Ciena Corp (CIEN) 2001 Q4 法說會逐字稿

Please stand by. We're about to begin. Good day, everyone. Welcome to the CIENA corporation fourth fiscal 2001 results conference call. This call is being recorded.

At this time for opening remarks I would like to turn the call over to the vice president of investor relations Mrs. Suzanne Delong. Go ahead.

Thank you.

Welcome to the CIENA conference call. Thanks to all for joining us for our Q4 results. I'm pleased to have Mr. Smith the president and Steve Chaddick, our chief strategy officer will be joining us for the Q & A of the call.

Joe will be joining us for the fourth quarter results. Gary will discuss the quarter.

Joe will wrap up the prepared remarks as guidance for one one. We'll then open up questions to cell phone analysts. This press release is available on business call and and CIENA.Com.

If you are unable to obtain the press release or would like to be added to our e-mail distribution list please call 888-243-6223.

Excuse me. Before I turn the call over to Joe, I'll remind you that, during this call, it is likely that we'll be making some statements that are based on forecasts, assumptions of the company that include risk and uncertainties that could cause these actual results to differ materially from the statements discussed today.

These statements should be viewed in the context of the factors detailed in our 10K filed with the F.C.C. Today.

In addition the company assumes no obligation to

update the information discussed in this call. Whether it's the result of new information, future events, or otherwise. Joe?

Thanks, Suzanne.

Good morning, everyone. As we preannounced on November the 12th revenue for our fiscal fourth quarter of 2001 totaled $367.8 million.

This represents growth of more than 27% over last year's fourth-quarter revenues which totaled $287.6 million. Our total revenue for the year was $1.6 billion representing a growth of more than 87%.

The fourth quarter included revenue contribution from a total of 45 Optical networking equipment customers. Our optical networking customer base now totals 60.

We recognized revenue from five new customers in the fourth quarter. And we had three 10% customers in the quarter. Two North American.

One which is a mix of North American and international deployments. Combined, the three 10% customers accounted for approximately 67% of total revenue.

For the year we had two 10% customers that, combined, accounted for approximately 50% of the revenues. International sales represented 31.6% of revenues for the quarter, about even with last quarter's 30.8% of sales.

For the year, international sales represented approximately 24% of total revenues.

Down slightly from last year given the heavy concentration of domestic revenues in the first half of this past fiscal year.

In the area of products the majority of revenue in the quarter came from long-distance transport sales and for the fourth sequential quarter material revenue contribution from coredirector our optical core switch.

Sales of coredirector were strong correcting more than 20% of total revenues.

Within long-distance optical optical MultiWave corestream and channel adds for corestream we're the largest contributors to the quarter's revenue.

Turning to net income -- I would like to remind everyone that, in my comments, I will be referencing adjusted net income which excludes a good will reduction charge, restructuring costs, deferred stock compensation charges, payroll taxes on stock option exercises and amortization of intangibles and goodwill and GAAP income as well as adjusted net income.

I will be referencing are articulated in our press release and shown in the income statements that accompanied our release this morning.

Adjusted net income for the quarter exclusive of items previously mentioned was $17.1 million or five cents per share.

For the year, adjusted net income totaled $195.3 million or 60 cents per diluted share, an increase of 94% over last year's adjusted net income of $100.8 million or 34 cents per diluted share.

On the gross margin front, gross margin for the quarter came in at 39.8% down as expected from Q3's 33.4%, primarily due to excess production capacity.

For the year, gross margins were 33.6%.

Our operating expenses in the fourth quarter, exclusive of the goodwill reduction charge, restructuring costs, stock compensation charges, payroll taxes on stock option exercises and amortization of goodwill totaled $22.7 million up from expected from Q3's $120.2 million.

Turning briefly to the balance sheet -- cash, short-term, long-term investments totaled $1.8 billion an increase of approximately $27 million from Q3.

And day sales outstanding came in at 97 at the end of the quarter this.

Is up from expected as the 373 days of last quarter, slightly outside our target range of 70 to 90 days.

Our Dso's are likely to continue to fluctuate and over the next several quarters may come in above our target range due to the uncertainty in the market and our customers' desire to conserve cash.

On the inventory front we made good progress this quarter versus last quarter. Net inventory levels ended the fourth quarter at approximately $255 million, down 17% compared to the third-quarter levels of 306.6 million dollars a decrease of 51.6 million dollars.

Excuse me. The inventory breakdown for the quarter is as follows -- raw materials, $161.8 million.

Work in process, $75.7 million dollars, finished goods, $71.3 million.

And a reserve for excess slash obviously of $53.8 million.

Inventory terms in Q4 were 3.5 as opposed to 3.4 the previous quarter, our third quarter. Our world-wide head count, at the end of the quarter, totaled 3,778.

Following the work force reduction, we announced on November the 12th, that total

decreased to approximately 3,398. And now we're going to turn the call over to Gary.

Thanks, Joe.

Good morning, everyone. Given the tough environment I think we're very pleased to have met expectations for Q4. For the year, we're also very pleased with 87% revenue growth and nearly 100% net income growth.

We believe these sorts of results, despite the very difficult year for telecom, points underscore CIENA's strength and clear market leadership.

What I'd like to do now is briefly review the quarter's business through a discussion of our product lines.

