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CIENA Corporation (CIEN)

December 15, 2011 12:30 pm ET

Executives

Gregg M. Lampf - Vice President of Investor Relations

Thomas Mock - Senior Vice President of Corporate Marketing & Communications

Rick Dodd - Senior Vice President of Global Marketing

Stephen B. Alexander - Chief Technology Officer, Senior Vice President of Products and Technology and Member of Technology Advisory Council

Analysts

Ehud Gelblum - Morgan Stanley, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the IR Educational Series conference call. My name is Saab and I'll be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today, Mr. Gregg Lampf, Vice President of Investor Relations. Please proceed.

Gregg M. Lampf

Thank you. Welcome to Ciena's second Investor Relations educational webcast. Before we begin, I would like to cover a few housekeeping items. For those who want to ask a question to the webcast platform, you can do so by clicking the Ask A Question tab to the right of the slide tab. To expand the view, click the square box to the far right of the controls on the bottom of the control window. An archive of this call will be made available on the Investor Relations section of Ciena's website. Ciena's IR educational webcast are intended to provide our perspectives on various technologies and trends in the optical industry. We're pleased to receive a very strong response to our coherent webcast in August and hope you'll get as much out of today's event.

Today's topic was selected due to the number of conversations we've been having about OTN technology, its applications over time and the distinction between Ciena's commercial experiences and possible vendor offerings in the future.

I wanted to remind everyone that we will not be discussing financial information, results, expectations or economic conditions. While we will not be discussing these items, we may talk directionally about the technology market. As such, please take note of our Safe Harbor language on this slide.

With that, let's begin. Joining us today are Tom Mock, Ciena's Senior Vice President of Corporate Marketing Communications. He will start our presentation in a moment. Tom will be followed by Steve Alexander, Ciena's CTO. And following Steve will be Rick Dodd, Ciena's Senior Vice President of Global Marketing. I hope you find our webcast informative today. Tom?

Thomas Mock

Thanks, Gregg. Before we get started today, we just wanted to spend a few minutes kind of giving you an idea of what Ciena has been doing in this space over the years and why we think it's important. We've been in the OTN space for over 5 years, and our first product in this space was our Ciena 4200 product. And while we may not have initially touted that as an OTN platform, the technology behind it was clearly OTN. But over the past few years, we've been pushing that OTN technology across our portfolio. As 40G and 100G and higher speeds begin to proliferate in networks, it will drive people toward a OTN switching and away from traditional SONET/SDH switching, because once you get past 40G, there really isn't a SONET-equivalent standard.

But one thing to keep in mind is that there's a concept of OTN for transport, which really is just about putting a digital wrapper around the signal that's being sent, and there's also OTN for switching, which turns OTN into a true traffic management tool. And it's the latter piece that we'll be talking about for the bulk of today's call.

And as you'll hear, OTN is also -- or the control plane dimension is a key part of OTN's value. It allows you to automate traffic management and it allows you to better keep track of what's going on in the network. So as we've invested in OTN, we've really focused on how to make it the most efficient way to manage traffic in a network, how to make it a very robust way to manage traffic in a network and allocate capacity amongst users and then use intelligence to automate the network.

As I mentioned when we were talking about the last slide, control plane is key to making OTN effective. And control plane is something we have a lot of experience, and we've been in this space for over 10 years automating networks and making them automatically restored in the most reliable fashion possible. Since we brought Nortel's MEN group onboard, we've also focused on pushing control plane across our portfolio to better ensure network automation. Gregg didn't mention in the beginning, but we'll also probably be doing a control plane chart talk like this in the coming months.

Let me show a little bit about what we've done and how we leverage OTN to deliver the future promise of better traffic management. First of all, we put these pieces together to build a wide variety of types of networks globally. We built the world's largest automated switch networks. You see the acronym ASON on there, that's Automatic Switched Optical Network. It's basically a way of automatically allocating capacity to end-user needs and also restoring in the event of a failure.

We've also built networks to expand the globe using this technology. You see a network up there that's combined in the center of both terrestrial and submarine components, and that's something we have a fair amount of experience in. But OTN and control plane in particular really begin to shine when you put them in a challenging environment. On the upper right-hand part of the slide there, we're showing some networks that we've done in India, where fiber cuts are relatively routine, and we're able to restore around those nearly instantaneously.

