Light Reading

Ciena CEO: I'm So Excited!

Ray Le Maistre
3/12/2014
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SAN FRANCISCO -- OFC 2014 -- It's fair to say that long-standing Ciena CEO Gary Smith is pumped.

"I've been in this industry for 30 years and have never been more excited than I am now to be in the networking business," he told a packed plenary session here Tuesday. [Editor's note: Check to see if he said last year that he'd never been more excited in the past 29 years…]

Smith, who has been Ciena's chief for a remarkable 12 years, told hundreds of networking executives that "the network matters again… for the past five to 10 years it hasn't had a starring role." Instead, the content providers have hogged the limelight, but that can change as end users of all types become increasingly reliant on dependable networks that can meet their immediate needs.

To do that, though, the networking sector needs to embrace virtualization in order to deliver on-demand capabilities. "The virtualization trend has really been limited to compute and storage, with the network in a supporting role. The next logical step is the virtualization of the network, and the opportunity to do that is right now."

To achieve that will require a shift in the way the telecom sector thinks about its assets, stated Smith. "We think of the network as infrastructure but we need to think differently… start thinking about end user application-driven behavior… and how service creation can be achieved in hours and minutes and not months and years."

That requires an "open" network architecture with APIs that can pass control commands around the network, a "fundamental change" to the way networks have been built until now, stated the Ciena CEO. (See 6 Degrees of Separation: SPs Define 'Open'.)

"We need to build networks differently, with packet-optical convergence and programmability and openness and analytics in the network, to be able to see what's happening and change the network accordingly. And this is not incremental change. This is not 100G to 400G. This is about how to build the network -- putting programmability and intelligence into the network," he noted, without even referencing his company's latest announcements. (See OFC: Ciena Smartens Up Photonic Layer.)

"Critically, it's about an ecosystem -- an equal partnership [for the network] with compute and storage -- all three need to work tightly in an ecosystem. And no one company has the ability to deliver all of this. Everyone needs to play nicely and that's not something we’ve always seen historically, especially in compute and storage, but it's needed."

And Smith ended his speech with a rallying cry for the industry. "It's about transforming capacity into capability. That's what this is about. Not just about moving bits, but about what you do with those bits. We need to make the network as programmable as an iPad," and be able to add new services and apps simply by "dropping" them onto the programmable network. "It can't take a year to develop a new service any more -- this is about changing our mindset."

The Ciena CEO concluded: "We have to continue on the curve of capacity growth to 1Tbit/s and beyond -- that's critical. But we need to deliver more than that, to deliver value to the network. We need to make the network matter even more," proclaimed Smith.

So a grand rallying cry for the networking sector... now all the network operators need is a business case. (See The Most Depressing And/Or Inspirational Thing You'll Read Today.)

For more from OFC, see:

— Ray Le Maistre, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, Editor-in-Chief, Light Reading

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mendyk
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mendyk,
User Rank: Light Sabre
3/13/2014 | 2:04:01 PM
Re: Where's the revenue?
Right -- so we have this hugely expensive system set up to predict what will be known in a couple months' time. And because this apparatus typically focuses on the very near term, priorities easily can be skewed.
brookseven
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brookseven,
User Rank: Light Sabre
3/13/2014 | 1:53:51 PM
Re: Where's the revenue?
Dennis,

I would say the value of Sell Side Analysts approaches 0.  Most of these guys cover literally dozens of businesses in multiple industries.  They write reports that are about 3 pages long that have approximately 1/2 a page of information.

So, how do they generate their estimates?  If you listen to a conference call, a company will walk through the elements of getting together an income statement.  Based on the guidance and commentary on Opex and GM, the analyst will do a linear extrapolation of what those numbers should give.

Now, what happens on a company basis?  You get to the earnings call like I said 4 - 8 weeks after a quarter close.  What do you think happens between the last day of a quarter and the conference call? Well, the books close pretty quickly - generally within a couple of days.  At that point the raw numbers are available.  The new quarter starts rolling along and you get a good sense for what is going to be happening in the quarter.

Scripts for the first part of the call are written and questions that are expected are written as are answers to the expected questions.  Income Statement massaging starts to try to linearize the EPS.  "The Market" doesn't like earnings that jump around so companies work to hide some money in quarters that are coming in at a higher EPS than previously planned.  The reverse is true in soft quarters.

So, wait....is what I am saying is that the numbers that (in this case) Ciena put out were massaged to meet the needs of Ciena? Why yes they are!  Ciena guided people to the consensus and then tried to manage the income statement to meet or exceed the consensus.

So, does an investor learn any "Truth" from a quarterly call?  I would say if they do its in the Q&A at the end.  What you learn is when there is a discrepancy between the future message and the future guidance that there is some smoke.  If one digs, they might find fire.  

seven
mendyk
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mendyk,
User Rank: Light Sabre
3/13/2014 | 10:38:14 AM
Re: Where's the revenue?
Wait -- I'm the voice of reason? That's the nicest thing anyone has said about me in at least five months. Thanks! And to the point about Street analysts, their forecasts either over- or under-estimate revenue and earnings the vast majority of the time. It makes me wonder what they actually bring to the table. At least sports prognosticators provide some amusement and comic relief.
baznyankee
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baznyankee,
User Rank: Light Bulb
3/13/2014 | 9:33:22 AM
Re: Where's the revenue?
I'll plead guilty to being interested in semantics, here slideruler.

