Ciena Corp (CIEN) 2008 Q3 法說會逐字稿

Good day, everyone, and welcome to the Ciena Corporation third quarter 2008 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 Chief Communications Officer, Ms.

Suzanne DuLong.

Please go ahead, ma'am.

Thanks, Tamara.

Good morning, and welcome, everyone.

I'm pleased to have with me Gary Smith, Ciena's CEO and President, and Jim Moylan, our CFO.

In addition, Steve Alexander, our Chief Technology Officer, will be with us for the Q&A portion of today's call.

Our call this morning will be presented in four segments.

Gary will provide some brief introductory comments.

Jim will review the financial results for the third quarter.

Gary will then discuss our outlook and strategy.

Jim will conclude our prepared remarks with guidance for Q4.

We will then open the call to questions from the sell side analysts.

This morning's press release is 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 will remind you that during this call we will be making some forward-looking statements.

Such statements are based on current expectations, forecasts and assumptions of the Company that include risks and uncertainties that could cause actual results to differ materially from the statements discussed today.

These statements should be viewed in the context of the risk factors detailed in our 10-Q filed with the SEC on June 6th, 2008.

We have until September 11th to file our 10-Q for the quarter, and we expect to do so by then or before.

Ciena 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.

With our third quarter results, we delivered solid performance, including our 18th quarter of sequential revenue growth and gross and operating margins in line with our targets.

In the last several years, we have grown faster than the market by leveraging our specialist role to address our customers' most pressing needs.

However, based on our recent interactions with customers, it is clear that many are more carefully scrutinizing expenditures given the broader economic uncertainties.

In the last weeks of the third quarter, we began to experience order delays from many of our Tier 1 service provider customers.

As a result, we've revised our near term outlook.

Still, we believe the fundamental demand drivers of our business remain intact.

The proliferation of new services and applications and subsequent demand for capacity is clearly real.

In fact, we are seeing strength in a number of important areas.

Our international revenue is showing strong growth.

The Government sector continues to invest in infrastructure to support continued demand for bandwidth and new applications.

And while still a small percentage of our overall business, revenue from enterprise and Tier 2 service providers continues to grow.

I will discuss the quarter in more detail and our business outlook after Jim reviews the quarter's results.

Jim?

Thanks, Gary, and hello, everyone.

This morning, we reported third quarter revenue of $253.2 million.

This represents an increase of 5% sequentially and 24% year-over-year.

We had three 10% plus customers in the quarter that combined to represent 48% of total sales.

Two of the 10% customers are North American based and one is international; and two of the three were 10% customers in Q2.

Sales from international customers represented 38% of total revenue in the quarter, up from 30% in Q2.

Breaking out revenue by our major product groups, our Converged Ethernet Infrastructure group accounted for $200 million in revenue, representing 79% of total revenue for the quarter.

Within Converged Ethernet Infrastructure, core switching was the largest contributor, at $79.7 million.

Long Haul Transport contributed $54.9 million in revenue, and our CN 4200 Advanced Services platform added $41.4 million for the quarter.

Our Ethernet Service Delivery group contributed $23.7 million, representing 9% of total revenue.

Product offerings from the World Wide Packets acquisition contributed $18 million of this group's total, a substantial increase over the roughly $3 million revenue contribution in Q2.

And finally, our Global Network Services group, which includes all of our services related offerings, was $29.5 million, representing 12% of total revenue in the quarter.

In the remainder of my comments today, I will speak both to the GAAP results and to what the results would have been if we excluded those items detailed in the press release to develop what we call the "as adjusted" basis.

Looking at gross margin, Q3's GAAP gross margin was 50%.

Our "as adjusted" gross margin was 52%, down slightly from Q2's 54%, and in line with our guidance.

This number is exclusive of share-based compensation, amortization of intangible assets from the World Wide Packets acquisition and a $4.3 million adjustment to cost of goods sold resulting from a write up to World Wide Packets' inventory.

This increase to cost of goods sold for revalued inventory is the result of accounting for the Packets acquisition, and it was limited to our second and third quarters.

Therefore, we do not believe it is reflective of our ongoing operations.

Our GAAP product gross margin remains strong at 52%, and our GAAP Services gross margin increased to 34%.

We are very pleased with the favorable mix within our Global Network Services group for the quarter, but we continue to expect our Services gross margin to normalize in a mid to high 20s range.

On a GAAP basis, we delivered 6% operating margin in Q3, with GAAP operating expenses totaling $110.7 million.

Adjusted for the nonoperating and/or nonrecurring charges detailed in our press release, our operating expenses totaled $94.5 million.

While up a bit in absolute dollars quarter on quarter, as expected, our operating expenses declined as a percentage of revenue and we delivered a 15% "as adjusted" operating margin.

Our Q3 GAAP net income was $11.7 million or $0.12 per diluted share; adjusted for the unusual and/or nonoperating items, our third quarter net income would have been $39.8 million, or "as adjusted" net income of $0.37 per diluted share.

