Ciena Corporation (CIEN) Q4 2016 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to the Ciena Corporation Fourth Quarter 2016 and Year End Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the conference over to Gregg Lampf, Vice President of Investor Relations. Sir, you may begin.

Thank you, Shannon. Good morning and welcome to Ciena’s 2016 fourth quarter and yearend review. With me today is Gary Smith, President and CEO; Jim Moylan, CFO; and François Locoh-Donou, COO. This morning’s press release is available on National Business Wire and ciena.com. We also have posted in the Investors section of ciena.com an accompanying investor presentation, including certain highlighted items from the quarter and the fiscal year being discussed today. In our prepared remarks, Gary will discuss management’s view on the market and overall progress, and Jim will provide details on our results as well as guidance. We will then open the call to questions from sell-side analysts, taking one question per person with follow ups as time allows. 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-K is required to be filed with the SEC by December 28, 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 to everyone on the call. As Jim will outline in a moment we saw in Q4, our best ever quarter for revenue, our best ever quarter for orders, which was significantly higher than revenue and enabled us to exit the year with the highest backlog we've ever had. And overall it was an excellent finish to a year that positions us extremely well for 2017. These strong Q4 results helped us post our seventh consecutive year of growing faster than the market and improving financial performance. Helping to make 2016’s adjusted net income to the highest in Ciena's history. As you know, we've always believed that winners and losers would emerge, as our industry evolved towards converged solutions for the on-demand world. Our strategic investments, our differentiated portfolio and customer experience, our diversification of the business and our consistently improving financial performance have all position Ciena as one of the clear winners in this industry shakeout. We've done extremely well in this environment, however we are not content to keep running a race that has essentially already been won. Because as we've seen over the past year the industry has begun to shift yet again. Creating if you will, a parallel race, which is all about enabling greater choice for the buyers of network technology. And again we have anticipated the shift and we are positioning ourselves to win this race as well. A little more context perhaps on what we mean about enabling the market with greater choice. For years now networks have experienced unrelenting growth in traffic and as a result large increases in network capacity have been required. Frankly, we don’t see this changing anytime soon. With end users increasingly requiring on demand services and the truly intelligent internet taking shape over the next decade. While this dynamics create an opportunity for service providers to rethink their business models they also mean fundamental changes for their networks. So many of our customers are embracing IT tools, like software programmability and virtualization, essentially to better manage the changes that are occurring within both their network and their overall business. And this is really at the heart of the next industry shift we're seeing developed. It’s essentially the convergence of the telecom and IT worlds, and indeed some of the largest carriers in the world are already merging their network and IT groups into unified teams. This kind of convergence means that the network is increasingly influenced by an IT mentality, that is shaping a new vision for network architecture and one that is less about proportioning and monitoring, and really more about orchestration and control. For network suppliers historically winning in the old telecom environment largely depended on their ability to protect the walled gardens, if you will, that had been built. But the IT mentality that is coloring today's network decisions means that there are new expectations for how network technologies will be deployed, purchased and implemented. Because of this we believe that winning in the new environment will depend on the supplier’s ability to deliver what the IT world has enjoyed for years. Mainly openness, co-development and agility in how technologies are really consumed. We are already seeing that different businesses are tackling this shift to IT centric networks in different ways, as you would expect, really depending on their unique business strategies. There is not necessarily a wrong way to make the shift as long as it’s made with market leading technology. So Ciena is committed to becoming the leading enabler of choice in the new environment of open IT centric networking, having the ability to work with customers no matter how they want to collaborate, innovate and consume network technologies. And we will continue to do so with the underpinning of the best-of-breed technology. In fact we’ve been learning, investing and preparing for the IT centric network over the last several years, and we’ve already established a strong leadership position. Some examples of which, we have what we believe is the market's leading orchestration software in Blue Planet. We've developed a dev ops tool kit that enables customers to add network resources and program new services at cloud speed. And we now have over 25 customers for WaveServer, we have captured the market's attention with a new kind of network solutions that leverages the open APIs and serve like management that IT buyers want. Our Emulation Cloud provides an open environment for customers and third party developers to create and test custom applications. We recently launched a new distributed NFV solution that includes full integration with third party components, enabling greater choice and eliminating vendor lock-in. And finally with WaveLogic AI, we’re setting a new benchmark for scale, automation and analytics for a truly self-driving network. I think all of these developments really underscore our ability to unit software and hardware strengths for greater customer value. These are important first steps, and they’ve created a foundation that already frankly separates us from our competitors. We are benefitting from first mover advantage and a deep commitment to what the customer really needs. So as this next shift in our industry gets underway in earnings, we are fully committed to being the leading enabler of choice and we will continue to develop our business accordingly. In closing my comments, it's been another excellent year for Ciena. We continue to deliver exactly what we have promised, taking share along the way, increasing our profitability and positioning ourselves for the next wave of opportunities. And finally after such a strong year, I’d really like to take a moment to say thank you. Firstly to the entire Ciena team, for your unwavering dedication to our customers, our technology leadership and our business, and you truly continue to inspire me every single day. To our customers, thank you for entrusting your agenda to us, we take that responsibility very seriously and we remain fully committed to being a customer first partner to your business. And finally to all of you on the call, we truly appreciate the support you’ve shown us over many years, and we look forward to engaging with you in the year ahead. With that I’ll hand over to Jim.

