Ciena continued a strong growth streak in the latest quarter. Revenues are up by nearly 40% on the back of continued network investment sparked by the AI boom, stemming from hyperscalers – where half of the company’s business now comes from – as well as neoscalers and service providers.
But the position isn’t without its problems. Chief among them is keeping up with demand. “Our orders grew by 50% from 2024 to 2025, and another 50% from 2025 to 2026, [but] supply isn’t coming online at that rate, and we do see orders continuing to flow through,” Ciena’s Chief Strategy Officer David Rothenstein told Light Reading in an interview.
Because of supply constraints, Ciena’s backlog continues to grow and will likely reach $10 billion by the end of the year, CEO Gary Smith said on Thursday’s earnings call.
For Ciena, the most constrained supply areas fall into three categories, Rothenstein said. The first is “a set of specialized optical components, and more specifically, pump lasers. Pump lasers go into gain blocks, which then go into optical amplifiers, which are part of the line system architecture.
“The second category are things like ceramic packaging, that provide a degree of electrical conductivity on the PCB [printed circuit board], and the third, and this is this is across industries, is memory,” Rothenstein said.
While this may sound like a pleasant situation to be in, he points out it may become problematic. “At some point, a super high backlog becomes more of a scarlet letter than a badge of honor, because the higher the backlog goes, it means we’re not servicing all of that demand.”
Ciena is working to overcome the situation. During the earnings call, it announced supply deals had been signed with key partners through 2029. “That incremental capacity serves to underwrite our confidence in our ability to service that ongoing acceleration of demand-not just today, not just in 2027, but really for the next three years,” Rothenstein noted.
Yet, this seems to be only the first step and it will take time for supply to meet demand. As things stand, he only expects this to happen in the second half of 2028, at which point it will take some time for the backlog to normalize.
Hyperscalers and neoscalers
The continued growth comes among strong demand from hyperscalers, service providers and “neoscalers.” More specifically, about half of Ciena’s business now comes directly from hyperscalers, Smith said on the call.
Neoscalers, or neocloud players, meanwhile represent a diverse group of companies. They seem to encompass anyone from Oracle to SpaceX, CoreWeave or Anthropic, all companies with different business models, Rothenstein noted. But all of them are looking to build their own network infrastructure over time, he noted, presenting optical fiber networking, dark fiber or wavelength opportunities, among others.
However, their buildout is in very early stages, with Smith noting during the call that Ciena expects neoscalers’ spend to ramp up in the next two years.
Shares slide despite strong performance
In the meantime, Ciena seems to have plenty of other demand to satisfy, and continued to boost its earnings. Revenue reached $1.67 billion the third quarter, up 37% from $1.22 billion. Earnings before interest, taxes, depreciation and amortization (EBITDA) rose 220% to $349 million from last year’s $109.2 million.
If the numbers alone seem overwhelmingly positive, the stock market seems unconvinced. Ciena’s share price was down 10% yesterday, and has dropped nearly by half to $317 from June’s high of $627.
While noting the company doesn’t reflect this in its decision making, Rothenstein attributes the fall to an overcorrection by the market: “I do think the market significantly bid up telecommunications for about six months in the first half of the year to very aggressive valuations. I think it is overcorrecting now on the other way, and I do hope just like with supply and demand, at some point the market will stabilise and normalise in this regard.”
Overall, he described the fall in valuation as “a pretty significant market overreaction” which isn’t limited to Ciena.
A research note by B Riley Securities analyst David Kang seems to echo his sentiment to some extent, saying the drop reflects a “shifting sentiment in AI networking trades.” It said another contributing factor may have been Ciena’s data center out-of-band management (DCOM) program with Meta, as routing and switching revenue dropped 6% compared to the previous quarter, “which management attributed to typical lumpiness.”
Speaking of negative sentiments toward AI, Ciena seems relatively unbothered by growing resentments against data centers in some corners of the political landscape and society, as well as concerns around energy and space constraints.
Recalling a conversation with a hyperscaler customer, Smith said: “One of the comments that was made to me was […] if they stopped building data centers tomorrow, Gary, you probably wouldn’t notice for two years, meaning they’ve already got these data centers out there, and they need connectivity, and they’re not going to strand the assets.”
Moreover, a data center approved today will take around three years to build, Rothenstein argued. At the same time, he believes there will be a “normalization of perspectives about data centers.”
Pointing to a recent article in The Wall Street Journal, Rothenstein argued that data centers aren’t the primary cause of rising electricity prices, and tend to lower property taxes. Moreover, he noted they have other positive impacts.
“Fundamental impacts to things like telehealth or financial services, or any number of other societal things that we take for granted are actually driven by the consumption and the training of data to then inference them out and deploy them for real-world applications,” he said.