Turning now to cash flow and the balance sheet, in third quarter, we generated $33.7 million in cash from operations.

Cash, short-term, and long-term investments at the end of the third quarter totaled $1.1 billion.

We did recognize a $5.1 million loss from our SIV related investments in the quarter, in line with our expectations, as detailed in the press release we issued prior to the quarter end.

Both of our SIV related investments are in the final stages of restructuring and we do not expect any more related losses.

For Q3, our accounts receivable balance was $138.1 million compared to $132.1 million in Q2.

Days sales outstanding were flat with Q2 at 49 days.

While the last two quarters have been better than anticipated, we still expect our to DSO range to normalize between 55 and 65 days going forward.

Inventory for Q3 was down 18% sequentially and $106.3 million, compared to $125.4 million in Q2.

Product inventory turns were 4.1 times in the quarter, up from 3.1 times in Q2.

The inventory improvement is in part due to a number of steps we are taking to optimize our inventory, including closely managing our suppliers' lead times and our safety stock levels.

The inventory break down for the quarter was as follows: Raw materials, $20.3 million; work in progress, $2.3 million; finished goods, $107 million; and a reserve for excess and obsolescence of $23 million.

Finally, on headcount, we added 91 employees in the quarter, with the majority of our new hires focused on engineering.

This brings our worldwide headcount to 2,210.

And now, I will turn call back to Gary.

Thanks, Jim.

The remainder of my comments will focus on three areas primarily.

First, I'll touch on the market environment, as it is clearly a significant consideration right now.

I will follow that with some thoughts on our portfolio and investments, and what we are doing to address customer needs.

And finally, I will wrap up with remarks about our position in the market and our outlook.

As our results to date have shown, we have executed very well this, year including Q3.

We have demonstrated our ability to execute and our commitment to delivering solid financial performance while raising our profile and logging successes in high growth markets.

Still, as we have said before, we are not immune to macro conditions and overall industry ebbs and flows.

Specifically, as I noted in my introductory comments, we believe we have begun to see the effects of broader economic uncertainties, primarily among our Tier 1 service provider customers.

On the positive side, we are not losing business, nor are projects being canceled.

But orders are getting pushed out, which means deployments are generally slowing down.

As a result, our expectations in near term demand changed significantly in the last several weeks of Q3, and the pattern has persisted into the start of Q4.

As I noted previously, the trend is consistent across our Tier 1 customers.

It is also consistent across our entire product portfolio.

This macro-driven slow down comes on top of some existing and well-publicized customer specific challenges that prior to Q4, we had navigated successfully.

It is possible that absent one tor other of these dynamics, we would be having a different conversation today; but the combination of the two results in our revised outlook.

For several reasons, however, we believe that this will be short-lived, albeit multi-quarter, slowdown.

First, our service provider customers are much healthier than they were several years ago, and end user demand remains strong.

The predicament service providers face now is adjusting their business models to reflect the changing nature of that demand, and better leveraging their networks as revenue generating assets.

We believe service providers' ability to postpone capital expenditures is limited for a number of reasons tied to their hard-earned financial health.

They need to meet customer demand, which means they need to offer and monetize new services to drive revenue growth, and they need to do so while continuing to reduce their operating costs by moving to more efficient network infrastructures.

Secondly, we believe the industry is still only in the early stages of a significant technology shift which we are well-positioned to address.

That is, the transition from SONET/SDH to ethernet based networks is undeniable, and has touched only a fraction of the market so far.

Thirdly, of all the available data, including the pace of the adoption of more efficient network architectures globally, increasing demand for bandwidth and new services and conversations with our customers, all indicate that that industry has experienced a short lived slow down versus a prolonged downturn.

So while we cannot deny the uncertainty in the short-term, we have a sound architectural vision that is echoed and endorsed by our customers, and we remain confident in our long-term opportunities.

We are mindful of the need to preserve profitability without sacrificing our long-term opportunity.

As a result, we will look to maintain our momentum in the short-term by prioritizing R&D and sales related spend ahead of all other operating expenses.

If we get indications that is the slowdown is either deeper or more prolonged than we currently expect, we will take action to reduce our operating expenses.

However, we won't look to change course at this point.

To that end, we will continue to invest in enhancing our portfolio in ways that address our customers' most critical challenges; principally, the migration to converged architectures.

With an expanding solutions and software oriented approach to service delivery, we are well positioned to do that.

We are deliberate in leveraging our heritage and positions of strength.

We made the transport network more flexible, automated and resilient.

We then lay it in the beneficial economics of ethernet.

Now we are adding the tools to improve service enablement, velocity and monetization with increased software.

To effectively facilitate that, we remain focused on prioritizing around several areas, including building data optimized switching solutions, expanding our ethernet service delivery and aggregation platforms and filling out our converged transport and aggregation family; and as I said before, extending the value of software across the portfolio.

We have already begun to see positive impact from this portfolio direction.

