Gregg Lampf - Vice President of Investor Relations Gary Smith - President and Chief Executive Officer James Moylan - Senior Vice President, Finance and Chief Financial Officer Françoise Locoh-Donou - Chief Operating Officer.

Douglas Clark - Goldman Sachs & Co. Rod Hall - JPMorgan Securities LLC Simon Leopold - Raymond James & Associates, Inc. Meta Marshall - Morgan Stanley & Co. LLC Tim Savageaux - Northland Capital Markets Jeffrey Kvaal - Nomura Securities International, Inc. Vijay Bhagavath - Deutsche Bank Securities, Inc.

Stanley Kovler - Citigroup Alex Henderson - Needham & Company Dmitry Netis - William Blair & Co. Jess Lubert - Wells Fargo Securities George Notter - Jefferies LLC Catharine Trebnick - Dougherty & Company.

Good day, ladies and gentlemen, and welcome to the Ciena Corporation Q2 2016 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 follow at that time. [Operator Instructions] As a reminder, today’s conference call is being recorded.

I would now like to turn the conference over to Mr. Gregg Lampf, Vice President of Investor Relations. Please go ahead, sir..

Thank you, Candice. Good morning and welcome to Ciena’s 2016 second quarter review. With me today is Gary Smith, CEO and President; Jim Moylan, CFO; and Françoise Locoh-Donou, COO. This morning’s press release is available on National Business Wire and Ciena.com.

We also have posted in the Investors section of Ciena.com and accompanying investor presentation, including certain highlighted items from the quarter being discussed today. In our prepared remarks today, Gary will discuss management’s view on the market and our overall progress, and Jim will provide detail on our Q2 results and provide guidance.

We’ll then open 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 9, and we expect to be filed 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?.

Thanks, Gregg, and good morning to everyone on the call. As you saw in this morning’s release, we achieved outstanding second quarter performance across all key financial operating metrics, including adjusted operating margin of 10% and adjusted EPS of $0.34.

In addition, order flows in Q2 were especially strong, which positions us well for the second-half of the year. I think this financial performance proves out our long-held view of the market, as well as our long-term corporate strategy, aimed at diversifying the business.

Specifically, we’ve invested heavily in key technologies and geographies to create a broad-based business that is capable of delivering sustainable growth in both revenue and profitability. And our Q2 results highlight this changing complexion for that business. Our growing Packet business is a good example.

Having anticipated Ethernet services becoming the fastest growing market for carriers, as well as healthy backhaul in preparation for 5G, we’re beginning to see our packet business expand by customer, application, and geography.

In Q2, we won Packet business from Tier 1 service providers, government agencies, utilities, and regional carries from across North America, EMEA and APAC, and we’re seeing international diversification beyond packets as well, really reflecting the investments we’ve made to support applications like submarine and investments in key markets, such as Brazil and India.

And we had a particularly strong quarter in CALA and APAC, with both regions experiencing better than 20% year-over-year revenue growth in Q2. As we’ve been saying for sometime and despite the macro volatility that we and others have referenced in recent quarters, fundamental demand drivers remain solidly in play.

Those drivers are continuing to ship the industry towards model of on-demand networking across an open ecosystem. And as this shift gains momentum, we’re seeing that our technology is now being consumed in many different ways. We view this dynamic as both the competitive advantage and an opportunity for Ciena.

With design principle, such as modularity and open APIs or programmability, our OPn architecture differentiates Ciena by allowing us to address the broadest range of consumption models, whether it’s for disaggregated line systems, platforms like Waveserver that change operational paradigms to meet web-scale needs for fully integrated packet-optical solutions.

We believe Ciena is the market-leading enabler of choice, when it comes to how different customers can consume network technology. Another dynamic that we continue to see is network operators absolutely demanding more service agility and automated to end-to-end control of their networks.

Frankly, they’re struggling with monolithic back-office systems, a dependence on vendor controlled legacy OSS systems, and long development cycles that inhibit the creation, customization, and most importantly the monetization of services.

Our Blue Planet platform is playing perfectly into this kind of an environment, leading the industries transformation to open control and bringing web-scale flexibility and velocity to the telecom world.

In fact, we’ve just introduced the Blue Planet DevOps Toolkit and Developer Community to provide the software development tools the network operators use in house, foreign collaboration with ecosystem partners, really allowing them to take that control of the managements and orchestration of both physical and virtual components.

