Q3 2019 Earnings Call
All lines will be really listen only mode until the question answer session.
Today's call is being recorded.
If anyone has only objection you may disconnect at this time.
I would now let's turn the call over to Ted Moreau head of Investor Relations for Infinera, Todd you may begin.
Thank you Rocco welcome to <unk> third quarter of 2019 costs call.
Copy of today's earnings and Investor slides are available on the Investor Relations section of our website. Additionally, this call is being recorded and will be available for replay on the website.
Today's call will include projections on estimates that constitute forward looking statements, including but not limited to statements about our business plan sales opportunities.
Manufacturing operations products technology and strategy.
Shipments about the current status of our integration plans and synergies as well as statements regarding our fourth quarter outlook.
These statements are subject to risks and uncertainties that could cause infineras results to differ materially from management's current expectations.
Actual results may differ materially as a result of various risk factors as included in our most recently filed 10-Q as well is the earnings release and that's just last furnished with our 8-K filed today.
Please be reminded that all states alright.
Statements made.
Today.
And Infinera undertakes no obligation to update or revise any forward looking statements to reflect events or circumstances that may arise. After the date of this call.
Today's conference call include certain non-GAAP financial measures.
I want to regulation G provided a reconciliation of these non-GAAP financial measure.
Hi, most directly comparable GAAP financial measures in our third quarter of 2019 earnings release and investors like.
Now I'll turn the call over to our Chief Executive Officer Officer, Tom Pellet.
Good morning, and thank you for joining us on our third quarter 2019 earnings conference call.
Joining me today, our CFO , Nancy Erba and see although they did hurt.
I'll start by briefly reviewing our Q3 financial performance highlighting our execution on integration and depicting our strengthening innovation pipeline and success and positioning our new portfolio, then expanding global customer base.
I'll, then turn the call over to Nancy to provide a detailed review of our Q3 results and get additional perspective, our financial outlook.
Looking back at the third quarter. My summary view that we had a solid quarter. They made significant progress in three key areas.
Aggressive execution on a Korean integration has put us in a position to close this chapter of the combination in the fourth quarter and deliver on our second half 2019 commitments, including non-GAAP operating profit and positive cash flow in Q4.
Our enhanced an integrated portfolio is being embraced by our customers as bookings for Q3 were at record high and we continue to win new strategic opportunities.
And our innovation pipeline is robust with differentiated solutions that are exciting our customers and opening opportunities for future growth in both the topline and gross margins.
Financial results for the quarter demonstrate significant progress toward completing the integration of Korea.
Q3, non-GAAP revenue was 328 million inline with our guidance well, we increased backlog for the fourth consecutive quarter.
non-GAAP gross margin came in slightly better than our guide midpoint, while operating expenses were at the low end of the range.
This pump comp positive combination was partially offset by a negative foreign exchange impact, resulting in non-GAAP EPS. They came at the midpoint of our guidance.
I'll highlight of the quarter was bookings, which grew significantly from a strong Q2 were a record for the company and exceeded our expectations at the beginning of the quarter.
Our pipeline and customer traction continued to build with the addition of three new tier one customer wins, which brought our year to date total 10.
Having recently passed the one year anniversary of the closing of the Korean acquisition. We're now in the final stages of integration on track to substantially complete our integration office activity during the fourth quarter.
As we close this chapter I'll remind you of the commitments that were made when we began this initiative.
First achieved significant cost savings for synergies to deliver a profitable business in the near term.
Second increase scale from expanded customer traction with tier ones and I see pease enabled by a refreshed and integrated portfolio.
And third invest to be the innovation leader by leveraging our unique vertical integration capability over a broad end to end solutions portfolio to serve as a cornerstone of a differentiated business model.
Against these commitments our execution highlights include executing cost synergies delivering two times are really stated goal, but the expectation of $200 million in savings through 2019.
Scaling a powerful end to end portfolio that fuel four consecutive quarters of substantial backlog expansion and helped us earn 10, new tier one scale customer wins to drive future growth.
And enhanced our leadership in optical technology as we successfully launched 600 gig and remain on track for delivery of our 800 gig solution in 2020, while introducing S. XR optics, a new network paradigm.
Well, we must successfully complete the remaining integration work our outlook remains that we expect to return a company to non-GAAP operating profit profit in positive cash flow in Q4.
Our heritage as a leading optical innovator has been a significant value driver for our customers. We believe this capability becomes more important in the future.