So what this allows you to do is build a network with the best overall availability and best perceived performance by end-users. So it's a better way to provide a compelling end-user experience for our service provider customers. And you'll see there in the center of the bottom just a selection of the customers that we've been deploying these types of networks with. And with that, I'll turn it over to Steve Alexander to talk a little bit about OTN technology.

Stephen B. Alexander

Thanks, Tom. I'm going to take you through kind of an OTN 101, give you some sense of where OTN has come from and where we're deploying it.

So when you look at the heritage of OTN, you can say a lot of it does derive down from some of the fundamental principles that were in place for, like, SONET/SDH. And you do want to maintain the good pieces of SONET/SDH, but there's a number of pieces that you really want to change. And the first thing you want to do is really get rid of some of the restrictions that were in architecturally into the SONET/SDH deployments, and that being particularly the focus on ring technology. What you'll see with OTN is you can deploy them in rings, but they really are very suitable for a mesh environment as well. And you can add to that the ability to do, as Tom mentioned, kind of the control plane. So once you have a mesh set of connections and the control plane to automate how those connections are established and how they move around and the size of the connections and such, you have a much more flexible infrastructure.

SONET/SDH also had a number of complexities built into it, specifically around things like pointer processing and the way that it was architected to be synchronous. One of the key differential attributes, if you will, between SONET/SDH and OTN is OTN was really built around an asynchronous approach from the beginning. And that allowed it to have additional protocol and timing transparency. It's really an ideal framing format and switching format to carry other types of signals. In fact, it's very amenable to carrying packet traffic like Ethernet. And you can also remove a lot of the constraints that were built into SONET/SDH in terms of framing conventions.

And as Tom alluded to, there aren't that many times when you could look out into the technology base and see a major transition coming at us. In the case of the end of the SONET/SDH world, again this world has been with us now for a couple of decades, that's clear: there is no SONET/SDH technology past 40-Gig. A different technology is needed, and OTN is one of those technologies. It's really an OTN and then 100-Gig and above Ethernet world is where the infrastructure is really headed to.

And another key attribute of OTN, like Ethernet, OTN is a global standard. It's the same all over the world. So we wouldn't be talking about an OTN for North America and an OTN for the rest of the world, like we did when we have SONET North America and SDH elsewhere. OTN allows you to build one architecture, one product, one set of parts, but you sell that globally. So that again has some very nice economics associated with it.

But again, don't think of this as running away from everything that was in SONET/SDH. There's some really good things about those technologies: the sectionalization of things, the additions of very strong OEM key [ph] features, the fact that you can manage the network very effectively. Those are the features that you want to keep going. But you want to make it much more friendly for the packet world.

If you go on to the next slide, what you'll see, it really -- where does OTN fit into the network? You'd think of it as kind of the physical layer sitting down at Layer 0, Layer 1, and it really lends itself to a multiservice environment, right? It allows you to set up light paths and set up light waves. It's an excellent way to help Ethernet exist in a wide area network, whether you're doing packet flows or you're establishing digital circuits, whether you're just doing light pass through a network. So think of OTN as kind of that foundational layer that sits under any sort of network that does multiservice service delivery.

Another way to think about OTN is it's really again ideal for multiple services. The sound bite that I like to use around this is calling it, like, the containerized freight model, where a container, and you can think of OTN as a container, it doesn't really care what's in it, right? It can be carrying almost anything you want. Here we've got some examples. That same OTN container that could be carrying storage protocols or mobile protocols can be carrying Ethernet, can be calling generic Internet services, and one of the fastest-growing is now video. So carrying different types of video, high-def, compressed, uncompressed, whether it's been formatted in various ways, all fits within this OTN container. And we expect this containerized kind of approach, containerized freight model because it does shift, it change modality so easily. You can carry it over wide area networks, you can carry it over metropolitan area networks. We feel this is a key piece to how network infrastructure will be built anytime there's a multiservice component to it.

And this is fundamentally different than what we first did with wavelength division multiplexing, where we said, okay, each wavelength would get a different service. What that ended up doing was, yes, it converged it down to one single fiber, but you wound up with different management paradigms for each one of those services. With OTN, since you're using a common container and a common approach, you also have one common management paradigm for all of those different services, and that's very critical in any kind of a multiservice environment.