In closing, Ciena’s long-term strategy and their ongoing R&D in go-to-market investments continue to be validated by the market with tangible results. And the growing need for greater service agility and an increase appetite for new consumption models, both position Ciena for future market momentum.

We’re confident in our ability to be the industry’s leading enabler of choice for a variety of used case is to a wide spectrum of customer segments, and our ability to leverage that leadership into continued growth in revenue and earnings per share over time. With that, I’ll hand over to Jim..

Thank you, Gary. Good morning, everyone. We have strong and growing relationships with customers all over the globe, and we are clearly enjoying momentum in the market, as our improving results show.

This is due in part to the disciplined investments we’ve made to build a broad-based business, a business that can address more kinds of customers, applications, and geographies. I’d like to take a moment now to update you on some of the key areas of diversification that are contributing to our progress.

That discussion starts with our Packet business, which is expanding across a number of markets, driven in part by a strong quarter for our 8700 platform, which now has 31 customers. Packet Networking revenue in Q2 was up nearly 30% year-over-year, and up more than 40% sequentially.

We had 15 new packet wins in the quarter, including a number of Tier 1s, both in North America and internationally. We had a particularly strong packet quarter in India and in the U.S. government market. As Gary mentioned, we are gaining momentum across regions especially CALA and APAC, which were up 30% and 60%, respectively, over Q1.

Regarding EMEA, in our last call, we referenced temporary CapEx constraints and some internal execution issues as affecting our performance. Both of those issues are improving, and as a result, EMEA revenue was up nearly 20% over Q1. While we have much more work to do, this is very encouraging.

Altogether, international customers contributed 43% of total revenue in the quarter. web-scale providers continue to be important for Ciena. As you know, we sell directly to these customers as well as indirectly, that is through service providers that are undertaking projects with Ciena on behalf of their web-scale customers.

We have said that, we’re getting direct revenue from web-scale customers in a range of 5% to 10% of total revenue. And Q2 revenue from web-scale customers was in that range, up approximately 25% over Q1. We also are getting indirect contribution from web-scale customers of about 5% to 10% of total revenue.

And with recent wins, we believe these percentages will grow over time. Overall, we continue to hold number one share globally in the data center interconnect market. Customers around the globe are very excited about our Waveserver platform, which is purpose-built for DCI applications.

Waveserver is building momentum and is getting high marks for its carrier performance. In fact, I’m pleased to announce that the platform has been selected by two additional top five web-scale customers, meaning Waveserver has now been selected by three of the top five web-scale providers.

We continue to believe that Waveserver is the performance leader in this nascent market and we are confident that as we evolve the platform over time, it will remain the leading platform in the space. And finally, we had a strong quarter for our Ericsson partnership, showing significantly better revenue than last year.

Turning now to our second quarter financials, Q2 revenue was $641 million. Q2’s adjusted gross margin was 45.1%, and operating expense was $223 million. We achieved $66 million in adjusted operating profit in Q2 for an adjusted operating margin of 10%. As Gary mentioned, orders in Q2 were strong coming in significantly higher than revenue.

We also generated $61 million in cash from operations. Our balance sheet continues to strengthen and our leverage ratios continued to improve. In fact, as we went to the capital markets to raise the $250 million in the Term Loan B last quarter, we received a ratings upgrade from both Moody’s and Standard & Poor’s.

We ended the quarter with approximately $1.24 billion in cash and investments. Finally, Q2’s adjusted earnings per share were $0.34. I’ll now provide guidance for our fiscal third quarter. We expect Q3 revenues to be in the range of $655 million to $685 million. We expect Q3’s adjusted gross margin to be in the mid-40s percentage range.

And we expect adjusted operating expense in Q3 to be in the range of $225 million, with some potential variability due to spending that did not occur in the first-half of the year. I’d also like to provide some commentary on our annual guidance.

You’ll recall that in March, we said that we expected 2016 adjusted operating margin in the range of 10% to 12%. We also indicated that for fiscal 2016, we expected revenue growth in the range of 5% to 8%, adjusted gross margin in the mid-40s percentage range, and adjusted OpEx for the final three quarters to average approximately $225 million.

