Gregg M. Lampf - Vice President of Investor Relations Gary B. Smith - Chief Executive Officer, President and Director James E. Moylan - Chief Financial Officer and Senior Vice President of Finance Thomas Mock - Senior Vice President of Corporate Marketing & Communications

Kevin J. Dennean - Citigroup Inc, Research Division Mark Sue - RBC Capital Markets, LLC, Research Division Eric A. Ghernati - BofA Merrill Lynch, Research Division Blair King - Avondale Partners, LLC, Research Division Paul Silverstein - Crédit Suisse AG, Research Division Simon M. Leopold - Raymond James & Associates, Inc., Research Division Jeffrey T. Kvaal - Barclays Capital, Research Division Brian T. Modoff - Deutsche Bank AG, Research Division Ehud Gelblum - Morgan Stanley, Research Division Rod B. Hall - JP Morgan Chase & Co, Research Division Nikos Theodosopoulos - UBS Investment Bank, Research Division Scott Thompson - FBR Capital Markets & Co., Research Division Sanjiv Wadhwani - Stifel, Nicolaus & Co., Inc., Research Division Jess L. Lubert - Wells Fargo Securities, LLC, Research Division Michael Genovese - MKM Partners LLC, Research Division

Good day, everyone, and welcome to the Ciena conference call to report unaudited second quarter 2012 results. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Ciena's Vice President of Investor Relations, Mr. Gregg Lampf. Mr. Lampf, please go ahead.

Thank you, Allison. Good morning, and welcome to Ciena's Second Quarter 2012 Review. With me today is Gary Smith, CEO and President; Jim Moylan, CFO; and Tom Mock, Senior Vice President, Corporate Communications. This morning's press release is available on National Business Wire and ciena.com. In our prepared remarks, Gary will discuss management's view on the quarter, and Jim will offer some color on our Q2 results and provide guidance for Q3. We'll then open the call to questions from sell-side analysts, taking one question per person with follow-ups as time allows. As a reminder, we'll be hosting our Analyst Day on Monday, June 11, in New York. That event will get underway at 1 p.m., and we look forward to seeing many of you there. Before turning the call over to Gary, I'll remind you that during this call, we will be making certain forward-looking statements. Such statements are based on current expectations, forecasts and assumptions regarding the company that 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 10-Q filing. Our 10-Q is required to be filed with the SEC by June 7, and we expect to file by that date. Ciena assumes no obligation to update the information discussed in this conference call whether as a result of new information, future events or otherwise. Today's discussion includes certain adjusted or non-GAAP measures of Ciena's results of operations. A detailed reconciliation of these non-GAAP measures to our GAAP results is included in today's press release available on ciena.com. This call is being recorded and will be available for replay from the Investors section of our website. Gary?

Thanks, Gregg, and good morning, everyone. With revenue of $478 million and tangible progress against our operating leverage objectives, we are pleased to report an overall strong performance in our second fiscal quarter. Our network specialist strategy, which encompasses a sharp focus on next-generation packet-optical networking, innovative solutions and a differentiated customer engagement model, is being validated across multiple vertical markets. That traction is enabling Ciena to take a position of competitive strength and clear architectural leadership in the marketplace. In recent weeks, you've seen announcements with customers from the ranks of major Tier 1 service providers, submarine cable operators and public research and education organizations who've chosen Ciena solutions spanning transport, switching and control plane as foundational technologies for their network modernization strategies. We're seeing customers look for some very specific characteristics as they evolve their networks towards application-centric and cloud-based models including the convergence of network layers and functions, open interfaces, network-level programmability and proven control plane software for automating that programmable infrastructure. Demand for these capabilities plays to Ciena's strength as the network specialist. By design, we've developed some of the industry's deepest expertise and deployed the most flexible implementations of these technologies. For example, we recently announced that we've extended our newest-generation control plane, OneConnect, across our transport and switching platforms to create a leading family of converged programmable solutions. This convergence also allows us to address a much broader range of applications from the metro through the submarine domain to drive architectural change in the industry. That need for change has contributed to growing momentum for our 5400 Family, which is now united by OneConnect with our 6500 platform, forming the critical elements of a new architectural model. These solutions are hybrid platforms for TDM, OTN and packet networking that are fully programmable and automated…

