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

Douglas Clark - Goldman Sachs & Co. Rod Hall - JPMorgan Securities LLC Simon Leopold - Raymond James & Associates, Inc. Paul Silverstein - Cowen & Company Meta Marshall - Morgan Stanley & Co. LLC Stanley Kovler - Citigroup Vijay Bhagavath - Deutsche Bank Securities, Inc. Dmitry Netis - William Blair & Co.

Timothy Savageaux - Northland Capital Markets Jess Lubert - Wells Fargo Advisors LLC..

Good day ladies and gentlemen, and welcome to the Ciena Corporation Q3 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, this conference is being recorded.

I would now like to turn the conference over to Gregg Lampf, Vice President of Investor Relations. Sir, you may begin..

Thank you, [Sia] (ph). Good morning and welcome to Ciena’s 2016 third quarter review. With me today is Gary Smith, CEO and President; Jim Moylan, CFO; and François 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. In our prepared remarks today, Gary will discuss management’s view on the market and our progress, and Jim will provide details on our Q3 results and provide guidance.

We will then open the call to questions from the sell-side analysts, taking one question per person. Before turning the call over to Gary, I want to let everyone know that we have scheduled an Investor Chalk Talk the next Thursday September 8 at 11:30 am Eastern. The topic is the breadth of the data center interconnect market.

We hope you can join us at Ciena.com or listen to the archive. During today's 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 September 8, 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..

Thanks Gregg and good morning everyone. In fiscal Q3, Ciena posted yet another quarter of strong results on all financial operating metrics. Revenue of $671 million was 11% higher than the year ago period with an excellent performance on both gross margin and operating expense we generated over 13% operating margin and adjusted EPS of $0.42.

Our strategy continues to be validated by our steadily improving financial performance and by our market share growth. We are gaining share in a market that is performing essentially as we had expected. As we have said for some time, we expect the overall market excluding China to grow in the mid single-digits in the near to medium term.

And we are now seeing most industry analysts and other market participants bring their expectations broadly in line with this view. And of course some segments are growing at different rates than the overall markets, some faster and some slower, for instance as we have expected we are seeing non-core market growth in the low single-digits.

I think this really highlights the importance of having global scale and business diversification in terms of technology, product portfolio, market application, customer base and geographic exposure. Over the past several years, we have executed extremely well against our strategy to design and build a truly broad based business in these areas.

One that is capable of better withstanding a slower growth rate or pause in a particular market segment, application, geography or vertical.

As a result, we have been able to navigate these market dynamics, grow our revenue and gain share across many of the market segments in which we have invested as part of our business diversification, and much of the success is evident in our Q3 results.

For example, in addition to strong revenue from our traditional service provider customer base, Q3 was a record quarter for non-telco infrastructure at 37% of total sales. Sales to web-scale providers made up a sizeable portion of that revenue as we had our best ever quarter with this key growth vertical.

In fact direct sales to web-scale providers were over 12% of total revenue, a result that fluctuates quarter-to-quarter, but more typically has been in the range of 5% to 10%. Our second largest customer in the quarter, and in fact two of our top six customers overall, were major web-scale providers.

And as you know web-scale customers make up a significant portion of our sales into the data center interconnect space, where our WaveServer value proposition is resonating extremely well. At the end of Q3, we had a total of 11 WaveServer customers and we have continued to add to that total since the quarter closed.

But DCI is more than just WaveServer and it's more than just web-scale customers. The market for DCI is broadening to include more and more carriers and enterprises and our success with this diverse mix of customers contributed to a strong quarter overall for our converged Packet optical and Packet solutions.

And finally, in submarine, IHS just released its new report naming Ciena the global share leader in the submarine cable upgrade market, and we have recently won another major cable upgrade that spans our product portfolio and we are seeing a strong pipeline of future upgrade opportunities, as well as emerging opportunities with new cables.

So the submarine vertical continues to be a strength for Ciena globally and specially in Asia Pacific. Before turning the call over to Jim, I would like to comment on our progress with the Blue Planet platform, given that we recently passed the first anniversary of the Ciena acquisition.

Overall, we are very pleased with the level of market interest and customer engagement on Blue Planet.

As we said from the beginning, 2016 is very much a year for building market traction and mine share with an eye towards increasing monetization of the platform overtime, and indeed interest in vendor agnostic orchestration and Blue Planet specifically is very high.

In fact, Ciena was just named the top three vendor for orchestration software in a recent IHS global survey of carriers.

Therefore, extensive Blue Planet engagements are underway across geographies, including multiple pilots, trials and awards from a range of customers that include MSOs, data center operators and Tier-1 providers like Orange business services and we continue to be encouraged by the variety of Blue Planet use cases, ranging from VNF, to VAM automation, to enterprise access to the cloud.

