Ciena Corporation

Ladies and gentlemen, thank you for standing by and welcome to the CNO Q3 2020 Financial Results Conference Call. At this time, all participants' lines 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 telephones. If you should require any further assistance, please press star zero for the operator. I would now like to hand today's conference over to Greg Lamb. Please go ahead.

Thank you, Carmen. Good morning, and welcome to CMS 2020 Fiscal Third Quarter Review. We are conducting today's call from Babbage Remote Locations. On the call 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 Q&A. 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 Q3 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 that stand as 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 TEN-Q filing, as well as in our upcoming TEN-Q, which is required to be filed with the SEC by September 11th. We expect to file by that date. CNS no obligations update the information discussed in this conference call, whether as a result of new information, future events, or otherwise. As always, we will allow for as much Q&A as possible today, so 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. Today we delivered outstanding third quarter results across the board, and similar to last quarter, our performance in Q3 demonstrates that our strategy, focused on innovation leadership, diversification, and global scale, has enabled us to manage well through the challenges of the current environment. The Ciena team has been a key element of our performance, and businesses, as we know, are all about people. Their focus, resilience, and drive to innovate and serve our customers is unrivaled in the industry. I remain incredibly proud of our global workforce and their collective efforts, including their continued volunteerism and charitable activities. Notwithstanding our strong quarterly performance and the resiliency of our business model, we are seeing negative effects of the pandemic and greater economic uncertainty weigh on our near-term outlook. We believe that this is being driven by an impact on the velocity and, to some extent, deprioritization of new business initiatives in general, as well as an increasing customer caution on budget decisions and the timing of spend, namely with service providers. as they are in turn beginning to feel the negative effects from large segments of their enterprise business. As we said last quarter, despite the favorable increase in bandwidth requirements, we are not immune to these dynamics as they continue to play out in the market. And we will provide more color and perspectives on this momentarily. Firstly, I'd like to discuss the key performance metrics in our third quarter. and provide a few highlights from across the business that really emphasize the inherent resilience and competitive strength of our business. So far this year, we believe we've taken an additional 1 plus percent of global market share. And I would stress that this is largely without the benefit of an increasing number of significant strategic design wins that we have yet been able to monetize given the current climate. Accordingly, we delivered outstanding financial performance in Q3. We had a great revenue quarter, and our gross margin, OPEX management, and operating margin were all very strong and, in fact, better than expected. Indeed, our adjusted operating margin exceeded 22%. And I think this really demonstrates the differentiated operating leverage in our business model that we've created. And we had excellent cash flow, finishing the quarter with approximately $1.2 billion in cash. Our performance this quarter also reinforced our innovation leadership and strong competitive position in critical areas of the network. Our latest generation modem, WaveLogic 5, remains the only 800-gig solution available in the market and is in volume production today. We are not just sampling or trialing this leading technology. We're actually shipping it for commercial deployments with a range of customers, including service providers, web scalers, subsea operators, and research and education institutions. In fact, we've already secured roughly 50 design wins for WaveLogic 5 Extreme. And this is a rate faster than previous generations. as the networks today are more ready than before for a step function in capacity to support demand. In just over three months of commercial availability, we've shipped more than 1,000 WaveLogic 5 coherent modems to almost 40 customers around the globe, with several of those networks already carrying live traffic. I think this is a strong testament to our innovation leadership and clear validation of our ability to execute and deliver against aggressive technology roadmaps supported by a very robust supply chain. In addition to our market-leading optical performance, we had several new wins in Q3 for our packet business. We now have more than a dozen customers for our adaptive IP solutions, including Telefonica UK and SK TelLink. which we announced in Q3. And this is amongst additional Tier 1 service providers who valued our automated, open, and lean approach to IP architectures. And of course, we also continued to see strengths with existing customers of our packet portfolio like AT&T. On the Blue Planet side in Q3, we delivered on a strategic mobile transformation in the Asia-Pacific region. secured significant upsell business with several large service provider customers domestically and internationally, and added a number of new enterprise logos as well. Now moving to the overall market. Secular demand drivers for connectivity obviously remain very much intact as network traffic grows and the adoption of cloud architectures continues apace. So the fundamentals of our business are absolutely unchanged as we look to the future. Nevertheless, as I alluded to in my opening remarks, late in the fiscal third quarter, we began to see some of the effects of COVID-19 manifest in our business to a greater degree than anticipated, as well as increased economic uncertainty. Specifically, we began to experience a meaningful slowdown in orders and a softening of our outlook. I would stress that the decline is broad-based across our service providers' customers globally, whose spend now appears to have been somewhat front-end loaded in the calendar year, resulting in lower orders in our third quarter from a number of our large customers in this segment. We believe the softness in our order flow and our reduced visibility is the result of a couple of customer-related dynamics. Firstly, COVID-19 continues to have an adverse impact on the velocity of business in general, and particularly new business initiatives. Limitation on physical access at ours and our technology partners' sites continue to create challenges for executing on some network projects that we've already won. And generally, in this uncertain environment, customers' ability and willingness to move forward with new business initiatives is constrained. In fact, the best evidence for this dynamic is evident in our recent gross margin performance, which reflects a larger percentage of revenue from existing businesses versus from new design wins and early life in projects, which tend to carry somewhat lower margins. The second dynamic is customers have grown more cautious about the near-term outlook for their businesses and are beginning to exercise greater restraint and respect to their capex span. This is particularly evident with our service provider and MSO customers, as certain large segments of their enterprise businesses are being negatively impacted by the pandemic and economic uncertainties. Overall, I would say that customers are running their networks hotter, and they are carefully prioritizing where and when to add network capabilities. And they've proven their ability to do this for extended periods of time, as we've seen before with previous economic developments. conditions that are challenging conversely with our web scale customers the year has pretty much so far played out as we expected directionally with some covid related reduction in spending specifically in fiscal 2020 as expected one of our large web scale customers reduced its optical spend as it had some absorption and changes to its architecture while I would stress that we've gained significant share with others, including a new significant architectural win with one of the major players that is new to Ciena. We now believe that overall optical spend growth in this web scale segment will be flat to low single digits for this year, versus the 7% to 10% that was expected at the beginning of the year. And I would stress that our competitive position remains strong in this key vertical, and we remain confident that we have gained share in all of the other accounts despite one large customer absorbing during the year. Therefore, overall market share continues to expand in this sector. While the strong diversity in our businesses generally enables us to manage through ebbs and flows in any one customer segment or geography, The breadth and magnitude of COVID-19 challenges and economic uncertainties are making it more difficult to do so. As a result of the broader economic conditions and related market dynamics, we now expect overall market optical growth, excluding China, will slow. In fact, we now believe that the market will be roughly flat to down for this year. And this dynamic has already been reflected in some of the latest industry analyst forecasts, and we expect that sentiment to continue. Accordingly, we expect our orders and revenue to be adversely impacted for the next few quarters. However, I would stress that we believe that these challenges will be short-term in nature. With bandwidth demand increasing at approximately 25% to 30% year-on-year, We do not believe it will be possible for our customers to serve that level of demand for more than a few quarters without increasing capacity. Importantly, our competitive position is incredibly strong, and we remain the clear market share leader. We believe that uncertain conditions will only reinforce and possibly accelerate a flight to quality in terms of vendor selection and the ability to maintain investment velocity. And we have the scale, focus, and balance sheet to not only continue differentiating ourselves, but also manage through these conditions effectively. And we intend to press down on that advantage to ensure both our own and our customers' long-term success. With that, I'll hand over to Jim to talk you through our Q3 results and outlook.