Ciena Corp (CIEN) 2004 Q1 法說會逐字稿

Good day everyone, and welcome to the CIENA Corporation first quarter fiscal year 2004 earnings results conference call.

Today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations, Miss Suzanne DuLong.

Please go ahead, ma'am.

Thanks, Matt.

Good morning and welcome, everyone.

I am pleased to have with me Gary Smith, Ciena's CEO and President, and Joe Chinnici, our CFO.

In addition Steve Chaddick, our Chief Strategy Officer, will be with us for the Q&A portion of the call.

Gary will provide some brief introductory comments and Joe will review the quarters financial results.

Gary will then discuss the business in the quarter and the acquisitions of Catena and Internet Photonics, each announced separately today.

Joe will wrap up our prepared remarks with guidance for Q2, we'll then open the call to questions from the sell side analysts.

This morning's press releases are available on National Business Wire and First Call and also on Ciena's website at CIENA.com.

Before I turn the call over to Gary, I'll remind you that during this call it's likely that we'll 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-Q, which, in keeping with Ciena's longstanding practice of filing the same day we report, will be filed with the SEC today.

In addition the company assumes no obligation to update the information discussed in this conference call whether as a result of new information, future events or otherwise.

Gary?

Thanks Suzanne, and good morning, everyone.

Our first quarter results were in line with the guidance we gave you at the beginning of the month.

Some points worth highlighting, I think, in Q1;

Our customer base continues to grow and diversify;

Cash use in the quarter was lower than expected; and we achieved positive service gross margins a quarter ahead of plan.

In addition to our first quarter results, we are excited to be talking to you about two important and strategic moves into the broadband services arena, the acquisitions of Catena and Internet Photonics.

And I'll discuss each of these later in this mornings call, after Joe reviews the quarters results.

Joe?

Thanks, Gary.

Good morning, everyone.

This morning we reported first quarter revenue totaling $66.4 million.

This is a 6% sequential decrease and a 6% decrease from the first quarter of FY '03.

We recognized revenue from 100 customers in the quarter, up one from last quarter's 99.

Of the 100 total customers, 14 were new customers.

With the CN Storage Area networking platform gaining traction, our customer count is likely to continue to increase at an accelerated rate quarter to quarter.

As a result, it's likely that we will cease to report on this metric, as it is rapidly becoming less relevant.

We had one 10% + customer in the quarter that represented 17.9% of total sales.

The customer is an international customer.

This compares to Q4 when two 10% + customers accounted for 26% of the quarter's total revenue.

Domestic sales represented 56.1% of the quarter's revenue, roughly in line with Q4.

Turning to the product front, revenue from core networking, which includes CoreDirector and Long Haul Transport, increased sequentially and contributed slightly more than 50% of the quarter's total revenue.

CoreDirector revenue increased both in real dollars and as a percent of total sales, contributing approximately 35% of total revenue.

Revenue from our Metro Networking products, which includes Metro Transport, ONLINE Edge, the CN Storage Area networking extension platform, and MetroDirector K2, was down slightly, sequentially in real dollars, but remained flat as a percentage of total.

Revenue from our Multiservice Networking DN 7 platform represented less than 10% of total revenue, down sequentially reflecting a digestion period at a significant customer for that product.

In addition, we recognized some revenue, though not material, from our reseller partnerships.

Service and support related revenue represented approximately 18% of the quarter's total revenue compared to last quarter's roughly 20%.

The remaining revenue in the quarter came from our Solutions Group which includes sales of On-Center Network Manager software.

Turning to our quarterly results.

Press release represents a GAAP-only presentation of our results, as well as detailed information about the adjustments that, as management, we make to Ciena's GAAP earnings in our analysis of Ciena's ongoing business.

In general, we exclude items that are unusual and/or not related to ongoing operations.

In my comments today I'll speak to both the GAAP results and to what the results would have been if we excluded those items detailed in the press release.

As we discussed in our preliminary report, gross margin in the quarter was stronger than expected as a result of favorable product mix.

Product gross margin improved slightly from 37.5% in Q4 to 38.7% in Q1.

We continue to deliver improvement in our targeted area of services with gross margin turning positive a quarter ahead of plan, improving to 4% from negative 2% last quarter and from a negative 39% in Q3.

Despite our improved product and services gross margin, our overall gross margin declined slightly from Q4's 31.6 to 30.9 in Q1, because of the need to take a charge for excess inventory.

Now turning to operating expenses.

On the GAAP basis, our operating expenses in the first quarter totalled $89.4 million.

As noted in the GAAP P&L, this included non-cash charges for deferred stock compensations, amortization of intangible assets, and restructuring costs.

I'll discuss each of these.

The first, stock compensation charges.

As part of our acquisitions we have recorded unamortized deferred stock compensation costs relating to the unvested stock options and restricted stock assumed in the acquisitions.

During the quarter the amortization expense related to deferred stock compensation amounted to $2.8 million.

Amortization of intangible assets.

This is a non-cash expense unrelated to normal operations arriving from the amortization of intangible assets acquired in our various acquisitions.

During Q1 this charge totalled $3.4 million.

Restructuring costs.

During the quarter we reported a restructuring charge of $3.6 million related to exiting a warehouse facility, workforce reductions of 52 employees, and the change in the timing of sublease payments from nonutilized facilities.

Ongoing Op Ex was about flat with Q4 at $79.7 million.

R&D increased by 3% from $45.8 million in Q4 to $47.2 million in Q1.

Sales and marketing decreased to 1.3% from $26.4 million in Q4 to $26.1 million in Q1.

G&A decreased 8.3% from $7.7 million in Q4 to $7.1 million in Q1.

Our GAAP net loss for the first quarter was $76.7 million, or a loss of 16 cents per share.

Exclusive of the unusual or nonoperating items I discussed earlier, our loss for the first quarter would have been $59.3 million or $38.3 million if tax affected or a loss of 8 cents per share.

Now turning to the balance sheet.

We continue to work our quarterly cash burn and to preserve the strength of our balance sheet.

Cash, short-term and long-term investments at the end of the first quarter, totalled $1.5 billion, a decrease of $107 million from the fourth quarter.

Cash activity during the quarter included $58.6 million used toward operations.

This was lower than expected and within our target of $50 to $70 million.

We also used $49.2 million to call the remaining 5% L&I convertible notes.

We continue to believe that CIENA's strong cash position is a substantial measure of our financial stability for our customers.