In closing, our progress across the market and our steadily improving financial performance are direct results of disciplined investments in the strategic diversification of the business.

We have positioned Ciena for long-term success with a variety of use cases to a broad range of customers all of which is foundation of a continued growth in revenue and earnings per share. Jim..

Thanks, Gary. Good morning everyone. We had another great quarter and 2016 as a whole is shaping up to be a very good year for Ciena. Market dynamics are playing to our favor and we have consistently made the necessary investments to capitalize on shifts that are occurring in the customer set and the way networks are designed and operated.

Our diversification efforts are working and I would like to take a few minutes to provide additional detail on our performance in our two key areas. I'll start with the regional view of the business. International sales were 39% of total revenue, which is slightly lower than we have seen in recent quarters.

This is due in part to the strength of our results in North America, where our business is as balanced as it’s ever been and the benefits of our diversification are apparent. Looking in our business organically year-over-year, and excluding AT&T, which we expected to be flat to down this year.

We grew our North American revenue in double-digits in Q3 of 2016. In CALA, this -year revenue was down a bit from particularly strong Q3 of last year. We like the improvement tone of the market in both Mexico and Argentina and Brazil continues to be a solid performer. Additionally, we are seeing new opportunities for submarine builds in the region.

Overall, CALA is performing very well for us and we expect to show meaningful growth in that region for the full fiscal year. In EMEA, we are encouraged by some key wins and our Q3 results. Q3 benefited from an uptick in regional activity by global web-scale accounts.

That said, we still have work to do to recapture share with service provider customers in the region. It was another excellent quarter in APAC with revenue up nearly 50% over Q3 of last year. Our business in the region is expanding, especially in India, which is our fastest growing country.

Mobility, cloud and DCI dominate most discussions and decisions of APAC, which is great for Ciena. We play a critical role in delivering the leading connectivity solutions to enable all of these applications. Other drivers include submarine, government spending and web-scale bandwidth consumption.

You might have noticed that we have referenced one of the trends that we are seeing across regions and that’s the globalization of some critical applications. Web-scale applications, which had been largely North American center, are increasingly driving sales in other regions.

DCI, which also started in North America, is gaining momentum across geographies as well. This underscores the value, not only of our diversification in the technologies required to address these opportunities, but also our investments to scale our presence in these regions in order to capture these opportunities.

When we look at the business through the lens of our offerings. Converged Packet -optical continues to be strong led by a record quarter for 100-gig port shipments. Our top two 100-gig customers in the quarter were above web-scale providers and we had another strong MSO port.

200-gig shipments were solid with the majority going to web-scale providers in almost all cases 200-gig shipments were from metro applications regardless of customer type. Packet Networking revenue was down a bit from a very strong Q2, but up 11% year-over-year. We added five new customers for the 8,700 Packet wave bringing our totals to 36.

Market momentum for the 8,700 has been driven by a combination of network upgrades of DCI deployments. Software and software related services revenue is up nearly 20% over Q3 of last year and about the same percentage year-to-date over 2015, reflecting an increase in recurring revenue from our software subscription model.

Turning now to our third quarter financials, Q3 revenue was $671 million. Q3’s adjusted gross margin was particularly strong at 46.8%. Q3’s operating expense was in line at $223 million. We achieved $91 million in adjusted operating profit for Q3 or an adjusted operating margin of 13.5% and orders were solid slightly less than our revenue.

We are very pleased with our progress in gross margin over the last few years. It reflects significant progress, and innovation, and cost reductions in our product set, and it significantly improves services margin and in particular an overall better product mix including software.

That said, products and customer mix, early stages of large deployments, and all of the other factors that cause fluctuations in our gross margin will continue to affect them going forward. As a result, we continue to believe that mid-40s gross margin is where we are as a company today with some quarterly fluctuations above and below.

Overtime, as software and package switching becomes a larger part of our revenue, we expect to see an upward trend. We generated $70 million in cash from operations and we ended the quarter with approximately $1.27 billion in cash and investments.

As you likely have seen, shortly following the end of Q3, we repurchased approximately $205 million of our outstanding 2017 convertible notes. We expect to continue to evaluate alternatives to manage our capital structure and to lower our financial leverage including opportunistic debt repurchases. Lastly, Q3s adjusted earnings per share was $0.42.

I’ll now provide guidance for our fiscal fourth quarter. We expect Q4 revenue to be in the range of $700 to $730 million.

We expect Q4s adjusted gross margin to be in the mid-40s percentage and we expect adjusted operating expenses in Q4 to be approximately $230 to $235 million reflecting some projects that are shifted from earlier quarters into Q4 as well as an expected high rate of order inflow in the quarter.