It also has a big role to play in how the network cores are going to evolve, because OTN has a role in both the metro core, as well as you would call the wide area or the core of the core network. We all know that the speed that we're able to achieve now on individual channels is increasing, right? With the advent of the coherent technologies, we've kind of broken through that barrier that was sitting around 40-Gig and we're now doing 100-Gigs, we're looking at 400 gigs up to terabits now in terms of actual speeds on wavelengths. And so you can see the core of these networks is going to go much, much faster.

Having a capability that allows you to take that very high speed channel, let's say that terabit channel that you've created, and divide it up into usable pieces effectively virtualizing that wavelength, if you will, that's a key attribute to any flexible and efficient network architecture.

And so in the core of the network, what you're going to find is you're going to have people focus on maximizing structural efficiency, getting as many bits down the fiber, using the optical bandwidth they've created, as possible. Then you can use OTN to virtualize those very high-speed connections into smaller channels that are used to make individual connections. In the Metro side, you're going to be fully packing 10-Gigs and 100-Gigies with OTN frames around them so they interface very nicely into this much higher speed core network. But again, the OTN attributes here is really around virtualization of the wavelength.

In fact on the next slide, I want to emphasize how powerful a concept that is. If you think of OTN as a tool that lets you virtualize wavelengths, and you think about the kind of attributes that a wavelength service really has. This is 0 packet loss, no contention for resources; it's not a shared infrastructure. That's ideal for the OTN container approach. That's not the kind of a operational environment where a pure packet kind of a service can deliver those attributes, right? In a packet environment, there's a shared switch fabric; there is all the opportunity for contention for resources. But it doesn't virtualize wavelengths. OTN is the technique that you use to take these very high-speed wavelengths, these 100-gigabit waves up to these terabit waves and virtualize them.

Now once you've done that, of course, then you can build virtual networks out of those connections. So you can envision building up literally terabit flow cores and then virtualizing that large core network into smaller virtual networks that may be using 10-gigabit, 40-gigabit, 50-gigabit, 100-gigabit flows in there, whatever is necessary to establish the services. And so OTN fits in very nicely in a world where the network resources are being virtualized just as we're doing in cloud infrastructure, we are virtualizing compute resources and storage resources. So it's an ideal technology to marry those capabilities together.

On the next slide, what I'm going to try to do is give you a sense of OTN also is used as a foundation of across disparate networks. It lets you take many different kinds of networks and make one network out of it, and simply because OTN doesn't care what it's carrying. And so you can use it as a foundational layer under an existing network or as a new network infrastructure. And it allows you, in conjunction with control plane technologies in these virtual wavelengths, you can establish these connections across Metro edge, Metro core, core of -- the core of the core out to the Metro's again, and this really does create kind of the point and click or software-controlled connectivity model, where not only the connections but the topology, like the virtual network piece, as well as the size of the connection now is all under software control. I mean, the thing that enables all this, of course, is going to be that distributed software control or the control plane.

So if we go on to the next slide, this is really the key software attributes around an OTN infrastructure is this intelligent multilayer control plane. The fact that you can look across the different layers and see what is going on in the network, that's really where a tremendous amount of savings comes from. And again, in most networks, you're going to maintain roughly 3 types of databases; one carrying kind of the physical inventory, what network elements are at what locations. You'll have another one which is basically your connectivity database, which is what works on what boxes are connected into various network elements. And on top of that, you'll have the services database, which is saying, which services are mapped on to which connections and which boxes.

The benefit of the control plane is it lets you consolidate all those into one single database, it's actually resident down in the network. And so you can actually query the network. The network becomes your database of record. And what that adds up in is none of this swivel chair management paradigm that exists in a lot of carriers today, where they can look at one screen to find out what's going on at one layer in the network, and they literally have to swivel over to another screen to find out what else is going on somewhere else in their network.

With this approach, where you combine the different functions together and you can look across your network and up and down the various layers, you look at one screen and you can understand much more about what your network is actually operating. So it's really the combination of the OTN technology, both as the transport mechanism, the switching aggregations mechanism, as well as the control plane, that really differentiates the technology.