Based on our first half performance and our expectations for the second-half of the year, we continue to expect to achieve those results for the full fiscal year.

More specifically, given our strong order flow in Q2 and closer proximity to the end of the fiscal year, we now expect that 2016 revenue growth will be approximately at the midpoint of our guidance range.

In closing, as the need for on-demand networking drives change across the industry, customers continue to tell us that Ciena is highly differentiated and its approach to both engagement and technology, resulting in an overall better experience and more valuable outcomes for them and their end-users.

We compete in a market where customers increasingly require more choice and different consumption models for network solutions. And we believe that Ciena is uniquely suited to provide the widest range of choice to customers.

Our ability to deliver greater value to network operators positions us for sustainable long-term growth and continues gains and profitability. Candice, we will now open the line for questions..

Thank you. [Operator Instructions] And our first question comes from Doug Clark of Goldman Sachs. Your line is now open..

Great. Thanks for taking my question. My first one is on the data point that you gave on the web-scale direct sales growing 25% sequentially.

I’m wondering if that’s driven by revenues from Waveserver or expansion of customers or perhaps a combination of both?.

Yes. It’s not Waveserver, Doug, not yet. Waveserver is just entering the revenue base of its life. We expect that it will grow, but it’s basically the – our standard 6500 platforms that we’re selling to them now..

Okay. And then as a follow-up, we’ve been getting questions on the submarine market and you mentioned it briefly in your remarks. Can you talk a little bit about the activity going on there, as well as the involvement by web-scale companies, for example, Facebook and Microsoft just announced their own submarine cable network.

Can you talk a little bit about that topically?.

Yes. Hi, Doug, it’s Gary. What we’ve seen in the last sort of two or three years of the submarine market is, we’ve been doing a lot of overbuilds on existing capacity, because we’re able to extend the life of these cables and that’s really being our entry point into the market.

What we’re now seeing is the demand is so great that people are actually putting new cables out there, and you’ve seen some of the announcements, both Consortia and also directly with the web-scale guys as well. And this, I think provides a great opportunity for Ciena to help really drive that capacity.

So we see quite a vibrant market in the submarine space over the next two to three years, and we think we are incredibly well-positioned for it..

Excellent. That’s helpful. And a quick follow-up to that.

Can you help kind of quantify or at least level set us in terms of how large your submarine exposure is?.

Yes, the markets overall is between $500 million and $700 million. We have roughly 30% of the market..

Thanks, Doug..

25% to 30%..

Got it. Thanks a lot..

Thanks..

Thank you. And our next question comes from Rod Hall, JPMorgan. Your line is now open..

Yes, good morning, guys. Thanks for taking my question. I guess, good set of numbers here, a couple of questions I’ve got.

First of all, could you guys just give us an update on Verizon timing? And I guess, I’d also like to know if you’re including in your revenue growth for the full-year any material revenues from them? Are you thinking most of that revenue pushes into late this year or early next? So that was the first question? And then secondly, on back to Waveserver, could you talk about when you expect material revenue there? Are you expecting that leader this year, just give us some idea for how you expect revenue there to spin-up? Thank you..

Hey, Rod, let me take the Verizon one first. I would say, I think the next-gen metro which you refer is on track. The split looks like the split that we expected. There’s a mix of larger and smaller metros. I think our expectations they’ve pretty much been on track, I think for a while in terms of the schedule of the project.

So, and I think that again – we’ve taken some revenues, I would say it’s pretty small. We’ll be – we’ll take some more during the second-half as that begins to ramp. But I think you’re probably looking at 2017 and 2018 for the majority of revenues associated with it. But it’s pretty much on track and as they’d previously indicated..

So, Gary no impact from this drag, could you just clarify that one?.

I think it’s too early to tell from that. But I think we’ve baked some of that into obviously our expectations for the second-half..

Okay..

And I think in terms of the planning, I think that was also sort of previously baked in..

On the Waveserver question, the exciting thing to us is that, we have more than 30 engagements around the world with Waveserver. We have total of five customers, which are one, three of which are web-scale type customers and just a lot of excitement around it.

In terms of revenue, we said in the past that we think it’s in the low tens of millions this year and should start ramping next year..

Thank you, Rod..

Thanks a lot, guys..

Thanks, Rod..

Thank you. And our next question comes from Simon Leopold of Raymond James. Your line is now open..

