Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Sienna fiscal Q1 2020 financial results call.
At this time all participants are in listen only mode and after the speakers presentation. There will be a question and answer session.
Last question during <unk>.
Press Star one on your telephone please be advised that todays conference is being recorded.
If you require any further assistance please press star zero.
I'd now like to hand, the conference over to you presenters today.
Vice President of Investor Relations Greg.
Yes.
Thank you James Good morning, and welcome to see on his 2020 fiscal first quarter review.
With me today is Gary Smith, President and CEO, and Jim Moylan, CFO, Scott Mcfeeley, our senior Vice President of global products and services will join us for the Q when a portion of today's call.
In addition to this call in the press release, we have posted to the Investor section of our website and accompanying investor presentation that reflects this discussion as well certain highlighted items from the quarter.
Our comments today speak to our fiscal Q1 2020 performance developments in our business our view on current market dynamics as well as your outlook.
Today's discussion includes certain adjusted or non-GAAP measures as young as results of operations. A detailed reconciliation of these non-GAAP measures to our GAAP results is included in today's press release.
Before turning the call over to Gary I remind you that during this call will be making certain forward looking statements such statements, including our guidance and long term financial targets are based on current expectations forecasts and assumptions regarding the company and its markets, which include risks and uncertainties that could cause actual results to differ materially from the statements discussed today.
Right.
These statements should be viewed in the context of the risk factors detailed or no. Most recent 10-K filing and interrupt coming tend to filing just required to be filed with the FCC by March 12.
Expect to file by that date.
C N assumes no obligation to update the information discussed in this conference call, whether as a result, new information future events or otherwise.
With that I'll turn it over to guard.
Thanks, Craig and good morning, everyone.
Today, we delivered outstanding first quarter results.
The diversification across our business combined with our technology leadership.
Including a fifth generation 800 gig Wavelogic modem technology that is available today continue to set us apart in the market.
Specifically, we reported Q1 revenue of 833 million, reflecting 7% growth year over year.
On the high end about guidance range.
Q1 gross margin was also very strong.
Driven by favorable product and customer mix in the quota.
And importantly, we performed very well with respect to profitability measures.
Its operating margin and he P.S. in the quarter were higher than expected and cash performance was strong.
Finally, our orders in the quarter were greater than revenue.
As we previously mentioned a unique degree of industry diversification across customer segments. Some regions in particular continues to provide resiliency and balance in our business.
I'm plays a significant role in our strong financial performance.
This is particularly relevant as the broader economies faced with a growing uncertainties surrounding spread of Corona virus.
Thus far for our industry. The challenge is currently presented by the situation I've been largely contained to the China market the supply chain and logistics.
For Sienna by design, we have among the lowest exposure in our industry to the China market and the Chinese supply chain.
As a result, as we sit here today, we believe that we all better positioned than most of the industry players to manage through the current set of challenges presented by the Corona virus.
However, the situation is obviously very fluid I'm not certain at this time, and we're not immune to potential broader business implications as it evolves.
Jim will give you additional color when he provides our guidance.
Now I'll turn back to the highlights about Q1 performance.
Again, the comments I'm about to make regarding a regional performance and forward view all without any further impacted the corona virus situation, but rather how we see things from where we are today.
In Q1, Asia Pacific perform well, particularly Japan, and we continue to see opportunity for growth in a P.J. in twentytwenty.
In India as much as anticipated we experienced softness as we started the year, but we continue to believe there is opportunity for modest growth in the second half of the year.
In EMEA, we had a very solid contribution from service provider customers in Q1, and we continued to see opportunity to expand market share as many carriers in the region reevaluate their infrastructure partners and then next generation builds.
We had an excellent quarter in our Americas region in Q1.
North American service provider business was strong, including 210% customers in the quarter, Verizon and 18 today.
And revenue from other verticals, including my so customers like Comcast and shorter and the U.S. government was up about 5% year over year in Q1.
We expect material contribution from the service providers in Twentytwenty as well as growth from Centurylink later this year.
And we also expect continued growth in the Americas to be driven by the customer verticals.
[noise] web scale was also a solid contributor in the quarter as this vertical continues to perform well and as expected.
We also anticipate a strong Q2 in web scale.
As a reminder, we anticipate this market to grow roughly 7% to 10%. This year and we believe that we can grow a web scale revenue was roughly market right and maintain our market share leadership in this position.
We also continue to add new customers every quarter in this segment.
There is no doubt the confidence in our technology leadership is a significant driver of outperformance and continued strong customer engagement.
As I mentioned at the start of the cool I'm pleased to confirmed the Wavelogic five extreme next generation coherent optical technology is now available.
In fact by now you should have seen on numerous announcements with southern cross Verizon and Comcast as well as internet to what we've begun initial field deployments.
As evidenced in these customer networks, we have delivered on our promise to be the first to market with an 800 gig solution.
Well ahead of any competitive offerings.
Wavelogic five extreme is fully featured and performing better than anticipated across a multitude of applications.