At this point, what I'd like to do, I'll turn it over to Rick Dodd and he's going to discuss with you how we position the OTN solutions in the marketplace.

Rick Dodd

Okay, excellent. Thank you, Steve. So as Steve said, what I'm going to do is talk a little bit about our specific approach and the benefits that our customers are getting from OTN switching, including that control plane.

And in fact, if we go to the next slide, let me actually spend just a few minutes talking about the control plane that we've built specifically and some of the specific things that our customers are doing with it and the benefits that they get from it.

It's worth reminding everybody that Ciena has been innovating in optical control planes longer than anybody. It's been over 10 years now, really starting with the quarter after intelligent optical switch. And as you can imagine that with 10 years of R&D, we've been making major enhancements in functionality and performance.

So for instance, at the most basic level, as Steve mentioned, the control plane is really about distributed software that provides smarts around the nodes and the links and the network. How much capacity is available between what nodes and what services are running over that capacity. But we've added some pretty interesting features around latency. So making the control plane aware of latency and also making the control plane aware of some pretty detailed network attributes, like diversity, what circuits are running over what fibers, things in the same conduit, et cetera. And that gets taken advantage of our customers. So, for instance, in the upper left-hand side of the screen, just a little box talking about how we have customers who are now using the latency information that the control plane knows about to route circuits for their customers. We have one customer that told me that they're seeing a 30% average reduction in circuit latency by letting the network, their Ciena network, route circuits using the control plane instead of having a human being route their circuits manually, which they would have done in a world of digital cross connect, and so forth.

On the lower left-hand side of the screen, we have customers that are using the richness of the control plane, being able to set different priorities on a per-circuit basis, to actually turn around and sell that as a feature. So for instance, customers selling gold, silver and bronze bandwidth classes to different customers, depending on their willingness to pay for different levels of restoration and different priorities relative to other circuits in the network.

On the upper right-hand part, I think is a benefit that most people understand pretty intuitively, has to do with the rapid restoration without providing any dedicated bandwidth. So, as you may know, in the world of SONET rings, the way you provide protection to circuits is you give every circuit a restoration path that has to be dedicated to that circuit. When you have an intelligent switch network that's running in control plane like we do, you don't actually have to tell the network in advance what the restoration path is going to be. Instead the network can dynamically find that path in case of failure. And therefore different failure scenarios can share the same bandwidth as the restoration. The net dollar benefit to a customer comes in the -- basically bandwidth savings. So you'll see our customers claiming 20% to 30% bandwidth savings by looking for restoration capacity dynamically instead of having to dedicate it in some sort of a ring protocol.

And then finally in the bottom right-hand part of the screen, it's also the case that we've implemented our control plane algorithms off board into planning tools. And that's relevant because then a customer can use those planning tools to predict exactly what will happen in their network, what will be their network behavior in different failure scenarios? And that basically is a risk reduction benefit our customers can and in an offline way go model different scenarios and figure out what risks they're willing to take and what risks they're not.

Let's go to the next slide, please. So a big differentiator for Ciena is the breadth of our product offering, which supports OTN switching and control plane. And if you were with us back in our June analyst day, you heard us talk about what we called the cross pollination of key core technologies, namely coherent -- coherent optical processing, specifically our WaveLogic ASICs, our switching and our control plane software across the portfolio. And that's really what you're seeing here.

We also at that time announced for the first time our One Control Management System. So unified management system, end to end across the portfolio. This is really key to our value proposition, because it means that we have, in my opinion, the broadest set of devices that have the same core technology that you can use to build end-to-end networks. So all the way from multi-terabit core switches, like the 5430 on the right-hand side of the screen, down to our new Tuzla 6500 on the left-hand side of the screen. So if you have a complex network that has different locations with different needs for capacity, you know you're going to be able to have a Ciena product that's optimized for that site in the portfolio that will all share core technology with other sites in your network.