Great. Thank you. I have a question that you may not want to answer or maybe can’t, so I reserve the right for another one if you punt.

But I wanted to talk about margin trends towards 2017, at least, if you could express a level of bias? And what I’m trying to think about our crosscurrents where we think you’ve got increasing software business that’s margin favorable yet some new projects, such as a Verizon initiative that typically in the early phase, it can be margin unfavorable.

So if you could help us understand cross-currents longer-term?.

Well, you mentioned that you want us – wanted us to express bias, so I mean, I want to know that we have no biases here, and of course, we’re not going to respond on 2017. What I would say is that, we’ve made great progress on gross margin over the last really year, year-and-a-half maybe, and we’re now in the mid-40s.

We do feel good about where margins are today and we think that we’re in that mid-40s range. There’s going to be some volatility in our margins depending upon what’s hitting the margin at any given quarter, but we feel good about where they are..

So maybe if you could give us sort of a shorter-term perspective then in the context of the guidance you’ve given.

What are your expectations for the software mix going up to the balance of year? How should we see that trend given that that has a lot of leverage on your margin?.

We’re not expecting a big growth in software this year. Now, if you look at our data around software, we have shown a nice growth rate in software and software-related services. And most of those software-related services are subscription and software and maintenance kinds of things.

So the trends are good, but we’re not expecting a lot of software revenue in the second-half this year..

Okay. And then one last one, quick clarification. You mentioned EMEA starting to improve, which we’re encouraged by. Was the source of that, the big three customers that you’ve historically benefited from or something different? And then I’ll yield the floor. Thank you..

It was broadly based, yes, we got a little from those customers, but it was a little more broadly based. And as we say, we are encouraged by the fact that with our lowered expectations, we’re now sort of on plan to what we thought we would do when we talked about it end of last quarter..

Great. Thank you..

Thank you..

Thank you. And our next question comes from Meta Marshall of Morgan Stanley. Your line is now open..

Great.

I just wanted to get an update on whether the growth rates you had kind of given for the long-haul metro and DCI market kind of stand given what you’ve seen in the service provider spend market over the last quarter? And then just a question on how Cyan performed to expectations and are they performing to your expectations for the year? Thanks..

In terms of the metro, in terms of the growth rate for DCI and metro, it’s about what we thought. As we look at the overall market, we think it’s in the sort of mid single-digit if you blend all of those, some are obviously much higher than others and that’s what we’re seeing in mix.

So really our view of the market as we look at for the rest of 2016 really hasn’t changed as we look at the blended balance of growth..

Yes, we said that we believe that we are growing and taking market shares in every region except for EMEA and we still believe that to be the case. On the Cyan question, I assume, Meta, that you’re talking about the hardware side of Cyan, the Z-Series. On the Z-Series, it’s been doing very well.

We had a total of about $25 million in revenue from Cyan this year, both products and services, that’s….

This quarter..

This quarter, excuse me, thank you, Gregg. So it’s pretty much, it’s performing as to expectation. And then on the software side great traction, again, not a lot of revenue this year, but we’ve proven to ourselves that there’s a market and that we have a really, really good product, because we’ll win..

Thanks, Meta..

Great. Thanks..

Thank you. And our next question comes from Tim Savageaux of Northland Capital Markets. Your line is now open..

Hi, good morning. A question on sort of business mix geographically as the year progresses or what’s implied in your outlook. Obviously, you saw more than a fair bit of international strength here in the quarter. I wonder if you expect any changes in that as the year progresses for U.S.

customers to maybe step up a bit? And sort of in context of that if you might be able to address trends you see in the U.S.

market, you’ve already kind of focused on web-scale, maybe talk about trends in your traditional Tier 1 customer base as well as cable, where we’ve, at least, seen a fair bit of strength it would seem of late?.

Yes, Tim, I think the dynamics that we see playing out for the rest of the year – listen, I think APAC is going to continue to be strong. I would highlight India specifically has been a standout geography and also CALA. But I do think, which I think is to the point of your question that we will see North American growth strengthen in the second-half.

And we think that we can probably see double-digits organically growing. If you take out AT&T from the North American picture, we can see double-digit growth in North America in the second-half. And I think to your point that that’s a blend of cable, web-scale environment, utilities, some of even the large enterprise data center pieces as well.

