Q4 2019 Earnings Call
Results call.
At this time all participants are in listen only mode. After the speakers presentation. There will be a question answer session to ask a question drain, especially when you need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero.
I'd now like to hand, the conference over to today to Mr., Greg Lamb, Vice President Investor Relations. Please go ahead.
Thank you Shirley good morning, and welcome to she enters 2019 fiscal fourth quarter and year end review.
With me today, as Gary Smith, President and CEO , and Jim Moylan, CFO , Scott Mcfeeley or senior Vice President of global products and services will join us for the Q1, a portion of today's call.
In addition to the school and the press release, we have posted to the Investor section of our website and accompanying investor presentation that reflects this discussion as well as certain highlighted items from the quarter in fiscal year.
Our comments today speak to our view on current market dynamics and how we're addressing the opportunity in front of us.
Our Q4 in fiscal 2019 performance as well as a discussion of our long term financial targets in near term outlook.
Today's discussion includes certain adjusted or non-GAAP measures of Cnas results of operations. A detailed reconciliation of these non-GAAP measures to GAAP results is included in todays press release.
Before turning the call over to Gary I'll remind everyone that during this call will be making certain forward looking statements such statements you put your guidance and long term financial targets are based on current expectations forecasts and assumptions regarding the company and its market, which include risks and uncertainties that could cause actual results to differ materially.
Statements discussed today.
These statements should be viewed in the context of the risk factors detailed on her most recent tend to filing and our upcoming 10-K filings.
Our 10-K is required to be followed the FCC by December Thirtyth, and we expect to fall by that date.
C N assumes no obligation to update the information discussed in this conference call, whether as a result in north American future events or otherwise would that I'll turn it over to Gary.
Thanks, Greg and good morning, everyone.
Today, we reported strong fiscal fourth quarter results rounding out an extraordinary your top and bottom line financial performance and leading market share gains.
For the full fiscal year, we again delivered industry, leading growth and profitability, including 15% revenue growth.
Greater than 50% growth in adjusted EPS.
We delivered 13.1 adjusted operating margin for the Euro and took important steps during the that will drive continued leverage and improvement.
We also had a very strong U.S., a cash generation with more than 413 million in cash from operations.
During the fiscal year with over 1 billion in cash and investments.
We frankly had a phenomenal your by any measure highlighting got clear market leadership, and most importantly positioning us to continue delivering profitable growth going forward.
We are entering 2020 with tremendous confidence and have strong visibility into our business prevailing market dynamics and key customer relationships.
We all the industry's clear innovation leader and have an enviable competitive position without technology leadership.
Hi, diversification and global scale of created a balanced and resilient business.
And one that is consistently outperformed the market and appears even.
Even in the face of short term challenges in any particular geography segment well customer.
Our deep understanding of industry dynamics and customer behaviors as enabled us to provide both short term guidance and longer term forecast that we have consistently met or exceeded.
Well there also well documented headwinds as we head into 2020, we have taken them fully into account.
Lets them against the positive drivers of our business, giving us confidence in our view towards continued faster than market growth and bottom line expansion.
In fact this confidence it's also positioned us to increase certain about long term targets, which Jim will discuss later in this cool.
Specifically, we continue to see strength in customer spending in North America and the meal.
And this is particularly true without service provider customers.
Despite a relatively flat overall spending environment.
We continue to build on our relationships to win new business and execute on our recent awards given good strong visibility to growth within this customer segment in 2020.
Asia Pacific continues to present growth opportunities and our outlook that remains positive. Despite some challenges in certain geographies during fiscal 2019.
With respect to India like other companies, we saw a meaningful reduction in revenue. After a couple of years, a very aggressive network build outs on a fluid regulatory environment.
Given our position in some key accounts, there and our overall competitive position we have a good line of sight to modest growth in India market in 2020 compared to 2019.
Regarding our web scale customers. We are now clearly an established incumbent in several key accounts and we broaden those relationships considerably in 2019.
This led to a greater than 50% market share in the global PC OEM market.
The strong market position as benefits it up business meaningfully.
Direct sales to web scale customers grew 40% year over year.
Representing 22% of total revenue for the.
Going forward, we believe that web scale spending will continue to grow although it's a more moderate right. Then recent years. However, we fully expect to maintain I'd say our market share.
And to see and beyond.
More broadly, we're seeing increased engagements and opportunities across multiple market segments as customers continue to pursue a flight to quality.
The strategic partners, who off a leading technology and engagement models on a global basis.
Those with the financial strength and stability to deliver innovations over the long term.
Overall, we're operating in a demand environment that reflects significant network traffic growth and automation needs.
These dynamics are driving the transformation of network architectures and this represents a great market opportunity for Sienna.
And we have a unique and favorable position within high growth areas about markets, where we've made significant strategic investments over the last several years.
A year ago, we explained how about renovation diversification and scale enable us to address these key opportunities.
We proved that ability in fiscal 2019.
Non telco revenue grew 25% year over year.
Led by our growth with web scale customers.
We continue to advance our innovation leadership in optical with a very healthy business that grew nearly 17% in fiscal 2019.
And we expect enough business to grow even stronger.