First of all, long call transport. And as expected sales in the quarter were down more than 30%. And are likely to decline again in Q1.

CIENA's diverse customer base in our alignment with several carriers who continue to build their networks out, albeit at a slower pace than they did previously, insulates us from the sharp downturn that many of our competitors saw in this long-haul segment next year.

Even now, we are seeing obvious signs of the slowdown.

Over all, system sales, however, continued to outpace channel card sales, which is a good sign for future growth. It's evident that carrier spending on long haul has slowed dramatically.

Even CIENA's diverse customer base and our next gen products cannot insulate us entirely from the effects of this.

We believe he are finally feeling the effects of a significant slowdown in purchasing. We also believe that demand for the equipment will resume.

All indications that the underlying growth in traffic remains robust. So long as that is the case, we believe the demand for faster, bigger, more intelligent pipes to transport that data will return.

We expect that our products' capabilities, along with the value proposition they bring to carriers position us to benefit very clearly when this market returns to recover.

Moving to Metro transport, revenues from MultiWave Metro held steady as a percentage of revenue in Q4 versus Q3.

During the quarter, we recognized revenue from 16 Metro customers, up one from last quarter. And as noted in the press release this morning, we're pleased to announce a new Metro customer this morning, Teleglobe.

Teleglobe has selected CIENA to provide their Metro optical transport system for a ring-based networks in cities throughout the United States and in Europe.

Deployment has already begun to provide up to 48 wave lengths of oc 48 or oc 92 capacity per fiber pair on Teleglobe networks in Los Angeles, California, Miami, and Florida.

-- or Miami in Florida.

Teleglobe expects to deploy Metro in cities through Europe including Amsterdam, Paris, and five cities in Germany. We continue to make good progress with Metro direct to K2.

We recognized initial revenues on the product from several customers during Q4, including revenue from announced customers eAccess in Japan and AFN. We are getting traction with both current and potential customers looking to use Metro direct as a feeder platform, as well as with customers looking to deploy the product as a multiservice access and switching device.

In addition, I believe we're making good strides towards delivering SDH capability, which will open up additional opportunities for the product internationally.

And now onto corestream.

We've been very pleased with coredirector. The product is being deployed with new players, incumbents, and we believe is still the next generation switch being deployed in volume.

We've now shipped this flat platform, which includes coredirector and coredirector ci of a smaller version to 26 customers world-wide.

This is up from 19 last quarter. And as Joe mentioned, coredirector revenues were up over Q3 increasing more than 60% and contributing more than 20% of total revenues for the quarter.

As expected, coredirector sales also represented more than 10% of total revenues for the year that we've just finished.

We're also pleased to have coredirector under way in several areas internationally.

One of our key goals for 2002 is to increase our presence with incumbent carriers, both domestically and internationally. And these trials represent good, forward progress towards this goal.

Before I turn the call back to Joe for some specific guidance about one one, I'd like to make a few comments about the marketplace in general.

Clearly, our industry's facing a dynamic and challenging market environment. The uncertainty of which has been accentuated by the larger, over all economic slowdown.

Conditions in the industry are causing our customers to employ cash conservation tactics which, at least in the short term has lead to dramatic reductions.

It is not clear, as traffic continues to grow, however, how long these tactics are really sustainable. All indications are that the underlying demand, the data continues to grow, and it naturally follows that service providers will be able to optimize their current networks for only a period of time, but eventually, they'll have to resume spending on their network infrastructures in order to keep up with their demand growth.

And certain indications are that that will be in the next generation space, which we have clearly to ship in.

However, the uncertainty, of course, is when? And that question, then, becomes faced with this uncertainty -- how do you operate your business in this kind of environment?

Because we believe that a recovery is inevitable, we have chosen to pursue a sustained investment strategy that we believe best positions us to capitalize on that eventual recovery.

We believe that, because of our compelling value proposition to carriers, our customer base, and our financial health, CIENA is playing from a position of relative strength in the industry.

And we believe that position opens up more options for us.

It enables us to make different decisions than many of our competitors. We can play to win, not merely to survive.

Many of our competitors are in disarray. Legacy players are struggling to make the shift to next generation products amongst enormous staff cuts and emerging players are struggling to find customers in the face of insufficient critical mass.

Frankly, we see this as an opportunity for CIENA. We believe that our market leading position gives us the ability to deploy a strategy of sustained investment through this market downturn.

The guidance that Joe is about to give factors in sustained, strategic investment in our business.

Particularly, in the areas of R & D and sales. Short term, this means that we will incur operating losses.

Long term, we'll remain committed to operating our business profitably, and we will constantly reassess the market to determine if this sustained investment is, in fact, an appropriate one.

Having said this about sustained investment, this does not mean it will be business as usual for CIENA in this environment.

We have a proven track record of managing our business to be fundamentals, and we will continue to concentrate on the fundamentals.

We have significant efforts under way across the company to minimize expenses, to spend wisely, and balance resources against the opportunities.

As a result in 2002, we expect the cash flow from operations will not be negative for the year. If CIENA were not the market leader, if we weren't in the infancy of this optical networking revolution if we did not have a diverse and growing customer base and a complete next generation product set, and if we did not have financial strength, the strategy of sustained investment would not be an option for us.

But it is.

And we strongly believe that this is an opportunity for us to further distance ourselves from the competition.