We continue to expect initial revenue in Q2 with more material revenue in the second half.
Yes.
In addition to that mom an achievement. We also recently announced several new products and capabilities and Fiveg network solutions.
First we added three fiveg optimize routing platforms designed to enable network operators to migrate from Fourg to Fiveg and meet the low latency high performance demands of frontal made whole backhaul transport.
And we also introduced Blue planet software automation enhancements comprised of dynamic planning capabilities, an end to end network slicing and this solution.
And with respect to Blue planet in Q1, we secured new wins with two major international tier one service providers both outside of the U.S.
We also added four new logos for our route optimization and analysis products and we took strong orders for our unified assurance and analytic software on the heels of closing the Seventeena acquisition.
[noise] with rising macroeconomic concerns and uncertainty customers more so than have oh pursuing a flight to quality, where they are seeking strategic vendors, who awful long term innovation leadership and financial stability.
And we are clearly very well positioned with the financial strength, expanding technology leadership diversification and global scale.
And now needs now and into the future. We are very focused on taking advantage of this opportunity.
With that I'll, Tony over to Jim.
Thank you Gary Good morning, everyone Q1 marked a strong start to fiscal 2020 as Gary mentioned total Q1 revenue was $833 million and adjusted gross.
The 5% driven by favorable product and customer mix.
Adjusted operating expense on the quarter was $266 million.
With respect to profitability measures in Q1, we delivered adjusted operating margin of 13.1% adjusted net income of $82 million and adjusted EPS of 52 cents.
[noise] for using your models the tax rate we used in Q1 for our adjusted net income and he'd be us was 21.6% a bit lower than we expected tax planning is allowing us to make better use of the lower effective U.S. tax rate on exports, we'll expect to use this 21 for.
6% tax rate for the remainder of 2020.
In addition in Q1 cash from operations was very strong at $40 million in what is typically a seasonally lower cash generating quarter.
Adjusted EBITDA in Q1 was $135 million and we generated free cash flow in the quarter again, a sign of strong cash generation.
We ended the quarter with approximately $960 million in cash and investments.
As Gary mentioned, our balance sheet is yet another differentiator that speaks to our long term strength and viability, particularly in the current environment.
Finally, we continue to execute on our share buyback plans repurchasing approximately 1.3 million shares using $51 million of cash during the quarter.
I'll now turn to our Q2 outlook before I go into detail I'll reiterate what Gary said with respect to the Corona virus situation.
Specifically, we believe that we're better positioned than most to navigate through to the current supply chain challenges presented by the Corona virus.
However, we're not immune to business impacts, including in our Q2.
Specifically, given what we know today, we expect that fiscal Q2 revenue will be reduced by approximately $30 million predominantly due to supply constraints and logistical challenges to execute in certain countries, resulting from the grown of ours.
Taking that into account, we expect to deliver revenue in a range of 875 million to $905 million to be clear without the expected impact of the Corona virus. The midpoint of our revenue guide would have been approximately $920 million.
Like every other company, we're giving you our best view at this point in time.
Also in Q2, we expect gross margin in the 42% to 44% range and operating expense of approximately $275 million.
In closing the fundamentals of our business are sound.
The best technology, we're diversified across geographies and verticals and our scale is a competitive strength.
And we continue to gain market share.
As I mentioned, the Corona virus will impact our business to a certain extent in Q2.
Its impact on the remainder of fiscal 2020 is uncertain at this time and it would not be appropriate for us to speculate if we do not include any potential impact beyond Q2, our expectations for fiscal 2020 are unchanged.
This includes with respect to revenue.
Cash flow and adjusted operating margin of 15% and.
And we remain confident in our long term financial targets.
James will now take questions from the sell side analysts.
Hi, This is Tom I'd like to remind everyone in order to ask your question. Please press Star and then one on your telephone keypad.
As for a moment, while we compiled acuity roster.
And our first question comes from the line of George Notter with Jefferies. Go ahead. Please your line is open.
Hi, guys. Thanks, very much I guess, maybe I'd start on the Corona virus discussion you Gary you were talking about.
You see in its positioning being better than a than others in the wake of the krona virus situation can you kind of talk about what you're looking at there in terms of.
Both the supply side on the demand side in a in China and elsewhere. That's a that's affected thanks.
Sure.
Largely today this has been somewhat contain to China, and obviously spread into some of the P.J. countries as well from a supply chain point of view you know center a long time ago. I, you know does not have exposure to manufacturing into China directly.
And direct supply chain, obviously, some third or fourth order.
Contract manufacturers do so we're not immune from it but unlike most of our competitors, we don't have significant direct supply chain based in China.
And then secondly on the demand side as many of you know, we do not sell directly to the major carriers in China, and that's a very conscious decision.
On on hand, part so we don't have exposure to the demand side from China, but.
That being said you know we are present and many of the other REIT PJ countries that have had challenges.
Some of which you're in sort of locked down and it's difficult to get to some of their sites for installation. For example, so you know it is having an impact on US which you know is reflected in a in a change in our Q2 guidance.
