUs increase and distances expand due to constraints like power, many of the techniques used in the WAN segment that propelled Coherent to prominence will be applicable within the data center. As market leaders in Coherent, we will have opportunities to leverage our technology in this related market. I believe the next generation, which is likely around 2025 and beyond, will present these opportunities. The consumption models will differ significantly from the WAN system business. However, the core technologies are essentially the same ones we have been developing in the Coherent field over several generations.
Unidentified Analyst, Analyst
Great, yes. I think Coherent has put out a forecast for Datacom Transceivers could be like $15 billion by 2028. Is there a percentage that you would put that could be Coherent?
James E. Moylan, Jr., CFO
Yes. At this point, I believe it's a bit early to determine how that breaks down. If you consider the current generation of technology, there's an effort to extend its lifespan for as long as possible. Regarding the new technology we're discussing, we are attempting to identify where that transition occurs, but I think it's still somewhat uncertain.
Gary B. Smith, President and CEO
Just to be clear, we do have a development track to develop those kinds of products in our R&D roadmap. And we are talking with major data center providers. So we're going to stay right on top of it. And when and if the shift occurs, we're going to be a part of it, we hope.
Unidentified Analyst, Analyst
That’s all, thanks, guys.
Operator, Operator
The next question comes from Meta Marshall with Morgan Stanley. Please go ahead.
Meta Marshall, Analyst
Great, thanks for taking the question. Wanted to dig into Europe a little bit. I know in the past, maybe some of that European Telco spend was actually kind of indirect cloud spend, as they kind of helped with data center builds for some of those customers. And so I just wanted to get a sense of kind of, if any of the weakness you're seeing is kind of on the indirect part, and if any of that's just due to kind of power constraints that we're hearing about and kind of building out data centers or just any commentary there on kind of the indirect portion? And then maybe just as a follow-up question. Just as Jim, on how much you plan to kind of work down inventory levels across the year would be helpful? Thanks.
James E. Moylan, Jr., CFO
Hi Meta, there has been a shift over a few years where particularly the cloud providers used wholesale type capacity in Europe. Increasingly, in the last couple of years, they've been going direct and taking dark fiber. I think that has impacted some of the service providers, particularly the wholesalers. And obviously, they come direct to us as opposed to through the carrier. So I think you have seen that dynamic, particularly in Europe. That's not the case in most other international jurisdictions where you've got regulatory issues and the rest of it. So it's much more of a hybrid in other countries such as India. But I do think that has impacted somewhat some of the wholesale capacity in Europe is now direct into the hyperscalers.
Gary B. Smith, President and CEO
On the inventory question, Meta, we said that we were going to improve and reduce our inventory level this year, and we will. As you saw, we reduced our inventory by $66 million in Q1. And we've slowed the rate of material into our system to match our demand forecast, so we are confident we're going to take our inventory down this year. Because Q2 is going to be a bit lower than we expect and the rest of the year, a bit lower as well, we're probably not going to get down as low on inventory as we said we would. I think we said we were going to get it down by $300 million or something like that. And I think we'll get it down by a couple of hundred million, I would think. But on the other hand, it might grow in Q2 because the situation is a little bit late-breaking for us, and we can't react to it quickly enough. But we will drive inventory down for the year by at least a couple of hundred million.
Meta Marshall, Analyst
Great, thank you.
Operator, Operator
The next question comes from George Notter with Jefferies. Please go ahead.
George Notter, Analyst
Hi guys, thanks very much. I guess I'm curious about where your product lead times are right now. I'm wondering if product lead times are quite short, and that's leading to some of the excess inventory taking longer to bleed off. Can you just talk a little bit about that dynamic, lead times versus buffer stocks at customers?
James E. Moylan, Jr., CFO
Hi George, we have a very diverse product portfolio, so lead times can differ. However, we’ve communicated a standard 12-week lead time to our customers. In practice, we have been performing much better than that in terms of lead times during Q1. We are getting closer to our pre-pandemic lead times, though we're not quite there yet. This improvement is likely influencing our customers' ordering behavior; if they don’t need to wait for 52 weeks, they won’t place orders with that long lead time.
George Notter, Analyst
Got it. I'm sorry, what were the normal lead times before the pandemic?
