CIENA's CEO Hosts Annual Stockholders Meeting (Transcript)

| About: Ciena Corporation (CIEN)
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CIENA Corporation (NASDAQ:CIEN) Annual Stockholders Meeting March 20, 2013 3:00 PM ET


David M. Rothenstein - Senior Vice President, General Counsel and Secretary

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

David M. Rothenstein

Good afternoon. I'm David Rothenstein, Senior Vice President, General Counsel and Secretary of Ciena Corporation. On behalf of Ciena's Board of Directors and management team, I'd like to welcome you to Ciena's 2013 Annual Meeting.

We're excited this year to be hosting our first completely virtual meeting, with our stockholders attending exclusively via our annual meeting web portal and listening by telephone. Through this new online platform, we hope to increase participation and reach a greater number of our stockholders. And by using the Internet to host our annual meeting and distribute our proxy materials, we believe we can expedite delivery of those materials and reduce the cost and environmental impact of our annual meeting.

It is now 3:01 p.m. Eastern Time and I will now call this year's annual meeting to order. In just a minute, we'll consider the 3 proposals on the agenda for today's meeting. After reviewing these proposals, our CEO, Gary Smith, will briefly discuss the current state of Ciena's business, industry and markets, and we will review certain key elements of our corporate strategy.

First, however, I'd like to introduce a number of members of the Ciena team here with me today, including certain our board members: Patrick Nettles, our Executive Chairman; Berry Cash; Patrick Gallagher; and Michael Rowny. I'd also like to introduce Gary Smith, our CEO. You'll be hearing more from Gary later in the meeting.

From our executive team here with us today are Jim Moylan, Senior Vice President and Chief Financial Officer; and Gregg Lampf, Vice President, Investor Relations. Currently, Ciena has appointed Jim Raitt from American Election Services to act as inspector of elections. Jim has taken and signed the required oath to faithfully and impartially execute his duties.

The 3 items of business under consideration today are: one, the election of 3 members of the board to serve as Class I directors; two, the ratification of the appointments of PricewaterhouseCoopers as Ciena's independent auditors for fiscal year 2013; and three, a stockholder advisory vote on our executive compensation.

Under our bylaws, the deadline for nominating additional director candidates and for proposing additional matters for consideration at this year's meeting has passed. As a result, these proposals will be the only items to be voted on at this year's annual meeting. Before proceeding to a vote, I'd like to address some procedural matters.

Copies of the agenda and rules of conduct for today's meeting are posted on our annual meeting web portal. After the formal business of today's meeting, we will provide an opportunity for stockholders to ask questions. Only validated stockholders that have entered their control number will be able to ask questions via the web portal. Please note that this meeting is being recorded and will be available on the annual meeting web portal by 5:00 p.m. Eastern Time on March 21. However, no one else attending today's meeting is committed to use any audio recording device.

I've been advised that we properly mailed a Notice of Internet Availability of Proxy Materials on February 1, 2013, to stockholders as of our record date, January 22, 2013, and I've received an affidavit of distribution to that effect from our proxy distribution agent. Also, a list of Ciena's stockholders as of the record date was made available for examination at our corporate office and has been posted on the web portal.

According to our preliminary count conducted just prior to the meeting, approximately 88.4 million shares are represented at this meeting in person or by proxy. That represents approximately 87% of Ciena's shares outstanding on the record date, which is sufficient for a quorum under our bylaws. This meeting is now duly convened for the purpose of transacting business. I will declare the polls open at 3:03 p.m. Eastern Time on March 20, 2013.

The first item of business is the election of directors. Today, we will be electing 3 Class I directors who will serve in office until the 2016 annual meeting or until their respective successors are elected and qualified. The board has nominated and recommended the election of Lawton Fitt, Patrick Nettles and Michael Rowny. Information about each of these individuals was included in your proxy materials, including descriptions of their business experience and other qualities or characteristics considered by our board in nominating these individuals. As no other nominations were timely received, the nominations are closed. Is there a motion for election of these nominees?

Unknown Attendee

I move for the election of the board's director nominees.

David M. Rothenstein

The second item of business is the ratification of the Audit Committee's appointment of PricewaterhouseCoopers to serve as Ciena's independent registered public accounting firm for fiscal 2013. Is there a motion to that effect?

Unknown Attendee

I move that the appointment of PricewaterhouseCoopers be ratified.

David M. Rothenstein

The third and final item of business is our annual stockholders' say-on-pay advisory vote regarding our executive compensation. We encourage stockholders to read the compensation discussion and analysis and executive compensation table sections of our proxy statement. These sections provide a detailed discussion of our compensation programs and policies, the compensation governance measures used by our Board of Directors and the compensation awarded to our executive officers in fiscal 2012. Is there a motion regarding the advisory vote on our executive compensation?

Unknown Attendee

I move for an advisory vote regarding the executive compensation described in this year's proxy materials.