Let's go to next slide, please. So as we've done this integration across the products, we basically get network effects. And so that means our differentiation gets stronger as our customers deploy more of our product suite. So to give you an example of this, let me just start with this really simple network that you see here. This is just a network of a couple of 5430s. You can actually deploy 5430s without the control plane, if you want. You can deploy them as digital cross connect. It's unusual for our customers to do that, but it is within the theoretical realm of possibility. If you deploy those switches without the control plane and configured them manually, you would still get some amount of benefit relative to the competition because of the hardware. You'd get a density benefit, you'd get a reliability benefit, because this hardware and its heritage of being proven with the core record platform of such high reliability.

But if you go to the next slide, the benefits really start to accrue once you do turn on that software, that control plane software. And once the control plane is on, now you're getting the benefits that I talked about earlier. You're getting the point-and-click provisioning so you can provision circuits very quickly. You're getting the resiliency. You're getting the ability to differentiate between different [indiscernible].

Let's go to the next slide. It's also the case that we introduced the OTN switching capability into our 5410 platform, which, of course, is a smaller form factor than the 5430, and that means that customers who have smaller locations that may not require yet a full rack of equipment but still want that same intelligent switching benefit that they get with the 5430, now they have an option to get in with that half rack system, a little bit less capacity, obviously, but still get that same behavior in a seamless way.

Let's go to the next slide, please.

We talked a little bit about planning tools. The planning tools can add differentiation to the network, because, as Steve said, really the network becomes the master of all information about circuits and nodes and services. And so the planning tool, instead of needing to be configured by some human being, who's trying to recall or discover what's been deployed in the network, the planning tool simply talks to the network and asks, "What's your inventory? What's connected to what?" and then can be used with these offline planning scenarios. That obviously gives you a lot of -- it's going to reduce errors, and it's going to help you with that risk reduction benefit we talked about before.

And then finally on the very last slide year here, with the integration of the switching and control plane on to the 6500, we actually allow you to now integrate the intelligent switching with the WaveLogic coherent, right? So that's key, because you can now build end-to-end networks or 6500s and 5400s to peers, and you get that benefit of intelligence closer and closer to the edge of the network, even in those smaller locations, where in the past you might not have decided to deploy 5400 platform, but you could certainly deploy one of the smaller 6500 form factors.

Okay. Let's go to the next slide, and let me skip to a different benefit, which is really about the packing efficiency of bandwidth. Steve alluded earlier to the fact that coherent technology is really increasing the opportunity for OTN switching. And the reason for that is that coherent has really let us increase the data rate of the wavelength much faster than we have in the previous decades. Now you can think of typical data rates over the last 10 years have been about 10-Gig. Once we cracked the coherent code, we quickly got to 40-Gig, 100-Gig, you'll see 400-Gig and terabit in the future. And that's very decoupled from the wavelength -- sorry, from the service speed that people are deploying. There's still lots and lots of 10-Gig services that are being carried over 40 and 100-Gig waves and will be carried over 400 and terabit infrastructure as well.

The OTN switching capability basically provides an efficiency benefit, because it's the key function that allows you to take what in the past would -- what in a non-switched network would become very quickly fragmented bandwidth, where you get little gaps of 10 gigabits here and 20 gigabits there and 40 gigabits there, that you're not able to fill with services. OTN lets you basically rearrange those services and pack them more efficiently onto those higher-speed wavelength.

And obviously, maybe intuitively, as the delta between the service rate and the wavelength rate gets higher, OTN brings a greater and greater benefit in terms of efficiency. Some of the modeling that we've done with our customers is kind highlighted in that gray bar at the bottom there. We've seen situations where, if you have largely 10-Gig services riding over 100-Gig networks, you can see a bandwidth efficiency of up to 50% by putting, by basically distributing switching across your network and being able to therefore pack those wavelengths more efficiently.

Next slide, please. So speaking of efficiency, it's also the case that OTN can help reduce the cost of your IP network by basically making those routers more efficiently used. And the idea here is that by increasing the meshiness of the network, of that IP network, specifically, basically by building more direct paths between routers at Layer 1, you basically stop using routers as your generators and use a much more cost-effective system, namely an OTN switch, when you have a link that can be directly connected.

So in effect, you're sort of like thoughtfully unburdening those very expensive router ports. And Steve's team on the CTO side has done some interesting modeling that we talked about in the past, showing CapEx savings of 25% to 40% simply by using a more cost-effective way of tandeming that traffic between routers. You obviously don't build a full OTN mesh. You have to be smart about the kind of meshiness that you deploy. But in so doing, you're going to be able to save money.

