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Executives

Thomas Mock - Senior Vice President of Corporate Marketing & Communications

Gary B. Smith - Chief Executive Officer, President and Director

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

Francois Locoh-Donou - Senior Vice President of Global Products Group

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

Philippe Morin - Senior Vice President of Global Field Operations

Rick Dodd - Senior Vice President of Global Marketing

Analysts

Mark Sue - RBC Capital Markets, LLC, Research Division

Alex Henderson

Catharine Anne Trebnick - Northland Capital Markets, Research Division

Simon M. Leopold - Raymond James & Associates, Inc., Research Division

Vijay Bhagavath - Deutsche Bank AG, Research Division

Edward A. Zabitsky - ACI Research

CIENA Corporation (CIEN) 2012 Analyst Day June 11, 2012 1:30 PM ET

Operator

Please, welcome to the stage, Ciena's Senior Vice President of Corporate Communications, Mr. Tom Mock.

Thomas Mock

Good afternoon, everybody. Welcome to Ciena's 2012 Analyst Day. I'd like to thank you for taking the time to come hear our presentations today. We spent the last couple of years or so trying to find good vehicles for keeping this audience aware of things that are going on in our industry, things that are going around the technology and how we can adapt to that. And this presentation today is another good step in that direction.

But as with anything like this where we share this type of information, there are going to be forward-looking statements. That -- and the results you may see as a result of today may be materially different from what you hear in the presentation. So we don't -- as we've said before, we don't maintain a need to update these on a periodic basis and we would ask you to consult our press releases and our most recent SEC findings -- or SEC filings, rather, for further information.

And with that riveting introduction, let me turn it over to our President and CEO, Gary Smith.

Gary B. Smith

Thanks, Tom. And thank you for doing the [indiscernible] one -- I appreciate it. Listen, welcome, everybody, I appreciate you showing interest and spending some time with us today and for those of you who might not be aware, the timing of this is not brilliant not because of other activities that are going on in the industry, but because England are playing France live in the European championship right now so -- and it's 1-1, I believe, Francois, right? 1-1. We'll update you as we go through the course of the presentation.

The title is Open Minds, and we selected that carefully because I think it does epitomize the sort of juncture we're at as a company and particularly I think around the sort of engagement with the outside world -- around talking around the future of the company. And we really wanted to take this opportunity to sort of elevate the engagement, if you like, around more of a visionary future, understanding around what's going on in the industry and more sort of strategic insight that we think we can provide around some of the dynamics for that and really, I think a little more clarity around the path that Ciena is on.

And 2 years have passed since the MEN acquisition and we are well positioned. We think we have the technology, the relationships and the industry we think is evolving in a way that's particularly favorable to us. But as many of you know, Ciena has very often taken a contrarian or a different approach than many others in the industry and I really wanted to go over that and how that will leverage into the future. And really, I describe that as being different by design. We had the opportunity a couple of years ago to really step back and to remake the company in an image that we thought was very appropriate to the future. And I think we've taken the last couple of years to do that.

And it's really around creating a network specialist that is very different from a lot of our competitors, and this has been very deliberate. And if you think about it, compare and contrast it to many of our competitors, there are even niche players who don't have the global scale or the breadth of offering to really add value into the industry and to do what they want to do or you've got a collection of legacy conglomerates that are really struggling to shape up for this next generation of architectures that's coming upon them.

We really sort of, if you like, chose the Goldilocks strategy, which was really to be large enough to be able to execute but also small enough to be able to focus. And I really think this area of focus is a critical one. We have deep expertise in what we do and it's all we get to worry about every day. We're not worried about a whole breadth of products with legacy handsets to switches, to all other kinds of businesses that we're looking to get out of. We spend all our waking hours thinking about how to optimize the space that we're in and the future of that.

And innovation, and really the whole design around the business is to be able to continue to lead in key innovations in each of the technologies that are important to us and we really have 3 or 4 key core technologies that we're focused on to execute on our strategy. And again, the design point is that as we're successful, we can absolutely fund those in a very strong operating model going forward to maintain that leadership. And last but definitely not least, but is more difficult to quantify, is relationships. And we've built up, I think, some of the best trusting relationships with some of the large carriers and customers around the world than anybody and we have very intimate customer engagements, which means that we have a lot of insight into both technical, operational, architectural and, increasingly, the business issues of our customers.

But I think, and I think this is important, it is a confluence of those elements that really, I think, equal the differentiation of Ciena going forward. I think from a general comment, it's very difficult to maintain competitive advantage continually on pure elements of just technology. And customer intimacy allows us to have insights that others don't get, and we're able to increase the velocity of that innovation. And I think this gives us a very strong platform on which to address the future and how we can grow.

And today, we're going to share with you basically our ongoing transformation in 2 dimensions, the evolution of our role in the industry or continue to say, what we do to evolve our role in that and how we continue to do that from an operating agility point of view.

And the first couple of presenters, myself, Steve and Francois will really be addressing the how -- or rather, the what we're going to do to evolve our role in this, and Jim will really talk about the how we're improving our operating agility to affect that. And then we'll get a chance to have some Q&A at the end of the session and then during happy hour, get some one-on-one conversations and dive down into a little more depth. So hopefully you'll get a good flavor for the whole sort of business around what we're thinking around the evolution of the industry and Ciena by the end of the afternoon.

So first, let me get going on the -- on where we are and what we've built and how the industry is changing and how we're evolving to meet the growing changes in the marketplace and I think the most important thing is really, as always, the foundation that we've built and I think we've built a very strong foundation by design. We've been very deliberate around the things that we wanted to do with this business and how it will address the future. It's very important that we build a strong foundation.

And let me drill down a little bit more on the 3 elements that I've talked about: focus, innovation and relationships. Focus, we have really developed the world's leading expertise in some very strategic parts of the network. What we're most known for, I guess, would be the exponential capacity creation over the history of the company. We clearly are well qualified to talk there, but I'd also stress some of these other elements, which we -- many of which we pioneered in the industry and I think are going to be critically important to us going forward: packet-optical convergence, virtual switching, platform programmability, control-playing automation, many of these elements we actually helped pioneer in the industry and have leading technologies and roles in them.

And again, I think as we talked about convergence, the fact that we have deep expertise positions us extremely well to leverage these in the marketplace. Innovation, if you like the sort of manifestations of that expertise, we've been able to bring a number, I think, of very impressive product innovations and this is just over the last couple of years and bear in mind, we've been deep into a pretty large integration during this time. So OneConnect, which we announced recently, is really our intelligent control plane. This leverages a lot of the technologies that we pioneered with CoreDirector into the 5400 range of platforms, and now we're able to bring that same technology into the 6500. OneControl -- and this was something that was a very challenging thing for us. We basically fundamentally re-architected all of our network management from the ground up when we did the integration with MEN and Philippe led that initiative.

And that's critically important when you think about architectures moving forward, and Steve and Francois will build on that. We've really got a great platform now from a network management point of view to address the future needs. WaveLogic 3, we're now on our third generation of high-capacity networking and that really is 100-Gig and beyond and the 5400 Family, which is really the only platform in the world that allows the migration from SONET/SDH all the way through to optical packet at very, very high-capacity.

We've got many other innovations coming to market over the next 12 to 18 months but the fact that we've been able to put these foundational ones out there, I think, in the last 2 years gives us a very good opportunity to leverage that going forward.

And again, relationships. We have some of the best customer relationships in the industry, both in terms of their trust from a cultural point of view and I would not underestimate that and also from a respect, from an expertise point of view as well. So the combination of those really make for a very, very trusted partner and really that positions us extremely well when you start to think about an environment of rapid and unprecedented change. We're well positioned with many of our customers to help them make the necessary transitions as their trusted partner.

And there's a couple of dimensions to this. One is we've increased our breadth within some of the large carriers, both in terms of what we supply and the solutions that we enable but I think more importantly, we really are a strategic vendor to them. And I think the fact that we've been anointed by both AT&T and Verizon recently as their supplier of the year I think is ample testament to that. And we continue to see opportunities to spread out within those kind of accounts to be a more meaningful partner to them.

Additionally, we've identified markets that take really the core technology and solutions that we have and appreciate the same solutions. About 25% of our business now is outside of carrier infrastructure; things like enterprise, research and education and, increasingly, government networks. And again, back to my point around different by design, part of that was to have a business that was more balanced and had different revenue streams and I think we're well on the way to that. Another example would be the submarine space, which is a market really where we had no presence at all about 2 years ago. We now have about $100 million of revenue from that space from a standing start, and I think that's a good example of taking the core technologies that we have and applying it into different markets. But again this relationship's, I think, is critically important when you couple that with innovation and focus.

So in the last 2 years, that has translated into increasing market share and was to get some ebbs and flows on a quarter-by-quarter basis and by vendor, I think you can see from a North American point of view, in this case next-gen optical, next-gen networking broadly defined as metro, long-haul and switching and we've got #1 market share in North America and we've now become #2 globally.

And again, the point that I would make is this has all been during a time until recently of intense integration between 2 companies. We're now completely focused on the marketplace and we are well through the integration. And this is translating into improving financial performance overall, and Jim will cover this in a little bit more detail later on.

But you can see pretty much all the metrics are going in the right direction. When you combine this with the momentum that we have in the marketplace and our market share gains, that's going to equal operating leverage as we go forward. So I think the point that I would make is we've methodically built a solid platform that is very applicable for the future and positions us extremely well to take advantage of some of the market dynamics that are coming.

So let's spend a few minutes talking about some of those dynamics and I think seismic shifts, I think, is not an overstatement. There's an unprecedented amount of change, I think, coming at us, and we are seeing this in all of our daily lives, virtualization, mobility and machine-to-machine, virtual everything. 1.8 zettabyte of data was created and replicated in 2011, that's about 18 gigabytes serving per person on the planet on a daily basis and that's just growing exponentially.

This year was the first year that we now have more mobile devices than we have people in the world. Machine-to-machine, or the Internet of things, if you will, this really -- we are at the very early stages of this and I think for those of us who've been in the industry for a while and there's probably many in the room have been sort of 20 or 30 years, we need to remind ourselves we've seen a lot of change, but we haven't seen anything yet. The changes that are going to happen over the next 10 to 20 years are going to be exponentially more. Of that I'm absolutely sure. This industry is still at its early stages and when you think about machine-to-machine, I think that's a great example right there.

And so the implications for that are quite far-reaching. Any one of these things frankly on their own would be very dislocating. The fact that you've got 3 of them hitting at the same time creates a very interesting dynamic. And clearly, you can look at this and go, "Well, yes. We're going to need a lot more capacity." And I think that's absolutely clear, but I think there's some other subtleties to this that are just as important. It's about scalability, reliability, et cetera but -- and I'm going to draw some parallels here.

Folks talk about networks as being potentially just dumb pipes in the future, and I've never subscribed to that view. I actually think it's more around providing a lot more intelligence on the network than rather dumb pipes because if you think about it, if you've got to deliver these things, these right capacity at the right time and the right place, you require a fairly intelligent network to be able to deliver that and what kind of capacity as well, not just rural capacity. So I think the summary from all of this is the network is actually important again and it is such a large part of the customer experience when you think about it from an application point of view.

Listen, when the network doesn't work well, the applications don't work well. And we've seen that from the mobile world particularly, and I think you can parlay that into these other dynamics as well. So it has major implications on the network, these dynamics and this growth. Over-the-top services will likely very much to continue to dominate. We need to rethink central offices as they become potential content centers.

Bandwidth clearly is going to grow 10x to 100x. The point I'd make about that is it's going to grow at sublinear costs if we're going to be able to scale these networks and differentiation driven by software-defined networks. And we're going to provide some of that perspective on what FTN really means and what we're doing about it and what we think, how that plays out in the marketplace during the course of our chat this afternoon. But clearly major impacts on the network.

And part of this -- this is not an epiphany, these things have been going on for a while and many of us have kind of lived it. And it's about rethinking the role of connectivity. If you go back sort of 5, 10 years, this is how we used to build networks, very silo orientated, by -- essentially by application. So you build a network for voice, you build a network for data, video, et cetera, essentially.

And we've been moving steadily over the course of the last few years to really a converged single network, if you will. But I think infrastructure is really now around being just an enablement for applications and it's really application-driven and as we've seen from the mobile phone industry, these applications evolve very quickly and the infrastructure on which they're built needs to adapt very, very quickly.

Really when you think about it, this platform calls for seamless working between the compute and the store and the connect and a lot of emphasis to-date has been on the compute and storage, where you've seen some dramatic impacts of technology on there, and I'll talk about that in a second. But really, I think what you're talking about now is an equal partner for connect. And all of this is really, I think going to deliver, from a network point of view, what we call a performance on-demand application ecosystem. So it's not about just capacity on demand, it's about performance on-demand; the right capacity at the right time with the right characteristics at the right cost points.