You will remember that at the beginning of this year, we guided operating expense to approximately $900 million for the year. At this level for Q4, we will remain well below that target. In closing, we believe that our differentiated results reflects a differentiated strategy.

Our diversification efforts have positioned Ciena to benefit from the current market dynamics. We believe that we are making the right investments to capitalize on future shifts as well. And in a market which is growing in the mid single-digit range, we expect to continue to take share and to show higher rates of growth than the overall market.

We believe that we will continue to increase the value we bring to our customers and to deliver sustainable long-term growth with continued gains and profitability. Tekia, we will now open the line for questions..

Thank you. [Operator Instructions]. And our first question will come from Doug Clark of Goldman Sachs..

Great and thanks for taking my question. My first one is on the gross margins and just the competitive dynamics in general. One of your competitors commented on kind of increasing price pressure on metro.

I’m wondering if you can talk to that a little bit certainly in the gross margins in the quarter kind of reflected solid pricing and margin favorability.

So if you could comment on kind of competition and what you are seeing on a go forward basis?.

Yes, let me take that Doug. You know I think at the highest level, I think the dynamics from our perspective and environment haven’t really changed. It has been and continues to be a very challenging environment, not seen anything appreciably changing that. You know it’s pretty intense.

It's just one of the dynamics of the space that you know I think we are well equipped to deal with.

And particularly when you get into the metro, when you look at these high end metros with convergence and Packet and software capabilities, I think the value proposition that we are able to deliver there is stemming up well and I think we are well equipped to deal with that.

We have vertical integration, global scale and the innovation is clearly being valued by our customers. So it's a challenging environment but I think as you can see from our improving financial performance and gross margin is a bit of a proxy for that. You know we are being well valued by the customers..

I would just add a point, we have seen big competitors around the world attacking on price for years now and we have been able to navigate those waters very well, so we don't think that any significant change will come about as a result of someone else, just starting that can compete on price..

Great that's really helpful and then my other one is kind of more geographic specific. India and EMEA you kind of commented on strong trends in kind of order opportunities particularly submarine, a few peers and competitors who sell into those regions have commented on weakness.

Have you seen any change or in fact are still kind of as positive as you were last quarter?.

Yes Doug, it's François. We are still as positive as we were last quarter, we are seeing a lot of opportunities in the submarine space, actually both in the upgrade market and increasingly actually in the new cable markets, because the architectures in the submarine space, the industry has embraced open cable and that favors the Ciena architecture.

And we are also seeing a trend towards optimizing new cable for coherent technology, which favors the innovation we have brought to the table. So generally the submarine space is pretty active for us across the globe, EMEA, Asia Pacific in particular and we expect that to continue..

Thank Doug..

Thank you and our next question will come from Rod Hall of JPMorgan. Your line is now open..

Yes, good morning guys thanks for the question. I wanted to start off, Jim you commented on this high order intake that you are expecting in the guided quarter and that's the reason for the OpEx being a little bit high. So I just wanted to get an idea of when you would expect revenues from those quarters to come through.

Is that's the January quarter that we ought to be seeing that come through. So if you just kind of give us a little bit more color on why you are expecting that order intake and how it affects the revenues looking forward.

And then also could you guys comment on these margins I mean they are considerably higher than we expected can you give us a little more color on why that's the case and how sustainable that might be? thank you..

Yes, on the order intake, that is the primary reason for the slightly higher OpEx in Q4. We also have some projects in both our IT, real estate, and also R&D that have slipped from earlier quarters into Q4. So that's the reason why we are slightly higher.

Again, I'll say that we are well below the $900 million that we talked about for the year, so we will always get some fluctuations in our quarterly OpEx as result of those two factors.

On when those orders come to revenue, we have talked about the fact that we are increasingly - because our lead times have come in very nicely into as short as two weeks in some cases and four weeks in other cases. We are increasingly generating revenue in quarter from orders taken during that quarter what we call our book to revenue.

And that's as I say, orders come into quarter that turn revenue - a significant portion of that order inflow we do expect to come into Q4.

The one thing I would say on Q1 is that that's always going to be a slow quarter for us, it's a holiday period, it's a time when many operators around the world slowdown their efforts to upgrade their systems and then it's November, December, January and things don’t just jump up when January occurs.

So as you will note in over the past long, long number of years Q1 has been a sort of a off trend quarter for us and we have a strong Q2, Q3, Q4. So just want to make that point to everybody. And I will make comment on gross margins. Our key emphasize how pleased we are with our progress in gross margin.

We have done a very good job in our innovation, in our cost reduction, in increasingly improving engagements with our customers around the world and improving our product mix with those customers around the world. But there are always going to be fluctuations in our gross margin.