Our accounts receivable balance at the end of the quarter was up slightly, as expected, to $45.9 million from $43.6 million in Q4, putting day sales outstanding at 62, up slightly as expected from 56 in Q4.

On the inventory front.

Inventory levels ended the first quarter at $49.2 million, an increase from the fourth quarter's total of $45 million.

The inventory breakdown for the quarter is as follows: raw materials were $13.2 million; work in process, $5.1 million; finished goods $52.4 million; and a reserve for excess and obsolete of $21.4 million.

Product inventory turns were 2.8 in the first quarter compared to 3.1 in Q4.

Finally head count.

Our world wide head count at the end of the quarter totalled 1,778, a decrease of 38 from Q4.

And now I'll turn the call over to Gary.

Thanks, Joe.

Since, to some extent, we've already discussed Q1's results with you, after a brief review focusing on our key strategic levers of revenue, profitability and costs, I'll concentrate the majority of my comments on our acquisitions of Catena and Internet Photonics.

Firstly revenue.

First, while in some cases it is taking longer to get to revenue than we originally expected, we continue to win new customers and, as Joe noted, we added a total of 14 new revenue contributing customers in the quarter.

Revenue from tier 1 customers worldwide made up roughly 60% of revenue with Q1 consistent with Q4.

As expected, we saw our second quarter of revenue from British Telecom and follow on revenue from Tellex.

We also have finalized lengthy new product contract negotiations with an existing incumbent customer, with deployments we anticipate beginning in Q2.

We expect that our overall gross margin will improve over time, but short-term our gross margin will fluctuate depending on the product mix in any given quarter.

In addition to improvements we expect from overall volume increases, we continue to work to improve gross margin by adding more profitable product platforms to the portfolio, by improving the profitability of our services business, and by continuing to focus on product cost reductions.

And we've talked previously about efforts specific to our services business and this quarter we are pleased to get into positive margin territory, a quarter ahead of our internal plan.

In addition, our ongoing focus on product cost reductions resulted in what we estimate to be an aggregate 5% cost savings across our product lines this quarter.

While we have outsourced substantially all of our manufacturing, we continue to look for additional outsourcing opportunities including a direct drop ship program we expect to begin shortly for both the CN 2000 and the DN-7 product families.

Now turning to costs.

Reducing operating expenses continues to be a key focus.

In the last two quarters we've held ongoing Op Ex at about $80 million despite the addition of both WaveSmith and Akara related expenses.

While we are not prepared to discuss the details of our plans at this point, we will reduce our operating expenses 10 to 20%, exclusive of the effects of the acquisitions announced today, by the end of our fiscal year.

We continue to believe we cannot simply cost cut our way back to sustainable profitability.

That recovery for CIENA must come from a combination of revenue growth and careful cost prioritization.

More importantly, our costs and our investments have to be aligned with the opportunity increasingly in the broadband services area.

And that's a good segue into the commentary on the two strategic announcements we made today, both of which get us into new and growing markets.

Internet Photonics is a leading supplier of carrier-grade optical ethernet transport and switching solutions.

They were founded in 2000, with offices in New Jersey and Massachusetts, and they have about 110 employees.

Catena is a leader in the emerging broadband access market.

They were founded in 1998, with offices in Ottawa and North Carolina, and they have about 250 employees.

In the interest of time, I would ask you to refer to the respective press releases for more details on the transaction terms, but, in summary, Internet Photonics is valued at approximately $150 million.

And based on the average closing price of CIENA common stock for the ten trading days prior to the signing of the merger agreement, the number of CIENA shares to be issued is 24.4 million.

For Catena, we'll issue 77.5 million shares.

And based on a closing price of CIENA stock yesterday, this deal is valued at approximately $486.7 million.

We expect both transactions to close by the end of our fiscal third quarter.

As many of you who have been following CIENA know, the key elements of our strategy to drive future revenue and earnings involves expanding our addressable market and the set of solutions we offer our customers.

With Internet Photonics, we expand CIENA's solution portfolio to include a flexible gigabit ethernet transport and switching platform for next generation broadband services.

We also capitalize on Internet Photonics substantial momentum with MSOs, a customer CIENA has yet to truly target.

With Catena, an acknowledged broadband access leader, we gain access to a market that is expected to benefit a service provider shift spending to target the access portions of their networks, building DSL and fiber-based access services.

In addition, Catena's current revenue stream and operating model is likely to have immediate positive affects on CIENA's business model, accelerating our path to profitability.

From both Internet Photonics and Catena's perspective, combining with CIENA immediately and dramatically enhances the scope of their sales and support resources and eliminates any potential question of financial stability or endurance.

It also gives these relatively young companies the opportunity to maintain an entrepreneurial culture, while potentially having the significant impact on CIENA's transformation and future direction.

Let me spend a few minutes on each of these opportunities.

As I said, Internet Photonics has strong momentum with MSOs.

Their current customers include six of the top ten cable operators in the United States, including significant deployments by CableVision and Adelphia as well as carriers such as TDS MetroCom who use Internet Photonics solutions to deploy ethernet private line services.

Industry analysis from Infonetics Research estimates the worldwide ethernet services market, in which Internet Photonics participates, will grow from approximately 2.9 billion in 2003, to as much as 7.5 billion by 2007.

In the cable market, optical ethernet is the underlying infrastructure for the new triple play of bundle services as well as video on demand, voice over IP, and HDTV.

It also improves the access speed of existing services like cable modem internet access.

This same carrier class ethernet switching and transport infrastructure can also help traditional telecom carriers provide new high-speed ethernet services faster and at a lower cost.

In fact we see the future potential to apply Internet Photonics flexible, low cost approach to enhance CIENA's current metropolitan and enterprise solutions.

Organizationally, Internet Photonics will become part of CIENA's Metro and Enterprise Services Group and will continue to operate from their current locations in New Jersey and Massachusetts.

Now turning to Catena.

Catena has deployed more than 5500 integrated broadband access solutions with regional bell operating companies, major independent operating companies and competitive local exchange carriers.

Their produces include the CNX 5, which is a card for card upgrade solution for the Lucent SLC 5 series loop carriers.

It provides two lines of integrated plain old telephone services or POTS, and two lines of DSL service, and replaces cards that provide two lines of POTS only.

Catena's CN1000 broadband loop carrier is a high density broadband access system that delivers integrated voice, data, and video services at the fraction of the cost of competing systems.

It integrates the functions of a next generation digital loop carrier, a video enabled digital subscriber line access multiplexer, or more commonly known as a DSLAM; a fiber multiplexer and a packet ready media gateway for voice-over IP.