Thank you Gary, and good morning everyone. The strong results we have posted this morning, for both our fiscal fourth quarter and the full year, demonstrates Ciena’s differentiated performance over the competition. We continue to grow faster than the overall market. We are steadily improving our operating leverage, profitability and cash flow. And we are extremely well positioned as the industry shakeout continues. Through leading technology, strategic investments and the diversification of our customer base we have truly transformed our business and it is directly visible in our results. It is also visible in the market place, just this week analyst firm IHS released the results of its latest global survey, on optical leadership, which measures network operators perceptions of the vendor community, and in the eyes of the market Ciena truly hit its stride in 2016. The report says that we once again took the number one overall position, claiming the top spot in six of nine categories, including technology innovation, R&D, product reliability, service and support, solution breadth, and management software. We reclaimed the top spot in transport SDN and control plane by a wide margin, displacing Huawei. Underscoring our focus on the value of software as a driver of openness and choice, and perhaps most importantly the fact that we were named the overall leader, but not cited as the price leader proves that we are winning on the total value that our technology and our people bring to the table. We believe this illustrates a high level of customer trust and strategic partnership. Turning now to our results, for the full fiscal year revenue of $2.6 billion represents growth of 6.3%. For the year some of our biggest growth drivers are directly attributable to our diversification efforts. Globally non-telco sales for the year were 31% of revenue, representing an 11% increase year-over-year. Enterprise sales were up 34% for the year, direct web scale revenue was up about 25% and MSO sales were up 11%. Additionally, revenue from our resale agreement with Ericsson was up about 20% for the year and submarine sales were up 9%. That is a vertical driven largely, by web scale demand. From a regional standpoint both APAC and North America exclusive of AT&T provided very strong growth at 31% and 11% respectively. As we expected AT&T was down slightly coming off a record year in 2015. EMEA was essentially flat for the year, but we are encouraged by that regions progress and we expect to return the growth in EMEA in 2017. CALA was slightly down in 2016, but we do feel good about our prospects going forward. Adjusted gross margin for 2016 was in our mid-40s target range at 45.5% and adjusted operating expense was $887 million resulting in adjusted operating margin of 11.4% for the year. We generated $290 million from operations in 2016, and $182 million of free cash flow. Adjusted net income was 215 million and adjusted earnings per share for 2016 was $1.38. Clearly our value proposition is resonating with customers and momentum is building, we are executing well and our business continues to gain operation leverage. By every measure, we delivered in 2016, what we said, that we would deliver. One of the reasons that we were able to achieve such strong annual results is our performance in Q4 which was an excellent quarter for our newer products in particular. With 14 new wins for WaveServer in Q4, we more than doubled the number of customers for that product, for a total of 25. The market response to WaveServer has been very strong and our success with that product is one reason why Dell'Oro named Ciena the number one share leader in both the ICP market and the overall DCI market last week. We also continue to be excited by the traction we're getting with Blue Planet, 2016 played out as we expected. Going into the year, we said that 2016 would be a year of gaining Blue Planet footprint and that we did not expect significant revenue contribution. In Q4, we added five new Blue Planet orchestration customers brining our total customer count to 18. And we are encouraged that orchestration revenue began ramping in Q4, albeit from a smaller base. And finally, we added another four customers for our 8,700 Packetwave platform for a total of 40. We expect the 8,700 to play increasingly vital role as customers shift to IT centric networks. In Q4, total revenue came in at $716 million. Revenue was strong in part due to our best ever quarter in APAC, which continues to be driven by strength in India and in submarine applications. We also had a strong quarter in EMEA, which was up 20% year-over-year and in North America, which grew 11% year-over-year exclusive of AT&T. International sales made up 39% of total revenue in Q4 and direct sales to web scale customers were in our expected range of 5% to 10% of total revenue. Q4’s adjusted gross margin was 45.2%, down a bit from a very strong Q3, largely due to the mix of customers and in various stages of deployment. Operating expense in Q4 was $234 million. We achieved $92 million in adjusted operating profit or 12.8% adjusted operating margin. And as Gary mentioned orders in Q4 were the strongest on record, significantly higher than revenue. We closed the quarter with a record backlog of $1.5 billion, so we're seeing a lot of activity in the market. Our balance sheet continues to improve and in fact has become a differentiator against the competition. In Q4, we generated a $137 million in cash from operations and we ended the year with $1.14 billion in cash and investments. Adjusted earnings per share in Q4 was $0.44. I’ll now turn to guidance. First for our fiscal first quarter. We expect revenue to be in the range of $615 million to $645 million, consistent with the seasonal reductions in order volume and customer deployment activity that we typically experience. We expect Q1’s adjusted gross margin to be in our mid-40s percentage target range and we expect adjusted operating expense to be in the range of $220 million to $225 million. For the full fiscal year, we continue to believe that we have the strongest position in the industry and we believe this momentum will translate into another very strong year for Ciena in 2017. We expect to continue to grow revenue faster than the overall market which we believe is growing at mid-single digit rates. We expect adjusted gross margin for the year to be in the mid-40s percentage range. We expect adjusted OpEx to average approximately $235 million for quarter over the fiscal year. And we expect adjusted operating margin to be in the range of 11% to 13%. Looking beyond 2017, we continue to believe that we can achieve the next stage milestone for profitability that we set last year. As a remainder, at that time we targeted an adjusted operating margin of 15% within the next three to four years. To achieve this milestone, we need to continue on our past of gross margin expansion as a result of increasing software, packet networking and solution sales, elevating the overall business value Ciena offers to a broader set of customers. We also expect to continue to take market share and to grow revenue faster than operating expense. Of course the exact contribution of each of these factors will vary quarter-to-quarter. But we are confident that overtime the cumulative effect will result in greater value for both our customers and our shareholders as we position Ciena as the leading enabler of choice in our market place. Before I close, I want to make a clarification to something that I said earlier. I believe I said that we had $1.5 billion in backlog at the end of the year that was misstatement, we have $1.15 billion in backlog at the end of the year. Sorry for that misstatement. Shannon, we will now open the line for questions.