So we – on the order flow that we saw in Q2 was, I think reflective of that, and that that gives us visibility and some confidence around that North American market in the second-half as well..

Great. And if I could just follow-up real briefly on that.

With regard to the strength you mentioned in CALA and APAC in addition to the commentary around Ericsson, should we be connecting dots in terms of our relationship between those two trends right there on the one hand? And on the other, do you feel like you’re taking share in those regions, perhaps in a more aggressive fashion than the rest of the world?.

I would say the relationship certainly has had a good contribution to it. I would think, given the size of the numbers that we’re seeing there it really is us taking share. And I think, you look at somewhere like India, we’ve been invested in the Indian market now for almost 10 years, and we’re really beginning to see the benefits of that.

We also are pleased to announce that we’ve just been awarded the defense project in India, which will start to roll out during 2017. It’s the largest network of its type and that’s really based on sort of carrier Ethernet transport delivery to all of the various armed forces in India and we’ve just been selected for that project.

So I think that’s an example of the kind of direct activity that has taken long time to come to fruition, but we’re really beginning to see those markets move now..

Thanks, Tim..

Yes, nice quarter, guys..

Thank you..

Thank you..

Thank you. And our next question comes from Jeff Kvaal of Nomura. Your line is now open..

Yes, I think a couple as well.

I think number one is, could you talk perhaps, Jim, about the spending that didn’t occur in the first-half of the year? It seems as though you were more or less on plan with your OpEx so far, so what’s happening there? And then bigger picture, if orders are better and it seems as though, you’ve given us a lot of reasons to think why orders are better, then why only reiterate the midpoint of your guidance for the full-year, why wouldn’t you take that up? Shouldn’t – or maybe to signal a new an incremental level of conservatism in the full-year guidance? Thanks..

Okay, Jeff, on the OpEx question, remember when we started the year, we said that we were going to do $225 million a quarter and that’s what we thought. We actually did quite a bit lower than that in Q1 and slightly lower than that in Q2.

Some of that was because of just management of OpEx and making sure we weren’t spending any money – anymore money that we had to, but some of it, particularly in areas like real estate and IT and to some extent in R&D.

We are project based and our spending is not necessarily going to occur in the period that we project and some of it’s going to move out in the year.

So we’re trying to give ourselves just a little bit of room when we said the $225 million with some potential variability, due to spending that did not occur earlier in the year, in case, we run a little hotter than $225 million in Q3..

In terms of the growth for the year, I would say that we expected a good order flows in Q2, and now that we’ve got that and we’ve secured some of those deals that we thought we were going to get. I think that gives us greater confidence and visibility as we look into that guidance.

Obviously, it’s all always a risk-adjusted, balanced perspective on it. I mean generally speaking, we’re reasonably accurate on where we think we’re going to come out. There’s a lot of moving parts to it, but I think, we’ve got greater confidence and visibility, which is why we reaffirm that number..

Excellent..

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

Yes, thanks. Yes, hi, Gary and Jim..

Hi, Vijay..

Hi, Vijay..

Yes, hi, a quick question for you on visibility in the emerging market opportunities.

Roughly, how many quarters do you think of order visibility you have in projects in India and also in LatAm, in particular? And then Europe, Gary, would you view Europe as challenging or performing better than your internal sales targets heading into the back-half? Thanks..

Okay, let me take sort of the project base. We have pretty good visibility into the project, so they tend to be more large project-based with longer cycles to them, sometimes takes longer for revenue, but it does give us visibility into it. I think you look at some of the buildouts that are going out in some of these key markets now.

I think there’s sort of one to two years to three years, they’re pretty large buildouts. You’re seeing that in India as well-publicized around the 4G buildouts that are going on there and also in CALA, so we have pretty good visibility to them.

Regards to EMEA, I mean, I think that market has been challenged from a CapEx point of view for – it’s well documented for a little while. Also the competitive dynamics there, frankly, in the closing period of Alcatel’s existence and also with Huawei have been very, very competitive in Europe.

And also I think, as we’ve said, we think we can do better to be aligned around some of the opportunities for us in EMEA than we have been. So I’m – as Jim said, I’m encouraged by the profile that we’re seeing in Europe, it’s early days.