Next slide, please. So finally, I guess, just a few words on resiliency. It's certainly the case that the ability to dynamically restore bandwidth has been really key with many of our customers, and we're seeing this more and more in the subsea context. This is just a slide with some commentary from Verizon regarding a situation where they were able to keep communications up to Japan during the recent earthquake there, and they were able to keep communications up despite the failure of numerous subsea links. The reason for this, of course, is that the switching technology is continuingly looking for available capacity and restoring those highest priority circuits onto that capacity. And that's done, of course, by really 3 things: One, a clever network architecture that Verizon had to put together. Number two, the switching ability of the systems themselves. And number three, the control plane that's very fast at finding capacity and switching traffic on to it.

So if you put all these things together in terms of the benefits, if you go to the next slide, really the results of those advantages have been for us share gain in switching. And so here you're seeing the large view Delora's [ph] of global market share and switching over the last 5 quarters, and you'll see Ciena and the red line there, growing our share. And obviously, we're working hard to continue winning in this area.

So with that, let me hand it back over to Tom to wrap up and then close the call.

Thomas Mock

Thanks, Rick. As we go to close the call, we've talked a good bit about OTN technology, the history of it and our approach to using OTN in networks. So we wanted to close with, what's the opportunity there? What does that mean for us? We've had an OTN -- we had switching solutions in the market that address basic traffic management concerns, and that's basically been our traditional core direct to marketplace. And OTN can clearly address that marketplace, as well as address the needs of the marketplace as it expands as capacity grows. So we see -- first of all, we see the traditional market for this growing.

It's also important to note that while a lot of people think of this as just a simple network infrastructure, it also supports a number of important services. For example, private lines. It actually are very profitable for service operator -- for service providers today.

Today, what I would call traditional market for optical switching represents about $1 billion of market, and we expect that to grow as network capacity increases and as networks move to 4800G. But we've seen the overall OTN market is being bigger than a traditional optical switching market. And one of the things we talk about in that context is submarine. Now you might ask why I'm putting that in the new market area, and the reason is that while optical switching has been used in the submarine market for a while, we're really starting to see that become a more important part of optical networks today, and a good example of that was our recent win on the [indiscernible] cable, where we're putting OTN switches into 16 different landing stations across Southeast Asia, the Middle East and Western Europe.

This switching architecture also supports a number of new services and improves the efficiency of the infrastructure. Rick and Steve both noted how this can make more expensive use of expensive routing elements in the network and also how it can make better use of bandwidth in the network. So when we start looking at these additional opportunities to use OTN switching in the network, we see that market growing from where it is, about $1 billion today, to $2 billion over the next 3 to 5 years.

And with that, I'll turn it over to your questions.

Question-and-Answer Session

Operator

[Operator Instructions]

Gregg M. Lampf

[Operator Instructions]

Operator

And your first audio question will come from the line of Ehud Gelblum.

Ehud Gelblum - Morgan Stanley, Research Division

A couple of questions, if I could. Can you talk a little bit about OTN in the switching world, which is where your 5400 is, and OTN in transport. Does transport have to -- the transport networks have to get redone as well to handle OTN, or has that already happened, and do the transport networks have to be a digital transfer business and everyone else's and have to be compatible with OTN, or is it completely transparent. They don't know that OTN is really happening at the switching sides?

Stephen B. Alexander

Okay. So let me start with a piece, and then I'll let Tom add some color to it. One of the key attributes of OTN is the fact that it is so transparent. So for example, you can go into an existing infrastructure and we'll just use a simple 622 megabit ring, right, that may be sitting in some metro location. If a carrier is asked to put up 1 gigabit Ethernet service, then they have a fairly unpalatable choice, right? It says, okay, to go in, I've got to update every piece of that ring to be faster than a gigabit to offer a gig service. You can go in with OTN and a dedicate a few of the OTN ports to transparently carry the existing 622. The existing equipment doesn't even know the OTN is sitting underneath it. And then another few of the OTN ports can be providing those gigabit services. So think of it as being able to slide underneath an existing architecture or infrastructure, maintain the connectivity of its existing equipment wants, but also add the ability to -- add new services. In this particular example, gigabit Ethernet, but the same principle applies for anything that will fit inside of the OTN.