Thank you. [Operator Instruction] Our first question comes from Jess Lubert with Wells Fargo. You may begin.

I want to squeeze two in. First for Gary, I was hoping you could help us understand, when you look at the upcoming year and some of the opportunities you're positioned to address in metro cloud, the submarine market, what you think are likely to prove most impactful in the short term, which are likely to take a little bit longer to get to the point where they're really moving the numbers. And then for Jim, I was hoping you could touch on the pricing environment, some of the factors that drove the sequential down tick in your gross margins despite what appeared to be a pretty good quarter for both the packet and the software business. Is this a sense that as some of these metro builds ramp up, we should expect lower gross margins? If you could help us walk through that, that would with helpful. Thanks.

Hi Jess, I’ll take the first one. So to think about it from sort of product segmentation and market segmentation in the short term what’s going to drive growth, I think you’ve seen it in this open multi-haul architecture around metro and even some long-haul rollouts, we’ve got a number of those already secured and we’ll be rolling those out during the course of the year. Markets that continue to grow are really the ICP, WaveServer type markets. We’ve got a lot of new platforms in that. The 8,700 Packet business continues to do well and encouragingly outside of North America as well. From a geographic point of view I think we feel much better about Europe, you saw a very much improved performance in Q4, up about 20% year-on-year. I think we’ve turned the corner with our particular challenges in Europe. And as Jim articulated Asia Pacific particularly very strong growth and we see that as we go through '17. India I would call out as a specific very positive market for us where we are very well positioned and I think we will see excellent growth in 2017. I think from a financial impact point of view and Jim referenced it, we are very encouraged by what we’re seeing on Blue Planet. Obviously that market is nascent and will take a little while to develop and really have a big impact on our bottom line. But I do think you’ll see some progress in 2017 in our overall software business.

