Gary Smith, CEO, Ciena 646202

'We're used to more intense cycles on the capital side. But this feels different to me.'

August 31, 2007

9 Min Read
Gary Smith, CEO, Ciena

The last time Ciena Corp. (NYSE: CIEN) CEO Gary Smith gave a Light Reading interview (not counting LRTV), it was 2004. The optical long-haul market was a shambles, and his company was just starting to piece together a series of acquisitions it made during the telecom downturn. (See Gary Smith, CEO, Ciena.)

Since then, Ciena has posted 14 consecutive quarters of sequential revenue growth and became profitable for the first time in fiscal 2006. Investors are starting to take notice, driving the company's stock up more than 30 percent year-to-date.

Smith credits the turnaround to a few strategic bets Ciena made, and he points to his company's "converged Ethernet" story as the reason for Ciena's revenue growth outpacing the market.

"The consistent execution of our network specialization strategy has enabled us to benefit from two significant industry trends: the demand for increasing network capacity and the transition to Ethernet IP-based network infrastructures," Smith said on Ciena's recent third-quarter earnings call. (See Ciena Swings to Profit.)

"We believe it's Ciena's relatively unique positioning that has enabled us to benefit simultaneously from both of these trends, driving our faster-than market growth."

Following Ciena's quarterly report on Thursday, Smith spoke with Light Reading about the state of the optical market, the emergence of Ethernet convergence, and the timing of 100-Gigabit technology.


— Ryan Lawler, Reporter, Light Reading

Light Reading: Carrier spending on optical seems pretty high now. What's driving it?

Gary Smith: I think it's a confluence of things, but I think the drivers of capacity are all the things that we've been seeing – the growth in enterprise video, video mobile, peer-to-peer traffic, etc. I think a lot of those applications are beginning to mature, and some of those are in fairly early stages as well – we're talking about high-definition TV, etc. – that's not really impacted [the market] yet.

Then you've got this shift where, fundamentally, a lot of carriers are moving from voice-architected networks to data-architected networks to more efficiently support the growth in traffic, but also to create new services as well.

And I think Ciena's at the sweet spot of that. So it's really around the portfolio, in particular, of converged Ethernet that's really driving our growth, as more carriers look to migrate their networks to a more data-centric architecture.

LR: Where are we in the spend cycle for optical now, and how long can we expect that growth to continue? And where do you go once that growth slows?

Smith: I characterize the space we're competing in as converged Ethernet. I think pure optical is more on the transport side, although we play there as well and I think that's part of the solution. But I think that, if you look at it, probably the biggest example is BT Group plc (NYSE: BT; London: BTA). They're building a new network based on converged Ethernet/IP. That's probably going to take them three to five years, and they're at the forefront of this. If you look at all the various carriers around the world, they're all at various stages of this transition, so I think it's going to be a while, if you focus on converged Ethernet/IP.

I think that for those of us who have been in this industry longer than we care to admit, we're used to more intense cycles on the capital side. But this feels different to me. And I think it's different because you've got the demand drivers around capacity that are built around the Internet – peer-to-peer traffic, video, mobile backhaul – you know, all of those things. And then you've got this fundamental shift in architecture from voice to data.

So I would hesitate to call this a cycle. I take comfort from the fact that this is more success-based, in particular if you compare it with the late 90s, early 2000s, where it was more speculative builds going on. What you're seeing now is more closely aligned to end-user traffic.

LR: Who would you say is your biggest competition in this converged Ethernet market?

Smith: Globally it's probably Alcatel-Lucent (NYSE: ALU). They have a big installed base, they have a very broad product portfolio.

How we compete with them is we're more focused. We're a specialist, really focused on the converged Ethernet transition. As we bring that technology to market, it's newer technology, it's combining our focus around control plane integration together with the software around switching and intelligence on the network. That's how we're able to get people at British Telecom and AT&T as core adopters of our architecture.

LR: Speaking of Alcatel-Lucent, a lot of your competition seems to be getting bigger, or at least looking to. What are your M&A options?

Smith: Well, if I can look in the rear-view mirror quickly, we acquired five companies during the telecom downturn, and they were fairly nascent-stage technology companies. And we did that to ensure we had the right blend and mix of new technologies to help us address the converged Ethernet space. We went out and did that when other folks weren't investing. So I think that's important from a strategic investment point of view.

