Ciena Corporation

Ladies and gentlemen, thank you for standing by. Welcome to the Siena Fiscal Q2 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to Mr. Greg Lamp, Vice President, Investor Relations. Please go ahead.

Thank you, Sharon. Good morning and welcome to Ciena's 2020 Fiscal Second Quarter Review. We are conducting today's call from various remote locations. With me virtually today is Gary Smith, President and CEO, and Jim Moylan, CFO. Scott McFeely, our Senior Vice President of Global Products and Services, is also with us for the Q&A portion of today's call. In addition to this call and the press release, We have posted to the investor section of our website an accompanying investor presentation that reflects this discussion, as well as certain highlighted items from the quarter. Our comments today speak to our fiscal Q2 2020 performance, developments in our business, and our view on current market dynamics, including with respect to COVID-19, as well as our outlook. 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. Before turning the call over to Gary, I'll remind you that during this call, we'll be making certain forward-looking statements. Such statements, including our guidance and long-term financial targets, are based on current expectations, forecasts, and assumptions regarding the company and its markets, which 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 10Q filing, as well as our upcoming 10Q filing, which is required to be filed with the SEC by June 11th, and we do expect to file by that date. CN assumes no obligation to update the information discussed in this conference call, whether as a result of new information, future events, or otherwise. We will allow for as much Q&A as possible today, though we ask that you limit yourselves to one question and one follow-up. With that, I'll turn the call over to Gary.