CN1000 provides POTS, DSL, and packet voice capability on every line enabling carriers to software provision these services to any subscriber remotely without manual intervention.

Catena is currently selling to three major RBOC's including Bell South.

CIENA's customer base, particularly at the RBOC's, is very complimentary with Catena's.

Let's spend a minute on the broadband access market generally.

According to market research by the Yankee Group, the number of broadband subscribers in the United States will nearly double in the next four years, growing from 33.5 million in 2004 to 61.5 million in 2008.

And overall the Yankee Group estimates the broadband equipment revenues in the access arena will present a market opportunity in excess of 7.5 billion.

Broadband subscriber growth means new revenue opportunities for service providers and a growing market for Catena's products as carriers place increased emphasis on the access portions of their networks.

Catena's solutions enable cost-effective delivery of voice, data, and video services over both copper and fiber infrastructures including fiber to the premises and fiber to the curb.

We believe Catena's portfolio provides the most cost effective solution for carriers to deliver next generation broadband services.

We also see meaningful synergies with out DN 7 product family.

Together, the DN 7 and Catena solutions will provide carriers a compelling offering, enabling new DSL and voice over package services.

We also believe that CIENA's market presence and established customer relationships will lend significant credibility and traction to Catena's CN1000 platform sales.

The existing and still growing footprints of the CNX 5, and the fact that it shares a common EMS with the CN1000, is a factor we expect can exploit as a Trojan horse to facilitate its adoption versus competing solutions.

From a product integration perspective, Catena's products are already interoperating with CIENA's products today.

Organizationally, Catena will form CIENA's Broadband Access Group, operating from their current headquarters, and led by their current President and CEO, Jim Hogeson(ph).

I'd like to extend a welcome to the Catena and Internet Photonic teams.

We are looking forward to you becoming a part of CIENA.

In summary, we continue to take the necessary steps to position CIENA as a comprehensive, strategic solutions provider.

Steps we believe will translate into future growth potential.

The acquisitions of Catena and Internet Photonics are part of our ongoing efforts to fuel long-term revenue growth and sustain profitability by expanding our addressable market, and tapping new growth opportunities in adjacent and complimentary markets.

In the simplest of terms, Catena and Internet Photonics enhance the scope of the solutions we can offer our customers and further extends CIENA's network reach.

More strategically, these acquisitions are part of CIENA's vision to offer our customers a comprehensive set of solutions that enable them to realize a true, all-service network.

One that, through automation and network intelligence, reduces the overall cost of network ownership and facilitates new services.

The adoption of broadband services by enterprises and consumers around the world is reshaping our industry.

Today's acquisitions of Catena and Internet Photonics significantly enhance CIENA's participation in the fast-growing broadband market.

Since 2003, CIENA has been a participant in the delivery of enterprise broadband services with it's ONLINE Edge, CN 2000 and DN 7 platforms.

CIENA will now have the ability to support both residential and enterprise broadband services for both telecommunications and cable operators.

The near-term opportunity for carriers and enterprises is optimizing delivery of any broadband service anywhere, as opposed to any one specific service in any isolated portion of the network.

That's why CIENA is integrating the best optical, data, and access solutions to enable more profitable, more reliable, and more efficient delivery of a wider range of broadband services.

We passionately believe that the steps we have taken today to involve the vision and solution set to encompass new technologies, in new areas of network focus, position CIENA for stronger, more sustainable revenue and earnings growth longer term.

With that I'd like to hand over to Joe who is going to walk you through the guidance.

Thanks, Gary.

Before I begin to offer our guidance for the second quarter, I will remind everyone that statements Gary just made and those that I am about to make are forward-looking.

It is important to review the risk factors detailed in our 10-Q in order to understand the factors that might cause actual results to differ materially from this guidance.

In addition, our Q2 guidance includes no expectations associated with the acquisitions we announced today.

We continue to believe that revenue in the second quarter will be up as much as 20% from Q1 depending, as always, on the timing as well as acceptance of significant orders including those associated with the gigBE(ph) project.

I'll reiterate that short-term we continue to anticipate gross margin volatility quarter to quarter depending largely on product mix.

We believe overall gross margin in Q2 will decrease from Q1 due to predominantly to product mix.

We expect overall operating expenses in Q2, exclusive of any unusual or nonoperating items, will remain roughly flat to Q1.

We expect other income expense will be an expense of approximately $500,000.

We estimate Q2 share count at approximately 475 million total shares.

As a result, we expect that, exclusive of unusual or nonoperating items, our net loss for Q2 will be in a range of 8 to10 cents per share.

Finally on cash.

We expect our operating cash use in Q2, exclusive of unusual or nonoperating items, will be approximately $60 million, roughly flat with Q1.

Before we go to questions, let me offer a few comments on the performance profiles of the acquisitions.

Catena's Q4 revenue was approximately $25 million.

Internet Photonics Q4 revenue was approximately $5 million.

Catena is recently profitable, whereas Internet Photonics is at a much earlier stage.

We expect combined, they will have a positive combination in dollar terms to operating income in our fiscal '04.

As Gary noted, we expect both transactions to close by the end of our third fiscal quarter.

Operator, we'll now take questions from the sell side analysts.

Thank you, sir.

To ask a question on today's conference, please press the star key followed by the digit 1 on the touchtone telephone.

Again, that is star one for questions.

If you are using speaker phone equipment, please be sure your mute function is disengaged so your signal can reach us.

Again, it is star one.

We'll go first to Brant Thompson from Goldman Sachs.

Hi, guys.

Can you hear me okay?

Good morning.

Congratulations on the acquisitions.

I was wondering if you can give us any color on a few things?

First off, just give us an idea of maybe the company's revenue run rates and what levels of profitability they bring to the table?

If you can get into that kind of detail.

And then, specifically on Catena, what kind of traction there currently is on their CNX 1000 product?

And if you think there's potential to see contract announcements around that product in the near-term or is that a product you expect to ramp more as we get towards '05?

Thanks.

Brant, why don't I take that.

In terms of to give you an idea, in terms of run rate of the companies, Catena's Q4 revenue, I think, was around the mid-20s and Internet Photonics was about $5 million.

Catena is recently profitable and Internet Photonics is at an earlier stage.

In terms of the CN 1000 traction, first of all it's already shipping.

They already have customers, and it is in trials with a number of potential customers.

We expect that that will translate into revenues in the medium to longer term, but they are already getting revenues from that platform.