Well, we've been reducing expenses this year, we love reduced increased our R&D investment for our vertically integrated optical technologies by 20% year over year.
Filling our pipeline with solutions that are aligned with the fastest growing segments and the optical market.
We have clear in certain strategies to drive growth with the high bandwidth applications data center architectures and metro aggregation and distribution networks.
On the innovation front, we are driving to differentiate in three distinct categories.
Optical leadership through vertical integration with differentiation in performance and cost.
This aggregation with open platforms for both optical and IP solutions.
In automation that delivers network operational efficiency and rapid service deployment.
On the optical front, we are delivering 600 gig technology to the market shipment schedule for revenue this quarter.
For 800 gig our picks are being demonstrated to customers and our DSP remains on track for delivery. This month.
It aligns with our plan for 800 gig product delivery in the second half of 2020.
We believe our 800 gig product will deliver a significant cost and performance advantage, while our vertically integrated manufacturing capability. The most complete in the industry will enable us to rapidly ramping this fifth generation of technology into volume.
We continue to believe will be one of only a very small number of companies delivering 800 gig in 20 <unk>.
In a continuation of our history of providing game changing technology, we introduced XR optics at you talk in September and received a strong market reception.
This is an innovative approach to drive radical simplification and step function cost savings to aggregation network architectures and creates a new product category. The first coherent point to Multipoint optical networking technology based on the network aware optical pluggable.
Network providers, the XR as a compelling solution for applications, such as Fiveg wireless cable fiber deep and business service aggregation as it supports the evolution of bandwidth demand while greatly simplifying network operations.
Infinera is committed to bring this technology to market when they multisource strategy to enable a broad based adoption of this technology across network applications.
The next few quarters, we expect to make further announcements as we position ourselves to deliver intelligent network pluggables.
On the opening disaggregated front, we were committed to leadership in two areas and the optical space caught that modular platforms continue to experienced double digit yearly growth and are expected to be at 3.6 billion dollar market in 2023.
Being adopted by both IC Pncs piece, our group platform supporting up to 600 waves today continues to outperform from a market acceptance perspective.
With the addition of over 40, new growth grew customers year to date, including a significant IC P and a number of tier one CSP globally. Our expectation is that our market share will show noted growth in the second half of 2018.
As we prepare to introduce 800 gig into our offering this is the opportunity for continued market share expansion with our leading optical capability.
With the advent of Fiveg in fiber deep our customers are driving a fresh approach to metro aggregation and are looking to router desegregation as a way to minimize vendor lock in speed New service deployment facilitate faster innovation and assure cost effective scaling.
As previously announced Telefonica is currently deploying our direct route or for Fiveg wireless network build in Germany.
Our disaggregated D.R. X X T M and transcend wireless solution Leverages, our field harden cell site routing installed base, while offering our customers a powerful transition to fiveg.
Our pipeline of activity continues to grow with the Drs and we expect relative to begin ramping in 2020, what is expected to be a lengthy fiveg investment cycle.
Transcend our automation software suite is a key enabler to deliver an efficient network across traditional and this aggregated network elements.
Today transcend helps customers like 18, T Nbn and Verizon to manage their network assets with greater efficiency and improved customer responsiveness.
Instrumental in the purchase decision for our Disaggregated Metro solutions as customers expect simplified operations and the rapid rollout of new revenue generating services.
And finally, it facilitates creation of new service offerings with tier ones, providing the intelligence required to migrate legacy circuits next generation networks as evidenced by our previous Verizon announcement.
With the Korean integration nearly complete multiple proof points that our portfolio isn't being embraced by customers and innovation pipeline poised to deliver meaningfully disruptive solutions to the fastest growing segments in the market and material progress improving the bottom line of the company. They see the opportunity we envisioned a year ago starting to materialize.
At the macro level, we see fundamental demand remaining strong as bandwidth hungry services require new architectures that deliver dramatic cost reductions in transmission and networks.
Our leadership in vertical integration is core to our ability to continue to drive down costs enable these new architectures and deliver technology in a narrowing group a viable technology sources.
On the global front, we're well positioned to take advantage of growing concern over network security well, having very limited exposure to the political uncertainty surrounding China.
As we prepare to close 2019, I look back with appreciation at the significant transformation. Our company has achieved in one year.
Looking forward I'm excited and realistic about the opportunity ahead and the work required to complete the execution of our vision I.
I would like to thank our employees for their significant contributions toward enabling this transformation I.
I will now introduce our new CFO Nancy Erba, Nancy will share initial observations about Infinera and then review our results in Q4 guidance.