In fact, in the third quarter, we took our first CN 4200 orders for an international IPTV project; and we also won for the World Wide Packets platforms a WiMAX build as well, with a large North American MSO.

Additionally, we're growing our business in the Tier 2 service provider and enterprise markets, as well as expanding our managed services partnerships across all segments.

In summary, we acknowledge that based on what we've seen recently and what we've heard from our peers and competitors, we're in a volatile environment where things can change quickly.

However, we remain confident that our vision and strategy positions us well to help customers navigate a changing market landscape and compete more effectively.

For the lon- term, we are committed to development and investments focused around optimizing our portfolio to deliver software enabled service driven networks.

We have been able to outperform our peers and competitors for the last several years because we have been executing well on a strategy that is aligned with the evolving business needs of our customers.

We have worked hard to stabilize our business model and we are committed to running a profitable business.

I will turn the call back to Jim at this point to talk about our specific guidance for Q4.

Thank you, Gary.

I will conclude our prepared remarks today by talking to guidance for Q4.

I will remind everyone that the statements we have just made and those that I am about to make are forward-looking, and it is important to understand them in the context of the risk factors detailed in our 10-Q.

As we said in our press release, we now expect fiscal fourth quarter revenue of between 190 and $210 million.

As Gary noted, the macro uncertainty seems to be pervasive across our portfolio.

As a result, our expectations around fiscal '08 revenue from World Wide Packets have also changed.

We now expect the former Packets business will contribute between 25 and $35 million in total for fiscal '08.

On gross margin, as we have said previously, gross margin remains difficult for us to predict with accuracy, and we expect it will continue to fluctuate from quarter to quarter.

Our gross margin ultimately depends on a combination of factors, including product and customer mix.

Based on our visibility into expected order flow and product mix, we believe our Q4 gross margin will be been within a mid to high 40s range.

Given current market conditions, we now expect operating expenses to remain flattish in absolute dollars from Q3.

We expect other income and expense net in the fourth quarter will be income of approximately $4 million.

Just to touch briefly on our tax position, though it ultimately depends upon the level of GAAP profitability we achieve going forward, we believe it is possible that we will be required to release a portion of our deferred tax valuation allowance in Q4.

We will talk about this in more detail when we get to Q4 and have greater clarity on our GAAP profitability in the quarter, and expected profitability for future periods.

In the meantime, remember that while our GAAP tax rate may change, it will be as many as 10 to 15 years before we'll have to pay any meaningful U.S.

cash taxes, and our "as adjusted" results will continue to reflect that.

Finally, we estimate Q4's diluted share count at approximately 112 million total shares.

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

Thank you.

(OPERATOR INSTRUCTIONS).

And we will take your first question from Cobb Sadler with Deutsche Bank.

Thanks a lot.

I guess my question is on the Q4 guidance.

You seem to have a slowdown in the deployment cycle but you are guidance is down north of (inaudible, audio breaking up).

I'm sorry, Cobb.

We couldn't hear you very well.

Can you repeat the question?

Sure.

My question is, your commentary around stretch out and deployment cycles versus your Q4 revenue guidance, down north of 20%, I guess, quarter on quarter.

Could -- I guess, you know, if it is just a stretch out in deployment cycles, why is the near term quarter down so much quarter on quarter, I guess, is the question?

That's it.

Thanks a lot.

Okay, thanks, Cobb.

I think it is a combination of things.

I think it's orders, it's deployments, it's revenue recognition, it's -- you characterize it as the overall demand; and looking at that profile right now causes us -- and the push out really of some of those requirements, of course, is to affect the revenue outlook so dramatically.

Hence, this sort of 20%.

And I'd also say, Cobb, it was for multiple customers in Tier 1s.

The other thing I'd say, Cobb, is we saw this in the last few weeks of the third quarter, and it has persisted as we have come into the fourth quarter.

Just given lead times, manufacturing times, all of that sort of thing, that's -- really the outcome is a revenue quarter in the range that we have talked about.

Okay.

And with Worldwide Packets at AT&T, I guess it sounds like that is probably going to happen as is usual, right?

A little later than normally expected.

You know, what -- I guess, is the opportunity any smaller than -- the overall opportunity any smaller than you originally thought, or is it just kind of a little bit of delay in deployment timetable?

That's a good question, Cobb.

I think the whole Worldwide Packets opportunity there at ethernet service delivery with AT&T is on track.

I think, as you rightly characterized, it always takes longer than you think to get these new services into a large carrier, but it is absolutely on track.

And in terms of size, you know, I would say it is -- from our expectation, you know, it has not changed since we first, you know, made the acquisition and won the business with AT&T.

So I would absolutely characterize it as being on track.

I think as we said at the last call, we don't expect any meaningful revenues from that probably until -- certainly 2009, and probably the second half of that, by the time it rolls out and we can recognize revenue.

Great.

Thanks a lot.

We will go next to George Notter with Jefferies.

Hi.

