Ciena's Smith: Next-Gen Spending Has Tipped

Ciena's improved financial fortunes are a clear signal that telecom operators are investing in next-gen networks, not legacy gear, CEO Gary Smith told Light Reading.

In an interview just after Ciena Corp. (NYSE: CIEN)'s impressive third quarter earnings were announced, Smith says his firm's improved financial fortunes in 2013 are an indication of "a fundamental shift in the industry," that Ciena expected to occur even earlier than it has. (See: Ciena Beats Fiscal Q3 Expectations .)

Smith says this shift favors companies selling converged packet-optical gear even if carrier capex budgets don't go up substantially. (See: Ciena Soars as 100G Boosts Its Top Line and Ciena Soars on Q1 Surprise.)

"All the things we are seeing around mobile data, cloud computing, shared services -- those trends are driving carriers to adopt a converged architecture and a multi-service network, as we always thought they would," says Smith. "We are seeing carriers spend on converged next-generation networks and stop spending on legacy stuff. This has taken longer than we all thought it would but it is happening now."

While admitting the transition to converged networks will still take several years to complete, Smith credits North American telecom network operators with leading the global pack on this front, in large part because of their aggressive deployment of 4G LTE wireless networks, which rely on a packet backbone.

"This is where Ciena placed its bets -- around a next-generation network convergence between packet and optical, and we are now the beneficiaries of investments we placed over many years," Smith says. "I believe it is a good steady opportunity for the long-term. Things are not always going to be completely linear quarter-to-quarter in every dimension, but we can build a balanced substantive business."

The ongoing shift to a more open architecture and ecosystem will include adding more intelligence to the network via virtualization through software-defined networking (SDN), OpenFlow, and network functions virtualization (NFV), Smith says. He sees that trend as having too much momentum to be seriously delayed, especially since adding intelligence to an open network ecosystem represents service providers' best opportunity to recapture the value of the networks, and generate the revenues needed to justify their investments. (See: Ciena Rallies Research Nets for SDN Demo.)

What we are talking about now is building a platform for these major carriers where they are much better equipped to do new services and retain more of that value. The network is important again -- it is such a key part of the application experience. Having the right network capacity of the right type at the right place at the right time is crucial to these new applications.

One key to all of this is using an open architecture and ecosystem to replace discrete networks built to support specific services and often dependent on a limited set of vendors, Smith says.

"We need to be able to work with smaller software companies that are specialists and back office companies like Oracle Corp. (Nasdaq: ORCL) and IBM Corp. (NYSE: IBM)," he says. "You are seeing a need to deliver to these carriers an open architecture where all these players play nicely around an open platform."

— Carol Wilson, Editor-at-Large, Light Reading

DOShea 10/22/2013 | 5:55:45 PM
Tellabs I wonder if Ciena ever regrets that the Tellabs deal of 15 years ago didn't pan out... Probably not.
Shantanu Bhattacharya 9/9/2013 | 4:58:47 AM
Re: Is this sustainable? Thanks Carol for your report ! We need to watch what the big equipment makers are doing in the virtualization space and their current prototyping engagements with the carriers.
Carol Wilson 9/5/2013 | 12:29:04 PM
Re: Is this sustainable? I think what Smith is seeing is a significant period in which carriers spend money to manage the legacy-to-converged network transition and that gives Ciena reason to believe there will be solid revenues over the next few years. That doesn't mean there won't be some less-successful quarters, which will probably send the financial analysts off screaming about impending disaster.

As for M&A, I wonder if any big equipment maker will manage the transition to virtualization without acquiring more talent, in bulk,via purchase of a start-up or two, or 12.
[email protected] 9/5/2013 | 2:54:04 AM
Is this sustainable? The bump in Ciena's share price Wednesday, up nearly 14 percent to $23.54, suggests a certain level of relief that the new wave of spending that CEO Smith has been predicting for about 2 years has finally happened -- but how long will it last?

Smith is talking about a steady opportunity for a few years - let's see if sequantial quarters reflect that WITHOUT any more M&A...
Carol Wilson 9/4/2013 | 2:19:37 PM
The Internal Shifts Are Still Coming Moving away from discrete services and networks to a converged platform ultimately means breaking down the internal siloes as well. Gary Smith says this is happening, faster at some companies than at others. I think that for the services piece of this to take place - as he describes above - the internal changes have to happen along with the network changes. 
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