Ciena Corporation
Q4 2014 Earnings Call Transcript

Published: 19 Feb 2015

[Operator:]

Good day ladies and gentlemen and welcome to the Cyan Inc. Fourth Quarter 2014 Financial Results Conference Call. Today’s conference is being recorded. [Operator Instructions] And now, I’d like to turn the conference over to Ms. Maria Riley. Please go ahead Ma'am.

[Maria Riley:]

Thank you. I would like to welcome everyone to Cyan’s fourth quarter and fiscal year 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. Shortly after the market closed today, Cyan issued a press release announcing the results for its fourth quarter and fiscal year ended December 31, 2014. If you would like a copy of today’s press release, you may access it online at the Company’s Web site 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 forecast of financial results and business performance, including the affect of our cost reduction efforts and other trends and actions expected to affect gross margins and operating expenses, the timing of initial NFV deployment and the availability and competitiveness of our N11, the first member of our N-series Open Hyperscale Transport Platform. Forward-looking statements include those in which we use the terms believe, anticipate, expect, and 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, and 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 September 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 comparable GAAP measures can be found in our financial results press release on our Web site. The information we are providing represents our views of the matters discussed as of today, February 18, 2015. 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. In the fourth quarter, we continue to execute on our strategy and made tangible progress on our core objectives. We had a very strong close to the year and I’m excited to report that our momentum in the market is accelerating. A few highlights for the full year include doubling our International revenue, growing our cloud and content provider revenue by over 40%, and increasing our software revenue by 49%. Specifically in the fourth quarter revenue well exceeded our expectations, driven by increasing demand across our customer base and on our expanding footprint within Windstream. Total revenue grew 14% over the third quarter and 46% over the fourth quarter of last year to reach $30.5 million. Revenue for Windstream increased significantly to $15.8 million for the quarter. Windstream is an important customer of Cyan, and throughout the year we worked closely with their team to expand our use cases in their network beyond business Ethernet services and mobile backhaul. In December we announced that Windstream selected our Z-Series Packet Optical Platform to upgrade their regional and metro networks to 100gig, which contributed to the momentum in the fourth quarter. Beyond Windstream, the fourth quarter was very strong, bookings across our whole customer base. As a result we’re entering the first quarter with record backlog. Furthermore 2015 is off to a great start, as earlier this month we received an order for over $28 million for our Z-Series Packet Optical products. This order is the largest order in the Company’s history. It came from an existing customer and is scheduled to be delivered throughout 2015. Moving on to our progress with our Blue Planet SDN and NFV software platform, on our last call we reported that we tracking 15 Blue Planet active evaluations and that we expected to start seeing significant decisions in 2015. Today I'm very pleased to announce we have been awarded two RFP wins for NFV orchestration. One of these wins is with a tier one carrier. To our knowledge, these are the first NFV orchestration RFPs by carriers to be awarded to-date. Initial deployments are expected to begin by the end of the first half in 2015. These carriers who use Blue Planet’s platform to unify the orchestration of their services across both virtual and physical domains to drive the creation of new services. In both cases, Blue Planet was chosen over offerings from much larger competitors. Blue Planet was selected for its ability to orchestrate virtual network functions and services from end to end. In addition, Blue Planet’s ability to orchestrate virtual functions from multiple vendors meets a key customer requirement, and has proven to be a significant competitive advantage. As we’ve said last quarter, we are tracking a number of active projects and this continues to grow and we believe our initial success demonstrates our competitive lead. We are very excited to see the carrier market move in our direction. We believe now is the right time to build upon this traction and increase our focus on the cloud and content provider or ICP customer segment. As we announced last week, we’re developing a disruptive new family of high density, high capacity transfer products for data center interconnect networks. Our first product in this family, the N11 is designed to deliver massive optical capacity at 34 terabits per second in a single rack, which we believe is significantly more than any other products currently available. The traditional approach of data center interconnects relies on repurposed telecom systems and proprietary chip development which is expensive and hard to rapidly scale. In contrast our N-Series Open Hyperscale Transport Platform will utilize the best of breed off the shelf silicon with an open carrier grade Linux operating system. The N-Series is designed based on the feedback from ICPs, and as a result it utilizes the same Unix tools these companies use for servers and switches today. In our opinion this strategy was validated by Facebook’s recent announcement of their Six Pack data center Ethernet switch which incorporates COTS components and a Linux operating system. We believe our N-Series is a disruptive and differentiated platform compared to other DCI products on the market. It reflects the approach that ICPs want when operating their interconnect networks versus the closed proprietary silicon and software they are forced to use today. The N-Series, which is expected to be available for customer trials next quarter will enable cloud and content providers to meet rapidly growing traffic demands at the lowest cost per gig. In summary, we continue to push the innovation envelope in developing technology that supports relevant real world use cases. We have a solid and growing position as a network transformation leader with real deployable solutions. We believe that the market is starting to change and we’re very excited about our 2015 opportunities. Based on this our current view is that our 2015 revenue will grow in the range of 35% to 45% over 2014. With that, I’d like to turn the call over to Jeff, who will walk you through our financial performance, Jeffery?

