Greg Lampf - IR Gary Smith - CEO Jim Moylan - CFO Steve Alexander - CTO.

Rad Hall - JP Morgan Doug Clark - Goldman Sachs Vijay Bhagavath - Deutsche Bank Tal Liani - Bank of America Merrill Lynch Victor Chiu - Raymond James Paul Silverstein - Cowen & Company Michael Genovese - MKM Partners Meta Marshall - Morgan Stanley Jeff Kvaal - Nomura Jess Lubert - Wells Fargo Security Stanley Kovler - Citi Research Alexander Henderson - Needham & Company Tim Long - BMO Capital Markets Catharine Trebnick - Dougherty Patrick Newton - Stefil.

Good day ladies and gentlemen. And welcome to Ciena Corporation's First Quarter 2017 Earnings Conference Call. At this time all participants are in a listen-only-mode. [Operator Instructions]. Later we will conduct the Question-and-Answer Session and instructions will follow at that time. As a reminder today's conference is being recorded.

I'd now like to introduce your host for today's conference Mr. Greg Lampf, Vice President of Investor Relations. Sir, please go ahead. .

Thanks Liz. Good morning and welcome to Ciena's 2017 first quarter review. With me today is Gary Smith, President and CEO; Jim Moylan, CFO and Steve Alexander, CTO. This morning's press release is available on National Business Wire and at ciena.com.

We also posted to the investor section at ciena.com an accompanying investor presentation including certain highlighted items for the quarter being discussed today. In our prepared remarks, Gary will discuss management's view on the market and our overall progress and Jim will provide details on our results as well as guidance.

We'll then open the call to questions from the sell side analysts taking one question per person with follow up if time allows. Before I turn the call over to Gary, I'll remind you that during this call we'll be making certain forward-looking statements.

Such statements are based on current expectations forecast and assumptions regarding the company that include risk and uncertainties that could actual results to differ materially from those statements discussed today. These statements should be viewed in context of the risk factors detailed in our most recent Form 10-K filings.

Our 10-Q is required to be file by the SEC by March 9 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 include 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 in the investor section of our Web site, Gary. .

Thanks Greg and good morning everyone and thanks for joining us today. With the first quarter results we announced this morning we're off to a very good start to fiscal 2017. Revenue grew approximately 8.5% over Q1 of last year. The fundamental demand drivers as well as our market momentum continued to strengthen.

In the quarter we won significant customers in the U.S., India, Japan and the Middle East and we continue to gain share in key segments of the market, including DCI and submarine applications. As a result of all this, we saw our highest ever product order inflows in Q1.

We shipped more products in Q1 than in any previous fiscal quarter and we ended the quarter with the largest product backlog in Ciena’s history.

All of these clearly demonstrate that we are winning in today’s market and that’s largely due to our strategy to diversify the business, with targeted investments in the key geographies, market segments, new product lines and a broad range of high growth applications.

And as we discussed in December, we’re also positioning ourselves to win the next race as the IT and telecom worlds converged. And we’re helping network operators transform their network and their business with an approach that leverage is openness, co-development and agility in how technologies are concerned.

In Q1, we continue to make progress and delivering these capabilities, especially with platforms like WaveServer and Blue Planet. Both of which bring IT tool essentially to the telecom environment. For WaveServer, it was a record quarter in which we added 11 new customers.

WaveServer sales were up more than 10 times over Q1 of 2016 albeit from a relatively small number. And since closing the quarter, we've won another pace of significant business with a Top 5 web scale provider, which we expect to result in volume shipments as early as Q2.

Obviously, we’re very pleased with the market response to this platform, including the recently announced WaveServer AI that leverages our next generation chipset to achieve unprecedented capacity and service densities.

And while it's still early days based on the customer adoption we’ve seen to date, as well as our forecast for the second half, we now believe the WaveServer revenue will likely be at the high-end of our expected range of $50 million to $100 million for the full fiscal year. We also added two more orchestration customers to Blue Planet.

Both Tier 1 operators in North America and the Middle East. Blue Planet is allowing us to transform the conversations we’re having with that customers from just a strategic value of hardware as part of their infrastructure, to the strategic value of applications and services related to transformation across all facets of their business.

In fact, the relationship between software and overall customer engagements has become so interrelated for us that we recently combined our software and services organizations into a global unified team.

We learned essentially that while customers are embracing the new environment, they want and need more guidance in implementing software enabled orchestration. And we believe that this unique model, will benefit both Ciena and our customers as they continue to evolve towards openness.

This seamless integration of software services and programmable hardware really underscores our ability to elevate and differentiate the value we're bringing to market, it is essentially this combination of technologies and services.