Thanks, Gary. Good morning, everyone. I'll take a few minutes to provide some detail on the results that we published earlier today. As a reminder, I will be speaking only to non-GAAP results. Please refer to this morning's press release on our website for the reconciliations to our GAAP results. Second quarter revenue of $478 million showed solid growth. In addition to the ongoing strong demand that Gary mentioned, revenue came in higher than previously expected due in part to the recognition of revenue from some of the international solutions-based projects we've mentioned previously. Adjusted gross margin came in lower than expected, just below 40%, due to a couple of factors related to mix. Large new installations contributed to a lower margin mix within both transport and services due to the initial phases of several deployments. While very encouraging for our long-term revenue and gross margin prospects, these initial deployments not only tend to be chassis-heavy, they also are associated with higher volumes of installation services, which tend to provide a lower margin than our other services offerings. We expect these factors to continue into Q3. In addition, our switching segment was down somewhat in Q2. We do remain committed to our mid-40s percentage target range for gross margin. And we believe that we can achieve that target over time through a combination of continued convergence, leading to lower product costs and improved functionality, more software-rich solutions coming to market, cost reduction efforts and working our way through the costly early stages of the product introduction cycles for various new platforms. Adjusted OpEx was lower than expected at $173 million. We are seeing in our results a positive impact from some of the business process transformation projects that are underway. And we also were helped by the fact that some…

[Operator Instructions] Our first question comes from Kevin Dennean of Citi.

Quick housekeeping question. What's the customer trial count on the 5430 now? I think you mentioned it's approximately half of the 40 CoreDirector base, but could you give us the actual number?

Yes, Kevin, I think given the maturity on the trial piece, we've stopped sort of giving that because I think we're beyond that stage. But I think if you're talking about number of customers, we're approximately 20. I think it's 19 in total and that's about half of the total CoreDirector customers we've had over that period. I think that's an interesting comparison and I think talks to the opportunity that this platform have.

One thing I might add to that, Gary, is about half of those 19 customers are not current CoreDirector customers, again speaking to a broader applicability.

Great, okay. And then, look, just thinking about that 5430 opportunity longer term, I know every Tier 1 is a little bit different. But can you sort of dimension for us what you think the opportunity in a typical Tier 1 deployment for the 5430 might be over its deployment cycle?

I mean, I think it does vary. It's a very flexible platform, and I think this sort of creation of this sort of programmable platform between the 6500 and the 5400 is really now sort of a joint family with the integrated control plane. So we've got opportunities to put control plane into all the 6500. And then also in all the 5400, we've got the chance obviously to put all of the optics and provide a complete integrated solution. So basically, Kevin, we could go right from the core of the network right out into the metro with a converged control plane solution, so -- but that's a very large architectural decision for a Tier 1 carrier. But we are, certainly, I think, at an inflection point where we're seeing momentum towards driving this kind of architecture. So they're big decisions and it tends to take longer than you think to get it through all of the work that's required to integrate it into the back office, et cetera. And as you know, I think we've talked about a couple of very large Tier 1s that we're making good progress with there. But I think the results to date, I think it's fair to say, have not included any large-scale deployments at any Tier 1 carrier. I think that's clearly all to come. And we expect that, in seriousness, to begin in 2013. But we do expect switching revenues to be up in the second half of the year.

Our next question comes from Mark Sue of RBC Capital Markets.

Gary, just a clarification. Did you guys have any SEA-ME-WE 4 revenues during the quarter?

We don't normally talk to specific customers, but I think we have talked to this one before. We actually did not recognize any SEA-ME-WE 4 in Q2. We do believe that we will recognize that at some point in the second half of the year.

Got it. So the question is if you could give us some comments on just the overall directional trend in your backlog perhaps over these last few quarters and the last few months and just kind of further share why you believe the second half revenues might be better than the first half? Any tangible points would be helpful.

Well, I think we've not given detail on backlog because it's not always an indicator of the future, given the kind of business that we're in. But I would say we continued to build backlog in Q2. And that follows on a strong run out of Q1 and Q4 of last year and we are seeing strong momentum across the board. We highlighted, from a geographic point of view places like Asia Pacific, Latin America, certain parts of EMEA being in the Middle East, Russia, et cetera, is helping to offset any challenges in Europe. So I think with the design wins that we're seeing as well and with the early stages of rolling out some of those, that gives us some -- put all that together and I think that gives us some good confidence that we have strong momentum going into the second half.

I'll just add one other thing to that and that is that our process for developing our view is really a strictly bottoms-up forecast from our sales force. And they tend to be very, very accurate on the coming quarter in terms of what orders are going to hit. And based on our forecasts and based on our backlog, that's what gives us the confidence as we look into the second half, that it's going to be better.

Our next question comes from Tal Liani of Bank of America Merrill Lynch.