With that as background, Joe, I'd like you to walk us through the guidance for Q1.

Thanks, Gary.

Before I begin to offer guidance for Q1, I'll remind everyone that the statements that Gary just made and those that I'm about to make are forward-looking. It is important to review the risk factors to understand that the factors might cause the results to differ materially from this guidance.

As Gary noted conditions in the industry are causing our customers to employ cash conservation tactics which, at least in the short-term, have lead to Cap-X reductions.

We believe that revenues in one one will be down sequentially in Q4 by between 30% to 40% primarily as a result of the decline in long haul transport spending.

We realize that this is a broad range, but those of you that know us, know that we do our best to call it like we see it.

And we believe that this broad range reflects -- best reflects the range of potential revenue scenarios for one one.

Long haul transport revenues in one one could be down more than 50% sequentially. Based on what we know today we expect that revenues from our other products, including coredirector, will grow sequentially.

Based on that assumption we believe gross margins will in the range of 30% to 35% depending, of course, on revenue primarily reflecting manufacturing over capacity.

In this uncertain environment, gross margins are especially difficult to forecast, given a number of factors that might influence them such as -- changes in product mix, potential pricing pressure due to more aggressive competition, manufacturing deficiencies, inventory obsolescence.

We expect that operating expenses will increase as a revenue, but remain about flat in real dollars Q4 to one one.

We expect other income to be in the range of $4 million to $5 million.

Based on the wide range of revenue guidance we've offered, we would expect a wide range of EPS estimates as well ranging from a loss of eight cents to a range of 12 cents per share.

Based on our conversations with our customers, we do not believe we are in the position to offer any further guidance for 2002. What is clear, at this point, is that our customers' purchasing plans for the year are uncertain.

And while uncertainty can work both ways, the level of uncertainty and the amount of change we have seen already to customers' plans leads us to believe that FY '02 revenues will be down sequentially from FY '01.

Our operating expenses will likely be out of line with our historic business model, which could result in an operating loss for the year.

As Gary noted, however, we

will work to manage our inventory and our accounts receivable and expect for the year our cash from operations will not be negative. Gary?

Thanks, Joe.

Despite the tough market environment and a challenging year for customers, vendors, and investors, I think CIENA has had tremendous success. We know there have been times in the past where we've been viewed as a contrarian.

Guilty as charged. In part, it is this willingness to take a contrarian view point that has established our leading market position today and has given us the opportunity to choose, yet, another contrarian strategy -- that of sustained investment in our business.

We believe that this is the right long-term stance for the company, our customers, and our shareholders.

And, as I said before, however, it is a strategy that we will continually reevaluate in light of the dynamic market conditions.

As we've said before, we believe that CIENA was among the last of the telecom vendors to feel the impact of a tough environment for a few key reasons we believe.

Firstly, we're aligned with the customers who are still spend, albeit more carefully, and are focused on improving and growing their networks and helping their economic models.

Our exclusive focus on next generation product set positions us to capitalize on the areas of the market that have the potential to grow as carriers look for ways to meet demand, while conserving cash.

And, thirdly, we're financially sound, and we've got a very strong cash position.

As a result of all of these, we are able to focus, not merely on surviving, but on leveraging our competitive position and capitalizing on what could prove to be an opportunity to break away from the pack and extend our leadership even further.

With those comments, Bill will take calls from the analysts. Thank you.

Thank you, Mr. Smith.

This question and answer session will be conducted electronically. If you would like to ask a question, you may do so by pressing the star key followed by 1 on your telephone.

We'll take as many questions as time permits. If you wish to remove yourself from the queue please press the pound key. We'll pause for just a moment to assemble our roster.

We'll take our first question from Nikos Theodosopoulos, UBS Warburg.

Ok, thank you.

I had a couple of questions. First, on coredirector I want to make sure I heard what you said correctly. I think you said sales were up 60% up sequentially and were 20% sales for the quarter.

I want to get a sense -- you said your guidance thinks you will be growing sequentially again next quarter.

What is the status with that guidance in terms of there are a lot of contracts that you haven't announced yet, just by looking at how many coredirector customers you have announced, and how many you're recognizing on a quarterly basis.

Can you give a sense of what's driving the visibility on coredirector? Is it some of these new customers?

And my other separate question is -- on the -- on the receivables, Joe, it looks like the provisions have come down for accounts quite a -- throughout the last few quarters.

Can you comment as to what is driving that? Is it that the customers,

although they are buying less, are becoming more high in quality? Thanks a lot.

Thank you, Nikos.

Let me take the first couple of coredirector ones which is confirming yes you have heard what you heard up 60% sequentially and 20% for the quarter.

Slightly above 20%, as a matter of fact. The guidance we did give is that it, potentially, could be up in one one versus Q4.

There were -- we do have it deployed to quite a few customers, a lot of which we have not yet announced. Gary, want to take the rest

there? And I'll come back with the receivable ones?

Sure.

Nikos, we haven't announced all of the customers for coredirector. We're continuing quarter to quarter to see new opportunities with coredirector.

I think that particular market place we feel pretty confident about growth for the year. I think, because it's so compelling from an economic value prop zig, most of the carriers that we deploy to, they can justify it, just on the basis of reduced Cap-X, let alone the operating expense reductions.

You know, I think because of our leadership there with core directer, I think we feel pretty confident about that moving forward.