So it is shipping and it is a maturing product.

And clearly, with part of the rationale for the acquisition is that I think our sales channels and relationships, and financial endurance, I think, will particularly assist Catena in achieving CN 1000 platform sales.

What kind of long-term gross margins, kind of normal gross margins, do you expect to get from these different companies?

Hey, Brant.

This is Joe.

Let me take that one, if I can.

At this point, we need to get the two companies in and we need to put them on the same accounting policies and everything that we are doing.

So until we do that, we are not really prepared to go down there, down that path right now.

Maybe when we report the next quarter we'll be able to give you more information on that.

Thanks, guys.

We go next to Ehud Geldblum with JP Morgan.

Thank you.

Good morning.

I have a couple of questions.

First on the quarter and then on the acquisitions.

Joe, on the quarter, what percent of revenues do those 14 new customers represent?

And would it be correct to assume most of them were probably Akara?

And on the acquisitions.

Looking at, it looks like you paid essentially, roughly the same multiples for both of them, roughly in the vicinity of 4.5, maybe 5 times revenue.

And as an - on a multiple of invested capital, it looks like it's somewhere around 2.4, almost exactly the same in both situations.

That seems to be a lot more on a multiple of invested capital at least, a lot more than you paid for WaveSmith last year.

And I'm looking for a comment as to how you arrived at these valuations, and how you could justify these were the right prices to pay for these types of companies now?

And why you paid pretty much the same multiple for both, when one seems to be much further long in it's progress than the other?

And then, I guess the final thing is, if you could go again over the strategic logic behind Catena?

Internet Photonics I do understand, it makes a lot of sense, I'm just still struggling why Catena is not a little bit far afield from what you've been doing, and granted it's a good idea, certainly, to diversify.

I don't quite understand how it fits in with the rest of your product portfolio and you might be stretching yourself a little bit too thin?

Sure.

I'll take that.

I'll start off and maybe let Gary finish up, if that's okay.

Let me just recap your first question to make sure I answer it properly.

The first one had to do with the quarter.

And it was a percentage of revenue from customers and were a lot of them Akara?

We all talk about, we don't normally talk about how much of a percentage of revenue comes from new customers.

I don't want to be inconsistent with what we normally do, but I can tell you that out of 14 new customers, almost half, but not quite half, of them were because we sold the Akara product or CN product to the new customers.

But we sold pretty much the rest of the product line in some of the other customers.

So it was pretty diverse, which in our mind is a really good thing.

There was also one new tier one customer in the mix as well.

When we talk about these calls, our focus is on getting more and more tier one players into the mix.

The second question has to do with valuation and price for each of the acquisitions.

And I think you specifically referenced the one that we just did with WaveSmith as a stake in the ground.

And I would say on both of the fronts with each of these companies, they both have had revenue from multiple quarters, whereas the WaveSmith folks didn't have anything quite as strong as that, or substantiative as that.

And that's really what drove the valuation and the pricing.

As well as, probably, in the case of Catena, the future opportunity and markets we can address with the Catena products and in addition to the Internet Photonics products.

Gary, you want to handle the Catena question?

Or Steve?

Sure, I'll handle it.

The synergy between the broadband access systems and specifically the fact the Catena product is a packet-based system, lends great synergy with our existing DN platform, which is primarily used in aggregation of broadband services, specifically DSL and other layer two services today.

So they are quite complimentary.

Clearly there's a lot of synergy with the other technologies in the company including some optical technologies, and layer two packet technologies, and frankly, it's where the money is being spent.

So, you know, as carriers shift their spending, as we've noted earlier, from core infrastructure to broadband services, for us to be a significant participant, we have to have portfolio products that are aligned with that.

Okay.

Do you think the opportunity with Catena is primarily domestic or is there some international opportunity there as well?

There is very, very strong international opportunity.

Particularly in Asia.

Despite the fact the core product is a (INAUDIBLE) part 5 part ,which is primarily a U.S. product?

It's not the CNX 5 that is gaining traction in Asia, it's the CN 1000 platform.

Okay.

Thank you.

Appreciate it.

We go next to Timm Bechter with Legg Mason.

Thank you.

I was wondering if you could talk a little bit more about to the extent to which these acquisitions can accelerate the path to profitability, and I get a feel, obviously, that you're gonna add some revenues and maybe on balance, the two of them together maybe net neutral and maybe even a little bit positive in the near term.

You're not going to close this for a couple of quarters.

How is that impact, at what point, going to bring to profitability?

That's my first question.

Timm, I think, you know, that Catena is recently profitable and I think they will both contribute even within this year that they'll assist us to be profitable from a dollar perspective.

That they will contribute on a dollar basis to improving our financial performance.

And I think as we look further out, as we gain traction and synergies between the new platforms through the sales channels and the rest of it, we think that they will accelerate that financial performance.

And clearly, you know, when we make these kinds of decisions, particularly in this environment, we need to balance the medium, longer term strategic issues with the shorter term financials.

And that's what we've done here and, I think both of these are a good balance between the two.

Both as Steve has said good customer traction, existing revenues, and an expanding customer base.

And, I think, Timm, we'll be in a better position to discuss that in detail after the acquisitions actually close.

We can be a little more specific about some of the activities there.

Okay.

Fair enough.

My other question has to do with relationships.

You said that Catena is in three of the four RBOCs.

I'm just curious if you could speak to SBC in specifics since that has been one that you guys have been trying to get into?

And with regard to Internet Photonics, I'm wondering if they have relationships with the largest two or three providers, Comcast, TimeWarner, (INAUDIBLE).

Timm, I don't want to get drawn on specific customers other than what's in the public domain.

But I would say that SBC, we have significant traction with SBC, you know, translate that as we are shipping product on the DN 7 platform.

So, you know, if you think about it from a synergy point of view, as Steve Chaddick was talking about, what the DN 7 is doing is actually aggregating a lot of that broadband access traffic.

It's very well - we're already interoperating with those kind of platforms.

We've already penetrated SBC and I think that really adds to the relationship and broadens us out in the broadband access space.

Turning to IPI, the customers announced, and I think as we said, they've got six out of ten larger MSOs in North America.

We announced Adelphia, or they've announced Adelphia and CableVision, and they have good relationships with the others, but we can't talk about that publicly yet.

Thank you.

Next to Steven Kamman with CIBC World Markets.

Thanks very much.

My questions have been answered.

We go next to Nikos Theodosopoulos with UBS.

Thank you.

A couple of questions.

