Ciena Corporation (CIEN) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Ciena Next Generation Pluggables Q&A. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I will now turn the call over to Mr. Gregg Lampf. Please begin. .

Thank you, Jenny, and welcome, everyone. Thank you for joining us today for the Q&A call covering Ciena's next-generation pluggable-s strategy. We hope you took the opportunity to listen to the recorded webinar available on our website. We won't be giving a presentation today, obviously, because we made it available about a week ago. We hope that was helpful for you to be able to take it all in and think about it and come prepared for the discussion today. If you have not done so, however, I know you all are well informed about the topic, but please do listen to that at your earliest convenience. There has been -- we recognize a lot of discussion and prognostication about this topic over the past few years. And we wanted to, obviously, engage with the community. And in fact, this is an important topic, and the next-generation pluggables do represent an important development in our space. As you listen to the webinar recording and engage with us today, we'd like you to consider some important messages from us. Next generation pluggables are a natural evolution. Next-gen pluggables merely represent the continuation of the reduction of power, cost per bit and modularity of DWDM systems. This is not a revolution, although it will take strong vendors to compete in this space over time. Two, customers view pluggables as one component that can address their needs. A large majority of network operators view pluggables as just one element of their optical infrastructure that often well include transport systems. Three, Ciena is uniquely positioned. We're the only vendor with a strong degree of verbal integration, competencies and experiences, right customer relationships and financial strength to aggressively innovate and lead this market. Simply, we have a unique understanding of the customer's network and breadth of solutions to cover their needs. And last but not least, this is an attractive opportunity for us. Next-generation pluggables expand our addressable market and represent an opportunity for Ciena over the next several years. So with that, we have today leading our discussion is Scott McFeely, Senior Vice President of Ciena's Global Products and Services. Scott will be joined by Dino Di Perna, Vice President, R&D, Optical Technology and Packet Optical Platforms. You would have heard him on the recording when you listen to it later as well. We're looking forward to that conversation with all of you. Before beginning today's discussion, I did want to remind everyone that we'll be focusing on our next-generation pluggable strategy, including use cases, markets and technologies. We won't be discussing Ciena's financial information, results, expectations or economic conditions. While we won't -- we will not be discussing these items, we may talk directionally about the technology market, and as such, we please do ask you to consider these comments in the context of the risk factors detailed in our most recent 10-Q and 10-K filings. I hope you find this engagement informative. And now I hand it over to Scott.

Thanks, Gregg, and good morning, everyone. Thanks very much for joining us this morning and your interest in this topic. As Gregg said, I hope you had a chance to have a listen to the webinar. It is a very complete perspective on how we see the market and how it touches pluggable. And I wanted to thank Greg Friesen from our product line management team, and Dino DiPerna who's with me here today, for their contribution to the webinar. As I said, I'm joined by Dino, so I bring a friend today. Dino has been the leader of our Packet Optical R&D team for many, many years. Part of his team are the engineering organization that produces our coherent optics capabilities, and they have driven the new generation of our coherent optic solution in the marketplace. So I'm a bit biased, but I don't think there's anybody better in the industry to speak to coherent technologies than Mr. DiPerna. So happy to have him here today. So with that, let's turn it over to you folks for some questions.

Thank you. Let's start with the questions. We're looking forward to the discussion.

[Operator Instructions] Your first question is from George Notter with Jefferies.

I guess I'm still playing catch up to some degree on the presentation, so forgive me if this is contained in there. But can you just walk through your product delivery timing, products, as you see kind of these pluggable products coming into the marketplace? And then I guess, secondly, I wanted to ask about -- there are other sort of pluggable strategies out there. One of your competitors is housing a strategy of -- it's a point-to-multipoint model effectively for access networks. And I think the idea there is that they're trying to reduce the amount of pluggables content in the network using a subcarrier type of model. Can you talk about that strategy and how that's compared and contrasted vis-à-vis what you're doing?

Yes. Thanks, George, and good morning. First of all, at a high level in terms of our WaveLogic 5 family of products and the rollout that you were asking about. As you know, and just to remind others on the call, our first offer in that WaveLogic 5 family was our WaveLogic 5 Extreme, which is an integrated product in a multiple of our products meant to address a number of the application spaces that we talked about in the webinar. The second part of that family is our WaveLogic 5 Nano technology, which is the basis basically for the various different pluggable offers that we'll have in the marketplace. And I'll let Dino sort of expand on those pluggable offers and the time line. Dino, you want to maybe take a crack at that, and then I can come back and comment on the multipoint access technology.

Okay. Thanks, Scott. Dino here. Good morning, everyone. Yes, as Scott said, the 5 nano technology is on deck. It's obviously been in development for several years now. The short answer, George, is we're ramping production right now. And the first application is the 400ZR, and we expect to be generally available with that by the middle of this year. And we'll be shipping our first production units over the next several weeks to some key customers. The ensuing modes, if you follow through the chart deck and that, there's multiple modes depending on ZR, ZR+ and their variations thereof. They'll be following up in the ensuing months and quarters through the second half of 2021.