Got it Okay, and then just switching gears first second you.
You saw a really strong gross margin performance this quarter.
I guess I and I hear what you said certainly in terms of customer mix product mix, but can you talk a bit more about what surprised you there.
Yeah, I think certainly coming into the quarter you guys were looking for gross margin numbers that were quite a bit lower thanks.
Yeah. Thanks, George we said, 42% to 44% for the quarter and for the year and we still expect that's the range in which will be operating.
However, we had a great quarter in Q1, and it was totally driven by mix as we've said before depends upon the stages of various projects. If we're early in a project we're going to have lower margins later on with typically going to have higher gross margins, we had a particularly good software.
So that was a part of it as well it's hard for us to call I think were 42 to 44 today, but we did great in Q1, we'll see what happens rest of the year.
Okay. Thank you George.
Our next question comes from the line of Paul Silverstein with Cowen Go ahead. Please your line is open.
Doug what you just take a person corona blows commentary.
No I just want to make sure.
Well like.
<unk>.
Component.
So.
All of those.
Correct.
Good.
No we don't know.
How many countries are we talking about.
In fact, all the shortfall.
The demand.
Back to your customers just can't accommodate your ability to.
River.
Not constrained in terms of the actual components of this fall.
Okay pull let me let me take the the logistics part of that I guess, rather than sort of you may recall logistics. Yeah. There are a number of sites that we can't get access to you know both on the submarine side to do installations and also in places like South Korea.
Even in Singapore, you know folks working from home and that's having an impact in terms of you know our ability to get to the some of those sites and do and do installation. So that is certainly some of it Scott you want to talk about some of this had a chain mall in the supply chain. So I just just to clarify it a bit. So we don't obviously, we don't do any RF.
D., we don't do any new product introduction, we don't do any contract manufacturing directly in China.
We do have some suppliers that sourced from China, many of which we have second sources for.
Some secondary suppliers.
They are exposed to China, and we're not immune to that.
We have.
Very close communications, where their contract manufacturers and those suppliers in terms of what their plans are.
And their expectations or how that.
Material comes back online for the rest of the quarter and that's factored into the numbers that we have here.
Jim.
When you reiterated guidance.
That's taking into account shortfall from Corona.
To put assuming there's no would just one product.
Well.
Correct, Yes, Paul that's correct.
All right I'll pass it off course in Brooklyn. Thanks.
Our next question. Our next question comes from the line of Simon Leopold with Raymond James Go ahead. Please your line is open.
Great. Thank you for taking the question.
Eric you you made reference to a number of of opportunities and I wanted to see if maybe you could drill down on which ones have the biggest potential to maybe move the needle for you specifically.
I want to drill down on sort of the non 18 non Verizon non hyperscale part of the business you mentioned, Japan you mentioned the cable guys. I don't think you mentioned Deutsche Telekom and in your prepared remarks. So could you help us understand how to think about that particular groups effect on the 2020 outlook.
Yes, absolutely.
So you know we talked a little bit in the in the commentary around some of the S. M. I SWACO sector. So if you know if I look at where I think we're you know we're gonna see good strength.
In 2020, you know I think its MISO space, we've had a number of wins.
In that space. In addition to the large market share that we already have I'm, we see a lot of activity in the MSR space, you know Comcast charter et cetera, so quite bullish on that looking at some of the other big tier ones in North America.
Centurylink I would highlight as well we think for the for the Youre certainly in the second half of the your is gonna be stronger as you know we're pretty much you know we had some significant wins in the last two years, there and that will begin to roll out to it's beginning to roll out now, but I think we'll have a strong a second half well so some of the other verticals.
In North America, I would highlight would be the government I think is you know after.
A few years of really being sort of somewhat under invested I think we're beginning to see plenty of activity in the government space.
So we feel good around North America or overall, you know when not just the a you know the couple of primary large carriers that have been our big customers that so I feel good around North America Europe.
I think you know, we're saying some of the benefits of decisions that were made like Deutsche Telecom.
Who are you know rollout in effect into our numbers I.
I do think there's an opportunity in the carrier space to continue to take share in in a manner. So I do feel good around that for the for the rest of the your so those are two areas I think Japan at a very good start to the Euro you know, we'll see how that goes with some of the challenge it's had around the corona virus et cetera, but.
You know so far so good.
So those are the areas that I would highlight around strengthen the ER and the business.
Thanks, and just as a follow up from a from a product or segment perspective last quarter, you had a very strong packet networking and this quarter and as you suggested it would it would fall off a sequentially in and it did could you maybe step back and talk to us about that particular business for not just the year, but yeah.
See if you can take it out longer term as you have in the past it sounds like growth prospects are good I, just like to get an update on that thanks.
Yes, Scott So we are.
On the packet piece as we said last quarter, we had a great quarter not to expect that to be the Neil.
That go for normal quarterly run rate through 2020, Q1 basically came in as we expected on the packet business and we're still bullish in terms of the plan for the year, what we said over a three year period for the impact as we expected to grow faster than the aggregate and he is sort of 8% to 10% range over our three year plan.
