Gregg Lampf - VP of Investor Relations Gary Smith - CEO and President Jim Moylan - Chief Financial Officer Tom Mock - SVP of Corporate Communications.

Amitabh Passi - UBS Mark Sue - RBC Capital Markets Ehud Gelblum - Citigroup Scott Thompson - FBR Vijay Bhagavath - Deutsche Bank Georgios Kyriakopoulos - Raymond James Kent Schofield - Goldman Sachs Rod Hall - JP Morgan Martin McKechnie - Evercore Dmitry Netis - William Blair Sanjiv Advani - Stifel Catharine Trebnick - Dougherty.

Good day ladies and gentlemen and welcome to the Q2 2014 Ciena Corporation Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions).

As a reminder this conference call is being recorded I'll now introduce your host for today’s conference Gregg Lampf, Vice President of Investor Relations. You may begin..

Thanks Ashley. Good morning, and welcome to Ciena's second quarter of 2014 review. With me today is Gary Smith, CEO and President; Jim Moylan, CFO; and Tom Mock, Senior Vice President of Corporate Communications. This morning's press release is available on National Business Wire and ciena.com.

We've also posted to the Investors section of ciena.com an accompanying investor presentation, including certain highlighted items from this quarter being discussed today, as well as our historical results.

In our prepared remarks today, Gary will discuss management's view on the market and Jim will offer some color on our results and provide guidance. We'll then open up the call to questions from the sell-side analysts, taking one question per person with follow-ups as time allows.

Before turning the call over to Gary I'll remind you that, during this call, we will be making certain forward-looking statements.

Such statements are based on current expectations, forecasts and assumptions regarding the company that include risks and uncertainties that could cause actual results to differ materially from the statements discussed today. These statements should be viewed in the context of the risk factors detailed in our most recent 10-Q filing.

Our 10-Q is required to be filed with the SEC by June 12, and we expect to file by that date. Ciena assumes no obligation to update the information discussed in this conference call, whether as a result of new information, future events or otherwise. Today's discussion includes certain adjusted or non-GAAP measures of Ciena's results of operations.

A detailed reconciliation of these non-GAAP measures to our GAAP results is included in today's press release available on ciena.com. This call is being recorded and will be available for replay from the Investors section of our website.

Gary?.

First as expected, we are capturing a greater share of Tier 1 carrier spending by addressing more applications beyond pure optical infrastructure; second, we are broadening and diversifying our customers base; and finally by design, the solutions we are offering today are ideally aligned with the new requirements of an emerging on demand environment.

I'll address each of these dynamics in little more detail, starting with the Tier 1 carrier market. Since our Q1 conference call, there had been some concern about near term carrier spending in the U.S.

And although we've said it many times before, I think it bears repeating that we believe the shifts within CapEx budgets are better indicator of our opportunity than the total envelope of carrier CapEx. As Packet Optical is foundational for creating new revenue generating services, carriers are shifting their spend towards these solutions.

And according to the Dell’Oros, Ciena is number one in Packet Optical worldwide. The shift towards Packet Optical coupled with our leading position is allowing us to expand our applications within Tier 1 accounts. And as a result, we're now involved with multiple projects at different carriers and that’s our more strategic level.

With more engagements at the front end of the business, we're helping customers drive service creation through models such as carrier managed services and applications such as cloud services, data center interconnection and other applications that grow carrier revenues.

Our expanding role means we’re doing more kinds of business with Tier 1s today than we have ever done, which is helping us establish a more balanced, broader-based business.

So clearly, we hold a very strong position with Tier 1 service providers, particularly in North America, but we have also designed our business to diversify in to other high growth segments which is the second dynamic that’s fueling our success. We continue to focus on extending our international reach.

And in addition to our direct sales efforts in key geographies, we see our new partnership with [RXM] as an opportunity for greater long-term international growth beginning in 2015. And that relationship is off to a good start and early indicators are very promising.

But to continue to expand beyond service providers as well, for the last four quarters our non-telco revenue has climbed from about 25% to 30% of our total revenue including government, financial services, healthcare, and other enterprise verticals.

One of the fastest growing non-telco segments to Ciena is Web 2.0 which includes customers such as internet content providers and data center operators. We are now dealing with most of the major Web 2.0 players either directly or indirectly. Ciena now accounts two of the top five Web 2.0 players as direct customers.

And increasingly we are collaborating with traditional network operators specifically to support their Web 2.0 customers with both infrastructure and we carrier managed services.

All of our customers service providers, Web 2.0 players, and private network operators of all kinds are looking to leverage an open ecosystem of the virtualized resources to enable the real time analytics and network agility required to deliver on demand business models. And that is the third dynamic driving Ciena’s continued strong performance.