Thanks very much, guys.

I guess I was trying to figure out -- you mentioned that this will be a multi-quarter slowdown, but that the business would come back over time.

I mean, again, can you flush out for us why you expect some of these slower customers to come back?

What about your conversations with them, or order book or visibility allows you to have confidence in believing these guys will come back?

Yes, I mean, that's a very appropriate question.

I think first of all, you know, our position in their networks.

I think we'd describe it now as strategic, as a vender many of these Tier 1 carriers.

I think secondly, you know, talking to them, they clearly see pretty good demand dynamics from their perspective.

I think we are all seeing multiple applications driving demand on their networks; their challenge is how can they monetize it, and the shift towards -- for want of a better description, George -- next generation networks, which clearly plays into both our position in the network, our value proposition.

And I think the underlying demand characteristics are, you know, strong.

And I also think -- you know, if we step back from it, I think we are in the early days of a fairly fundamental shift from SONET/SDH to ethernet deployments, and I think we are pretty well placed there.

I would characterize the executive conversations with these large carriers as being really just increased scrutiny.

I don't think any of them are really sort of changing their plans.

I think they're just being very cautious given the macro economic environment, that they are on or below their anticipated budgets.

Got it.

And then, can I just ask specifically about AT&T?

I mean, obviously they have been a very big customer for you guys on the core director.

I mean, it seems like the magnitude of the change in expectations, you know, would imply that AT&T has to be a big part of this.

Is there -- can you confirm that some of the softness is coming from AT&T?

I would say that, you know, the slow down -- if we characterize it as that -- is pervasive across the Tier 1s.

I would also offer more color to you that it is predominantly -- and I'd stress not exclusively, but predominantly -- in the North American arena.

I would say specifically to AT&T that we have seen a little bit of that at A AT&T.

I would also add that the core director deployments are on going and we believe on track for the remainer of the year.

We have seen sort of ebbs and flows before, and we absolutely believe that the core director deployments at AT&T are on track and we have some visibility into that.

Great.

Thanks very much.

We will go next to Tal Liani with Merrill Lynch.

Yes.

Thank you.

I want to go back -- all of the questions are on the same topic.

I want to maybe ask it in a different way.

Two things.

First, specifically North America, you had very large deployments with two accounts for core director.

How much of the slowdown you are seeing in the fourth quarter is coming from end of projects or things that just ended -- projects that have just ended -- and how much of it is coming from the slowdown in the traditional -- in the long haul point to point, et cetera?

I want to make the distinction -- I want to try to unanimous the distinction between one off projects and on going deployment of capacity.

Second, expenses.

In the last cycle, it took the Company a long time to get back to profitability -- many, many years.

What are your plans this round, if this slowdown continues a year or two years?

What are your expectations when it comes to expenses?

How flexible are your R&D and sales and marketing expenses, and other types of expenses?

Thank you.

Tal, let me take -- go back to your first point.

I would be be at pains to describe it as non-projected related.

I don't think, you know, that any of the things that we are really seeing are related to sort of end of project.

I would really just relate it to the carriers providing additional scrutiny to the CapEx dollars that they're spending.

And I think it has just resulted in an elongation of their deployments; no fundamental changes to them, and we are not seeing orders canceled.

We are, in fact, seeing activity across the portfolio continue.

We are not losing deals.

So I'd be at pains -- I am very careful to characterize exactly what we are seeing, and I think it really would summarize it as just additional scrutiny on CapEx.

No changes to the plans; and, you know, that makes sense when you look at the demand characteristics that are driving the carriers.

So I think their challenges are really just being mindful about what could happen from a macro economic point of view.

But is -- just to go back, is it that the same big projects of core directors are not getting full on orders, or do you see the weakness in kind of capacity-related equipment, not.

-- ?

Yes, I was going on to say, you know, we have seen it across all of the product lines.

So, you know, I don't think I can provide real sort of distinction to you.

We have seen it across all of the platforms.

That's why we would really characterize it as more of a macro economic issue than specifically related to long haul transport or metro or even ethernet, or converged architectures around core director.

It is really -- you know, really across all of the platforms.

The profit question?

Okay.

On the second side, you know, firstly, I would say I think we are in a very different environment than we were in 2001-2002.

I think first of all, you know, Ciena is in a position of strength.

I think it is a more mature and balanced business now, notwithstanding we are not immune from the macro economics; and particularly, you know, you can say that we do have customer concentration amongst the major Tier 1s, and particularly North America.

So we are vulnerable to that.

I don't think there's any question, as we are witnessing in our Q4.

But I would say, I think it is a very different environment and we are a much stronger business than we were in 2001.

We are broader-based.

We were really a single platform Company in 2001.

I would also say that we have managed to run a profitable business over the last couple of years, and we intend to continue to run a profitable business.

I would characterize, you know, what we think the environment is right now as being fairly short-term.

We will continue to monitor the environment around that, manage our expenses prudently; and I think as Jim outlined in his guidance, we are going to be flattish from Q3 to Q4.