And we think we're in good shape to do that.
We're looking at expanded application spaces on the portfolio I'm working with.
The new launch of our of our rotor portfolio focused specifically optimized around fiveg, but more generic more generically other IP application sets as well.
So it's 10% over the next three years is kind of the expectation and early periods, but we're on track for that.
Thank you. Thank you very much.
[noise]. Our next question comes from the line of Rod Hall with Goldman Sachs. Go ahead. Please your line is open.
Yes, hi, Thanks for the question I wanted to start by asking about just digging into current of ours, a little bit more.
Really wondering what you guys Italian exposure is at this point and whether you've seen any evidence that network rollout. There are slowing and then on more on a positive side of things as software number was better than we expect that I wonder if maybe you could comment on trend there what drove that number and how you expect that to shape.
Through the year and then I just.
Color further color on packet networking could you just talk about front haul backhaul opportunity and maybe Scott how thats changed in the last quarter for you. Thanks.
Okay I'll take the first couple of feelings got you could do that package. The we don't have really anything of significance and Italy. So that anything that happens there will be unlikely to affect us this year.
With respect to software we did have a good quarter, we're continuing to roll out our new.
Emcp platform software and that we're getting good take up from customers. We do expect a good year from Blue planet as well. So we'll continue to do what we think with respect to source.
Yes, just to pick up on the software piece on Emcp as he has spent a lot of time talking about in this form for us that is our next generation.
Domain controller cloud native design from the ground up we actually believe it's.
The first in the marketplace that has the breadth that it has been a packet networking multi multi domain multilayer management capability and what you saw in Q1 is you know the accelerated adoption of that in our installed base.
So that.
Puts us in a great position to deliver on some of the promises of the adaptive network that we've been talking in the industry about.
Back on your packet question on front haul and backhaul. So hopefully you saw the product announcements that we did a couple of weeks ago around our new product portfolio and take a step back from that of a little bit and talk about what's the pieces of that so we've talked in the marketplace about adaptive IP and for US that's built on a bunch of different dimensions.
As of capabilities and of all come together in this product portfolio. In this announcements first sort of foundational is a next generation cloud native IP never go west that is the right.
Based architecture capable of running in a disaggregated environment on white boxes on an integrated coherent solution or surrounding the greatest Deanna solution like we've talked about.
In the press release and optimized for the right go forward IP protocols. So the right Roddick routing protocols going for as opposed to legacy I eat Jeff protocols from 20 years ago.
When we instantiate that on a sienna hardware, we can have the opportunity to integrated and with the world's leading coherent optics, which we've done in this product portfolio in the announcements and bring to bear a bunch of stuff that we've had from our history in terms of differentiating how we deploy these and service provider Mark service provider networks service.
Well agreements support be able to deploy an outside plants and to be able to deploy that mega distributors scale.
So to marry that then with the the.
Adaptive tool set that comes both from.
The market, leading domain controller, I mentioned Emcp, but also our automation software suite around Blue planet.
And that we think delivers a very compelling value proposition in the marketplace and allows us to play in spaces that we haven't played before the first instantiation of all that value is in these fiveg optimize routers that.
I was cut employ in a fourg environment, but evolved to Fiveg is.
If you look back historically in our packet business, we've been very dominated by.
Wholesale operators, providing basically layer two services to the M&A knows this now allows us to step beyond that.
And to compete basically right down to the cell site rotor through all the IP backhaul as well, which is a significant market expansion opportunity for us.
And we're starting to see RFP that are looking at next generation networks optimize around their fiveg access infrastructure and that's the opportunities that we're going after with us. So long long answer to a short question, but hopefully that gives us some color.
No that's great. Thanks, Scott Thank you guys.
Okay. Thank you.
And our next question comes from the line of Michael Genovese with MKM Partners. Please go ahead. Please your line is open.
Hi, Thanks, very much hey, guys. How are you thinking about the 800 GE competitive environment, how long do you think you're going to be the only product in the market I think the competitor that's coming out which one also is trying to have a 600 GE cycle with another product. So just how are you thinking about the market this year and sort of when competition might catch up.
Yeah. Thanks, Mike.
I'll pick that one so first of all hopefully everybody got a chance to public customer references that Gary referenced on Wavelogic five deployments in light of networks and.
For those that have and maybe just a point, though some of the key things that that those those.
Announcements really highlighted so first of all it first single carrier 800 gig deployment that happened to be a data center interconnect application, but also across those applications. Those announcements you saw single carrier 600 gig in a mixed fiber environment was deployed.
Performance at greater than 16 under kilometers.
You saw 400 gig transmitted over 4000 kilometers delivering on our promise to be able to carry 400 gigabit services anywhere in the ruled on regenerated and you saw us demonstrating the software control that delivers on the promise of sort of variable transmission rates from 200 400 608 hundred. So you asked a question of the context eight on.
