Ciena Corporation
Q3 2014 Earnings Call Transcript

Published: 6 Nov 2014

[Operator:]

Welcome to the Cyan Incorporated Q3, 2014 Financial Results Conference Call. (Operator Instructions). At this time I will turn the conference over to Maria Riley, Investor Relations. Please go ahead.

[Maria Riley:]

Thank you. I would like to welcome everyone to Cyan's third quarter 2014 financial results conference call. I am joined by Mark Floyd, Cyan's Chief Executive Officer; Jeff Ross, Cyan's Chief Financial Officer; and Michael Hatfield, Cyan's President and Founder. Earlier this morning Cyan issue a press release announcing the results for its third quarter ended September 30, 2014. If you would like a copy of today's press release you may access it online at the company's website www.cyaninc.com During the course of today's conference call, management will make forward-looking statements regarding a number of topics. These may include forecasts of financial results and business performance, including trends and actions expected to affect gross margins and operating expenses, future markets and prospective customers for our products, expectations regarding our existing customer’s demand for our products, futures cash requirements and resources, our ability to raise sufficient additional capital to meet our operating requirements among other matters. Forward-looking statements include those in which we use the terms believe, anticipate, expect, target, among other similar words. These statements are just predictions and actual results or events may differ materially. We refer you to the reports on Form 10-K, 10-Q and 8-K that we file with the SEC from time-to-time, including our Form 10-Q that was filed for the quarter ended June 30, 2014. These documents contain important factors that could cause the company's actual results to differ materially from those contained in our forward-looking statements. Please also note that we will discuss certain non-GAAP financial results. Our GAAP results and reconciliations of non-GAAP to the most comparable GAAP measures can be found in our financial results press release on our website. The information we are providing represents our views of the matters discussed as of today, November 6, 2014. Except to the extent that we have a duty to update, we do not expect to update our guidance even if circumstances change. I will now turn the call over to Mark Floyd. Mark?

[Mark Floyd:]

Thank you Maria and thank you all for joining us. We appreciate you taking the time to attend our call this morning. Given the early start we will keep our formal comments brief. Overall in the third quarter we executed well and continued to make progress on our core objectives. We grew revenue 9% over the second quarter to reach $26.6 million which is at the upper end of our guidance range. Our international revenue grew 42% sequentially to reach a record of $6.9 million. We continued to build out the second phase of the deployment for our large Korea network and won a large optical opportunity with an existing customer in Japan. Additionally we’re beginning to see 100G metro deployments in both the U.S. and international markets. Revenue from Windstream was $5.6 million or 21% of total revenue for the quarter. From a market perspective network operators around the globe continued to evaluate ways to transition away from proprietary closed network architecture and adopt programmable open SDN environments that enable them to virtualize their network infrastructure and employ NFVO applications. We believe this major technology shift technology shift has caused some near term disruption in the carrier spending environment. In light of this we’re realigning our resources and implementing a cost reduction plan and Jeff will provide further details on this initiative. Being the first to market with a carrier focused SDN platform has given us a tremendous opportunity to actively engage with network operators to help define their first use cases. We believe that we’re very well-positioned to benefit as the move to SDN and NFV evolves. Our solutions are currently six Tier 1 labs for trials and in total we’re tracking 15 active evaluations many of which are part of some of the industry's leading initiatives with this transformation technology. We expect to start seeing significant decisions in 2015. We remain very confident about the market opportunity for our Blue Planet and Z-Series platforms and we will continue to dedicate the necessary resources on our core objectives. During the quarter we continue to demonstrate significant technology leadership related to the carrier SDN space. Specifically we announce Blue Planet's ability to automate, manage and provision Ethernet services across Cisco ASR and Juniper MX platforms. This enhancement reduces the complexity of delivering Ethernet services on routed networks utilizing standards based interfaces such as CLI, and NETCONF and (indiscernible) modeling. We’re seeing strong interest in this new Blue Planet functionality and we believe the ability to control these wildly deployed devices greatly enhances Blue Planet's reach in global telecom networks. Additionally, we have added four new APIs for greater programmability of next generation services between Blue Planet and Northbound BSS OSS systems. We also recently introduced several new features to our Cyan Z-Series platforms including support for MPLS-TP a new 8-degree ROADM module that supports flexible high-density 10G, 100G and 400G applications and a new integrated amplifier module that extends the reach of the Z-Series for Metro, Regional and certain long haul applications. In summary we continue to push the innovation envelope in developing technology that supports relevant real world carrier use cases. We believe our recent announcements and the strong group of trials in which we’re currently engaged solidify our position as a network transformation leader with real deployable solutions. We believe that the market is starting to change I'm bullish about 2015. While our fourth quarter guidance reflects the industries current view at the North America Telecom spending [ph] Environment. We see several factors that will drive sequential growth in Q1 of 2015. Recognition of a large order that we receive from existing customer, an increase in Tier 2 and Tier 3 spending as Connect America funds become available early SDN and NFV software sales and continued strength from international markets. With that I like to turn the call over to Jeff who will walk you through our financial performance. Jeff?