On the development of Wavelogic five on next generation coherent optical modem, we've made great progress and I'm very pleased with the performance was saying.
Customer demonstrations during the recent vectors technology events that are all do a lab, we're extremely well received.
We remain very confident we will be first to market with an 800 gig solution in fact, well ahead of any other commercial offering.
Customers, obviously share in this confidence as engagements continue to ramp including Peos already in house from several of them.
As such we are on track to have Wavelogic, five and customers hands in fiscal Q1 and continue to expect revenue momentum to began in Q2 with more material revenue in the second half of 2020.
At this time last year. We also noted that we would augment a packet networking capabilities to expand our addressable market and I P. Ethernet as the market grows.
We had a record you're not packet networking segment in fiscal 2019 with revenue growth of nearly 23% year over year.
And we are aggressively attacking this space with our adaptive IP solutions.
Already deployed with two global tier one customers adopt to fight pays designed to be automated lean and open for a simpler more cost effective means of scaling access a metro networks.
She is traditional complex an expense if routing options.
At vectors, we receive resembling feedback that out of adapt to fight P. solution is just what customers need to evolve that layer three applications.
And finally this year, we reinforced our commitment to building out tower intelligent automation software business as service providers look to tackle service network complexity across the globe.
Revenue from my Blue Planet business doubled in fiscal 2019 meeting our annual target.
This revenue growth included some significant customer wins, including with the focus in Australia, but our entire Blue planet software portfolio will play a critical role and then network transformation.
We also recently closed the acquisition of 17, now a leading provider of service assurance analytics and network performance management solutions.
This rounds out our software capabilities to enable closed loop automation and positions us for even greater opportunities heading into 2020.
As we leverage our technology leadership and investment capacity, we continue to have the most compelling portfolio today.
The most credible and robust road map for those going forward.
Coupled with our global scale and diversification across geographies and customer segments. These advantages are directly driving a strong market share gains and differentiated financial performance across the business.
That I'll turn over to Jim.
Thank you Gary good morning, everyone.
Q4 marked a strong end to an extraordinary fiscal 2019.
Total revenue was $968 million Q4, adjusted gross margin was 43.8%.
Adjusted operating expense in the quarter was $295 million. This was higher than expected due largely to higher variable compensation tied to our strong performance in the quarter and the year as well as a one off charge for doubtful accounts in Latin America.
With respect to profitability measures in Q4, we delivered adjusted operating margin of 13.3% adjusted net income of $90.4 million and adjusted DB, Yes, 58 cents.
In addition in Q4, our adjusted EBITDA was $152 million and cash from operations was $240 million.
As Gary mentioned, we ended the quarter with approximately $1 billion in cash and investments.
Finally, we continue to execute on our share buyback plans in the fourth quarter, we repurchased approximately 1 million shares for $38 million to close out the year with total amount repurchased of approximately $150 million as expected.
With respect to our performance for the full fiscal year as Gary mentioned annual revenue increased 15% from fiscal 2018, which was significantly above our target growth rate of 6% to 8% and well above market growth.
We believe that we gained approximately three percentage points of market share as a result to this performance in 2019.
Adjusted EPS was $2, an 11 cents, which greatly exceeded our target 20 plus percent annual growth rate.
And finally free cash flow for fiscal 2019 was $351 million.
Which represents 75% of adjusted operating income also well above our 60% to 70% target range.
Following the strong performance in 2019, we're again, providing an update its at a three year financial targets in this case through fiscal year 2022.
For the most part these long term targets remain about the same and reflect the continued confidence in our ability to execute so I'll only speak to a few key metrics and address those that have changed.
The full set of our long term targets will be included in the earnings presentation that will be posted on our website. After this call.
To start and as we previewed in September we're maintaining our target annual revenue growth rate of approximately 6% to 8% over the next three years.
With a continued focus on driving increased profitability, we continue to target a growth rate in our adjusted earnings per share at 20 per cent per year over the next three years.
And I'll start with an adjusted operating margin update.
Given our operating margin performance in 2019, as well as additional efficiencies to be gang within our operating model. We now have line of sight and confidence that a 15% adjusted operating margin is an achievable goal for fiscal 2020.
From there through continued revenue growth and disciplined operating expense management as well as some gross margin improvement. We're now increasing our long term target for adjusted operating margin to 16% to 17%.
Fiscal 2022.
[noise] investors since you got to know that for many years, we've set out operating margin targets for the company, reflecting our continued confidence in our future performance as we have achieved each of these targets we have set for ourselves a new hire target for operating margin.
We've done this again this year and this next target a 16% to 17% operating margin sets, a new higher bar for performance in our space.
With respect to cash generation, we're increasing our expectation and we're now targeting annual cash flow of approximately 65% to 75% of adjusted operating income over the next three years.
Vital update to our long term targets is for annual revenue growth for I believe.
Planet Armed services segment.
Well that segment, we're not reaching our target to $120 million to $140 million in revenue for fiscal 2022.
With these long term targets in mind I'll now provide a view into our expectations for fiscal year, 2020, which as Gary mentioned earlier takes into account industry headwinds, while balancing against the positive drivers of our business.