Thanks, Dino. Back on your multi-point question, George. That's sort of an architecture approach that we have looked at in the past. And I'll certainly say that we don't necessarily have perfect insights into what competitors might be doing in that space, but we probably have reasonably decent insights. And from our perspective, the economic value that may come with that doesn't necessarily justify our one -- what we think would be a totally parallel ecosystem required to deliver it when there's lots of volumes and lots of effort being put on, I'll just say, a more standard ecosystem. And we think that, that, at the end of the day, is going to win. And we'll see how it plays out.

Thank you, George. Appreciate it.

Your next question is from Simon Leopold with Raymond James.

I wanted to maybe see if you could address some questions about the industry structure around the ZR pluggable market. So clearly, you've demonstrated strength in the DSP and the modem content. But I guess where I struggle is how you compete in a pluggable market relative to others who have a lot of experience making high-volume discrete elements. That's certainly an area we haven't seen from Ciena in the past. I think you alluded to having manufacturing partners. But can you help us understand how you compete -- or industry landscape as you see it in this particular space?

Simon, thanks for the interest and the question. Obviously, competitive dynamics have lots of different dimensions to them, so I'm going to sort of explore the space for a little bit here. So first of all, if I just sort of think about the players and what it takes to produce the coherent modem, what we call modems, anecdotally, if you go back, let's say, 3 [ OSDs ] ago or so, I think sort of walking the floor, you could count probably more than 15 vendors that claim that they were going to have a 400-gig ZR product in the marketplace and that it would have been there no later than 2020. And some are even planning 2021. And here we are today, I think that number is a lot smaller. So first of all, this stuff, to produce one, isn't easy. And I think you got to look at the folks that have some coherent pedigree to have the list of folks that can potentially get there. To your question about volume manufacturing. I will remind you on the coherent modem and sort of the IP that goes into producing of coherent modem, we've produced hundreds of thousands of modems. And we're probably one of the biggest historical producers with that. On the pluggable side, and I'll let Dino come in here and I'll let him take the component side of this. On the manufacturing piece of it, you're right. I mean, we have a set of contract manufacturers that have absolutely been in the business of producing discrete pluggables. And we've work carefully with them over the period of the development of this. And I think we've -- in the coherent space, I think we've proven that we can go from general availability to very high production levels in a very short order in pretty much every generation that we've done in the coherent piece. And that includes, by the way, and the world probably doesn't recognize is that well. But that includes some of the key components like silicon photonic and electro optic devices that have been in our technology for a couple of generations now. The other aspect of competing on this level is how are our customers when they consume this? And what does it take to actually be the strategic optical provider? There are some applications within the total application set where the plug itself could be consumed and procured independently. And we talked about that in the Webex, primarily being limited to the campus metro DCI use case. In all the other use cases, we actually still see this being very much a system player game, because there's a lot of other complexities and capabilities that come into delivering the end-to-end solution to that customer base, even if part of that solution is going to be pluggables. Pluggables is not a new thing, by the way, for those customers and those applications. They've had them for multiple generations. That's kind of exploring the different dimensions. Dino, maybe I'll pass it to you to just sort of talk about what the key components that make up a coherent pluggable and why we think we're comfortable, both from a technology perspective and a volume ramp perspective.

Certainly, Scott. Yes. And I think, Simon, the question certainly is spot on. The -- in the coherent world, the ingredients are quite different. Like we're not talking about the gray optics where you're picking up EMLs or DMLs and CDR chips and putting them in the box, and that this is one that relies heavily on the critical ingredients. One, you mentioned the DSP itself, and the nature of its design, how it works and the analog interfaces to it. And Scott already touched on the electro optics part. If you look through the chart where you'll see something we call a transceiver on a chip, that's a die scale integration. That's the whole engine in there. You just insert the light from a laser into it. And all of that stuff is done on that tiny -- we refer to it as the cortex, which has all the critical ingredients. So the focus of the design has been to really, really optimize that integration so that it isn't a lot of manual machinery to put these things together, but it's all done in those critical components. So in there, you have the DSP, you have critical, high-speed analog functions, and you have the transmit electro optics, the modulator, we call it. And then on the receive side, the optical mixer and the photo detectors that provide a signal. So that's one the reasons that we believe we can leverage all our strengths and get this thing into volume production very readily. The other thing is, and Scott touched on it, the hundreds of thousands of modems we've been making over the last 15-plus years, our test calibration methodologies and procedures in manufacturing, I think, are at the top of the industry. And our ability to yield these things and know how to optimize across all of the parts, this is absolutely critical. We've lived through it over the generations of modems. And we know it's going to play a big role even in the pluggable world. So I think in many ways, this space, now that it's high capacity coherent, actually draws on our strengths. It plays to our strengths here. Versus us trying to assemble a more conventional IMDD or a gray optic client interface. That's completely different. Hopefully, that gives you a bit of color.

Yes. No, that's all helpful. The one point I'd like to maybe follow-up on briefly is just how do you see industry structures? Is this a market that you imagine supports 2 players, 3 players, 5 players? What's it end up looking like? I get 3 years ago, there were dozens, and now, there are fewer. But how many can succeed, in your view?

Yes. So I think the way I look at this is each successive generation of this technology is getting harder and harder to do and more and more expensive, and you need to have volumes in order to justify the investment. And you need to have, obviously, the key wherewithal and the key component pieces. And we actually believe some of that wherewithal absolutely comes from participating in the network deployments and taking that knowledge back into the design cycle. So at the end of the day, this is -- I don't think this is an industry structure that can support multiple handful of the players. I think you're going to ultimately talk about a handful of players, and how many digits is on that hand, we'll see.

