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CIENA Corp. F2Q10 (Qtr End 04/30/2010) Earnings Call Transcript

CIENA Corp. F2Q10 (Qtr End 04/30/2010) Earnings Call Transcript


F2Q10 (Qtr End 04/30/2010) Earnings Call

June 9, 2010 8:30 AM ET


Robin Weinberg – IR Consultant

Gary Smith – President and CEO

Jim Moylan – Chief Financial Officer

Tom Mock – SVP, Marketing and Communications


John Marchetti – Cowen and Company

Joe Longobardi – RBC Capital Markets

Vivek Arya – Bank of America/Merrill Lynch

Kevin Dennean – Citigroup

Paul Silverstein – Credit Suisse

Simon Leopold – Morgan Keegan

Jeff Kvaal – Barclays Capital

Michael Genovese – Soleil Securities

George Notter – Jeffries & Company

Subu Subrahmanyan – Sanders Morris

Todd Koffman – Raymond James

Blair King – Avondale Partners

Alex Henderson – Miller Tabak

Shubhu Ghosh – Thomas Weisel Partners

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Good day, everyone. And welcome to the Ciena Corporation Second Quarter 2010 Results Conference Call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Ciena’s IR Consultant, [Robin Weinberg]. Please go ahead.

Robin Weinberg

Thanks, Michelle. Good morning, and welcome everyone. I’m pleased to have with me Gary Smith, Ciena’s CEO and President; and Jim Moylan, CFO. In addition, Tom Mock, SVP, Marketing and Communications will be with us for the Q&A portion of today’s call.

This morning’s prepared remarks will be presented in two segments. Gary will review our financial performance in the second quarter, discuss our view of the market environment and give an update on our integration of Nortel’s MEN business. Jim will then detail our Q2 financial results and provide our guidance for Q3. We’ll then open the call to questions from the sell side analysts. This morning’s press release is available on National Business Wire and on Ciena’s website at

Before I turn the call over to Gary, I’ll remind you that during this call we will be making some forward-looking statements. Such statements are based on current expectations, forecasts and assumptions of the company that include risks and uncertainties that could cause actual results to differ materially from the statements discussed today.

These statements should be viewed in the context of the risk factors detailed in our 10-K filed with the SEC on March 5, 2010. We will file our second quarter 10-Q by June 10th. Ciena assumes no obligation to update the information discussed in this conference call whether as a result of new information, future events or otherwise.

Today’s discussion includes certain adjusted or non-GAAP measures of Ciena’s results of operations. A detailed reconciliation of these non-GAAP measures to our GAAP results is included in today’s results release available on or website at Lastly, as a reminder, this call is being recorded and will be available for replay from the Investor portion of our website. Gary?

Gary Smith

Thanks, Robin, and good morning, everyone. Before I begin, I’d like to emphasize that our Q2 results should be viewed obviously in the context of our having closed a transformative acquisition during the quarter. Please bear in mind as we provide you information today and understand that many elements of today’s report are not indicative of Ciena’s ongoing business. This quarter’s performance reflects only partial results from the MEN business, as well as a number of accounting considerations relating to the closing of the transaction during the quarter.

As such, comparison to previous reporting periods and future extrapolations may not be representative and should be made with due caution. As we committed from the beginning, we’ll be transparent and provide as much information as practical to bridge the performance of Ciena standalone to the combined company.

With that said, today we reported fiscal second quarter revenues of $253.5 million. This includes approximately six weeks of revenue or $53.5 million from the acquired MEN business. Revenue from Ciena’s pre-acquisition portfolio was $200 million, representing a 14% sequential improvement.

At 49%, our Q2 adjusted gross margin was higher than our near-term forecast range and largely reflects a number of favorable items in the quarter, which we’ll discuss later. And our non-GAAP operating expense was $131 million, reflecting additional expenses associated with the MEN business.

Now I’ll speak to our current view of macroeconomic and industry environments and provide an update on our progress in integrating the MEN assets.

As I discussed last quarter, we think about the progress of our business in three fundamental ways. Firstly we examined demand in the global market and where we see it improving. We assess how the fundamental demand drivers of our business are performing and based on that we determined where to make investments in our portfolio.

As per demand trends in the market we’re encouraged by recent signs of recovery, however some customers continue to remain cautious. We think this is consistent with our stated belief that we’re likely to experience some turbulence as we come out of this global recession.

In North America, we see signs that the market environment is definitely improving. The Central and Latin America markets as well as Asia-Pacific, which now comprise a larger portion of our business, are beginning to show some pick up in customer spending. In contrast, Europe continues to lag the global recovery and remains challenging due to volatile macroeconomic conditions.

With respect to the underlying demand drivers in our business, fundamentally they remain strong, driven by what we continue to believe to be the early stages of an industry wide optimization cycle.

Service providers are reacting to competition from application providers by focusing on new services and most networks are designed for terrestrial voice, not for video and advanced wireless applications, so existing infrastructure needs updating. As a result, we anticipate strategic spending as network operator’s transition from SONET to next-generation architectures to address new service demands and traffic growth to make sure their network upgrades are cost effective and efficient.

In terms of investment in our portfolio, we’re focused on addressing the most critical areas of those next-generation network architectures, which we view as high capacity transport, mesh based switching and Ethernet services. With the acquisition of the MEN business, we’ve effectively doubled our resources and are now large enough in our critical mass to execute on our plans, yet I would stress that we maintain our very much our specialist focus.

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