You will recall when we reported Q3 financial results in September we said that in 2020, we expect to grow revenue consistent with the consensus expectation at that time.
We continue to expect that level of growth, reflecting the low end of our 6% to 8% target annual growth rate for 2020.
And a return to our long term target range. After two years of extraordinary your revenue growth.
Typically our revenue expectation for 2020 aligns closely with the current consensus of approximately $3.8 billion.
And given that the market is expected to grow only in the low to mid single digits. It represents continued share gains and faster than market growth driven by market leadership.
As for fiscal 2020, we expect to deliver adjusted gross margin in a range of 42% to 44%.
With respect to operating expense, we've taken significant steps over the last year to drive additional efficiencies and process improvements across the invest across the business.
As a result in 2020, we expect adjusted Opex to be flat to slightly down from fiscal 2019 levels in the average range of 270 $275 million per quarter.
As I mentioned previously this drive for efficiencies gives us increased confidence that our target 15% adjusted operating margin is an achievable goal in fiscal 2020.
And finally speaking to our fiscal first quarter 2020 performance, we expect to deliver the following.
Revenue in a range of $805 million to $835 million consistent with historical revenue seasonality disclosure we shared previously.
Adjusted gross margin in the 42% to 44% range and it just adjusted operating expense of approximately $265 million.
I'll close with this.
We are the established market leader in our space.
We continue to deliver consistent differentiated financial performance and we intend to press down aggressively on our competitive advantages, including our leadership in technology.
The diversification in our business across geographies customer segments and applications and our ability to leverage our global scale remain critical to our ability to meet and outperform our target expectations.
These foundational strengths form the basis of a balanced and resilient business underpinned by a proven ability to navigate short term challenges and drive broad based growth across geographies and verticals.
We feel great about 2020, and we enter the new year with strong visibility and great confidence in our ability to continue taking market share and increasing profitability.
Sharon will now take questions from the sell side analysts as a reminder to ask a question you'll need to press star one on your telephone to withdraw your question press the pound or hash key please standby well, we compile the Q when a roster.
Your first question comes from Jefferies Jeffrey Qual with Nomura. Please go ahead.
Oh, yes. Thank you gentlemen for a for the question I'm wondering if we could start by discussing some of the variables underneath your 6% outlook for 2020 .
I asked because there are who's a little bit lumpy in terms of where the revenue sources came from particularly in this last quarter I get a web scale down packet networking up. So if you could help us kind of understand a little bit about either what happened in the quarter and what that means for the 2020 view we'd appreciate it.
Sure Jeff.
First of all we are very diversified and we have a project base business. So there are always going to be movements among various customer groups and you saw that in Q4.
As we look to the future and 2020, we expect really a broad based growth across geographies and verticals.
We expect a.
A bit of us with service providers, particularly in North America I'd just to highlight the point that broad based growth is what we expect across a lot of different geographies and verticals.
Oh, Okay and then.
Sorry.
Right right.
Okay, all right just to I guess follow up on that.
The trajectory of the <unk> revenues in.
Asia Pacific has suffered from India. It sounds like that's going to be somewhat better in 2020 . The what's the confidence level in that isn't to what extent because some of the other regions in Asia Pacific help there you've talked about a success in Japan in prior quarters.
Yes, Jeff. We this is Gary Yeah, we expect to have a growth in Asia Pacific having India. Specifically, obviously you know was it was a challenging year last year and we expect the dynamics to continue to be challenging in India frankly for the next probably couple of yours, but you know given that the.
You know relatively low number bar of 2019, and given the engagements and orders that were seeing from certain of the stronger customers that I would say, we expect modest growth in in India.
I feel more bullish around a straight earlier in some of the wins that we've had there and some of the momentum. We've got the subsidy also I would highlight in Asia Pacific is going to be very good you are in 2020, and we've got good visibility to that well. So I think Japan is going to have a good you Uh huh.
I would I would sort of reinforce I guess, what Jim said around you know broad based demand I think we've been very realistic and understand very well you know the challenging markets in places like India, etcetera, and I think that's all built into our.
Guidance for the for the year I think we've been very very realistic on that.
Thank you Jay Thank you all.
Excellent. Okay. Next question comes from Simon Leopold with Raymond James.
Great. Thank you appreciate you taking the question I wanted to double click on on the Hyperscale web scale market vertical in particular, and maybe just a couple of things I'd I'd like you did address a part one is whats implied within your forecast of revenue growth for fiscal 20 of kind of.
Six <unk> percent what are your assumption and I. Appreciate if you could maybe explain or how you see that the drivers for this web scale market because I I think met many folks have associated your your prospects with the prospects for per switching or servers, and maybe help us understand.
The relationship correlation or lack of correlation I appreciate that thank you.
Yeah, I'll start and then started Derek and asked and answered the second part of the question. So first I'd say that we've had two phenomenal years and the web scale space as they have grown themselves. They run their capex. It really extraordinary rates. We gained share we think that were well over 50% and.
But.
In that sector right now.
As we look into 2020 it is our view that their capex is going to moderate.