Thanks, Tom and good morning, everyone. Today I will provide my initial thoughts on the business. So that's our Q3 financial highlights and provide our outlook for the remainder of the year for your reference we have posted slides the financial details chart Investor Relations website to assist with my commentary I.
I became infinera as CFO just over two months ago. What initially drew me to the company and what I have validated in my time here is the history of technology innovation and the potential for Infinera to emerge from the Korean to acquisition poised to increase shareholder value and the growing 18 billion dollar optic.
Called networking market.
The organization has put forth tireless effort over the last year to integrate two companies at a fast pace as we entered the latter stages of the integration we work through the anticipated charges of three significant structural business changes.
First the consolidation of three ERP instances until one.
As we announced last week the complexities of this integration resulted in a delay in announcing our financial results until today.
We will continue to improve our close process and shorten the time to announce our financial results over the coming.
Second a supply chain transformation, enabling the move from a fixed cost structure to an outsourced model that will allow for variable flexibility to better support our customers well optimizing our cost leverage and third the introduction of a new finance leadership team.
The complexity of these transitions was magnified by stronger than expected demand in booking and anticipated shipping shutdown recovery that extended longer than planned.
The results was the heavily back end loaded quarter in terms of shipping linearity invoicing and collections.
We anticipate shipping recovery to be accomplished in the fourth quarter.
I will now walk you through the financial highlights of our third fiscal quarter, which illustrate the progress we have made toward executing on our strategic goals.
Q3, non-GAAP revenue increased 7% sequentially the $328 million [noise].
Was within our guidance range of $320 million to $340 million as discussed revenue was impacted by our planned ERP shutdown and delayed shipment recovery.
We recognized 110% customer in the quarter and we experienced strengthen the I.C.P. vertical where we benefited from the growth in demand from a new customer that began deploying our growth platform earlier in the year as a result, our geographic mix skewed more towards North America with 49% of revenue coming from that region.
Yeah.
non-GAAP gross margin of 33.1% came in above the midpoint of our 33% to 34% guidance range, even with our continued growth and footprint expansion for line systems and the corridor.
The flow through of our integration cost efforts, we're able to modestly offset these margin pressures.
Moving now to operating expenses, we continued to make solid progress driving down expenses reporting Q3, non-GAAP opex at $127 million below our $130 million guidance midpoint and down 3.7% from $132 million in Q2.
Well, taking actions to reduce our overall non-GAAP opex spend we are also ensuring that we invest in the right growth areas, such as increasing R&D and critical programs as Tom mentioned earlier.
Diligent management of expenses affords us the ability to focus investment on innovation.
And provides us the ability to differentiate our solution and approve our operating model through gross margin expansion overtime.
So as an investment versus spending mentality with the intense focus on the resulting business model.
In aggregate, we recognized a non-GAAP operating loss of 5.7% and a non-GAAP net loss of seven per share both metrics within our Q3 guidance range.
Turning to the balance sheet total cash investments finished the quarter at $121 million.
As a result of the disruptions, we experienced with the ERP integration and the shipment linearity I described our invoicing and collections for the quarter were also impacted this is a temporal issue that will resolve during Q4 and into Q1.
As a result, we drew down $30 million on the ABL facility, which was put in place during the third quarter for precisely the type of situation. The A.B.L. provides flexibility to our working capital to support an increasing demand profile like we experienced in Q3.
I am keenly focused on improving our cash conversion cycle by measuring our working capital prioritizing inventory turns and managing accounts receivable collection.
Well, we have made progress over the past year, we believe there remain many ways to improve our operational efficiency, we believe that our cash along with our existing credit facility will be sufficient to meet our currently anticipated working capital requirements.
Now to our guidance for the fourth quarter fiscal 2019 as mentioned earlier, our Q3 bookings increased materially in the quarter, representing the fourth consecutive quarter of backlog growth.
We continue to see a healthy pipeline and expect another solid quarter bookings in Q4 for Q4, we currently anticipate non-GAAP revenue of $355 million to $375 million, which would bring us to the target of 1.3 billion for the year.
Based on the benefits of our new leverage supply chain model and as our product mix continues to normalize in the period, we expect non-GAAP gross margin to be between 34 and 36% for the quarter. It for the fourth quarter of this year in line with previous expectations, we anticipate additional cost benefits to flow through.
For the <unk> dollar 2020, when the full impact of the expected supply chain efficiencies will be reflected.