We want to maintain our strategic investments.

If the environment deteriorates and appears to be longer term and difficult, you know, we will -- we are not afraid to make some difficult decisions.

I would also say that you know, the investments that we made during the downturn really put us in a good position to outgrow the market than the last few years.

But clearly, it is a balance, and it is a balance that, you know, we are not afraid to make.

Gary, I want to go back to the first question, just ask it -- I am sure that this question is on everyone's mind.

You had two types of growth, two types of deployments over the last few years.

One was a change of architecture to ethernet or to [mesh] networks, and another one was capacity -- simply capacity, because internet traffic is going up.

Can you say that you see the slowdown in one group versus another, or -- which means if you see slow down also in capacity, it means that we some have excess capacity in the networks, and can you measure how much excess capacity we have?

Okay, okay.

I think I understand where you are going with that.

I do not think that capacity is overbuilt.

And as I said in my earlier comments, I think the ability of customers -- even if you just take -- just capacity.

Let's just take that at its lowest level.

I don't think the carriers have a tremendous ability to delay expenditure, because they don't have a lot of excess capacity.

Now, you know, I think carriers can always run their networks a little hotter, which is probably what they're trying to do right now is they're looking to manage their CapEx very carefully.

But they have got real demand on that capacity, Tal.

So I don't think that we are seeing, you know, them having overbuilt capacity and now we are in for a lull.

I don't think that is what is driving it.

Does that answer your question?

Yes.

I understand.

It is more about -- as much as I understand, it is more about discretionary spending of carriers trying to deploy new architectures, and they can postpone it for a while the if they don't have the money to spend right now.

Yes.

I mean, I think that's reasonable, and I think even on the capacity stuff they're just being really careful with it.

And so they can stretch that out a couple of quarters.

You know, so I think you combine those two; but what is really driving them is just the uncertainty in the global macro economy, and they're just scrutinizing all of the dollars more carefully.

I don't think they're changing their plans; they know they need to drive to new architectures, because that will reduce their costs and allow them to create new services, and also they need to add capacity if they're going to provide these new services and bring new customers on.

So those are the challenges they have got.

It is not that they don't have the money.

They're in great financial shape.

They're generating cash, they've got strong balance sheets, stronger than they have been in a long time.

So they have the money.

The demand seems to be growing.

They're now just watching the economic environment and they are going to make decisions over time as it befits their capacity growth.

Thank you, guys.

Thanks, Tal.

We will go next to Tim Long with Banc of America Securities.

Thank you.

Two questions, if I could.

First on the gross margin guidance for next quarter, could you talk a little bit -- is is this all mix, or are we finally seeing more of a volume impact?

We haven't really seen a volume impact in the last few quarters.

And if so, what are the mixes causing it?

And then second, if you could just detail some of your outlook for Europe and the international markets.

It has been pretty strong, and you said you have seen it a little bit more in the U.S.

Are you seeing any early indications that we might be seeing one or two quarters from now in Europe what we are seeing here in the U.S.

right now?

Thank you.

I will take the first question on the gross margin.

It is not the effect of volume.

It is purely the effect of mix.

We have said many times in the past that mix across both products and services is quite varied among our products or our offerings, and as well as between customers.

So this is purely a mix effect, it has nothing to do with volume.

Okay.

Can you just highlight within it what is causing -- I mean, we are talking about 600 -- you know, 500 or 600 basis point decline.

Tim, why don't I -- I will take part of that.

I mean, I think we have been able to post gross margins about 50% for I think the last three quarters, four quarters.

But, you know, last year, we had a gross margin -- I think it was in Q2 where it went down to 42%.

We don't think it is going go down that low, but I think we have always been most consistent around really our sustainable gross margin in the sort of late 40s -- mid to late 40s on a normalized kind of mix.

So even within the product lines themselves, it depends on the mix -- you know, how much software, what application was sold into.

You know, looking at our business, you know, while it is great to be in the 50s and we can certainly touch that -- and that is certainly our ambition as we continue to roll out more software oriented platforms -- I think right now -- which is why we keep coming back to the sort of mid to late 40s kind of range on the margin, just because of the product mix.

If we are successful in executing on our overall strategies, we get to late '09, 2010, we hope to be in a position to have sustainable gross margins that begin with a 5.

Tim, let me take the second part of your question, I think which is about a sort of potential hangover effect into international of what we are seeing.

We did see amongst some of the Tier 1s, even internationally -- I'd predominantly characterize it as North American thing that we are seeing, but that also we are also heavily skewed towards North America from a concentration point of view.

We actually saw our international markets grow sort of 38% of our revenues in Q3.

We are seeing one or two of the Tier 1s have the same kind of phenomenon, and we are seeing that fairly broadly across the Tier 1s internationally.

We are not as exposed from a revenue point of view to them as some of the North American ones, but we are seeing it there, Tim.

Okay.

Thank you.