We think that it's going to grow but probably in the seven to tenant range or something that's what we get from our checks in that environment. We expect to maintain our market share I think is gonna be hard to grow market share there given that we have such a high market share, but we expect to maintain our market share as we move into next.
This year.
And in Simon It's Scott in terms of the dynamics I think you see demand coming on us from really to two different dimensions. One is geographical expansion other other data center footprint and then bandwidth.
Coming at US from just application growth and if you look I just sort of port shipped you can see that growth so absolutely in our numbers and we we continue to see that looking forward in the future what's different than with us maybe than some of the other competitors that you're seeing in the marketplace is just the breadth of the logos that we deal with we don't have the same customer concentration at some of the other folks.
You May you may be looking out here.
Great and and I guess I might just a quick clarification. Please use the 110% customer looks like you're pointing to a north American telco just want to verify I got that right.
Yes, that's a that's absolutely correct Greg.
Great. Thank you very much.
Simon.
Next question comes from Paul Silverstein with Cowen.
Oh.
On the competitive from Jerry and Jim You know there's been a lot to talk you felt infineras stabilizing in improving a lot of concerns about 600 gig.
You were sure. So two questions your broad in a narrower question on the narrow question.
There there's been talk in investment really about Youre, having a re spin I trust from your comments on Wavelogic five on the timing, but that is not the case it sounds like you're confident that that will ship in the near term you've already got custom orders in hand, the broader question. What are you seeing in the competitive environment I.
You mentioned there in particular more generally from competitors.
Yeah, and Paul It's Scott just on the on the generic Wavelogic five question I'd say I'd say this and Gary talked about it in his remarks, but just to reiterate I, we're thrilled with the execution both from a program execution perspective in a performance perspective, and since we talked to this group glass in September we've.
Had or technology or form, which we called vector is where we had several hundred customers come through the labs and witness that execution to witness the performance and they walked away exceptionally confident which is more important than my confidence by the way as witnessed by the fact that many of them a placed orders on honest for that and we do expect to have.
That capability in their hands as we said starting before the end of arc fiscal Q1, which is not that far away and revenue in Q2. So we're we're thrilled and feel great about the competitive position on that one.
In terms of the overall dynamics the broader question pulls it as Gary a you know we think the competitive advantages that we're going to delivering wavelogic five an 800 frankly cause is most of the engagements. The we've had with them to skip over any 600 gig requirements quite frankly, and we say not in web scale.
Well, we see an in service providers you know, there's just not enough benefits in terms of the a of the.
Ah speed and reach of 600 gig, which frankly some of the stuff that's coming out is really only competitive with Wavelogic AI, which has been in the market for two to three years from now.
Okay.
Gary.
It's one.
Greg can I do one quick follow.
Yes, I figured I think it's clear from your comments Bill asked the question are there any one offs for better or worse.
We will get fiscal its warning.
You're talking revenue or what do we have.
Sorry, upsurge in from a revenue standpoint, I mean, certainly the theme has been ongoing diversification.
Most regions product markets customers et cetera, but are there any particular.
For me meaningful impact on revenue for better or worse are there any particular for many of those factors as you will get over there well I would describe it like this fall.
I think what we've seen over the last two to three your decision or certain customers pause or they have some trying do certain markets pools. We saw we saw India go very strong for a couple of years the men pause last last year.
The point that I would make is that we've got such breadth and scale now that we can withstand the navigate our way through those challenges you know we had some real challenges in 2009, taking around some of those markets, which I think are well understood.
I think what was particularly strong in 2019 was web scale, we expect as Jim said for that to continue to grow but at a more moderate right.
I think what we're saying 2020 years, you know just more moderate growth across a very broad customer market segments I'd characterize it as that but.
If you look at 19, I think what was particularly strong was web scale and some of the North American service providers I, absolutely think that service providers will be strong in 2020 across the wins that weve. The we've had.
I appreciate it thanks Paul.
Thanks, Paul next question comes from Rod Hall with Goldman Sachs.
Yes. Thanks for the question I wanted to drill into this a packet number the the revenues there a lot stronger and I know Gary you talked about adaptive IP wins I Wonder could you just talk a little bit more about the pipeline there and.
And what sort of things you're seeing out in the market are you seeing people.
I think you alluded to switching off at routing platforms onto the just any more color on what the trajectory of that's likely to look like since that was way ahead of what we were expecting and then does that possibly drive networking platforms growth higher for you in 2020. So that's I know its long winded. That's my first question then I have one follow up.
<unk>.
Yeah, I think Paul it's Scott in terms of looking in the rear view mirror on what drove the growth on pocket.
It really is I look at sort of the applications. When people are looking at modernizing their access and aggregation networks to deal with a number of different applications, that's particularly in Q4.
We benefited from a number of projects that were looking at migrating from their legacy Tdm services onto the APAC and infrastructure and when they did that they actually wanted to go with a more modern which we call that adaptive IP approach to it I mean, it's definitely benefited from a looking forward. We continue to see that as an application driver, but I also think as people start.
To look at Fiveg from a standalone perspective, and start to make architectural decisions around that there's an opportunity there for that same product portfolio. So we.
We do expect looking forward, where that packet portfolio to grow faster than our aggregate.