We know that this quarter was a particularly strong quarter in terms of product mix and we believe that we are in mid-40s gross margin company today.

We know there is going to be some movement up and down around that and as we get an increasing amount of software revenue and packet switching, we can see in it a improving trend in gross margin we just don't see it in the near-term..

So, can I just clarify one thing Jim, are you saying that seasonality then in Q1 should be more less normal or do you think it would be a little bit better than normal? And then I will cede the floor..

I would expect normal seasonality..

Okay. Thanks very much..

Thanks..

Thanks Rod..

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

Great. Thanks for taking my question. I don't know to what degree you can talk specifically about the Verizon initiative that everybody has been paying attention to.

But if you could give us some updates on the status of the new metro project and thoughts on how you expect that to play out? And also of significance, I would like to try to get a better understanding of how you see this as a reference for other customers in terms of adoption of very similar architectures and technologies? Where are other operators in terms of mirroring or duplicating what you have wanted Verizon with the next gen metro? Thank you..

Simon this is Gary, I'll take the first part of that. I would say that everything is going well and I think essentially on-track, deployment have begun and we would begin to recognize some small amounts of revenues.

We have recognized some revenues in Q3, don't expect that to be terribly large in a fiscal 2016, which is pretty much what we have thought. Deployments will then gain momentum really in 2017, 2018 and out to 2019 and I think we are on-track for that.

I would also say that our engagement with Verizon continues to expand obviously, we have got the long-haul with them, but also in packets and software and I think that relationship continues to expand obviously deeply embedded in the converged metro. But I think we have a lot more opportunities with them overtime as well..

And I would add Simon in terms of other carriers around the world that are adopting a similar architecture. The context I give you is the drivers for Verizon project actually are twofold. One is increased capacity in the metro, because of general increase in traffic, video or otherwise requiring upgrade to 100-gig and beyond in terms of capacity.

But the other driver is conversions of a number of services, Ethernet services, TDM services, et cetera onto a single platform and that convergences what requires the Packet optical switching capabilities that we have invested into, in the 6,500 for last five or six-years.

So when you look at these drivers, we are seeing that basically most carriers who have TDM networks, actually need to go through these upgrades and we are seeing opportunities in the metro frankly across geographies.

We are seeing and winning some opportunities in EMEA, in CALA, in Brazil, in particular in India, we are going through substantial upgrades, as well as metro network with Packet optical converged. So its broad applicability frankly across regions in a number o1f carriers..

Thank you..

Thank you. And our next question will come from Paul Silverstein with Cowen & Company. Your line is now open..

Thanks guys. First off Tier-1 metro wins. How many at this point, I heard the commentary you just made, but how many total wins did you have, what is the revenue contribution at this point, and what is your expectations in terms of timing, and I'm looking to indulge in one or two more questions..

The question as to the number of Tier-1 accounts. I don’t have that number at my finger tips. What I would say is that we have swept the North American awards that have been made over the past three years, you know there has been a number of these awards made and we swept them all.

We are not soul providers to all of them, but we are in the mix and everyone one of them. We are seeing more and more globally, François mentioned India. If you look at where we are today, in this quarter 43%, 40-gig and above revenue is shorter reach metro and regional.

So that’s what I can tell you Paul, we feel very good about what we are doing in the metro. We think increasingly metro will be a bigger percentage of our revenue and not just because metro is growing faster than long-haul, it’s because we have a great set of products and we are going to continue to take market share in that space..

All right and Jim on the margins, can you just re-ask for us in terms of versus corporate average. These metro deployments, the DCI win your Packet internet business.

Can you remind what margin structure is relative to corporate average?.

Yes. The single biggest or highest gross margin, of course is going to be software at least as reported. You know that we have - our [indiscernible] gets here, but it’s as reported by us. Packet switching has been a strong margin area for us.

When you get down end to transport, you can see that the newest innovation like 200-gig, typically that’s going to be good margin, you can see when we are converging switching with the transportation, because of our innovation there, those are good margins.

But when you talk about individual customers really, there is not a huge amount of difference across the customer based in terms of our revenue.

Now, when we have early stage deployments, we know that that’s going to be lower margin, we are selling columns, we are selling [tectonics] (Ph) and typically that’s going to be at low margins in the later stages of the projects, but as the customer said, really I wouldn’t say there is a lot of difference across that.

We sell to big companies who have a lot of purchasing power and they are smart. So it’s just not going to be a lot of difference there..

Jim just to be clear on the metro deployments, to the extent that there is a skew in the street, there appears to be the skew that this metro deployments like Verizon are significantly below corporate average.

I hear you saying not necessarily the case given the fact that [indiscernible] very quickly what is the average size of your DCI deployments in this stage, or at least the wins?.

Average size of a win?.