Thomas Mock

I think one of the other things, I think, that you were asking in your question is, is OTN likely to be embedded in the transport and how will that affect the transport market moving forward. And we think it most definitely will be embedded in transport. We're actually doing that in our 6500 transport product line. One of the reasons we wanted to have this particular talk is to help people understand that that's going to be -- that OTN is going to be a switching technology that shows up across the network. And it's going to require a number of different solutions inside the network. There'll clearly be the need for big OTN core switches in the core of the network, where there's huge diversity in the past that traffic may take, and the need for the level of sophistication in capacity and switching would really suggest that you need a large stand-alone OTN switch, as well as cases further out in the transport networks, where the capacity may not be -- the switching capacity needed may not be so high or the switching sophistication may not be so necessary. And in that case, it makes a lot of sense to embed it in the transport equipment. But one of the things I would point out is that for that kind of a scenario to really be effective, you have to be able to connect the control planes of those 2 parts of the network together, so that the switching that's embedded transport operates in a seamless fashion with the switching that's being performed by the larger stand-alone devices.

Ehud Gelblum - Morgan Stanley, Research Division

Okay. So very little has happened today, that's on the next step, it sounds like. The OTN you're talking about right now is switching and it works perfectly well with the transport that's in ground today?

Stephen B. Alexander

Yes.

Ehud Gelblum - Morgan Stanley, Research Division

Okay. That's helpful. One of other thing I wanted to ask about was, the control plane architecture that you pointed out was such a huge advantage of this. Is that standard to OTN or that is something Ciena-specific. And if it is standard to OTN, then can you -- is there an interoperability issue between your control plane and somebody else's control plane, or do you have to have 5400 set up in the entire network? And then I guess finally on that last same topic, if the control plane is somewhat a piece of OTN and everyone has that in their OTN switches, then how do you -- can you compare and contrast your 5400 family with the competition out there and how do you differentiate yours?

Stephen B. Alexander

Okay. So there isn't a piece of the OTN standard per se that says, thou shalt have a control plane in it. So there's extensions to it that support it. The fact that OTN allows multiple topologies, not just ring, for example, but you could do ring, you can do mesh, you can do star topology, you can do a lot of different things, allows you to create a control plane infrastructure that automates all of that, so the control plane solution is really unique to Ciena. We use extensions to what's known as G.ASON, Automatic Switched Optical Network extensions that allow it to talk into GMP less infrastructures. So there's a lot of work that has been done to add intelligence into the, I call it, the OTN standards, the G.709 standards. The way that we handle the inter-op, because that is key for all networks has been to the OIF, the Optical Internetworking Forum. That was created specifically to address these sorts of issues and it's a place somewhat unique, where vendors, carriers, actually component suppliers can come together and they don't generate standards per se, they generate interoperability agreements. So there are external network, network interface interoperability agreements that are crafted there that allow the various networks to interoperate.

Thomas Mock

As a practical matter, and I'd be interested in your color, Steve, if you disagree. While there've been a number of technology demonstrations around that to date, the practice typically is to implement an entire segment of a network with a particular control plane technology. One of the other things, though, to keep in mind, as we go along that some of the interfaces that Steve talked about are going to help facilitate is the interoperability between control planes at different layers of the networks. So the higher layer control planes essentially influencing the behavior of the lower level control planes.

Stephen B. Alexander

Yes. That's exactly right, Tom. And typically, just as the Internet is broken up into what you would call autonomous systems and those autonomous systems have interoperability requirements, the lower layer control planes work the same way. What's particularly useful about the approach we've taken is because it has the Layer 0, Layer 1, Layer 2 capabilities integrated into it, you can see through all those different layers, and that allows you to do a lot of the kind of service and operational correlations across the various network elements.

Gregg M. Lampf

We have another question that has come through the webcast. It says, we have talked about OTN's ability to collapse networks by being able to support multiple data types. However carriers seem unwilling to actually rip and replace for equipment supporting voice, et cetera. How do you anticipate carriers making the transition to a flatter network and over what kind of time frame?