So it's a combination of new

prospects that we have, some of which are incumbent carriers, and some of which we have not announced yet.

Nikos there, is Joe.

I'll address the issue on the receivables provision. It has decreased over the course of the year. And that relates to the fact

that we were able to saw off a lot of the iaxis gear that they did not pay for and defaulted on that. Is really a lot of what happened there.

All right. Thank you.

We'll take our next call from Rick Schaefer, CIBC.

A couple of follow-ups.

It seemed like that number on coredirector came in lower than people were looking for. I was wondering if there is anything more to that, if they're receiving competition out there.

Also a want a question on the HDX. Have they had any success out there in freezing the market? Have they impacted pricing with regards to optical switching?

Ok, Rick, why don't I take that?

Coredirector revenues will vary, depending on customer type timetables and specifically revenue recognition criterias, very high software content on the product.

In terms of HDX, I think that I would describe it that, you know, we're seeing activity from HDX in terms of them talking to them about customers.

We haven't seen any product yet. So I think, you know, time will tell as to the rollout of that.

But we -- their ability to freeze the market I do not think is as compelling as, perhaps, it would have been against CIENA two years ago.

I think we've got to critical mass. I think that customers, when they get it in the lab, have been very, very pleased with coredirector.

And I think we're very pleased with what we see, both in terms of the revenue rampup and the opportunity for coredirector moving forward.

Ok.

So I think, while we remain suitably paranoid I think that we believe that, you know, with the international deployments that we are getting we've got a pretty good head start, and we want to make sure we capitalize that by seating as many of the large, new accounts as possible, you know, prior to to, you know, a real competitive challenge, if any does come, into the marketplace.

So, did you see any significant pricing pressure in either coredirector or any of your other product groups like Metro or long haul?

Certainly not in coredirector.

Metro, pretty much the same as it's been. I think long haul the same as it's been. It's been tough for a while on the long haul side. I wouldn't describe that,

Rick, as an appreciable change. In coredirector we are not seeing any real, competitive for coredirector right now.

Ok. Thanks.

We'll take our next call from Paul Silverstein, Robertson Stephens. Mr. Silverstein, your line is open.

Thank you. Can you hear me?

Yeah.

Gary, on the customer mix --

Yep.

The 67% and the aggregate, the three 10% customers, can you give any color are there any customers that were particularly outside relative to the other two?

Or is it pretty evenly split?

Paul, between the customers, I think it was pretty evenly split in the quarter.

I think there was one -- actually, there was one customer that was a large percentage.

Joe, have you got that?

Yes. There was one that was a large percent that was Qwest relating to the big shipment we had to them.

I assume it won't do any good to ask what they were as a percentage?

That's correct. It would not do any good to ask. Very good observation, Paul.

Could you all give -- talk about the competitive landscape going back to the coredirector question?

Beyond Nortel Lucent trying out a number of new products -- can you talk about the competitive landscape, not just in coredirector, but also in Metro and long haul, recognizing that revenues are down in long haul.

Are you seeing any change,

what's new and different? Can you give some color there?

Paul, let's see.

Let me touch on a couple of things there. Hum, in the coredirecter space, because coredirecter is such a mature platform, more scalable than the other platforms that are out there, and has such a rich base of features in terms of mesh ring, APS call, no one can touch it.

A new product that has not gone through the last year of validation with major customers as coredirecter is at least a year behind regardless of the power point.

Some of the new announcements we've seen are announcing products that less scalable, smaller, less granular, and have even, on the road map, less rich features in terms of the way that mesh is, so forth.

We think our position there is sustainable for quite some time.

Of course, we're not sitting still. We have, as Gary mentioned, a strategy as we continue to invest. What does that really mean? We're not going to lose our status with that product in the foreseeable future.

And the other market space I think our long haul products are as competitive both price and capacity-wise with anything that's out there, and more so.

And will continue to be as we continue, as Gary mentioned, to invest also there.

On the Metro space in the integration of wdbm and ensuring Metro call product because we believe, in the long run, the combined features of coredirector, Metro transport and Metro switching will be compelling from a value proposition for incumbents, as well in particular for pgt's internationally.

We think that that's also going to be quite a large area of opportunity for us.

So, particularly in the Metro

space, we're not as far in front as we would like to be, but we're investing heavily to remedy that. So I think you'll see the results of that later in the year.

Steve, on the scale of coredirector, is that on track? Can you give any color there in terms of that? Is there any pressing need for the larger version?

I think the need, because of the slowdown, has pushed out in time a little bit.

We have not reduced our investment in scaling that product. So we have -- you know, what would be in the rest of the

industry a whole company effectively working on the larger version of coredirector, and that is, moving along smartly.

Great. Thank you.

Our next question comes from David Jackson, Morgan Stanley.

Thanks very much.

A couple of quick questions about Metro. Can you talk a little bit about what you are seeing in the Metro market currently in terms of pricing and demand?

Also, can you talk a little bit about how you view your Metro dwm business the next year, specifically, you know, prospects of substantial

orders from accounts and what the geographical mix might look like between North America and the rest of the world. Thanks.

David, why don't I take that?

In terms of the pricing and demand if you are just talking about the transport piece of Metro, I think we are seeing kind of reasonable, sustained demand for that.