Good Jim, if you want to talk about on the early stage of the deployment, but in terms of the DCI average size of win.

Paul on the DCI first of all for context that’s an application that we are seeing in the metro, but we are also that application in regional and long-haul networks and actually we are even seeing that application in submarine networks.

One of the reasons we are getting very significant traction with our WaveServer platform is because it’s probably a unique platform in the market in its ability to fulfill all of these applications not just metro applications.

So there isn’t actually a typical size of deployment for DCI network, because they vary depending on whether the metro, regional or long-haul network and they also vary depending on the type of customers, because we are seeing DCI application with some of the big web-scale providers.

But we have won the 11 customers that Jim mentioned earlier, we have won WaveServer and DCI applications now. Not just in the web-scale space but in the media space, in the enterprise space, and also in the traditional telco space.

So there is a wide variety of applications that we are winning, which is why we are getting so much traction in the DCI space..

And I remind everybody, 12% of our revenue was direct sales to DCI this quarter that’s higher than we have been and there is going to be some fluctuations around that but we are having great traction with that products, with our full range of products. On the Verizon margins, we are not going to comment on the margins with any particular customer.

What I can say is that that deal is going to follow the same pattern of all the deals that we win around the world. It’s going to be lower margin going in and higher margin later on.

And we are very comfortable with our mid-40s range of gross margin with that customer and all the other customers we are going to bring in to the pool over the next year so..

Thanks for the call..

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

Great and thanks for taking my call. One the questions or one of the things you mentioned was kind of strength with web-scale in EMEA and I was just wondering are you seeing web-scale customers can build out their own networks there versus kind of leveraging wholesalers as they have done in other regions.

Just a little bit of commentary there would be helpful.

And then second, are you seeing any ahead of delays in India due to the Spectrum auction delays or are all projects there kind of proceeding as planned?.

Yes Meta, I’ll take that. In terms of the web-scale folks in Europe, it is more challenging for them to build their own infrastructure and sort of access to fiber and some of the regulatory constraints that they have.

So I think you are seeing a hybrid approach there where we are collaborating with some wholesalers and some other carriers to help facilitate that. So some of it is direct and some of it is indirect depending on the regulatory environment and the availability of some of the fiber so it's mixed.

In terms of India, we are actually seeing very positive momentum there. I don't think I can pinpoint any sort of impact yet on the delays on the Spectrum. In fact, I think the build out there for the 4G continues to be very, very strong. And as Jim said in his comments, it's our fastest growing country and we are seeing no signs of impact on that.

In fact, we are seeing a broadening out of that demand, last quarter we announced the award of the government contract to us for an India wide defense network and we are continuing to see additional opportunities into the various government entities in India as well..

Great, just to clarify, with the work you are doing with web-scale through the wholesalers would that still count into kind of the 12% you were saying as web-scale or would that kind of be in indirect revenue..

That's a good question Meta, when we call out the percentage it was you know 12% that is a separate that's where we contract with them directly. There is a whole other book of business which is substantial that we help facilitate or it goes direct to the carriers but ends up into our business.

So in fact, the impacts of web-scale is way beyond you know the direct relationship we have with them for the 12% and we don't include that in the number..

Great, thank you guys..

Thank you..

Thank you..

Thank you, and our next question will come from Stanley Kovler of Citi. Your line is now open..

Hi, good morning, thanks for taking my question. I just wanted to ask about the DCI market, when you look out at this market over the next couple of years.

I think one of the themes that's sort of emerging is whether or not these web companies have an appetite to do what they have done to the server market and to the switching market, which is to use a lot of whitebox solutions with the pluggables.

How close are we to that type of architecture and deployment in this particular market segment and then I just have a follow-up, thank you..

Thank you Stanley, so the, I think there are two trends that I would point to you for deployments of optical capacity for web-scale. One trend is a trend for open line systems and that is the desire to build line systems with a vendor and have the opportunity to evolve and choose from a number of vendors for the capacity in-fills.

We as a company sort of embrace openness, because we want our customers to have choice fundamentally, we find that that's an enabler that ultimately is a good trend for us and for our customers. So we embraced openness three years ago and we are getting actually a lot of business by open line systems and this open model with web-scale providers.

The other trend and you are pointing to some of the things that have been done into our data center with the open compute projects and other initiatives to really decost servers.

In the wide area network, so intra data center connectivity, yes, we are seeing a trend towards bare metal optical capacity and that is what you are seeing in platforms like DCI purpose built platforms like WaveServer. They really are the equivalent of whitebox in the optical domain.

Again, in that trend we are doing very well, because we have built platforms that are purpose built for that application. We expect that trend to continue and we expect that form of consumption of optical capacity to take hold probably not just in web-scale segment, but as I said earlier in other potential segments.