Numbers, we've we haven't updated the targets I don't think explicitly in a in the three year plan, but they're very consistent but we had in the last three year plan, which as you know higher it would be double digits, but higher than a higher than our aggregate numbers.
Could you Scott could you just expand on that Fiveg common and say a word or two about what's happening. There are you know with regards to visibility in revenue trajectory.
Right now.
Yeah, I think what what's going on right now is in general you know those of US that are in you know the the packet over fiber infrastructure business are benefiting from a number of different drivers as bringing more bandwidth onto the network and those drivers have been consistent I think you're going to be consistent going forward specific to you know.
Wireless access networks in Fiveg I think what's going on right now is a lot augmentation non standalone deployments, which is bringing yes more bandwidth onto the network, but not necessarily them looking at their new architectures, and making new vendor decisions because of that I think going forward in the future as they start to look at Standalone deployments as architecture conversations come up and there's opportunities for.
New competitive displacements for vendors like ourselves, but I think that's really going to be in 2021 type timeframe.
Thank you right and then I was just my follow up was just on India as Gary said moderate growth I could you guys put us in a ballpark on a like are you talking what do you mean, there mid single digits or.
Any kind of quantify.
I I would say I'd say sort of single digit type growth in India.
And in that kind of range.
Offer up a pretty you know well off the 2090 performance Yep.
Great. Thank you.
Next question comes from George Notter with Jefferies.
Hi, guys. Thanks, very much I guess I wanted to go back to the a the strength on the packet networking business.
Just to connect some dots <unk> I think.
But my hunch is what you're seeing there is a is a cross connect replacement project and with a major tier one north American customer.
I guess I my impression is that it's still very early days in that project. My impression also is that you know there is a big installed base of those platforms and many other customers as well. So I just was hoping to get any commentary you could give us on a kind of the picture for new project.
Ends there and kind of what inning are we in terms of that kind of application and where it can grow too. Thanks.
George I guess, two things as Scott So first of all.
That application was one of the drivers for the for the packet growth it's broader than that so I wouldn't just fixate on that but that was certainly one of the drivers on that application itself I I do resonate with how you are you phrase. It I think it's early innings I think both in terms of the customers that were in but also the number or customer logos out there that have this challenging.
Okay.
Great. Thank you.
Next question comes to next question comes from Jim Suva with Citi.
Thanks, Thank you very much thats hard to questions about mostly focused on revenues, which is absolutely correct thing to do so maybe if I can switch it down to operating margins and operating expenses.
But.
They find my math is right. It looks like you came in around 13% operating margins this quarter or maybe I'm off on that.
It seems like a opex your cost a little bit higher was that related to me to comment about like a doubtful accounts adjustment or can you help us understand kind of why it seems like operating expenses were a little bit higher.
When they'd be what's what's with itself for this quarter.
Sure Jim.
Yeah.
We came in a little bit higher on affects than we expected, but it really is driven in large part in fact, mostly by the fact that our incentive comp on both our new or sort of a sales commissions and regular corporate bonus was higher than expected, we had well over $20 million of.
Extra expense because of our performance in the quarter and the year. So it's a good thing for you that we performed as well and a good thing for our employees frankly, and then the other thing is we did have a a $4 million <unk> roughly a 4 million dollar charge or a bad debts in South America was.
A number of accounts and.
We took those to reflect what's going on in those accounts. So overall, our opex for the quarter and for the year is very close to plan. If you look at our annual Opex.
Against our plan.
Just about all of it is driven by the incentive comp.
Pluses that we had during the year and this 4 million dollar charge for bad debts. In Q4. So you take those out we're very close to our plan for Opex per year.
[noise] 75 cents. Thank you so much for the classifications.
Yes, and the other thing I'd just to repeat as I said earlier, we're going to return to a lower level 270 to 275 million per quarter for the year 2020, which reflects flat to slightly down from the opex that we experienced in 29 Jane.
Your next question comes from Michael Genovese with MKM partners.
Hi, Thanks for the question.
So with the the Wavelogic five I mean, it sounds like the customers of common seen in Ottawa, and then you're going to get it to them. It sounds like in January for.
Field testing and first office applications I'm, just wondering how long it does that stuff typically cake and you know.
Can we have a strong revenue uptick in Q2 or is it more accused three given given the timing yet.
And Mike I think the way to think about it is the on will start we'll start to recognize revenue in Q2, but a significant material amount will be in the second half of the year.
Okay, and then I just I guess can we talked in Hyperscale vertical and maybe the sub sea vertical as well sort of maybe more in hyperscale. The importance of that technology, I mean, I'm getting a sense at the four hundredg cycle is.
Coming to an end to a and that we really need to get this product out to two to have the growth that we expect and the vertical. This year is that is that accurate tiers are more life and 400 GE than that I'm talking about here.
So.
The way the way I would say it is the folks that are fiber constrained and have high bandwidth growth demand will always go to the highest performance optics.
And Ah you know that that will be wavelogic five a in in the in very very very near future.
So you know those folks will move to that new technology fairly quickly. When you say the 400 jeez cycle, though I want to point out like the 400 gig cycle as a as a capability is just starting being able to ship or be able to carry 400 gig anywhere on the globe, though.