Her gig, but there are a lot of market firsts, coupled up in those in those announcements and I do want to highlight that these were on real production networks that means mix fiber types that means they need to coexist with existing wavelengths and it has all the complexity complexities that you have to deal with in a real network as opposed to.
Demonstrations and control lab environment.
This was real production hardware.
And we're in a process and ramping that and we expect to recognize revenue for that product in this quarter and ramp through the through the second half of the year.
And as we said all along over the last number of course, we've been talking about this we had expected to introduce this on two product platforms 6500, and waste server and the combination of those customer announcements are actually across both those product platform. So delivering on that promise as well I will say that.
This gave us great opportunities you see the performance of this optical engine in real customer environments.
All the announcements that we showed you.
We're done with performance despair.
Confirming what we've seen in our labs and delivering on our promise not only to be the first to market with 800 gig, but to have the highest performing optical engine in the marketplace.
Into the timing I think it's going to be well ahead of anybody else, having 800 gig to be able to deploy in that kind of real world environment.
I want to take the opportunity actually and I would normally do this on this call but.
[music].
To get this to market was in many many year journey and it was contributions from multiple disciplines and I really want to recognize and thank all of the piano team across many functional groups that they continue to push the envelope and they continue to build on an incredible reputation to deliver I also want to thank customers that.
Done this journey with us over multiple generations.
I know I'm, a long answer guide today I apologize for that.
Are those great answer Scott Thanks, Jim I won't ask your question.
Follow up and it's a hypothetical.
So hypothetically speaking.
If there were no Corona virus do you think you would have raised the guidance today from the bottom end of six to eight to the middle range of six to eight for this year.
Mike Thats, a hypothetical question I.
Told you what we expect today and I just don't think it's right for us to speculate there were have we're going to have a good year great year, we're doing very well all the things we've talked about our business our business model and our financial strength still remain and we're very confident about the future.
Thanks, Thank you.
Okay.
And our next question comes from the line of Jeff Kejriwal with Nomura Instinet go ahead. Please your line is open.
Thank you very much.
I was wondering if you all could delve into some of the dynamics inside of the web scale numbers for us. Please.
Mix has come down.
These amounts in the last couple of quarters sounds like you feel pretty good about what's happening in the upcoming quarters.
What can you tell us about the permutations there.
I think we feel we feel very confident around or.
Position in this space overall.
Q1 was about as we expected Q2, I think we'll be up.
Based on based on what was saying do you know what is particularly satisfying in that space is two dimensions, one broadening customer base.
In a lot of folks understandably you know is focused on the larger players web scale players in that but there is beginning to be an increasingly.
Broader set of customers that are looking to build their own networks and.
Optimize their datacenter connectivity and we are taking more than our fair share of those new names.
So that is placing the second thing games with the existing large customers that we've got the engagement around their road map in their future.
Rollouts.
Encouraging we've worked very closely with them on things like Wavelogic five on some of the software pieces to it. So the integration into what is now you know very large global networks is what we're very enthusiastic about that in the third dimension to it I'd also add is the collaboration that we now have with.
Some internationally well, we're helping them get connectivity in markets, where we have very strong outside of the U.S. that collaboration has been very strong places like Europe Asia Pacific Endear, I would particularly highlight which is a big growth market for them Middle East.
So you know the relationship continues to expand on that gives us a lot of confidence I know, we've got a very large market share there, but we're very confident of maintained in that market share given those dynamics that we've seen in that space.
The other thing I would add just from an overall demand point of view in that space, We see no let up in terms of there almost insatiable demand for.
Datacenter connectivity and build out not just in the U.S., but globally.
Okay. Thank you Gary.
And then also I guess, we are on the verge of having a third large national wireless play as the T mobile.
Yes.
Yes.
That is typically not been neither side those have been big customers of yours I'm, just I'm wondering as they become a bigger.
Bigger play if that has the potential opportunity for sienna, perhaps not in fiscal 20, but but down the road.
I would think and somebody's, yes, whilst you know spreads has not been a large customer in more recent years I've got a very very very large installed sienna base, where our first ever customer commercially. So we have a long gotten great relationship with them. So.
So we do think that is going to be a good opportunity now this looks like resolving I don't think it's probably a 2020 opportunity Jeff, but as we get to 21 I think the build out there I know the and other.
Infrastructure builds for the five G. I think there's good opportunity for us and that does it you know pervades some about thinking into why we're so positive around the north American market.
Okay. Thank you. Thank you all very much.
Yes.
Our next question comes from the line of Samik Chatterjee with JP. Morgan go ahead. Please your line is open.
Hey, guys. Thanks for taking the question I just wanted to look for low cost on Squawked. So compensated for the 800 gig ought to be logic by product God. If you can kind of share you mentioned you expect revenues in this quarter or are you thinking about the ramp up revenues relative to maybe some of the.
Previous generation products like the 400 gig if you can check talks on that.
Yes, a couple of comments so first of all I think Oh, we do expect revenue this quarter, but it won't be material is core to the ramp is going to be in the second after the year in a few you look at the model for the your second half of the year was was bigger than the first half of the year, partially due to the fact that.