Just real quickly, do you have, in the past when you acquired a company, CIENA typically did the integration effort.

They used Steve Chaddick or any of the staff to go in and integrate the companies, and the senior management teams, for the most part did not stay around.

In this case, you're getting two companies, spread out geographically.

What's your plan?

Are you going to do something different this time?

Do you have retention plans for the senior management teams of the two companies or do you think you're going to use the same method that you did in prior acquisitions?

So, if you could comment on that and then I have a follow-up question.

Okay.

Nikos.

I think each of these acquisitions are different and we have to view them on their own individual merits and decide with the leadership team what's the right thing to do.

For example with WaveSmith, the engineering team is in place.

Mike Reagan, who was leading that engineering team is still leading that engineering team.

Bob O'Neill is responsible for that business, and he was with WaveSmith when we acquired the company.

And similarly, same kind of situation at Akara.

With these two companies, certainly from Catena, as we've already said, Jim and the leadership team are staying, and the key players are staying at Catena and Jim will report directly to myself.

On Internet Photonics, that will become part of the Metro and Enterprise Solutions Group and we're still working through the exact integration plans for that.

We are absolutely focused on retaining the key employees.

That has always been a focus of CIENA in any of these acquisitions. 'Though, as I said, Nikos, they vary from the different types and spaces and maturities of the company.

Right.

So when I hear you say that the CEO's will report to you, is that something you expect will be ongoing or just on an interim basis for the integration process?

Nikos, I think it's too soon.

We've said publicly around the reporting is what we've said.

I think it's too soon to get into any more details on that, except to say we absolutely intend to retain the key folks.

Okay.

Joe, just two quick questions for you.

Deferred revenue went up.

Can you talk about the composition?

Why did it go up and services product and any color on that.

Thank you.

Thanks, Nikos.

Sure thing.

Deferred revenue went up.

It was predominantly through the shipments of hardware.

I can give you a clue that it was long haul.

We haven't yet announced the customer and / or the new agreement but stay tuned on the announcement.

We may have something for you within the next couple of weeks.

Okay.

And just, really one last quick one.

Do you have a combined operating expense for the two companies in the fourth quarter?

You gave the revenues, but do you have an Op Ex number?

No, Nikos, we did not share that with you.

We need to get in, and like I said, it's kind of hooked into the question that was asked earlier on the margin front.

We need to get in and finish it off and make sure the way that they accounted for stuff, and geographically where it stands on the P&L is analagous to the way that we do it.

And until we do that, it would be premature to share that information with you.

Okay.

Thank you.

We go next to Steve Levy with Lehman Brothers.

Good morning.

It's Marcus Cooperschmidt for Steve.

I guess I wanted to get a better sense in terms of the guidance for the core business.

Potentially sales growing up to 20% next quarter and the thing about the data networking business.

I guess, for my first question is, would you expect the data networking business to rebound after a slight pullback this quarter?

And do you think that comes from new customer opportunities or a return from the one key customer?

And I have one follow-up.

Marcus, my answer to that would be yes to both of them.

I think the particular customer we're talking about would be, digested some of the deployments and also, we've got a lot of new customer traction to the DN 7.

So I would absolutely expect that product.

It's going to, you know, get lumpy quarter to quarter, but absolutely going to be an expanding revenue stream for us and we are very pleased with the traction that it's seen at a number of large new customers.

Okay.

And a quarter ago you gave us some rough guidance for data networking and the Akara to be around a third of the total revenues for fiscal '04, I believe you said?

Do you have an update on that guidance, please?

Yes.

We haven't updated that but we think that's consistent with what we are seeing and the traction and that's certainly our goal.

You know, I think as Joe eluded to, we see strong data sales, you know, in Q2, Q3, et cetera.

But Q2 mix will likely be biased toward long haul and that will be impactful on the margins, as Joe indicated.

Think about the strong second half (INAUDIBLE) to get to that kind of target?

Yes.

Okay.

Great.

Thanks.

We go next to Paul Silverstein with Needham & Company.

Thanks.

Joe, can you (INAUDIBLE) the head count with respect to continuing Internet Photonics?

Sure Paul, the head count at Catena is around 250 and Internet Photonics is at 110.

I recognize it's early but I'm sure you guys have done some noodling.

Any expectations for what the head count will be coming in?

We didn't hear the last part, Paul.

You know what, strike it.

Can you just repeat, I was a little bit confused.

I thought I heard you say, Joe earlier, that Catena did $25 million in Q4 and Internet Photonics, $5 million, but then Gary, in a subsequent question, said it was in the 20s.

Did I hear you correctly?

I think I said mid-20s.

Or I should have said mid-20s. $25 million for Catena and about 5 million for IPI.

How long have both been shipping?

Paul, I'd say quite a few quarter between each of them.

Hard to say.

There's a track record for both of them?

Oh, yes.

Oh, yes.

Again, Internet Platonic is a bit more lumpy than Catena is.

A lot of new customers, and we'll offer more for you, maybe at the end of Q2 on that.

You're suggesting that if we look at it from a customer win perspective, they are gaining attraction even though the revenues right now (INAUDIBLE)?

Paul, the answer to that is, yes.

To an earlier stage as we talked about Catena but they are gaining customer attraction and translating that into revenue.

Gary, I know the focus of your comments with Internet Photonics is on the cable market.

Outside of cable, is there any insight you can give us as to where the company is?

Steve, do you want to - ?

Yeah, Paul.

There is a fair amount of attraction with the products and some revenue associated with ethernet services delivery and specifically tier 1, tier 2 carriers around the world.

Those are new and developing, but for ethernet services, and the enterprise spaces in particular, this is a very, very attractive platform to provide those services.

There are some channels in place that will help that product sale around the world, and they've been in the works for approximately 18 months while the Internet Photonics guys are quite mature, although we can't talk about it publicly yet.

Better aimed at tier 1, tier 2 players globally.

Great.

Are there any revenues to date from the international market for either Catena or Internet Photonics?

Paul.

As Steve said, there are for Internet Photonics, I do not believe there are for Catena right now, Paul.

To the best of my knowledge.

Absolutely Internet Photonics.

One final question, CN 1000, you want to tell us what that is as a percentage of revenues right now or in dollar terms?

As opposed to the line card business for Catena?

Paul, we're not prepared to share that now.

You're right.

Thank you.

We go next to Gina Sockolow with Buckingham Research.

Thank you.

Could you discuss how much of your revenue came from acquisitions in the last year?