Having to regenerated no is a key value proposition I believe logic five even though we talked about it being 800 gig and that's important because the the client rates coming off of things like switches and routers are still 100 gig today, they're going to go to 400 gig.
So that's still in front of us.
Okay.
Yes, I I agree that particularly the telco market the for energy cycles in front of us and them I was asking about Hyperscale and I appreciate the answers. Thank you Scott.
Thanks, Mike.
Next question comes from Samik Chatterjee with JP Morgan.
Hi, good morning, Thanks for taking my question.
Gary if I can just asked about the longer term dog, there's kind of more dean confidence level Andrea treating these extreme listened revenue guide, but at the as you guiding to six Bulson revenue growth in the next fiscal year old and then six to eight order through your time horizon and you spoken about some of the headwinds you, what's giving you the confidence is excellent headwind.
Don't extreme at all or do you should we see it doesn't necessarily you.
One friends in the market share wins that continue to drive you in that range.
You know I think if you look at the overall market dynamics and fundamentals I think they're very very solid if you look at the the wins that we've had we've gone out and the customer plans that we have them were intimate with across the globe.
I think it's you know we've got a very high degree of confidence and visibility into that I would also say you know the balance of its when we look at those things we're not counting on miracles in any of these markets. All customers. You know, we take a very balanced and realistic view to it and quite frankly over the last few years, we've been very accurate.
On that we'd be the method or exceeded it.
So I think we have very good confidence in its I think we've we've got a very good understanding of the dynamics, whether all some challenges and we have good visibility into that we have great customer an intimate relationships, which give us privy to that plans you know both in the in this year and.
Beyond and I think you know folks tend to and I think quite rightly focused on some of the headwinds which is sort of well documented. There's also on the broad demand you know a lot of Tailwinds and you know I would say actually for us, particularly very specific to see Ana. It's the service providers on tier one wins that we've had both in.
North America, and in EMEA and in Japan, and Australia, as we look to 2020 I don't think other folks are enjoying Matt and I understand it at a macro level overall capex spending in the service provider space is flat to down but it's that's not the deterministic issue for us it's what are they spending.
On and we've got the linear leading innovation them relationships with them and that's why we've got confidence in.
The service providers going forward.
Got it and if it can follow up on the.
I didn't chito the use of cash will you ended the quarter with a strong gosh number and the strong balance sheet. So what did the options you're considering you know given that a little bit investments also for the next generation products appeared to be largely done all you can saying like maybe exiting repurchases what are the options.
Well I you know I think you could probably named the options are pretty obvious we're going to continue to generate a lot of cash over the next several years and we would love to make good acquisitions, if they're out there and available for us and if not then we'll we'll have a choice of perhaps.
Increasing our distribution to shareholders my own preference would be to do some smart good acquisitions, but those have to appear force.
Thank you. Thank you.
Next question comes on Mehta, Marshall with Morgan Stanley .
Great. Thanks first question just on kind of the revised.
16% to 17% kind of fiscal 22 operating margin target should we assume that most of that comes from Opex savings and just give a sense of where within kind of opex savings are coming would be helpful. And then maybe second question. You know there's been a lot of discussion about you know.
Europe , a and walk away kind of.
Whereas it looked like well wait wouldn't be kicked out of certain accounts.
Looking more likely just any change in commentary around European customers over the last couple of weeks would be helpful. Thanks.
Thanks, Matt I'll take the first part and with respect to our higher targets. We believed that it will be a combination of increased operating leverage as we continued to grow our revenue faster than our Opex and also we expect to a bit of margin improvement. So it's a combination of those factors with.
Respect to Opex.
We've done a lot of things over the last year to get a drilling efficiencies out of our business and that's why we can call that our opex will be flat to down as we go into next year, we'll continue to look for those kind of opportunities.
But generally speaking, we're just going to run our opex in a very disciplined way and as I say, we will grow revenue faster than opex.
My sort of meat on the on the European context.
Around China, Inc.
Yeah, I would say.
I'd say that it's really the dynamics haven't particularly changed I think it's difficult to discern any impact on <unk> on our business certainly the today show showing up in our financials.
It's obviously difficult to predict have all of this will play out, but what I wouldn't say this sudden and in particular regard to the European carriers I think there's much more of a sensitivity now around overdependence on certain on certain vendors regardless of all the you know the other geopolitical and security considerations that.
In play and I think you know whenever youve got such a large market share of a particular player I think a number of carriers and now becoming concerned about that and we're engaged in a number of conversations you know that said that presents an opportunity for us I would stress the visa mainly infrastructure type decision so they're not quick.
A mental quick to you know show up into the numbers, but I think we we are engaged as you would expect with a number of major carriers, which presents opportunities for us within this dynamic of an over dependency on a certain play.
Thank you ma'am.
Next question comes from John Machete with Stifel.
Thanks very much.
Gary I was hoping you could just spend a little bit of time on that Centene acquisition that you kind of snuck in here.
Just talk a little bit how that sort of rounds out the the software offering and combined with sort of you know what feels like an improved outlook for that total software business. Just curious if you know the tenor or tone of discussions with service provider has changed to wear now you really feel like you you kind of know how to attack that market and look for that.