As the IT mentality increasingly influences network decisions, we’re providing customers with much greater choice and agility in how they managed their networks on their business. This further separate to us from our competitors and it is increasingly apparent in our differentiated performance.

Before turning the call over to Jim, I'd like to take a moment to thank Francois Locoh-Donou for his many contributions to the growth and success of the business over the last 20 years. And as you know Francois Locoh-Donou has accepted the position of CEO at F5 Networks and is stepping down from Ciena later this month.

We will certainly miss him, but we wish him continued success in his next assignments and in his career. In the meantime, we've activated our succession plan which takes advantage of the depth we've built on our global leadership team.

In addition to uniting software and services we've also brought together global sales and marketing under a single leader. Our hardware development will continue to reside in our networking platforms group and the reporting segments remained unchanged.

We're confident that we've got the right structure, and more importantly the right leaders in place to continue to drive our business forward as we aim to become the industry's leading enabler of choice, Jim?.

Thank you, Gary and good morning, everyone. Our Q1 results clearly demonstrates Ciena's differentiated performance against competition and they highlight the importance of the investments we've made to build a broad based diversified business.

I'd like to take a moment to highlight a few of the areas of diversification that are contributing to our continued faster than market growth. WaveServer now has 36 total customers, frankly we're thrilled with the market's adoption of this relative new products and its open approach.

The success of WaveServer has helped us to claim number one market share in DCI applications. And in fact, Dell'Oro recently named Ciena as the market leader across every quarterly DCI category that they track. Our two new customers for Blue Planet bring us to 20 total customers.

Used cases for Blue Planet are varied and we believe strategic to our customer's business. For example, our new North American Tier 1 Blue Planet customer is using the platform to orchestrate bandwidth on demand between datacenters while our new Middle Eastern customer is using Blue Plant to automate optical services across the wide area network.

These used cases are representative of the constant engagements we're seeing for the platforms, and we expect the recent announcements of Blue Planet Analytics and Blue Planet MCP to drive additional used cases. We also added three new customers for our 8700 PacketWave platform for a total of 42.

The 8700 platform is part of our packet networking portfolio which had another excellent quarter in Q1 with revenue up 50% over the year ago period. Taking a look at customer segments, approximately 30% of revenue came from non-Telco sales, just included direct sales to web scale customers and our accepted range of 5% to 10% of total revenue.

Notably a major web scale player was a Top 5 customers in the quarter. And our momentum continued in the submarine upgrade market as well. In fact in the first industry analyst report to measure the SLTE upgrade market Ovum recently reported that Ciena now holds nearly 55% of this market. Turning now to our financial performance in fiscal Q1.

Revenue in Q1 came in at $622 million slightly lower than expected, partially due to an ERP upgrade that affected our shipping process longer than we anticipated, limiting our flexibility at the end of the quarter. Notwithstanding, we had an excellent quarter that was driven by continued growth across key geographies.

APAC revenue grew nearly 60% over Q1 of last year. India in particular continues to be a fast-growing market for us. Submarine applications remain a significant driver in India, but we’re also now engaged with every major Indian career.

Beyond India, we’re seeing opportunities emerged with web scale players across APAC both local entities, as well as U.S. based players expanding in the region. We believe APAC will continue to be a growth driver overtime. Our performance in EMEA continues to improve, with revenue up 13% year-over-year.

We’re seeing traction in Europe, particularly with the web scale community including ICPs and exchanges and also in submarine applications. And Tier 1 service providers in both Europe and the Middle East continue to drive revenue growth in the region. Overall, international sales made up 39% of total revenue in Q1.

And in North America, revenue grew 14% year-over-year exclusive of AT&T, driven by a strong quarter with web scale customers and Tier 1 service providers. AT&T and horizon were both 10% customers in Q1.

Our overall North American business continues to be very well balanced with solid contributions from MSOs, enterprise, government and R&E [ph] customer as well. Q1’s adjusted gross margin was 44.9%. Operating expense in Q1 was $226 million. We achieved $53 million in adjusted operating profit in Q3 or 8.5% adjusted operating margin.

We continue to take steps to improve our balance sheet having purchased an additional $46 million of our convertible debt. We also refinanced our existing term loans shortly following quarter end, further reducing our debt by approximately $93 million and reducing our go forward interest expense on the remaining term loan borrowings.

And as a result of our continued balance sheet improvement we've recently receive two upgrades from the debt rating agencies. Going forward, we expect our adjusted interest expense to be reduced by approximately 2 million per quarter due to our debt reduction and refinancing efforts.

In Q1 we used $26 million in cash from operations, largely due to a very backend loaded quarter. We ended the quarter with $1.05 billion in cash and investments. And finally, adjusted earnings per share in Q1 was $0.26. I’ll now turn to guidance for our fiscal second quarter. We expect revenue in Q2 to be in the range of $680 million to $710 million.