We’ve discussed for several quarters now that a major market shift is just beginning towards an on demand model that’s better suited to changing end user behavior. Both consumer and enterprise end users are consuming network resources today largely through network applications that require an on demand experience.

Our customers businesses depending on enabling that experience making network performance more critical than ever. This shift to an on demand world is a fundamental market changer and as we said before there will be new winners and losers in this environment.

We have deliberately built our approach, our organization and our portfolio as the network specialist for this opportunity. Today Ciena is uniquely positioned for a market shift that is much more than just about the 100 gig. Our OPn network architecture is all about transforming capacity into on demand capability.

Additionally we have key industry partners to help us drive an open ecosystem of virtualized resources. As you know we’re developing SDN control software with Ericsson and we recently announced a joint solution with Brocade to enable on demand provisioning for both computing and network resources across data centers.

By capturing a greater share of customer spend, diversifying our business and offering a compelling value proposition for the on demand environment we are performing well and we see opportunities for continued revenue growth and margin expansion.

In the second half we will be introducing new application software and an entirely new product platform targeting opportunities that expand our addressable market in a way that makes strategic sense for both Ciena and our customers.

Given the increasing diversification of our products and our customer base I would stress that our business today correlates less with the overall spend of a handful of North American carriers and less with the forecast from optical component suppliers.

We are capitalizing on segments that are growing faster than the traditional telco market and we’re taking share in those segments. All of these factors help drive another strong quarter in first half for Ciena. And we viewed them as critical underpinnings for our continued differentiated performance going forward.

We have built a broad and balanced business for the significant multiyear opportunity in front of us. And as a result Ciena is in the position to not just win in the new environment but to drive increased operating leverage in our business in 2014 and beyond. I’ll now turn the call over to Jim..

Thank you, Gary and good morning, everyone. I'll cover some of the highlights of our results and I'll speak only to non-GAAP results. Please refer to this morning's press release which you can find on our website for reconciliations to GAAP numbers.

Given the quarter-to-quarter fluctuations we sometime see in our results, we emphasize that you should view our performance not solely on what we do in the quarter but also in the broader context of half year and even full year results. We have now completed the first half of fiscal 2014 and so my comments will address both the quarter and the half.

Q2 revenue came in at $516 million. We had strong order flows in the quarter and orders were meaningfully higher than revenue. For the first half of 2014, revenue was $1.1 billion, a 14% increase over the first half of last year. At 43.1%, adjusted gross margin in Q2 was consistent with Q1's gross margin.

For the first half of 2014, adjusted gross margin was 43.2%. Adjusted operating expense in the second quarter was $206 million. For the first half of 2014 OpEx was $406 million, in line with our guidance of an average of approximately $205 million per quarter for the full year with some quarterly fluctuation.

As a percentage of revenue, OpEx was 37% in the first half. Q2's adjusted operating profit was $35 million and we posted an operating margin of 6%. For the first half adjusted operating margin was 6% as well. We ended the quarter with [$430 million] in cash and investments.

We said last quarter that we expect the business to benefit from a strategic investment we made in the Converged Packet Optical inventory. And indeed we are already seeing some of that benefit.

We've reduced delivery lead times, we have improved philosophy which is helping us win new diversified business, particularly with customers like the Web 2.0 players Gary talked about earlier. And we can increasingly book and ship more orders in the same quarter, converting backlog to revenue faster which will in time benefit our cash flow.

And as we have said before, this investment did result in some short-term cash use. We still expect however to generate free cash flow for the full fiscal year. Turning now to guidance, for the fiscal third quarter of 2014, our guidance is as follows. For Q3, we expect revenue in the range of $585 to $615 million.

We expect Q3’s adjusted gross margin to be in the low to mid-40s, similar to Q2’s result. We expect Q3’s adjusted OpEx to be approximately $210 million. We remain committed to our OpEx plan and we continue to expect that the quarterly average for OpEx throughout the fiscal year will be approximately $205 million.

We also remain committed to driving down OpEx as a percentage of revenue going forward toward our target of the low to mid-30s as a percentage of revenue. In the second half of this year, we expect it to be in the mid-30s as our revenue grows.

With regard to other income and expense in the third quarter, we project an expense of approximately $11 million related to the interest on our convertible notes. We expect our tax obligation for Q3 will continue to be related solely to foreign taxes.

And as for share count, we estimate Q3’s basic share count at approximately $106 million total shares. Diluted share count will vary depending upon your assumptions about our profitability. Before we go to questions, I would like to comment on the year as a whole.

At the beginning of this year, we expressed enough confidence in our visibility, our backlog and the overall strength of our business to provide annual guidance for adjusted operating margin for the first time. We continue to have that confidence today.