And really the point I would make is that needs to be intricately linked into the application ecosystem which drives it and that, I think, is the challenge for the industry. So moving from static silos to really a performance on-demand application ecosystem when we think about the network and I think we're well on the way to that as we think about some of the changes that are coming and again, I think it's about thinking of it in the big picture and connect being an equal partner, if you will, with compute and store.

Typically, when we think about compute and store and some of the things that have happened to revolutionize those spaces in the last few years, we think of clearly virtualization and it's really been thought of just in terms of sharing, computing and storage resources.

Well, I've put to you that we're at the point now where we need to think conceptually around the same kind of implications for the network if it's going to scale and provide the kind of intelligence that is required to deliver on these applications. And really that's the same principle that we need to apply to the actual network and lots of people mean different things by virtualization, so I'm going to keep this really simple. It's really the ability to run a variety of services and functions as applications within this ecosystem and have the ecosystem adapt to it efficiently.

And really, it's efficient use of resources right time, right place. So conceptually, very similar to what you've seen happen at compute and store. So we see some unprecedented changes and opportunities and the issue is what is Ciena going to do about these opportunities and how are we going to see some of the opportunities in front of us?

Well first of all, I think clearly we've got an opportunity here to define our specialist role in this application ecosystem more tightly and really, I think, to take a leadership position. We've very much been of this view around the vision of the network for some time, and we've been steadily executing on this kind of a plan.

So again, back to different by design, this is not an epiphany for Ciena, this is something that we thought through over a long period of time and it is incredibly grounded in our intimacy with our customers and how we form a view of the marketplace. And so I think it's very appropriate that Ciena takes the leadership in this space. And it's about delivering a network that dramatically reduces cost at scale, and it's also about creating a totally differentiated user experience for our customers.

And it's because of our relationships, not just our technology, that I think we're well positioned to help here. We don't have all the answers to all of the networking issues that are clearly going to arise from this. And again, we're focused on a set of network elements that we think are highly valued and will be the underpinnings to help make this change. But really I would stress, it's our relationships. And so as we talk to our customers, there are many elements that need to be considered to go deliver on this kind of a network and we call it the performance on-demand.

But I think as we think about them, they really fall into 3 primary categories: One is scale with intelligent simplicity to achieve very low cost at great scale. Clearly, Ciena has an incredible pedigree in that space. As we go around and talk about programmability, again, and this is around taking it from ports to platforms to network. And if you think about some of the pioneering work that Ciena has done, we've done things like FlexiPorts. We're the first in the market with that, integrated control plane, really around the actual platforms and now it's about providing programmability on a network-wide basis. And last it's around network-level applications and as we go around the clock here, you've got degrees of maturity as well and I think this is obviously, the network level apps is the least mature and that's where we're spending a lot of our time, but it's really around that directs the behavior of the network that affects the programmability and then drives the actual scale and capacity. So these are the fundamental elements that we think are necessary to deliver this performance on-demand.

So with those key elements, I'd like to introduce you to Ciena OPn and we're introducing this today. It's really the evolution of our architectural approach and it's already demonstrating terrific momentum in the marketplace in its various forms that are existing. And the name OPn reflects these attributes; really exponential scale at lower cost made possible by optical packet networks and also the software-enabled orchestration and automation made possible by the control plane and open interfaces both within the network and within the platforms themselves.

And so it's about reduces cost of scale, virtualizes network resources and really enables software-defined networking. And Steve is going to talk to you a little bit more about the architecture itself in a moment, and Francois will dive a little bit deeper into the specific deliverables to make this vision a reality.

But the point I would stress is, by design, we've been evolving this architecture for many years through our customer relationships and market insights, and I think it's just an appropriate time now in our evolution and the evolution of the industry that we would share this with greater clarity and vision going forward.

Essentially we have the critical mass, we have the technologies, we have the portfolio expertise, we've got growing partnerships which are increasingly important to create an ecosystem and solid execution in our ability to capitalize on this opportunity.

So in summary, different by design, I think, we've got a very differentiated architectural approach that I think many of our customers are really excited about, and that's what's been getting us traction and I think our ability to articulate that with greater clarity and purpose going forward will be incredibly helpful. And really when you think about it, it's really the culmination of a lot of our heritage and our pedigree that's allowed us to position ourselves today for this kind of an approach.

And I think we've built a solid foundation on which to build this architecture as well, which I think is very important. We've got the ability to execute. The design of the business is such that we can maintain leadership in each of the spaces that we're in because we're a focused player. And I think last but clearly not least, it's a better way to create fundamental value in all of its manifestations. We're delivering -- it starts with delivering more value to your customers and I believe this does. It's about creating and expanding a more valuable role for ourselves in this new ecosystem within the industry and within our major customers and that will translate into driving more value for our stakeholders, and particularly our shareholders.

We're very excited around this opportunity and we've worked extremely hard to get to this position. Many of you have followed us for many years and you've seen the trials and tribulations and our ability to come through those and develop a business that's highly pertinent for the next generation of networking. And many of you will also recognize many of the attributes we've talked about when we consider this network vision. So again, this is not an epiphany for us. We've got many of the elements in marketplace today to be able to leverage this. We look forward to sharing more with you over the coming months as we roll this out into even more products and with even more customers.

With that, I'd like to hand it over to Steve to tell you more about the architecture itself. Thank you.

Stephen B. Alexander

All right, thanks so much, Gary. I wanted to stay with that OPn, OP raised to the n. Is that thing glorious or what? There's an exponent in it, right? The geek in me loves the fact that there's an exponent in this thing.

But let's talk a bit about optical packet and then extreme scale, right? That's what we're talking -- one of the pieces of OP. Think about what it is, optical and packet, optical for capacity, packet because it's how you define and deliver this ubiquitous service delivery mechanism. The other thing I want you to think about when you hear OPn, think about OPn and programmable but also again, it's a very large scale and think back to how Ciena came to market. We were the first to deliver what were called open system WDM and that really opened up the marketplace, it virtualized fiber. We worked with anybody's chip. We did the exact same thing coming into the submarine business. We introduced the ability to put coherent optics on the submarine systems and opened up that marketplace, so OPn is kind of built into the DNA of the company.

Programmable. So you've heard about WaveLogic 3 where we can actually program the characteristics on the line and by doing so really dramatically simplify what goes on, on a fiber optic system, but think programmable in terms of what we've done with FlexiPorts where we could change the characteristics of the port to be SONET or SDH or Ethernet or fiber channel and think about it in terms of programmable with what we've done with control plane over the years, like the fact that we could make the networks dynamic.

So when you see that lovely crafted OPn, OP raised to that n, think about what is optical and packet, but also think about how we can use it opening up networks and programming networks. And you look at some fundamental changes and I would tell you, I think we're at another one of the inflection points.

I'm going to start over on the left-hand side there, and it's a bit of looking =- what's happened in networks over the last 10, 15, 20 years or so. When we really started out building networks, what we were doing was connecting places together, right? This was the origin of the original landline phone system, it was putting phones on desks and buildings and what network scaled pretty predictably, it's the growth of population, it's the growth of which you build buildings and you can create locations that you want to interconnect.

Well, you get a certain growth slope and you go back in time, you'd say 5%, 6%, 7% a year, that's what networks grew at -- and services were pretty predictable. Well, now you're in the business of connecting people. This is the mobility revolution. This says every person on the planet wants 1, 2, 3 kind of mobile devices. And so you go from a slope that might be like this to a much higher slope. Well, we're now at the point of connecting machines, right? As Gary alluded to, this is kind of the Internet of things that's coming at us and yes, some of this you can extrapolate and say, "Look, every light bulb in the world gets an IP address", but that's a tremendous amount of connectivity.

So this is one of the key features going on out there, right? This is one of the driving forces. This is what our customers are faced with. At the same time -- we'll go to the center of this chart, what you might call the zone service uncertainty, right? If you plot where a connection or service or an application shows up, how long it has to last for and the kind of capacity or bandwidth that, that requires, that is dramatically increased in all of those dimensions. So it used to be a relatively predictable set of events in the networking space and that smaller cube that's drawn on there has really expanded dramatically.

So I'm at a point where I've got exponentially increasing capacity demands, coupled in with uncertainty in terms of the type of services. It's a very high dynamic range. I mean, we will all sit here and we'll be doing, let's say VoIP, we're doing kilobits per second and guess what? The VoIP call says go download the high-def video and now you're doing megabits and gigabits. And the network has to be responsive and dynamic at that rate.

And on the far right side, again, the fundamental change in our customer space is the proliferation of the top services, right? The whole value equation has moved around, and the network fundamentally has to be responsible for all this. And you've seen all sorts of charts like this and we can talk about the zettabytes and the rest, and yottabytes and all the size of this thing. It almost becomes too big to get your arms around.

But the relative change is very, very important here, and there's been various versions of this from pretty much every customer that we service out there. But an interesting soundbite on here, by the mid-2020s you're looking 10 years out into the future. The amount of traffic carried completely dwarfs what was there in the 2000s. And you think about all the infrastructure, all the capacity, all the kits that was deployed during the first kind of Internet rollout; that's going to pale in comparison to what has to be deployed going forward just in terms of raw capacity.

So the network we know has to get 10x to 100x bigger, and we know that it can't cost 10x or 100x as much. It can't consume 10x or 100x as much power. It fundamentally has to be different. At the same time, we sit and we talk to the customers and we say, "Okay. Tell us what's going on in your traffic patterns. How do you see the traffic flows, the services and applications changing the network" and there's been a couple of very fundamental shifts. If you sit out at the edge of the network and you looked at kind of the mixed fiber, the mobile access, what you'll find is more users wanting more content, but from generally fewer numbers of locations.

When you're getting on the net, you're not going on and going to hundreds of different locations. You might be getting on and going to 2 or 3 or 4 or 5 or 10, but you're getting much more content from them. You're uploading, you're downloading, you're doing file exchange, doing video calls but you're not going to hundreds and hundreds of places. And that's a pretty fundamental change in terms of traffic pattern.

At the same time, you look at the business service and you're seeing similar things. Yes they want more and more from certain locations, but there's a tremendous amount of flow within the network where content's being moved or content's being replicated. I may be sitting at its multi-national, got an ERP system running and that has to be distributed all over the globe for me to be efficient, so I'm replicating, I'm moving, constantly shifting.

I know there's some pretty fundamental changes in how you want to look at network architecture. And in fact if you bake through those, you'll see, "Okay, I'm up against some pretty fundamental problems. I've got traffic going up exponentially. I've got a cost curve that I have to get under control. The revenue sitting in the carrier space isn't going up as fast as traffic demand is, clearly. And so what do I do about this? What architecturally can we do to change this game?"

And it's all about how do we bend those cost curves down. What do we do architecturally, because this is not a debate about port costs. They go down as the supply chain improves and scale goes up and quantity changes and such. This is an architectural shift. You can't address this just by saying, "I'm going to get cheaper ports next year and cheaper boxes the year after that." Right? This is a pretty fundamental change that has to occur in the network architecture itself to be able to address that kind of scale and provide a much lower cost way of implementing that sort of a network.

So when we talk about this platform infrastructure and we want to use the word platform very deliberately, because a platform is something that you build other things on top of. You build businesses on top of them in some examples, right? The fact that today you have things like Netflixs and salesforce.coms living on top of programmable platforms, taking advantage of the combination of compute, store and connect to build their businesses.

Faced with this kind of exponential growth, we think there's some real value we can bring to that and how that connection network, how that better machine, that better combination of connect, compute and store gets built in order to provide this kind of an infrastructure. Now clearly, you have to reduce the cost of scale but you have to be able to then program the network. It has to be dynamic, it has to be responsive to what these applications, these new services, these new businesses in some cases, need the infrastructures to be able to provide.

So you got -- there's just a fundamentally different way of looking at it. And ultimately, because this all becomes how does the network respond, you have to be able to open up the network, head the APIs, application program interfaces, head the network programming interfaces, make the network responsive to what the services and applications have to be.

And in fact, sitting and talking with our customers, you really want to start thinking of network differently. You want to stop thinking of it about, "I've got backhaul and metro and edge of metro and intercity and core and long-hauls." There's really now kind of 2 networks you want to pay attention to. We've got them counted on here. One network, whether you're residential or wireless or enterprise, you're building a network that pretty much fundamentally connects users to content. You heard Gary say earlier around content centers, think of this as the evolution of today's central offices, the infrastructure's in place, condition, power, cooling, facilities, that's where content can live in the future. So think of those things evolving to be content centers. A network needs to get built to connect users to that content. But you're not going to want to be just connected to one content center and you may have an enterprise that's geographically distributed; you're going to be connecting content to content because in fact very large flows can occur in that piece of the network.

So again, start thinking about the network, 2 pieces, users to content and content to content. But both of these pieces have to be flexible in order to -- they have to interwork together, right? That's what the whole enterprise wants you to see. Again, fundamentally a different way of thinking about network architecture. No more talking metros and cores and intercities; user to content, content to content.