Thomas Mock

It's a good question, because I think it's unlikely that you'll see particularly the larger service providers go in and rip and replace pieces of a network. Typically, if something's in place and working, it gets left alone. Now I will say that the stuff that's in place in the network today isn't particularly friendly to some of the new services that are being offered. So a lot of the service providers are initially putting this kind of architecture in place to be able to address new service needs and to be able to address the migration to 40 and 100G in the transport infrastructure. I suspect over time, you will though see then begin to migrate some of the old traffic off of the old networks and onto these networks or migrate their customers from the old services onto the new services.

Stephen B. Alexander

Maybe I'd agree, Tom. I'd also point out, at the rate that many of these networks are growing, the 10%, 20%, 30% a year, if you look at it, that kind of translates into an over a decade's time and that work better get somewhere between 10 and 100x bigger. That kind of makes a lot of what's deployed today into a smaller total problem from a capacity point of view. And they will start to look at, we've already seen this, the benefits of just the additional density that you get. The fact that, in one network element today is relatively straightforward to manage multiple 10, 40 and 100-Gig wavelengths, and that would have been a rack's worth of equipment in the past. So they'll go in and they will harvest out, just from a space and power and cooling efficiency point of view, the older equipment that is more power hungry, more space hungry, and they will put in the newer equipment that is both higher speed and much more efficient in the use of both power and floor space.

Thomas Mock

That's a good point, Steve. In fact, we've actually seen some of our customers begin to start implementing programs to reclaim some of that space and to reduce the amount of power and cooling and things like that, that are needed in central offices. As you might imagine, these kind of transitions take a fair amount of time. If we look at, we've all been talking about the fact that SONET is going away for the better part of 10 years now, and we're finally beginning to see the market for SONET/SDH equipment begin to decline a bit. But the thing I point out in terms of people beginning to adopt this technology, a lot of the traditional impediments to putting a new technology in the network, things like integration into network management and integration in the back office systems and training of craft and things like that already have largely happened for this type of technology and is actually beginning to hit mainstream in various parts of the network.

Gregg M. Lampf

[Operator Instructions]

Operator

There are no further audio questions in the queue.

Gregg M. Lampf

Okay. It looks like we did have one that just came in on the webcast. The question is, what is the difference in network topology relative to integrating OTN between Tier 1 carriers?

Thomas Mock

I'll start and, Steve, you correct me when I go wrong here. I wouldn't say there's necessarily a big difference in topology. I mean, there oftentimes are differences in the details of how a particular service provider chooses to migrate or how they actually choose to implement it in their net network or how they integrate it into the management systems, but I think they're all using it for largely the same types of applications. And I'm wondering, your question may be headed down the path of, does this also indicate that some are implementing OTN as part of a mesh implementation and are some of them are not doing that. I'd say broadly the people we're seeing that are implementing this kind of OTN approach to traffic management largely are doing it in a mesh fashion. So a lot of the things that we talked about in terms of network automation and control plane indeed apply. But a lot of that is going to is depend again at the rate at which the service provider tends to make the migration and how their existing systems tend to support that sort of a migration.

Stephen B. Alexander

Yes. I absolutely agree with you, Tom. I think the thing that you can count on is they're all going to be slightly different. It depends upon how the carrier grew up, whether they grew from acquisitions, if they have common architectures to begin with or not. In many cases they don't. And so what they actually can do is use OTN again as a common point to actually converge networks together to provide ways to interwork between the existing assets that they've got between regional networks and long-distance networks. And it also has something to do with where they are in building out their various network pieces. You've got some folks who are concentrating more on the core, who may have made investments in the metros over the last few years. You've got others who are adamant about where their issues are is building out in the metros because they've invested in the core in the past. But what they're finding is that OTN has roles in both, because it's such a great way of turning up, again these virtualized wavelengths, and there's a lot of services and equipment that works best when it's connected over virtual waves.

Gregg M. Lampf

Thank you. If there are no other questions, we will end the call here. And we wanted to remind everyone that this call webcast will be archived on our website shortly. Please check in the Investor Relations section for that information. And again, I wanted to thank everybody for joining us again today. We look forward to connecting with you again on our next call. I wanted to wish everyone a happy holiday and please feel free to reach out to us for a more detailed conversation on this topic. Thank you.

Operator

Thank you very much. This concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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