We expect Q2’s adjusted gross margin to be in our mid-40s percentage target range and we expect adjusted operating expense to be approximately $240 million. I’d also like to provide some commentary on our annual guidance. Based on our first quarter performance and/or expectations for the remainder of the year.

We continue to expect to achieve the results for the full fiscal year that we indicated in December.

You will recall that in addition to expecting to continue to grow revenue faster than the overall market growth rate of mid-single digits, we said that for fiscal 2017 we expected adjusted gross margin in the mid-40s percentage range, adjusted OpEx to average approximately $235 million per quarter and adjusted operating margin in the range of 11% to 13%.

In closing, we believe Ciena is in an excellent competitive and financial position. We've built our portfolio and our business in alignment with the direction of the market. And we are expanding the kinds of conversations we're having with customers as they increasingly embraced IT capabilities to transform their networks and their business.

We remain confident that overtime we will continue to drive greater value for both our customers and our shareholders as we position Ciena as the leading enabler of choice in the marketplace. Liz, we will now open the line for questions..

[Operator Instructions]. The first question comes from the line of Rad Hall with JP Morgan. .

I guess I wanted to just ask you, Gary, if you could talk a little bit more about India. India seems like a large opportunity this year and I wonder if you could adjust for the size of it with something like Verizon, it sounds like it's probably significantly larger, maybe your largest growth opportunity.

So anything you can do to quantify that opportunity for us. And then Jim could you just talk about this ERP impact, do you expect that to carryover in the fiscal Q2 and are you pretty much catching up in fiscal Q2 for the negative impact in Q1? Thanks..

Thanks Rad, let me take the first part of that. I would say and I think most of you read what's going on in the Indian market right now, I think it's a confluence of things that have come together to stimulate the growth in that marketplace.

There's some very large builds underway essentially to underpin bringing 4G basically out to the marketplace there with a number of carriers investing significantly. We've been there for a number of years, I mean this is an investment that we've made dating back 12 years, both in terms of software development teams and market development teams there.

It is our fastest growing country, and we are basically with every single major carrier in India and we are very well positioned for it. So I think it's a multi-year opportunity it's not just one quick build out that's getting all the attention, it's across the very broad base of technologies for Ciena.

And really it's a market that I think will be very, very high growth for us over multiple years..

And on the ERP upgrade, we have been engaged in this upgrade really for, going on two years, it's a huge project for us, we spent a lot of money. We've upgraded on Oracle release 12 and we cutover during the quarter.

It is about being that bring up shifting capacity, just a little capacity took a bit longer than we thought, and that did effect our revenue in the quarter. We believe that that's behind us now, we should be able to operate at full capacity for the quarters going forward. There is a bit of a pick-up.

In Q2, if we hit the mid-point of the guidance for Q2 we'll be frankly ahead of plan on both revenue and bottom-line..

Rod, the other point I would make is, there is never a good time to implement these ERP systems, but we felt that given the scaling of the business, it was very important that we build a bigger engine for the business that had global reach. So, this should really underpin now a much greater velocity capability for the business going forward..

Great. Thanks guys..

Your next question comes from Doug Clark with Goldman Sachs..

My first one is on Verizon popping up as a 10% customer. Is this due in part to kind of early metro deployments. And then secondarily looking at OpEx jumping kind of above the expected midpoint or average OpEx range for the full year.

Can you talk about why it’s jumping in the second quarter and then is it, I guess then possibly we expected to come back down in the second half slightly?.

Let me take the first part of that one Doug, I’ll take the Verizon. We are seeing initial stages of the metro rollout that did contribute to them becoming a 10% customer in the quarter.

I would also point that the other aspects of business with them are also doing well, including the long haul, packet, Ethernet, switching and their global based switching network as well. So we’re seeing good adoption across the broad range with Verizon..

And on the OpEx point. Yes, we are on plan, in fact we’re slightly ahead of plan on OpEx and below the expect to OpEx for the first half, if we had supporting in the second quarter. OpEx is -- there are going to be projects particular in R&D sometimes in real estate and even IT.

That are going to cause OpEx to move from the mean, for the year up and down, and you saw that at Q1 want, we were below the average of 235 for the quarter that we talked about, and in Q2 we’re going to be slightly above the average for the quarters.

But we still expect OpEx to average roughly $235 million per quarter as we move through this year, so by definitions it will come down some..

Thanks guys..

Your next question comes from Vijay Bhagavath with Deutsche Bank. .

Yes. I think my question is on the cloud optical business. Help us understand, if you anticipate any volatility or higher volatility in the DCI optical build outs. And the reason I ask is, some of your peers have been seeing more volatility then they can handle in this cloud DCI optical rollout, so I'd like to get your view point? Thanks..

