CIENA's CEO Discusses Q3 2011 Results - Earnings Call Transcript

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CIENA (CIEN)

Q3 2011 Earnings Call

September 01, 2011 8:30 am ET

Executives

Thomas Mock - Senior Vice President of Corporate Marketing & Communications

Gregg Lampf - Assistant Vice President of Shareholder Relations

James Moylan - Chief Financial Officer and Senior Vice President of Finance

Gary Smith - Chief Executive Officer, President and Director

Analysts

Tal Liani - BofA Merrill Lynch

Mark Sue - RBC Capital Markets, LLC

Blair King - Avondale Partners, LLC

Kevin Dennean - Citigroup Inc

Alex Henderson - Miller Tabak + Co., LLC

Rod Hall - JP Morgan Chase & Co

Tim Long - BMO Capital Markets U.S.

Nathan Johnsen - Pacific Crest Securities, Inc.

Brian Modoff - Deutsche Bank AG

Jeffrey Kvaal - Barclays Capital

Ehud Gelblum - Morgan Stanley

Simon Leopold - Morgan Keegan & Company, Inc.

Paul Silverstein - Crédit Suisse AG

John Marchetti - Cowen and Company, LLC

Greg Mesniaeff - Kaufman Bros., L.P.

Presentation

Operator

Good day, ladies and gentlemen, and welcome to Ciena's Fiscal Third Quarter 2011 Results Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I'd now like to turn the conference over to your host, Mr. Gregg Lampf, Vice President of Investor Relations. Please go ahead.

Gregg Lampf

Thank you, Allie. Good morning, everyone, and welcome to Ciena's third quarter 2011 review. With me today is Gary Smith, CEO and President; and Jim Moylan, CFO. In addition, Tom Mock, Senior Vice President, Corporate Marketing and Communications, is here.

Today's call will follow a new format for us. In this morning's press release, which is available on National Business Wire and ciena.com, we've included much of the financial data that we normally would cover in our prepared remarks, well actually in tabular format for easier sequential and year-over-year comparison of our results. We believe this change allows us to better focus our remarks during the call so we can spend more time answering your questions.

In our abbreviated prepared remarks, Gary will discuss management's view on the macro environment as well as our business progress. Jim will offer some color on our Q3 results and provide guidance for Q4. We'll then open the call to questions from the sell-side analysts.

Before I turn the call over to Gary, I'll remind you that during this call, we will be making certain forward-looking statements. Such statements are based on current expectations, forecasts and assumptions regarding the company that includes 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 most recent 10-Q filing. Our next 10-Q is required to be filed with the SEC by September 8, and we expect to file that by that date. 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 press release available on ciena.com. As a reminder, this call is being recorded and will be available for replay from the Investors section of our website.

Gary?

Gary Smith

Thanks, Gregg, and good morning, everyone. Despite coming in at the low end of our guidance on revenue, we've made progress in many areas of our business that have enabled us to report strong results for the quarter. As expected, product mix improved significantly with both switching and CESD up more than 30% on a quarter-on-quarter basis, contributing to gross margin improvement. Operating expenses also were significantly improved in the quarter. And as a result, we achieved an as-adjusted operating profit of 4% which we believe is a solid result, particularly given the challenging economic environment.

And I'd like to take a moment to comment on that environment and what we're seeing in our business. Given customers' caution around the macro economy, our customers are scrutinizing their spending more carefully today. And we're seeing some slowness in markets around the world, I think most notably in Europe. And given the level of our overall international business that we now have, we're seeing slightly longer cycles for sales, deployment and revenue recognition. However despite their caution, customers will need to move forward with network modernization. The growth of data, video, cloud, storage and other bandwidth-intensive applications is not slowing. And at this time, our customers are continuing to advance their network modernization plans, albeit some at a slightly slower pace.

We are confident that Ciena is extremely well positioned even in a tougher environment. The demand drivers underlying growth in our industry remain very compelling. We have industry-leading solutions, and customer traction is strong. We are winning deals in the marketplace, and we continue to see a healthy flow of orders.

And while we remain optimistic, our industry is not immune to macroeconomic forces, and we can't know for sure how the economy will play out. So we are focused on controlling the things we can control and optimizing the business with an eye on continuing to improve the bottom line.

Turning to the third quarter specifically. We have said all along that building the new Ciena would be a multistage process. And as we discussed last quarter, the business is essentially moving from a phase that has been focused primarily on integration to a new phase focused largely on optimization and achieving operating leverage.

Because our early focus in the Ciena MEN combination was on a quick and smooth integration, we still have many levers available to optimize the business. In fact, our early optimization efforts have helped us pass another milestone this quarter, as-adjusted profitability. It's an important step, but we recognize that it is just that, one step in the process. Nevertheless, our Q3 results illustrate that these improvements are beginning to happen.

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