And so when you say, "Okay, what do we have do to address this? What are these kinds of fundamental architectural principles of a network architecture that would address some of these issues?" You heard about scale and I'll say that here is scale from an addressing point of view is largely soft today, right? With IPv6 and such, you need trillions of addresses; we can do that. What's missing, you would say, is the kind of great scale problem of take those trillions of addresses and give everybody megabits and gigabits. That's a problem that hasn't been solved yet, and that's one that needs solving.

Programmability, how do I make the network flexible? What are these applications that I can run on top of it? This sounds like a different way of thinking about the network. I'm not putting the absent things down in the bowels of the equipment anymore. I'm bringing it up and saying, "No, I can provide applications that run across the entire network."

So within scale, what do I have to do? Well, there are some very simple principles. Generally things that are tremendously complicated don't scale very well. So when I put a knife-work architecture in place, it minimizes the total number of complex locations. Convergence, now you've heard of us talk about convergence for years. Convergence to us meant one box does the work of multiple boxes. But you're not buying WDM and putting TDM on top of it and packet on top of that and IP on top of that from 4 different vendors, one box does the work of multiple boxes. And even that we've talked to you over the years about is a wonderful technology that provides that and there's some great simple forwarding ideas around Ethernet where you can build very large scale networks.

Programmability. You need to adapt to uncertainty. Remember that cube of uncertainty that we showed you. That's germane to all the services out there. Now you can't predict what your network has to be responsive to; you just know it's going to be uncertain and it can change from kilobits to gigabits almost instantaneously. That speaks to having a lot of physical resources ready to go, but using virtualization techniques to tailor those physical resources to the services and the applications that you really need to be delivering at any point in time.

So go back to the model Gary introduced you to, virtualization. We know how to virtualize storage, we know how to virtualize compute, we now have to be able to virtualize the connect function. Once you do that, then you've got the better machine. To make all that [indiscernible], that's the distributed control plane. Why are we so interested in getting the control plane from core switches over to 6500? To support this kind of an implementation.

And then the network level apps rapid service creation. Again, this is all about how does our customer base catch up to the demands that are being put on their networks. Rapid service delivery, flexible service delivery, rapid time-to-market, right? It's all about ultimately creating a differentiated end-user experience. There's a lot that can be done with an analytics approach, a network analytics selecting information, making the network responsive to what's going on and a key piece of this is going to be this open interface. I'm going to use the word open a lot of times in this.

So we're going to walk through a couple of these. Now, this is a really interesting one. It used to be when we would engage with customers, they would say, "Now Steve, Ciena, come in; optimize this link for me. Optimize wireless backhaul conductivity. Optimize my intercity transport." And what's happened over time is that dialogue has changed pretty fundamentally. Instead of saying, "Look, I've got issues with wireless in Los Angeles," what they're now coming to us and saying is, "I've got issues with wireless. I know it's growing, but so is my private line. So is my public IP. So is my internal networking."

Here's the whole thing. Let's optimize the entire package, don't try to optimize individual services or individual layers anymore and that's a fundamental different way of looking at it. And Ciena, by virtue of the factor that where we sit in networks historically, and historically, we sat down here as the capacity function. We have a very unique perspective. We see everything. We see every single service that, that service provider has in market, plus their internal operations in many cases that need connectivity. It's a very unique perspective, and we've been able to leverage that through the dialogue with their fundamental planning folks, with their architectural folks and say, "Okay, how do you really want to go about optimizing the whole network, not just a slice of it?" There's some kind of fascinating science behind it. You go back to Demi and see some of his work on quality where it said, "Okay, if you really want an optimum solutions, you may have suboptimum parts. You want to optimize the whole problem statement."

Well this network, especially when you start to combine in compute and store, it's a pretty complicated problem statement. It's a really interesting problem to have to work on. And what you find, you have to start to change where traffic flows in the network. We run a very simple little model with folks; we call it kind of a day in the life of a packet. Put a packet into the network and we'll go through and say, "Okay, how many times have you touched this? How many times do you have to address it? How many times do you have to crack it open and look inside it? How much functionality do you really need in your network to make the network work versus how much are you really doing just because that's how you built your network, that was the way we normally had to do it and the results are pretty astonishing. There's a lot of savings to be gained by keeping traffic flows lower than network.

In fact, we see a world where kind of high-touch IP, the complex functions and I'll put, let's say, VoIP into that bucket. If I can make a VoIP call, leave you a voice message, you can have it e-mailed to you and you can pick it up on your wireless device, that's pretty high-touch, okay? And that world works really well. And we know how to scale that. What we don't know, how do you scale the lower world, kind of the low-touch? We've got an approach that we're going to call lean packet, where you're not going in and you're touching the addressing over and over and over again.

In fact, we've had folks come in to us now and say, "I like this approach. It's really giving me some nice economics. How about you build me a network where I'm going to touch this thing at one time within the IP state and everything else I'm going to do switching and connectivity. Can I get a better cost out of it?" Absolutely you can. In fact if you look at the cost points here, if I do manipulations down at the Photonics layer, I can do it for hundreds of dollars. Now, I can't go in and look at every bit. So what do you do? You aggregate efficiently at the edge and you fill up those wavelengths early and you carry them into your content, very simple architecture that scales up pretty nicely, which will minimize all that complicated IP touch. You do the exact same thing in the content-to-content network. Content isn't necessarily moving geographic location. I'm not re-computing IP addresses all the time. I kind of know where it is, I'm switching, I'm connecting. That's really one of the key pieces to this.

And so you operate the networks differently. You use DWM (sic) [WDM], you use Photonics to its advantage, you use Ethernet, that's where you can really get tremendous economic advantage. So when you look at what this network is for, think of it as being the network that connects billions of user devices over here to thousands of content centers over here. And today, if you took any one of the networks out there, it wouldn't look anywhere nearly this smooth, right? It would be very lumpy depending upon how their network got built, they may have far too much high-touch because you know what? It was easy to do, I just replicated it, it worked for -- hey, it worked for email, I'm just going to make more of it. Well, guess what? It doesn't work so well for video because it's very expensive and then with this onslaught of traffic coming, it's very, very expensive. So how do I change some things? And this is the kind of profile you really want to get to.

Think of billions of users, thousands of location for content, lots and lots of connectivity in here. It's a really good time to be in the connect business, it's all about that scale. And again I'll go back and tell you, "Look, the scale issue from addressing solved by IPv6." The scale problem, the great scale problem of how I make those connections all at high capacity? That's what OPn is intended to solve.

The whole piece of them virtualizing the switch has been very, very critical. It's today, true that I think every one of our platforms has some amount of switching built into it and that's a convergence message. And within that switch, once you've got switching in the platform, if you architected it correctly, you have the correct software features, virtualization is the next step. Why do you virtualize? Because I want to take that physical entity, that big physical box into a lot of virtual instances of it. And then I want to map, marry those virtual instances to the services that I need to provide.

So why the investment in FlexiPort over the years? Why are we so fixated on having a reconfigurable switching system that would start the Photonic layer and go all the way up through OTN and up into the packet layer, which will address this exact issue? It's a story of transition.

A lot of those connections today at the content centers, they are legacy, they're established. Yes they need to grow, but this isn't going to be a wholesale swap out; it's a transition. It's a way to give the service providers the tools to make this transition to this new programmable infrastructure in a sensible way. So you peel the onion on the switches, we've always been kind of encapsulation agnostic -- MPLS-TP, PTT, MTOs, it's fine by us, we do all of that, but we do it in a virtual sense so that we can map the switch to the service and the application that we really want to be able to provide into the marketplace.

Now this one, I really like this picture. I hope this kind of -- you get it when you see this, right? You're sitting here, you've got a platform infrastructure, and on-air run a series of applications.

And in the past when we would've done this, we would've built those apps down into the equipment. You would've bought a box that did a certain series of applications. It's a very simple one, recovery availability. That's called protection, right? It's something as simple as just a line switch. Well 12 years ago with CoreDirector, we introduced a concept that was called the virtual line switch. You walked up to the box and what you saw was just all these ports and you could assign which ports you wanted to participate in the protection schemes all with software, there's no physical -- it wasn't like work was here and protect was here; you just -- that was software definition of how that function worked.

We want to take that exact same thing, make it a network-wide app, bring it not just from CoreDirector but across into 6500, 5400, that whole suite of families and then extend it outward from there. [indiscernible] interoperability work to that exact thing.

Another one on here that's kind of interesting, VM migration. At the last EMC World, we introduced a concept; we call it the data center without wall. But one of the demonstrations we did in there was a network being responsive to a virtual machine so the virtual machine could migrate, so you can actually physically, virtually move that machine.

So think about that. There is a network that's being responsive to the needs of a VM somewhere that says, "I've got to get bigger, I've got to get changed, I may be getting to a point where I've got to change geography." And it can go off and communicate with the network, the network can configure itself so the virtual machine can efficiently move and can migrate, makes the migration and the network resources are freed up for other application for use. That's a pretty fundamental change from the world of point and click and manually configured in fingers in the network, right? That's a network being responsive in the space of virtual machine.

Now the last one on here I want to just kind of focus on is this optical VPN, Virtual Private Network, because that's a key step forward in terms of virtualization. Keep in mind we've cracked the code of how you get terabits, all right? So we can make extremely large flows occur between locations now, all right? Terabit per second, we know how to do that, crack the code. Question is okay now that I've got all this physical resource, what's the best way to map it, to marry it again to the service and applications? Well, let's imagine taking that terabit network, that multiple terabit network, terabit connections, I'm going to virtualize it. I'm going to carve it in this particular example the 3 different virtual nets. Now just for review we may still have the top one, well, that might be my public IP offering. The middle one, that might be, let's say a private IP or a private line network that I built for a large customer. And the bottom one, that might be optimized for content distribution or delivery. And I'm going to walk you through the ability to run individual applications in each one of those.

We have a fundamental change in how we think about what the network is and how it operates and how it's aligned with different service offerings. And again in the virtual world, I can exchange the bandwidth as I need to. So think about addressing this problem of the cube of uncertainty. If I have a change in content distribution, I can move bandwidth here. If that turns out to be not as necessary right now, I can move the bandwidth elsewhere. I can change connectivity and I can change the type of connections I'm offering, but again in a far more dynamic sense than anything that can be done today. Use virtualization to really drive a different set of economics and ultimately, a much different end-user experience in the network.

So I'm going to build it out for you now, just what does this whole thing look like. Let's start over at the access edge again. I'm going to connect users to content. What do I need to do that? The most fundamental thing is economic aggregation. We're going to stop building networks as whole lattice and staircase of different boxes. It's going to be much more efficient aggregation. I'm going to learn to fill up those wavelengths out at the edge in a flexible dynamic way. And then I'm going to carry those waves very efficiently to content. That's this little express line that's in there, all right? I'm going to bypass some functions in the network that today, I kind of think I always do, but when you really get into studying it with your customers as we do, right, this day in the life of a packet, how many times are you touching that packet? Do you really need to touch it that many times? A whole different way of building aggregation at the edge.

Second piece, high-scale, mean packet core. Again, think reconfigurable switching in this instance, right? Connections today, Sonic SDH. That world ends at 40-Gig. Big connections in the future, OTN, right? 40, 100 and beyond and then all the packet features that go with that. How do I fill those up efficiently? How do I move services back and forth and around? That's the point to all that reconfigurable switching.

On top of that, how do I make this thing smart, distribute a control point. All right? That's kind of the engine that you use to discover connectivity, distribute topology, right? Think about it as all the software that sits amongst the network elements and lets those applications run seamlessly. And then some of those applications, ultimately we'll be talking to in the future, cloud operating system once those become much more common. Think of that as the orchestration layer, all right? I may be in the infrastructure or the service business in the future. I'm cutting up this thing into various virtual entities with certain sets of services and function, and that's what I'm actually taking into the marketplace. Again, a much different way to think about it.

So we've talked about some of the architectural principles. What I want to do is just plant a few seeds for you here that when Francois gets up later, he'll let them grow a little bit more for you in terms of what we're going to be able to do here.

On the scale side, we cracked the code on the terabits, right? The coherent optic lets us do that. OTN, we've been a big proponent of OTN, the containerized straight model, the end of the SONET/SDH world, it's an OTN Ethernet world going forward. And we, from the beginning of the quarter up to back 12, 14 years ago, distribute control point, putting intelligence into the network so the network could be responsive to the needs of the services and applications.

On the programmability side, hopefully you understand virtual switches. Think of pretty much every network element that we sell today has some capable switching element in it, whether it be a cord level switch or central fabric switch, but there are some kind of switching capabilities in them.

Look at this as a way of saying I can take that switching, distribute it across the network and get much more efficient connection set up, much more dynamic, much more agile. Agile photonics, right? The ability to say, it doesn't matter what fiber types you've got, we can run hundreds of gigabits over it. The fact that we can go into somebody and say, it's actually easier to run hundreds of gigabits than it is to run your 10 gig. That's a tremendous improvement, right? Just complete dramatic change in the industry.