We built a balanced, diversified business that has aligned with high growth segments of the market and we continue to execute very well. As a result, we’re delivering steady improvement in operating leverage.

And we remain confident that we will achieve the low end of our current target range of 7% to 10% for adjusted operating margin for the full 2014 fiscal year. Ashley, we’ll now open the line for questions..

Thank you. (Operator Instructions). Our first question comes from Amitabh Passi of UBS. Your line is open..

Hi, thank you. Good morning guys. I had a question for Gary and then a follow up for Jim. Gary, you talked about a diversified customer base, yet I think your largest customer was almost 22% of sales this quarter; revenues there I believe grew 20% outpacing overall U.S.

sales growth as well as international sales growth, just wanted to get your thoughts when do we expect momentum across the rest of your customer base to start picking up? Because I suspect going forward the investments will likely be a big concern just in terms of the concentration around your largest customer?.

Thank you, Amitabh. I think we’ve built into the guidance for the rest of the year the various fluctuations and changes that we see within that and the couple of things I would stress. One, relative to where we were, we’ve diversified with our top customers the overall percentage of business pretty considerably over the last two to three years.

So it is much more balanced. We’re continuing to do well with those large customers and we’re continuing to expand the applications that we’re driving in all of those large customers.

And so, we continue to diversify our business in both our role and the reach dimensions of it and our international business as well; diversification into other customers is going extremely well. And I would expect that to show into the numbers as we move forward.

Also diversifying the business, 30% of our business now comes from non-traditional infrastructure business that’s up from 25% last year. So you can see we’re making good expansion in terms of our overall diversification.

You take someone like an AT&T for example, we’re now providing them metro applications, we’re in the core of their backbone, we’re in submarine, we provide global mash, we’re in mobile backhaul, we’re in their business services, we’re in their fiber-to-the-building VIP program, we do carrier managed services with them, layer one and layer two and provide consulting services as well.

So, I think we need to view the word diversified in both of its dimensions of both role and reach. And I think in that context, I think we have a much more balanced business than we had previously..

Thanks for the color Gary. And then Jim just for you, I think you’re just [marking] a very subtle change in gross margin guidance low to mid 40s, I think it’s the first time in the last two years that you’re actually guiding up to the mid 40s.

Just curious what’s changing, and as we look at gross margin sequentially fiscal 2Q to fiscal 3Q, should we expect gross margins to be relatively flat; could you do better in 3Q? I would love to get some incremental insight there?.

Yes. The one thing I added to the changed guidance was I said, we expected to be similar to what we did in Q2.

One thing I'd say about our gross margin is that, because of all of the changes and addition of software content to our products and the increasing [role] and diversified reach that we have across customers, we are seeing good things happen in our gross margin. So, I just say that we feel good about it.

I think there are going to continue to be movements around gross margin, because we have big items flow through our results, which can impact our margins up or down. But overall, I think our gross margin trend is good..

Thank you. Our next question comes from Mark Sue of RBC Capital Markets. Your line is open..

Thank you. Good morning gentlemen..

Hello Mark..

Hey Mark..

My question, Just how you feel about [linearity] and predictability in your diversified order trends.

And (inaudible) real in terms of your working capital requirements and subsequently your cash generation and how we should think about cash generation and then working capital over the next several quarters, that would be helpful?.

Yes. We have seen really over the past three years, very strong order flow at a growing backlog as we have talked about Mark.

The feature of the growth in our business as we have diversified internationally is that we have got an end of the business of building out complete networks which require installation on our part and require the entire network to be lift and accepted by the customer, before we can book revenue and for the most part before we can collect.

So, a natural feature of that business is that it has used working capital.

And so really this year we -- for the first part of this year a big part of our use of cash has been building this outside inventory for these projects and this strategic investment that we talked about several times about trying to get enough and urge back an optical inventory on hand to handle the new customers which are really focused on lead times.

So having said all that, my feeling is that we are going to start to generate cash nicely, I think we have gone through this bulge of having to put inventory on our balance sheet.

I do -- again I have to put out another word which is we do tend to have quarters which are back end loaded and that means that at the end of a quarter our receivables tend to be higher than they are during the rest of the quarter.

And so you don’t see the inner workings of a quarter and what happens to our receivables balance, but I think we are going to now turn to generating more cash then we have particularly over the last couple of quarters..

[Opportune].

And perhaps currently you have to sit and let’s just think about your cash and should we think of deleveraging, should we think of debt repayment, any thoughts on just the long term cash that you generate more and more?.

Well, I think that is going to be a great problem to have Mark, but what I would say is this; we know that we have got a convertible which is coming due in the first part of next year $187 million. I am confident frankly that that is going to convert to equity and so I don’t think there is going to be a cash need.