But it's not a huge market place or a huge revenue. You know, comparatively for us. You know, I think that the -- you know, as Steve talked about earlier, we really see the evolving market there as being a more integrated Metro market, which is not just the transport piece, but really taking the transport piece and integrating it into a very rich structure that includes coredirector ci, the Metro director k2, and next generation of oadm's and Metro transport products.

And that will start to be rolled out during the course of this year.

And we think that that should match with the market needs, both domestically and internationally. Part of your question, David, was sort of the mix.

We are seeing, I think, signs of some good demand outside of North America that I think fit into the flexible architecture that we're looking to roll out this year.

I think, you know, in isolation the Metro transport is an interesting, but small market.

I think it's really the broader product set that's required to capitalize and, to some extent, stimulate the market. If you think of it from a carrier point of view, you know, they've got this big fat pipes at 10 gig and all of their customers, corporate customers talk to them in language of e1 and t1.

Really, the issue in simple terms is how do you get from the big, fat pipe down to the customer aggregation level?

And how can you do that in a flexible, economic way?

For that you need a suite of products, technologies. We think that we're very well-placed there. And that's why we're working

in our light works initialive in the metropolitan area to create.

And, Gary, how do you think your position visa very your competitors. What are your expectations for the penetration of those accounts?

I describe our expectations as very realistic.

I think it's going to take a while to get real penetration into the Aubauchs and into the incumbent carriers internationally, the PTT's.

I think we're well positioned in some of them. We could do better in others. But I think, you know, the underlying message in there, particularly relating to Metro,

I think it's going to take time.

That's great. Thanks very much.

We'll go next to Udderburg Kobin.

It's not easy.

Excuse me?

You are going forward.

I'm concerned about in the ensite of constrained Cap-X and we see it where there's a drive to utility ports and chassis.

You seem to be somewhat counter to that. I wondered if you have any insight on why that continues.

In the TSO can you explain why the revenue wasn't up a breakout as to why the increase, continuing increase? If you can just decompose that a little bit.

Why don't I take the first call over the system versus channels.

I can understand the puzzlement to that. I think, you know, it's an issue that we've been looking at closely, too, as you'd expect. I think that it's to do with the carriers that were particularly aligned to when they put new builds out there.

Given the large amounts of potential capacity that go with things like core stream where you can get, you know, way beyond one terabyte of data, and they're still rolling -- it's cheaper for them to do that in some cases than to put more channels on their existing, older products.

And so they'll have the new fiber and put this equipment on that has a much lower cost space.

Even though there's a new line system associated with that from a capital investment point of view.

So I think we just happen to be aligned to, you know, a number of carriers that well positioned for the future in terms of their capital investments.

If I could just push that one step further. Has the system overchannel revenue spread become greater in the last couple of quarters or stayed about the same?

I think it has come a little tighter. You know, it was very, very pronounced. You know, a year ago, say. But it is beginning to narrow.

Ok. ) and that comment do you want to --

Good morning, this is Joe.

The DSOs are going slightly above our range is really a function of the industry and the economic times and our customers trying to take

advantage of that, and pay it a little bit slower. I don't think it's anything more than that.

Ok. Thanks.

We'll go next to Alex Henderson, Saloman Smith Barney.

Hi.

You thought the K2 could see an enormous amount of opportunity once it sees capabilities in the international market.

I was wondering if you could give us some color in terms of when that would occur?

I know that you guys really look at the Metro partly cloudy an integrated approach with switching, transport to the customer as an integrated solution.

Could you tell us how many of your trials are with customers who are only looking at the K2 who are not existing coredirector or transport customers?

Thanks.

Ok, Alex, let me take the first part of the question.

In terms of the SDH capability, that scheduled for midyear slightly earlier I think the sort of may, June time frame for SDH on K2.

So that's when I think we'll one that will assist greatly in terms of opening up potential international markets for us.

In terms of how many people are looking at the k 2's as a separate product as opposed to integrate it.

I haven't gotten the exact terms to that. It's pretty even, which is a good sign for us.

I'm feeling pretty excited about that. It's evenly -- somewhat evenly deployed both domestically and

internationally.

Thank you.

Our next question comes from [INAUDIBLE].

Goldman Sachs. Your line is open, sir.

Good morning.

Good morning.

) ) Given what we're seeing in long haul for the current quarter, January quarter, is it your sense that that business stabilizes at those levels?

My second question is on coredirector. Can you give it a sense of what you expect it to be as a percentage of revenues both for the January quarter and

for the year of '02?

Ok.

Let me take the transport one first. Sales in the quarter were down sequentially.

I think it is difficult when purchasing of long haul will resume. We do feel that it will resume. You know, you could characterize it given the broad customer base and the large base that we have it is just sustained levels right now where the carriers are basically or subsistence levels.

If you have that much in store base out there you have to believe that there's a certain level.

Baseline level. I guess that was the driver

behind your question. It's difficult to call out. Would I sense that we're probably at those kinds of levels. Joe, do you want to --

Sure, [Subu], depending where you are in the way of guidance it would drive the percent of coredirector.

It is Safe to say that it could be up appreciable. We don't typically go into how much but it would go up.

The number we gave you for this quarter was 20%. It could go up to definitely above the 25% number and even

higher.

Thank you very much.