We expect that this timing only logic five and we expect that those dynamics to play themselves out in the second half of the year. So I'd say, we sort of model that into our into our plan for the year in terms of the transition timing.
I'd say this.
And.
As we moved it from previous generations.
To ER to say Wavelogic four in particular Wavelogic AI story in particular, there is a dependency in terms of the infrastructure line systems, they need to be able to deal with higher baud rate transmission capabilities.
That got in the way of the pace of transition I'd say, it's a previous generations much of that infrastructure now has been enabled and will no longer be a hurdle in many of our customers accounts in terms of moving to these next generation technology. So I would expect the transition to go faster in some cases and.
I am applications than in previous generation lose but in terms of the numbers in terms.
From our perspective, what we see right now that's baked into the growth in the second half of our business plan.
Got it on just a follow up Oh, I'm getting you mentioned kind of the opportunities email couple of times. So are you kind of thinking of those if you can kind of outlined which markets. You think the biggest opportunities are you seeing.
More opportunities in countries like you give it is an older education gapping no market share for certain vendors or are you looking at kind of agenda.
We'll be from so.
Thats kind of overall in the region, that's going to help you.
I would say two aspects to it in.
One just generally speaking we have with smaller market share the given the historical dynamics with it.
When I see opportunity, it's really around two dimensions.
One it was a big web scale buildup going then in Europe, and we're obviously extremely well placed with those folks but also you know what's got more attention is being obviously the tier one carriers and we do see opportunity with those carriers I think.
So it's it's as much about realignment, where you've got a couple of players with very large market share and I think a number of these tier one carriers are beginning to reflect on just the you know the concentration there and bringing in.
You know by a strong.
New vendor, we've seen that to it.
At Deutsche Telekom, Obviously, we've won that would just you know in the rolling that out, but we're seeing it with other tier one carriers as well so.
I do think there's opportunity and it's multiyear I think the thing I would remind everybody is.
These are very big strategic decisions for the carriers point number one takes time number two its infrastructure, which takes time.
Both too.
Oh migrated into award and so you know where a couple of years into this and we're beginning to see the the benefit. So some of these decisions like Deutsche Telekom, but there's plenty more in front of US frankly, and I think it is a terrific opportunity for us, but it is a multiyear opportunity I think we'll see some of.
This year and in the staff.
Yeah.
Great. Thank you.
Thank you.
Our next question comes from the line of Tim Long with Barclays. Go ahead. Please your line is open.
Thank you, there's just too if I could actually both both related to to web scale. So first one you talked about Gary talked about a lot of opportunities new players.
Your opinion other other expansions yet the growth rate is a lot slower than what we saw last year. So could you just touch on that is that digestion is it.
Back of any incremental share because again, so much last year. So just give us some color on on the lower growth rate there. Despite all the positives and then second related that could you just update us on on ZR in where Sienna what do you think the web scale guys are what kind of impact could that.
Technology.
I have on this vertical as we look out the next year or two thank you.
Yeah, Let me talk about sort of web scale I I think the quick answer to your question you know Tam around that is we had an incredible year last year, and we took massive amounts of market share and obviously, we've got well over 50%.
In that space. So you know I think it's being realistic you know it's it's we can expect to have those kind of.
More than double digit growth rates going into this year, we do think the overall market that will grow about 7% to 10% I mean, we think we will grow probably in line with that market I do not think we will lose market share there given the dynamics that a the relationships the embedded nature of those relationships be we've got the.
Yes roadmap for them they pay an integral in helping design, Matt and you know very much land 10 on a lot of the developments that we went out delivering into market on the road map and visibility that we that we have with them, but I do think it's going to get to a more normalized rate of about about the seven to.
The 10% I would say that we've got a much broader base of customers. Then now them. We had last year. So it gives us some confidence around the diversification all based on the Ziosk side, Scott you want to comment on down the ZR. So so first of all just to reiterate what our perspective about my.
It is we do you that it will be a subset of.
The Metro based datacenter interconnect market that would be able to take advantage of ZR capability. We have put numbers in the past on that as being sort of like 500 million dollar market opportunity in total.
I don't think our perspective on that size of opportunity has changed at all what has changed I think is our perspective of the timing of that market continues to push it to the right. We do believe it will be a 2021.
Market opportunity, we are building product to that off of the Wavelogic five family. We had when we announced we advisory five couple of seasons ago, We announced a wavelogic five extreme product, which is the basis of all the announcements you've seen last week, and we announced the Wavelogic five nano product line that nano product line will be about.
Well from us.
At the Uh huh towards the end of 2020. So we think we're in decent shape to intercept that mark the other thing I'd say about it is I think theres a perception that a.
Hi, This is a commodity market commodity says you can have many many suppliers you can pick them up at Wal Mart.
This is not an easy technology to deliver so I think there will be fewer suppliers that deliver the goods and people imagine as well.
So there's some thoughts on it Tim.
Thank you Tim.
Thank you very much.
Our next question comes from the line of Jim Suva with Citigroup investments go ahead. Please your line is open.