Yes. I mean, I think given what we’re doing with WaveServer and the other platforms that address that space, I think the difference between us and the competition is, many of them are very niche based in terms of the engagement. We’ve got a very broad global engagement with the ICP.

I mean, we help them not just in North America, but outside of North America including all the submarine stuff, including places like India and I think that allows us a much more diverse and broader based engagement, frankly with the broader set of customers in the DCI connectivity market.

So whilst we’re seeing fluctuations customer-to-customer, overall we’re seeing a very positive growth in that space, but we expect to continue. And those fluctuations, because we’ve got such a broad base of customers, is really just lead to nice solid growth performance for us overall. And we continue to take market share in that space..

And as Gary pointed, out we have a pretty significant win at the end of this -- beginning of this current quarters too which will show itself up in revenue this year, shipments in Q2 potentially revenue in Q2..

Perfect, and Jim a quick follow on for you would be the timing of maintenance service contracts, did you pronounced delays in maintenance service renewals? Thanks..

I wouldn't say delays, we do often try to get multi-year maintenance agreements with our customers and sometimes it takes a bit longer to negotiate those because there are multiple years under considerations. So I wouldn't say that we're seeing any slowdown there..

Thank you..

The next question comes from Tal Liani with Bank of America Merrill Lynch. .

I have a few questions maybe I'll start with the Blue Planet software. How is it trending this quarter and how is it versus your previous expectations of up $20 million to $25 million for the year.

And if I can squeeze in one more, I want to have a broader question about North America overall, what are the puts and takes in North America for 2017? You highlighted a few things, if you can summarize it for the region versus the rest of the world kind of..

Why don't I take the part of that Tai, the Blue Planet is tracking well. We had two new Tier 1 customers in the quarter and looking at the pipeline we expect to add more obviously as we go through the year. The engagement is still nascent in this space. But I do think it will be on track to be in that $25 million type range for the year.

We seem to be tracking well for that, and I think we're adding additional capability through it. The analytics suite that we announced and the MCP capabilities as well will continue to drive it as we come out of the year.

And I think the point about it is it's a different set of engagements with the customers as well which is we're seeing a great deal of richness around that. and I think that's opening up additional opportunities for us on the services side, which is why we've combined those elements as well.

So I think the quick takeaway is, we're on track and we're seeing very good traction with it..

On North America, when you include AT&T the growth rate comes down. Because as we've said AT&T we expect to be flat to down for this year that's as expected. By the way their CapEx for this year are down a little bit from last year that's not always just positive of our results.

But they are focusing on moving to next gen as quickly as they can and I'm happy to report that we are very actively involved in many strategic projects with them including software services and hardware, expect that to be a strong customer for us for the long-term although flat to down this year.

As we said, absent AT&T, North America grew by 14% and that is indicative of what we're doing across the board in North America. We are number one market share provider in North America.

I believe we can continue to grow market share with the success we're having with the ICPs, with the success we're having on the network deployments that are taking place. And the other thing I'd say is that as you heard from Mobile World Congress people are beginning to think about 5G.

And although deployments are pretty scattered now, it’s early stages that we don’t expect it to be a huge driver for us right now. We are extremely well positioned to take advantage of the growth in demand or capacity that will come out of 5G implementations.

The other thing that’s happening is that MSOs are talking about taking this taking denser networks closer to the customer. The initiatives are called Fiber Deep, we’re extremely well positioned to win in that section as well. So I’d say this year we’re going to do well in North America, we'll grow.

Even though AT&T will be flat to there and we expect to continue growing North America, it’s a great place for us to deploy our technology..

Got it. Thank you..

Your next question comes from Simon Leopold with Raymond James. .

This is Victor Chiu in for Simon Leopold.

Can you provide us an update around your progress with web scale customers and the percentage of sales and also just kind of where your expectations are around fiscal 2017 from this vertical?.

Let me take the first order part of that, I think we covered in some of the commentary here. As Jim said, we added a significant piece of business from a Top 5 web scale player, which really was a competitive takeaway on a pretty large scale. And I think it's testament to that ways of technology that we’re deploying down.

So we feel very good about the overall space.

Not just in North America as well, I mean we’re saying at global capabilities that we’re able to bring to bear, because we’ve got global scale with all of the major careers pretty much around the world, we’re able to be a fabulous partner for this ICPs in terms of finding them the right kinds of capacity and connectivity.

Not just in North America, but in international markets as well and the submarine space where they are now, number one, two and three in terms of the Atlantic cable capacities as well. And Ciena has got well over 50% of that marketplace as Jim said.

So I'd encourage folks not to just think this is connecting data centers and within North America, that’s a large part of it. But this is a much more global phenomenon across many different facets of our technology that we’re able to deploy. So that’s why we’re sort of uniquely positioned to be able to address this marketplace.