And it’s a model of consumption of optical capacity that we link, because it's built on maximizing spectral efficiency, maximizing the use of coherent technology and that's the best technology that we have placed. So we are encouraging this trend..

Thanks.

And just a follow-up on margins to that point on WaveServer, I wonder if we can get a ranking of that within your gross margin profile where that sits? And then separately on operating expenses as we think about the seasonality of revenue into Q1, should we expect similar seasonality on OpEx as some of these factors decrease into next year? And then, the run rate for next year given the fact that Q4 has some pull ins of R&D and also higher order rates.

So should the average run rate for next year be similar to the Q4 run rate or below that or higher, if we can get some sense of that. Thank you very much..

Yes, the WaveServer margins are going to be similar to corporate averages, they are not going to be much different.

On OpEx, we are way too early to be talking about 2017 OpEx, we are formulating a 2017 plan and I will say that we have shown that we consistently grow revenue faster than we grow our OpEx and we do that very intentionally, because we want to grow our operating margin. So that's the one thing I would say.

As we look at OpEx during the year, there is a trend that our Q4 OpEx is going to be or has been a bit higher than the average for the other quarters, mainly because in the Q4 period we have - a lot of our commission driven people are hitting their excel rates. And so we have that effect in our OpEx, that's the one thing I would say about our OpEx.

Other than that, we don’t have a lot of quarterly fluctuation, I mean not a seasonal fluctuation. We will have fluctuation driven by the timing of when various projects hits each quarter and we have big projects in R&D, we have projects in our real estate where we are moving our two biggest innovation centers during this period of time and in IT.

So there will be some quarterly fluctuation, but one thing I would say is that if you look back over the past three or four years, we have been very consistent in our OpEx performance, we have been very disciplined and what we have done with our OpEx and we have consistently hit our plan..

Thanks Stan..

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

Yes, thanks. Good morning, Gary, Jim..

Hey Vijay..

Hi Vijay..

My question is on better understanding the cloud customers from an OpEx point of view. Is it reasonable to assume that the cloud customers are lighter touch from sales OpEx and also from an R&D point of view versus some of the bigger telcos you work with.

And if that’s true could we expect a lower OpEx number as a trend line heading into next year or is this $230, $235 million you guided to the new norm and I have a follow-up?.

Vijay let me try and answer that as best I can. I would say the cloud web-scale folks have certain requirements. I wouldn’t describe them as light on R&D and in fact in many cases they are the early adopters.

For example of a 200-gig capabilities and that’s forming a large part of the uptake in 200-gig is actually from the web-scale folks and the R&D involved in that is as you can imagine, quite intense, and they are cutting edge in some of that development.

They don’t have as many other system constraints, but have to some of the larger Tier-1 global carriers, because they don’t have large existing networks and some of the compatibility costs that go into that. But I would say on the whole, the blended R&D and as Jim alluded to, you have seen the operating leverage that we delivered on our R&D.

and we are going to continue to innovate along the whole sort of transport spectrum better than anybody else and that’s why we have got number one market share in the world. So we have a lot of operating leverage going forward..

Perfect and a quick follow-up, thanks Gary.

In terms of, how should we think of sales opportunities in the emerging markets and in Europe, in particular? And the reason I ask is, are you seeing any demand pause, any ordering delays due to the strong dollar, any higher discounting than usual to offset the strong dollar effects in the UK in particular and also in parts of emerging markets? Thanks..

We have seen a fair amount of obviously currency fluctuations over the last two to three years on a global basis and they can have sort of short-term impact, but I think we are actually seeing a reasonably settled - you know despite all the global turmoil, we are actually seeing a reasonably settled set of dynamics right now.

And in fact we are probably not the best parameter for this, given some of the particular challenges we have had in Europe, but we are actually seen good progress in Europe. And we think, we have had a number of wins, you see the performance in the last couple of quarters has improved.

And we are actually quite optimistic around being able to have reasonable growth out of EMEA going forward. In some of the emerging markets, I think you can see from a geographic performance of the business, CALA has performed incredibly well over the last two years and we are going to have excellent growth in CALA this year.

And Asia-Pacific as Jim said is up 50% year-on-year and there is a lot of emerging markets they will contain within that. Obviously the largest for us is India and we are seeing very, very good growth there and we have strong momentum.

So we actually are quite positive around the global markets and some of the specific positioning that we have within them..

Perfect. Thanks Gary..

Thank you, Vijay..

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

Great. Thanks guys, a couple of questions.

I was looking your guidance for Q4, its bracket in consensus, but it was lower by about $7 million, at the mid points what consensus was? So just wondering was there any currency impact Brexit, British pound impact, if you could comment on that? And also can you talk about the backlog and whether your bookings were above revenues this quarter or not, just kind of curious on those two..

