CIENA Corporation
December 13, 2001
Q4’01 (October 31, 2001 )
Conference Call Notes

Core Director > 20 % of revenues.

Raw Materials 161.8 M
Work-in-Process 75.7 M
Finished Goods 71.3 M
Reserve obsolescence 53.8 M

Inventory turns 3.5 X

Headcount at FYE was 3778, this is now 3338.

Long haul (LH) transport sales down 30 %, likely to decline in Q1’02. Customer base sheltered them for F2001, but that will end now. Carrier spending on LH has dropped dramatically. Next Generation Networks (NGN) will not shelter them as it did in past. LH traffic remains robust, so feels there will be a return to LH spending.

Metro revenue held steady. Had 16 customers. Announced Teleglobe as a Metro customer with a ring based system. MetroDirector K2 is going well. Recognized several customers in Q4’01.

CoreDirector (CD) – very happy with it. Being deployed in volume. Has been shipped to 26 customers worldwide, from 19 last quarter. Revenues of CD were up > 60 % of revenues in Q4’01.

Gary Smith discussed market environment for Q1’02. Mentions dramatic capex reductions. It is not clear how long this will occur. Eventually carriers will need to start spending again. Question is when, and how do you operate until recovery occurs. Because Ciena thinks that recovery is inevitable, hence they will continue investing in their business. They will play to win and not survive. Says legacy competitors are in disarray. CIENA sees this as an opportunity. Hence sustained investment through this downturn. CIENA will continue heavy commitment to R&D. CIENA will constantly review market to ensure them that sustained investment is appropriate. Expects cash flow from operations in F2002 to be “not negative”. Deep pockets give them the allowability of sustained investment.

Guidance for Q1’02

  • Revenues will be down sequentially from Q4’01 from 30 to 40 %.
  • LH could be down more than 50 %
  • CoreDirector should grow sequentially
  • Gross Margins could be 30 – 35 %. This is a difficult number to gear on as there are many issues to deal with, such as cost of components, inventory obsolescence, sales, etc
  • Other income 4 – 5 million dollars
  • Eps loss of .04 – 12 per share. (I may have missed this)
  • F2002 revenues to be down sequentially from 2001. Expenses will not reduce sequentially since investment in future will occur.

Gary Smith comments

  • Claims CIENA is a contrarian. Mentions that investment strategy is contrarian, but will constantly reevaluate that strategy.
  • CIENA claims they are aligned with the customers. Exclusive focus on Next Generation.
  • CIENA goal is to capitalize on product and service in future.

Questions and Answers

  • UBS asks about CoreDirector guidance. CIENA is confident on F2002 sequential growth. Customers can justify based on capex reductions and operating expense reductions. Some customers have not been announced.
  • Ciena mentioned that much of Iaxis gear was sold off.
  • Rick Shafer from CIBC (he is a key follower of Corvis) asked about pricing in optical switching. CIENA followed with mentioning no appreciable change in competive environment. Mentioned that they are not seeing any CD competition.
  • Three 10 % customers were fairly evenly split in quarter. Qwest was a large % of the 10 % customers. Mentioned that CIENA has “gorilla status with CoreDirector “ Metro space focus is on DWDM, believes combined features of CD in metro are compelling. CIENA’s investment focus will be to infiltrate and dominate the metro space.
  • Competitive point of view looks good. They are remaining paranoid as always, but not losing customers.
  • Backlog for Q1’02 and Q2’02 is basically CD.
  • Capacity utilization rate are not very high. As LH goes down and K2 and CD go up this increment doesn’t change since outsourcing of these two products. Utilization around 50 %.
  • Square footage of factory space not typically given out. Discussed that recent restructuring announcements will reduce by about 40,000 square feet.
  • Sales force around 250 and this has gone up this quarter. Doesn’t expect much change on this.