[Jeff Ross:]

Thanks Mark and good morning to everyone on the line. With the exception of revenue, the financial results and guidance that we will discuss are all non-GAAP. Our GAAP and non-GAAP results as well as non-GAAP to GAAP reconciliations are included in today's press release. In the third quarter we achieved revenue of $26.6 million which was up 9% over the prior quarter and in-line with the guidance we provided in August of $25 million to a $27 million. International revenue in the third quarter grew to $6.9 million, a 42% increase over the second quarter of 2014. International revenue in the third quarter represented 26% of our total revenue which was our total highest contribution ever from our international business. From a customer perspective we had three greater than 10% customers in the quarter, including Windstream, which represented 21% of total revenue. For the third quarter we reported a gross margin of to 41.4% compared with 40.2% for the same period last year and 42% for the second quarter of 2014. In the midterm we believe that our gross margin will be consistent with these numbers. Third quarter operating expenses decreased sequentially by $1.7 million or 8% with R&D expenses at $7.9 million, G&A expenses at $2.9 million and sales and marketing expense at $9.5 million. The net loss for the third quarter was $9.1 million or $0.19 per share based on 4.7 million weighted average shares outstanding. This compares with a net loss of 11.9 million or $0.25 per share in the second quarter of 2014. Moving on to balance sheet and cash flow, at September 30, 2014 our cash, cash equivalents and marketable securities totaled $29 million, a decrease of 9.8 million from our June 30 balance. We expect cash usage to be up somewhat in Q4 as a result of the increased inventory to support the large Q1 order, Mark referenced. As expected, deferred revenue decreased in the quarter as most of the earlier stimulus based transactions have achieved final acceptance. Deferred revenue was 7.5 million at September 30th compared to 12 .1 million at June 30th. In the quarter cash used in operations was 8.3 million; we ended the quarter with 12.2 million in inventory, a decrease of $0.9 million from our June 30 balance. Inventory turns increased to 5 from 3.5 in the second quarter. Moving to our Q4 outlook, we expect continued strength from our international markets. However, we are taking a more conservative view in North American consistent with the outlook that’s being expressed by the majority of telecom equipment companies that have recently given guidance. As a result we expect fourth quarter revenue to be in the range of $24 million to $26 million. Additionally, while the industry norm is to report a seasonally down first quarter we expect significant growth quarter-over-quarter in Q1 of 2015 based on the factors Mark described earlier. As mentioned earlier we have commenced a cost reduction program aimed at reducing our operating expenses, while continuing to prudently invest in the vital areas of the business. Our goal is to reduce total non-GAAP operating expenses by 12% to 15% off our current quarterly run-rate of approximately $21.5 million. We have initiated the program and expect to see some benefit in Q4; these efforts should be substantially completed by that beginning of Q1 and fully completed by the end of Q2. We expect to incur a onetime charge in the fourth quarter of approximately $1 million in connection with these cost reduction actions. In addition, in order to help strengthen our cash position, we are actively evaluating financing opportunities for execution in the near future. We expect our fourth quarter non-GAAP net loss to be between 10 million to 12 million and net loss per share to be $0.21 to $0.25. These non-GAAP results exclude the effect of t restructuring charge. On a GAAP basis we expect fourth quarter net loss to be a 13.5 million to 15.5 million and the net loss per share to range from $0.29 to $0.33. Operator, you can now open up the call for questions.