And as Gary said, we're early into the network level apps. But think about what we're able to do with that hypervisor. The fact that we could take a virtual machine and have it instruct the network what to do, right? Virtualize the network, the hypervisor approach, right? The supervisor of supervisors. That was pretty key. That's a good early indication of where we can go with this. And then opening up the network from programming both API, the classic kind of application programming interfaces, but also we would say network programming interfaces are going to be subtly different, but important differences there in terms of letting the network be very responsive to what applications need. And ultimately, you're talking about application defining the network, right? The network, we would claim, needs to be responsive to what the applications running on it require.

So ultimately, what do we get? What do our customers get out of this? Lower cost of scale, change of complexity model, keep things lower levels in the network, keep them there longer, efficiently aggregate. At the end of the day, it's all about can they differentiate their own service offerings, right? Let's give them some advantage in their business. That's the service development test, greater service diversity, faster time to market for them and ultimately, it's all about differentiated user experience. And I'll go back to one of the comments Gary made; it's a great time to be in kind of the connect the bandwidth business, because the network matters again, right? I mean it fundamentally makes a difference to what the end-user experience is, is the quality of those connections. That's one of the things we're in business to provide.

So just to kind of drive home what's the difference here? Well, the cost. You can't -- I'll go back to you can't have the network grow 10x or 100x bigger and cost 10x or 100x as much. Economics just don't support. You've got to support dramatically sublinear scaling. This network does that. Architecturally, it's built in.

We're going to say you're going to program this network at multiple layers. This is not going to be big static dumb pipes. You're going to say the network itself is going to be responsive, okay? It's a packet-oriented network. It's optical for scale, it's packet for service delivery, optical packet to the end, OPn, optical packet to great scale but programmable levels. We think that's key.

And lastly, in the past, the apps in this networking world have largely been vendor-specific. Even that's going to change. We think we have to be able to enable network level apps, really for the first time. We think there's really some real advantage here, right? And that changes the ecosystem. It gets you into a much faster, much more dynamic, much more responsive approach. Again ultimately, it's all about creating that differentiated end-user experience for our customers.

And with that, I want to thank you for your attention, and I'm sure we'll be talking about it some more.

Operator

We will now take a 15-minute break, and we'll be back in the room in 15 minutes.

[Break]

Operator

Please welcome to the stage Ciena's Senior Vice President, Global Products Group, Mr. Francois Locoh-Donou.

Francois Locoh-Donou

Good afternoon. Welcome back. So I just want to come back to Gary's comment about the France/England game that was going on when he started his presentation. The game has now ended, unfortunately in a 1-1 draw. So if you're not familiar with soccer, it's this game where we play on for 90 minutes, and then at the end of the day no one wins, and we're still happy with that. So the argument of the BRIC was about who dominated profession during the game. But there's no winner. And as my name would indicate to you, I think the French team is vastly superior to the English team. So I'm very disappointed with that outcome. But there's more to go in that tournament. So with that, I do want to take it a level down from Steve's presentation. Steve talked about the principles of openness and architecture. And I'm going to take you to what we're doing in our portfolio to implement and turn that vision into reality over the next 12 to 18 months.

Yes, I'll talk about the development in Ciena's product portfolio, but I will also talk about how we're making that real with our customers. Because ultimately, the OPn vision really is there to transform our customers network and help them profit from what we've called this performance on-demand world or more broadly, the cloud infrastructure.

So first thing I want to say about the open architecture is it's actually -- the concepts that we've talked about in OPn are actually not new to Ciena. And what I want to do is take you back to when I joined Ciena. I joined Ciena in the mid-90s and I think it was at '96 or '97 shortly after I joined, we went to a show called Supercon. Some of you may have been in the industry long enough to remember that show. The show was happening in New Orleans and what we did then is we rented horse carriages in New Orleans. And all the carriages in the city that were taking people to and from the shows and to their hotels and back, hundreds of them. All these carriages had a big banner on them that said 40 gigabits per second today. And we're very proud of that because what that was -- by the way, that was not 40 gigabits per second in the modules you can get today. What that was is the first time that anybody could put 40 gigabits per second on a fiber. Before that, we had all been limited to 2.5 gigabits per second on a fiber. And effectively what that was is first instance of virtualizing fiber. And you can think of that as a precursor of virtualization of networks. You can put a lot more capacity on optical networks today, and I will come to that through this presentation. But the principles of virtualizing networks were really the founding principles of Ciena. We initially applied it at Layer 0, which really was the fiber. But now we can apply it across all layers in the network. So OPn is really taking our DNA of virtualizing networks and making them scale and applying that to all layers in the network to transform our service provider customers' networks. And we now have the scope and breadth to be able to do that. We didn't at that time. We were only focused on Layer 0. We now have the scope and breadth to be able to do that across all layers.

So as I go through the changes in the portfolio, I will use the framework of the user-to-content and content-to-content networks because we really believe that architecture is really going in that direction, and that's the right way to think about networks today. Networks don't look anything like that today. They are a lot more complicated than that, and you'll see that a lot of the things we are doing today is to make them a lot simpler and also to make them a lot more dynamic.

When you look at the 3 elements of scale, programmability and network level applications that are the 3 founding principles of the OPn architecture. I won't go through each of them in turn. But the thing I'd say upfront is those elements are there fundamentally to change the business model with our service provider customers. Scale, driving lower cost at scale is something we're doing to lower the cost of existing services and enable our customers to create differentiated services and faster service startup through network level applications and programmability. I will start with what we're doing with scale. And I'm going to come back to the story I gave you about my starting at Ciena at Supercon and having 40 gigabits per second today then. We can drive a lot more -- we went from 40 gigabits per second or before Ciena commercialized WDM, 2.5 gigabits per second on fiber. Today, we can put about 10 terabits per second on a fiber. 10 terabits on a fiber, if you look at that, we have driven -- we have increased the capacity that can grow on fiber networks by 3 orders of magnitude, and we have decreased the unit cost of bandwidth by 2 orders of magnitude, okay? The unit cost of bandwidth today is 100x less than what it was then, okay? So in terms of driving scale, Ciena has significant pedigree. What we're doing next is really applying that beyond just optical fibers and applying that in other layers of the network.

So how are we doing that? If you look at this content-to-content network, we are converging layers and domains. The next-generation platform that Ciena has out today, the 6500 platform and the 5400 platforms are actually unique in the industry in 2 ways. The first is these platforms are capable of operating across traditional geographic domains, metro, core, intracity network, intercity network and submarine networks. So the use of a service provider that can use the same technologies across all these domains, it significantly reduces the cost of planning, sparing and operating these networks. And Ciena really has the unique ability to bridge these domains and converge these domains today, and that is fundamentally changing how our customers are operating the networks. The second thing we're doing in terms of convergence is packet enabling these platforms. So the 6500 and 5400 are the only platforms at the moment available that can deliver labeling switching, sub-labeling switching and packet switching in one platform, okay? The net effect of that is fundamentally collapsing layers and simplifying the networks.

I was in Europe 2 weeks ago, and I was having a conversation with our Tier 1 carrier in Europe, that's actually a conversation that I've had many, many times over the last 18 months that points to the complexity that exists in today's networks. And the conversation with the CTO of one of our Tier 1 carrier customers, and he was pointing to the following problem that as they have grown the network, they started by putting routers in the core, as traffic increased and the capacity that was available on these routers became insufficient, they moved these routers towards the edge of the network and put bigger routers in the core of the network. And they continued to do that and do that and so on to the point where they got to a network that has pervasive routing from edge to core, so routers all the way from the edge to the core. But when they stepped back and looked at this, they realized that a lot of these routers that they're using are actually only delivering switching functionality, because they actually do not need to look at packet addresses at every single load. And the result of that is significant CapEx overspend and also an operational complexity that becomes very difficult to deal with when you scale these networks to thousands of nodes. The ability of our platforms to integrate packet switching and multiple functions in a single network device actually reduces the need to do that and fits with the point that Steve made in his presentation that you can now use, minimize the use of very complex device such as routers in the network and only use them when necessary.

So we opened a significant investment in packet switching capabilities on these next-generation platforms as a way to simplify the architecture and reduce the need to do that. But that example from our Tier 1 carrier in Europe is actually not an isolated example. We have a number of carriers across North America, Asia and Europe that have had this problem and we're helping them deal with it.

The second thing we're doing in terms of scale, we've talked about the increase of traffic, okay? And the fact that the revenue curve is actually not matching the growth in the cost curve. Where that pain is most felt is in access networks, where mobile broadband has driven very large increases in capacity and access network by 2 or 3 orders of magnitude. And our customers are coming back to us and saying, "We are very coping with the bandwidth requirements in access networks today. We know they are going to increase by another order of magnitude in the next 3 to 4 to 5 years, and we just don't know how to deal with this onslaught of bandwidth and deal with it economically."

What we are doing about it is leveraging the economics of Ethernet to provide very cost-effective aggregation, Steve described it as economical aggregation, very cost-effective aggregation with the economics of Ethernet. But we're also using the economics of data center. So if you look into the platforms that we're putting at the edge of the network, the Ethernet we're putting at the edge of the networks, we're using merchant silicon to build these platforms because of merchant silicon chips are delivered for all kinds of applications, not just carrier network applications and therefore, they are built by tens of thousands and millions. And we are leveraging these economics to drive down the cost of Ethernet aggregation, okay? And as well as doing that, we are increasing rapidly the capacity of these platforms.

That, from a CapEx standpoint, is helping our customers deal with this onslaught of bandwidth. By the other aspect that Ciena is bringing to the table that really has been a problem of these networks is the operation and maintenance of access networks. Ciena has pioneered a low-touch positioning technology with the use of carrier Ethernet protocols that is dramatically reducing the cost of provisioning these services. The best example of that I'll give you is we have a Tier 1 customer here in North America that has been using this technology for mobile backhaul. And the primary driver for the use of the technology has been they've been able to turn off new base stations in a few minutes as opposed to hours or days in the past just using this technology. And the savings associated with the speed of turning up of these services or increasing the bandwidth of these base stations has been the driver for use of the technology which is now deployed in thousands and thousands of base stations. So the operation savings, as well as the CapEx savings are key to this economic aggregation, and we're driving that with the economics of Ethernet and leveraging the economics of data centers.

Last but not least, we have announced our third generation of coherent processor, a WaveLogic 3 processor which is capable of 400 gigabits per second, which again continues to drive down the unit cost of bandwidth into optical fiber networks. But we're also scaling our multiservice switch up to 15 terabits. Now if you think about it, CoreDirector was a very high capacity switch which we released into the early 2000, which had about 640 gigabits of capacity, okay? The 5430 platform will soon have more than 20x that capacity. Now when we started this development, this was about 2.5 years ago, the engagements we were having with customers went to form the following lines. We said we would develop a switch that would give them 3 terabits of capacity, which most of them felt was plenty, with the exception of a few large Tier 1 carrier customers in North America. Most other carriers around the world would say 3 terabits of capacity is plenty, you don't really need to go further in the short term. Yet we pursued a development to move the capacity all the way to 15 terabits. And over the last 12 months, what has happened is, these conversations have now gone from: "Hey, this is a science project. We don't think we'll need that until 2020" to "Actually, when can you have the 15 terabits because we have to deploy it in the next few months?" So whilst we believe we are ahead of the market and well ahead of our competitors in terms of switching capacity and be available to scale at the big nodes, we're still only helping our customers cope with what we believe is a sudden increase in bandwidth requirements.

So I'll talk about programmability of the second aspect of the OPn architecture and talk about what we're doing there. Now programmability in networks is not a new concept, okay? Traditional networks, the way we've architected networks today, most people would argue are programmable, and indeed they are. And in most cases, the routing layer is programmable, and everything else below that is static, okay? The belief is programmability has a degree of complexity with it, and if you can program your services and program your applications at the routing layer, keep the layers below that static because it actually reduces your cost. But what you then do is you over-provision the optical layer to deal with sudden increase in bandwidth. So you have a programmable layer at the top and a mobile provision, but static layer at the bottom.

Our belief is that every layer in the network should be programmable, and that's new, and that's different from what anybody's done so far. The value of programming every layer in the network is now you can optimize the use of every layer and can change the network to adapt to different requirements. In a world, in a performance on-demand world, in a world where you have best-effort email applications or machine-to-machine active replications that have very stringent latency and quality of service requirements and you want to run all of these applications on the same infrastructure, cost-effectively, you have to be able to program every layer to deal with different requirements. So what are we doing about that?