But having said that given our current cash position and the fact that we do expect to generate cash for the rest of this year and next year as well, we’re confident that we have the liquidity to manage our business including the repayment of this debt.

And once we get through that repayment or conversion or whatever it is, I do think we’re going to have options on cash and we’ll deal with those as they come up..

Thank you, Mark..

Thank you. Our next question comes from Ehud Gelblum of Citigroup. Your line is open..

Hey guys, good morning. So a couple of questions to dig little bit in. Clearly past year your largest 21% customer in the past had obviously been a number of other customers that were close to 10% but haven’t quite met it.

Can you give us a sense of sort of what the next collection of customers look like, are they customer in the 8%, 9% range or from there is a drop off, how many do you have in that range in there -- just drop off a little bit? Just to give us kind of like more of a spectrum view of what your customers look like on the diversification from there? And then Gary you mentioned a lot of different areas that were driving growth from wireless backhaul, you had a whole list.

Can you give us a sense as to how much of your revenue is driven by each one of these types of deployments whether it’s fiber to the home, (inaudible) guys because the data center builds, things like Google general, Google fiber.

Are you still able to sense what the drivers are so we can kind of get our arms around when we see increases and decreases in spend in those particular areas as opposed to the crunch we’ve had in the past which was just spending from the large enough American providers overall, we can get a sense as to what areas of your business are doing well..

That’s a long and a long question..

Just break it down..

But first part I would say this. Overtime we have seen less concentration and more diversification just numerically in our top customers and just to give you an example if you look at the second quarter of this year, just over 60% of our revenue came from our top 10 customers and that was almost 65% last year.

So that’s just an indication that we’re getting more and more diversified. And you can take that and sort of guess -- put sort of yet to the amount which the other 9 contribute as a piece. And of course there is a declining in percentage as you go down the top 10 but that gives you some indication. If you look at the top 20, you see a similar trend.

And we’ve seen this trend continued over time. So, I know people tend to be focused on two big U.S.

customers and they’re very, very important to us, but we do think that with the fact that we’re much less concentrated as a company than we were two and three years ago overall, then people should feel much more comfortable about our prospects being more diversified..

And Hudi, let me take the sort of second part of that which is sort of the questions around market perspective and try and answer that in a couple of different ways. And first of all from sort of an application point of view and then I’ll talk about market segments.

The network is moving more to be from the traditional view of the network segmentation to be more about either connecting content-to-content or content-to-users.

And I think in the content-to-content, we’re seeing good growth around that particularly as one we’ve described out as sort of data center to data center connectivity and that market is clearly extremely strong.

But I would think that the -- I would say that the content to the users piece is where really a lot of the diversification of our applications and a lot of growth is coming.

And that’s really the manifested in older segmentation terms of sort of growth within the Metro and at the edge of the network and around things like carrier managed services, Ethernet business services seeing very strong growth there as evidenced by our performance and overall the move towards a converged single network as opposed to multiple networks, which is why the Converged Packet Optical segment is growing so fast for us.

That’s the bet that we placed. And I think you are seeing that now show up in the network architectures and in our financial results.

To take another sort of perspective probably, I see very good growth in international, both from our direct efforts, we have a number of large opportunities and large existing account spend, we're broadening out within those accounts.

I think the relationship with Ericsson, although very early days, it looks very promising and we're building a nice pipeline of business there.

And also from the segment point of view, I think the Web 2.0 market segment, we're seeing very good traction there, both directly and indirectly, where we're providing carrier managed services through our partners into those Web 2.0 Players, both in North America and outside.

The other segment that we're also diversifying and seeing very good growth is obviously submarine, that's a market that we had zero share in two to three years ago. We now have number one market share and about 30% of that total market and that continues to grow nicely.

So, when we step back from all that, we think about the expansion in our role and our reach and we're diversifying in each of those dimensions. So, I hope that gives you little more color Hudi in terms of where we see the growth of the company..

That’s helpful..

We need to move on to others. Thanks..

Thanks. I appreciate it..

Thank you. Our next question comes from Scott Thompson of FBR. Your line is open..

Good morning, guys. Remember the days when we had to worry about swinging three quarters together. I am not sort of [idle] any more, but nice quarter..

Thank you..

Let’s dig into the web scale opportunity a little bit, the Web 2.0 guys. It sounds like those guys are building out data centers and maybe some of the top 30 cities as a group, maybe well beyond that into next year.

I would assume there is some services opportunities as well as some equipment opportunity around that, but what’s the magnitude and the timing around that, how would we start to build that source of demand into our models? Thanks..