The next question is from Tim Savageaux with Northland Capital Markets.

My compliments on the disclosure in terms of market size and share across your business. And I had a question about that, which is if you're looking at the metro DCI market, that represents about 30% of Ciena's cloud revenues last year. And I wonder if you could give us a little more color on how the rest of that cloud revenue is sort of characterized, with the further thought that while you don't report Waveserver revenue anymore, when you did, that was around 2/3 of cloud revenue or so. Maybe less now. But would you characterize -- is there a segment of the market that's point-to-point DCI just longer distances? I imagine you've got some subsea and long-haul in that number as well. But any additional color on kind of the broader picture with the cloud players from a revenue perspective and maybe relative to Waveserver in particular, would be appreciated.

Tim, yes, first of all, one of the things to recognize now is what Waveserver actually has -- it started out as a pretty good surrogate, I guess, for some of our, I'll just say transponder business, in the web scale space. The Waveserver deployments now have stretched beyond that and are now getting consumed in service providers and in MSOs as well. So anybody that's got an application that is muxponder-based and has space constraints, the Waveserver format is very attractive. And it's not just the web scale and stuff like that. It's not a great surrogate anymore for web scale revenue. But back to your question, if you think about our web scale business today, we sort of do the metro DCI piece of it. That was pretty clear in the presentation. The other sources of revenue for us from that customer group is -- they have a very big influence on our submarine revenue, both direct and indirect. They have, on the equipment side, also a significant revenue that I'll just say is core backbone networks for them. So think of it as national -- regional to national terrestrial networks. And those networks, for the most part, are -- also have a very sophisticated [indiscernible] line system in one of those. So it's not just Waveserver and transponders. And then another piece of our business with the web scalers is a growing use of services business with them as well. So if -- the question was to try to figure out where do we think the market sizing is for the pluggable optics. But as we said, we had thought of that in the past as being that metro DCI opportunity, about $500 million in full [ supply ]. And then you could see part of that is substitutive to our Waveserver metro revenue, and we said it was about 1/3 of it if you want to put absolute numbers on it. Last year, that probably equated to something like $220 million worth of revenue, Waveserver revenue, for that metro DCI application. Not all of that will jump to pluggable. Some of it would. But I'd also point out, as we did in the presentation, there are other noncoherent solutions to that Metro DCI use case that are going to move to coherent pluggables. So for us, we see that as opportunity as well.

Great. And if I could follow-up with a technology question. And you guys -- you indicated that while not necessarily revolutionary, this is the first time that we have some -- the clients and network-type form factors being the same in one of these cycles. And you seem to point to some power challenges in integrating those on the client side and the line side of the same device. I wonder if you might be able to expand on that.

You want me to take that, Scott?

[indiscernible]

Yes. Yes, very good point. The -- so when we tackle this Wavelogic 5 Nano designs, I mean we have a pedigree, obviously, in coherent decades and the high performance. But fitting the power envelope, is the -- is probably the most critical piece that we focused on. And it touches all aspects of the design. Obviously, the DSP plays a role, but the analog and the electro optics as well. So if you recall, obviously, you've listened to the webinar, the form factor physically is the same, but the power footprint for clients is 12 watts or below, and the coherent needs a bit more than that. So the industry benchmark that we're trying to hit is in the order of 15 to 16 watts. And much more than that, and it actually takes away from the density of the router. And there's a trade-off there. And frankly, one of the reasons coherent directly in routers has been around for decades and never really taken off is because that compromise has been just not a good bargain. And so we get them separate. So in our case, we focused very, very, very much along the power consumption. I'm very pleased to say it's looking excellent on our part and from what we're getting feedback wise. It does appear to be best-in-class on power consumption. Folks expect we'll get the optical performance there as well, of course, but the power consumption is also very, very important. And only a few watts difference there can really stress the platform it's plugged in and therefore take away the benefits that anybody is hoping to have with the integrated optics. So that's why the power is such a factor. The other thing I'll add, of course, is as you look at the myriad of capabilities in the pluggable world, it's easy to just cherry-pick some numbers. Like a plug DD, small 1,000 kilometers. You can't have them all at the same time, of course, because more performance, more reach needs more watts. And so there's trade-offs, which is why we keep emphasizing it really depends upon the network that you're trying to plug into. So that's why the emphasis on power consumption, the lead application 400 ZR, has got a very stringent power number in order to not be inefficient on the router platforms. We think we've got what we need in there. And then we've got ways of using more power to get more performance for other applications.

Yes. Thanks. Just a couple of things on the power theme. One is I think there was a narrative in the industry around Ciena that said, hey, these guys are great at coherent, they're great at coherent at the high end, but haven't really demonstrated that they can design and deliver it to the lower end or the lower power footprint applications. I know that's something that drove Dino nuts. And as I said, we've been focused on the power here. And I'll tell you that we believe we're going to show up with a best-in-class power solution on the 400-gig ZR. Secondly, I'd say is people, I think, take 400-gig ZR and say, "Oh, it's standard. It's a commodity part and you can't differentiate yourself." And I'd say, well, you can. You can differentiate yourself by actually having well, first of all, meeting that power spec, but then having a best-in-class solution around that power spec. And as Dino is alluding to, the reach performance within that power end book as well.