The first thing we're doing is we're making all of our multiservice switches programmable with any mix of Layer 0, Layer 1 and Layer 2 switching capability, okay? And that's unique to Ciena, okay? Any mix of Layer 0, Layer 1 or Layer 2 capability in one device. That allows you to adapt to the requirements I've just given from best-effort email to very stringent data center replication-type applications. Well, I'll give you an example of where that has played in one of our customers networks very recently. If you look at most of our customers, their networks do not look like what we're painting right now and a lot of the challenge, a lot of what OPn is about is about finding ways to help existing networks migrate from the present mode of operation to a future mode of operation. To do that, one has to understand the present mode of operation very well. We have a customer here in North America that has a lot of SONET rings, a lot of SONET rings, okay? And the increase in bandwidth over the years have mean we stacked these SONET rings one after the other after the other to the point where there are a couple of locations where they have physically run out of space. And when they tell me that they can no longer terminate services in a couple of these locations, even though this is where the customers are, they're having to take a link to another location only because of space, okay? Now in a non-programmable world, we would have a next-generation box, and we would ask them to build, overlay a new network, build that network, turn that network on and then start migrating existing services onto that network. The new network would be cheaper, shinier, faster, everything you want. The problem is for most carriers, that's actually not palatable because it involves putting a large amount of CapEx invested upfront and then having a return on investment on that, that range from 3 to 7 or 8 years. What we're able to do with the programmability of these platforms is take one of our switches and program it to behave like a SONET switch, okay. To have the same response to restoration protocols, to have the same modulation format in terms how we transmit lights on the fiber and effectively be able to interoperate with all the SONET switches and be dropped into a SONET ring. The result of that is we were able to take that switch and drop it into the location I mentioned, whether we're terminating a number of SONET rings, and take out 20 racks of equipment by replacing legacy SONET TDMs by one single 5430 switch, okay? That's the power of the programmability applied to existing networks and applied to the very real problem that our network, our customer networks face today. And OPn is really about helping that transition become real with real, innovative but pragmatic solutions to the transition that our customers want to achieve.

Now when I said we believe programmability happens at every layer, I really mean that, okay? So I do mean we also believe programmability has to happen at Layer 0. In most cases, nobody would talk about programmability at Layer 0. Layer 0, the wavelength layer, in the way that most networks are architected and in the way that a number of vendors talk about network, is a layer that should be static, okay? We believe actually there's significant power in being able to program the wavelength layer. And we do that with a technology we've called WaveLogic, and we've just launched our WaveLogic 3 technology. Now for most people, when we talk about WaveLogic or coherent, optical coherent technology, most people think about it as, "Well, that's the technology that allows you to go from 10-Gig to 40-Gig to 100-Gig and beyond." And that's true, but that's only a part of the story. Because as far as Ciena is concerned, we've put more intelligence in that technology than we believe anybody else. And what it allows us to do is to program the technology to behave differently depending on the application. I'll give you an example; latency. We have a number of -- well actually, you probably know this. There are a few companies out there that are actually building separate networks just to save a few milliseconds of latency, there's a network that's being built across the Atlantic to achieve that. And there's been terrestrial networks inside America to save a few milliseconds of latency and to be able to charge a premium for high-frequency trading applications. Well if you're able to program your optical link, your Layer 0 with WaveLogic technology, we are able to actually change the modulation format of light to reduce latency on latency-critical applications, and we program that back on if you don't need the latency-critical application running on the network. So that's an example where programmability at Layer 0 can actually make a big difference. But we're also able to pack channels closer together or change the modulation format to transmit twice as much bandwidth on a short link as we would on a long link, okay? So when you think about these content-to-content connections, imagine you have 2 content centers separated by 300 miles versus 2 content centers separated by 600 miles, if you're able to transmit twice as much capacity on the content centers that are close to one another, the cost per bit in that connection goes down by 1/2, not by adding any more equipment, not by changing the technology, just by programming your Layer 0 to behave differently on the modulation format.

So the real power of the coherent processors that Ciena is developing, I think, is only about to be tapped in the industry, and we haven't really -- we haven't really started tapping that power. Now programmability is great, but the power of programmability only comes to change the business model of our customers if that programmability, that capability can be leveraged by network-level applications that run on top of that. And as Steve mentioned, our goal is to be able to decouple those network level applications from the hardware that any specific vendor is putting on the table.

An example of a network level app that have made a difference, a few months ago, we had the earthquake in Japan and at the time, if you recall, a number of carriers actually had significant outages that lasted for long periods of time. One of our customers, in this case Verizon, actually did not lose traffic. One of the reasons they didn't lose traffic is because they were running an app called Mesh that was running on top of a controlled plane-enabled network, okay? That example of an app that today runs on Ciena's control plane-enabled technology that we believe could run on any vendor's hardware in the future. Okay? So that's what we've done in the past. So let's look at what we're doing now in terms of network level applications. And I want to touch on the hypervisors. Steve mentioned what we've done on the network hypervisor. Think of the network hypervisor as a software layer that sits on top of our hardware and our control plane-enabled hardware and allows an application to request resources from the network, okay? Such as turning bandwidth up and down or changing latency behaviors of the network. The first application of the network hypervisor that we are releasing in the market is one that is targeted at virtual machine-to-machine replication and allowing replication applications to work across data centers and request resources from the network in an automated way. We've demonstrated that at the MC world and we're starting to roll that out with customers in the near future.

The next application that we are releasing talks to network analytics and the power of analytics. And I have to stop here and relate to your conversation that I had very recently in Europe with an important carrier in, actually in France. And the conversation went to the problems they were having with operating the network, and what they related to me was that they actually are touching the network way too many times. They told me they touched their network 200,000x a year. The problem for them is the amount of times that they're touching the network is actually growing with the amount of bandwidth that goes into the network. And they're looking at that curve and feeling that the model is broken, okay? So they're touching the network 200,000x a year. They only have 250 maintenance windows a year and they only have a few hundred technicians. So if that grows to 400 or 500 or 1 million times a year over the next couple of years, they're just not going to be able to cope with the changes. And so their question back to us was, "What could you do to help us reduce the number of times we're touching our network? Because that has real value, we will pay for that value, and we believe that with the specialist skills that Ciena has and the knowledge you have about networks, you can really help address the problem for us that is a significant problem." And we are starting to tackle those kinds of problems. We don't quite have the answer to that very problem, but we're starting to put capabilities in the hands of our customers that will get to this problem. The first instance of it is an application we've called the Photonic Network Capture, which basically leverages a lot of the information we have about what goes on in logical network. We know where every card is, we know the behavior of the fiber, we know if somebody is tampering with the fiber, we know if the degradation on the power signals between different stations, and we know the history of all that and we can trend it. And we've built an application that takes that information and gives realtime information to our customers around what's in their networks. That potentially could help them figure out some patterns where there are outages in the network and therefore drive preventative maintenance that would reduce the number of times they touch the network. But in the immediate future, it tells them what's going on in the network and where all of the equipment and all the assets are deployed in the network. One of the big problems carriers still have today is they do not know well what's deployed where in the network, and that results in sending a lot of technicians to the field that actually go to the field and realize there that there's no card and just in general, results in poor assets utilization. So applying our knowledge of networks and putting an analytic engine on top of that to drive better automation, better productivity from our service provider customers is a key part of what these network level applications can do and the Photonic Network Capture is the first of these applications.

The last on the network level applications is we're putting OPn interfaces on every single one of our platforms. And we're putting these OPn interfaces on our platforms to allow third-party applications to leverage the programmability that we've put into our platforms. The hypervisor's a perfect example of that, but we're putting a number of other network programming interfaces on our platform. OPn flow interface is an example of that as well that we're developing and implementing today.

Now, I've covered some of the technology developments and some the portfolio developments that we're making to make the OPn vision real. But the thing that is absolutely center to our strategy and how we are approaching this transformation is the engagement philosophy with our customers, okay? Gary touched on the importance of relationships for Ciena, and that is absolutely central to the way we engage and the way we think about the developments we make in the portfolio. What we've done over the last 4 years is develop strong capabilities that allow us to engage our customers differently in that transformation, okay? So if we're going to transition from a present mode of operations the future mode of operation, the problems that customers have is understanding what's in the network, but understanding how to approach the transition, how to do it with the way that has a return on investment that's palpable in their environment and their business model. And we've developed capabilities that help them assess that and engage us differently. Capabilities such as: network assessment tools, methodologies for understanding, from starting a transformation from A to B, processes, tools and consulting competencies that allow us to engage our customers in this transformation. And this is really how we believe we're going to be able to turn the OPn vision from a network vision into a reality that's implemented in our customers' networks.

Now all of that, all of the developments and all of the advances with OPn components into our portfolio will have an impact on our addressable market, okay? We believe that our addressable market today is roughly around $16 billion. And we think the addressable market will grow to about $26 billion over the next 5 years, okay? That will come from a combination of growth in our existing market segments, as well as potentially the creation of new or different market segments as a result of the technologies and the conversions that we're driving today, okay? So we're doing all these developments to help our customers transform their networks, but we believe there's a potentially significant reward from an addressable market's perspective in the next 5 years with Ciena.

So to wrap this up, the foundation of OPn is in place today, okay? We have developed these principles over the years, but we are now at a stage where we feel we both have enough technology elements in the portfolio or in the next 18 months to really make that vision real and really transform networks on a larger scale. We also have the critical mass, the incumbency, the presence with our customers and the capabilities to turn that technology vision into reality in the next couple of years. And we believe that, that architecture, if we're able to implement it and transform our customer networks, will provide significant value to our customers. It will help them dramatically lower the cost base of their services, and it will also help them create differentiated service offerings and take advantage of third-party innovation beyond the specific proprietary systems of any network vendor. And that really is what OPn is about. It's creating an open architecture that spurs innovation for our service provider customers and gets them to profit from this cloud ecosystem.

With that, I want to thank you very much for your attention, and I want to pass it on to Jim Moylan, who will take you through the value creation piece of OPn. Thank you.

James E. Moylan

Thank you, Francois. Hello, everyone. Great to see so many smiling faces here. Hope you learned a lot of stuff about how we're thinking about networks, and I hope you're saving up a lot of questions because we have the full management team here, full senior executive team either up here on the panel after I speak or during the cocktail period, so you'll have a chance to get all your questions answered.

I'm going to start with a summary, and that summary is that we believe that we have an opportunity to bring a lot of value to Ciena's shareholders, if we can continue to execute as we have over the past 2 years.

You've heard from the other speakers about the evolution of our role in the industry through customer engagement and through technology. I want to talk about the -- more of the business side, what we're doing on the other side of the business to guarantee that all the good work we're doing out in the market transcends into operating profit.

Specifically, you heard from Steve about thought leadership and how, in the way we're thinking about networks, we believe that we are gaining mind share. You heard from Francois how we're taking that vision of the network, tying it together with how customers are thinking so that we can solve their needs. And the combination of those 2, we think, is going to continue to expand our customer base and will continue to grow market share.

Our focus is going to be more on optimize or updating you on our optimization activities, and also I'll talk about how we're going to achieve our operating and financial objectives.

I'm going to stop a moment and just think back to the progress that we've made in the past 2 years and just give you a couple of metrics around that growth. First on the revenue side, and we're looking at half-year periods here. You can see that over the past 2 years, we've more than doubled our revenue. That, of course, the first period doesn't have the full impact of the MEN acquisition, but we have certainly made progress on the revenue side and we continue to do so.

We've also made progress on the profitability side. And you can see that cash from operations, looking back over those same 2 periods, has changed by about $150 million. We used $73 million of cash in the earlier period, and we generated $73 million of cash. This was recent, about 6 months. And then taking that a step farther and just looking at the change in our cash balance in that period of time, in the earlier period, which was a time when we were integrating the acquisition, when we were building working capital as a result of the acquisition, we were actually using a lot of cash, and our cash balance was going down. You can see that in this period of time, we've grown our cash balance.

You'll probably remember when we did the close, we said that we were going to focus during the integration on speed rather than perfection, which meant that we knew when we put the companies together that we had a lot of opportunity to improve the way we did business. We've made a lot of that progress already, but there still is some room and I'll talk about that. The areas we're focused on, as we said last year, were cost-reduction and business transformation. I'll give you an update on where we are today.

First, I want to talk about cost-reduction. We are always looking at how to take cost out of our products. This is a very competitive business. Innovation is critical. We think we are the leader in innovation, but we also have to be the leader in cost-reduction, and we believe we've done very well here. We talked a lot about things we've done, particularly WaveLogic 3, which adds functionality to a industry-leading transport platform at the same time reducing its cost.

We're looking at things like build versus buy on components and subsystems where we can add value through design rather than by off-the-shelf parts. We do that. We talked about convergence, and convergence has the benefit to our customers of reducing their cost. But as you can imagine, it also offers us a great opportunity to take cost out of our cost structure. On the supply chain and how we're dealing with our suppliers, we now have the sort of scale and market presence to have a different engagement with our suppliers. We believe that we are a preferred customer for them. We're one of the few companies in the industry who is growing. We try to have the same sort of relationship with our suppliers as we have on the other side with our customers, a very open arrangement. And what we have been able to do is we've taken our contract manufacturers down from 5 to 3. We've taken our distribution centers down from 4 to 1. We've taken a lot of cost out of our system by moving into lower-cost areas now. Virtually 70% of our supplier comes from Mexico, which has 2 benefits: it's a low-cost area and it's also close to most of our major markets. And then finally, implementing direct order fulfillment. This does have a positive impact on lead times. It also takes some cost out, but the big advantage of direct order fulfillment is that it enables us to move inventory from our balance sheet onto our suppliers. We've implemented a piece of that already. We'll do another large percentage of direct order fulfillment implementation by the end of this year. So by the end of our fiscal year, we'll start to see nice improvements in the inventory as a result of direct order fulfillment. The chart on the bottom takes a little bit of explanation. It's called the supply chain transformation cost index. And what that represents is the transformation cost. If you take the sum of the costs of the build materials of components and subsystems and compare that with the finished goods cost of a finished good, there's a burden that has to be applied to the build materials and consisting of contract manufacturer cost, our own distribution cost, freight, all those kinds of things. We pay a lot of attention to this index, to this factor. And when we started the process before we had integrated the back office system, that cost, as a percentage of bomb was -- we call that -- the index was at 100%. I'm not saying that we took the bomb and added 100% of the bomb and created a cost which was twice the cost of the bomb. I'm saying that there was a factor and at that point in time it was at 1.0 today, most recent quarter, with a factor of 0.75 over the 1.0 that we started at. And our goal is to get it down to about 50%.