Yes, on the pricing environment and gross margins, you know Jess that we have often said, there are a lot of different variables that impact our gross margin. And you’ll recall when we guided for Q4 we did say that we expected gross margins to come back to the mid-40s range, which they did. Overall the pricing environment has not significantly changed. What I would say is that some of the competitors who have lost market share continue to be very aggressive, particularly some of the smaller companies. But in overall form the pricing environment has not changed significantly. And I would say this, that as we move forward here and as we guided, we think our gross margins are going to be in the mid-40s this coming year. And yes we are going to get, we think a little help from software, we think our software business is going to be up 20 million to 25 million, in that range. But we do have a number of early stage, Tier 1, next gen metro deployments, and it’s a number of them, it's not just one. So that’s why we’re guiding to the mid-40s for this coming year. I don’t believe our margin for this year is going to be significantly different than it was for 2016.

Our next question comes from Doug Clark with Goldman Sachs. You may begin.

Maybe to follow up on one of those latter points you mentioned multiple Tier 1 deployments ramping. Can you talk about some of those, where they are geographically, and then in particular the one in North America that we’re all familiar with. Can you talk about how that’s coming in line relative to expectation? And then slightly different topic, you talked about web 2.0 having basically doubled the number of customer adds, I think 14 in the quarter, yet it sounds like if we just do the quick math on on direct Web 2.0 sales, they came down from about 12% into that 5% to 10% range. So can you talk a little bit about the mismatch in terms of timing and sequential pullback on web 2.0 business in particular?

Yes, so let me take the part around deployments. They’re characterized as next gen metro, but I think the lines are blurring, let me first of all say between metro and long-haul, particularly as we rollout various features on the 6,500 platform that really are a much more open architecture. And so what folks were looking at is a platform that will blur into both the convergence of long-haul and metro. As you know we’ve had a number of those wins in North America, pretty much a clean sweep across all of the Tier 1s and they will continue to roll out during 2017. So strong in North America, but I would also point out you've got various activity in Brazil, where we continue to do rollouts, similarly in Europe, we've had a number of wins in Q3 and Q4 that are translated into revenues during 2017. I highlighted India earlier, very large build outs in India at fairly early stages. And also -- I would also highlight Australia as well, as another geography. So very diverse, very broad spread. I know that the financial community is particularly focused on North America, but I would really encourage broader view around the global markets as we roll this out. Specifically around one or two of the metro deployments in North America and let me go to Verizon metro, which I think Dough is your question. We did take some initial shipments in 2016 and we continue to expect the gradual ramp across 2017. I would say though that in general I think the investment community got a little bit ahead of this because I think by-and-large that project is on track, and I think they will gain momentum throughout ’17, ’18 and through to ’19. So, I think that's from our perspective completely on track. To your second question on WaveServer, ICP type market was down a little bit from a direct point of view, but in fact was up from an indirect point of view and remember we have various manifestations of the ICP business, where we have a direct relationship with them and order flow was actually very strong and I think you will see just the normal ebbs and flows in the quarter was slightly down directly, but indirectly was actually up for the quarter. François you want to? François Locoh-Donou: On your -- just you said there was a contradiction between the increase in number of customers and the percentage of revenues for web scale. Just to clarify, we did double the number of customers on WaveServer to 25 customers, more than half of those are actually ICPs or web scale players. There are number of customers for WaveServer that are not in the web scale markets, in media, enterprise and also in the traditional Telco space. So we're incredibly excited about WaveServer as a platform. It has broad applicability across a number of segments, including in the web scale space where we're seeing a number of Tier 2 web scale players start to adopt the technology because of its programmability and performance. So generally very strong on in the ICP, but also broader application range.

And we did reference WaveServer in the comment about ICP, but that's not the only product that we sell into that market and I will remind you that Dell'Oro named us Top Share leader in ICP and overall DCI market just this past week. We're doing very well in that customer set.

Thank you.

Thank you. Our next question comes from Dmitry Netis with William Blair. You may begin.

On the M&A side, we had been watching closely here, can you guys kind of just give us some color about any impact that you may see or if anything maybe as a result of century link and Time Warner Cable, XO and all the hoopla that we’ve seen throughout the year and how that may sort of project into the 2017 timeframes? Certainly the guidance isn't reflecting some of that maybe here or including some of that here, so I'd love to hear your thoughts there. And then secondly, if you could talk a little bit about the optical layers disaggregation that's going on and the effort that AT&T is sort of leading to disaggregate and maybe some of the ICPs as well, but for the most part we have been waiting for AT&T to kind of get into this 100 gig long-haul project and maybe there is a completely different RS deal, completely different way of approaching that. So if you could comment on how they are going to go to market with that and how they are going to roll that optical layer disaggregation, how are you positioned to that, that would be great. Thanks.