This is Eric Ghernati for Tal Liani. You -- last quarter, you discussed that your order intake -- products order intake was up 20% year-over-year. Can you just give this metric and also whether it was up on a sequential basis? And I have a follow-up.

We did disclose that statistic last quarter because we, as you know, we underperformed on revenue last quarter and we wanted to make people understand that, that underperformance was not a weakness in the overall business. We really don't intend to give that kind of detail about product and percentage changes and all that sort of thing on an ongoing basis. I can just tell you that we were pleased overall with our order intake in Q2, and we're expecting good things in Q3.

Okay. Then maybe I can -- if you can flush out some details about the gross margin side of things. Clearly, your deployments on 40- and 100G right now are coming in at slight, lightly populated chassis and that's what's hurting the gross margin side, coupled that with your mix is more towards transports and your switching revenue is so weak. You had previously suggested that your switching revenue will move up in the second half of 2012. And you had some cost reduction elements that will take place in the second half of 2012, though you did say that you will not get to the mid-40% gross margin this year. Now how do -- should we think about when all these dynamics are largely behind you? And in other words, I guess I'm asking when do we expect the inflection point to gross margin to occur?

What I did say is that we expect these factors that influenced gross margin in Q2 to continue into Q3. We're not going to be able to give you specific guidance about margins for the rest of this year or certainly not next year. But what I would say is that trends inside of the categories of both switching and transport and services for that matter are positive and we certainly expect improvement from these levels. I don't want to get into when that's going to occur, but we do expect it.

Our next question comes from Blair King of Avondale Partners.

I have maybe one, Jim, for you on the deferred revenue. Obviously, a pretty nice uptick on deferred revenue quarter-over-quarter. Maybe you could give a little bit of detail around what drove that, what's in it and your expectation for some of that to come through to the P&L.

Yes, what that is essentially all, Blair, is when we sign a contract for an extended service arrangement, a maintenance arrangement and we get paid upfront for it. So that's basically what that is. We take the cash and we defer the revenue and take the revenue in over the period of time that the service contract runs. So that account is going to move up and down depending upon the signing of maintenance agreements with our customers.

Okay. Maybe one quick last one. Can you -- you had mentioned going into the quarter that you thought CESD revenue would be higher this quarter. Can you give us a sense as to what drove that this quarter and what your expectations would be for at least next quarter, and perhaps the balance of this year?

Yes, Blair, I think what we're beginning to see on CESD is finally some of these Ethernet business services actually kicking in. And we've got a number of carriers that we're now deploying that with. I think it's fair to say it's taken a long time to get that transition going into Ethernet business services. But we have about 150 customers now in Carrier Ethernet overall, and I think we're beginning to see this broader base begin to generate Ethernet business services as opposed to just wireless backhaul. And we also think that given that and some of the things that we're doing to add features and functionality into the portfolio should see an uptick in the second half of the year for Carrier Ethernet as well.

Our next question comes from Paul Silverstein of Crédit Suisse. Paul Silverstein - Crédit Suisse AG, Research Division: Guys, my apologies. Notwithstanding my positive view on your stock, I don't -- I'm going to give you a hard time about not giving us the order growth rates. I really don't think it's appropriate if you do it on a selective basis, so my apologies. But my hope is that you're going to share it with us because I really do think it's appropriate.

Paul, that's a conversation I'm happy to have with you off-line. Paul Silverstein - Crédit Suisse AG, Research Division: All right. That being said, if you could give us some incremental insight about the nature of the activity you're seeing in North America as well as those emerging markets. Gary, I know you mentioned in quite a different number of areas, subsea, long haul, metro, can you -- and you mentioned about a number of big build-outs where you're in the early phases. Can you give us any more insight in terms of the number of such build-outs and the nature of those build-outs, whether it's across the spectrum or really focused in particular product markets?

Well, I think from a geographic point of view, I've talked to some of those. We are seeing areas where it's offsetting any sort of weakness particularly into Europe. I think we are fortunate in that we're not very exposed to Southern Europe for historical reasons. And I think we're seeing in a lot of these emerging markets, markets like India, Middle East, Russia where they're actually building greenfield architectures, which is very well suited to this sort of next-generation architecture. So we're seeing some nice build-outs with those. And I think we're also, from an architectural point of view, beginning to pivot across this architectural convergence. I mean, if you look at things like 40-Gig, 100-Gig does not work with SONET or SDH. So I think the take-up of 100-Gig is I think an indicator of this sort of shift finally happening. And I think we're also -- our ability to put true convergence across these platforms is beginning to gather momentum as well. So it's tough to put real metrics on that other than just the kind of revenue uptick that we're seeing and the activity levels continue to increase across-the-board. Paul Silverstein - Crédit Suisse AG, Research Division: Gregg, can you all share with us the 40-Gig and 100-Gig numbers in terms of customers?