James E. Moylan, Jr., CFO
In the portfolio for us, it was mid-single digits for weeks.
Gary B. Smith, President and CEO
Depending on the product line.
George Notter, Analyst
Got it. Okay. Do you think the issue with customer inventories mostly pertains to North America? Is it widespread across the region or limited to just a few customers?
Gary B. Smith, President and CEO
I would say it is North America. It's one or two examples internationally, but they're not super meaningful to this conversation. I think it's mainly North America, and it's mainly the Tier 1s, but it is sort of shared challenge across most of the larger carriers in North America, who have obviously tried to get out ahead of the whole supply chain piece. But now you've got this dynamic where we and other vendors are turning up with enormous amounts of equipment. I mean, I think we shipped 24% more equipment last year than we did the prior year. And you think about all those trucks turning up at the same time with a bunch of other vendors to put the system together, and that's causing the challenges around their capacity and all the various facets of people, storage, logistics, fiber availability, etc. to back up. And it's just taken longer than we all including them would like or anticipate. And to your earlier point, until we kind of move down through that path and particularly with reduced lead times, it's super logical as to why we see the orders being what they are. They are improving, and we are seeing the deployment. I want to stress that. This is not a sort of binary event. We're seeing improvements in absorption. The inventories are coming down. We're seeing an increase in orders in service providers. It's just not the step function I think we collectively anticipated.
George Notter, Analyst
And to be clear, in this context, we're referring not just to telecom service providers, but MSO service...
Gary B. Smith, President and CEO
Yes, I'd include cable in there, too.
James E. Moylan, Jr., CFO
Yes.
Operator, Operator
Next question comes from Michael Genovese with Rosenblatt Securities. Please go ahead.
Michael Genovese, Analyst
Oh great, thanks. I wanted to follow up on the last question because I understand mostly what you're talking about with these North American service provider challenges, but the comment on fiber availability, could you flush that out a little bit more, I'm kind of struggling to come up to speed with what that means?
James E. Moylan, Jr., CFO
Michael, you likely understand that the major activities, such as large builds and equipment consumption, occur when new routes are being established or new fibers are being installed. The process of acquiring those fibers, despite the intentions of North American customers to expand, involves construction steps that require time. This situation is further complicated by the current labor market in North America. Accessing the fiber has been challenging, and the timing has extended beyond our expectations. The process of characterizing the fiber and finally completing the construction is taking longer than we had predicted, given the volume they aim to achieve. They are working through these issues. Our ability to assist our customers is reflected in our installation services, which have significantly increased compared to previous periods. Progress is being made, but it is not happening as quickly as we had anticipated at the start of the year.
Michael Genovese, Analyst
Okay, great. And then I guess my next question, just the competitive environment for DCI, I mean it seems like you've maintained a very high level of market share in DCI. As ZR has become more important, are you finding a different set of competitors in the market or how has the competitive environment changed recently in DCI, if at all?
James E. Moylan, Jr., CFO
I see it from two different perspectives. The ZR impact has not affected our business at all. In fact, we achieved record results for Waveserver in Q1 2024, primarily driven by DCI. So, it's evident that there's no negative impact on our business despite some concerns related to the web scale, which grew by 57% year-on-year in 2023. A significant portion of that growth comes from various forms of data center interconnect, so the situation is not detrimental. Furthermore, if you analyze the market size, it's clear that we gained market share with GCNs last year. Regarding competition from the pluggable side, there are indeed different consumption models emerging. However, only a limited number of companies are investing in the core technologies required for these ZR plugs. Various ecosystems are attempting to integrate these technologies, but I firmly believe that if you don't own some of the essential technologies, your future prospects are uncertain. This process will take time to unfold. As you are aware, we have ownership and control over our key technologies, allowing us to dictate our own path forward.
Gary B. Smith, President and CEO
And just to be clear, we have roughly 50% market share globally with web-scale companies. If you take out that, which Huawei does, which is just about entirely in China, then it gets to be a bit higher than that. So we're very comfortable with our share position, and we think it's going to remain at that level; probably hard for us to gain share from this point because they all want a second source. But we'll take 50% plus.
Michael Genovese, Analyst
Thanks so much.