The other side is on the business transformation side and improving efficiencies. We spent a lot of time looking at how we do our back office. The primary process in our back office is what we call the quote-to-cash process. Quote-to-cash is all about the steps that are made from the time we have a customer engagement to the time we collect cash from the customer, from quote, order entry, order management, revenue collection. We've engaged a third party to help us through this process. We're finding a lot of opportunity here, and I think we're going to start implementing actual steps here pretty quickly. My own feeling about this quote-to-cash process is not so much that we're going to see a huge amount of cost-reduction out of it. But I think that it will enable us to scale our process as we grow and enable us to hold our back office costs relatively flat.

Day sales outstanding. As a result of the integration as we've talked about, we did grow our working capital to points that we weren't happy with. We got up to the sort of mid-80s of DSOs. We're now in the mid-70s. I think we can do a little better than that, and we're certainly working at that. We've looked at partnerships for some of our functions, trying to get lower cost per unit out of some of those functions. And as a result of all of that, we've certainly seen our revenue grow faster than our operating expenses, and we think we can continue to do that. To give you some history here, in Q2 of last year, OpEx as a percent of revenue was 45%. This most recent quarter it was 36%, so we've trended down nicely. Our goal is low- to mid-30s, and we see a path there. Cash position, again, up $100 million over the 3 quarters.

Now we all know that macroeconomic conditions in the world aren't wonderful today. Although the U.S. economy is moving along a bit at a time, we've seen some real trouble in Europe. There's a lot of questions about China. All of those headwinds really are causing operators to think about how they spend and how they grow their networks and really, we think, driving them in our direction because we can take some cost out of their network. You're certainly seeing in our competitors the results of some of these, and they've talked about them openly. In this environment, we're proud of what we've been able to accomplish. We certainly are not where we'd like to be today, but we've made a lot of progress and we think that we can still get to the kind of financial model that we talked about last year. I won't go through all of these in detail, but we still believe and we see a path to an operating model of 10% to 12% operating margin as a percent of revenue.

To do that, we have to do the same 3 things that we've talked about before. We have to grow our business on the top line. We have to improve our margins. We really have to get up to the 40% -- mid-40s range and we have to get our operating expenses down to about the low-30s range.

I'm going to talk about each one of these individually, talk about recent performance, talk about what our target is, and then talk about some of the things that are going to drive hitting the target or overachieving the target. Our most recent performance quarter-over-quarter is 14%. Now we certainly haven't been growing that fast. We've grown slower than that in other quarters, but that's our most recent performance. We think that you can expect us to grow between 9% and 11% going forward. As you can see, there's some drivers to that. We have to see transition to next-gen architecture where our platforms really thrive. We have to not only win new deals, but we have to see an uptake in the wins that we've already seen. We have announced, and some of our customers have announced, the fact that we've won a lot of platform upgrades in their networks.

So what we have to see now is we have to see them begin to uptake some of those upgrades. And generally speaking what we're seeing is, as some of you would probably know, North America is actually strong for us. We have seen some results of what's going on in Europe even though we're not exposed to any of the southern European countries in any major way. We're based really in France and England for the most part, but we certainly have seen an effect on our business of the uncertainty in Europe. We've actually seen share growth in transport switching -- and just a word on this financial target of 9% to 11%, if you look back, at least over the last year and maybe the last couple of years, our industry in general has not grown 9% to 11%. We certainly had a much bigger increase in capacity added to networks, it's been 30% or something like that, but we've seen price compression. And as a result of that, if you just look at the most recent performance by the industry, you wouldn't see 9% to 11% growth. You'd see sort of mid-single-digit growth or maybe less. So we do think that we have an opportunity to gain share here. And that's why we're setting the target at 9% to 11%. We'll see what happens.

Gross margins. If you look at the most recent 4 quarters, our average gross margin has been 42%. In order to hit our financial model, we've got to get to the mid-40s as a percentage of revenue. There are a lot of things that are going through our margins right now. As you all know, we actually reported a little bit less than 40% in the most recent quarter. But as I said, a lot of things flowing through our margins right now. We are rolling out a lot of new products. We are building out brand-new networks and there are startup costs involved in both.

Another thing that we've seen most recently is a much higher intensity of deployment services on some of these networks. And deployment services, by their very nature, are lower in margin than the more advanced services like maintenance, technical support, consulting, the kinds of things that Francois was talking about.

Then next within the product line, most particularly transport recently, but both transport and switching have an element of the razor and razor blades phenomenon. When you roll out initial, less than fully loaded chassis, that's a lower margin placement than when you add cards to add capacity to those chassis. It's just the nature of the way we work. We're seeing that heavily in transport today. But we think that's going to ameliorate over time.

And then finally, all the cost reductions and initiatives that we're doing on the part of the products themselves, we think, are going to improve margin over time. I'll mention one other thing because I've talked about this with probably most of you, we do have a relatively small percent of legacy transport platforms in our transport mix. They're heavily cards, they're better margin than average and over time, that percentage of revenue is going to decline. But when I take all of these elements and I put them together, I believe that we are going to see improvement in margin. The most leveraged improvement in margin is going to come from the product mix as we sell more switching, as we sell more CESD, as we sell more software. But all of the other things, save the decline in the older transport products, are going to have a positive effect on margin going forward.

And then operating expense. If you look at the past 4 quarters, the average of OpEx as a percent of revenue is 40%. As I said, it was 36% in the most recent quarter. All the things that we're doing in the back office are going to enable a, perhaps not a huge cost reduction opportunity in the back office, but an ability to hold costs relatively flat as our revenue grows. So I feel good about an ability to keep G&A as a percentage of revenue going down. Well, the other day, we were sort of stabilizing in the low $180 million per quarter range. We did better than that in the first 2 quarters of this year. We said early in the year that we thought that our OpEx as a percent -- I'm sorry, in absolute terms for the full year of 2012 would be roughly flat with 2011. We now think that based on our performance in the first 2 quarters of the year that we'll do a little better than that. But a lot of that performance in the first 2 quarters was because we had some deferred expenses that didn't hit as quickly as we thought they would. We are committed to those expenses. They have to do with R&D and IT, so we are going to spend the money. So our guidance for next quarter is sort of low 180s. But the combination of all of this, we are confident that OpEx will not grow as rapidly as revenue, as we grow our revenue.

So just to summarize my section here, we certainly established ourselves as the focused spender. We're a leader in the market. We're in a strong position. We've certainly taken market share over the past year. I think we have an opportunity to continue to take market share. We're certainly looking at all aspects of our cost structure from product cost to supply chain cost to back-office cost. And so we're improving our profitability as we grow our top line, which was essentially was the design point for the combination of these 2 companies.

Net of that is that we're improving our balance sheet, growing our cash and I think our balance sheet is going to continue to improve.

And just to bring together what you've heard today from all the speakers, we've talked a lot about how networks and their design is shifting, and the part that we're playing in that evolution. The elements of our strategy really are all about focus. We only play in a particular part of the network. It's about listening to our customers, engaging them deeply and then coming up with technology and innovations which meets their needs. Putting all that together, we are confident that as long as network demand continues to grow, we are going to grow.

We think that with all the things that we're doing in the back office, we're going to be able to translate that top line growth into bottom line growth. And if you come back all the way to what Gary had to say, we worked very hard over the past 2 years to put ourselves in the position at which we're in. We're certainly in a position to grow. We have great customer engagements all over the world and have an opportunity, I think, to grow market share and grow our bottom line. In the end, we think we've built a company and an approach to market that is different by design.

With that, I'm going to conclude our prepared remarks. We're now going to have, in just a minute, a panel discussion, or a panel Q&A session that will have 5 of us up here. So I'd like to ask the speakers to come up onstage. We're also going to have Philippe Morin come on stage, he heads our global field operations and he's available for your questions. So guys, come on up.

Question-and-Answer Session

Gary B. Smith

Okay. So listen, I appreciate -- so we've already got hands in here. Very good. So just so we know what we've got here, you pretty much got a good cross-section of the leadership team. You've got Philippe Morin, who runs basically a very simple operating structure in the business. I don't know if you sort of fully appreciate that. Basically anything that touches a customer, anything that's front facing, customer service, sales, et cetera, is Philippe. And anything from touching a product perspective is Francois. So supply chain, product development, et cetera, it's a very simple operating structure and as we describe it, the rest of it -- the rest of us are here to support. So we should be able to answer any questions that you've got. So Mark, do you want to start first?

Mark Sue - RBC Capital Markets, LLC, Research Division

Mark Sue, RBC. Perhaps if we could start with how you are seeing the mix of products in terms of order trends, when we might see an uptick in switching or what might be the leading indicators for switching. As it relates to gross margins, Jim, I have a question for you. If we strip out the mix, how should we see, just kind of a baseline of gross margins going forward. There's a lot of things that you are doing as a company but as an industry, a lot of the companies that are reported have reported pressures on their gross margins, so I'm just wondering if there's a industry structure thing that we're kind of fighting against as you lift your gross margins, basically asking you if it -- gone are the days of 39% gross margins?

Gary B. Smith

Okay. Philippe, do you want to take a switch here?

Philippe Morin

So the first one, the momentum on the business so -- and predominantly on the switching side. So I think what you heard from our Q2 results is that one, we've got great momentum continuing on the switching side. And it's with the 5400 Family being introduced into major Tier 1s being standardized. And I think most of you understand the standardization process. You've seen the Verizon announcement, you've known about AT&T; these are big Tier 1 customers that you have to go through the standardization OSMINE and so on that, that takes a bit more time. The good news is we're up to now over 20 customers with our next-generation switching. We're starting to see applications that maybe we have not been as visible. One in particular is the submarine market. We've done really well in winning the coherent photonic upgrade part, so putting in 100 gig, 40 gig over someone else's optical amplifier chain in the submarine. But what we've been able to change is the dialogue towards being what used to be a deployment of subsea, so beach-to-beach, to now bringing it back to the back office, it was pop-to-pop, and now we start having a discussion with our customers by putting in switches at the end, in putting mesh across the network. Francois talked about Verizon being able to sustain through a major earthquake, 6 major cables going into the Japan islands. While one of the reasons they were able to not get us any traffic yet is the fact that they had a combination of our equipment along with our switches and along with our mesh traffic. So Mark, to answer your question, so we're making good progress. Very, very happy to see the wins we're getting, the next generation win, network modernization win, combination with our transport portfolio in addition with helping us, as we control planes that used to be in the switch into the 6500. We just have a much stronger end-to-end portfolio allowing us to win some of these next-generation bids. Do you want to take the gross margin one?

James E. Moylan

I thought we might get a question on gross margin, Mark. Yes. What I'd say is the whole question about gross margin is it has a lot of moving parts inside it. And what I would say is that, particularly in transport, we are in a very competitive market. We have a lot of competitors. We have too many competitors. I do think that over time, some of that is going to resolve itself, but we have too many competitors. We're also in a phase of network upgrades and at the same time most of the big carriers, if not all, are trying to simplify their supply chain, get fewer suppliers. And so as a consequence of this, we see -- everyone sees a ramp in spending and everybody sees fewer people that are going to be receiving that spending. It has been very competitive on these new network upgrades. It's been that way really for as long as we've been together as companies because we have been competing in these global RFPs really for a year and a half, 2 years or so. So I don't really think that any of that is changing today. I think it was competitive then, it's still competitive, it's going to be competitive going forward. Maybe the structure of the industry might ameliorate that a bit over time, but we're not counting on that. What we've seen most recently is that some of the wins that we've had over the past really 6 or 8 months happened to come on in this most recent quarter, and that was really the impact that we saw in Q2. Now I think that as I said, over time to all the things that I've talked about, we're going to see improvement in our margins. Our guidance for this coming quarter was about flat with Q2. So we're certainly not expecting a big change going from Q2 to Q3. But we do see, in our order book, in how the mix will be within transport, we can see some improvement in the trends. So we just don't think that there has been a structural shift as we sit here today.

Mark Sue - RBC Capital Markets, LLC, Research Division

And can I quickly follow-up, and maybe Gary, you could chime in too. If there's a opportunity where it's really price competitive, are you at a point where you would walk away from the business so that we could maintain the 40% or higher gross margins in our financial models?