We'll take our next question from Jeff Lipton, JP Morgan. Mr. Lipton, your line is open, sir.

Can you hear me? Thank you.

Yes, good morning, Jeff.

Good morning. The first question is on K2 also. Are you still on track for certification? Then I'll come up with a quick follow-up.

Hi, Jeff, it's Steve. Yes, there are various aspects of the piece. We're on track with what we told you before.

Ok.

Thanks, Steve. Gary, one for you and just a very broad one. Industry-wide, relative to what you were thinking last quarter, have you pushed out your expectation for the

timing of an over all carrier spending rebound?

That -- that's a difficult question.

I mean, I think what we're seeing at the moment is just uncertainty. I think you are seeing reductions in CAP-X. I think you have to take it quarter by quarter.

There's a big focus on -- and I understand that -- what are the carriers CAP-Xing for the year? History will tell you that that's not been incredibly indicative of what ends up happening.

I don't want to accentuate the negatives in any way right now.

But I think it's a quarter by quarter basis. We don't see any immediate rebound as I think we've articulated clearly this morning.

I wouldn't describe it -- I don't think it's changed. I guess really is what I'm saying, Jeff.

Ok. So the timing of a rebound is essentially what you were thinking last quarter?

Yes.

Ok, great. Thanks so much.

We'll take our next question from [INAUDIBLE], Bear Stearns.

Yes.

This is Mike for [Wojtek]. We had a couple of competitors come out and say they expect the bottom somewhere in '01 or '02.

You guys were the last ones to see this downturn and you've taken a significant amount of market share this year. I was just wondering, due to the large bills that you guys have participated in this year if you would be the last ones to come out of this or kind of later than a lot of your competitors?

And then, secondly, in terms of the coredirector, it looks like, you're expecting about 100% sequential growth last quarter that was around guidance and you guys got 60%.

You know, a good chunk of that was in first office applications.

You guys kind of waiting to book the revenues. I was just wondering, in terms of the deficit there, how much is your customers coming to

you and saying, we can't order this stuff right now. We have to cut back on spending. And you guys were not able for some accounting reasons or what not, able to recognize that revenue. Thank you.

Yes.

Mike, let me take the first part of your question. I think it's the last end and that's fair to say we have sort of been the last to be dramatically impacted.

Logic would tell you that we're last in because of the strength that, you know, we've shown in the market place, logic would tell you that we should be the first out.

You know, if we have the competitive advantage and continue to sustain that. You know, that's certainly how we are viewing it.

Logic would tell you, if we have the most compelling value proposition that has allowed us to sustain our revenue in growth and do what we did last year, then we should be the first out of this.

As I said, I don't think that we're not calling a bottom to this this, if you can.

I think we feel well placed when the market does return.

We continue to win new accounts. We're not losing much business at all. We feel good from a competitive point of view serving with a mixed paranoia keeping us on the edge.

In terms of the coredirector question I think we talked about a potential 100% very sequential growth and I think we achieved 60% sequential growth the It was largely to due with recognition in the fourth quarter and people not pushing out coredirector which is why we feel pretty bullish about coredirecter this year going forward.

So I wouldn't read too much into that at all. I think 60% growth is pretty healthy in the quarter.

Could you detail what kind of revenue recognition it is?

Next quarter if there's any sequential growth you are expecting do you know how much

is coming from revenue recognition and from product that has already been shipped?

Joe, do you want to --

Sure.

This is Joe, Mike. In the case of the revenue recognition it was purely nothing more than acceptance. That's about it. With acceptance you need signed documentation.

You need somebody to sign the paperwork. With the holidays, if there is not someone around and they're on holiday, they're not there to sign the paperwork.

You get it the first week of one one instead of the last week of Q4. That's what it boils down to.

So that's our story. We're sticking to it?

That's our story. We're sticking to it.

All right.

Thank you very much.

We will take our next question now from Hasan Imam, Thomas Weisel Partners.

Hasan?

Yes. I came on the call late. Did you give any guidance for the full year?

From the uncertainty we've seen now, we're not in a position to give guidance for the year.

I think we've tried to call it as we see it. Given the

uncertainty now, we don't think it's appropriate to give guidance for the year.

In terms of previous conference calls you talked about a flattish first half of o2 and then maybe a rebound in the second half of '02. Does that still hold?

I think, you know, given the fact we're not going to guide on 2002, I think that doesn't hold.

Hasan, this is Joe.

You did mention -- I did make a comment towards the end of my discussion about the Q2 overall would be down versus

'01. I don't know whether you heard that.

Ok.

Thanks. And, then, on the long haul front, I guess follow-up to a previous question, where -- at

what kind of rate do you see a bottom? That means maintaining incremental upgrade starts creating a bottom in the long haul revenues?

Hasan, I think we answered that question a little earlier on.

Our sense is the kind of revenues that we're down to on the transport is at kind of a base line in our view. That's our best view right now.

It's going to move around a little bit but, you know, given the amount of installed product out there, you know, which is very large. There's a lot of chassises out there. Given the fact that end user demand continues, you know, I think what we're seeing is and I think people sustain capacity growth in there.

It will move around a bit quarter to quarter. We can't be precise about it. That's our best view now.

Ok.

Just a quick question. In terms of your strategy in resizing the business, when do

you -- what kind of time frame are we looking at? I mean, you have a view, I guess, on the next six months internally at least. Do we get an update after six months or so?