With regard to operating expenses, we have made tremendous progress driving down our expense levels, reaching our end of your target ahead of schedule. We will continue to manage expenses closely and anticipate Q4 non-GAAP operating expenses to remain in the range of 125 to 129 million dollar.
There's this range includes the increased commissions expected with stronger bookings and revenue.
We expect our Q4 non-GAAP operating income to be between breakeven and 2% slightly profitable with anticipated non-GAAP EPS between a loss of one cents and five cents per share.
The combination of stronger demand for our products as repo selected by increased backlog and new customer additions and the impact of our synergy saving efforts has kept us on track for not Q4, non-GAAP operating profitability and turning cash flow positive in Q4.
With the integration of course, it kinda to a close we see the foundation in place for growth and improved operating leverage we plan to share the metrics will be measuring and 2020, along with a framework for our long term business model. During our Q4 earnings conference call next year without I will turn the call over to Rocco.
For the Q and a portion of the Paul.
Thank you we will now begin the question answer session.
To ask your question Your press Star then one on your telephone keypad.
<unk> phone, we ask you. Please forgive her handset before pressing the keys to withdraw your question. Please press Star then too.
We also asked me please limit yourself to one question, what's the single follow up.
Today's first question comes from Rod Hall at Goldman Sachs. Please go ahead.
[noise], Yeah morning, I'd say so the question good set of earnings I, just wanted to check I guess on 800 gig Tom and see if you could expand a little bit on where we are in that process. It sounds like you finished tape out maybe let us know what the next milestone there isn't I've a follow up.
Sure on thank you for your time, Yeah, we remain on track as I've said to delivering our 800 gig product in the second half of next year. The next major milestone is delivery of our DSP that is scheduled for this week. So we should have that in our hands. This week other than a fairly significant amount of work that we will do to valid.
Our history has been that the Dsps work, but no until it works you don't know you should expect us to have announcements in regard to.
I would call it customer demonstrations in the first half of next year and then shipping for revenue in the second half.
The pick as we said in the call is in good shape right now, we're demonstrating that to customers in our lab, a we're doing emulation of the DSP and so far our customers have come back with the overall reflection that the performance is quite good.
Okay. Thanks, Tom and then my follow up for Nancy is regarding working capital I guess more bigger picture regarding cash flow, but cash flows a little bit weaker than we expected Nancy and then if we dig into that it's mostly in the working capital line, we see the inventory going up which is probably a good sign I guess and then accounts receivable.
So is also up a little but so I just wanted to see if you could talk us through some of those movements and what's your expectations for cash flow or.
Sure. So you know as we talked about we had the delay, which we had expected and shipments with the cut over to the combined ERP I will say that that took a little bit longer than we had initially planned which cause not only a delay in shipments, which then leads to all the follow on repercussions in terms of invoicing and the UBS.
Due to collect that you do see that increase both in the inventory and in a our because of that what we expect and it is a temporal issue is now that we are back running we will see those collections start to roll into Q4 and into Q1, and we would expect as I said in my statement to be cash flow positive in Q4.
And there and can you expand on that shipping issue a little bit like why did the ERP system effect shipping just so we can understand a little more detail.
Yes. Thanks, there were actually two issues. So one was certainly a cut over a three.
Safety systems into one ERP, but the second is as we've discussed on prior calls we moved.
Our own fixed manufacturing from our own facility in Berlin to an outsourced partner in Thailand, and Fabrinet and so all that happened all at one time, so we cut over both systems on the supply chain and so as Nancy mentioned, if you looked at invoicing and shifting on a weekly basis and.
Divided out of the number by the the number of weeks in the quarter instead of.
Oh, that's only having a down period of about a week and a half that turned out to be about a three week period. If you take that out to cash flow thats. The delta in what we forecasted the cash and what we actually.
Put out good news being.
We very rarely have a bookings cancellation.
And our bad debt is.
0.15%, so as Nancy said, we expect that cash to restore in the next two quarters.
I don't know next question today comes from underneath them of Needham and company. Please go ahead.
<unk>.
I'm assuming that your line is open.
Might be Mr. Henderson, Oh, I apologize I know next question today comes from Middle Marshall at Morgan Stanley . Please go ahead.
Great. Thanks, maybe just if we could kind of isolate what amount of revenue might have slipped from Q3 that Q4, just as a result of this kind of three week period.
As kind of a a bookkeeping item and then maybe as a second item just progress made on kind of getting I see p. customers at work cloud expressed customers converted over to group customers just to make that 800 gig transition process easier next year. Just you know if there's any kind of traction being made.