Great. Thank you, Tim. Appreciate it.

Your next question is from Paul Silverstein with Cowen.

Scott, relative to your last response, given that 400ZR's spec, that there's opportunities to exceed the metrics -- the defined metrics in this spec, what percentage -- rough percentage of customer opportunity do you think will simply be meeting the spec is good enough? And we don't care if you exceed the spec. And therefore, a lot of it becomes about price. And what's the opportunity, to the extent you're differentiated in a positive perspective from technology, above and beyond however you're pricing it for you to gain incremental share versus others? And then I've got some related questions to that.

Yes. Okay, Paul. The percentage of the market at the ZR place -- first of all, it's going to be difficult for me to give you a number, but I'll give you sort of a subjective statement. We assume the sort of -- you're okay in the 15, 17 watt power zone, and you're okay if you reach up to 80 kilometers. I mean everything -- that's good enough, and then everything else is, in a way, how are you as a supplier and how are you from a price perspective on the decision-making? I think there is, certainly, a portion of the market that will be in that category. However, even in that category, if you can shave the watt off, that's real economic value from. And so that will, at the end of the day, buy you at a preference to a point. That will be a competitive lever. There's another portion of it where 80 kilometers hits only a portion of their "metro and campus DCI" links. And are they willing to carve off a section of their solution set that meets that and then have a different solution for the portion of the links that don't need it. That's still, I think, a journey in front of us. My speculation is that if they can find a solution that covers that full gambit. that's certainly going to be a preferred partner solution set and will give us an opportunity to be -- have a preference, if you'd like. It doesn't mean we aren't going to have to compete from a marketplace perspective. We have to compete, by the way, from a market price perspective in every application. And to compete successfully in a quite tough market pricing environment that we've lived in for decades, you have to do 2 things. Number one is you have to have control over your cost base. And I'd say from a vertical integration perspective, there's probably nobody out there that has control over more of the components than we do. So that puts us in good seat from a cost perspective. And then do you have the volumes to drive that cost base? And we've shown, I think, in the coherent space, across all application sets, that we're one of the ones that drives volume and allows us to continue to invest. So I hope, without sort of giving you a number, I'm hoping that gave you some color.

Well, Scott, I hear your response with respect to power, and I did read the slide deck. But I'm still just trying to understand, and the question being, what is your technical competitive differentiation? Of course, that begs the question whether -- to what degree you're aware of Inphi and solutions based on Inphi's DSP. Similarly, Acacia Cisco and solutions based on their DSP and NEL. Do you have do you have industry insight that informs to what extent you truly are positively differentiated? And the final question would be, from a commercial opportunity standpoint, you all have been trying for years in terms of the merchant market. You've had a challenge in that your competitors -- I think the target with DT primarily originally in terms of target market, given that most of your western competitors didn't want to compete -- didn't want to source from you, given that you're a competitor. In the ZR market, is your opportunity still just selling -- and I don't mean it from [indiscernible] standpoint, but is it selling through the traditional communication service providers, the hyperscalers and other such customers? Or is there an opportunity to also sell to system suppliers, whether in Arista, a Juniper or others? I mean, is there any evidence of success? I know it's very early. I apologize. I know these are long term.

Yes. There is a few things here, Paul. Let me see if I can unpack it. First of all, on the competitive differentiator piece of it. At the end of the day, I'd go to 3 points. Number one is we think we're going to have best-in-class from a power perspective. Number two, within that power end book, we think we're going to have best-in-class on a reach differentiation perspective. And yes, we are aware of the competitive environment as you would expect us to be. The -- which customers actually will value those the most, and therefore, will give us a preferential treatment within meeting the marketplace, I think that's still -- we're very early days, and that's still a journey to see. The other dimension of this, of course, is can you ramp the supply chain? Can you produce in volumes? Are you a trusted supplier? And I think on -- in the coherent space, as we said in the past, we've demonstrated that we tick those boxes. And somebody -- one of the questions earlier is we have to convince people that we can also do that in the smaller form factor spaces, and that's certainly in front of us. The other thing, over time, of course, this is a point in time, it's a technology in time. And as we all know, that technology moves on as we have the wherewithal financially and capability set-wise to keep doing it and doing it again, because we're on a treadmill and we have to continue to win in this business. The other piece in terms of what you at the consumption model. So as you said, the merchant piece, we've been at for a while. We've said publicly here for some time and I think consistently, for the most part, our bet on the table around the merchant piece had 2 strategic initiatives for us. Number one is we don't participate in China as a system vendor per se. We have some business there with the content providers that is facing the largest part of the China market [ service provider ]. We don't participate there. We saw the merchant approach, as you call the call it, as an opportunity to participate there. Frankly, I think the opportunity is still in front of us. I think it is -- the timing-wise really required our WaveLogic 5 technology that will play there. I think the time for that is kind of now, if you like. The second strategic piece, though, is exactly what we're talking about here, which was the consumption model around, particularly the metro DCI market moving potentially to a pluggable. And that was the reason why we started to exercise that muscle from a merchant perspective. I think it's still an open question around how the content providers will consume this. I mean, procure it, I should say; procure it. Whether they will go through a system vendor, and you named a number of them, that participate in their data center switching, or will they buy it direct from their "coherent supplier". I suspect we'll have both. And we are absolutely willing to and -- to transact in both ways. And we have, as I think you're aware, Paul, we do have a team within Ciena that we call Ciena optical microsystems that is set up to be able to transact with those third parties.