Thanks, Greg, and good morning, everyone. Amidst the uncertainty resulting from the COVID-19 pandemic, nearly every industry and company has been challenged in some way, and obviously, Ciena is no different. However, our deliberate strategy over the last several years centered around innovation, diversification, and global scale has yielded a resilient business more capable of navigating challenging times. And this served our business operations and financial results well during the second quarter. Throughout the pandemic, our focus has been on ensuring the safety of our people, our employees, customers, and communities. And it is because of the extraordinary Siena team and our partners that we have continued to enable connectivity around the globe and help customers advance their automation strategies to adapt to new reality. Our significant investment and focus in three critical areas over the past couple of years have played a pivotal role in our ability to execute through this crisis. Firstly, we completed a significant IT transformation, providing our increasingly distributed and flexible workforce with the collaboration tools to make for a seamless transition to remote working. And as we talked to you today, more than 96% of our employees are in fact working from home. Secondly, we established a truly agile services delivery model that has allowed us to continue providing customer support despite restrictions around the movement of people. And thirdly, we operationalize the supply chain that is deeply rooted in an ecosystem of leading manufacturers that have strong business continuity planning and multiple manufacturing sites globally. These have enabled security of supply across our business. I am incredibly proud of our team and their collective efforts to continue serving each other and our customers through this time. I'm also extremely proud of the volunteering and charitable actions of our global workforce to support their neighbors, communities, and frontline workers. Within our Ciena CARES program, we increased our corporate charitable match to three times for employees' donations and volunteering. Our employees have also been volunteering in important and heartwarming ways, including putting our engineering know-how to work to produce 3D printed face shields and components for healthcare workers. I'd like to take this opportunity to express my gratitude for our employees for their continued focus, strength, and kindness. As a result of all these efforts and continued execution of our strategy, we delivered outstanding financial performance in Quito. Revenue in the quarter was strong at $894 million. and gross margin exceeded expectations at almost 47%. We also delivered 18% adjusted operating margin in the quarter with adjusted EPS of 76 cents. It was also a great quarter for cash generation, and orders in the quarter were strong. It is the core attributes of our strategy, innovation, diversification, and global scale, that have put us in a position of strength and that are helping drive this industry-leading financial performance by essentially enabling us to better support our customers. Starting with innovation, we remain the leading enabler of connectivity. And as we've learned through this global event, bandwidth is a critical resource now more than ever. Ciena were first to market with both 100 gig and 400 gig. and now we are the world's first again with 800 gig. In Q2, WaveLogic 5 Extreme became fully commercially available. We've now shipped product to more than a dozen customers, and the technology is operational and proven in some of the world's leading Tier 1 service providers. In fact, we've made public announcements with Internet2, Telia, Verizon, Comcast, Southern Cross, and most recently Deutsche Telekom. Importantly, we are also on the leading edge of driving automation. While not as an immediate of an opportunity given the current focus on capacity needs, as network providers emerge from the crisis and begin to normalize, it is certain that network architectures will be more closely evaluated to adapt to new user behaviors. And essentially, we believe that over the medium to longer term, the rise of remote everything will accelerate the drive towards cloud-based models and virtualization, which is the sweet spot for our Blue Planet software. Moving to diversification. Q2 was a great example of how the diversification of our business serves to help mitigate the potential impacts and ebbs and flows that may result from unforeseen events and uncertainty. As COVID-19 began to affect various geographies and customer segments in different ways and at different times, in Q2, our business benefited from our strong positions in both North America and EMEA, as well as Tier 1 service providers, MSOs, and web-scale companies. All performed extremely well in the quarter, given our deep relationships and ability to provide the solutions and support our customers need even during these unique circumstances. And in fact, non-Telco revenue in Q2 comprised 42% of total revenue with direct web scale business representing 24%. I would also reiterate that the diversification in our supply chain served us well in Q2. As expected, we experienced some disruptions from our suppliers. including component constraints, extended lead times, and reduced or temporarily suspended operations. However, given our sophisticated ecosystem designed to ensure continuity of supply, we navigated those challenges extremely well, and their impact was in line with our expectations. I would emphasize that we are continuing to manage through these challenges very successfully. And finally, on global scale, we continue to possess the largest focused optical R&D investment capacity in the industry. And this gives us the ability to deliver leading innovation with the best time to market. This coupled with the largest world-class specialized sales force that is intensely focused on delivering for customers and driving toward opportunities. With the vast majority of our employees working remotely, Both of these teams were able to successfully execute on their plans in the quarter, creating a flywheel for faster-than-market growth and continued financial leverage. With respect to the broader market, obviously the full impact of this pandemic on the global economy and any particular industry or company is still largely unknown. However, In our space, it is clear that the uncertainty is further accelerating flight to quality in all of its dimensions. Our customers, more than ever, are seeking trusted partners that have the financial sustainability and reliable supply chain in the near and long term to continue driving innovation and to deliver it to them on a global scale. And importantly, they are leaning into those partners with whom they have longstanding and trusted relationships and that are increasingly deeply integrated into their business. As we said last quarter, we entered the COVID-19 pandemic better positioned than most to manage through the challenges and that absolutely remains the case. The challenges are largely related at this stage to the pandemic's adverse impact on the velocity of business in general. And specifically, with many of our large and long-standing, predominantly international customers, operating conditions have complicated and extended the time required to deploy and activate new equipment and services. And, as to be expected with some of our newer deals and customer wins, again, primarily in international markets, conditions have made it more challenging to ramp up and operationalize on original timelines. It is simply taking longer than normal to execute with certain customers, but we anticipate that it will shorten over time as conditions continue to improve. Notwithstanding these operational challenges, which we believe to be short-term orientated, the fundamental demand drivers of our business, including increased network traffic, demand for bandwidth, and the adoption of cloud architectures, remain very strong. Against this backdrop, our innovation, leadership, and competitive advantages are frankly amplified. Specifically, our resiliency and agility position us to support our customers through the current challenges and to accelerate their transformation journeys as we emerge from the COVID-19 pandemic. Our deep relationships with a diverse set of network operators, geographies, and applications Our testament to our status as the leading trusted advisor in the industry. And our investment capacity and financial position will allow us to emerge even stronger than we were before. Our competitors simply do not have the scale, focus, or balance sheet to compete. And we intend to use these advantages to continue differentiating ourselves and focusing on capturing further market share moving forward. With those comments, I'll turn over to Jim.