Gary B. Smith

Let me answer the question like this, there's absolutely business that we walk away from. Yes. I mean we take a lot of things into account. I mean we've been at this a long time. We understand very carefully what's a strategic customer to us and we look at the whole relationship on the long term and all of those things. And there are customers that we don't think appreciate our overall value proposition and we can get to over time, and maybe not even so much around specific margin point, we look at that in aggregation around the other opportunities that we have. So I can assure you that we absolutely turn down opportunities. And we're very careful around the markets that we focus on.

Alex, [indiscernible]. Alex, here on. Right there, sorry.

Alex Henderson

Alex Henderson, Needham & Company. In that last question, there was obviously a differentiation between transport, CSD and switching, and CSD is still losing money. It's narrowed its loss, but it's still losing money. ODN switching, we clearly got some momentum in the commentary about orders but it's very difficult from an external analyst's perspective to try to figure out how rapidly that turn in momentum shows up with rev recognition problems and all the other stuff that's out there. Can you give us all bit more clarity on a, when you're going to get CSD back to profitability? Two, when do you start to see the CSD and OTN switching pieces growing faster than transport, where I think everybody believes you have strength already, and how does that rev rec timing issue play out within that context?

Gary B. Smith

Francois, do you want to take the first one?

Francois Locoh-Donou

Yes. So on the -- the first thing I'd say about the CES technology is, and we talked about it today is, we are putting Carrier Ethernet and packet switch capabilities across the portfolio. So while you may look at the CES portfolio as a standalone piece and the LTE and switching portfolio as a standalone piece and looking at the growth of that, the first thing I'd say is we are putting OTN switching technologies in platforms like the 6500 and we're putting packet switching technologies in platforms like the 6500 and the 5400. So when we look at the growth of our Packet Switching business across the portfolio, we are starting to look at all elements of that, the CES and the access, but also what goes on into the core. So that's how we're looking at the evolution of the CES business across the portfolio today.

Alex Henderson

I'm sorry, it's still a reported segment and as a reported segment, people forecast it. Can you talk to the reported segment piece? Interesting that it's in the other stuff, we know that. What we need to know is are you going to be able to take that segment and turn it to profitability and when you get that access, edge piece growing faster than the rest of the company or at par with the rest of the company, and same thing with switching side?

Gary B. Smith

Let me answer the Carrier Ethernet one. We expect Carrier Ethernet to improve in the second half, which is what we've talked about as a segment that it's currently reported. So purely just the Carrier Ethernet access piece, which is really what that is. What Francois is talking about, really referencing back to the architecture we talked about today, as that converges, we have to think about how we talk about that from a categorization point of view because it really is beginning to converge. So if you look at the amount of Ethernet ports that we ship out, it's across all of the portfolio. And over time, we'll look at ways in which we talk about that externally, would be differently. But to answer your question directly around the Carrier Ethernet, we do expect it to be up in the second half. We haven't given guidance around exact profitability points. It's been a little lumpy as we have seen. And I think the thing that's taken longer than we would have anticipated is really the Ethernet business ramp up. Now, we've included a number of new customers into the Carrier Ethernet space and we continue to win it, but it has taken longer than we would have thought really for that to come online. And really, most of the revenues you see today and reported in that segment are predominantly wireless backhaul. Now if you would have asked me that 3 years ago, I would have said it would be completely the opposite. And then the other part of your question, which I think using as a proxy sort of OTN for sort of 5400 switching and when are we going to see the ramp in that, again, it always takes longer than you think. I mean some of the indicators that we talked about are very promising. The CoreDirector has been out for 10 years, and we have about 40 customers globally for that platform. We already have, in a short space of time, about half of that for the 5400 platform and we've not got all of the capabilities that we'd really like to see in market yet for the 5400. So whilst it does take longer than we think, we are actually making good progress with it.

Catharine Anne Trebnick - Northland Capital Markets, Research Division

Catharine Trebnick. Question on the control plane, which gets back to gross margins, Jim. On the control plane, can -- how much of your revenue today is attributed to the control plane and how many of your customers have actually adopted that? Because if I believe the long-term-story that you're going to increase your gross margins on the services, I'm trying to get at how does that play off today and then where you see it in adoption?

Gary B. Smith

Jim, do you want to?

James E. Moylan

I think maybe it's a lot to deal with the control plane aspect and...

Rick Dodd

Do you want me to go first?

James E. Moylan

Yes [indiscernible].

Rick Dodd

So control plane, the way sell our control plane is as you know, is we initially deployed it for private line services for a company like AT&T and so on, and then offered on top of that mesh functionality, which ultimately drove better margin as we sell these types of software. We're now introducing control plane not only onto -- actually that's one of our strengths in our portfolio is the fact that we're now bringing it across the 6500 and along with OTN and OTN switching. So I think when we talk about gross margin improvement and so on, it's not just about selling switching only your CES, it's the fact that both our transport platform is going to get enabled with control plane. They're going to get -- the switching platform is going to get enabled with coherent technology and so on. So our progress on control plane has been initially -- the initial value that we thought control plane was around fast provisioning and then we evolved our customers to mesh. So your question about how many customers have actually -- most of the customers that are deploying CoreDirector use the control plane for provisioning and so on. Your question, I think, was how many will get to mesh, and until a good portion of our customers went to that survivability into mesh. I think with what you heard from OTN today -- from our OPn, sorry, and having Gary on the job, from new architecture and you combine that with the used bandwidth growth and so on, when the dialogue we're having with customers when you look at about network modernization discussion, is they're going to be using control plane not only for provisioning and so on -- fast provisioning, but as well for restoration requirements because of the amount of bandwidth you have into your networks. So the dialogue we're having, the win with Verizon and again that was public, is about mesh and control plane and along with OTN.

James E. Moylan

And it's very hard to really predict a number that -- that's going to drive. But we've seen enough from our customers. We've seen the engagements with them. We're confident that we're going to create value if we have programmability of a network down to Layer 0, that is a valuable thing for customers. And so I can't give you a number or a time, but we like the progress so far.

Simon M. Leopold - Raymond James & Associates, Inc., Research Division

Simon Leopold with Raymond James. Two questions for you. One, I'd like to see if you could comment a little bit on the dynamics of the optical market as a whole and not just Ciena's piece in it. In particular, I'm wondering how much of your share gains are coming from weakness in China hurting Huawei and weakness in Europe hurting Alcatel, Lucent, if you could kind of characterize those aspects? And then in terms of the CSD business, it's been lumpy and it's been slower than we expected and it feels as if the competitive dynamics there may have changed, an advantage that seemed apparent when you first made the acquisition maybe has gone away. So if you could give us some sense of what's going on in the competitive landscape around CSD and those particular challenges, what's your -- basically what the pitch is, because you didn't talk that much about CSD today. So sort of why should a customer want to buy your product?

Rick Dodd

I'll take the optical market. It's very interesting to see what's happening in the market right now in the optical world. Clearly, our strength with the 6500 platform, the coherent technology, is allowing us to absolutely evolve and have a very strong value proposition and we're beating the competition that often are incumbents into these accounts. So I think what you've seen from Gary's chart, you've seen the folks that we steal -- stolen market share, predominantly on transport have been the ALU, the NSN and these types of accounts. When we move from one region to another though, we do tend to see a different type of the competitors depending on their incumbencies and so on. As an example, when we go after submarine market, it's predominantly Alcatel submarine systems system and it's Tyco or SubCom. So I think -- and then we start going in into Asia. We tend to see Huawei being an incumbent there and so on. I think the key message that I would say is -- I'll give you some statistics. I mean, in the summary, in upgrades as an example there's been, to our knowledge, 8 upgrades that have taken place, we won 6. We've now won 4, 3 out of 4 in CALA. And these are again -- it's the strength of our core end technology that's allowing us to go in and basically show a path to our customers to go 40 gig, 100 gig and a terabit. And I think when you start looking at coring technology, the barrier to entry, so for the companies that have not invested into that technology, I think compared to maybe when we we're at 2.5 gig and 10 gig when there's a lot of silicon merchant and so on, and people can buy the components and offer a system, we're starting to see that fragmentation in our market now, and you're starting to see some of these optical suppliers that are having a hard time competing with us.

Gary B. Smith

Simon, I think on the Carrier Ethernet [indiscernible] do you want? Or Francois, sorry.

Francois Locoh-Donou

On the -- so the first thing about CESD, you said we haven't talked about it today. I want to make sure CES and CSD is absolutely part of the OPn vision, both in the user content and in the content-to-content network. In terms of the dynamics of -- I think your question was what's our competitive advantage? Do they have it changed or not? I'd say the competitive advantage in the access networks, which was very low-cost Ethernet aggregation as well as ONM protocol that gave low cost provisioning of Ethernet services, that has played out over the last few years and it continues to be a strong differentiator for us in the marketplace. In addition to that, we are now moving -- our strategy has always been an edge-in strategy starting in the access and moving to the first and second tier of aggregation; that is now playing out. So when we look at the most recent wins we've had in the CES space, they were solutions win not just access wins, but access Tier 1 and Tier 2 of aggregation with the whole CES portfolio. So that's a potential growth catalyst for us in the future. So one thing that potentially has changed for us was that our initial customers had a strong focus on PBB-TE as a networking protocol, MPLS and MPLS-TP, which is now being standardized, has gained a lot of momentum in the market. We didn't have a head start on that. So we've put a lot of development effort into making sure that we're there for the MPLS and MPLS-TP applications. That's fundamentally what's changed in the CES marketplace.

Vijay Bhagavath - Deutsche Bank AG, Research Division

Vijay Bhagavath, Deutsche Bank. I have 2 questions. I mean one is, in terms of OPn. Simple way for all of us to kind of understand OPn would be a before, after. What can I do with OPn, what could I not done without OPn that's helpful. And then moving into the second half, what would be incrementally new in terms of the product cycle ramp? For example, you've won deals on metro 100 gig upgrades at Verizon, for example, you're doing some 5400 upgrades at Verizon, et cetera. So is there anything not new, incrementally new, as we head into the second half from a product cycle point of view?

Gary B. Smith

Steve, will you take the first part, and then Francois?

Stephen B. Alexander

Sure. So I would say when you look at OPn, what you want to think about is a platform infrastructure that's responsive to these list of applications, much more dynamic operation of the network. And I'll give you a really simple analogy that we even had this discussion with the customers, right? Because you can do an analogy between connections and highways and traffic signals and congestion, right? And we've all had the experience of being on the road, right? Four-lane road with a traffic light and it turns red, you sit there and there's no cross traffic. And you say there's got to be a better way. There's got to be a more efficient way to build an infrastructure so it is far more responsive and far more dynamic. That is what OPn will deliver, but into the carrier environment. And they know they've got this problem, right? In the sense that they build networks where the only way they could get their higher-level functions to work is just throw a bandwidth at it. Well, as those functions have become more complicated and less predictable, we'll go back to this uncertainty cube that we drew for you, they can easily be at a point where they've got all their capacity dedicated over here, to let's say public IT, and demand on their network at 7:00 on a Friday night is lower in content and how they get capacity moved around, right? So think of changing that paradigm, and I'll go back to just the really simple model of if you're sitting there at that traffic light, there's no cross traffic. And you go, there's got to be a better way to run these things. That's what we're doing with OPn.

Francois Locoh-Donou

I'll take the second part of the question of what's not new in the second half in the portfolio, and I'll pick a couple of examples for you. In the OPn presentation, we talked about breaking down barriers and we've talked about breaking down barriers horizontally and vertically. You take apart from like the 6500, which typically more folks have associated with transport application. Well by the end of the second half, the 6500 will be a platform that play across first mile, which will access optical application all the way to metro and core transport application including submarine application. So that's an example of where we are potentially extending the addressable market of this platform horizontally. But we'll also be putting inside of this year OTN switching and packet capabilities onto the 6500, which converges the capabilities vertically as well as horizontally. So all of these capabilities on one platform, if you will, are new in the second half of the year. The second example I'll give you is on the network management, which is an enabler for some of the applications we've talked about. So we are cross pollinating the technologies across the portfolio, but we're putting 1 control on our network management platform will have the ability to provision services in areas from Layer 0 to Layer 2, from access to core, across the various platforms, 6500, 5400 and CES portfolio. So these capabilities are actually quite important for carriers who want to provision Ethernet services from access to core and leverages all of the technologies in the Ciena portfolio under one umbrella.

Vijay Bhagavath - Deutsche Bank AG, Research Division

Just to round it up, if you strip off all of the marketing from OPn, just to make it very, very simple, is it fundamentally about provisioning incremental or marginal capacity -- provisioning marginal switching capacity where needed on demand? Would that be kind of the generic way of looking at OPn get -- stripping off all of the marketing also?

Stephen B. Alexander

Well I would go back to the performance on-demand network, right? Where the performance is dictated by the services and application and those are now very dynamic.