[Jeff Ross:]

Thanks, Mark, and good afternoon to everybody on the line. With the exception of revenue, the financial results and guidance we will discuss today are all non-GAAP. Our GAAP and non-GAAP results as well as our non-GAAP to GAAP reconciliations are included in today’s press release. In the fourth quarter we achieved revenue of $30.5 million, up 14% over the prior quarter and well above our initial guidance of $24 million to $26 million. Fourth quarter revenue outpaced our initial expectations due to strong demand for our Z-Series Packet Optical Hardware for both metro and regional 100G and packet applications. International revenue in the fourth quarter was $5.9 million, up 72% when compared with Q4 of last year. For the full year, International revenue grew 114% to reach $21.9 million or 22% of total revenue. From a customer perspective Windstream represented 52% of the fourth quarter revenue as we continued to grow our footprint. Windstream was our only greater than 10% customer for the quarter. For the full year we had two customers greater than 10% of revenue, Windstream at 29% and Colt at 11%. We reported very strong gross margins for the fourth quarter, driven by primarily by product mix. Gross margins increased to 44.3%, up from 40.7% for the same period last year and 41.4% to the third quarter of 2014. In the midterm we are modeling our gross margins to be around 41%, based on a more normalized product mix. In the fourth quarter we began to see some benefit from the cost reduction initiatives we implemented in November. Fourth quarter operating expenses decreased sequentially by $0.5 million or approximately 3% with R&D expense at $7.3 million, sales and marketing expense at $9.8 million and G&A expense at $2.8 million. In the quarter, we incurred a one-time GAAP charge of approximately $630,000 in connection with the cost reduction actions. We expect our cost reduction plans to be fully completed by the end of the first quarter. The net loss for the fourth quarter was $7.1 million or $0.15 per share, based on 47.2 million weighted average shares outstanding. This compares with a net loss of $9.1 million or $0.19 per share in the third quarter of 2014. For the full year we reported revenue of $100.5 million, compared with $116.6 million in 2013 and a non-GAAP net loss of $43.3 million or $0.92 per share compared with $30.9 million or $1 per share in the prior year. Moving on to the balance sheet and cash flow, at December 31, 2014 our cash, cash equivalents and marketable securities totaled $59.8 million, including $47.8 million in net proceeds from the convertible offering we completed in December. A total of $1.2 million in expenses related to the debt have been paid or expected to be paid in Q1. Consistent with our expectations, cash usage increased in Q4 to support our growing demand. We expect our operating cash flow usage in the first quarter to be in the mid-single digit range. At December 31st deferred revenue was $7.5 million, in line with the September 30th balance. We ended the quarter with 12.4 million in inventory, an increase of $0.2 million from September 30th. Inventory turns increased to 5.6 from 5.0 in the third quarter. Moving to our Q1 outlook, we currently expect first quarter revenue to be in the range of $32 million to $34 million and as Mark stated, we are currently expecting our 2015 revenues will grow in the range of 35% to 45% over 2014. We estimate that our first quarter non-GAAP net loss will be between $6 million and $8 million, which translates to a net loss per share of between $0.13 and $0.17. At this time, we are not providing net loss per share guidance on a GAAP basis, nor will we provide a reconciliation of non-GAAP guidance measures to corresponding GAAP measures on a forward-looking basis. This is due to high variability and low visibility for expenses related to the Company’s recent convertible debt as these expenses are out of the Company’s control and or cannot be reasonably predicted. Operator, you can now open up the call for questions.

[Operator:]

Thank you very much. [Operator Instruction] And looks like our first question today comes from Ryan Hutchinson with Pacific Crest.

[Maria Riley:]

Hello, Ryan, are you there?

[Ryan Hutchinson:]

Sorry about that. So first off, just on the Blue Planet software wins, can you just talk through why you guys won and what are the customers saying with regards to the selling point there, and then, what else are you seeing in the overall NFV space and I’ve got a couple more?

[Mark Floyd:]

Great. Mike, you want to take that?

[Michael Hatfield:]

Sure. So what we’re seeing is that there is real movement to commercialize on NFV side. So last year was a lot of positioning. This year there actually was a commercialization. So when they’re doing these RFPs, they're really focused on what will actually be commercially deployable and we’re standing out in that very significantly. A lot of people have Vaporware right now. We go in, we go into the lab, we demonstrate that we have a real product that is deployable and commercializable. So that’s been a significant factor in our winning. The second piece is that we’ve demonstrated that we’re multi-vendor. Some of our competitors say that they are, but really are just a life support system for their own products. So those have been two significant factors in our wins.