To be a real contributor to for growth going forward.
Yeah. Thank you. Thanks, Thanks John .
No I think it does round out in a number wise I think a you know two to sort of started the at the end of your question then on the overall dynamics that we're saying we were obviously very early entrance into this market and Weve got ourself educated and we've learned a lot over the last three to five years, particularly around.
The entry points into the service providers around their pain points and how to get this next generation of automation really solutions targeted a day needs and we've we've now put together I think a world class a portfolio with in Blue planet to address that this last piece of it really was around that.
Well sure rents, which allows us to have what they sort of pull up a closed loop understanding of what's going on in the network and now we've got a very pool, you know full portfolio around Federated inventory route optimization analytics and this was really the the obvious and final element now which.
Allows us to pull all those pieces together.
We're seeing very good momentum now in a number of carriers around.
These kinds of solutions and automation and taking some of the complexity around to their assets out and you know we had a very good year, we doubled our revenues and Blue planet and I think we're going I'm a strong strong here in 2020 as well.
And then maybe just as a a quick follow up to that point. Gary is this being used primarily with you know going in with some of the new network builds that you're doing is is it customers that are looking to to monitor eyes. You know some of their back office stuff just curious where are your inserting yourself.
As you go to market that solution. Thank you.
You know, they're all some examples jonah of new networks. It obviously you know that's the easy one but the Greenfield you put the you know the leading edge automation elements and now we do have some of those but largely it is around existing carriers looking to automate elements of their network you know the back office. These complex.
It was not designed to deliver the kind of services. They all today you know when one of these back offices were designed to deliver basic phone service to your house.
And two offices and so that's the big issue that they are trying to deal with the now you have an environment, where you want instant on demand large amounts of capacity and services on the back office is just not suited to that and so we've identified the particular pain points that can you know high leverage elements that can deliver a low.
Lot of savings and improved services to the carriers and we've seen some some great use cases now around improved service delivery, an understanding of the network and that's cascading around a number of carriers around the world. So we can see your question is really you know it's in the existing networks and the pro.
Items that were trying to solve though.
Thank you. Thank you.
Next question comes from Tim Savageaux with Northland capital.
Hi, good morning, and congrats on a strong quarter without a lot of moving parts and that's kind of where my question is which is.
If you look at what was a very strong north American performance and it's pretty severe headwinds in Asia Pac.
For the quarter, I guess I'd be interested in kind of where things may have surprised to.
The plus side and maybe to the might affect relative to what you might have expected.
Either geographically or end market customer wise.
On the one hand, and then were commenting on what your expectation what you saw in the quarter on the table vertical and what your expectations might be heading forward. Thanks.
I'll start with that one Tim I'd say that the quarter played out generally as we expected the.
We have a big backlog, we have very deep.
Engagements with each of our customers and we know what projects or ongoing which projects are beginning which projects are coming to the end of their lives. So we didn't really have any.
Huge surprises I would say that are big North American customer was performed.
But better than expected that had to do with what things that were going on in their network, but overall no real surprises in the quarter. We did see reduction in the web scale, a vertical we expected that and we will we had a great your with them and we'll have another good year within next year.
Tim just on the on the cable Oh element of your question, we had a pretty strong you're in cable or in 2019.
But significantly we've had a couple of very large wins not cable space, which will play through to 2020 and now we frankly have all of the major North American M.S., those Oh, CNN customers and most of the international ones as well, particularly in Europe , where you've got the other large ones. So we're pretty.
Much now have a clean sweep across all of the major cable MSO players and that that also gives us confidence as we go through to 2020.
Thank you.
Next question comes from Troy Jensen with Piper.
Hey, congrats on the Great. Your gentlemen, my first question that would be for Gary just curious what your thoughts on what the bigger revenue driver will be for 20 isn't going to be 400 gene moving into metro or is it going to be heat energy in DC.
I'll take the first part of that and then maybe Scott get your views to it I I still think the main growth driver is gonna be it'd be 400 gig and we're saying that just as we're about to 800 gig didnt in market, Scott and where you.
No I totally agree at at the end of the days of the fundamental driver is continued bandwidth demand.
And growth and that's going to materialize in a number of different applications I think what you're going to see is 400 gave becoming ubiquitous transport currency around them around the globe. So now that that will instantiate in a couple of different technologies belvieu that'll be the key driver.
Just a follow up just a reminder, we said earlier Troy just a reminder, Troy we did say that we as far as geographies verticals, we expect pretty broad based growth and a maybe a little bit about performance from the tier one provider service providers, particularly in North America, but overall, we expect growth across a wide range.
Joe geographies verticals.
So maybe just a follow up with Scott or Gary just 400, GE Metro can you update us on trashing, you've had significant revenue ramp.
I mean, we've been shipping 400 gig capable products with Wavelogic AI for for quite Awhile, and I think last count we're approaching 100 different customers on that we budget Gail I wanted to be capable.
Technology, it's a it's us it's a combination of that.
I do.
Two fundamental drivers for people won't have optical performance. One is I've got no significant bandwidth increase and I've got fiber constraint I'm going to want the best optical performance I can get.