And why we don’t see as many fluctuations as other niche players do as well..

The other thing I’d say is that the 55% market share that we were quoted was in the SLTE [ph] upgrade market. There is coming a new build market and we are extremely well positioned to be a player there with our new engagement with Te Subcom. So I feel really good about that submarine market and how the ICP is applying there..

Okay.

Did you say the percentage of sales from web scale customers?.

We said between 5% and 10%..

Okay. .

And that’s the direct sales. Remember that, we saw indirectly including in the submarine business, tons of capacity to the web scale players..

Great and just a quick follow-up we pay a lot of attention to Verizon as a reference project, but what are the other carriers in terms of similar architectures and opportunities for 100G Metro..

I think it's in an across this sort of broad sway.

In the North America environment, we pretty much had a clean sweep of all of those metro deployments and there we're getting places like Central Link, et cetera, AT&T, Verizon, Comcast all of the major players are deploying and we're pretty much, we had a clean sweep of wins there with our 6500 converged packet platform.

So North America, incredibly strong and across the broad sway with customers. And you're also seeing the same phenomenal internationally as well. We sort of mirror up year-on-year which is pleasing for us, we're seeing great growth in APAC as well.

And also I would say the other phenomenon you've seen is really to move to 200G which we've got a leading market share, we were the first to market with that and that also is a great technology being deployed into the metro space. And particularly with people like OCPs as well. So very broad sway of adoption across the carrier marketplace globally..

Absolutely. Great thank you. .

Your next question comes from Paul Silverstein with Cowen & Company. .

Yeah guys if you already answered these questions my apologies, I missed in the call.

But first off I think I heard you all stated orders for record level gain, but in general how do you characterize what are the areas in the quarter, any visibility today versus 90 days ago a year ago? And the other question is relative to the previous question Jim and Gary can you actually quantify how many 100 gig metro deployment wins do you have and how many of those have you now advanced to the revenue roll off there?.

Let me take the first part of that Paul. The I think the first one is linearity in the quarter. It was more backend loaded in this quarter principally because we upgraded the ERP system when we closed down shipping for a while. As I said there's never a good time to do that we've been in the planning for it for two years.

But we felt very strongly that it's not just an ERP reimplementation we basically reengineered a lot of our global processes because we felt strongly we needed to build the bigger engine basically given the scale of the business globally.

So that caused us to have a very tail end loaded quarter, more than normal, took away a little flexibility at the end there. But I think that was driven principally by reengineering project that we did.

Overall though I would say given the commentary about the order flows overall and the strength of the backlog right now which is the largest that we've had from a product point of view. I think our visibility has improved. Your direct question was in the last 90 days has it improved, I think it's improved.

And these are the -- that's the key element of it is visibility orders, but it's also the software elements around the engagements with the customers and understanding their plans. And overall I think we've got better visibility into the year than we had a few weeks ago. .

One of the reasons that we use the cash on the floor was we build inventory in the quarter and you can see that that happened both in deferred cost of sales which is material, which is out at customer sites awaiting either deploying or acceptance, and we build finished goods inventory in anticipation of the increase in demand which is coming.

So all I'd say is we have good visibility, we're not seeing any sort of slowdown from any of the things that other people have mentioned, we're not seeing an M&A pace slow now, we're seeing wins across the board and so we feel really good about what's going to happen for the rest of the year.

On the metro and region piece of business, the best I can give you is this. What we have said is that -- and this goes back a couple of years, we’ve said that metro is roughly 40% of all business and long-haul was roughly 60%. We are now seeing that it’s about 50%, 50-50 metro and long-haul.

So the change that we projected at that time, just sort of reversed those percentages is occurring and we expect that it will continue to occur. To sort of draw the line -- and by the way those are estimates because drawing the line between metro and long-haul deployments is not always perfectly clear. So that’s what we can tell you about it..

Thanks..

Your next question comes from Michael Genovese with MKM Partners..

Thanks very much.

I just wanted to ask about [technical difficulty], number one, just can you comment on market share trends at Verizon and the metro project versus your competitor there? And then secondly given your clean sweep of the U.S., could you talk about your market your targets in Europe and the competitive environment over there versus in North America? Thank you..

Yes. On Verizon, we have said repeatedly that we expect that we will get at least our fair share half, if not more, and we base that on information that Verizon has given us about the cities that we would build out to.

As far as whether we get a lot more than our share or a bit more than our share it’s really hard to tell, we're in the really early days of deployment. Things are going well. They are happy with our gear, we’re working with them well we think and feel good about where that project is going..

On Europe, we had some challenges last year or I think we shared with everybody. Some of which was self-inflicted, some of which were market dynamics.