Gary B. Smith

So just to tie the 2 pieces together, both in terms of what is it and what are we shipping differently in the second half. The other thing I would say, and the reason we wanted to share this with you today is, as I've said, this is not an epiphany we've suddenly had and we're talking about stuff way in the future. This is basically a blueprint that we've had frankly, for many years and we've been working steadily to it, but we've never had the scale, we've never had enough of the platforms and market to get the critical mass with it. And it's taken a lot of work to construct the network management and the other elements to pull this together. So we're -- finally, we think we've got the critical mass to go do that and I think importantly it gives us a framework to now talk to the outside world. But when we talk about this convergence, which right on us now, we talk about Carrier Ethernet ports going across the portfolio. We talk about control plane, hopefully it will give you a framework on which to really understand that. And we want to make sure that as we make this transition to true convergence and really, the 6500 and the 5400 is really a family of programmable platforms that are this OPn architecture that we can change the profile of by software and by what cards we put in there, that will help you understand as we go forward and make these announcements. But a lot of the things we've talked about are actually beginning to impact in the second half of the year and as we get into 2013. And most importantly, now gives us a framework on which to go engage in the marketplace as well.

Unknown Attendee

First Jim, and then Philippe and Gary. Jim, I hate to bring you back to gross margin, but if you just do your simple math in what you've given us, 9% to 11% growth, to where you are right now, if your gross margin were at mid-40s, you'd be hitting your target -- you'd be very close to your target operating margin next year. So the gross margin is the end all, beat all of, I think, of the conversation, it's not really the operating leverage on your OpEx. And to that end, your gross margin seems to be tied up with the comments you made about competitive environment and you made somewhat offhanded comment about you think that industry structure will sort itself out. Why would it, can you talk about, as you count your competitors, and Gary, you can chime in too, how many can you count -- I mean, we can count on our side probably 6, 7, 8. But how many do you think are the real ones that really matter, are mucking up the pricing environment here? And in what way, I mean they all look like about they have pretty decent balance sheets, in what way do you think that will change? Or could we have a possibility where this is the new normal and this is just where the gross margin environment is because that's what the competitive environment is? So to the extent that we can figure out when and how the competitive environment transport will ever change that might unlock some information on the gross margin line? Philippe, when you compare, go back, I guess is it 3 or 4 years or 4 or 5 years? Whenever Nortel was still -- before it kind of fell off the cliff and was still a reasonably decent strong play, can you compare, aside from the fact that they were about to go bankrupt and Ciena isn't, and based on how has Huawei in their Internet work and hopefully you guys don't, but what else -- what is Ciena doing differently than Nortel was doing then so that you couldn't break out of it back in the Nortel days but essentially, it's your product that seems to be driving a lot of the revenue right now, putting aside the 5400. Can you just compare and contrast the 2 environments because you have the perspective of having been at Nortel, the people on the stage versus -- and kind of seeing a lot of different perspective? And then just a final thing, just hit me before, Gary, you talked about the 5400 hitting 20 customers, I think it was maybe 19 or 20 this early in the cycle, CoreDirector at 40 now, but how long did it take CoreDirector to hit 20? Did you get 20 in a couple of years and then it took a long time to get from 20 to 40? Or just if you can give us a sense as to where was CoreDirector 3 years, 4 years or so years into after the launch, would be great.

Gary B. Smith

I think the there's 3 [indiscernible], this is like doing the quarterly results where we say just one question...

Unknown Attendee

That's why we come to these, so we can ask more.

James E. Moylan

One question per analyst, per person.

Gary B. Smith

Jim, you want to start?

James E. Moylan

What was the question?

Unknown Attendee

Competitive environment, why would it ever change?

James E. Moylan

Okay. First of all, as I said, there are a lot of things that are flowing through our margin right now. With respect to the industry structure, I'm not really making a prediction that it's going to get better because if you look at the people that we compete with around the world, outside of the U.S. it's Huawei and Alcatel, Lucent and some others play from time to time. In the U.S., it's Alcatel, Lucent and Infinera. And Infinera's not today in a 100-gig market, but they probably will be. But that's who we compete with and probably all those people are going to be around for a while. But in addition to that, there's a whole bunch of other players who play at the edges and in niche kind of situations. What we have been able to do is we've been able to take cost out of our platforms up and down the line all the way, as Francois said, from the edge of the network into the core on transport. And I think we're going to be able to put some pressure on some of those players. And so I think at the margin, there's a chance that the industry structure could get better, but that's not really a part of anything that we've said today, it is an offhanded market. About our margins themselves, I don't really think that there's been a change in the -- a significant change in the competitive environment over the past couple of years. What I do see is this big footprint grab that's going on today. Everybody wants to be a part of these big rollouts. The winners are being decided now. And the way pricing has been structured, we're pricing in such a way that hopefully, as we move through time with the rollouts, our margin will improve. That's -- contractually, that's our expectation. So that's one thing that will happen once the percentage of the sort of chassis-rich revenue reduces. And that will happen unless we continue to win at the rate that we've been winning in the past year. Who knows, I hope that we do continue to win business. We'll try to go after it and we'll try to go after it smartly. So all I can say is that when you look at all of those factors inside of our margin mix, mix within product, cost reductions, competitive environment, I think we can see some improvement in margins. Now by the way, if you go back just a couple of quarters we were at 42%. So what's changed from there is that our higher-margin product mix has come down a little bit and the percentage of our transport revenue, which is being driven by big new wins has come up a little bit. So you can see a couple of percentage points very quickly with just a little bit of change. So I, having said all of that, this is a competitive business and it probably will be. But we're winning, we're gaining market share and I like our position better than anyone else I can think of.

Philippe Morin

So to answer your question on the Nortel and what's better with Ciena. [indiscernible], the CFO. Not to -- to very simply put it, for me the big, big difference comes down to 2 things. Focus. In Nortel, we had a wireless business, we had an enterprise business, we had a switching business, you come into Ciena, there's one thing that your sales team is and your R&D team is focused on, and that's your portfolio. The second thing I would say, what people hopefully are starting to realize is the strength of the relationship and the intimacy and the insights that the Ciena team had with the sales team with our customers. The amount of time, especially in my new role, I get to meet customers, that they say, "Your team understands better my network than my own people." Because it's years of relationship being focused on one side of the network. And ultimately you combine that with innovation, what's coming out of our labs, coherent technology, combine that with the strength of our portfolio now that we have, we didn't have a control plane that can scale. We didn't have a switch that can scale. We didn't have a Carrier Ethernet portfolio that allowed us to play in both edge and to aggregation. And you put that in there, those things together, and then next thing you can have a different engagement with your customer. And to get AT&T supplier of the year, and the only equipment vendor in Verizon that got supplier of the year is us. And it's that combination of customer relationship, customer knowledge, and that's why it's so critical for us to -- as we evolve our dialogue with our customers, we're spending much more time on network modernization, we're setting up practices to help our customers migrate, leveraging that trust that Gary talked about along with our product portfolio and our richness in our portfolio ultimately makes it -- now we're able to see the type of growth you saw in our Q2 results versus our competition.

Gary B. Smith

I think the last part of your question was how long did it take for CoreDirector to get to 20 customers. I'm guessing at this from memory, but it took many years. It was certainly not after 18 months that it had been in market. It was -- I'm guessing there's about -- it would be about 4 years, 4 or 5 years before we got to that kind of number. And I think to the point of Philippe was talking about earlier, what we're seeing is a lot different applications for this platform. And really, it's available market is larger. So we would expect to see more customer traction as we're seeing.

Edward A. Zabitsky - ACI Research

Ed Zabitsky, ACI Research. You touched on greater focus on packet and a lot of the carriers are talking about the interplay between MPLS and OTN, which they're going to deploy in tandem. So you guys haven't spoken much about the 5410 platform in that vein. And also, I'm wondering if you're able to update the 6500 to handle Layer 2.5 or whether that would entail a new platform.

Gary B. Smith

Francois, you want to?

Francois Locoh-Donou

Yes. So I'll start with your second question. We will definitely be rolling the 6500 platform to handle Layer 2.5 and having DLS capabilities and MPLS switching capabilities, so that's definite. To your first question around the 5410 platform, we have talked about it but not talked about it in the context of a solutions. But what I said earlier that the wins we were having now in the CES space were more solution wins than they were point wins. The 5410s are critical part of that. So when you go from access to first tier of aggregation to second tier of aggregation, the 5410 is playing a big role in that second-tier aggregation and it's part of those wins we are now having. The capabilities that we are putting on the 5410 include MPLS capabilities. So 5410 is now MPLS-enabled. So we're also putting a higher density and scalability in the platform to a higher, increase it to handle increasing amounts of traffic. So we see that platform as a core part of our go forward CES strategy and packet aggregation strategy.

Gary B. Smith

Next question, Paul, down here.

Unknown Attendee

If you already answered this, we could talk offline. But 2 questions. One, maybe I kind of misunderstand it, but to the extend your control plane into the 6500 and to the other transport platforms, I assume you're monetizing that, which that's a question. And does that change the margin profile and/or the revenue profile? I assume it does, but maybe not. And the related question is how do we track, to the extent you're articulating this vision, this new architecture were contrary to a Cisco [ph] approach, it's almost the exact opposite, right? You're sucking in Layer 2 functionality into Layer 0 or Layer 1. How do we track the progress? Can you give us any more insight in terms of customer adoption to date? It sounds like it's more than just an architectural roadmap that you've been down the road with this. Can you some different insight where you're at with the customer base and how do we monitor this on an ongoing basis as we go forward?

Gary B. Smith

So Philippe, do you want to take the last question first?

Philippe Morin

Sure. The way we're monitoring -- I mean, again when it starts with an overall next-generation equipment discussion and you start looking at again, this OPn type of architecture, the dialogue starts almost and automatically started with let's have a discussion on how we upgrade your backbone, how we upgrade your metro and we have coherent technology, which is programmability and so on. And then very actively, we got into discussion around how do you start bringing mesh functionality and how do you start bringing a switching capability, and when you start bringing on network management platform to open up their application. And you're starting to see the wins -- I mean Verizon, when you start looking to read that in the press release, it started with 100 gig network and global. They're announcing I'm going to put OTN everywhere and I'm going to start putting my control plane so that I can do both the survivability, the restoration and really open up this platform so now I can start bringing more as well, packet functionality, OneControl and then ultimately can decide on how to provision based on latency, on survivability and so on. So to answer your question, we're starting to see those wins already coming in and it's all about how do you evolve the thinking to be what initially was predominately a data center interconnection to now content-to-content. You start having discussions about how do we also bring some of our partners into this, so we increase our share of influence. PNC was talked about, IBM as well on some of these other application. And so all of this is gradually now happening. It's starting with the Tier 1 starting to -- on a global basis as well. And so you're starting to see some of the results. Sometimes you'll see maybe first maybe a transport win or sometimes we'll start off with a pure switching win. Mobily is probably another Tier 1 account in the Middle East for us that you've seen some announcement, are absolutely buying into a complete end-to-end OPn architecture from CES into edge into OME into the metro rings and to ultimately, our 5400 family into a OneControl platform and our control plane.

Gary B. Smith

Well, to your first question. Yes, absolutely. I mean as we start to put OneConnect, which is a control plane onto 6500, we will monetize that and we will also -- that should help the margins of the platform as well. And I think one of the things, as we go forward thinking about Ciena OPn is really how we talk around these kind of categories as we get convergence, and we'll be talking both in terms of platform and in terms of the type of ports and see -- you should be able to see the gross margins go up over time as we pull all these pieces together. So that's also a key part of it. As we get more software orientated.

One last question? Eva?

Unknown Attendee

The one change, and I'm seeing this here, is that service providers are actually building into the contract pretty steep guaranteed production supply. How are you going to offset that over these next -- and it's not just you guys, I mean it's everybody. So how do you offset those steep price declines even taking cost out the product, in some cases, isn't going to get the sort of 10% to 30% reductions that we're sort of seeing reported in?

Gary B. Smith

I mean it's fundamentally a change in architecture. Francois, do you want to?

Francois Locoh-Donou

Yes. So the -- one of the sort of conversations we're having with carriers is just dropping the unit cost of the box can only get you so far. So that is why what we're promoting, what Steve has talked about today it's really collapsing the layers and being able to integrate more functions into a single network device, and it's one we're able to win these architectural arguments that we get over the price per box [ph] as to decline by X every year. That doesn't take away from what Jim talked about. We have a lot of efforts ongoing to take cost out of the products. We look at all aspects of this. We look at our supply chain of relationship with contract manufacturers, our relationship with our suppliers, we also make some decisions around integration, where they are now in supply chain, and all of that's part of aggressively taking cost out of the platform. But ultimately, the real play for us is being successful with this convergence of layers and integrating multifunctions -- multiple functions into one device. And that actually is the real play for our customers as well.

Gary B. Smith

Okay. Thank you very much. We appreciate it. The team will be available in reception where we'll have cocktails, which I think is just outside in the lobby. So we look forward to more questions from you.

Thanks for your time, appreciate it.

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