[Operator:]

(Operator Instructions). And we will take our first question from Rod Hall with JPMorgan.

[Rod Hall:]

I guess I want to focus mainly on the cash position and you made the comment that you are looking at financing option, I would assume that those you would lean heavily towards debt financing but we just would be interested Jeff, if you could comment what's your preferences are in terms of financing and also just give us some idea of what the minimum cash balance in your mind that allows you to operate the business, it is? And then I have a follow-up. Thanks.

[Jeff Ross:]

So Rod, where we’re in the process, I really can't comment specifically on the timing or the nature of the financing. I can say that we have spent a fair amount of time and we have a number of scenarios and options lined up that we’re actively pursuing and as far as the amount of the cash, it's probably somewhere between 5 million and 10 million that I need to have enough adequate working capital to run the business.

[Rod Hall:]

And could you guys comment on when you think with the cost cutting, would you expect to be cash breakeven in 2015 at some point assuming the cost cuts that you’re taking and what you know about revenue trajectory and so on?

[Mark Floyd:]

If you think about the cost cutting, that will be very clear, one of the things that we did we jumped ahead of SDN market and built up so we could be first to market with a complete product and shippable today like we have done. Now we’re just getting our cost in-line because now we’re in the execution phase of this model going forward. So we feel pretty good about that. As far as cash break-in, we haven't given that a forecast so I really can't address it right now.

[Operator:]

(Operator Instructions). Next we will go George Notter with Jefferies.

[George Notter:]

Can we get an update on Blue Planet, you obviously mentioned the number of Tier 1 trials and I think you mentioned 15 active evaluations but can you kind of walk us through how those trials are progressing? What's the feedback from the Tier 1 customers, can you walk us through the total number of Blue Planet customers that you’ve as well any sense on the amounts of revenue you’re generating on Blue Planet right now? I mean I would love to hear more of that what's going on there.

[Michael Hatfield:]

So what I would say is that over this past quarter we have seen more RFQs and RFIs in this space than we had in the previous period of time combined so it's a definitely heating significantly. The other characteristics I would say about the engagements that we have is that early in the year we were doing a lot of proof of concepts demonstrating how SDN and NFV works and how it's viable. We’re now in this quarter, previous quarter we did a lot more of focus on field deployments that people are trying to do. We’re seeing that coming together in a pretty significant way and what we’re finding is that people are beginning to get very bold about it, they are seeing the economics, they begin to run some of the economic models themselves around the implications of this and we’re finding that this is actually starting to move now. So we’re very encouraged by what's happening. In terms of the number of Blue Planet customers, we have got a 156 those who are using it and part of what we’ve been doing and seeing is that once we get that footprint there is a very natural expansion to the kind of capabilities we’re bringing into it. So to give you an example anecdotally we have a pretty significant customer who has the Blue Planet deployment they saw the announcement on the addition of the Cisco and Juniper into that mix and they said to us, hey, we want to go ahead and budget that for next year. So we’re seeing that adoption and the expansion, the capabilities we’re bringing into Blue Planet is having a very significant effect.

[Mark Floyd:]

Let me give you a little bit more color as well and I think what we have seen in – 2014 was when the carrier started looking at an SDN and NFV functionality, it seemed like some of them we got early traction and looking at our software inception them. I think some of the carriers have thought well why don’t I just use my own internal IT staff to go ahead and start developing part of this as well. And what we’re finding right now is that some of the carriers have just figured out that this thing is pretty tough to do and the resources to be able to do what we do there internal IT staff's probably or not – have not that much experience in it. And so we’re getting that’s why I said I'm pretty bullish about 2015 because it seems like the interest in bringing Blue Planet in is picking up and like Mike said specifically in the last quarter, so we feel pretty good about it.