Gary B. Smith, President and CEO
Thanks, Mike.
Operator, Operator
The next question comes from Alex Henderson with Needham. Please go ahead.
Alexander Henderson, Analyst
Great, thanks. I was hoping we could talk a little bit about the mix between product and service and the 2024 expectations. I realize that the service was up quite a bit in the January quarter, but it was actually down significantly quarter-to-quarter because the January quarter is typically a lockdown quarter for most service providers in terms of mix. You pointed out that there was a shift to transceivers, which they will install but not line systems. So I'm assuming that the line systems installation is going to increase meaningfully quarter-to-quarter. And therefore, you're looking at, what, $210 million to $220 million of service, which would imply that the product sales are down about 25% to 35%, something in that range. And how does that play out over the course of the year, as the installation continues to be churning through what's been shipped as opposed to new shipments? And then does it fall off at some point after an under shipment period, so we get out in the fourth quarter and into the first half of 2025, does this service start to roll off, can you give us some guidance on that?
James E. Moylan, Jr., CFO
Let me give a little context here, Alex. You have to think about that services business really; it's two businesses. One is maintenance and one is installation. Those are the two things. We have some other consulting-type practices and advanced type services, but those two make up the bulk of it. The maintenance expense is going to grow as our product sales grow because almost everybody takes maintenance with our products. So that's one piece. On the implementation side, it's not one size fits all. For most of the larger carriers in the U.S., we don't do a ton of installation. Now we have started to as they have tried to work through their inventory levels. But in the past, we didn't do a lot of installation for them. In places like Asia, South America, sometimes in Europe, we do a lot of installation. So our services mix is going to be, I think, more related to where our sales are. And I'd say this that we love expanding our implementation business, and we'd love to continue to help our big customers here in the U.S., and that's what we're trying to do.
Scott McFeely, Executive Advisor
Yes, that's the main point, Jim. There are some details to consider. The Installation Services aspect varies by location and by our offerings. Historically, we haven't engaged much in Installation Services for our routing and switching products. As these solutions become more advanced, our customers will increasingly expect us to handle more installations. Geographically, in some regions, we provide installation services ourselves, while in others, customers manage it on their own, and in some areas, they rely on third-party partners. The mix of revenue sources varies considerably and will likely change over time. While it's not a significant portion, our services team is also working to broaden the services we offer to our customers, which we anticipate will grow over time. We believe our service business will continue to expand at or above the overall growth rate of the company.
Alexander Henderson, Analyst
Just to be clear, though, the seasonal swing between the January and the April quarter, normally services are lower in the first quarter because of the lockdown. Are we expecting it to be up sequentially $212 million, $215 million, something like that, in which case, the majority of the quarter-to-quarter decline is in the product side?
James E. Moylan, Jr., CFO
It's always very risky to try to give individual slices of what we expect of our business. I would think this, because of the dynamics that we talked about, because we will show growth in Q2 in our overall business, it is likely that services will grow as well. So I don't have a number for you, but I think it will probably grow just like the product revenue will grow in Q2.
Operator, Operator
The next question comes from David Vogt with UBS. Please go ahead.
David Vogt, Analyst
Sorry guys, I was on mute. Thanks again for all the color. Maybe just digging back into backlog and orders. Maybe, Jim, can you help us understand where backlog exited the quarter. I think last quarter, you mentioned it was roughly around $2.6 billion. And so what we're trying to figure out is what the orders look like going forward and how to triangulate the growth rate in 2025 in terms of an order trajectory? And I have a follow-up.
James E. Moylan, Jr., CFO
Our backlog, we ended backlog in Q1 at $2.2 billion. So you can sort of calculate what our orders were in Q1. We said last quarter that we expect our backlog generally speaking to come down for the full year because we are approaching historical levels of lead times and customer ordering behaviors are probably going to track those in the past, which means that our ending year backlog is going to approach a level like the levels we had prior to all the craziness of the past three years, which traditionally has been about 35% to 40% of the coming year's revenue. That consists of about $1 billion of services and about $1 billion of products and software. That's what it's been historically. I mean, that's what makes up to $2.2 billion.