Yes, Dmitry on the quarterly guide, you will recall that we said earlier in the year, we tightened the range of our guidance for the full-year.

I think it was after Q2, we tightened our guidance for the year to specifically the mid-point of the 5% to 8% that we had called at the end of Q1, and we are pretty precisely on that number, you can argue about a couple of million here or there, but we are very precisely on that number.

So that’s what I would say, again on this as we have done on OpEx, we have done and we are doing pretty much what we said we are going to do, because there is really no FX, no significant FX or no incremental FX affect from what we have seen and what we have talked about.

So that’s what I would say, we think that we are going to have a good Q4 and of course a great year. On the question of the backlog, we said that the orders were a bit below revenue in Q3, we had a very strong Q2, we expect a strong Q4 as well. So we expect by the end of the year that our backlog will probably be up a bit..

Very good, excellent. And then my second quarter is just again kind of touching the web-scale issue or topic, which net back quite nicely on both direct and indirect basis, you commented a good or significant actually traction with WaveServer.

So I’m just curious here, is it skewed still more towards as you look at your total contribution in that vertical in that segment. It is skewed more towards 6500 still or is it starting to - or DCI WaveServer for example, as we look at this quarter specifically.

And is the mix largely due to new project activity or did you see maybe capacity reorders in the quarter..

Yes, so the mix is still very heavily weighted on 6500 as a platform, I think we are still in the early stages of deployments of WaveServer and initial design wins. We have only 11 customers on the WaveServer, we have a number of other wins that occurred after the quarter and for a number of them we are just in early stages of deployment.

So I would expect that not just for this quarter but also for the next few quarters the mix would continue to be heavily weighted on 6500 and there is still a large portion of the applications for web-scale providers that require full [indiscernible] based platforms with line systems and a number of switching capabilities. So that’s where the mix is.

The other comment I would make is also a large portion of the needs of web-scale providers continue to be fulfilled by carriers whether on terrestrial applications or submarine applications and we have a very strong participation in this deployments. The vast majority of which are based on the Packet optical platforms like the 6500.

So if you look at the overall business that’s driven by web-scale providers into Ciena, the mix is still largely 6500..

Thanks Dmitry.

Thank you guys. I appreciate it..

Thank you. Our next question will come from Tim Savageaux of Northland Capital. Your line is now open..

Hi, good morning. I have a question on growth rates, which at least on an organic basis appear like they are accelerating and perhaps sharply. So you mentioned overall it's market growth expectations and looking at the Q4 guide obviously had a very strong contribution from Ciena last year.

So organically that looks pretty solid double digit growth and I also want to focus in on the metric you mentioned I think it was U.S. or Americas ex-AT&T growing double-digits in Q3 that looks to be accelerating quite sharply closer to 25%, 30% in Q4.

So I would like you to kind of reflect on that math there and also maybe talk to what might be driving that acceleration in organic growth. Obviously we would be focused around 100 to 200-gig so in the spirit of helpfully offering a lot of granularity on various aspects of your business.

I guess I would ask if you might be able to bracket kind of the 100-gig plus business overall as a percent of the total business and how much that's growing and to what extent that's a primary driver of some of this organic growth acceleration if indeed that's the case. thanks.

That's more than one question Tim..

Really it's about one and a half, and it's all growth related..

I think Gary should address the overall growth rate.

One thing I would say is we had a very strong quarter in North America, we expect to continue to take market share in North America, but what I would say is as we have always said, about any individual quarter's performance, you should just be cautious about extrapolating any number from any quarter.

Overtime we have shown very consistent progress, growth rates in excess of the market and we expect to continue to do that, but I just caution people not to take a quarter and drive long-term growth rate based on what we do in any particular quarter.

Gary do you want to talk about the long-term?.

And obviously we are very encouraged by the performance that we have been you know able to put together frankly over the last sort of five years. If you look at it on half year basis, it's incredibly consistent and we have basically outperformed the market depending on your view of the market, you know in every single half yearly segment.

And given our positioning of global scale, some of the elements that you pointed out Tim around our performance, we are confident that we can continue to outperform the market. We see the overall blended growth at about 4% to 5% which is what the industry analysts are sort of aligning around now, we will see how that plays through.

Obviously it's way too early to discuss you know next year and beyond and we are not providing that today, but we are confident that we can continue to grow faster than that market.

As you point out, we are exposed to some of those higher growth elements, such as metro, things like WaveServer and our Packet business is really driving you know really driving that growth. But it is a blended - as our business gets bigger you have got the challenge of larger numbers and we are very mindful of that as well..