Thank you very much you mentioned this quarter gross margins were benefited from several factors mix and so on and so forth.
And then in your prepared comments you mentioned.
And half of the year, yes things are looking pretty good from a revenue perspective with Centurylink and you know will out of other things can you remind us as we look forward like in the second half the year and such is there any view on the mix that may impact margins like for example.
His hyperscale or some of the global ones.
More or less profitable or is it more having to do with the phase.
Of the rollout of what you're doing thank you.
Yeah. Thanks, Jim Firth first I'd say that if you look across customers, there's not a tremendous amount of difference in our gross margin. The customers are all big they have the same choices and the competitive environment and every customer is pretty much we're competing against the same group.
Openings, so not a big difference in.
Across customers. However, there is.
Typically or has been a significant difference in margin between the early stages of a project.
The line system, the Commons protonix that sort of thing and later in the product projects. When we are filling the chassis is with capacity.
And that's been a a model that's been going on for a long time, we think it will continue for the most part.
And that's the real big difference the other differences too is that.
And new customers, we tend to compete with transport and as we mature that relationship we tend to be able to sell higher margin products such as packet in particular, hopefully blue planet and those products have higher margin profiles by nature of there.
Complexity and software content than does transport.
So that it's it's totally about where we are in the lifecycle of a project and where we are in the lifecycle of customer.
Thank you. Thank you very much further detail that's greatly appreciate it thank you.
And our next question comes from the line of a meat Daria Nani from Evercore go ahead. Please your line is open.
Yes, I'm thankful for taking my question guys I'll I guess first one just to understand all the 40 million dollar revenue impact in April quarter from Corona, a wireless up yes is there a margin and free cash impact as well given the fact that to supply and logistical issue and.
Would you expect this demand to recover in the back half of the year or it's too early to call out.
Well the the $30 million lost revenue will have a gross margin attached to it so that there will be an impact on gross margin dollars.
I don't think that that'll have a significant impact on the gross margin percent.
And so by definition it could have an effect on the free cash flow now there's always this.
Effected.
By events that happened earlier right, we get the revenue we collect the money later on in the quarter. So if for example, the these losses in revenue occur late in the quarter.
That was significant effect on gross margin if it occurs sort of right now them, yet we'll have an effect on free cash flow.
[noise] Thats your question.
It does and then I I guess.
Do you expect us to recover at some point in the back half the year.
Well, what we said is.
I think by definition the answer is yes, but because we said that we expect that assuming no further effects from the Corona virus our guidance for the year stands.
And I just want to point out too that the this $30 million is not really due to demand per se. We're in we're parsing that carefully what we're seeing is the effect of logistics in certain countries. We had we had demand we had orders and we we would have recognized.
As that revenue save for the fact that given the Corona virus situation, we could not get the sites.
So it's not really a demand issue, it's a logistics issue and we also said that it's it's also a supply chain issue.
Thank you.
Our next question comes from the line of meta Marshall with Morgan Stanley Go ahead. Please your line is open.
Great. Thanks, a lot of my question to that.
Maybe I'll just focus on.
There is of course.
A large European.
Ah competitor examining strategic options that they wanted to see if you're seeing any ability to take advantage of that dislocation and whether there's any.
Outcome.
<unk>.
I think there's sort of industry structure.
No matter is an interesting one and I think what you've seen that we'll see enter in the last sort of two to three euros is really taking advantage of that.
You know.
Direction, that's been moving over over many years I think you've got a number of generalists that have obviously you know how to add some challenges and I think that's enabled us as a focus play a to take share you know because we're incredibly focused where the best in the world at what we do.
Not as you know increasingly more and more valued as folks want higher capacity closer to the end user and the on the application. So you know you look at this share that we've taken frankly in the last you know two to three yourself pretty much all of the all of the existing players in this space and you know.
We now have the largest market share of anybody in the world than we do not operate directly in the largest market, which is China. So that tells you you know I think the gains that we've we've had but we feel very good around our portfolio in road map and continuing to take share.
Got it thanks.
Thanks, Matt Thanks Amanda.
Our next question comes from line of Tim Savageaux with Northland Capital Go ahead. Please your line is open.
Hi.
Good morning, and wonder focus back yet on the cloud space, which was.
Pretty weak in the quarter and.
It looks like it could be challenging to a.
Could grow given that Kirk for the year I wondered.
If you might be seeing a dynamic of customers waiting for 800 gig solution that would really.
Kind of push growth into the second half or any changes.
I'm in market share because it looks like you have to kind of double your run rate from where you work here to grow to your targets.
I Wonder if you have any what sort of visibility you have.
Up there and then I'll kind of related.
You know there does seem to be some relationship right between a drop off in the cloud side and very strong gross margins, but Jim if I heard your right you're encouraging us not to read too much into that thanks.
Yes, we are encouraging you not to read a correlation there with respect to a pause to wait for 800 gig, we're not seeing that at all the demand for capacity is such that they really most.
Yes, the in place even if it's not 800 gig.