That’s a good question. I would say that two -- by way of sort of context, two years ago Scott, we really didn’t see any of this business, it was non-existent to us. We have now got two of the top five internet content providers as direct customers and an increasing opportunity with both them and the others.

And I think it’s an increasing number of leading exchanges and data center operators, so it covers a number of them.

I would say if you were to take an estimate of that Scott in terms of the total optical market, I would say it’s less than 10% now but growing to sort of 15 over the next year or so and we are addressing that both directly and indirectly through various carrier partners. So, I would say it’s becoming a very high growth part of the market..

Thank you, Scott..

Thank you. Our next question comes from Vijay Bhagavath of Deutsche Bank. Your line is open..

Yes. Hi guys, Vijay on behalf of Brian. Hi Gary, hi Jim..

Hey Vijay..

Hello Vijay..

Yes.

So a conceptual question, I mean like to better understand Web 2.0 opportunities in terms of ASP’s margin profiles, you see them comparable to the big telcos in the U.S., you see them giving you a better price point so and hence better gross margin profile for sales into the Web 2.0 versus the big telcos?.

I would say it varies by application and not too dissimilar from the overall sort of telco market. I mean it’s whether we are providing wholesale capacity to them or whether we are at the edge of the network with sort of carrier managed services type applications.

They’re at the very early stages of deployment and build out but we’re seeing it is a constant theme, again both directly and indirectly. I would say that my assessment right now is I would say similar margin by application..

Yes. And then a follow up would be on the metro opportunities at your U.S. telcos. Do you see an early inflection point in 100 gig in the metro in the U.S.

heading into the back half or is that still too early to make this call?.

I mean I think we talked about that last quarter; we are beginning to see metro deployments.

Tom do you want to give some color on that?.

Yes. What we are starting to see -- a couple of things happened in the metro space Vijay. The first one is we are beginning to see 100 gig happen in the metro. It was a significant portion of 100 gig shipment in the quarter, was kind of in the 20% sort of range that we are going to those shorter distance applications.

But probably a more important point that we are seeing in the metro space is the fact that as you get closer to the end user you have to be more involved with service deliveries. So the capability of those boxes is becoming more diverse that you end up with a greater need for OPn switching and greater need for packet switching.

Gary alluded to a platform that you’re going to see coming out from us in the latter part of the year and that’s really a lot more type of the integrating packet and optical together and being able to deliver that packet capability closer to the end user..

Thank you Vijay..

Thank you again..

Thank you. Our next question comes from Georgios Kyriakopoulos, Raymond James. Your line is open..

Yes, thank you. This is Georgios for Simon. Garry just looking about your U.S. customers outside AT&T for the remainder of the year, earlier you seem very excited about AT&T spending so I was wonder if you could discuss how your business plans with rather big U.S.

customers especially given the which quarter revenue from which customers excluding AT&T actually declined 6% grossly?.

So you’re talking about large -- let me just understand the question you are talking about large telcos in the North America or excluding AT&T, is that the question and what do you see the dynamic around that?.

Declined 6% percent?.

Okay. Yes, within the quarter -- you’re going to see fluctuations within the quarter we expect to have a strong second half with most of the major Tier 1 carriers in North America. We don’t expect to see a drop off with people like Verizon for example you’ve got CenturyLink, you’ve got Sprint, you’ve got Comcast you’ve got Bell Canada.

So I think we’re going to continue because of that diversification in that customer base as we are in more and more applications with them so I would expect the stronger second half for that segment within North America..

Okay. And then you mentioned that your business is less correlated, to the forecast from optical component suppliers, which was rather weak this quarter. Can you expand a little more on this, [it has] been less inventory perhaps less optical content in your systems maybe some of vertical integration or favorable component pricing? Thank you..

Let me take a stand with that Georgios, we have to say about that. There is no question that over the long-term, as spending on telecom goes up we are going to be somewhat correlated to those guys.

But what happened if you look back over the past 3 or 4, at least 2 or 3 years, is that as we've diversified our products the percentage that we represent of their business and the percentage that they represent of our purchase has changed.

And if you actually look at the quarter to quarter correlation between our results and theirs, it just doesn't correlate, I mean that you can get be fooled by making judgments about what we are going to do based on what those fellows are saying.

To me the best thing you can do is listen to what we are saying about our results, because we have the best view into our business..

And to take another cut on that, if you look at our portfolio, we're diversifying with our open architecture, it's increasingly about software, which we develop ourselves, you are not going to see that show up in any supply chain metrics.

It's increasingly about our own degree of A6 and vertical integration where we're choosing strategically to own that technology, it's increasingly about consulting and services and it's increasingly about packet, which does not necessarily show up in the optical ecosystem.