We’re seeing a much better execution in Europe since we’ve made some changes there and realigned some of our priorities and we’re actually frankly seeing good traction and pipeline build there, we're up 13% year-on-year on the quarter and we think, we’ll have reasonable growth in Europe this year and again it's the same kind of mix of customers, we’re seeing web scale folks moving into Europe and trying to grow their business there and we’re well positioned with that because of our relationships with most of the European carriers and their various flavors, and also the submarine business, particularly Transatlantic.

So we see the dynamics there as being way more positive for us at this time last year. We’re pleased with our progress and I think we’re at the point, we’re beginning to actually take market share back from where it was..

Thanks again..

Your next question comes from Meta Marshall with Morgan Stanley..

I wanted to ask two quick questions. The first was just the step down in the consulting and network design revenue for the quarter. I just wanted to see that kind of normal seasonality where there are certain projects that were finishing up. And then the second was just touching base on LatAm, other vendors have noticed softness in the region.

But is that something you are picking up on as well or where there are some projects wrapping up that contributed to the downturn. Thank you..

On the services side Meta, there is always timing involved when projects get recognized, when they get completed and so we’re not seeing really any change, fundamental change in that services business..

On the LatAm side as you've alluded I think we've seen some down tick in that, we've kind a predicted. We've had two or three years of fabulous growth there and penetration of the market.

I think specifically in Brazil you've seen a quieting down of the investment really based on big build outs in infrastructure around the Olympics and World Cup, the World Soccer Cup and I think you seeing a bit of a tail end of that. Overall, I think in terms of market share I think we're doing well there and particularly in places like Mexico.

But I do think after the extraordinary growth frankly of the last sort of 2 to 3 years is going to be quite a year this year. And it's kind of what we expected..

Great thank you. .

Your next question comes from Jeff Kvaal with Nomura. .

I was wondering if you could help us parse through the web scale bit a little bit. It sounds as though you had a pretty impressive customer roaster in the past quarter and yet web scale was still in that 5% to 10% of sales range and where it had been, with the exception of one quarter a few quarters ago.

And then secondly, it sounds like there is yet another new customer that you are adding for the April quarter, should we be thinking that that is in your guidance for the upcoming quarter? Will that help us get out of that 5% to 10% range that you've been stuck in for a long time? Thanks..

Let me try to add a little more color to it. And I caution folks around this sort of 5% to 10%. As Jim said we try and break that out just for transparency, and to give you some indication around it. Increasingly our engagements with these web folks go through other channels, that's really the point.

They're both carriers and to some extent some of the integrators and the folks that own the DOC fiber. And so -- and it's more difficult for us to pull that out. But I will tell you it is a very strong growth driver across our business. The direct relationships that we have is continued to grow as the business does.

I would expect some quarters where you're going to see greater than 10% direct engagement with them depending on their particular model.

But overall, the expansion comes through increasingly as they go -- another way of thinking about this, increasingly as they get more and more international outside of North America they have to go through other entities that's really the point.

Because as you hit other regulatory environments, India been a great example, they can't really go direct in India, they have to go through a carrier that has the capacity. And so therefore we will get the business. Very often we have direct visibility into it and we're partnering with them. But the business does not come to us directly from them.

And we'll work on how do we try and quantify some of that a little bit more, but the metro is really how they get to their customers on their clouds. And that increasingly is international and it's increasingly through other carriers, and so that dynamic, I think will continue.

But if we step back from all of this, these folks are really driving the overall global capacity that's the point. Whether it's direct or indirect for submarine or through a carrier in India, we got visibility too. The point is these folks are really driving demand.

And it's not just the main sort of five of six big players, you got international ICPs now coming into the picture. You’ve got what I’d say the smaller ICPs are now connecting us their data centers and you’re seeing much greater dynamic that’s broader based..

And as you say, we have been above that 10% number, a couple of times in the last year. Just to clarify the dynamic as well, when web scale players often are the chooser of the technology provider. Even though, they’re not going to be buying direct. They strongly influence the choice of the optical vendor in many of the international engagement.

So we wouldn’t count that as a direct sale, but in many ways, it’s because they are influencing the choice of Ciena..

Thanks..

Your next question comes from the line of Jess Lubert with Wells Fargo Security..

First, I was thinking data, on the Ericsson partnership, how that’s going, how material the growth driver of that could be for the year? And then secondly, it looks like the packet networking business had a really strong quarter.

So just hoping you could help us understand the drivers there if the performance was influenced by any large deals like Verizon, it’s more 8700 upgrades.

And to what extent you believe in momentum in that product category is likely to continue through the year?.

