MARCH 10, 2008 By Meghan Fuller Hanna -- Following Ciena's (search for Ciena) fiscal first quarter earnings announcement last Friday, CEO Gary Smith spoke with Lightwave about the applications driving Ciena's growth, how the recent World Wide Packets acquisition has been a good fit for the company, and why he believes the industry, on a macro-level, is stronger than it's been in long time.
Ciena's revenue for the first quarter totaled $227.4 million, representing an increase of 38% over the same period a year ago when the company reported sales of $165.1 million. Smith attributes this growth in large part to the growing popularity of converged optical Ethernet. "We're in the beginnings of a fundamental shift away from SONET/SDH rings toward a converged Ethernet architecture," he explains. "How do you enable that transition for the carriers? That is where we are seeing the hot spot."
He says one particular area of growth for Ciena is mesh software, which he describes as "the underpinnings for a lot of the shift toward Ethernet. Ethernet fundamentally does not like rings," he says, "so you have to provide another highway for it to run on. Things like the mesh architecture, which we have invested in heavily--we're seeing that very strong."
Moreover, Smith notes that Ciena's carrier-class converged optical Ethernet equipment is now applicable across a range of customers, from carriers and large enterprises to government and research & education networks. Though he admits Ciena's enterprise customer base is small--focused on just a few large financial enterprises--the company is seeing 50% to 60% year-over-year growth. "To be fair, we got dragged kicking into that marketplace," he recalls.
Another market that hasn't been historically strong for Ciena is the cable MSO market, but Smith expects the World Wide Packets acquisition to give Ciena broader applicability there. (See "Ciena to acquire World Wide Packets," by Stephen Hardy). "We've got six of the top ten cable companies in North America, but it's really been more on what I would call the infrastructure side with them, behind the head end," he explains. "What we get with World Wide Packets is the ability to take that Ethernet service further out."
"The World Wide Packets acquisition gave us, really, the Ethernet operating software to be able to manage and deliver those services," he continues. "You are now looking at a cycle where you're moving from SONET/SDH to Ethernet. How do you make that migration, that transition? How do you deliver those services? How do you keep up the same quality of service? It's software; that's the answer to a lot of that," he contends.
Strong fundamental drivers
The mood of this year's OFC/NFOEC conference, held two weeks ago in San Diego, was surprisingly dour, particularly among the Wall Street types who argued that the component vendors must consolidate to improve the overall health of the industry. When asked his opinion of the optical communications market, Smith admits that the component industry, in particular, is highly fragmented. However, on a macro level, he says, the fundamental drivers are better than they have been in a long time.
"You can almost draw the analogy back to 2001, when everyone thought we were in a brave new world," he muses. "Clearly, everyone got way ahead of themselves and over-invested, the business models weren't mature, the applications weren't mature, and the technology was too expensive. I think we've flushed that out," he says. "What you're seeing now are real applications--video to the mobile, high-definition TV. All of these things are beginning to happen, and I think you're seeing an explosion in bandwidth requirements."
But in an environment where carriers are asking system vendors for greater levels of functional integration at ever lower price points, and component vendors are averaging gross margins in the 20% to 30% range, who pays for the R&D to support new applications?
Ultimately, says Smith, it will come from the consumer. "If you start at the front of the food chain, have the consumers got an appetite for these new applications? Absolutely. And do they want video on their mobile? Absolutely. And they want data and high-def TV and video and the rest of it," he says. "You are starting to see an insatiable appetite for this stuff, provided it's delivered in a timely manner and in a way that is effective, from a technology point of view, and at the right price points. The carriers, system vendors, and component guys have to figure out how to do that, but if you get it right, there's enough money out there."