Yes, I can do that Paul. The current customer count we've got, for overall coherence, is around 114 customers, of which about 105 are 40G and about 30 are 100G. Recognizing that some of those are common between the 2 is why we have a lower number for the total than the sum of the separate parts.

And we're over 50% coherent in terms of our -- 40-Gig and 100-gig coherent in terms of our MWD (sic) [WDM] transport revenue.

Yes.

Our next question comes from Simon Leopold of Raymond James. Simon M. Leopold - Raymond James & Associates, Inc., Research Division: Great. I wanted to first see if you could give us a little bit more color or clarification on the 2 10% customers this quarter, what their split was and what type of business geography they're in? And then in terms of the guidance -- and I'm cognizant that you put up strong sales in the April quarter. Not ignoring that fact. But I am looking at the sequential pattern and wondering how we should think about the SEA-ME-WE 4 revenue recognition in your assumptions for the July quarter? Because if I were to exclude, let's say, half of the SEA-ME-WE 4 revenue in July, you'd have a sequential decline and I'm just trying to get comfortable with why that would make sense.

So let me say take the first part of that in terms of color around the Tier 1s. I think it's -- I think both of the over 10%-ers that we saw in the quarter were both North American.

And on the SEA-ME-WE 4 question, Simon, we try not to give specific comments about specific customers because I think people can take wrong interpretations of what's happening inside our results. One thing I'd say about SEA-ME-WE 4 is that we said earlier it's going -- we believe it's going to happen in the second half of the year. The timing of it is still uncertain. It's not necessarily binary. It could come in partially in each of the quarters. And we've tried to take into account that set of facts in giving our guidance. But one thing I'd tell you is that there are lots of puts and takes as we set up our quarter and things will move around. And so I would not draw a conclusion about being down with or without SEA-ME-WE 4 at this point in time. I just think it's preliminary to draw that kind of conclusion. Simon M. Leopold - Raymond James & Associates, Inc., Research Division: So maybe let me see if we could rephrase the question. Let's ignore SEA-ME-WE 4 and just focus on the midpoint of the guidance is flattish. So your overall tone, it sounds very constructive. You sound optimistic, yet flattish sequential guidance doesn't necessarily reflect that. So I'm trying to weigh how much of this is conservatism, how much of this is uncertainty and so I have to imagine a lot of us are sort of struggling with just how to interpret the guidance with or without SEA-ME-WE 4?

Simon, it's Gary. I understand particularly in the context of the overall environment right now. I think what we try and do in terms of our guidance, as Jim said, there's a lot of moving parts to it. And I think if you look at what we've just done in Q2, we essentially overperformed Q3 guidance for revenues in Q2. Now that comes off a weak Q1, and I think we fully recognize that. But I think overall if we look at it in sort of halves, which is when we put both product trending and overall trending in halves, I think it tends to give, I think, a sort of clearer picture of the trends. And as we draw the line around revenues, orders, those kinds of things and customer traction, that's how we extrapolate out. So yes, we had a very strong overachievement, if you like, in Q2. We expect Q3 to be within that range and it's pretty strong and I think current consensus is about that for Q3.

Our next question comes from Jeff Kvaal of Barclays.

Can we talk about switching a little bit, please? You've -- I mean, this wasn't your strongest quarter in switching and some comments about why that would be. Are people delaying purchases of CoreDirector, for example? And then secondly, could you talk about your comment that the second half should be better than the first half? Does that mean in aggregate, we should be adding up the January and April numbers and saying, okay, well, the July and October should be higher than that? Because that does suggest a pretty decent ramp. What gives you visibility into that? So a bunch of switching questions there for you.

Okay. So I think from an overall point of view, we're seeing a lot of momentum on the switching side. It is lumpy for want of a better technical marketing term. And these things do take longer to deploy on a widespread basis, particularly because they are big architectural decisions typically for most of the carriers and they do take a lot of integration from the back office. But as we've seen with CoreDirector is once they're deployed, there's a nice scale up to it. And we're still really at the early stages of the 5400. I gave the statistic around the amount of customers. One point I would make around the amount of customers is that we're only including SEA-ME-WE 4 there as one customer when really it's about 16 different Tier 1 carriers are going to get the platform, and that also opens up other opportunities to clearly talk to them about their domestic architectures. So I think we're still at the early stages of this. CoreDirector deployments, I would also say we've still got some growth on that. It's a totally integrated part of the family and we're only at about 50% capacity on average in some of those CoreDirectors and that's entirely compatible with the 5400. The initial 5400 that we are deploying are less than 20% in capacity. So you are seeing even in that dynamic somewhat of a chassis and a card characteristic as well. So I think, Jeff, we look at all of that and we look at the engagements that we're having with a broad range of applications -- and that's the other thing I would say, is CoreDirector was really at a very specific market niche almost. What we're seeing with 5400 with OTN and with the 100-Gig is a much broader applicability and the fact that we're seeing customers in all different kinds of market segments get early traction with it.