Converting those customers. Thanks.
Hi shirt. So I guess first we should reiterate that you know revenue came in just below the midpoint of guidance. So with all of the challenges that we had during the quarter, we were able to recover well and come back into the range. So I want to make sure that we remember that it's we're talking about this so.
You could then infer right that the bookings being as strong as they were in the backlog that we are now.
Now working through a there is there is additional opportunity we see they improvement going into Q4, I range 355 to 375 and revenue through Q4, and another expected strong bookings quarter.
Yeah, Yeah, there was more than sufficient demand to hit our guidance window. In Q3, we kind of ran at a time with recovery as Nancy said, it's less of a revenue recognition issue, it's more of a linear already and invoicing and collections issue than a Rev. Rec issue in regard to IC.
Piece, Yeah, we're very being very successful with the group and if you think about the grew one of the advantages. It has its a sled based architecture, which allows multiple generations of technology not to be deployed as the as the Infinera CX platform kind of runs through its normal course of life.
On the ice for we are being successful introducing the group into IC piece that we've historically had but just as importantly, winning new IC piece with that platform, particularly the one we pointed out a couple of times, a substantive I CP or that is driving a significant amount of man demand, but it's important not to just think about.
The group platform for IC piece, it is being exceptionally well received with csps around the world. They are using this platform for transmission as they look at building out Fiveg networks as they look at building normal long haul Metro networks, it's being exceptionally well received in general.
Got it for your guys is stances that really this three weeks shut down does affect the collections not that more of the bookings that were booked in Q3 would have been.
Recognize it so I think yeah, I think Nancy was pretty clear in terms of certainly there was opportunity, but and certainly we are positioned well with backlog as we enter Q4, but as any integration you're going to go through the learning curve as we go and we've contemplated that into our guidance range for Q4, Yeah as I said, we read.
At a time had we had the ability to ship faster or what have we had the demand that we would have fulfilled a more more.
We're at a time.
And our next question today comes from Michael Genovese with MKM Partners. Please go ahead.
Great. Thanks, So youve talked about four straight quarters of a building backlog in the orders have been quite good for four straight quarters. My question is do you think that that's a function of the industry demand or a function of share gain.
That you're doing or or both.
I think it's a function of a few things one.
As I said in my commentary, we see relatively strong and healthy demand a lot of these new architectures that are being deployed to support next generation applications I just require more bandwidth. So I see a healthy bandwidth environment too I see that the solution set that we're bringing to market as we've integrated this portfolio and tied together.
A number of various platforms into an integrated solution with transcend is being well received we are winning a number of new customers. So when you when a new customer invariably I figure I look at it as winning new market share and we've won 10-Q, one scale opportunities with new customers. This year in the first year of any of those.
Typically don't do a huge amount of revenue, but it's a foundational.
But now that you can grow your business on a overtime I also believe that while the industry continues to be broadly served by a number of competitors of ours are there are fewer and fewer people, who can actually bring differentiated integrated technology to market and I think we are leveraging the strength we have in that.
Position to not only selling our portfolio today, but our roadmap tomorrow and people are.
Appreciative of that capability.
Okay, Great and then a as my follow up I just wanted to check it with your language around the fourth quarter operating profit.
What was that the same as what you were saying before were you talking about EPS profit I previously in the fourth quarter or was it always operating profit that you that you were discussing.
It's always been operating profit that we've discussed.
Okay, Great I appreciate it thank you.
Huh.
I don't know next question comes from Simon Leopold overtime and James. Please go ahead.
Thanks for taking the question I got a question a follow up first on the the vertical mix I. Appreciate the this slide you. You've you've included here are just wanted to see if you could talk a little bit about how you expect a the vertical mix to trend over say the next year or so when you look at your pipeline your product mix the.
Coming 800 gig, making an assumption that we should see I see piece rising maybe cable or falling.
Just if you could give us a little bit more color on how you see this evolving.
Yes, so again I think a as Tom mentioned compact modular space being a market that is growing at 29% towards that 3.6 billion dollar market. We think we're going to see a significant traction along both I see piece as well as tier ones.
With that group compact modular platform with open line systems and us being in a it obviously in a take share position in terms of our aggressiveness towards the market. So I'd expect to see both IC piece.
Continue in a share gain mode.
And tier ones as Tom mentioned, we've closed 10 of them and that's planted the seeds those should be in growth mode is as we look forward over the next year. So moving forward. If my commentary would be the our ice six will be first deployed with IC pieces are they drive technology and I think we're well positioned there too.