Dmitry, let me take this sort of the overall environment around and I think specific around sort of customer M&A. First of all I think it's been a facet of this space globally for a long time, and we’ve seen a lot of it internationally, again we’re seeing considerable amount of it in North America. I would say of the announcement so far, I would overall say that generally we view them very positively for Ciena over time. I think we’re very well positioned in virtually all of those announcements with excellent relationships with them. We are not seeing really any impact to us at this time in any way, shape or form. The order backlog is probably the best example of that and the visibility that we have is the best that we’ve ever had. I would say a couple of other sort of dynamics around it, we’ve seen historically during this is that bandwidth demand continues to grow and so this notion of really pausing for a long period of time as they come together is not one frankly that we’ve witnessed in some of our historical M&A activities with customers. You’re bound to see a little bit of that, but I think the point that I would make is Ciena is now very diversified with global scale, expanding customer base and application set, and I think we are extremely well equipped to deal with any ebbs and flows that may come. François you want to? François Locoh-Donou: Dmitry on the question of AT&T and this optical -- what you’ve termed the optical layer disaggregation. It is in a way very exciting for us because it is the manifestation of what Gary talked about earlier, which is the shift towards more openness and programmability. And AT&T is open road and is one example of that, but we are seeing it in other parts of the industry. For example, WaveServer running over foreign line systems is a manifestation of that. The 400 gig announcement we actually made with AT&T for their network in the metro is a manifestation of that, and the big shift we’re seeing in the industry is a shift from closed architectures and closed proprietary systems towards more open systems, and you are kind of seeing that in the results of performance of different vendors. As Gary mentioned we have been preparing for that for a long time around openness and programmability and what we are doing with WaveServer, open interfaces, Blue Planets and WaveLogic AI are example of technologies that enable that shift. So generally a trend that we feel very excited about and we think we will accelerate in '17 and beyond.

Do you guys expect the AT&T business to be up from 2016, in the '17 timeframe?

We think it will be flat to slightly down for this coming year. [Multiple speakers] But we are doing very well with that customer and we look for a strong customer from AT&T for a long term.

Thank you. Our next question is from George Notter with Jefferies. You may begin.

I was curious about your backlog. I think you said $1.15 billion. In the past you've talked about shippable backlog, also i.e. shippable within a year. Can you give us that number by any chance?

No, we won’t give that number George, but the vast majority of it will be shipped during the next year. We do have as we’ve said a number of long term maintenance projects in our backlog which are delivered over several years. But by far the vast majority of it will be delivered in 2017.

Is it fair to say the year-on-year growth in backlog, then, was driven not by longer-term services contracts, but [multiple speakers].

That is fair to say, yes. We have a very, very strong hardware backlog.

Okay. And then also just curious about 2016 comp [ph]. I think in prior quarters you've given us a customer update on ’16 comp. I was just curious if there's a number you can give us for this quarter. Thanks.

Yes, we’ll look that up and we’ll give it to you in just a moment George. Hold on one movement, you’re going to get that for you. Its 56 correct, thank you.

Thank you. Our next question is from Paul Silverstein with Cowen & Company. You may begin.

I have two questions, if I might. Jim, was there a currency impact both on revenue and on margins? And with respect to 2017, when you look at the revenue composition is there a shift in terms of chassis versus line card, given the coming metro buildouts and some of the other stuff you all referenced in the call?

Yes, there was not a significant FX impact on revenue in the quarter, I mean there are always puts and takes, but there was not a significant impact. As you will recall, the quarter ended before recent important political events in the U.S. François Locoh-Donou: Paul in terms of chassis versus line card, I would say, we do have in 2017 a number of early phase deployment in sort of Tier 1 next generation applications, we call them multi-haul applications because increasingly as Gary mentioned there is a blurring between metro and long-haul boundaries. And this shift implies that most customers want to define the behavior of network in software rather than hardware. And so we have these early stage deployments across the board that are somewhat shifting the mix a little bit toward chassis, but overall it’s driven by a number of new wins we’ve had this year and we expect to have in early '17.

Jim, just a clarification, if I may. On the comment about FX, when you said it didn't have a meaningful impact, are you expecting it to have a meaningful impact going forward?

No. And just to be clear, when I said that I was referring to against our expectations, when we gave guidance for the quarter. The quarter's results were not significantly impacted by FX effects and as we look into the coming year, again I don’t see a significant change from FX. Now, if foreign currency movements move about, then, yes, we might could. But for now we don’t see -- we don’t expect FX to be a significant part of the puzzle for us in 2017.