Or in another way, how much of your incremental revenue over the past 12 months have been contributed by acquisitions?

And I have another follow-on question for you.

Gina, I don't have that off the top of my head.

I will say to you that the objective, certainly, of the more recent acquisitions with Akara and WaveSmith has been to expand our addressable market more toward the edge and access and clearly, IPI and Catena are consistent.

This has been part of our plan going back about two years.

And what we have indicated, if you look to WaveSmith, you know, fairly early on they were about 10% of our revenues, even in, I think, the first quarter that they participated.

So I would say the overall objective this year is for the data and access piece, which is largely acquisitions would be about 30% of our revenues.

So I would answer it like that, Gina.

A reasonable general conclusion that, you know, about 30% at least, of our revenues will come from the recent acquisitions that were made.

Okay.

And then looking at your acquisitions, the recent acquisitions.

Are these all end user products?

And if so, CIENA doesn't intend to sell to end users, will you change your distribution channels and your distribution strategy?

Gina, we are moving from the core, if you look at our overall business, moving from the core to the edge.

By its very nature, some of these access products are both carrier products and customer primus enterprise type products.

And so the natural channel, if you like, that we have is through the carriers.

And so they are really using it as customer premise equipment.

We're also working on other channels and we inherited a lot of that activity when we acquired Akara and so we were able to leverage off that, plus some of the other activities that we've done ourselves.

So the carriers are customers for infrastructure as opposed to essentially distributors?

Well, they also, within a lot of the carriers, they have enterprise sales groups.

So it's a natural channel for us.

Where we can provide infrastructure product and they can resell those services into the enterprises.

Okay.

And lastly, you're buying, looks like you're buying layer one companies.

As I keep asking Steve, how are you going to move to layer 2 to 5 particularly, IP processing at layer 2.5?

How -- you need to do it and how are you going to do it?

Gina, this is Steve.

I'll disagree a little bit with these being only layer one companies.

Both of these products have fundamental layer two aggregation in switching capabilities, both on the gigE side for switching video on demand streams with Internet Photonics, and the CN product, which is also got a storage product, which is very, very protocol illiterate at, and really higher layer protocols, than even layer two.

The DN platform is our multiservice switching platform is a layer 2 to 2.5 product.

In fact, we are introducing the first release of that product very shortly with MPLS capabilities on it for carriers and that's already under trial in a couple of places or early evaluations.

The Catena product, as I mentioned before, includes media gateway for (INAUDIBLE) voice eventually.

It actually is not a layer one product, either.

So, if you look at our product family right now, including some of our classic layer one products, they all include layer two capability and in some cases, layer two and a half.

Our layer three stuff comes primarily from our association with Laurel networks which is an edge router and so as we move step by step through this network convergence process, you'll find us becoming more and more literate specifically up through layer two and a half with MPLS.

Our layer three stuff currently comes from primarily from our association with Laurel Networks, which is an image router and so, as we move step by step through this network convergence process, you'll find us becoming more and more literate.

Specifically up through layer two and one half.

Thank you.

In the interest of time, we do ask that you limit yourself to one question.

Next to Steven Koffler with Wachovia Securities.

Thank you.

Can you hear me okay?

Yes, good morning, Steven.

Good morning.

Protocol literate.

I like that one, Steve.

I'm going to take one more crack at the business model impact of Catena, if I could.

As we've sort of seen the industry restructure and gross margins fall out along different classes of products, as always, software content had a lot to do with the gross margin.

And it's pretty clear that sort of high value added, high software content products are supporting gross margins at least in the mid-30s up into the 40s.

Can you comment on Catena that way, in terms of revenue stream now of $25 million quarterly.

You should have a pretty good gauge where it slots in along the software content and what, at least the gross margin trajectory would look like?

Steve, I'll take a crack at that.

A couple things that are important about Catena.

First it has a great deal of software associated with it.

As an example, one of its key benefits is the ability, in particularly in DSP software, to enable DSL without physical intervention or adding splitters, which is a great operational benefit.

It's a software-based product which allows features to be added over time without physical visits.

Another really key important piece of value in the Catena product line, is their intellectual property in the area of custom ASiC development, which is in a sense a form of software that has very, very high value because it manages to keep the future set rich and the costs low.

So in general without being real specific about it, I think our expectation is that these products in the access arena and broadband services arena, because of their high software content, intellectual property content, will generate higher than typical margins for the access space without going into more detail on that.

That's our expectation.

Steven, I think without going into detail on the business model, it would be a reasonable assumption, that as we expand our portfolio here, we are looking for both adjacency from a market point of view and towards the edge into the broadband services.

But all of the companies that we look at would have to deliver ,within a short space of time, a strong business model and would have to contribute to the company and in many ways be a better gross margin than some of the core transport.

Okay.

So just to close that up.

I guess, usually all the gross margins that are flying around now from competitors, it's at a benchmark, something pretty close to what you're seeing from competitors when your evaluating an acquisition.

Well Steven, as I would say, at a general level, we look at things that can contribute financially and meet that strategic architecture and market needs.

Okay.

Thanks.

Good luck with it.

Thank you.

We go next to Hasan Imam with Thomas Weisel Partners.

Hi, it's actually Mike Evoshell (ph) for Hasan.

Question on what you are targeting for, your break even business model, starting with CIENA stand alone previous to the acquisitions today, I think you were talking about something in the -- in the 150-$175 million a quarter on the revenues in order to break even.

Is that still your expectation there?

Mike, let me take that.

I think we've indicated on this call and others that our operating expenses have remained flat at $80 million, even though we've absorbed two acquisitions on a full quarter basis, WaveSmith and Akara.

If you would look on a core business basis, outside of these two acquisitions, to see our break even come down from 150.

Okay.

And with the two acquisitions, is the expectation that it basically stays in that 150-175 range?

Putting the acquisitions to one side, Mike, we indicated today, we expect our operating expenses to come down 10-20% as we come out of the fiscal year.

Now depending on what gross margin you assume on the core business, that would take the break even down from 150 million in the core business.

Right.

I meant, we know the core business now is 150 or less.

If we add in the other two, do we still stay in the 150-175 range?

I think, as Joe said earlier, not prepared to discuss the integrated performance yet, because we've got some other work to do there and part of which is the deals haven't closed.

When they close we will absolutely share that with you.

This is Joe.

The lawyers are all over us about going anywheres with any type of forward-looking information with regard to either of these two acquisitions, because we will have to file S4's and then we get into navigating through all kinds of SEC rules.