That being said, I think we got a lot of the strategic elements we need to be able to continue to drive our portfolio into the marketplace. I wouldn't rule out acquisitions in the future, but we've got a lot of the pieces that we think we need to continue to be competitive in the marketplace going forward.

I would also say, as a broader-based commentary – and I fully understand the desire to have economies of scale globally amongst some of the larger players – I think that makes sense. But I would also caution that this industry is very fragmented and diverse, around applications and technology. So I think there's certainly a very healthy space, as I think we're demonstrating, for a specialty-focused player, particularly targeting growth markets.

LR: What about Infinera Corp. (Nasdaq: INFN)? Do you see them as a threat to your business?

Smith: They are more based on point-to-point transport, while we're really focused on converged Ethernet. Clearly, some of our portfolio addresses some of the same spaces, but they're really into the point-to-point type market in North America.

Next Page: The 100-Gig Question

LR: We know that there's a packet-optical RFP out there for Verizon Communications Inc. (NYSE: VZ), and we've heard that you're not in the bidding. What's up?

Smith: I couldn't comment. We don't comment on specific RFP activity, but I'll tell you that Verizon is a long-time customer of Ciena and we have a very broad portfolio that they utilize from Ciena.

LR: In terms of other RFPs that might be out there, can you talk about what different carriers are looking for from the converged Ethernet space?

Smith: I think what you're seeing is the adoption of mesh architecture as a general feature across the globe, and certainly in the major carriers we're seeing that. That makes sense, because that's really the foundation for IP and Ethernet. So that convergence we're seeing growing pace around the switching market for that – and also in the converged metro market as well, which seems good, in the end, for that. And that makes sense if you look at where the capacity drivers are and as they make this transition towards next-gen networks.

So what carriers are really looking for is convergence around control plane integration, which really simplifies networks that are lower cost and more efficient to run and that can also create new services that are more intelligent.

LR: You told LRTV earlier this year that you think we're going to see 100-Gig products earlier than expected. What sort of timing are you expecting?

Smith: I still think that, and it has to do with the convergence as well of enterprise Ethernet and IP together with the carrier space. I think you're seeing that coming together both at the component level and the architecture level of the demand drivers for 100-Gig. When you get the two together from the data world and the telecom world, that's when I think you start to see a multiplier effect.

You saw it at 10-Gig, which was the first time really that telecom intersected with the data world from a component level, and that drove down the price of 10-Gig very quickly. I would speculate that you're going to see a similar type of dynamic around 100-Gig, which is why I think it will move faster than people probably think.

The standards aren't quite there yet, and some more things have to happen, for sure. So I wouldn't characterize it as being something everybody is going to adopt tomorrow morning. But if you said to me that in the end of '08 or '09 you'd start to see some real activity there, then I could get my head around that.

LR: What does that mean for 40-Gig?

Smith: I just think that 40-Gig will happen. It will just be a quicker stop-off point than people think. We're in 40-Gig trials now and it'll absolutely happen. But what we're encountering with our customers is, yes, they're interested in 40-Gig, but they're more interested in making sure that in the long term they've got a scaleable architecture that can get to 100-Gig. That's really what they're focused on, and I can understand it, given what sort of capacity drivers they're seeing.

LR: What do you think about the prices for 40-Gig? Will they ever come down to a point where it makes more sense for carriers to deploy that technology?

Smith: Well I think that's exactly the right question with this, and can you carry 40-Gig cheaper than 10-Gig. Because you've not got the data folks meting you on the components side of things for 40-Gig, I think it's going to be more challenging from a pricing point of view than 100-Gig, because you're going to have critical mass around components that are going to be used in the telecom space and in the data world. That's why I think the price points on 100-Gig are going to be on a faster curve down than 40-Gig. It's really around the component parts to it, and it's around the economics and volume. Do I think 40-Gig is going to get there? Yes, but the clearer dynamics are around 100-Gig, I think.

LR: Do you see any future for Ciena in the broadband access market?

Smith: We do. We play there now, but I would describe it as more of a specialty focus. I think there are things in there, particularly as it moves more towards Ethernet and as it becomes Ethernet over any media, and particularly in the business and enterprise markets. We have a lot of technology that's applicable there, in terms of Ethernet transport. So I think that's a market we'll continue to play in, particularly in Ethernet broadband as more and more of that is delivered by Ethernet.

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