Our next question comes from Patrick Newton with Stifel. You may begin.

My first one is just trying to pars out the 2017 revenue potential. You talked about mid single-digit growth for the industry, share gains for Ciena, incremental revenue from Blue Planet that I think calcs to about 1% year-over-year growth, strong backlog and then benefits from the Verizon metro rollout. If we put this all together is it fair to assume a high single-digit growth rate for Ciena in 2017? And then the second question would be on Blue Planet. What is the time frame for when you think you could start to see meaningful revenue beyond the $20 million to $25 million you talked about in 2017?

I think the influence that you've made is a fair influence. So we’ve given you a lot of points of guidance for 2017 and as you back into a revenue growth rate, then that’s where you get to, absolutely.

Patrick, let me take the Blue Planet piece. As Jim talked about, we added a number of new customers in Q4. We're seeing very good traction -- still nascent, still early days, multiple pilots, trials and awards sort of characterize the market. I think we begin to see some single-digit million revenues as we came out of Q4 and I think that will continue to scale during ’17. My own view is I think given what we're seeing, I think as we turn from 2017 into 2018 it will turn into tens of millions of dollars. And I think over a course of time you can get into that sort of $50 million to a $100 million range over a couple of years and that then becomes to be very meaningful both from a market share point of view in a fast growing early market. And also the financial impact on Ciena or as Ciena -- as Jim said, getting to our next target goal of 15% operating margin that's going to be a key element and helping us get there.

Thank you for taking my questions. Good luck.

Our next question is from Tim Long with BMO Capital Markets. You may begin.

Two questions, if I could. First, on the Ericsson partnership, if you can just update how things are going there, particularly in light of the management changes that are going on at the company. And then, secondly, on the OpEx, it looks like the guide for next year is a mid single-digit increase. Anything out of the ordinary in there or is that just growth of the Company and investing in some new technologies? Thank you.

Yes, only on the Ericsson relationships, things have been progressing well. As we said, our revenue with Ericsson year-over-year was up 20%, we've done very well with the Telstra relationship with Ericsson and that continues to expand into new application beyond the initial that we came into Telstra with Ericsson for. And then around the globe, there have been a number of new wins this year with Ericsson, typically in geographies where Ciena doesn’t have a physical presence and Ericsson has a strong in-country presence and relationship and we’ve been able to work together to compete in those countries and win new business. So overall, we continue to be pleased with the progress with the relationship.

And with respect to OpEx, the guidance that we’ve given is consistent with what we’ve done in our annual plans for 2017. And we have a very disciplined approach to establishing OpEx, we look at the opportunities for investment whether they be R&D or in the field, or even in the back office and we make our choices in prioritize based on the fact that we are going to spend where we need to, but we are also going to continue to increase our operating leverage. If you look back over the past five years we’ve grown OpEx about 5% a year. We’ve grown revenue two or three percentage points higher than that and I think that that’s the kind of forward view you can expect from us.

Our next question is from Vijay Bhagavath with Deutsche Bank. You may begin.

It's great to hear on the order backlog strength getting into your new fiscal year. Please helps us out here in terms of color on new optical networking projects here in the US. In particular I'd like to hear how do you see fiber-to-the-home playing out? Do you see that as a stronger rollout cycle versus metro? Or do you think both metro optical and fiber-to-the-home would be approximately the same in terms of rollout intensity? And then also quickly on hyper scale clouds and metro, do you see the need [indiscernible] 200-gig products in the New Year? Thanks. François Locoh-Donou: I’ll start with the -- Vijay, François here, I’ll start with the 200 gig question. If you look at 200 gig, we have shipped several thousand ports of 200 gig already in 2016. And that's one of the competitive differentiators for Ciena because we're seeing some of our competitors getting excited about potentially shipping 200 gig in 2017. And frankly for us that’s a little bit of yesterday's news because we’ve shipping 200 gig for several months, and in '17 we’re going to start shipping 400 gig ports, and that’s really where we think certainly where the market is moving in metro. And we’re also extending the 400 gig distances into original networks. That’s happened in the ICP and the web scale space you mentioned, but also in the carrier space increasingly, we're going to be shipping 400 gig in '17. As it relates to fiber-to-the-home, yes we do see more -- basically the general trend is that both in the carrier space and in the MSO space, customers want to push more capacity to subscribers and end users, and increasingly to do that they need to push fiber further out at the edge of the network. Whether in all cases fiber will reach the home is not decided and a number of our customers are looking at a number of architecture and architectural choices to get that done. But I think what you are going to see over the next two years is the fundamental rethink of access networks and you are seeing that in the access networks of our carrier customers, AT&T for example in their Domain 2.0 architecture have project where they’re really reinventing their access networks and they’ve announced things like core central office reinvented as a data center. That's really about leveraging network function virtualization to reinvent their access network. But MSOs are also going to push fiber deeper in their networks and over a period of time that’s a great opportunity for Ciena, on our Packet and optical platforms.