So, you put all of that together and to reiterate Jim's comments, I think you are saying we're moving into a different environment now around these converged technologies and that encourage everybody not to keep looking at us through this pure optical filter of our history.

I mean, yes we have go market leadership in a 100 gig etc and we are absolutely going to continue with that, no question that’s a core part of underpinning of our architecture and our strategy, but we are much more diversified than that.

And back to my point when you see dislocations in the market as we are seeing, as we move to these on demand networks, you are going to see winners and losers and you are going to see a different set of players both decline and emerge frankly.

So I think it’s very important that as an industry, we understand sort of contacts of the dynamics that we are dealing with..

Thank you..

Thank you, our next question comes from Kent Schofield of Goldman Sachs. Your line is open..

Great, thank you.

I have to admit that I was sitting and struggling a little bit, with how to formulate this question but kind of the bottom line and maybe it’s comparing it and contrasting, but if we think about international and I know that’s a broad bucket and that’s the reason I struggled with this a little bit, but if we think about that, it’s undergrown your domestic piece and sometimes that’s driven by AT&T or not, but it’s undergrown your domestic piece for more than kind of a full year.

And so can you just help us understand is there a different level of cycle deployment, is there an inflection that we are waiting, do we need Ericsson to come online to get that growth ahead of the domestic side of things? Just trying to understand without being kind of the more, I think the domestic business is being kind of the more mature piece that maybe the growth opportunity isn’t quite is large there, but you may have more room on the international side, but we just haven’t seen that really happened that.

And I know it’s a long question but any color would be helpful there?.

Sure. Let me take a stab at that and I am sure Gary will have a comment or two as well. The first thing I would say is that if you think back a couple of years ago as we talked about the network architectural shift, we said that it was likely to happen in the U.S. first.

And so we thought that we would actually for a couple of years see faster growth in North America than we would in the rest of the world and that has played out fully. Secondly, we are growing internationally in our engagement with customers around the world. We’re well positioned with many customers.

In many cases, this growth is about these big networks where we are building out complete networks as we talked about that have to be lived before we can recognize revenue and so what you’re seeing is that our deferred cost of sales has grown.

And you can think about that as if it were on a normal revenue -- I shouldn’t say that revenue cycle like that of North America, then we would already have booked that revenue and that sort of masks the growth that we have.

If you look at our backlog overall with that deferred cost of sales and other business that we have in our backlog, it is much more heavily international than it is U.S. So, I do expect over time that international will grow to a larger percentage of revenue than we have seen.

And Ericsson is just another item that’s going to help us grow internationally. So we feel good about international business. So you are going to see growth there..

Great, thank you..

Thank you. Our next question comes of Rod Hall of JP Morgan. Your line is open..

Yes. Good morning guys. Thanks for taking my question. I just wanted to see if you guys did -- I mean Gary, you have commented on the second half of the year momentum, confidence in the U.S. And then I think in your prepared remarks you said it’s going to be better than the first half.

I mean it feels like you’re indicating that maybe better than normal seasonality there or a little bit at least. And I just wonder if you could comment on that and also on what gives you that sort of confidence and visibility [regionally], is it Europe you think is going to pick up more is it the U.S.

and Europe and what exactly drives that? And then secondly, I wondered if Tom brought along his coherent in 100 gig customer numbers, maybe you just update us on those accounts there. Thanks..

Hey, Rod. Let me take the second half question first. I think what we’ve seen actually is over the last two to three years as we’ve executed on our strategy, the second half has consistently been better than the first half.

And I get back to the point that Jim was making, I would encourage people to look at us, if you’re looking for trends, put the halves together. You get -- things can fluctuate in any given quarter, but I think the halves really kind of tell the story.

And the second half is being consistently better than the first, so that’s one piece of data that I would offer. Secondly, the reason that we’re confident; it’s a combination of things.

It’s backlog, it is the order flows that we’re seeing, it’s the engagement in the pipeline, the conversations with the customers, very broadly based as well I would say Rod.

To your point, we’re seeing it internationally, to the comment that Jim made, we’re seeing in North America, to the diversity of customers that we’ve got across both international and North America. We’re seeing it across the diversity of applications that we’re in as well.

So I think you step back from that and look at it and that gives us confidence for the second half. And I think we're still at the early stages of the shift which is a sort of multiyear shift into this on demand type architecture. And I think the carrier space broadly is really beginning to move now.

And as Jim said, the sorting of the market first over the last 18 months; we're beginning to see that internationally now as well. Some examples of that are people at places like [CALA] and Brazil, particularly putting a lot of investments in infrastructure. So, we look at all that broadening and we feel pretty confident about the second half.

Tom, do you have your….