Our next question comes from Brian Modoff of Deutsche Bank.

Can you give us at least an idea on the switching side, what you're seeing from the order standpoint, kind of give us an idea what momentum you might have because you obviously had a sequentially quite a bit of a drop. And then on the WaveLogic 3 chip, how do you see that affecting margins as we move into the back half of the year?

Brian, let me -- on switching orders, I think we are not going into the depth. I don't need to probe again into the detail of that because, again, that can be misleading depending on the backlog, et cetera, doesn't necessarily roll through to the following quarter. I think what we're giving in our guidance is consideration of all the aspects that we see and we do expect switching to be up in the second half. Tom, do you want to...

Yes. In terms of the WaveLogic 3 margins, Brian, WaveLogic 3 does give us the ability to do more things on a single card, so it does reduce the overall cost base of the card, and as a result, we would expect some margin improvement on that. The cautionary note I would put around that is that we'll be getting -- we'll be beginning to deploy WaveLogic 3 in the second half of the year and probably we'll see the bigger effects of it as we move into 2013. The other point I would keep in mind around that is we're in a market, as we observed before, that's a continually competitive market and a lot of the steps we're taking in terms of cost improvements are to help us essentially maintain our place in the marketplace and continue to be competitive from a price perspective.

Our next question comes from Ehud Gelblum of Morgan Stanley.

In the Q each quarter, you actually give a breakdown on the switching between 5400 and CoreDirector. And last quarter, 5400 fell pretty hard and CoreDirector was actually quite strong. Within the -- can you just give us kind of a preview as to what the breakdown was? Because quite possibly, your 5400 actually could have gone up this quarter and already starting showing momentum, but you wouldn't necessarily know it by looking at your switching. So can you give us a preview as to what that looks like? And then I know there's certainly a lot of questions about backlog and order intake so far. But in the past, you've given us at least a direction on backlog. I may have missed it, you may have said it. But did backlog actually grow again? Or did it fall as you had a strong quarter this quarter. And then I have a follow-up on the balance sheet actually. So Jim, can actually talk about that a little bit?

Yes, I mean the backlog actually did grow. And as far as the breakdown between 5400 and the CoreDirector, 5400 was roughly flat from Q1. It was down slightly, but you can consider it flat.

So rough -- so it stayed in the $5 million level per quarter?

Roughly, yes.

Okay. On the -- I've got to hit the SEA-ME-WE 4 business again. Is that in -- when you came up with your guidance for next quarter, I mean, last quarter you said that it was going to be lumpy and that you -- when that comes in, we should expect to see it lumpy. When you gave guidance for next quarter, it sounds like you're guiding not only the second half strong, but it sounds like you're guiding the 2 quarters out being stronger than next quarter. But if SEA-ME-WE 4 is completely in next quarter, then it would kind of imply a little bit that you have a headwind going into fiscal Q4. So I know this has been asked 6 times already, but just trying to understand again what did you -- how did you account for SEA-ME-WE 4 in the guidance? And then the final thing on the balance sheet is you have a convert due next year. Are you planning on paying that off given your cash balance is actually quite strong right now or rolling that over?

Yes, Jim?

Yes, what I said earlier in response to the question about SEA-ME-WE 4 is we don't like to comment upon individual deals whether they're in or out of particularly guidance. What we can say is we do think SEA-ME-WE 4 will happen in the second half sometime. It's not necessarily binary and that we could get a piece of it in third quarter and a piece in fourth quarter. And that, that is just one of a number of puts and takes that are in our call for Q3. As you can imagine, there are a lot of things that are going to go one way or the other in Q3. But we believe that whether or not SEA-ME-WE 4 hits or a piece of it hits in Q3, we're going to have a good second half. So that's how I'd answer that question. With respect to the balance sheet, I can't comment on our plans. I would say that we are showing a nice growth in our cash balance and if we -- the amount which is due next May is about $216 million. If we choose to we can pay that off with cash and still maintain a very robust cash balance on our balance sheet. We're going to make that decision according to what's available to us in the marketplace.