Scott, do you have any systems companies like Juniper, Arista; or merchant transceiver suppliers, the NeoPhotonics [indiscernible], et cetera, that have committed to you to use your DSP at the merchant transceiver level or to use your full-blown 400 ZR transceiver at the systems level?

Yes. First of all, we haven't gone down the path of actually decomposing, if you like, the modem. So what we're offering in the marketplace right now is a fully integrated modem. And we -- it doesn't say we won't in the future, but at this point, that's what we're transacting. Again, largely, the conversations have been around WaveLogic 5, and that's still early days. But we're engaged with a number of them, and you named [indiscernible]. So we're engaged with those folks.

Thank you, Paul.

Your next one is from Fahad Najam with MKM Partners.

I do have several questions, hopefully, if I can ask most of them. How should we be thinking about 400-gig ZR opportunity in helping you gain share against Huawei? You mentioned that you're willing to sell your technology on a component basis. But on a module level, do you expect that this is probably going to help you gain share against Huawei outside of China? And also if you can help us understand in terms of -- both Inphi and Acacia have demonstrated interoperability. But we don't know if your modules are interoperable or not. How would that help you gain entry into some of the next scale guys like Microsoft, which have been publicly talking about this interoperability between Acacia and Inphi. And then I have a couple more questions that I'll ask after you've answered this one.

Fahad, thanks for the question. I'll maybe take the Huawei one, and then I'll ask Dino to comment on the interoperability piece. Huawei -- I mean, there's lots of dynamics to the competitive aspects of meeting Huawei in the marketplace. I don't actually think the pluggable and the ZR one is actually on top of that list or anywhere near top of that as it relates to Huawei right now and where we see them. I would say this no more generically. Every generation of coherent technology that gets into this in the marketplace has been an opportunity for us to gain share. And as we move to this generation, our fifth generation of technology across our WaveLogic 5 family, whether that be integrated into our systems or as pluggables, we look at it as an opportunity to gain share, and we fully expect to gain in share as the world moves to that generation of technology. Again, I'll go back to what I said earlier. Each of these generations of technologies is more and more difficult [ to get ] performance. And there are fewer and fewer folks in the industry that have demonstrated the ability to do that. So we think it's a wonderful bridge of opportunity to gain share, both competitively in the application spaces that we're dealing with today, but also there are some new application spaces that have not been coherent in the past. We talked about some of the large web scalers in their metro DCI applications are not in coherent technology today [ will be moving to ] coherent technology. That's an opportunity. But also, as you may have seen in the webinar, all of the service provider access networks that are today 1 and 10 gig as they move to the 100 gig and buy 100 gig, that's a new space opportunity for coherent as well, all brand-new space that the folks that have the coherent capability can now participate in. So the general statement is lead generation and coherent technology, a great opportunity to gain share as we have in every other generation. On the interoperability question, I'll pass it off to Dino.

Yes. Thanks, Scott, and thanks, Fahad. And the -- yes, the 5 Nano has been designed to conform to the OIS interop's agreements. That's the 400ZR as well as the open ZR+ NSA, if you will. So the design of the structure, the DSP, those are all industry documents, and that's what the implementation has been targeted at. In addition, of course, per our webinar, you could see we also have some higher performance private modes to get even more out of the network. As far as where we're at right now, we're right in the midst of the integration, these production parts integrating into third-party systems as well as interop-ing with some of the third-party plugs. There's still weeks and months to go here in front of us as we start to ship them into different test sets, but so far, so good. So not only was it designed to do that, it is adhering to it. The other thing I might add is, Scott was listing some of the key points to the previous question, obviously, on the optics and the performance, et cetera, et cetera. But our system expertise is really helping in this space as well. Like these coherent plugs are more sophisticated than the client grade, if you will, that I mentioned earlier. And the amount of software in there, not only to provision, alarm, diagnostics, performance, all the stuff that matters in real-world applications, our stuff comes with many decades of system experience. So right out of the gate, the plugs are very rich in feature and robustness, and we're seeing that play out as we start integrating in these third party systems.

Okay.I appreciate it. I have a second question. I was reviewing your slide deck earlier today. And so I noticed that on Slide 7, you've mentioned that there is a 3- to 4-year lag from your high-end systems performance feeds to when they get to the pluggables. And then on your Slide 17, you kind of hinted at maybe seeing these pluggables come in the form of 1.6 terabits in 2025. If I take your 3- to 4-year lead time as indicative of where you would be introducing the 1.6 or 1.2 terabit solution, it seems like you might be introducing 1.2, 1.6 terabit solutions this year based on their timing as I look at Slide 17. So is that an intent? Or is this some -- let me ask you directly. Is that an intent -- you're highlighting that you're going to be introducing a 1.2, 1.6 terabit solution at the system level this year? And then 4 years later, we can expect a pluggable?