Gain market share, yeah, and I see piece. We're also seeing success with sub sea, that's with ice for today, but also a there's a intense interest in isix that growth will obviously come later, the next year and the cable space, we have a significant opportunity, though it's too early to call you should keep your eye out on the Drs.
This this aggregated H.D.A. model with the cable guys are looking to deploy a its later obviously than many had anticipated, but I think we're well positioned to grow in that space with the de Rx platform that will be a slow.
Growth, but over time I see significant opportunity.
And then just a follow up to that would be what are you thinking about the timing and effect of ZR and ZR plus pluggable on your business. Thanks.
Yeah, those VR, we view that as a is certainly impacting a small portion of our market.
I wouldn't call it meaningful I don't like lose any type of opportunity, but it's not meaningful we're actually going to plan on using the ZR in our applications.
We have no intention of using our scarce DSP and pick resources to create commodities I will go to enjoy the cost structure of commodities and we will incorporate that where it makes sense into our platforms in regard to the ZR plus it's still uncertain, there's still no standard I'm I'm intent upon using our.
X our portfolio to really offset with the ZR plus couldn't do our XR provides not only cost effective transmission, probably a better reaches then the ZR plus and it also provides the ability to build intelligent networks not just point to point.
Its mission service.
Great. Thank you.
Another question today comes from Tim Savageaux Muslim capital markets. Please go ahead.
Hi, good morning, and congrats on the results and outlook.
First question is.
On kind of customer profile mentioned, you had 110% customer in the quarter Warner.
Got a character as characterize a customer around you know tier one or.
You know traditional type customers and maybe provide I'm a little more colors, you're having a son, who you know beyond that who some of your key customers who were by Oh vertical and not at all for sure.
Yeah, our largest a was a north America tier one it's a customer that's often our number one customer Oh, we continue to enjoy significant business with them as we talk about well I think last quarter, a they deployed a significant amount of new footprint. This year, we continue to do not only law.
And with them, but also some metro and some Oh, what reason position in sub sea with them.
As I've talked to add to you before a that business there will be some challenges as they move for the long haul into a a complementary direction with 400 gig that is not where we are targeted but I see a substantive amount of opportunity short medium and long term with this customer it's.
Continued to be an exceptionally healthy relationship.
The next largest customer was our new IC Pea that we won based upon the group.
In North America, that's a new relationship this year, it's one of our tier one scale customers.
They were not quite a 10% customer, but they they had a substantive amount of business in Q3 like forecast that who continue to remain fairly strong business, though in the IC piece base as you know, it's a little lumpy. So you can't count on that every quarter, but we do anticipate a strong Q4, and we also anticipate that our eyes.
Six is well positioned within that market or whatever other large customers was a European tier one building a new network for a long hauls for the long term customer that's doing a technology refresh and they upgraded to our latest technology. So that's a smattering of the largest customers.
That drove some good opportunity in Q3, Tim.
That's great color and I appreciate it.
Moving onto that I know the question was asked about verticals over over time, but as you look specifically into Q4, you I guess you sort of mentioned it in Q3 was you know.
Heavily driven by ICBPS do you expect that to remain the case and if you could.
Provide any commentary on the cable vertical that remains weak obviously historically you've had a very significant customer there.
Maybe you could.
Offer some commentary similar to what you've done on your traditional tier warned about any expectations for for cable in particular or that large customer.
Sorry to go in general are that large customer particular thanks.
Yes, we have to have more than one large customer in cable people talk about our North America large customer legacy only cable Guy. We have is just not correct reflection, we are actually a pretty strong presence in Europe and cable also but into your specific question a that customer as we said.
Is working through a significant inventory position you will see that business growing Q4, all who play a very soft Q3.
They start bumping into capacity type of limitations that we are happy to help them with I'm excited about the cable space in general or.
The Rx is now well positioned in a number of labs and Oh.
We won't see any real demand out of that yeah. The early part of next year, but our success in cable overtime I think has a real opportunity how they inflection up based upon the receptivity of the Drs. So it's something to pay attention to.
Our portfolio is being well received by the cable space.
And they are one of the top segments that are interested in the XR technology. As you can imagine I mean is ideally positioned for fiveg and cable distribution. So I think that the richness of the conversations now the engagement between executives and people below executives as probably not been stronger than it is today that.
I will turn into bookings and I am.
I think Q4 will be stronger than Q3.