David M. Rothenstein

At this time, if any stockholder would like to make a comment or ask a question regarding any of the 3 proposals, please submit your comment or question through the web portal. We'll pause now. If there are no questions, we will proceed with the vote. I'll now ask the stockholders to submit any final voting instructions via the annual meeting web portal. Any stockholder who hasn't yet voted or wishes to change their vote may do so by clicking on the voting button on the web portal and following the instructions. Stockholders who have already sent in proxies or voted by telephone or the Internet and do not wish to change their vote do not need to take any further action.

Now that everyone has had an opportunity to vote, I declare that voting is complete and the polls are now closed at 3:06 p.m. on March 20, 2013. I'll ask the inspector of elections to please tally any additional ballots submitted and prepare his report on the voting results. We will receive the inspector's report on the preliminary voting results and complete the business of the annual meeting shortly. A final tally of the votes of today's annual meeting will be reported on the Form 8-K to be filed with the SEC within 4 business days.

In the meantime, it's now my pleasure to introduce Gary Smith, Ciena's CEO and President, who will report on -- to stockholders on the state of our company. Before he proceeds, however, I want to remind you that during the course of today's presentation or in answers to questions raised by stockholders, we may make forward-looking statements regarding future events or the future performance of Ciena. Such statements are based on our current expectations, forecasts and assumptions and include risks and uncertainties that could cause actual results to differ materially from the statements discussed today. These statements should be viewed in the context of the risk factors detailed in Ciena's filings with the SEC, in particular, our most recent 10-Q for our first quarter of fiscal 2013. We do not assume any obligation to update the information discussed in this presentation, whether as a result of new information, future events or otherwise. Gary?

Gary B. Smith

Thank you, David, and hello to everybody, be it afternoon, morning or evening, wherever you are. I appreciate the opportunity to talk with you this afternoon about the business. And I'm pleased to report a year of very good progress for Ciena in a number of dimensions, and particularly, around the overall execution of our strategy during the year despite what was a challenging macro environment and some particular challenges within the industry dynamics. Headlines are that we were profitable. On as adjusted basis, we generated cash. We grew revenue 5%, while as I alluded to the industry had some challenges and actually declined in our particular space, 7%, so we continued to grow our market share. We achieved record order flow, revenue and backlog during the year and that puts us very strongly positioned moving forward.

Significantly, we launched our open architecture and our network transformation services practices, which we think are going to be some of the underpinnings for the future of our business. We expanded our role and our reach, both geographically and within various verticals. And we had a number of significant Tier 1 wins during 2012, and in 2013, we've begun some of those deployments. So all in all, I think it was a year of significant progress for Ciena, and we have gained a lot of momentum moving forward.

And I think the reason that we're winning in the marketplace is really down to a significantly differentiated approach, which starts with our strategy. And our strategy is to position the business as a very focused specialist player, but one with global scale, focus and really the convergence of optical and packet technologies. And I think that's allowing us to win in the marketplace. I think, generally, the industry is moving towards more of a model that basically rewards and values players that are focused, that have leading technology and execution in their spaces, and Ciena certainly has that in the space that we're in. I think there is a general industry structural movement away from the sort of legacy conglomerates of old to more focused players. And really, I think this plays very much into the strategy of the company. And the pillars that really support that are clearly a focused player but one of leading innovation in this space that we're in. And I think the technology and the perception and the mind leadership that Ciena has in this space that we're in is second to none.

And that is also coupled with relationships and the unique and intimate relationships that we have with many of our major customers around the world. And it's really the confluence of the focus, innovation and the unique relationships that provide the underpinnings for Ciena's unique position in the industry and the fact that we were able to grow when most of our competitors' revenues declined.

If we think about the broader picture of what's going on in the industry and all of the things that are happening around virtualization, around mobile, everything, around machine-to-machine, communications, around big data, the basic underpinning for this is really the network. And I think we're heading for an era where the network is fundamentally important again to everybody. It really is such a large part of everybody's experience, of their applications. And I think it's not just about capacity, but it's about putting intelligence on that network so it delivers the right amount of capacity and the right type of capacity at the right time and the right place. And that's really around automation and putting intelligence on the network.

Now to be able to underpin this fundamental shift in requirements really requires a converged and intelligent architecture, and that really is where Ciena is focused. And this broadly is called next-generation networking. And you can see from this graphic that Ciena is really the #1 market leader in North America in this space and #2 globally. And in fact, in 2012, we increased our share overall of this particular space. I think it's important to note that Ciena has global scale and leadership and reach and is able to leverage the innovations that we bring to market across now a broad geographic base.

I think our performance in 2012 was understood and is reflected in our relative share price and stock position versus our peers. And in 2012, we grew about 26% when most of our peers actually declined. And I think you are seeing a reflection, I think, of the industry shift I talked to earlier around focused players being more valued by customers and really folks who are trying to be in all of these spaces struggling to keep up in the various areas. And I think that is reflected in the shakeout that is now going on in the industry.