David Vogt, Analyst
Great. And so maybe if I just extrapolate that comment in 2024 into 2025, maybe I'm doing the math wrong here, but it would imply that your order growth rate in 2025 would have to be up somewhere like 35% to 40% relative to 2024. Are we doing the math right and if that's the case, what does that imply for SP orders coming back next year? I know you didn't give a full year guide yet it's early, but just trying to triangulate on how we get to those that 6% to 8% multiyear target that you just provided?
James E. Moylan, Jr., CFO
Rather than give you a number for our growth rate in orders next year, what I would say is this, a healthy business which we've had for a long, long time prior to the supply chain disruption and COVID and all that sort of stuff, we typically ran orders in a given year at some fraction above our revenue, whether it was 5%, whether it was 10%, some number like that. So we're not at those levels right now. Which means that we do have to have some catch-up, as we move through the next couple of quarters and possibly some catch up next year. But that's what we expect our order volumes to be, 1.05 times to 1.1 times of revenue for a year, for example, and it varies by quarter.
Gary B. Smith, President and CEO
And that's obviously a function of the lead time piece as well. So typically, if the world ever gets normalized, it would be slightly ahead of the revenues for the year. Now there may be some bumpiness as we get into that. I mean, for example, in 2022, I think our orders were close to $6 billion, just to give you an order of magnitude around the challenges that we're having from a backlog point of view.
David Vogt, Analyst
Got it, helpful Gary. Thanks Jim. Appreciate it.
Operator, Operator
Next question comes from Ruben Roy with Stifel. Please go ahead.
Ruben Roy, Analyst
Yes, thank you for taking my question. Gary, I had a follow-up on some of the commentary around AI and then just increasing order rates with cloud. And just trying to work through not seeing yet sort of the impacts of traffic growth outside of the data center, the traffic that you mentioned being created by the GPs, etc. and yet the order rates are up. So, am I right in assuming that the cloud DCI business is mostly for a long haul and if that's the case, can you talk to sort of how you're thinking about the sustainability of sort of those orders around that specific business, cloud DCI?
Gary B. Smith, President and CEO
Yes. I think there's a combination of long haul and metro services that may not be immediately obvious. When we refer to hyperscalers, we often group them together, but their business models vary significantly, whether in search or in cloud services like Azure. As a result, their networks are quite different, including the submarine cables and metro aspects. These networks have become very large and complex, moving beyond just simple data center connectivity. They operate with a configuration that includes 6,500 points for resilience. Regarding traffic, the current flow is primarily between data centers. The real opportunity arises when AI applications transition from the data center to the wide area network, reaching various consumers and enterprises. This requires maintaining connectivity to local instances, whether they are edge computing devices or others. We are all enthusiastic about this potential, but that transition from the data center has not yet happened, even though they are making significant investments in computing, applications, and monetization, which have not yet translated into network growth.
Scott McFeely, Executive Advisor
The other dynamic on the AI piece, having an impact on the WAN traffic is because of the massive amounts of compute and the power required to do that. Every one of the cloud providers is talking about the need to further distribute their compute platforms. And that's going to mean more data centers, more geographical distribution. And guess what, when you do that, you've got to network them together. So that's going to be more transport, more networking gear. That's going to be another dynamic as AI starts to have an influence on, I'll just say, the classic transport part of the network.
Ruben Roy, Analyst
I really appreciate the detail, everyone. That's really helpful for me. If I can ask a quick question for Jim regarding gross margins. Jim, are we still expecting to maintain the mid-40s for the full year, given the lower volumes and revenue? I might have missed this, but did you discuss the mix or how you see gross margins evolving over the next several quarters?
James E. Moylan, Jr., CFO
Yes, I think they're going to be a bit lower in Q2, and that's a mix and volume because, as we said, we're not going to have the volume that we expected in Q2. But I think we'll average in the mid-40s for the full year. We started the year at 45.7%. It was a good strong start, and we'll get back to something like that.
Ruben Roy, Analyst
Understood. Thank you.
Gregg Lampf, Vice President of Investor Relations
Great. Thank you, Ruben, and thank you, everybody, for joining us today. We appreciate your attention, and we look forward to seeing everyone at OFC. Thank you, and have a good day.
Operator, Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.