We will go next to Paul Silverstein with Credit Suisse.

Gary, can you hear me?

Yes, I can hear you, Paul.

Gay, in terms of visibility, when you look out to 4Q and beyond, how much of your comments and thoughts regarding the outlook is based upon direct conversations with customers?

And I think historically you have cited about two quarters' worth of visibility on a rolling basis.

I assume that has changed given the guidance you just put out and your comments about the CapEx environment, but how much of your insight beyond the quarter is more based in concrete hard data points, and how much of it is just this kind of big macro picture in terms of the (inaudible), et cetera?

I think it's a combination of all of those things, Paul.

I think-- to answer your question, yes, I think our visibility has certainly diminished, given what we've seen in late July and August.

So I think it is a combination of those things.

I mean, clearly, you know, it is sort of orders, the overall sort of pipeline closure rate.

You know, typically what you see in this kind of an environment, you are not losing orders; your pipeline is actually getting bigger, but you can't get orders in and they continue to slip as CapEx is being scrutinized.

Dialogue with our customers is certainly critical during this kind of period, and so a large part of the waiting -- to your direct question -- is around those kinds of conversations, because from a data driven point of view, you know, it would actually be easy to -- you could conclude that your pipeline is actually in real terms going up.

And so you feel very good about the future, but you are not able to keep to closing those orders in a rate that you would have anticipated.

So I think exactly to your point, the conversations become more important, particularly at the executive and operational level as to what's really going on --

(Inaudible).

Sorry, go on.

No, go ahead, Gary.

I'm sorry.

And I think the dialogue that we have had are characterized as people are just being careful with the CapEx, no changes to the projects.

They see the need to put capacity on.

They want to move their networks more to ethernet; they want to create new services, they're just being way more cautious with it.

So Gary, the next question would be, in terms of activity measured by RPs, bids, wins, et cetera, both in the quarter at your side, 4200 and long haul, can you give some insight in terms of what you are seeing out there beyond your current customer base?

Are you seeing increased activity?

Are you seeing stable activity, et cetera, in each of those product areas?

I would say we are actually seeing increased activity.

You know, and we are seeing that -- I mean our Government business is going up, our enterprise and Tier 2 business is going up.

Our international business is going up.

And if you look at it -- to answer your question -- on a product basis, you know, some of the newer products that we bought in with the World Wide Packets platform.

We won a WiMAX back haul application; we won a new MSO in North America.

So, you know, I think the opportunities are out there.

In fact, on some of the newer ethernet based convergence stuff, it is growing.

Have there been optical switch opportunities?

Yes, yes, we are seeing that as well.

We continue to see opportunities for core director; they're just not closing as quickly.

We are just not getting the orders and bringing them to closure and getting the deployments as fast.

Okay.

Thank you.

Thanks, Paul.

We'll go next to Ehud Gelblum with J.P.

Morgan.

Hi guys, thanks, good morning.

Hey, Ehud.

How are you?

Good.

Couple of questions.

First of all, on the new guidance you are giving for World Wide Packets of 25 to 35 for '08, you've often said the AT&T deals were not going to actually hit until the end of '09.

And so this seems like it has nothing to do with that AT&T deal -- the new lower guidance -- and I would assume that their regular course of business seems to be either slowing.

Have they lost deals there, or why is that lower just for FY '08 for the near term quarter?

And next question, when you to the math on -- Jim, on what you were talking about with respect to revenue and gross margin, and relatively flat OpEx, you end up with barely break even operating margin for next quarter.

I know, Gary, you've said that you are monitoring how deep this slow down is and whether to cut back further.

But are you -- is operating margin something you look at, and how low would you let it go?

Would we go to negative 3, negative 5% before you cut back on the OpEx, or how do you look at that?

And then finally, when you look at your Tier 1s that appear to be slowing, does it appear that they are just slowing their spending in areas that Ciena plays into, or are you seeing that they're slowing their spending across the board in every last bit of -- Sprint notwithstanding, because we know that they're spending across the board is lower -- but in the other Tier 1s, are you seeing that they're cutting spending or just pushing it out in (inaudible) in every type of category, or is it somehow being singled out in the areas that Ciena sells into?

Let me take the last one fist and we will work backwards, if you will.

From a carrier spending profile, as best we can tell, we play in a number of areas.

So I think it is fairly broadly broadly based.

I don't think it is singled out just for the areas we play in, even if you characterize it as being transport or switching or convergence or next gen.

I think they're just being very careful across the board; and in dialogue I'm having with peers and with our customers, you know, that seems to be the case, though I would also caution we are fairly early into getting our arms around this.

But what I would say is I don't think it is us specific.

I think it is broader.

In terms of World Wide Packets piece, they had, I think, you know, a good Q3 at about 18 million of revenue, ramping up from 3 million in the previous quarter; clearly, that will be down, we think, in Q4.

I just really characterize that more as just, you know, the early stages of ramping issues, of us integrating it, getting it out so the sales force and early stages of adoption.