Yes, quickly on Ericsson. We’ll I think we’re probably going to see a bit of growth out there. So but they are not one of our major growth drivers for this year. The ICPs is clearly, the metro certainly and internationally particularly India significantly outweighs the growth we expect from Ericsson in terms of our outlook for this year.

We still like the relationship it's doing well, it’s just not one of our big growth drivers this year..

The only thing I'd would add to that is the success that we’ve had jointly with Ericsson and Telstra, I mean, I think that’s a multi-year -- when you saw some of the publicity for that around Mobile World Congress, that really is a big win for both Ericsson and ourselves. And that will be growth driver for us over multiple years.

In terms of the packet question, yes, I think the 8700 particularly, first platform of its type in the world really where the tight conversions around the optical capability and addition to packet.

And we’re seeing very strong adoption of that particularly as we rollout into things like 4G in places like India, it’s an ideal platform for that and I think that’s contributing particularly to a lot of the dynamic that we’re seeing. In addition to a strong showing from the Ethernet excess piece, which we sort of expect.

But I think as carriers and Jim sort of alluded to this increasingly put capacity closer to the customer, driven by things like get ready for 5G and putting fiber deeper in, I think we will continue to see good growth in our packet portfolio and that’s really where we’ve targeted these kinds of platform into that sort of access piece as you drive fiber closer into the customers.

And I think that’s pertinent both in the cable markets in North America and Europe, and also as we see this dynamic around building out capacity for both 4G and an advance ready for 5G, we’re ready beginning to see that as a real dynamic..

Thanks guys. .

Your next question comes from Stanley Kovler with Citi Research. .

Just wanted to see if you can comment on particularly the web scale part of the business where you're referencing that that customer base is driving a lot of the technology decisions and kind of the driving force for the capacity build out.

What are you sensing from the standpoint of them pushing the industry more towards merchant silicon type of solutions. And maybe if you can go through your portfolio and how your positioned from that perspective.

And then just as a follow up I wanted to see if there is any impact that you're seeing from your customer base related to some of the mergers and acquisitions happening in the space in the Telco world. Thank you. .

Sure, Sam this is Steve Alexander I'll give you some insights into what we see going on there. I mean and you're right, they are certainly interested in exploring all the different way they can saw they what they have in terms of access and transport architecture and such.

So they tend to be very interested in what you turn in merchant silicon and such. But truth is everybody uses merchant silicon to build products and then it's a matter of what you do on the system level, the other features that you put around it that really make the difference.

And we've seen a continued desire for choice and openness in the marketplace. I mean that's something we've supported since the founding of the company quite honestly. And so we are responsive to those trends, we participated in the things like the Open Road Initiative [ph].

We're participating in things like TIP, I mean we're engaged in that world, we've helped to create this specs for things like the CP2 ACOs and you can expect we're going to continue in those veins right, where we see an opportunity to introduce the benefits of open architectures and increased choice we're going to take advantage of that..

And on the M&A question to this point we haven't seen any slowdown or any other effect from the deals that have been announced and that's reasonable consistent with what we've seen in the past.

I would say that we have been a winner in just about all of the combinations of our customers which have occurred and I think just because once the customer is introduced to our company, our technology, our services, the way we engage, then we tend to be very sticky.

So we've won in cases where we were incumbent with the target and won in cases in which we were incumbent with the acquirer, and hopefully that will continue to be same..

The other thing I'd say about that is that, we're a very broad based diverse business now, and that's very very deliberate on our part.

We're not a niche player that's providing a particular technology to a particular customer and got high concentration, we're much more diversified and so we're able to deal with the ebbs and flows of these kinds of things much more easily than a lot of our competitors..

Thank you. .

Your next question comes from the line of Alexander Henderson with Needham & Company. .

Thanks, I was hoping we could just get a couple of housekeeping. Could you talk about what the impact of currency was on the quarter and I don't think you gave a book-to-bill and then I do have a follow up. .

Yeah, on the book-to-bill, we were slightly less than our revenue and our order intake in the quarter.

But Q1 and that's a strong quarter for us, Q1 is a quarter which spans holiday months and before budgets are set and so we were very months and before budgets are set and so we were very pleased with our order intake in the quarter it was higher than our plan. And the other question was [Multiple Speakers]. Currency was not a huge item for us.

I don’t have a precise number, it’s in the low-single digits in terms of our currency affected us, and in terms of our expectations, we just didn’t see a lot of movement this quarter..

So the question I wanted to ask really on the way the pipeline building looking forward. Clearly, the December/January quarter is somewhat of a lockdown for you. You don’t get a lot of business in there and you seem to have much better leverage to order flow and transactions in that quarter.

Is it fair to characterize the pipeline of activity as accelerating even above normal seasonal patterns at this point?.