The voice of reason here (mendyk) made the brilliant comment of:  "Street analysts-the people who create expectations out of whole cloth and then hold others to account when those expectations aren't matched."

To which the original poster insisted on digging his hole deeper and completely missing the point mendyk was making.  I suspect the original poster still doesn't realize his blunder. 

It's also obvious that my attempts at clarifying the issue didn't work.  I appologize for that.  
slideruler
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slideruler,
User Rank: Light Beer
3/13/2014 | 2:53:23 AM
Re: Where's the revenue?
Geez, Baz...shut up already!  Nobody likes a company shill or a grammar zealot!
Mitch Wagner
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Mitch Wagner,
User Rank: Lightning
3/12/2014 | 11:24:31 PM
Where's the revenue?
The person who spoke after Smith painted a grim picture, indicating that the service providers don't have a business model that will let them meet demand. Revenues are flat, and likely to remain so.
baznyankee
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baznyankee,
User Rank: Light Bulb
3/12/2014 | 5:07:56 PM
Re: How Excited?
Brook, Tom is beating around the bush trying to show where the company lowered their sales numbers.  Because the analysts consensus numbers were higher than the cos. latest midpoint of their range, does not mean the same thing. 

For whatever reason, those consensus numbers (numbers determined by analysts) show some displeasure the analysts have with their own earlier look into the future and as I noted, those analysts also missed badly the completed quarter and have given no explanation for it.  Pretty hard to get too excited about their position on cos. guidance not measuring up to their (analysts) earlier numbers.  As for the actual miss, consensus was for $561 M and Co. guidance range of $540-$570M giving a 1% miss if you take the midpoint of the range.  This is hardly something for anyone to get that excited about with the "lumpiness", etc. unless that person has an agenda.  And these comparisons are not the co. dropping their guidance, either-it is the co. seemingly not measuring up to a consensus of analysts opinions (that everyone starts out joking about). 

Maybe it comes down to a bunch of analysts didn't get it right, as they completely blew it for the completed quarter, but that is something completely different than the co. dropping its numbers. 
TomNolle
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TomNolle,
User Rank: Light Sabre
3/12/2014 | 4:51:44 PM
Re: How Excited?
What do you suppose "guidance" was about?  I'm ready to shut up at this point in any event.  Have it your way.
baznyankee
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baznyankee,
User Rank: Light Bulb
3/12/2014 | 4:48:17 PM
Re: How Excited?
I see you left off the next sentence, Tom.

"If the network matters again, why doesn't that generate more sales for the company according to their own view?"

That was what I was referring to-your reference is just more analyst gibberish that may/not have anything to do with anything.  You have made a statement of Company sales according to their own view-where is that information?  Put up or shut up is what comes to mind, here.
brookseven
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brookseven,
User Rank: Light Sabre
3/12/2014 | 4:35:40 PM
Re: How Excited?
Baz,

They are essentially the same thing.  Guidance refers to 3 numbers often given by companies:  Revenue, Gross Margin, and EPS.  When Tom says they adjusted the guidance, he is saying that Ciena changed its view of the future.  In this case lowering estimates for the next quarter.

The question he is asking is a fair one and you need to think about it.  If things are great and the company is becoming more relevant, why is the next quarter down?  There can be lots of reasons including my favorite in "lumpiness", but also seasonality, changes in what customers are buying, a bunch of deferred revenue got recognized this quarter so next quarter dips...lots of reasons.

But what happens often is that companies talk about only the positive, which is why I refer to these events (as well as quarterly calls) as Sales Events.  In this case, selling Ciena Stock.  Nothing wrong with that, but just like in product sales don't expect the 100% unvarnished truth.  

That unvarnished truth is what analysts are supposed to provide, but they have a hard job.  They get basic information from the company but it is a bit harder to dig below the numbers and check the future.  The best analysts spend time looking at the macro environment (like Industry Trends) as well as the micro environment (like what are the company's major customers and saying).

As I said, there are 2 kinds of analysts and you only get to see one.  They work with the companies to put on a quarterly dog and pony show.  The company provides a range of guidance (not always) and tries to nudge the analysts to numbers that it can beat.  It tries to keep a couple of pennies of EPS in its back pocket to try to smooth things out (hmmm if we took some money out of Warranty Reserve we can up the GM by 1% and exceed guidance - we are booking strong this quarter so far so lets do that).  

Let's remember most conference calls happen between 4 - 8 weeks into the next quarter.  That means they have already seen month 1 and probably closed the books on it.  The fact that companies can miss so badly sometimes only 1 month out should tell you something.

seven

 
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