Some of the order flow, you know, that we are seeing, we won -- as I think I said -- a new MSO in North America, a WiMAX deployment in North America.

So we are very encouraged by what we are seeing; but also, I think people are being cautious around their spend there, too.

So I think that is having some impact on Packets --

And they've not lost any business or customers in their major accounts, as Gary said.

They have not -- their customers have not deployed as quickly as they -- Packets had expected.

Now, is it wrong to assume that they're mainly more Tier 2 and Tier 3 besides this AT&T deal?

So would this be an indication that Tier 2 and Tier 3 might will slower as well?

They've actually got some exposure to some of the Tier 1s -- they have actually got some exposure to that.

Okay.

On the operating margin question, Ehud, you have done your math appropriately.

Operating margin is a metric that we look at, obviously.

Our target as we move through time is going to be 15% or greater.

However, as we've said, we believe that this is a relatively short-term -- probably multi-quarter, but relatively short-term -- slow down.

And with our confidence in that, we don't think it is time for us to reduce our investment, particularly in our R&D projects.

If we are in a short-term downturn, those -- any reduction in our R&D spend is going to have a revenue impact as we come out.

And so we don't want to slow down our investments at this point in time.

That is going to affect operating margin over the next few quarters -- that is true.

However, if, as we move through the next period of time -- the next couple of quarters -- we believe that this is going to be longer lived than what we now believe it to be, then we will take the appropriate action.

We are not going to do it right now.

Thank you very much.

We will go next to Samuel Wilson with JMP Securities.

Good afternoon -- just two quick questions -- or good morning, I guess.

Just two quick questions: What would you expect headcount additions to be or hiring plans to be for quarter and -- the quarter we are in now and the quarter -- maybe next quarter, and what was CapEx for the last quarter?

There will be some addition to headcount from here, but it won't be significant.

So we are still filling out some of the engineering positions that we had planned, but there won't be a major increase over the fourth quarter.

As far as CapEx, do you have that -- yes, we spent $8.6 million in CapEx in the quarter.

Most of that had to do with test equipment in our R&D labs.

And what was the share count -- the adjusted share count used in the quarter that was just completed?

It was 111.7 million.

Perfect.

Thank you very much, gentlemen.

Thanks, Sam.

We will go next to Jeff [Kwall] with Lehman Brothers.

Yes.

Thanks very much for taking the question.

I have two, actually.

The first is, do you have a sense of what triggers -- I mean, how do you guys decide when a short-term slow down may turn into a longer-term one?

That's a good question, Jeff.

I mean, there's no simple answer to that.

I think, you know, we have got our antennas clearly well and truly, up in dialogues with our major customers et cetera.

You know, you are gathering more information all the time.

You know, you don't want to over react if it is short-term; you don't want to under react if it proves out to be a longer-term phenomenon.

I do think, though, Jeff -- looking at the dynamics of the industry and demand characteristics, I do think that this would lead you to then conclude this is going to be relatively short-term.

I mean, we are well placed as a Company.

You know, we have outgrown the market for the last few years we have invested.

We have got refreshed platforms coming out all of the time.

So you know, it is really hard to get your head around this being a long-term, deep, you know, industry-wide downturn.

It really is, given the very positive dynamics from an application point of view and in overall traffic characteristics.

But we will continue to be vigilant on it.

All of the data we see says the flow of data across the networks continues to increase, and our customers are shifting towards ethernet type services.

And all of that says that this is short-term.

But, as Gary said, we are going to be watching exit, and we have our antenna up.

Okay.

Have you folks started to discuss 2009 CapEx plans with carriers yet, or is it still too early for that?

Or might that be a catalyst for --

It is certainly, you know, one of the next big data points.

I think we've started to have some initial dialogue with them.

But I think it is too early.

You know, it is too early to tell at the moment; we are just sort of in early September.

But we -- to answer one of the earlier questions, you know, we are not seeing any sort of diminishment of opportunity.

We are seeing new RFPs for the kind of platforms that we are bringing into market.

Okay.

Great.

And then, just secondly, inventory -- do you folks have a sense if there's any excess inventory in the channel at any of your carrier partners or is that not really part of the equation?

I don't think that's part of the equation, Jeff.

I think one of the healthy things that has happened to the industry, I think since some of our lessons from 2001-2002, is every -- they tend to be success-based.

So, you know, most of our carrier customers are really -- take equipment from us on a success-based -- that's simplifying it a little bit, but it is very (inaudible), it's very hand to mouth.

Okay.

Perfect.

Thank you both very much.

Thanks, Jeff.

We will go next to Mark Sue with RBC Capital Markets.

I thought 19 was an unlucky number.

Hi, Mark.

Hello, Mark.

Any indications from customers they will not increase their utilization rates on their networks and prolong things even longer?

And also, Gary, in the prior downturn, did people go out of their way to cancel projects, or did they just not act on them?