And they've got pretty tight reins on us now.

I understand.

Is it safe to assume though that in your evaluation of the acquisition you're not looking at a massive uptick in terms of what you need in revenues in order to be a company that can actually generate money in the future?

I would answer the question like this, Mike.

We are very conscious about medium-term, short-term and medium-term financial performance.

Okay.

Thanks, guys.

As a reminder in the interest of time, and allowing everyone a chance to ask their question, please limit yourself to one question.

We go next to Reginald King with WR Hambrecht.

Great.

Thank you.

Could you help give us an update on what you view as the competitors and what you view as the competitive strength of the company?

Reg, this is Steve Chaddick.

I'll take that for a moment.

We talk about Catena.

The CNX 5 product, which is the top grade (INAUDIBLE) product, has no competitor right now.

It is unique in terms of it's ability to update those existing loop carrying platforms.

The alternatives to that are installing completely new systems on a side by side basis which is certainly more expensive.

The CN 1000 space, the broadband, the carrier business, the field has been richer, I guess, in one of the competitors but it really comes down, I think, in the long-term to a couple of major ones, Alcatell and (INAUDIBLE) primarily.

We actually believe we will have extraordinary product strength in that space competitively, both from a future perspective, flexibility perspective and a cost performance perspective.

Internet Photonics is also a bit unique in the infrastructure builds, in the cable space.

The alternative there is classically been traditional (INAUDIBLE) boxes that have ethernet overlays as plug in cards, as an example.

Those tend to be much more expensive.

The Internet Photonics folks have done a very, very, very good job of building a very cost effective but carrier class product that is appropriate in that space and have integrated a number of layer two features for video on demand switching that, in the future, we think will be quite compelling from a competitive perspective.

So,in both cases we expect them to be extremely strong performers from a competitive perspective both in terms of features, flexibility and cost performance.

Steve, I'm sorry.

Did you say in your earlier comments that Catena has a media gateway as part of the product portfolio?

Yes.

It's built into the VLT product.

Okay, great.

Thank you, very much.

We'll go next to Tim Long with Banc of America.

Hey there.

It's actually Cobb Sadler for Tim Long.

How are you guys doing?

Good, Cobb.

Good.

My question is actually on, you know, kind of what made you famous over the last years, optical switching and (INAUDIBLE) WDM.

In Europe, I guess mid-'03, we're kind of thinking early to mid-'04, as far as big deals and PTT starting to do something.

Is that timetable still intact or you have any guidance for us there?

Thanks a lot.

I think if you look at the major PTT's, I mean, clearly British Telecom is moving.

We announced it's starting to see some activity amongst many of the other PPTs in Europe looking at the core infrastructure.

I would say towards the end of '04 early '05,Cobb.

So it's probably moved out a little bit from our view about a year ago.

We're seeing more core activity near term in the U.S. than we're seeing- If you want to put a time frame on it, I think some of the larger U.S. carriers are going to move before the continental PPTs.

Okay.

Sounds great.

Thanks a lot.

Thanks, Cobb.

We go next to Wojtek Uzdelewicz with Bear Stearns.

Thank you.

Good morning.

Just kind of from a strategic big picture perspective, it looks like you guys have been going in a lot of directions with WaveSmith, Laurel, cable, storage now access.

Sort of what do you want to be when you grow up?

More of the question is, you guys want to go end to end solution company, you want to be focused on specific space?

One thing I'm a little concerned, is are you sort of stretching yourself too thin?

Are you trying to chase too many markets?

That's my question.

Wojtek, let me answer that.

I'm going to answer it pretty simply.

You've got two main pockets.

One is optical infrastructure.

Clearly that's where CIENA made its name.

Clearly that market is not going to grow at the rate that we need it to grow to get this company to where it needs to be.

We set out about two and a half years ago to move and add to that portfolio into broadband services.

If you look at everything we've done, it's completely consistent with that.

The WaveSmith acquisition with the DN 7 is now aggregating broadband services and moving into MPLS aggregation for a lot of carrier traffic including frame and ATM services, including wireless services.

If you look at Akara, that's at the edge of the network, focused on storage space, and if you look at both of these acquisitions,you know as Steve was saying, they are broadband access further out towards the edge than the DN 7.

So I think there's a very consistent strategy with it which adds broadband services in addition to our strengths and optical infrastructure.

And I think, if we can put the two together in a careful and thoughtful way, then we've really got a tremendous amount of leverage, because we understand from our experience at the core of the network what it takes to actually migrate these large carriers to facilitate real end to end broadband services.

So we have a broader perspective than a lot of other players who are just playing in certain parts of that.

We are focused on innovative next generation type technology and bringing that to market in an end to end way from an economic perspective across the networks.

So we understand how to evolve these networks from the core to the edge, and now I think with these two announced acquisitions today, we've got a very powerful portfolio from the core of optical infrastructure that facilitates all of the broadband services.

That's fair.

Thank you.

We go next to Tal Liani with Merrill Lynch.

Hi.

I have two quick questions.

The first one is about the share count.

What should we model for share count for the rest of the year and next year?

And the second one is more sort of a question on the strategy.

You have made a few acquisitions in the past few quarters.

I'm wondering how, what kind of organization or support organization you have to integrate all these new companies into CIENA?

At the end of the day, you are relatively a small company and you're buying other small companies and it seems like so many acquisitions, in a short period of time, will require a lot of management attention just for the integration.

So I'm wondering if you can elaborate your efforts, how you do it from organization oint of view or structure point of view, how you plan to integrate all these companies?

Good morning, Tal.

This is Joe.

On the share count, if I go back to the script for Q2, we gave you a targeted share count of 475 million shares on a stand alone CIENA basis, and it shouldn't grow much for the entire year above that.

Gary, you want to take the next one?

It is a good question, Tal.

Highly pertinent.

We really geared ourself up over the last two years and structured our organization around being able to do multiple acquisitions and be flexible and nimble enough to be able to do that, organized by product lines so that you get the independence of the various market areas.

And I think you look at WaveSmith and Akara, these companies are already integrated in in a fairly short space of time.

We have a structure around our sales and our operations that's all geared up for this, which allows for us to do multiple acquisitions in a fairly short space of time and to integrate them very quickly.

I mean, clearly, it's challenging, but we're 100%, you know, focused on doing what's necessary to make them successful.

So we are very mindful of it.

We don't get it all right all of the time that's for sure.

But I think we try and create a structure whereby the people who have been running the successful businesses can continue to run those successful businesses.