[Michael Hatfield:]

And one thing to add to what Mark had mentioned about the IT staff, we have a pretty large customer that we’re engaged with that headed it down that path of doing their own internal development. So as this evolved it's sort of the this open playing field where some carriers are saying that they are going to do their own development, others are saying they are going to buy this functionality. This particular carrier had done a lot of internal development themselves, they recognize that they really couldn’t continue on that path. That they needed to move towards the buy scenario. We actually took some of the code that they had written and began to integrate it into Blue Planet and demonstrate the open capabilities of Blue Planet we could in fact adopt some of the work that they had already done.

[George Notter:]

If you look at the Tier 1 operator you engage with, I think the number six was equivalent to where you were at the end of the last quarter. Do you expect to add additional Tier 1 trials and then what do you think in terms of when you got to make a decision, I heard on the call earlier you said 2015 but I guess I'm trying to better understand the risk of these decisions keep pushing out and that this is a very complex area, the network and it just takes time for these guys to go through the imaginations [ph] and making decisions. Is that something you’re concerned about? What's your perspective there?

[Mark Floyd:]

No George, you’re dead on it and that’s why we originally thought, if you go back a year ago, we really thought decisions were going to be made in the back half of '14 and I mentioned that about a year ago and now it looks like it's a first half of '15. So you’re right it has taken, it is complicated and it has taken a little bit more time to make those decisions, when you look back and you think about where the carriers are headed and how to make them competitive in the industry especially when you look at when they compare against some of you know over the top web content providers. I think they realize, they have to do something pretty quickly and so I think we’re pass the stage of you know if SDN is going to be adopted or some kind of software control network is going to be adopted, I think they are looking at how am I going to integrate that into my system and move services over from the traditional vertically integrated solution to more of an open solution.

[Operator:]

And next we will take Kent Schofield with Goldman Sachs.

[Kent Schofield:]

I was wondering to follow-up on George's question around Blue Planet. As you’re looking into 2015 I guess you maybe today, what's the competitive environment look like? How is that involved? Are you still seeing similar win rates? Has that being going up? Has that being going down? And then second question around the OpEx reductions, forgive me if you have kind of clarified this I missed this but when you talk about the reductions, are you looking at sales and marketing, G&A, R&D across the Board or are there any specific areas there you’re focused on?

[Michael Hatfield:]

I will take the first question in terms of the competitive landscape we haven't seen any big changes there, what I would say though is that as I have mentioned we have seen the intensity of paper asking for that, so RFQs, RFIs, we have gotten the results from a number of those and that looks very positive. We like the way that we’re stacking up there and the results we’re getting from that. So we’re constantly engaging how our story is playing against the competition and that’s looking very strongly. We have been positively indicated on a number of those and we’re moving to the next stage. So we really like the way we sit from a competitive perspective. I would not say that there has been any significant change, in terms of any new competitors coming in or some different dynamic. I think the biggest thing for us is what Mark mentioned is just the inertial of the status quo that’s what we’re constantly finding it far more than competition. And we have done a lot of work across this quarter to help encourage people to move against [ph] that I was indicating with respect to the answer to George.

[Mark Floyd:]

Yes and Kent from the cost realignment, it really has realigned in our cost base. We will give for example, in some of the R&D area, we had done a lot of manual testing and over the last six months, nine months we have built up a really good automated testing capability and such. So we have got some resources there. On the go to market strategy, we cast a pretty big net on purpose because we saw interest of SDN across the globe at the same time and now we have refined – specifically there is one geographic region we went into that we just didn’t see the progress we wanted to see, so it's just really across the board. It's not going to affect, how we go to market, it's not going to affect our revenue and it's not going to affect how we bring products to market. We just refined it and make sure we are a little bit more sharp on the expense side.

[Operator:]

(Operator Instructions). That does conclude today's question and answer session. I will now turn the call back over to Mark Floyd for any additional or closing remarks.

[Mark Floyd:]

Well thank you very much for being on the call. We appreciate your interest. We’ve got a great opportunity in front of us and for us it is – the market is moving pretty quickly now and we feel confident that in 2015 that we will be positioned very well.

[Michael Hatfield:]

All right. Thank you.

[Operator:]

And that does conclude today's conference. And we thank you for participating.