I continue to think that we can expand in Europe and grow that business then I think we’re on a reasonable trajectory over the next 18 months or so to do that, but we’ve got lot more work to do..

Okay. A quick follow-on for Jim. That $225 million OpEx number, Jim, would that be the new norm for the next few quarters, or if the OpEx number could trend down, what could help in getting the OpEx number down? Would it be project-based or would it just be overall cost reductions? Thanks..

Well, we – as I said, we gave $225 million per quarter at the beginning of the year and we’ve done better than that. We think we’re in that range now. So we’re not going to be trending down OpEx as we move through the rest of this year..

Okay..

Thank you. And our next question comes from Stanley Kovler of Citi. Your line is now open..

Thanks a lot. Just two housekeeping questions and then a follow-up. So I wanted to just ask about foreign exchange impact especially given the strength internationally.

What – how that factored into the results and what we should expect for the balance of the year as far as that impact? And also the tax outlook for the balance of the year?.

Yes, on FX, remember, we had a long exposition about the effect of FX early on. And although some of the currencies have strengthened against the dollar slightly. We don’t see a lot of change in FX as we sit here today from the description that we gave at the end of the first quarter.

The Canadian dollar has strengthened a little bit that is affecting OpEx, but not a new story, significantly new story with respect to FX for the year. On tax, as we said, our tax line is really just driven by profitability in non-U.S. countries.

We do expect it to be slightly higher in the second-half than it’s been in the first-half, but it’s still going to be a relatively small number..

Got it. That’s helpful. Thank you. And then I just wanted to follow-up on the linearity in the quarter, especially in North America and the AT&T business.

If you can help us understand how it tracked throughout the quarter and the finish and then whether with your largest customer, we should be thinking about year-over-year to be flat or declining some of the trends there, especially non-Verizon metro 100G deployments and how those are tracking for the balance of the year? Thanks a lot..

Okay. Stanley, why don’t I take the AT&T first? I think we’re delighted with the progress that we’re seeing in AT&T, we’re continuing to diversify our role as a strategic supplier and I think their approach to the architecture is giving us a real opportunity to add a lot more value across a much broader range of engagements with them.

And we expect the profile of the account to evolve to reflect this as they go towards next-generation architecture and more software orientation. And so I think we expect from a revenue point of view that it’s going to be – that we don’t think it will grow this year. I think we’ve talked about that very clearly.

But I think, we continue to expand the market share within the account and manifest our relationship in different ways primarily with next-gen and software. So as a percentage of our overall revenue, I think – the rest of the business grows, it will decrease and I think that’s a positive element around the diversification of our business..

Just to clarify the question, you said linearity of revenue from AT&T in the U.S., where you talking about through the year or inside of a quarter, what were you asking there, Stan?.

Related to that part of the question, it was what happened in the quarter?.

Inside the quarter..

Fine, okay..

Well, as we said, our business generally is backend loaded. We do have a fair amount of the activity in the later part of the quarter. For larger customers, it is probably a little more linear.

We tend to have a little more steady quarters from larger customers, but still we’re just going to – always have a – by third month of the quarter, which is going to be heavier than the either of the first two months, that’s just the way our business works. We’d love it. We love to be very linear. It’s just not going to be..

Thanks Stan..

Thank you. And our next question comes from Alex Henderson of Needham. Your line is now open..

Yes. Thank you very much.

Can you hear me?.

Yes..

Yes..

Great, I was hoping you could talk a little bit about the competitive environment particularly given the transition at ALU to Nokia.

I know ALU has been particularly aggressive in the marketplace going into the transition period, but has there been any changes recently and do you anticipate any changes? Are you hearing any difference in their behavior in terms of bidding contracts that might alter the trajectory of their price aggression going forward?.

I would say, Alex, at this stage I think it’s sort of too early to tell, this thing takes a while for it to filter through into the front-end engagements, but we’re not particularly seeing much change frankly..

And then the second question if I could, the metro buildouts, you talked about the timeline for your revenue recognition, but is there a difference in the rate at which you are doing installations? I would assume that the installation process is fairly lengthy exercise and that some of that installation process has already been fairly aggressively engaged as we start rolling out metros here in the May timeframe and going into the back half.

So can you talk about the difference between rate of inflation and rate of revenue recognition over the course of the year in metro?.