Thanks very much.
Yep.
Ladies and gentlemen, I was or am I know she would like to ask your question. Please press Star then one today's next question comes from Sandler <unk> O.J.P. Morgan. Please go ahead.
Hi, good morning, Thanks for taking my question.
Oh I know you.
You mentioned a couple of times the.
Adoption of that the Arctic sort out of that you're seeing I just wanted to ask more broadly if you can quantify for us in terms of your order book how much of your order book is kind of open Disaggregation Garden looks like you open the line systems et cetera, what do you really seeing in book, if you can quantify that and maybe compare that to what do you had maybe a year ago. So that when you get something.
It's still incent them, so far off tracking the adoption, though and I have a format.
That's actually a good question in terms of a percent of portfolio on something we'll think about depicting for you may be in our next call in a better respect here's what I'll tell you the compact modular platforms allow for and insertion.
Into existing footprint at Ed Grady East along with open line systems, and we're seeing that as much a much larger portion of our portfolio. The last three quarters, we've had a ton of new footprint.
As well as more and more open line system insertion, both with our existing products as well as with the group product. So that has been an increasing I'd say by a factor to over the last couple of quarters in terms of the importance, which allows us to position ourselves to gain share on a go forward basis.
But really really good question and that's again a great part of what we're seeing in this opened in disaggregated World. In addition.
We announced a trial with Telefonica network deployment with Telefonica.
First in Germany that was publicly announced.
Obviously, that's a nice global property and as we see this open Drs desegregated router it marries up quite nicely with our products on the edge offering layer two with our X T. M series to really offer both solution for mobile front haul and backhaul, which we call X.
Paul as well as what Tom reference for the cable industry in deep fiber solutions and so we see both the pipeline for those products, increasing as well as bookings for those products increasing on a quarterly basis as we go forward and as Tom mentioned in his prepared comments.
Fiveg market is going to be a multiyear investment curve for the company and for the industry.
A quick color on open you know Infinera has unfortunately.
Been labeled as a closed slash proprietary type of supplier and it's never been further from the truth or they say, our because of our pick where proprietary I think our customer base in the market is finally understanding that technology of the pick has nothing to do with open and this aggregated how we are working very hard.
And growing market share in open line systems are the group is an open this aggregated transponder platform and the Dereks is an open odd this aggregated IP solution.
We're not doing it just to be good sports in the industry. However, we believe in an open world.
The advantage comes to whoever delivers the best transponder and we are convinced that our technology with our vertically integrated pick and our vertical in DSP, we create an unfair advantage for ourselves by executing on the optical platform and deploying that across open line systems hours or others. It's another reason that you'll hear us talking a lot about.
Our investment in transcend transcends starts playing a more strategic role as customers deploy this aggregated platforms because carriers are still looking for one net to grab around operational execution and efficiency. Our automation platform provides that one net to grab so you'll see us continue to talk.
Talk about open disaggregated optical leadership and automation finally, I would pay attention to tip announcement today.
Tip, we've made a press release and you'll see us a customer and tip talking about our role yeah. The Rx is playing in this new architecture in the industry you had a follow up question as well yeah I'm sorry on the more on the cost side of the C that seems to be more move towards outsourcing.
How should I think about that impacting go longer domain targets in terms of people. Some gross margin like those actually lowered the revenue base that you know need to get back dog and how should I think it'll be all implications fuel and getting to a lot the margin targets from more outsourcing.
Sure, Yes, so I mean, the outsourcing model as it relates to the system manufacturing is really designed to give us flexibility to allow us to serve our customers on our customers' needs more effectively and more efficiently. It's one of the examples that I spoke of in terms of how we're looking at growing and scale.
Selling the business and 2020 to be able to address this increasing demand and that we're seeing from the customers and then the market growth. So certainly the supply chain transformation that were undergoing does enable us to to offer that and as well it gives us an opportunity to get to the opex levels that we.
I need to in addition to that it impacts our margin efficiency I'm certainly we're very focused on bringing that margin up to what I will not a preview in terms of what that margin ranges, but certainly with our Q4 results. We will talk about both our expectations for 2020 and also the.
Leverage inefficiency that we think that business model can achieve and and next two years.
Overall, it positions us for margin expansion as we go forward.
The particular actions we took this year again, we took over the summer as we mentioned what was supposed to be a slow summer and turned out not to be we expect that to scale in full effect in a in 2020, which will afford some margin expansion.
Thank you.