[Ryan Hutchinson:]

Okay. And then as far as -- I think you referenced two 10% customers and also a Tier 1 win. As you think about customer mix throughout the course of the year, should we anticipate that we have another 10% customer show up at some point?

[Mark Floyd:]

Ryan, I would hope that would be the case. Well, what we’re seeing is that we have our existing customer base, Windstream being a very strong customer but we also have some new opportunities and we won a couple of new customers that are yet to be announced and some of these have ability to be a Windstream type of customer. So nothing is done yet. But we feel that we’re going to grow new customers so that we can diversify our customer base and move forward. So we feel really good about that.

[Operator:]

[Operator Instructions] Next from JPMorgan we have Rod Hall.

[Rod Hall:]

I just wanted to come back around to the Blue Planet wins and see if you guys could talk at all about sizing on those, what the revenue size might look like this year, how material it is by the end of the year and on into next year? The other thing I wanted to see if you guys could comment on is the revenue growth expectation for ’15 sounds pretty good relative to what we’re modeling. Could you guys comment on where you end up cash flow breakeven through 2015, or if you do on the basis of the numbers that you’re currently modeling?

[Mark Floyd:]

Rod, I think from the Blue Planet perspective, as our software gets deployed in the network, it will continue to grow and as it continues to grow, the revenue continues to grow as well. But for this year we think the initial deployments of those two wins are in the seven digit range. And we’ll continue to grow thereafter as we add more applications and cover more network elements within the carrier space. As far as the growth goes, growing 35%, 45%, we’re seeing that we had a very strong response to our software and our Z-Series, the announcement of our new N-Series which we think will have a revenue contribution late in this year, will start to contribute in the data center interconnect market. But we feel really bullish about that. And Jeffery, you want to add to that?

[Jeff Ross:]

Yes. I think Rod, Mark covered the drivers, or some of the drivers of growth and then you’d asked specifically about cash breakeven. As I stated, we expect cash flow in Q1 to be mid-single digits, which is quite a significant improvement. It may be a little bit better than what I would expect in Q2 at this point. So I'm not necessarily saying it’s always going to be mid-single digits. But we are modeling breakeven kind of second quarter of 2016. To the extent that we’re able to drive additional growth, we can pull that in. But we think we have the right cost structure, we think that we have the growth engines and we feel good about the path that we’re on in getting to that in pretty short period of time.

[Rod Hall:]

Okay, and then I wanted to just follow up on the N-Series N11. Can you guys give us any more color or detail on what sort of feature set you would be providing there, like what kind of interfaces and POS et cetera, et cetera?

[Mark Floyd:]

Mike do you want to attempt that?

[Michael Hatfield:]

Sure. So Rob, that product comes out of the work that we’ve been doing with one of our key customers, who is a Web 2.0 customer. And the way that they want to utilize capacity, and the way they want to implement inside the data center context. So the use case is data center to data center interconnect. It’s focused right now in terms of its first release on large scale optical transport at 100gig level. So lots of 100gig capacity put across a fiber and then done in a more of a server like deployment scenario. So a lot of what companies have done is sort of taken a Telco model into the data center and that is a real challenge in terms of the way they implement the product. We’ve taken a data center approach for the implementation. So it not only provides that great scale that you need between data centers, but also significantly simplifies their operations model and it looks more like what they’re used to in that context.

[Rod Hall:]

So it’d be like a two rack unit form factor Mike…

[Mike Hatfield:]

Yes, and it’s got 800gig of capacity in that 1RU.

[Operator:]

[Operator Instructions]

[Maria Riley:]

Operator, we can wrap up.

[Operator:]

Okay. As we have no further questions in the queue, I will turn things back to Mark Floyd for any additional or closing remarks.

[Mark Floyd:]

Thank you, Operator. I think this is what we really look forward to from the last year and half is we’re seeing software controlled networks taking hold, and I think that in 2014 we talked about that we would see people making decisions in 2015 in the first half and we’re seeing that happening. We think there’ll be several more decisions in the first half of ’15 and we hope we’re competitive enough to benefit from that as well. We see our Z-Series be exceptionally competitive in the marketplace right now. We continue to take some wins away from our competitors and expand within our existing customer base with new applications. And then finally, to get some very large orders coming in, especially a $28 million order, I think it validates our approach, it validates Cyan as a Company and the faith that customers have in us going forward. So we think we’re on the right track. We see acceleration of the business and so we’re looking forward to executing on our strategy and the next time we talk in the quarter, I hope we have the same good news. But anyway, thank you so much for your time. We look forward to talking you soon. Take care.

[Operator:]

And that does conclude today’s conference. Ladies and gentlemen, we thank you for your participation.