So with that as a platform, we are well positioned for 2013 to expand our role and our reach. And our intent is to continue to grow faster than the overall market, and we do think that the overall market will grow this year into positive territory and we expect to grow faster than that overall market. And this gives us the opportunity. We're very focused on driving our operating leverage now and to deliver on our operating model. And as I'll share with you shortly, Q1, which we've just completed, got us off to a good start with that.

The areas that we're focused on now in 2013 is really to expand our packet and switching capabilities and our reach; to build the software content. Really, a lot of the intelligence that's going out on to these networks is increasingly about software; and to optimize our cost structure. And we think as we go through 2013, that will deliver increasing operating leverage for the business. In fact, as I said, in 2013, in Q1, which we've just completed and reported, I think we're off to a good start. Revenues of $453 million, which is about a 9% revenue growth over the same period Q1 2012, so we're continuing to grow faster than the market. As adjusted gross margin, about 44.6%, and really, we delivered an as adjusted operating margin of about 6%. And as you can see, we have a very strong cash balance in the business, so we're off to a good start for the business.

So as we move into 2013, I'd like to open up to any questions at this time and be happy to answer any that are posted on the web portal.

Question-and-Answer Session

Gary B. Smith

Okay. The first question we have, and I'm going to read this out, most people seem to agree that the industry is about to enter a strong investment period. How long do you expect this cycle to last? And how positive will it be for Ciena? It's a good question. Typically, this industry has run in cycles. I happen to think that this cycle that we're entering into now is very different and for a number of reasons. First of all, at the highest level, the industry is moving in a very different way than it has in previous cycles. You've seen some of the demand characteristics around mobility, machine-to-machine and big data. It would naturally conclude this cycle would be different. And I think it's not just about adding capacity, which most of those previous cycles have been about. This is really around converging to a single network that can deliver multiple services and provides automation and intelligence onto the network. It's a very different dynamic, I think, than we've seen in any other cycle. I would also say from a Ciena-specific point of view, we are in a very different position than the last cycles we've gone through, even as a young company. Ciena, as I said, is the global leader in the space that we're in. We have global scale, which we did not have before when we entered into this space. And I think importantly, whilst we're a focused player, we have multiple platforms and are in multiple parts of the network with many, many carriers. So we are at a much stronger and larger customer base than we've ever had before, a much more diverse portfolio engagement with our customers. And I also think that we have much more of a strategic relationship now with many of the major carriers around the world where we provide large parts of their network and, importantly, of their transition towards these next generation networks. So whilst everything is a cycle and I recognize it as such, I think this is a very, very different set of dynamics that we have here, both for the industry and specifically for Ciena.

Another question. How do we feel about our balance sheet? First of all, we believe we've got a strong balance sheet. And as I said, we believe our momentum is strong and we expect to generate cash again in 2013, even with the growth that we're seeing. And whilst we made no formal decision, we do believe, however, we're well positioned to retire the 2013 notes, which I think are $216 million at maturity and maintain the strong cash position, and particularly, as we're continuing to generate cash. In addition, we recently exchanged a portion of our 2015 convertible debt, which extended the maturity of half of our 2015 notes, in fact, to 2020 with essentially the same terms as the original 2015 notes. So I believe the position that we're in is very strong, and we'll continue to generate cash. And that will give us the opportunity, over time, I think, to reduce the amount of debt that we have

Thank you. Since there are no more questions, I will turn the meeting back to David Rothenstein to complete the business portion of today's Annual General Meeting. David?

David M. Rothenstein

Thank you, Gary. Has the inspector of elections tallied all the votes?

Jim Raitt

I have. I am pleased to report that a count with respect to the election of Ciena's Class I Director nominees indicates that Ms. Fitt, Dr. Nettles and Mr. Rowny have each received the majority of the votes cast in accordance with Ciena's bylaws. I'm also pleased to report that a count with respect to the ratification of the appointment of the PricewaterhouseCoopers indicates that this proposal has also been approved by a majority of the votes cast. Finally, I am pleased to report that a count with respect to the advisory say-on-pay vote regarding Ciena's executive compensation indicates that a majority of the votes cast approve the executive compensation described in this year's proxy materials. That is all.

David M. Rothenstein

Thank you, Mr. Raitt. Based on those votes, I declare that the 3 nominees have been duly elected as directors. I also declare that the ratification of the appointment of PricewaterhouseCoopers has been approved. As the say-on-pay matter is advisory in nature, it is not binding. However, the Board of Directors value stockholders' opinions on these matters and will consider these voting results when considering executive compensation matters in the future. With the business of this year's annual meeting complete, I'd like to express my sincere appreciation to the stockholders attending via the Internet and those of you submitting proxies for today's meeting. Thank you for participating in this year's annual meeting and for your continued support of Ciena. There being no further business, the 2013 Annual Meeting of Stockholders of Ciena Corporation is now adjourned.

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