Hi Alex, it’s Françoise. So, on the metro, I think your question initially was specifically about Verizon. I think as we said, it’s going to ramp in the second half of the year, we don’t expect a lot of revenues this year.

But we will take some revenues in terms of the delta between the time we install the systems and the time we take revenue, that shouldn’t be – there shouldn’t be a long lag or long time difference there. It will be pretty straight forward in the case. Remember, we’re also doing deployments in all the Tier 1 in the metro in the U.S.

with AT&T and CenturyLink, and that’s already on the way and that’s the time between install and revenue there is also pretty straightforward..

Okay, great. Thank you..

Thank you, Alex..

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

All right. Thanks for taking my questions. I have a couple. One, I wanted to follow-up on the time question asked earlier. I don’t think you guys kind of touched on that.

But what are you baking into the full-year 2016? Is it kind of I think the last guide was kind of the 30s number for the next couple of quarters, so should that – is that what we should be expecting here? And how did Cyan do in the current quarter?.

Yes, we think that around $30 million per quarter is the right kind of range for now. It was little lower in Q2, it was around $25 million in total products and services, and so it’s on plan. What I would say is that, over time some of those customers are going to transition to 6500.

And so the delineation between Cyan revenue and 6500 revenue is going to get increasingly blurred. But overall, we’re very, very happy with both sides of that deal, both hardware and software..

Okay. And I guess on the software piece, if I may, the Blue Planet, I looked at the total software contribution this quarter. You had a nice, yes, I’d say – I mean, relative to the overall revenues, probably minuscule, but it was sort of nice sequentially up about $5 million or so. So there’s some traction there.

I was just wondering if it’s coming from Blue Planet or something else? I know you have some software-related services there.

So if you could kind of separate the two and give us a little bit of sense of where Blue Planet sits and how it’s doing and what your expectations may be for the rest of the year? And then maybe next year, can we expect Blue Planet to maybe do $25 million or more, I mean, how should we be thinking about that one?.

Yes, so couple of – let me start with your first question around current quarter. Yes we did see an uptick on software and software-related services quarter-on-quarter and year-on-year and the contributions come from three areas. One is, yes, we’re starting to see some contribution from Blue Planet and the revenue line there.

But we’re also seeing increasing contributions from our software subscription services, which is as you know, is a more predictable stream of revenues on software. And generally, our network management systems are doing well. As Gary mentioned earlier, the consumption models are evolving and that’s allowing us to sell more of this on software.

So there’s really three contributions giving up this uptick on software. I don’t think at this stage, we’re ready to comment on Blue Planet for next year. That being said, we’re seeing traction with Blue Planet across the Board. I would say, the pipeline has significantly increased from time of the acquisition of Cyan.

We’re seeing a number of applications for Blue Planet orchestrating resources in the data center. And we’re also seeing applications for solving key pain points in wide area network for carriers operating multivendor network.

And really this ability that we bring to the table to manage resources, both in the data center and in the wide area network is pretty unique in the market. And that’s why we’re seeing the traction that we’re seeing across the board..

Okay. It’s helpful..

Thank you. And our next question comes from Jess Lubert of Wells Fargo. Your line is now open..

Hi, guys. I have a question on the Packet Networking business. It’s a fairly strong quarter. You highlighted a number of longer-term drivers running business Ethernet services in 5G.

So I was hoping you could comment on how you’d expect this business to progress during the second-half of the year? And to what extent should we expect the Packet Networking business to grow faster than the transport segment from both the near and longer-term perspective? And just following up on that, perhaps you can touch upon to what degree the 8700 is opening new opportunities for driving some of the incremental optimism here?.

Very good. So on Packet Networking, so first of all, yes, it is growing faster than the transport segment. It has grown so far in the first-half of the year faster than the transport segment. And we expect that to be to have a – even a stronger half – stronger second-half on Packets that we did in the first half.

So overall for the year, we do expect it to grow faster. It’s growing higher than double-digit from the numbers as you will see. If you look at the trends and the reasons for that, there are a couple of important ones. One and Gary touched on it in his remarks.

Overall, the Ethernet services market for carriers delivering services to the enterprise is one of the fastest-growing segments of the enterprise market for services and we are very well positioned with that – with the relationship we have with carriers really helping them sell these new services.