If I may maybe, Scott, and then you can add color after. I'm looking at it now, refreshing my memory. Chart 17 was showing how the dynamics of the data center, certainly, the metro DCI, continue to change. What was the Waveserver-type appliances, now we're talking ZR. I think what we were trying to show there is there will be a natural path to an 800ZR. But on the fringe here, a lot of activity going on co-packaged optics. That was really the intent and you can say where everybody can place a bet on that. But in some ways, co-packaged optics might actually change what comes out of the router boxes. And it won't be plugs anymore, it would be these sort of lower reach, but optical interconnects. So this wasn't trying to say that we're going to have 1.6 terabit plugs -- coherent plugs in that time frame. What we are saying is, in that time frame, the dynamics inside the data center in the -- especially in the switch chips to try to get the bandwidth out, it could actually change to something like the co-packaged optics. Still a lot to be debated there, but that was the point. And hopefully, that's a bit clearer. I can see where the confusion would have come from, though. Is that helpful?

Got it. No, that clarified -- [ I didn't really care if it was possible on co-pack ]. The slide suggests that we expect in 2025, 1.6 terabit solution at that level. And if your earlier slide is indicative of that it's 3- to 4-year lag between systems and whether it's [indiscernible] copackaged, optics, it would certainly indicate that you might be introducing 1.2, 1.6 terabit system.

Yes. Your logic is perfect. No, your logic is spot on that, but that wasn't the intent, of course. Like we were talking about the co-packaged optics could change things.

Okay. One last question. In terms of the opportunity for ZR. Correct me if I'm mistaken, but outside of Microsoft and maybe Amazon, I haven't really heard of any major -- whether it's Facebook, which doesn't really have a metro network; Google, which hasn't really been very aggressive in adopting ZR. So relative opportunity primarily remains this year to be a Microsoft -- maybe even next year, maybe a Microsoft opportunity. I'm still skeptical. But help me understand if my correct -- if I'm correct in understanding that the DCI opportunity for ZR, does it extend meaningfully beyond just Microsoft? And if so, who are the leading adopters of ZR so far?

Yes again, I'd say we sort of sized that, in the fullness of time, that application's life -- opportunity for that application has to be up to $500 million in the market. But I would suggest, over time, it's going to be more than just one of the large content providers. I think you're right. I think the first mover will be Microsoft, and we'll see the others evolve. I think you've got a fairly good read on the order that they're going to go. And just a reminder, Microsoft is not moving from a coherent solution to a coherent pluggable solution. They're moving from a non-coherent solution to an coherent solution. So for us, that's part of the opportunity we're going to see. Fahad, you had a question on the interoperability. That's something that was really important. I just want to make sure that the folks understood here as well. When we talk about interoperability, there's really 2 parts of it, and that's been pressed around the optical interoperability between different plug vendors and see whether or not that's actually a consumption and an operational model that customers actually deploy. As I think you know, we haven't had [ expanded meter ] interoperability in a WDM perspective ever in the industry, not because it's not technically doable, it's just operationally challenging. But we'll see whether it goes there. Certainly it's a capability set in the standard. But the other really important aspect of the interoperability is because these plugs now are not coming from the same people necessarily that are providing the host, the system host of these plugs are very sophisticated with the software interoperability between the plug manufacturer and the system provider. And we do think that our experience as a systems software provider is going to really benefit us there when it comes to that type of interoperability as well.

Thanks, Fahad. Just so everyone knows, we really do appreciate the engagement. We're going to continue this discussion. So we want to make sure everybody gets their opportunity if they can.

Your next question is from Rod Hall with Goldman Sachs.

I just had 2 quick questions. One is regarding customers. I know you said you're not yet shipping samples, but I'm wondering how many people are asking you for samples. So can you give us some ideas how much interest there is in this now? And then as you ship in volume later in this year, how many good-sized customers would you expect to have maybe by the end of the year? Are you thinking just a couple of people? Or -- so just give us an idea of what the interest level, what you think the demand looks like this year? And then the other thing is on pricing. This goes back to the competition kind of question. But I think the specific thing we're interested in is the pricing decline or pricing curve on this technology. So is it typical? In other words, is it down 15%, 20% year-over-year after we have the initial price points getting set? Or do you think the decline is slower than that because there aren't as many competitors. Just help us understand what the trajectory of that pricing is likely to look like? Because I think there are a lot of misconceptions about that as they look at these higher speed pluggables.

Yes, thanks for the question. So 2 parts to that, I guess, in terms of the market opportunity. So again, if you look at our road map, we sort of said the first application is that 400-gig ZR application that is largely going to be dominated just because of the the spec of it, just a simple point-to-point networks, call it, 40 to 100-kilometer kind of reach. It really is going to be that metro Campus DCI, and the bulk of the volume is going to be in a couple of those that build-out those large metro campus data centers. And the previous question sort walk through who I think the early movers are going to be on that. I think you're going to see a limited introduction in 2021 and starting to see a volume drive in 2022 against that application. In terms of the other pluggable applications, for the most part, we actually see those actually being largely consumed within our system business. So the biggest demand for those is actually within our own Ciena product families, particularly in our routing and switching facility. Pricing...

You don't want to answer the question on the customers? Because I'm asking more like the customer question, not with you. We know the applications, but I'm curious what the actual customer kind of numbers and expectations are as you look to the end of the year.