Well, I think you know, the real answer to that is that we do it on an hourly, daily customer by customer basis.

And, you know, stay as close to the market as we possibly can as you would expect us to.

I think in terms of, you know, conversations at least once a quarter I think with the market on these calls I will update our view as to what is going on in the market place and take the appropriate action then.

As we said our strategy is a sustained investment because we think that's the right one from a competitive long-term value for the company.

If, however, it turns out to be a very, very prolonged downturn we will adjust.

Now, if you ask me for what is the deafa anything of a prolonged downturn versus a six to 12-month one, I don't think I know the answer to that one.

I don't think you could pin us down to a specific timing point of view. We'll have to continually monitor the situation and we'll take the appropriate

actions when we see it dictated by the volatility of the market.

Ok. Thank you. And have a good day, guys.

Thanks.

We'll take our next question from Sanjiv Wadhwani, Dain Rauscher Wessels.

That's one of the toughest names.

Joe, can you give us a look for the K2 platform for the January quarter and maybe for 2002, if possible. Gary, I know you have spoken about integration in the Metro side, the transport -- you have spoken about the integration in the Metro side and the switching.

I wonder if the combined transport, switching on that side and the future of the long haul. Thanks.

Yes.

Good morning, Sanjiv. How are you? In terms of K2 outlook for one one in my previous dialogue I said there was a possibility that it could be up.

That's a pretty good possibility given the way the shipments are going and scheduled to go. In terms of an outlook for the total year, I think in keeping

with the theme that we had towards the end of the call about, you know, not getting into a lot of the detail for the total year I would still rely on that comment and not go there.

Gary?

Steve?

Yes.

Sanjiv we mentioned the parallel effort that you eluded to in the core area is clearly important and under way.

In fact, we do have an active program under way to collapse some of the functionality into coredirector. The result of all of that is reduction in costs of the cause of the obvious reduction in ports required.

In fact, that's been under way for quite some time. So, yes, there is a strong

effort both to do physical integration and logical integration in the long haul core space as well as in the Metro space.

Got it.

Thank you.

Well take another question from Merrill Lynch.

One way to parallel your strategy, you're suggesting market share has increased in terms of importance, objectives, profitability.

The second part if you could

give us a little color. It looks like you have opportunities there. If you could give us some thoughts on how you would go about gaining share in international markets. Thanks.

Thank you, Simon.

You could characterize it as market share has always been important to us. You are seeing us win new customers, four or five.

That is critically important. What is important, we think, in this kind of an environment I would characterize it slightly differently than market share. It's, you know, developing your competitive advantage and maintaining it and increasing it.

You can only do that by sustaining your investment in key programs from a development point of view and sustaining your development from a sales relationship point of view.

If you start to change those things and get volatile with it, you know, basically take out those relationship people and take out the people who are working on those projects, it has a very detrimental impact to your deliverables and your value proposition and, therefore, your competitiveness in the market place.

So I think it's broader than just market share.

It's really -- you know, we have the opportunity here to extend our lead in terms of both technology and value proposition leadership.

And it's about market share, clearly, as well. If we focus on having the most competitive product offering and value proposition, you know, logic would tell you that if we get the sales and the marketing piece right, that we'll take market share.

We'll be more and more attractive to customers. So, you know, broaden it out instead of profitability from market share.

I think it's long-term competitive advantage is really the tradeoff, if you will, there.

We have managed our fundamentals. We have a really good track record of doing that when it was not particularly fashionable. We understand that a return to the fundamentals is how we are going to run the business when the environment gets to a more normalized patent.

But to run the company in a nonnormal environment and make a nonnormal investment strategy we don't think is the right way that.

Was a long answer to a short question, wasn't it, simon?

In terms of the international pace, CIENA has had historically over 40% from time too time international business, which is unusual I think for a North American young company.

We invested heavily in the infrastructure in Europe and Asia very early on. I think that longevity that will hold us in good stead to be able to leverage some of these international opportunities that we have with the incumbent T1 carriers, people defined with cash to build networks.

I think we are emphasizing the international piece in terms of our sales, infrastructure investments but we have a lot of that in place.

You mentioned Europe and Asia in that commentary. I understand there's opportunity in Latin America, marine landings, opportunities for coredirector. Do you see that?

Yes.

Yes. There are certain countries in Latin America that we have made an investment in there for the longer term. We think we are well

positioned with certain key accounts down in Latin America.

Great. Thanks a lot.

Thanks, Simon.

A couple of questions from Lehman Brothers.

You talked about revenues in the fourth quarter.

Can you comment on the visibility on your coredirector revenues in general going forward.

Has there been any change in that? I don't know, Gary, whether you want to follow up on one of your prepared remarks where you see a demand for long haul resuming. I guess the question is when?

Ok, Steve this is Joe.

In terms of the linearity in Q4, whether or not it impacted DSO's the answer is no. The majority of the Q4 revenue shift in the second month of the quarter towards, like, the first week of October, second week of October time frame, the DSO being above the range has nothing to do with the linearity of the quarter.

I think it's a couple of big gorillas taken advantage of the over all economic environment.

In terms of coredirector revenue visibility, I'd say it continues to be strong. With what we see.

It was strong in the third quarter, is equally as strong in the -- in the first quarter.