And they can get leverage from being part of CIENA as opposed to stuff getting in the way.

These businesses are going to be run independently for a while and only then you'd integrate them?

Well Tal, as I said, I think the Catena one will be run independently and will form the Broadband Access Group.

With the Internet Photonics, it would be part of our Metro and Enterprise Group, because I think they've got a lot of complimentary platforms and sales channels there.

And Joe, just one clarification on the share count.

You said, 475 for next quarter, what's the impact of all the acquisition you made on the share count?

I apologize, I'm in a hotel, so I don't have everything in front of me.

Oh.

I'm sorry, Tal.

Hold on, let me get a copy of the press releases here in front of me.

The Catena deal represented 77.5 million shares.

The Internet Photonics deal was, I do believe it was between 23.5 - 24.5 million shares.

And these are the only new shares that are gonna be added to the 475?

You don't have anything from prior quarters that is also going to be headed two quarters out?

No, sir.

Thank you.

We go next to John Anthony with Fulcrum Global Partnerships.

Good morning.

I apologize if you answered this first question I'm going to ask.

Relative to the guidance that you gave that you expect the Catena acquisition to be accretive, could you just at least give us some sense for whether you expect the Catena revenues to be growing faster than your core revenues and roughly how much of an acceleration in growth are you expecting for the Catena revenues?

Are you looking for double digit growth?

Are you looking for any growth in that guidance in 2004?

And then also going back to a question that was asked previously on the CNX 5 in the competitive landscape, were those comments about the CNX 5 being unique, without competition, also inclusive of Lucent's existing product portfolio?

Thanks.

Sure, John.

This is Joe.

Let me handle the first one.

You might have missed what we said earlier.

Because we need to file S-4s, we cannot talk about any forward-looking information, otherwise I'll be shot by the lawyers, so I just can't go there.

So you're going to have to, unfortunately, go with what we gave you in the way of some historical information and look to the S-4s, and then we'll talk more about it when we close the next quarter.

Steve, you want to talk about the CNX 5?

John, as far as I know, there is no upgrade path for the Slick 5 other than the CNX 5 from Catena.

Lucent does not have a product in their portfolio that can do the same thing.

In fact, they've pretty much abandoned that whole space.

Okay.

Thanks, guys.

We go next to Andy Schopeg with Nutmeg Securities.

Joe, good morning.

I wanted to ask you to give us an update on some of the balance sheet items, specifically the long-term restructuring liabilities which currently amount to over $50 million and the long-term unfavorable lease commitments of $58 million.

Am I correct these will be future cash costs?

And at what point, or over what time frame are you likely to whittle down these restructuring liabilities?

Thanks, Andy.

That's a good question because there are some large numbers.

They are definitely cash items.

They could go out as long as 15 years.

The degree to which they will go out is going to be a function of, believe it or not, the economy and real estate industry.

We need to sublease some of this excess space that we have.

We don't own any of it and none of it is related to any we do.

They are all related to leases, probably the biggest concern I have is all of the excess real estate that we own in the State of California.

That's probably the long haul (INAUDIBLE).

If you were to be able to sell or dispose of that real estate, how would it affect this particular liability or commitment?

Well, it would be a function of what we would get for it.

Again, we've already been able to sublease most it, some of it we've gotten 50 cents on the dollar, some of it we've done very well on.

I don't want to say how well, it might hamper our negotiations going forward.

But again, you know, if I sit here and say, what do I worry about the most?

And it's over the leased property we have in the State of California.

Finally the long-term deferred revenue of 15 plus million, what portion of that is associated with service and maintenance?

We don't typically go into that level of detail.

It's fair to say a large portion of it is.

Okay.

Thanks.

We go next to Alex Henderson with Smith Barney.

This is Mike Genovese for Alex Henderson.

My question is on the Internet Photonics acquisition, and specifically the overlap with the ONLINE Edge product.

If you could sort of characterize how the products may have - may overlap and how you plan to segment the market as you continue to sell each of these products?

Mike, it's Steve.

I don't think right now there's any overlap at all, really.

As we evolve those products, we'll look at what we can do with them.

We really think they are separate.

Can you talk about the different niches then that the products go after?

Well, the ONLINE Edge product is platform is really an aggregation platform for CPE and carrier provided CPE for more classic TDM services.

The Uniplex platform is very geared towards gigE switching and transports and, as we've mentioned, has a great deal of traction in (INAUDIBLE) space where ONLINE Edge is not played at all.

Okay.

And real quick, I just missed the head count.

Can I get that number again?

Sure.

This is Joe, Mike.

It's 1778.

Thanks.

We go next to Christin Armacost with SG Cowan.

Thank you.

Two questions.

First on the 20% guidance for sequential growth.

Would it be fair to say that the largest contributor to that sequential growth is the long haul business?

Christin, this is Gary.

That is a reasonable assumption, yes.

And then, Joe, you said that operating expenses would be flat approximately on a dollar basis.

So it sounds like some of the cost savings on the organic CIENA basis will be back end loaded if you're going to get closer to the higher end of the Op Ex savings range.

You're definitely accurate, Christin.

That's correct.

And so there's, I'm assuming these are attributable to processes that are in place or other potential for outsourcing, that in the next two quarters, or the back half of the year will help drive Op Ex down?

That is correct.

There are quite a few initiatives that are under way as we speak today that will come to fruition in the back half of the year.

Thank you.

Due to time constraints, we'll take our final question from "Subu" Subrahmanyan from Sanders Morris.

Thank you.

I just had a quick clarification on your comments on Op Ex reduction.

You mentioned 10-20% number again.

I'm wondering what is the basis for that 10-20%.

Obviously you've done some cuts but had some additions come back in.

Tell us where you are in the process of that cost reduction, so we know how much more there is to go?

Subu, the 10-20% comment is aimed at our current run rate which is about $18 (ph) million.

So it's a further 10-20 off of these levels?

Is that right, Gary?

Correct.

Yes.

Thank you very much.

That does conclude our Q&A session.

I'd like to turn the call back over to our speakers for additional or closing comments.

Thanks everyone for your time this morning and for your continued support.

As you can see we are very excited by these two acquisitions, and like to welcome the Catena and the Internet Photonics folks to the team.

We'll be busy with financial conferences over the next several months and expect we'll get the opportunity to see many of you in person on the road show and we plan to discuss CIENA's expanding scope and focus during those visits.

Thank you very much.

Again, thank you for attending today's conference.

That does conclude today's conference.

You may disconnect at this time.