Yes. Sorry, Rod, maybe I wasn't clear. I actually think the vast majority of the volume in that application, the 400 gig ZR application, because of the application space, is going to be controlled by the large web scale logos that we know and love and talk about all the time. Some have an architecture that is more conducive to this than others. And the early movers we talked about in the previous question, I think you'll see Microsoft probably being the early mover on this.

Okay. All right.

On the pricing question, you asked -- I kind of look at it this way, and this is sort of our window into what we're seeing in the early days of the market pricing. But we believe in the optical WDM space. We've been, for a couple of decades now, in an environment that has seen, certainly over the last decade, capacity demands in our customers' network going up, call it, 20% to 30% a year. You guys all know that the market size in optical WDM has been growing at probably, on aggregate over that period of time, in the low single digits year-on-year. The difference is price erosion. We're dealing with price erosion year-on-year in the mid-20s probably in that range if you do the math. If you draw -- and that's on a cost per bit basis. So if you draw that curve out and sort of extrapolated into sort of 2022, 2023 when this technology starts to hit its stride in those volumes I talked about, it's still on the curve. No difference from our perspective. And you can make a decent business in that curve, provided that your -- you've got scale, which we do, and provided that you own a significant portion of the cost of doing materials, which we do. And that's sort of our perspective on it.

Your next question is from Samik Chatterjee with JPMorgan.

This is actually Joe Cardoso on for Samik. So yes, just one quick question from me. So it seems like most or part of the discussion has been around this incremental TAM opportunity at the edge, where I believe the area that you guys would be displacing is these traditional routers being used today from the incumbent vendors of the world that have been leveraging custom silicon as opposed to merchant. So I just wanted to get your thoughts around why you feel confident that Ciena can displace these incumbent leveraging merchant silicons?

So I think -- it was Joe, was it? Sorry...

Yes, Joe.

Yes, Joe. I think what you're specifically referring to is where we showed the expansion of the TAM and sort of the access part of the network?

Yes, that's correct.

Yes. Okay. Yes. So first of all, I guess, if I think the access part of the network, today, we do participate in that, in our routing and switching portfolio, what we historically have called packet networking portfolio. And the application use cases there are enterprise business services, wireless backhaul and sort of the aggregation networks in our service provider domain. Like that part of the network largely has been, from a packet forwarding perspective, is what I think you're referring to from when you talk about merchants looking here as opposed to the optics. That part of the network has largely been with the main merchants looking for 3 years now. And even if you look at the folks that control -- have their own packet forwarding basics, the portfolio typically bifurcates where that sort of access part of the portfolio largely is done on merchant silicon chips. And we use the same sources as that and have been in our packet portfolio for some time. So I don't think that's a lever for differentiation of that part of the network. What has been a lever for differentiation of that part of the network is, obviously, software fit. Operational fit and the ability to deploy in outside plants, as an example and to deploy with zero touch provisioning in that scale, which we've been doing for years in our packet networking portfolio. What is coming in to play as the uplink -- links on these networks move from 1 gig and 10 gig to 100 gig. What's coming in to play as an ability to differentiate is your coherent solution. So in other words, it's sort of coming into our sweet spot, if you like. And that's a new opportunity for us, again, to use our coherent technology and strength there as a competitive differentiator. And if we go back to the sort of what's [ comprising ] the coherent market, it's going to be new applications with coherent technology. So I'm just speculating a bit on what you're getting at in your question, but hopefully I answered it.

[Operator Instructions] The next question is from Meta Marshall with Morgan Stanley.

Great. I wanted to maybe ask a question on the CFP2-DCO. And just get a sense of the interest you're seeing in that today, just given kind of a sole DSD provider in the market. And just get a sense of whether you're utilizing other componentry partners or just your own silicon photonics technology, just kind of given your announcements a couple of years ago about partnerships within the componentry space.

I'll take the sort of where we see the application space for the CFP2-DCO and the interest. And I'll pass it on to Dino to talk about the technology side and the sources of that. We largely see the CFP2-DCO as an evolution, I guess, the modularity aspects within our system business, and that will show up on our converged packet optical portfolio on products like our 6500 RT series, et cetera, as well as in our packet networking routing and switching portfolio. And we largely see the opportunity for us there, integrated into our system offers, that's where the pool is. And it's sort of an evolution from -- in previous generations. The modular that we got there was actually separation, if you like, of DSP and the electro optics with ACOs. That's the opportunity in front of us. And Dino, you want to maybe double-click on what's inside of the DCO from a technology perspective and the sources of it?

Yes. Certainly, Scott. Thanks for the question, Meta. Yes, so the WaveLogic 5 CFP2-DCO obviously leverages that slide I was talking about earlier, the one you would have seen in the chart deck. So on DSP and the silicon photonics in there. Those are the critical performance to find new parts. And then of course, there's a laser. And in some cases, there might be other types of optical filters and things like that as -- depending on the applications that we're working into. A good number of those come from our trusted partners in the industry as well. So those -- that's the lead. In general, I would say, even in where we have our vertical integration and our critical differentiation. And as a strategy, we always look to have a couple of really solid sources just for security of supply. It's just good, prudent management to make sure that we have a couple of sources for almost all of the key pieces, which we do. But clearly, the lead technology is our own and with WaveLogic 5 Nano generation.

Thanks, Meta.

Your next question is from Amit Daryani with Evercore.