No, I do not find numbers to add here; couple of things before I actually get into the details. I mean this was a great quarter for us from a 100G perspective; it was a record quarter for us. We announced six new customers for a total of 129 now that was six as we publicly announced, we actually 15 new customers in the quarter.

We also had new customers in terms of 40G as well and there are a total of 100 40G customers as we sit here today. So, if I look at overall coherent customer count, we have about 182 customers, 140 of which are 40G and 129 of which are 100G.

One of the other things that I think hasn't really been fully appreciated is that we're now putting 100G towards on our switching gear as well. So, if I look at our 5400 platform, we're beginning to put a number of customers, number of units to our customers that also have 100G optics integrated into our switching platform..

Great.

And could I just follow up quickly, Gregg?.

Sure. One quick one and we’ll move on..

Yes, just a quick one. Gary, what I was saying is that it sounds like you were saying second half would be better than normal seasonality. So we know that the second half is always better but it feels like you guys have maybe more confidence there then you have had in past years.

That’s what I was asking?.

Okay, alright. I would say consistent with previous years, I wouldn’t say we are -- I think we’re seeing very good progress and we have good confidence in it. But I wouldn’t --we’ve had a steadily improving financial performance and I think that is going to continue.

I mean sort of growth rates we are talking about, we were up first half of this year on the first half of last year was up 14%. I mean we’re seeing some pretty significant growth there. And if we can keep that up, then the operating leverage that we can deliver over the next few years looks very encouraging..

Okay, thank you..

Thank you..

Thanks, Rod..

Thank you. Our next question comes from Martin McKechnie of Evercore. Your line is open..

Thank you. Congrats everybody. So, two questions. The first is on the Web 2.0, I think there are a lot of questions on the call. My question is, are you breaking into some of the do it your selfers, i.e.

you spoke just to buy components directly and now they are buying systems, to whatever extent you can answer that? And then also what do you attribute some of the wins that you are getting at Web 2.0 against that, what products are they, what application are they, and why is it that they might be moving to do it yourself to buying systems from Ciena? And then the second question is, if you can remember it.

Your international business actually, as an earlier question, I thought it was pretty nice, it was up 9% sequentially. So, from Jim’s answers it sounds like that’s some of deferred revenues potentially coming through.

But could you give us an update on the strategic deal with the Vodafone I guess, are you running some trails there, would we expect it similar to what happened at the Verizon to play out there and any kind of commentary you can tell us on your content with the project Sprint? Thanks..

Okay. So let me take those [Mart], I think from a -- and I understand your -- I think the Web 2.0 market is still early days but I think it’s evolved from a very basic point to point kind of need of just addressing content centers to content centers.

Now it’s about broader performance about distance, capacity subsea network, so the degree of sophistication and complexity that they are now dealing with has increased, therefore to your point Mart there are requirements for more sophisticated systems to go and do that.

And I think as they spread out from just linking content centers from content to users their requirements are exponentially going up which is why that market space is increasing so much. So I think it’s just natural maturation of requirements.

And I think we are dealing with them both directly as I said and indirectly as part of a sort of broader ecosystem. And some of it they are building themselves I mean in terms of building the network themselves and owning parts of the network, but still a large the vast majority of their spend is actually coming through traditional type carriers.

And I would expect that to continue just to the reach that they’ve got to have. In terms of the applications, I would say converged packet optical. I think those opportunities with them as they get more into the users, delivering into the user space would be more packets and internet or [insighted] we’re just beginning to see that now.

In terms of international, as you said our international business was up, so we are beginning to recognize some of those projects and we’ve got more to come.

Don’t get too many specifics about particularly customers, but Vodafone we’ve announced those strategic relationship with Vodafone which we started last year but we confirm that we’re involved with as part of that as project Spring as that rolls out as they invest in their infrastructure and we think we’re well placed for the converged packet optical elements of that and I think they’re going to be strong customer as we go through 2015..

All right. Thank you very much..

Thanks Mart..

Thank you..

Thank you. Our next question comes from Dmitry Netis of William Blair. Your line is open..

Thank you very much. Nice quarter guys. Couple of quick questions here. On the switching side of the business, is that growing faster than the transport, can you give us an update what’s sort of the growth in that business has been this past quarter? I think it grew pretty fast last quarter, 74% rate.

I am just curious how fast is this growing again this quarter?.

Yes. One other things we’re seeing Dmitry that, this is Tom by the way, is the switching business is growing, but I think you need to look at it in the context of the fact that it’s across a bunch of different platforms.

We did talk about the fact that we added 5,400 customers in the quarter, but equally important is the fact that we’re now putting more switching across more of our optical transport platform and part of our value proposition in the market is that we can connect these big centrally located switches, we are efficient in switches that are embedded in the transport network.

