Eyeing convergence, Ciena’s outlook improves

Raising its expectations for the year amid continued revenue growth, Ciena attributed its current success to the burgeoning—though so far not clearly understood—market for converged optical Ethernet networks.

Sales of long-haul core transport gear jumped more than 50% sequentially to $74 million in Ciena’s second fiscal quarter (which ended April 30), driven by carriers’ need to both add capacity and transition to converged network architectures. Revenue from core switching gear grew 18% sequentially to $46 million. Those results led Ciena to raise its expectations for revenue growth this year to 36%, from between 27% and 30%.

“If we’d stayed as a pure transport player, we’d not be showing anywhere near the growth we’re showing now,” Gary Smith, Ciena’s chief executive officer, said on a conference call today.

“There’s a new market appearing,” he said. “Let’s call it converged Ethernet. You’re seeing a shift toward the compression of layers, from Layer 0 to…call it Layer 2.5. We’re at the fairly early stages of that. There’s no market data around it, so we’re still measuring it in older markets, like metro optical and long-haul optical. But it’s moved on us. We’re all struggling to get our arms around this new market, the combination of switching, transport and Ethernet.”

In a note issued earlier this week, Morgan Keegan analyst Simon Leopold wrote, “In the metro market, we expect increased integration of packet and optical in the next generation of equipment and have yet to hear about Ciena as a contender.”

Today, however, Ciena reported $160 million in first-quarter revenue from its “converged Ethernet infrastructure” segment (which includes optical and data networking gear). Revenue from that segment grew 17% sequentially to comprise 83% of the company’s total first-quarter revenue. Sales of Ciena’s 4200 multiservice transport platform were down sequentially, but the company shipped more than 1.5 times as much 4200 gear as it sold in the quarter.

Analysts believe Ciena is currently bidding alongside Alcatel-Lucent, Cisco Systems, Ericsson, Juniper and Tellabs to supply AT&T with Ethernet-based edge gear meant to support its IPTV services as they scale.

During this morning’s call, Smith also highlighted some of Ciena’s plans for future products. The company is developing next-generation reconfigurable add/drop multiplexer (ROADM) functionality and other technologies to lower the cost of long-haul transmission. It’s also working on adding VDSL2, ADSL2+ and voice-over-IP technology to its access gear. And it’s begun developing 40 Gb/s and 100 Gb/s transport and switching products as well as the combination transport/switching gear that will further enable network convergence.

In a March report, RBC Capital Markets analyst Mark Sue said Ciena was playing “catch-up” in the ROADM space. And during today’s call, another analyst asked if Ciena was playing “catch-up” in the market for 40 Gb/s equipment.

“The systems going out the door today are 10 Gb/s, upgradeable to 40 Gb/s,” said Stephen Alexander, Ciena’s chief technology officer. “We plan to have 40 Gb/s ready for that. The [requests for proposals] on the street for next-gen builds are looking for 40 Gb/s upgradeable to 100 Gb/s. We have technology development programs in place to put that into the market as it’s needed.”

Asked about the need to increase the capacity of its 640 Gb/s CoreDirector switch, he said, “It would probably be sensible for us to be looking at bigger switching capabilities.”