Just to follow-up very briefly, it sounds like that’s a pass on the 100-gig sizing question, but even if you do take your comments about normal seasonality it’s hard for Q1. I think you are still looking at an organic double-digit growth rate there, I think, but I'll pass it on. Thanks guys..

Thanks Tim..

Thank you..

Thank you. And our next question will come from Tal Liani of Bank of America Meryl Lynch. Your line is now open..

Hey guys this is actually [Dan Bardis] (Ph) on behalf of Tal. Thanks for taking my questions.

First, just generally, I was wondering if you see a trend where carriers are favoring pluggables for and how might that affect you guys? And then, secondly, just wondering high level, why services revenues have been under a little bit of pressure last three quarters and how we should think about the trajectory there going forward? Thanks..

Hi, Dan. Yes, I think our carrier customers have been consuming pluggables from us and other providers actually for a few years now. We like pluggables in general, because their way of sort of giving our customer [indiscernible], so it eases the entry cost of platforms and also their way of reducing cost of edge networks.

So we actually expect the consumption of pluggables to continue. We are not seeing a materially different trend today than we were seeing say a year ago, but we are seeing a larger variety of pluggables across the industry both in terms of client plugs and in terms of line cards as well.

So a trend we expect to continue, we actually like the trend and in terms of impact to our business, it's pretty much factored into the business you have seen from Ciena both in terms of growth and gross margins over the last couple of years..

On the services side, I do think you have to take a bit of a longer view than just looking at individual quarters. We are up year-over-year.

Our services business to-date has largely been an attached services business, things like insulation performance and maintenance those are the two biggest pieces of our durable services business and our attach rates are reasonably consistent. We can have quarterly fluctuations, but they are reasonably consistent..

Thank you, Dan..

Okay. Thanks..

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

Hi, guys. A couple of quick ones.

First, can you remind us what you consider to be normal Q1 seasonality when you think about metro upgrade, Packet cloud opportunities, which are most important next year and is there a reason we shouldn't expect some acceleration as these opportunities unfold? And then secondly, you alluded to a Packet opportunity Verizon type the metro build.

So I was hoping you can help us understand what percentage of the metro opportunities you are working on have a Packet opportunity associated with them and what degree would you expect the Packet business to ramp if some of your metro deployments begin to unfold over the next couple of years? Thanks..

On the seasonality question. The way that we have looked at it is we have looked at it a couple of ways, we have looked at the percentage of the annual revenue, which first quarter has represented and we have looked at decline from Q4 into Q1 and those numbers have been relatively consistent.

The former number is more consistent than the latter, because we can have a super strong Q4 and a little less than strong Q1, but those are the kinds of the comparisons that we have made and looking at them they are relatively consistent overtime. I don’t see that any particular metro rollout is going to influence that significantly.

I mean a metro rollout is complicated and there is always question as to whether people want to begin on metro rollout during the holiday season. And so I’m not sure that you can expect a stronger or weaker Q1 based on all the things I just talked about, I think you should expect in line..

And then, Jess on your question on, what sort of percentage of our metro opportunities would have Packet Networking components to them. Since you actually have a large proportion of them increasingly have that Ethernet access component to it. So like the most carrier modernization networks involve upgrading their transport and aggregation networks.

But also involve upgrading their access networks to be based on carries and that technologies for better economics and higher capacity. And that is why a number of metro opportunities that you go after in this telco networks require both technologies and that’s why we have been investing in both technologies for so along.

And it’s not easy to actually go in business in the metro, if you have a single product proposition or a single platform, that’s why you are seeing the sort of traction that we are getting in the metro.

So most of them actually have both components, some have much larger aspect of Packet Networking because big carrier really want to transform their access networks.

But in some cases even if the Packet Networking component is a very small portion of the deal, you cannot win the overall business unless you have the full portfolio from access to metro support..

Just a follow-up on my first question.

Can you comment on when you think about metro upgrade Packet and some of these cloud opportunities, which were most important next year and is there a reason we shouldn’t expect some acceleration as some of these opportunities begin to more material mature?.

It sounds to me as though you are looking for guidance for fiscal 2017 I guess and we are not prepared to give that. I would just sort of reiterate what Gary said earlier. We think that the market is growing at overall mid single-digits, and we have been able to do, somewhat better than that consistently over the past five, six years.

So that’s what we expect, as we develop our 2017 plan we will of course talk about it next time..

Thanks Jess..

Thank you guys..

Thank you everyone. We appreciate you joining us. Please don’t forget the Chalk Talk we have DCI, obviously that’s optical and we hope you will make time to join us next Thursday at 11:30 AM Eastern. Thank you everybody..

Ladies and gentlemen thank you for participation in today’s conference. This concludes the program and you may now disconnect. Everyone, have a great day..