Perfect. Just a quick bigger picture question for Gary. Gary, do you see Ciena as a share taker in 2017 or is share stable a more reasonable assumption? Thanks.

Thanks Vijay, absolutely a share taker. I mean we’ve taken share in the last seven years, we’ve pretty much, whatever the market rate has been, we’ve been almost double the revenue growth. I think on a global basis now with our scale I think we are very well position to continue with that in '17. So I expect us to take market share in '17, let me be really clear.

Our next question is from Rod Hall with JP Morgan. You may begin.

I wanted to ask about North America. We understand that the deployments there are going really well. I had two questions on this. One, can you comment on your performance in the deployments so far and what you think your potential for share gains is, share shifting from where the deal started? So I guess that's one question. Another is, we understand more cities are being added to that deployment plan over time. Can you comment on that or confirm that that's happening or you think it's likely to happen in the near future? And then I also -- I want to go back to this comment on software, Jim, you made. You said you think it's up $20 million to $25 million. That's a significantly better growth rate on software than we had anticipated. So, can you give any more color on that number? Is that a single customer driving that or are there multiple customers driving it? Thanks.

Okay on the software question, we’ve invested a lot of money in our software applications. And this kind of growth, 20 million to 25 million or so is within our range of expectation for the business. And remember when I said that I was talking about fiscal '17. Now there are a number of elements to our software business. We have the applications business which includes our network management software, and we have software support which is a service. And it’s the combination of those elements which we think leads us to the $20 million to $25 million number. François Locoh-Donou: Thank you Jim and Rod on your question on specific Tier 1 metro deployment I think you were referring to the Verizon metro deployment source. And generally we are on track with that deployment as it relates to our performance, there were several milestones that were agreed with Verizon around initial lab trials and sort of office applications and then starting commercial deployments and we have basically hit all of these milestones on track. As it relates to the number of cities, there were a number of cities that were assigned to each vendor a few months ago, that assignment hasn’t fundamentally changed. And I think as we said on the last call we are really pleased that we are getting our fair share of these deployments. And we expect a gradual ramp in 2017 as per the plan.

Great. Thanks. Could you guys comment real quick on the WaveServer customer adds. How exposed are you guys to Greenfield builds on WaveServer? Is it a majority of your exposure or are a lot of those adds are customers in existing builds?

The interestingly one of that unique aspects of the WaveServer is it’s a platform that works on foreign line systems. So it can be installed on line systems from other vendors and a number of our deployments actually are Brownfield, so they are going over other vendor’s deployment largely because the performance characteristics of WaveServer are frankly highly differentiated in the markets. So of the 25 customers that we announced, if you want to sort of look at it numerously, I would say probably around 40% of those would be over foreign -- what we call foreign line systems, so other vendors installed base. And then the others ones are on more Greenfield deployments.

Great, thank you guys.

Our next question is from Simon Leopold with Raymond James. You may begin.

First, another clarification on the comment Jim made on the software revenue. I want to make sure I've got the appropriate baseline. When you referred to the $20 million to $25 million of software, that is growth above and beyond the fiscal ’16 roughly $49 million of software sales? Or are you talking about the software and services combination that you're comparing that to?

Yes, I was talking about software and services combination, but it's also true of the software piece as well. And by the way if you look at that number, it was a $125 million in ’16, it was a $100 million in ’15. So we showed that kind of growth in 2016, very consistent with what we expect in 2017. Mostly Blue Planet is what's driving that growth in ’17.

Great. Thank you for that. I wanted to talk a little bit more about where you see the web scale customers going in that you this quarter talked about being in that 5% to 10% range again. And you did mention also good exposure for submarine applications. How do you see that particular group of customers trending in your fiscal ’17 expectations? Can we see them in a range of 10% to 15% of revenue? And how should we think about the applications beyond the submarine comment? Thank you.