I'll ask you, hopefully, quick ones. One, I think you mentioned volume deployments we are starting in the back half of this year. I'm curious, do you think you'll be first to market? Or are there others that are ahead of you? And I'm curious, what do you think you will be in the volume production side versus volume deployment? And then do you think the number of players or vendors that your customers want could be higher in ZR versus what you've traditionally seen, i.e. do they want 3 suppliers versus 2 probably historically? I'd love to kind of understand that part. And then secondly, I think you talked a fair bit about vertical integration throughout the slide deck. I'd just love to understand what does that mean and what advantage does that give you in terms of pricing or go-to-market or something else?

Amit, let me take -- let me take the last one first, which is sort of the vertical integration piece. We pursued vertical integration, and this isn't just related to the pluggable piece; it's related to everything we do on optics, primarily driven by 2 motivations: one is where we believe key capabilities are required in order to drive the innovation to get to a next generation. We want to be in control of our own destiny, and therefore, all the key design aspects of that. That absolutely is probably the -- at the end of the day, the primary driver for investing on our R&D resources to be "vertically integrated". And as Dino said, even when we do that just as a good practice from a security supply perspective, we do bring on other sources in those areas for security and supply. Then anecdotally, if you remember back in sort of some previous generations, we were talking about our time-to-market, we got lot of questions and calls like what are -- people were basically saying, hey, we're scratching our heads because the ecosystem around what you're talking about from a technical capability isn't saying that they're going to be ready at the same time as you are. And we kept saying that we understand that, but we're telling you what our dates are. The reason why we were doing that and we were able to do that is that control that I talked about around the innovation is key to next generation. That's sort of the belief system and the primary drivers for "further communication". The secondary driver is, of course, the platform, controlling the key cost drivers within the bill of materials of the solution. And that's an important aspect in terms of being able to drive the business, business model, the economic model that allows you to participate in the market pricing. We don't necessarily set the market price as long as there are multiple players out there. Particularly for the [indiscernible], the market prices are going to be a competitive dynamic. How well you can survive and thrive in that market price is dependent on the [indiscernible] optimization piece. The first part of your question, sort of time to market. I think we're in a good position to intercept the key buildouts of -- on this application [indiscernible] application. And a key part of it is going to be our -- the ability to ramp the production units. You would have seen perhaps a number of folks have been noted talking about where they've been on this journey for a long time. And I will point out that we have a different methodology in terms of how we build, develop and ramp. Coherent technology comes from multiple generations of doing it. And it comes from, I'd say, an angle of being more of a system provider than a classic component provider, if you'd like. But what it does mean is we come to market -- come into market with production quality and production ramp capabilities. And maybe I'll let Dino talk a little bit about sort of the methodology a bit, so you can kind of understand where we're coming at this time and where we are in that sort of journey right now.

Yes. Thanks, Scott. I mean, we said it again, the key thing is when we talked about we're providing production units now for the lead customers. In this case, they are coming right off a production line. So we put a lot of effort, obviously, in the design of the pieces and all that. And that goes through many years and with a series of test chips and incremental approach so that we can own in on the final design itself. But even early on, some of those prototypes, they're all built by our manufacturing team and our manufacturing process. So while we're developing the design of the actual componentry, and the modem, we are designing the manufacturing flow, the test program, the calibration programs. All of these things that we've learned over many generations of coherent and decades of volume production, those things are going hand-in-hand and it's fully in parallel. So "when someone makes a sample", you can always put one together in a prototype shop, that stuff is coming off the production line right now. And that means it's gone through production assembly, production calibration, production test programs, collecting statistics, iterations, et cetera, flow through. So that's a big part of what Scott means when he says our methodology. And that's one that we've honed over many years. And it's true. It is part of our whole system pedigree that causes us to think that way. And it's one of the reasons why we still continue to surprise people, and they say, well, you've just got your last part. And a couple of months later, you're shipping volume, and that's because we've spent the 1.5 years or so perfecting the manufacturing process and tests at the same time we're doing the actual design of the technology. So that's -- it's -- you can't overstate that because it's really important. But if you haven't lived it, it's not obvious. Again, time and time again, it's served us so well and the ability to ramp the technology as soon as it's ready. And that's why we feel pretty good about the timing at this point with the market.

Yes. Thanks, Dino. Folks, a fantastic set of questions and obviously a lot of interest. And we really appreciate the interest in this. Hopefully, the approach of the Webex material early and then the Q&A worked for you. I'm sure we'd love to get some feedback on that after the fact. But really appreciated the dialogue. Gregg, giving it back to you to close.

Yes. Thank you. Thanks, Scott. Thanks, Dino. We appreciate you joining us. And we really do appreciate the engagement. We know we went over, but we wanted to make sure everybody had an opportunity to ask us their questions. This is a dynamic topic. We certainly recognize it will continue to be so. And so we certainly would encourage everyone to stay in touch with us as they have more questions, as things evolve. We are more than willing to continue to engage on this and other topics. So please do, as Scott said, take the time, if you haven't, to take a look at that recorded webinar, and give us some feedback if you can. There's a lot of great information in there, and we look forward to getting that feedback and your questions in the future. Thanks, everybody. Have a great day.

That concludes today's call. You may now disconnect. Speakers, please hold.