So, routing and switching kind of broadly is becoming a bigger part of how traffic is managed in the network in much the same way as packet is as we were discussing earlier to run the new platform..

Okay. And then, that's helpful.

And on the Web 2.0, I know we have been dealing [of course to] that, but just as you look at your cross section of Web 2.0 customers, I am just curious the technology perspective, they are the ones that are more to integrate OpEx into the routing platforms or they are going actually the telco route where they take maybe some of the packet technologies and integrate those on for the optical transport boxes and using that way.

So, I'm just trying to get a perspective there of which route those guys are going? And then if you could talk about that, if you could just give us an update on your maybe future R&D initiatives.

So, I'm not asking for the roadmap, but clearly what were some of the things you guys are working on investing effort in going forward?.

Yes. The kind of things that we are seeing in that space do have to deal with conversions, but often time it’s more about later two conversions that it is about optical routing conversions.

Because if you think about what you are trying to do particularly in the context of disconnecting content centers to content centers, they really don't need the complexity of routing, what they really need is the ability to be able to established virtual channels between locations and layer 2 happens to work pretty well for that.

Most of the plants we've seen today have not necessarily integrated those technologies together, although you may see that happen overtime.

And that's one of the reasons when we are building looking how we build out our roadmap we're booking more and more focus on how we integrate packet and optical together putting, optical switching, I'm sorry packet switching inside our optical platform as well as coming out with larger packet platforms that include optical transport [explorer] of them..

Thank you..

Thank you. Our next question comes from Sanjiv Advani of Stifel. Your line is open..

Thanks, question for Jim. Jim I think you’ve addressed a little of that.

Just wanted to talk about backlog and I understand it’s going to be variable, but you obviously build significant backlog exiting 2013 even that you’re half way through the year, I was just curious to get a sense of what you thought backlog would be exiting 2014 and if you could give us an update on what the backlog trend was quarter-on-quarter that will be helpful.

Thanks..

Yes. All of the comments that I’d make about backlog are in the context of we expect strong order flows for this year for the second half just as we are seeing for the last several years.

But one of the things that our investment and converged packet optical inventory was [net to do] was to move, increase the velocity of our supply chain and move items from order to revenue, and hopefully to cash more quickly.

And so in that context, even with strong order flows, we would not be surprised to see backlog come off a little bit this year. To me that would be a positive because it would mean that we were successful in getting our lead times down, increasing velocity and hopefully getting the cash faster. That’s my feeling about backlog this year.

One other thing I want to mention here is this.

We look at a metric inside the company of how much of our revenue comes from orders which were placed in the given quarter, and with the investments that we made in inventory with some other improvements we have made in our supply chain, that metric and we call it book to revenue by the way is a metric that has shown really strong growth over the past year; it’s grown by 50% or 60%.

So that’s a real positive for our business because it means we can move through the cash cycle more quickly. And that’s mainly a new North America type of phenomenon. International we tend to have the same sort of completed projects type of accounting..

One more question?.

Thank you. Our next question comes from Catharine Trebnick of Dougherty. Your line is open..

Thanks for taking my question, nice quarter. Could we go dig into this 30% non-telco, not so much the Web 2 but more the indirect or direct channel into healthcare, federal and finance? Can you give us some more background on that? And maybe a better idea and how we can do some of our channel checks or think about our models? Thank you..

Thank you Catherine. Yes we’ve talked a lot about the Web 2.0 and the other segments as you rightly pointed out and as we diversified into these other segments, you have got broadly speaking enterprise and carrier managed services with typically the finance, healthcare, energy. And we go both direct and indirect there with our channel partners.

And really it’s about building private packet optical networks and they are migrating to cloud based architectures. And we have really leveraged over the last couple of years our customer engagement model to basically, I think we’ve double our sales in enterprises through the carrier channel in the last 18 months or so. So it’s pretty significant.

Governments and research and education, we have expanded that within state and local agencies, international governments and particularly sort of national research and education networks. They demand for enormous amounts of capacity and switching has really fed some nice growth in that market. Submarine, I talked about that.

We’ve now got number one market share from nowhere about two years ago. The other market segment which we haven’t touched on is cable and MSOs which again is showing good growth for us.

In fact, I think we had three new customers in MSOs last quarter alone and that’s really being driven by the growing opportunity, not just for infrastructure but more around Ethernet business services as well which we’re well suited to.

So you look at that in total and that’s -- we’re seeing growth in all of those elements which is how we’re able to move up from 25% to 30% and really have a much more diversified business. .

Great. Thank you..

Thank you Catherine..

Thank you everyone for joining us today. We look forward to connecting with you again over the next several weeks. Everyone, have a good day..

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today's program. You may all disconnect. Everyone, have a great day..