Our next question comes from Rod Hall of JPMorgan. Rod B. Hall - JP Morgan Chase & Co, Research Division: Just a couple of follow-up questions on things I think that you've already started to talk about. First of all, on the margin mix, I know you said that a lot of this is due to chassis deployments and I guess I'm just trying to get a feel for what the 100-Gig business, which sound like it's going to accelerate in the second half of the year, is going to do to chassis deployments in the mix. And if you can give us any quantification of how much of your revenues are related to new chassis deployments versus other, why that would be helpful? And then I also wanted to just get you to give us a little bit of color on the 5430 deployment at Verizon? They've made some comments suggesting that they're using it for deployment of bandwidth for customers that want wavelength provisions, but that's a pretty small part of their overall business. And it just is -- it's a little bit unclear just how it fits into Verizon's network architecture, so it'd be interesting to hear from your point of view how it's fitting in. And that's it for me.

Yes, Rod, what I'd say about the question is that we don't think it's appropriate to get into the sort of granularity about chassis deployments and percent deployments and all that sort of thing that you're asking about. What we can say is that if you go back to the early quarters of the combination of these 2 companies, we had a very rich card mix from the MEN business because they, during their period of bankruptcy, had not been able to sell complete systems. So their mix at that time was over-rotated toward cards and was very nice. We are now in exactly the opposite situation. We've won a lot of new deployments around the world including some very large ones. And so we are, as a company, over-rotated toward chassis. The other thing that we said is that it is a competitive world out there and particularly in the larger deals, sometimes you give upfront discounts to gain market share and that also costs us in terms of early margins. So what we can say is that we're going to move out of this period of time and we will be on a more balanced basis between chassis and cards and we will have moved through the period of discounts. And both of those things, in addition to the fact that we're adding software into our transport platforms, should improve margins over time. We're not being specific on the timing because it is hard to say. I hope we'll continue to win new big business in which case the ramp-up in transport margins might be slower. But that's going to be positive for the long term if that happens. Rod B. Hall - JP Morgan Chase & Co, Research Division: And Jim, just to follow up on that, the 100-Gig business you guys seem to have won for the second half of the year, I mean it looks like a great chunk of business that you're winning. And it seems logical to me to assume that, that would mean that the chassis-deployment mix moves up in the second half of the year and then maybe the stabilization you're talking about comes next year. And I just want to make sure that, that's a reasonable assumption to be making.

I'd say that's a fair assumption to be making. We've said that this is going to continue into Q3. The question is Q4 and although we're not prepared to give guidance, we like what's going on in terms of our mix in all of our products.

Rod, the other thing I'd just add to that, it's, I think as Jim said, it's confluence of things broadly under the heading of mix. We've also got multiple new -- what's exacerbating the challenge is we've got multiple new platforms in market that are going through these similar dynamics at the same time. You're at an inflection point in the industry where you're getting a lot of new builds and that bodes well for the future. But the point about these new platforms is they're not -- the first iteration is not cost reduced and so we've got the opportunity to take costs out there. And when you engage with some of these large Tier 1s on these new builds, the start-up costs for them and for us that we share, things like demos, training systems, those kinds of things, sparing, et cetera. But it's a good news story for the business, for sure, because you're creating a large strategic footprint. So it is a confluence of elements. Let me just touch on the Verizon question. I don't think it's inappropriate for me to talk about Verizon's architecture, but I would talk generically. What we're seeing in terms of 5400 applicability is not just in the core switch, but also the ability to put it out into the metro and particularly with 6500, and you've now got a scalable family of platforms within the 5400. It goes right the way from a smaller switch right up to currently 7.2 terabits. And we're going to go beyond that as well, so it gives it a whole family, and I think that provides a programmable platform for a lot of these Tier 1 carriers and we're -- a lot of discussions around the flexibility of that as a standardized platform.

Our next question comes from Nikos Theodosopoulos of UBS.

Just some quick clarifications. On the OpEx, you mentioned that it should go into the $180s million due to these programs that will impact the second half. What happens when those programs are done? Do we see OpEx fall back into the $170s million post these R&D and other types of programs that didn't happen in the first half?