And that's been consist we've been in the optical domain and I'll continue forever and then the other one is what services and clients or you're trying to carry on that line. Obviously, we're not at the point yet were 400 gig as a client driver is the dominant calling it a piece.
I've got that still in front of us.
We've seen we've seen a on the optical side broad based growth from Metro DC I infrastructure core networks in summary across the piece driven fundamentally by.
And with continues to tick girl.
Understood truck on for it.
Thanks, Troy. Thanks to my next question comes from Amit Daryanani with Evercore.
Yes, I'm thankful for taking my question goes off too as well your first one off just on the free cash flow <unk> free cash conversion was fairly strong in fiscal 19 that it was over 75% up could you just help square away why do you expect that do dropped to 60% to 70% as you go forward and your long term target, which is something one off that help fiscal 19 to be really go.
Good or just help me a little bit bridge over there.
Yeah.
First of all the range of 65 to 75, so I'm not sure we're going to see that drop but we did give a range that reflects at the midpoint a slight decline I would say that a lot depends upon the particular area of the world, where we're selling into some parts of the world, but generally have longer payment terms than others.
Also the extent to what your quarter is front end loaded or back end loaded in terms of revenue and for this past year. We've enjoyed a very high percentage of front end loaded quarters given.
Man bar expectation to go to you know sort of a midpoint of 70% reflects a growth outside of the U.S. as well as perhaps going back to a more back end loaded quarter.
Got it but I'd say they thought it would get 60 fabric 75, we're going to have great cash for the next several years.
Fair enough.
I'll just follow when do you think about you know either fiscal 20 over the next couple of years, where do you see the biggest share gain opportunity from a g. or end market basis. As you go forward and then on the web skilled side, where I think you sound a little bit more tempered on shagun potential going forward is that just a reflection that your customer the thing you up 50% share that's.
When TV, one diversity or is this some other variable there specifically.
Let me start with the last question first a you know I think there's just a reality when you get you know well over 50% market shares probably even closer to 60, frankly, yeah, let's just talk to grow is the <unk> Lora big numbers in China, I don't think there's a particular, particularly within that space I don't think that's necessarily driven by a requirement for diversity.
Do you have supply you know given the fact of our financial strength and our innovation in the rest of it we're seeing more or more you know both with large service providers and with web scale. There are absolutely if they've got the right you know flight to quality and trust in event or you know this this to bend a three bend a thing is really you know because.
I'm, a little bit of a thing in the past so but the market share pace. You know he is just the just the lower at lower big numbers. There in terms of other areas for us to take share.
I think it's across the board you know I really do I think it's very broad based I think AMEA has some particular opportunities I think a mirror you know given the concentration with other certain competitors. It in a manner things there's opportunity bad as opportunity in Japan for us given some of the indigenous spend is there and I think.
You know given our strengths of our scale on our technology with Wavelogic five coming out I think you know submarine well I also feel was going to have a strong you're in submarine from a share gain point of view as well.
Thank you.
Next question comes from Ryan Cone Switchboard Rosenblatt Securities.
Hi, good morning, or what have you guys have an updated view on a threat from a white box.
He has been very vocal about their interest in edge applications and the web scale sectors seen some some utilization you see that's starting to wane or and how's that affecting your products, you're actually going forward.
Thanks.
I think you know there there's certainly some segments that have a more propensity to or want to.
You know control some of their own innovation and that's been going on for Awhile and we've reacted to that we've we've made you know our technology base is available in various different consumption models everything from.
You know our or packet software assets available as an independent network operating system. You mentioned one of the customers that we happened to be engaged with them on that.
All of the various different open line system approaches around the world. We've been on a leader there and I think we took a leadership position and making or coherent technology available outside of our system business. So we've been grace sort of the this open consumption model frankly, you know for bringing value to the marketplace from a technology leadership and innovation, how our customers.
To consume it is how our customers want to consume animal react to that.
Thank you. Thanks, so much go to the next.
Thank you your question.
Next question comes from Catharine Trebnick quick already.
Oh, Thanks for taking my question I, just wanted to drill anymore on the sub sea, just said that that could possibly.
Market share gain next year.
You talked about.
Our first subs.
As Google.
Microsoft and drill into our carrier still a piece of that business or not.
Thanks.
Yeah, I'd say that there's a there's a kind of a broad range of people, who want to have customer or submarine capability, because everybody wants to move stuff across the world.
In recent years. It definitely has moved to the web scale fellows, because they're the ones, who we're building out data centers around the world and have to have that capacity, but we still do business with a large can saudia who.
Operate our across the world and so it's really a combination of all those the other thing that is important to know about that as we moved very significantly toward to an unbundled.
Conferencing bills and the the customer was best of breed in terms of the cable and in terms of the optical gear. We are clearly the leader with respect to optical gear no question about it and so we think that whether its web scale or whether it service providers, our technology really puts us in a great position.
And to win.
Right. Thanks, Jim.
Hi, Thanks I've ever.
At this time I'll turn the call over to the presenters.
Thank you. Thank you everyone have a happy holiday and happy New year, we look forward to 2020, delivering a very strong year again. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.