And our carriers and our technology and increasingly the help that Blue Planet brings to evolving these services is an accelerating factor on the Ethernet business.

The other factor that you’ll see is both carriers and utilities moving to Ethernet as a ubiquitous layer of connectivity to the hedge of the network and we’re seeing that in migrations from part of the world in emerging markets, we talked about that are still migrating from 2G to 3G or going straight from 2G to 4G.

So we’re seeing significant opportunities in the mobile backhaul space and that’s part of what’s helping our diversification and our growth in our international business. And then we’re also seeing utilities migrate from legacy systems to Ethernet based connectivity, and that’s an accelerating factor as well.

So overall, our Packet Networking business is growing rapidly and we expect that to continue for the foreseeable future..

Can you touch upon to what degree the Packet Networking strength you’re expecting is more dependent on some of these international opportunities or would you expect it to be fairly balanced both domestically and internationally going forward?.

We would expect it to be fairly balanced in terms of the growth rate. But as you know that the Packet Networking business originally was – had a high concentration in North America and what you’re seeing now flow through in the numbers is higher contribution from international customers..

Thanks guys..

Thanks Jess..

Thank you. And our next question comes from George Notter of Jefferies. Your line is now open..

Hey, thank you very much. I guess I was curious about the progress you’re making on 16QAM. I think in the past, you guys have given us a number of customers you have there. I’d just be curious on where you are with customer count and then just generally traction in the marketplace with that capability? Thanks..

So, George, we’re making a lot of progress. We have over 30 customers now that are deploying 200-gig systems from us and we’re really quite unique in this capability still in the marketplace in terms of the competitive environment.

That number is growing rapidly as we have roughly about 200 customers now that deploy 100-gig and a lot of these customers are starting to adopt 200-gig and 16QAM technology. We’re seeing that initial applications for that are in the metro, but that’s starting to move to more metro regional applications.

And as it migrates to metro regional then we’re seeing more customers of that.

All of that, George, it’s driven by – we see a lot of needs for increasing capacity effectively across the globe and a lot of our customers don’t have a lot of fiber and so spectral efficiency is very important for them and our 16QAM technology is really leading the market with spectral efficiency..

Just as a follow-up there, I’d be curious about how that impacts your financial model?.

Well, can you expand a bit, George, on the question? What part of the financial model?.

Gross margins?.

We don’t see a huge difference in gross margin. It is kind of a big product right now so we like bit of a premium in some markets. But it’s not – right now moving the needle in terms of our gross margin picture..

Got it, thank you..

Thank you..

George..

Thank you. And our next question comes from Catharine Trebnick of Dougherty..

Thank you. Thanks for taking my question. Last quarter you talked about some FX impact in Brazil and this quarter you noticed – you did say that CALA was up. Are there other regions in the CALA region and what would be some of the use cases that you are seeing in Latin America? Could you give us more color on that? Thank you..

On the FX side, the biggest effect from FX has been in – from Brazil. We’ve had an effect in Argentina, although that has tended to be in our other income line. The Brazilian effect is the biggest effect in terms of revenue.

And as far as used cases, you’re talking about product used cases or applications used cases, Catharine?.

Product use cases and some application. I’m trying to think outside Brazil, you have Mexico, other regions that looks like AT&T is building out, et cetera. I’m just trying to figure out, which other regions besides Brazil is there more subsea opportunity in that area, is it carrier Ethernet, is it more 100-gig, et cetera.? Thanks..

Hey, Catharine, it’s Francois here. Yes, so the use case are actually buried in CALA. We do indeed have subsea opportunities. They are both on private cables and on Consortia cables. We’re seeing more traffic from the U.S. to CALA and back driven by the web-scale players. So that’s a growing application for us.

We’re also seeing growing application in the Packet Networking space in CALA, which we are fulfilling both with our 8700 platform and our express products, and that’s really driven by continued migration in the mobile backhaul space to 3G and to 4G.

And the other thing we’re seeing in CALA is bespoke built, in part driven by web-scale players asking local carriers to build in country capacity for them, and that’s all 100-gig or in some cases 200-gig..

Oh, thank you very much..

All right. Well, with that, we appreciate everybody taking the time. We’re approaching the bottom of the hour. Thanks for listening. We look forward to catching up with everyone over the next following weeks. Thanks..

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Have a great day, everyone..