I think we don't talk about backlog. I'm not advocating that we do here. The backlog that we do have going into one one and into Q2 a lot of it is coredirector.

So I think that we feel pretty bullish about that product line. It's becoming -- Steve referred to as a gorilla it's

becoming a bigger gorilla. It's a pretty good news story there.

If the backlog or visibility is equally strong it doesn't change much?

That's correct.

) ) It'll might even be a little better. In terms of visibility, there's great dialogue with the customers.

The big question was when. Frankly, I don't know the answer to that. Let me share some thoughts about the dynamics. If you believe that end user traffic continues to grow and we can argue about the -- depending on which analysis that you look at, you know, it is continuing to grow.

The numbers may differ. There's only a certain amount of time that carriers can really optimize their network.

What they are trying to do right now is optimize their networks what they've been doing for pretty much most of last year.

There are points when it will create demand. I can't tell you when that is. The history of market behavior will tell you that this industry builds in sort of plateaus.

It will build out aggressively, eat up the capacity, and then build out the gain. So you know, it's typically been, you know, cyclical in that particular regard.

The big question is when? But the thing to focus on is the end user demand and some of that is, you know, clearly affected by the over all economic situation.

But, you know, logic would tell you that demand will return. We want to make sure that we continue to have market

leadership when that returns. You know, they can only optimize for a certain period of time. And it depends what it is carrier to carrier.

Ok. Thank you.

Thanks, Steve.

We'll go next to David Young, McDonald Investments.

David? Hi, David?

We'll go next to Gina Sockolow.

They said that they are cutting by 20% next year which I'm sure your people have indicated to you.

Can I tell you the impact on your relationship with them and if there is a financial impact?

And, also, I've got two other

questions. Can you catch us up with what is happening with core stream? Then I have one after that that will take longer.

Gina, I don't want to get into specifics with customers.

The uncertainties lead us to a cautious uncertainty. Cautious about our future forecast. All of that is taken into account when we give guidance as we're giving right now.

In terms of the core transport, I think we've covered that pretty comprehensively this morning. It is down in the quarter. We just had a conversation

about, you know, our view on when it's likely to return. I think we've really covered that point.

Ok.

Can you talk about whether you will have layer 2 capability on your Metro systems so you can build end to end systems? Or do you not see a need to deliver advanced services on end to end systems?

We have a large development aimed at specifically the Metro director adding a layer to specifically ethernet, BDN, related capabilities there.

We believe it is an important area. The issue for most carriers today is there are a myriad choices architecturally that haven't been sorted through from the perspective of which one wins yet.

This situation really hasn't changed in 18 months maybe. In terms of which data strategy, technology will win.

So we keep our eyes open as to which way the winds are blowing. We believe, in particular,

layer two and either net are important components in that, no matter which strategy wins architecturally behind that.

Thank you.

We'll take our final question from Mr. Bellis.

Thanks for giving me the opportunity.

I had questions, several. Can you address the manufacturing issue? How many square feet do you have? What kind of capacity rate are you running? Secondly in terms of the direct sales force how many salesmen did you end the year at?

What did you plan on adding in fiscal '02 if you have been planning to share that with us? What kind of planned revenues in the October revenue would you consider to be the turns business.

Thank you.

Good morning, Joe.

) ) Good to hear your voice. ) ) We don't typically give that data out. The restructuring announcement that we announced a few weeks ago is definitely going to take probably, I'd say, 30,000 to 40,000 square feet out of that or more.

Needless to say, given the conversation that we've had today so far, our capacity levels, our utilization levels are not very high at this point in time, given the -- the visibility that we do have and the type of revenue that we are seeing.

As long haul goes down and the coredirector and the K2 and Metro go up, a lot of that is outsourced more so proportionally than long haul.

Our efficiencies are not running very high at this point in time. I can definitely tell you that.

Less than 50%, Joe?

I wouldn't say it's quite that bad, Joe. It's right around that range.

Right around 50?

Yes. ) ) I'll let Gary talk about the bag toting sales people.

Ok.

I think -- you know, I'd answer it like this.

Our sales organization includes a lot of systems engineering folks, as well. It's approximately 250.

You know, it's gone up this quarter. We don't see, you know, great addition to that that number. It's more sort of a realignment to international and, also, a greater focus on the incumbents as you'd expect.

The structure we have within the large accounts we'd have a director or even a V.P. Looking after the account, and then there will be a number of people focusing on different areas in the account.

So, you know, it's about 250 folks in total.

Joe, could you do us a favor and reask your third question?

Yes.

Yes. ) ) We're writing it down there.

That's no problem.

No problem.

) How many was in the turns business? And in July? I don't need specific numbers. It's an important variable.

What do you mean by turns business?

Turns business is what you book, ship in the third quarter. Part of the business is shipped out of backlog.

I've got it. The easy one about that one, we don't go down that path, answer the question. Sorry about that.

Thank you.

That does conclude the question and answer session for today. Mr. Smith, I'll turn it the call over to you for any additional or closing remarks.

Thank you very much.

Thank you for joining us today. I'd like to wish you all a happy and safe holidays. We intend to report our

fiscal Q1 results on Thursday, February the 21st. Thank you very much.

That d oes conclude today's CIENA corporation fourth quarter fiscal year, 2001 earnings result conference call.

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