You're really talking about 2013 now, Nikos. And what we said about future OpEx is as follows: we've taken OpEx down to roughly the $180 million a quarter range. And yes, we were lower in the first half of this year. We're liable to be a little higher in the second half of that year. But $180 million per quarter is in the range of where we're going to be plus or minus this year. Now as we move into 2013, frankly, we're just beginning to think about our plan for 2013, but I do believe there's lots of leverage in our model. There are some elements of OpEx that we'll have to scale as we grow our top line. I think the sales cost is going to have to scale, to some extent, with our revenue. But all of our other costs, I think we can control. And that doesn't mean they're going to be flat at all because, I think, over time, you have to increase OpEx in some areas as your volume grows. But I do think there's a lot of opportunity for leverage in the model.

Okay. And then just one last one on the gross margin. Looking out several quarters into the future, when you start getting a higher line card mix, maybe not quite as high as when you closed the Nortel deal but closer to that, and the WaveLogic 3 chipset is embedded, do you see the transport margins getting close to where they were when you first reported post the Nortel deal? Or was that -- were those levels just abnormally high because the margin mix -- I'm sorry, the line card mix was just very, very high?

I think, Nikos, I think one of the challenge we've got as we look to 2013 and sort of beyond is this word convergence is actually finally beginning to happen, and we're delivering that into the marketplace. And one of the challenges when we talk about transport is we're going to be able to put switching capability clearly on to that with an integrated control plane, sell different software applications on to it. So with a platform-specific matter, I would expect the 6500 margins would improve. I would not particularly put that under the heading of transport given the other feature sets that we're going to be putting on it, but I think the combination -- so trying to answer your question that way, I think the things that help are clearly the mix, although we will be continuing to win new deals and roll out, we'll have the benefit of cards. We have a lot of software capabilities that we'll be rolling out next year on to that platform. Cost reductions, as well, should also help. So I think the combination of all of those, I think, help us get to our target model range of mid-40s over time.

Our next question comes from Scott Thompson of FBR Capital. Scott Thompson - FBR Capital Markets & Co., Research Division: I'll give you my word I won't ask any questions about backlog or SEA-ME-WE 4, but I did want to get a couple of clarifications in here. First of all, there were 2 10% customers. Were both of those regulars or was there a new one in the mix? And then secondarily, can we go back and talk a little bit more about these architectural changes at some of the carriers and the move in the metro area? So is there going to be a lot of work around that and is this kind of a structural shift in the industry?

Yes. So Scott, I think to your question, they were both existing customers, the 10%-ers in the quarter. Tom, do you want talk to the architectural?

Yes, in terms of the architectural change, there are a couple of things, I think, that are worth thinking about there. One of them is the different types of traffic that's typically occurring on the networks. And the other one is how people are connecting to networks and where that traffic is flowing. So on the first one, you're seeing a lot more dynamic types of traffic. And on the second one -- lot more dynamic types of traffic and also a lot more capacity being required at any given time. And the second one, you're seeing a deal where a good bit of the traffic that's inside the network is actually connecting data centers together rather than necessarily connecting users to data centers. So it's not necessarily visible in terms of traffic to the end users. So basically, what those things are really requiring in terms of an ultimate change in the network is the ability to first scale capacity at a rate that's -- at a cost rate that's lower than the rate which capacity grows. And the second one is being able to dynamically adapt to that capacity. So when you hear us talk about programmability and the ability to automatically control various functions in a network, it's really in response to those kind of fundamental shifts in traffic patterns. So over time, I think what you'll see is the network architectures begin to shift to a more programmable architecture that's really focused on being able to deliver capacity on demand across a wide variety of different types of services. Scott Thompson - FBR Capital Markets & Co., Research Division: Okay, let me try to break that one down for a minute. You gained good market share this quarter. In a market where a lot of people were down quite a bit, you guys held your ground. Do you expect that to continue, and why is that? Maybe that's a better way to get at this.

Yes, I think we've talked about in terms of the fact that we do expect to gain share moving forward and we expect to grow faster than the market. And I think there are 2 key issues we see as big differentiators for ourselves, so this idea of control plane that allows us to automate functions across the network and this programmability that allows us to be able to deploy network element that can be used for a variety of different purposes. So if you look at our switching platforms, for example, as Gary mentioned, they come at a variety of different sizes and can easily be expanded to handle more capacity. They can also start out as SONET/SDH, migrate to OTN and then also include packet functionality as time moves on. So that level of flexibly, we think, is another key differentiator for us.

Our next question comes from Sanjiv Wadhwani of Stifel, Nicolaus. Sanjiv Wadhwani - Stifel, Nicolaus & Co., Inc., Research Division: So just one clarification and one question. Jim, on the SEA-ME-WE 4 contract, where is that showing up in the balance sheet? I just wanted to get some clarification on that, and then had a quick question on switching.