I think that’s a fair characterization, I think we’re in a better position coming out of Q1 than we’d anticipate, is another way of expressing that. Both in terms of hard data, orders backlog, et cetera. And onside inventory into customers that we’re recognize. And also in terms of the overall pipeline of expectation and customer engagement.

You put those together and that’s how we take visibility read and I think we’re in about position than frankly we thought we'd be..

Great. Thank you..

Your next question comes from Tim Long with BMO Capital Markets. .

Thank you. Jim, could you just touch on the gross margin, maybe looking forward a little bit [technical difficulty]..

Jim, we’re losing you. .

You are cutting in and out Jim..

Tim, you there?.

Just to break out of this mid-40s range? Thank you..

Tim, I didn’t get your full question, but I think it was around gross margin and where we are. Here is what I’d say about our gross margin, we’ve made a lot of progress as we’ve said over the last few years, we’ve come from the low-40s to mid-40s, we believe that’s where we are today.

Now, there is a lot of things to go into our gross margin, we have new deals that are going to be lower than corporate average in the early stages, when we’re putting out photonics and commons and that sort of thing.

As we move through time and these deals become more mature in their rollouts and we’re adding capacity, that tends to improve our margins. If we’re attacking, particularly internationally where we have to take incumbency from someone, that’s going to cost us something.

So there is a lot of things impact our margin, I’m very pleased, that if you go back over the past six years, we have grown, we have increased our market share and we improved our gross margin. I think that’s a heck of a performance and as we move forward in time, there are going to be fluctuations in our gross margin.

I don’t think we can get in the near-term above that mid-40s range, but hopeful as we move through time as software becomes more important, as packet becomes more important, then I think we will be able to get above that mid-40s. In fact, when we said we’re going to get to 15% operating margin.

As we've said we have to improve from the mid-40s by a little bit in order to get to that 15% we believe..

Thanks..

Your next question comes from the line of Catharine Trebnick with Dougherty..

I have question more clarification on Ericson. You said Gary that you've been in over 10 years in India.

So as most of the Ericson business Telstar in Europe and less so India?.

Yes, Catherine, that's right, that's a good interpretation. I mean India we've been direct, pretty much got some local partners there. But basically, we are direct in India and the vast majority of the business that we see here is us engaging directly with carriers and other customers of their government particularly as well.

And our Telstar engagement is exclusively with Ericson and we've partnered over the last couple of years into the Telstar network, and that is purely with Ericson. .

And then follow on Blue Planet, I noticed that global -- the Australian subsea global crossing, I forget the exact name of it, talked a lot in their -- in that press release about Blue Planet and Subsea and why is that so important, couple of thought leaders they have talked to indicated that was a big deal..

I mean you've seen that in a number of submarine engagement capturing where we're actually deploying Blue Planet to manage both our equipment and other folks.

Steve, do you want?.

Yes, Catherine, I mean the simple way to look at it right there is submarine cables open up right in other words if you can procure the cable separately from the SLP or if you have an upgrade business you find yourself needing to orchestrate different domains right, one domain might be the cable infrastructure and the other domain might be the SLP, the third domain might be the equipment we're using to drive let's say or create Ethernet services.

So Blue Planet fits very well in that environment. It can orchestrate amongst anyone of those domains. So it fits very nicely. .

Alright thank you. .

Your next question comes from Patrick Newton with Stefil..

I guess first on some data points we're seen from component vendors. I'm curious if you're seeing any easing of capacity constraints or lead times. And just understanding your comments that the Verizon rollout is in its early days and going well, we did see some component suppliers point at the choppy trends currently.

I'm just curious of the near-term ramp and what's baked in April quarter guidance is been somewhat tapped down relative to your expectations 90 days or even six months ago..

I would say overall, I think we're in a reasonable place where from a supply chain point of view around component that we -- we're pretty vertically integrated, so note of caution, we're not maybe the best parameter overall of this. But I would say that we're not, apart from one or two exception which you normally sort of ebbs and flows of things.

we're in pretty good shape for going in through Q2 and into Q3..

There are so many things that affect the component and this is just as part as I would say that it's -- I'd caution you about trying to read through on us their results. China is a big deal for those guys and the ebbs and flows in China are going to impact their results and not have any effect on us because currently we don't sell in China..

And now on Verizon, on the near-term guidance, is has been changed at all relative to expectations a few months out?.

No I think Verizon is going pretty much as the plan. We're executing well on it. I think generally I would say the financial community have a view of it being bigger earlier than we have and And I think that’s sort of, that’s playing out, listen it’s a very big deal across multiple years and we’re just beginning that ramp.

It’s a nice piece of business for us over many, many years..

Great. Thank you..

Thank you. We appreciate everybody’s attention today. We look forward to catching up with everyone over the next days and weeks. Thanks everyone..

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