I think, you know, it is obviously -- we all go to -- I mean, experience what we experienced in the previous downturn there; but I would say, you know, it is a very different environment right now.

What we saw last time around was cancellations, absolutely.

People had overbuilt their networks, they had overcapacity and the real demand wasn't there.

We are not seeing anything like that.

All we are seeing is just increased scrutiny of CapEx dollars, and an elongation of them letting those out in the actual projects.

We've seen nothing canceled.

We are not losing deals.

You know, I wouldn't characterize it in any other way.

To your question on utilization, you can always increase utilization on some of these networks and they will probably run them slightly hotter.

But they can't do that for very long, because the real capacity demand is coming on.

All of the mobile traffic is only really just starting in terms of video access and the internet access over mobile.

All of that traffic growth is coming onto the network.

So I think the ability of carriers to delay that is extremely limited.

You know, I really think for all of those reasons it is a very different environment.

With that being said, Gary, how should we think of the slope of the recovery after two quarters of weakness?

Is it a gradual, or can we actually see things normalize pretty quickly after two quarters?

You know, the only sound to that, Mark, is we honestly don't know.

We try and call and give guidance based on our best view of things.

And clearly, you know, our visibility is very limited compared to what it was.

You know, so I really think I wouldn't -- I couldn't predict the slope of that curve.

I can talk about the industry dynamics, which I think are positive.

I can talk about Ciena's position within the customers, which I think has never been better.

I can look at our portfolio and the investments that we have been able to make over the last few years, and I have never felt better about the portfolio in terms of its positioning.

But you know, given what we are seeing right now, I just think it would be inappropriate for me to try and predict that slope, to be absolutely frank, Mark.

Okay.

That's helpful.

Thank you, gentlemen.

We will go next to Simon Leopold with Morgan Keegan.

Thank you.

I wanted to follow up on part of that last question first.

Typically, your January quarter seasonality suggests that that could be a sequential down quarter.

But we are come off of a -- I guess an unusual comparison.

So what is your best thought on seasonality and what kind of pattern you expect in the January quarter?

And then I have got a couple of follow ups.

So I mean, occasionally, we will see some seasonality.

I mean, I don't -- I mean clearly, you know, the last couple of years we have seen poor orders in August and July.

I'm very careful not to characterize what we are seeing as just seasonality right now.

I think it is more than that.

In terms of looking forward, I guess you are talking about sort of Q1, you know, just Christmas, Thanksgiving and New Year, it is typically not a great quarter, given all of those other activities and people that are just starting their new year budgets.

But again, I'd go back to, Simon, we really don't have good visibility into that, to be honest.

Okay.

And then in term of after we get through that period and we think about a recovery, how much of a recovery in business is dependent on, in your view, new products that are under development beyond the World Wide Packets platforms?

I think the portfolio that we have got out there right now -- and we are adding platforms and enhancements all the time -- you know, I don't think there's a particular catalyst to recovery of the new platform.

You know, we have got new things happening, particularly in the second half of '09.

You know, some, some big platforms coming through; but again, from a revenue point of view, it is probably end of '09, 2010 before they start to kick in.

Okay.

And then the last question is probably my hardest one for you, is -- the stock started weakening up early in July significantly, as if somebody investing in this stock recognized the problems before the rest of us.

And I guess what I -- your early comment at the opening suggested you saw the slow downs just in the last few weeks.

What do you think was going on in terms of your investors and the thought process and sort of the stock reaction relative to the way things actually transpired in your business day-to-day during the end of the quarter?

I mean, I can only answer that from a sort of personal perspective.

I think that folks -- some of our peers' and competitors' results indicated sort of volatile environment.

You know, I think that was sort of across the board.

I think the macro economic concerns began to gain traction; and also, people felt that telecom was a good place to be in that space -- at that time.

I think, you know, just the increase in those concerns and some of our peers' and competitors' results and guidance -- you know, some of them changed fairly dramatically during the sort of mid year, and I think that weighed on everybody's thinking.

And you know, from our perspective, we had a couple of particular challenges around a couple of large Tier 1s that I think were well discussed that were really nothing to do with the macro economic stuff.

But I think those challenges, if you overlay that -- the increased scrutiny of CapEx -- we began to see in, you know, July and carry through into August, which really impacted our guidance today.

It is also what we saw in August.

So it's a combination of those factors from our point of view.

In terms of where the stock went, where it didn't, I really couldn't say more than that.

Okay.

Thank you very much.

Thanks, Simon.

And we have no further questions at this time.

I'd like to turn the call over to Mr.

Gary Smith for any additional or closing remarks.

Thank you.

And thanks to everyone for your time this morning.

We look forward to seeing many of you at the Deutsche Bank Conference in San Francisco next week, and also at October 7th at our Analyst Day in New York.

Details about this event will be forthcoming in the following weeks.

Thank you, folks.

And ladies and gentlemen, that does conclude today's conference.

We appreciate your participation.

You may disconnect at this time.