Let me take that sort of the last part of that first. I mean in terms of the overall growth, I would expect them to continue to see very healthy growth. I’d remind you that as you alluded to we have various manifestations of that growth. We have the direct relationship where we're selling to where they can get direct fiber, for example, and we have indirect. And particularly as they expand indirectly their ability to get their own fiber is more and more challenged, so we have a more of an indirect free party relationship. I would continue to see growth both at the direct level in terms of dollar terms growth. Dollar terms growth in terms of indirect, that we can track as well in submarine, in international deployments as well. So, I think we feel very good about that segment, particularly with a lot of things like WaveServer and even Blue Planet another applications coming on to them that we can support them with. François do you want to? François Locoh-Donou: To the latter part of the question, specifically in the submarine space, increasingly we have a lot of influence, the web scale place has a lot of influence on what capacity gets deployed where and we've seen they are going to be probably exceeding this range of we said 10% to 20% overall, but in the submarine space they are driving increasingly a significant portion of the overall submarine capacity that’s installed out there and we see that trends continuing in '17 and beyond.

And I’ll just bring you back to our new announcement on WaveLogic Ai. This is a set of technologies which we believe fits very well with the web scale customers in their submarine applications, in their metro applications and in their long-haul applications. And by the way it's not just a web scale product, but it's going to drive product -- our market share gains we believe in that segment.

Our next question comes from Michael Genovese with MKM Partners. You may begin.

I think most of the questions have been answered -- have been asked. I'll just circle back on gross margins one more time. Maybe you could talk about the pricing environment you're seeing from carriers versus what you're seeing from suppliers. I think particularly on optical components there's probably some tightness and possibly even price increases in key products, so if you could comment on that. And then how is the strategy? Can you keep gross margins at their current levels and possibly a little bit better and make sure they don't get worse from here in that type of environment?

Sure let me take the first part of that and then I’ll ask François to talk particularly about the supplier context of that. As Jim said, ebbs and flows on the pricing environment, not really seeing anything appreciably change. You’re seeing some of the smaller players get desperate, but I think that's fully recognized and subsumed into the market place at this stage. I think you’ve also seen over a number of years, our ability to expand our gross margins. And I think that’s through essentially two main elements, one is just efficiencies in global scale of the business and the second one is the technological innovation that we’ve bought into the market place. Essentially putting more and more software delivered into the platforms. So I think we have a very good roadmap, WaveLogic AI is certainly a key part of that that we can continue to do that. I think also aided and abetted overtime by the Blue Planet software as well which I think, they are key elements, all of these, and it’s getting to our 15% operating margins. So I think we have a very good view around the steps that we need to take to get there. Let me ask François to talk specifically around the supply chain. François Locoh-Donou: Mike, your observations about potential tightness on suppliers is a very -- it's a relevant question and I think there is two aspects of that. One is around lead times and -- in large part driven by significant build in China. As you know a number of our suppliers have had a full book of business and maxed their capacities on factors. So we’ve had to do a few things to make sure that we were maintaining good lead times and be able to maintain great customer experience. To your point on margin, we’ve -- our suppliers have a long term view of the relationship with us and so even though there may be a build out in China, at the moment I think they’re seeing -- they’re thinking long term about that. So we’ve been able to work with them on that, and the other piece of that is, they see us a share gainer, you’ve seen a number of reports showing that we’re number one in the various market segments in which we play. And that allows us to have I would say significant leverage in our discussions with our suppliers. The last point I’d make is, where we think it’s relevant for us, especially in terms of control our forward technology road map, we have made steps towards vertical integration. The TeraXion acquisition was a manifestation of that. But we've made some important bets in that space that are helping the differentiation of the platforms overall. Jim?

Yes, and to just repeat some of what was said, but to add to it, we feel really good about the progress that we’ve made in our gross margins. We’ve come from low-40s to mid-40s. And that’s due to a number of factors, our guidance for this year would imply that we’re not going to see a lot of progress this year in our gross margins. But we do think that it's going to be around where we were in 2016. We’re going to get some help from software, we’re going to have some new deployments that are going to be a little lower margin. But what I -- again I would repeat, we do expect to get to our 15% operating margin. And I’ve told move of you that the way to get there is some operating leverage. But we do think we’re going to have to get some improvement in gross margin to get to that 15%. And we see that it's on the way.

Thanks very much for taking the question and for the well thought out answer. Thanks

Alright thank you all, we appreciate you taking the time to connect with us today, we look forward to connecting with you over next period of time over next weeks. Happy holidays to everyone and we will see you soon.

Ladies and gentlemen this concludes today's conference. Thanks for your participation and have a wonderful day.