We've collected some of the money even though we haven't recognized any revenues. So there is some in deferred revs. We also have deferred cost of goods sold. So both places. Sanjiv Wadhwani - Stifel, Nicolaus & Co., Inc., Research Division: Got it, okay. So there's nothing in finished goods inventory or anything of that nature, right?

No, I don't think so. If there is any, it's a small amount. Sanjiv Wadhwani - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then just on the switching piece, if you sort of exclude the SEA-ME-WE 4 fact that you might be able to recognize revenues in July or October and if you exclude that piece, are you still expecting switching revenues to be better in the second half versus the first half?

Our internal numbers would show it, so yes.

Our next question comes from Jess Lubert of Wells Fargo Securities.

I wanted to follow up on the question regarding the outlook for sequential decline in sales even though it sounds like orders remain strong and backlog continues to grow. So assuming you hit the midpoint of guidance, would it be right to assume we should see fairly strong sequential growth in Q4? And then I was hoping you could talk a little bit more about how you're feeling regarding the general tone of activity and visibility with some of your international customers. And to what degree your expectations surrounding a better second half are driven by an uptick in international? Or is that really more dependent on improvement with domestic accounts?

Yes, why don't I take the second one first and Jim will talk to the guidance issue. I think what we're seeing is, clearly, Europe is a little bit challenging, though I would reiterate that we are not exposed as many others are to Southern Europe. And we're seeing steady business out of Northern Europe. But I think the areas for growth for us are markets like Brazil, Russia, the Middle East, India, so I think we're seeing a good preponderance of international builds. A lot of them are greenfield builds as well, so they are this next-generation architecture. They're sort of 100-Gig, 5400-type build-outs, and I think that's helping offset any particular challenges in Europe. So I think the architecture around the business is to get more balance to it. And I think over the course of the last 2 years, I think we've been able to achieve that. 25% of our business actually comes from outside of pure carrier infrastructure and we've also -- so that's in places like enterprise, research and education, government, et cetera, and those have been strong markets for us. And I think we continue to see growth both in North America and internationally for those segments. Submarine is a new segment to us, and I think we're very pleased with the momentum that we're seeing in the submarine space as well, which is clearly predominantly international. And the North American market for us has been strong. And I think our architectural wins in some of the major Tier 1s, though we haven't accrued a lot of the revenues of that, they are big architectural wins that, over the course of the next 1 to 3 years, puts us in a very strong position in North America as well. Jim, do want to talk about...

On the question of Q3 and Q4, as you know, I'm not going to get into -- I can't really get into the guidance of Q4. But let me tell you, first of all, we feel good about the progress of the year-to-date. Our outlook from our sales force for orders for the second half is good as we sit here today. Historically, we've had the strongest orders quarter in our fourth quarter and a strong order quarter in Q2, and Q1 and Q3 are somewhat weaker. But as we look into Q3 today, we feel good about the outlook for orders in Q3. So that's about as much as I can say, but we feel good about our prospects.

Jeff, other thing I'd say again is we overachieved Q3 revenue guidance in Q2. So clearly with the guidance range that we've given, it was also very -- the midpoint of that range is about where consensus is right now. So we do see momentum going forward to be able to achieve that.

And our final question comes from Michael Genovese of MKM Partners.

My clarification here is just on the book-to-bill, I don't think you mentioned book-to-bill. Looks to me like it was probably a little bit below 1 in the quarter. I just wanted to get a check on that. And then my question is on the CESD product margins. If you can just comment where they are now compared to maybe where they were 1 or 2 years ago, are they consistent? Are they consistent with your expectations, or have there been changes in CESD gross margins?

Yes, Mike. We did say that we grew our backlog in the quarter, so that would say that our book-to-bill was greater than 1.

On the CESD margin, we're in transition into those platform. We've got a number of new platforms into market as well and we're increasing the aggregation capability within Carrier Ethernet over the next few quarters as well. But I think on a point-to-point basis, the margin is probably down given the fact that we're introducing these new platforms into market.

Okay. So just on the book-to-bill, back on that, I guess my assumption was based on you did say there was some revenue recognition from orders in previous quarters and the revenue number this quarter. But I guess you're saying with the growth in the backlog that the product book-to-bill was -- basically sounds like new orders were greater than the product revenues in the quarter is what you're saying, Jim?

We didn't refer to either products or services. We just mentioned that the overall backlog is at 12%.

Thanks, Mike. And thank you, again, everyone for joining us today. We look forward to seeing many of you again in New York on June 11 for Analyst Day. Have a good day, everybody.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect, and have a wonderful day.