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Oh no questions when it comes from Jim Suva of Citi. Please go ahead.
Thank you very much my question is first of all for Nancy you've only been then that CFO sito, a few weeks and you're working through a lot of ERP issues.
It sounds like you'll have it if I hear your comments correctly pretty much fully under control as you exit the December quarter for implementing all three ERP systems and am I right on that or is it.
Looking a little bit longer because you know that is part of the cause of the delayed for the GP earnings and why we're talking today.
Sure. So as anyone and you guys have followed a lot of companies who have gone through integration both.
As a result of an acquisition, but also companies who just simply are upgrading and integrating their ERP. This was a very complex integration three different instances to from the core inside of the House then I'm the in Panera.
Instance, bringing those all together was a very significant effort. We did a complete that we have closed our first quarter on the combined and integrated system. I will also say that you know, it's it's an ongoing process to gain all of the efficiencies.
At one instance will bring so we will continue to work to improve.
Our clothes time as well as the benefits that the system can bring us in terms of how we work working smarter closing better having better analytics and all of that benefits that that will bring to support the business. So first quarter closed a we will continue to evolve over the next several key.
Orders as we get all the benefits out of that one system.
Now I'll just add.
Converting three ERP systems is challenging you throw into that mix moving your entire supply chain to an outsourced model that the same time, it's a monumental task.
Extraordinarily pleased with the work of the team.
And I would say it's is an important part those items are the most substantive operational risks of this integration and they are now behind us. The Nancy's point, we're not done I would say, we're probably 90% done we have things to improve and to continue to learn from but I do believe that the close represent.
Milestones also in that the discoveries that we made we won't have to make again and that's a big milestone.
Great and then my follow up question is on the ERP system typically when the implement you know two into one or a new year's situation three into one there's extra operating costs and operating burden of from from that is that contemplate. It included in your Q4 guidance or will you have.
Even more cost savings I'm in the March quarter as far as you know kind of operating margin our operating expenses coming down I don't know again, if you have extra costs associated with this integration also that we should be thinking about.
Yes, certainly we will gain efficiencies through having one ERP and we have been thinking through our our integration efforts and the plans for the year included benefits from that I will also say that as we go into 2020, there are other efficiencies that we can gain.
That will enable us to leverage this model and to leverage our new supply chain and all of the actions that were taken in 2019, our positioning us to to be able to scale more effectively and efficiently in the 2020 timeframe.
Thanks, so much.
I don't know next question comes from Samsung or B. Riley. Please go ahead.
Good morning, a couple of questions regarding your fourth quarter EPS outlook, what's your FX assumption and my follow up question is a with all the moment you have how should we think about first quarter seasonality.
Oh, so for Q4, I should let's back up for Q3, and we did see a more significant FX impact than we had anticipated coming into the quarter.
It's the result of everything we talked about today, the significant movement of art intercompany resources to the new European distribution Center. In addition to the outsourcing of our supply chain far systems manufacturing that the level of transactions on a number of transaction.
It was and movement of materials caused a larger impact than we've had originally anticipated for Q4, we would expect to be on a more normalized range. We're not anticipating anything unusual in the Q4 timeframe in regard to Q1 as you well know our industry typically.
Experiences Q1 that is about 15, 14% softer than Q4 as that is driven by customer demand, where they just get their new budgets and start planning for the year I would anticipate our Q1 to be sequentially down from Q4, it certainly too early to call but.
Like most years, we're carrying a significant backlog into our Q1.
As we had talked about growing backlog for four quarters in a row.
When we look at our current bookings outlook for Q4, we anticipate that Q4 backlog will grow yet again. So we will go into Q1 with a stronger backlog than usual, but we do expect to see a somewhat softening of Q1 bookings. So that's about all I can comment on.
A quarter for Mel.
And my last question is on last quarter's call you talked about the being approached by a couple of a DSP customers now and you closure there.
We continue to see more and more opportunity and I think at a scarcity in the market of <unk> and how difficult. It is not only on the DSP side, but obviously integrating that into an open optic whether it be a DCIO.
And obviously in the future a pluggable. So we continue to have lots of activity and as we see more progress and we're ready to announce would we will make that public but very very good engagement in activity there.
Got it thank you I'd like.
I'd like to thank all of you for joining us today and I look forward for us having the opportunity to give you updates as we continue on this exciting journey to the veterans I want to thank you. The day after veterans day for your service to the country have a great day.
Thank you Sir This concludes todays conference call you may disconnect. Your lines at this time has a wonderful day.
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