And I'd say this that.
The web scale companies are project oriented just like the service provider companies or they're going to be ebbs and flows in their spin.
And so we expect a very good year with web scale, we expect will have a nice quarter in Q2, I think if you'll look back at some of the quarters. We did last year I don't think you'll you'll have a doubt that we can get too, though the numbers, we've posted or I mean weve.
Suggested were going to get to this year anyway, we're well placed and we're going to do well with that group. This year, we believe.
And to me the other thing I would say on it is we you know to your point around visibility we have very good visibility with them. You know we have strategic relationships with them you know that very sharing of their plans, both nationally and internationally and we collaborating with them on all of that.
The road map stuff as I've said, so we have very good insights into.
Plans, we have the largest market share there.
But that we've grown over the last few years.
Absolutely all confidence of at least maintaining market share in the 7% to 10% growth rate for the for the Euro and the other thing I would say as you know we had a pretty good order flow from them visibility into Q1 and in the first part of this quarter as well. So that's what gives us confidence to be able to do that and to Jim's point you do see.
Ebbs and flows with them you know individually and collectively you know and that's why we've got a diversified business that's able to.
Dry through that an increasingly.
They talked about on the some of the prepared comments you know that market is broadening out as well, there's some smaller players and the datacenter plays coming in there that want to connect and optimize the data centers, that's providing a good opportunity for us as well you know not massive individually, but collectively important.
Thank you.
Our next question comes from the line of Tal Liani with Bank of America Go ahead. Please your line is open.
Hi, guys.
Three questions two quick ones and one is more involved.
I want to start with the Corona, but try to look at it in the positive way is.
Your product you're kind of products, if you're selling in Europe.
Is there an opportunity to displace some of the vendors just because they can't provide or is the behavior of custom as is such that they'll just wait if they don't get the right product from Wally because there is no supply they'll just wait for them to.
The delivery later later in that time.
Second thing is.
And I don't know if it's an issue or are not at all but it's in a scenario that we all start to work from home for a period of time.
Will there be a demand for networking gear, just because you need to support a different type of connectivity.
Is this something that is a.
Positive potential positive, where you think that that's not a that's not a potential driver.
Pause here I have another question on routers, which is completed.
Okay. Let me take the first question on the competitive fan.
Exposure I think listen to it depends how this plays out I think two things number one.
What we'll see how this plays out in terms of their supply chain, but I do think it's an opportunity I actually think not in the short term, but in the longer term for us because I think you know we've got a diversified.
Supply chain and I think it is bringing home too many of the European carriers, just the degree of concentration with these with these existing partners. So I think it subtle, but I think important I don't think it said sort actually that might be want it you know a little bit short term opportunity I don't think.
Much tall.
I think it's more going to be around those folks, reflecting this part of their strategic decision, making over the next 18 months.
With regards to the second part of the question Jim do you want to talk about the share or home and media.
I think it's very interesting question to Alan and I will say that just like many other companies. We've taken a lot of steps to protect our employees with respect to them the grown of ours, where we are encouraging in some cases in some countries.
People to work from home.
As we've talked about travel bans into some countries. So we've done a lot of things that will accelerate what has already been in many cases, a movement toward working from home and we certainly we at Sienna are looking at expanding our collaborate.
And tools that I think other companies are doing the same thing it would not surprise me. If this combination of new technologies around collaboration and this.
Situation that has occurred here is that you will see more people work from home and overtime, Yes, that's going to me more bandwidth needed and a lot of different places I, it's not a near term effect, but yes, I think the direction is good for us.
Got it.
My next question is more about the routing to 5100 that you launched so.
On one hand, we see Cisco going into optical by making the acquisition also offering semiconductors to cloud, saying you you develop your router with my with my semiconductor your develop your optical with my semiconductor on the other hand, you're going into routing and I want to understand this strategy do you is this.
It's an offensive or defensive strategy, meaning.
Why are you going into routing is it because you believed that the networks will collapse into center layers into a single layer or you see an opportunity to grow from optical opt routing I'm trying to understand if you're just responding to Cisco in others that they incorporate optical in there in their router or that.
An opportunity or different application something I can see now.
That's a great. It's a great question so.
The short answer to the question actually it's both a an offensive play in it and the defensive player in the sense, it's not something that we we woke up yesterday morning, and decided we wanted to move here. It was a strategic decision we took many years ago.
And it expands our market share both on the access side than on our and our infrastructure side at the site.
Side of the Oh the equation, we do believe on the infrastructure side of the equation. The winningham going forward will be best in class optics.
Great Kerry carrier service provider grade product set, yes, IP, but also multilayer multi domain automation software and.
If you look at all those things in combination.
Combined it with our service provider relationships, we like our opportunities.
And is there any idea was young are addressing.
Okay, I will take it offline thats fine. Thank you.
That's pretty good question and thanks, everyone for your interest. We appreciate the time. This morning, we look forward to following up with everybody today and over the next several thank you have a good day.
This concludes todays conference call you may now disconnect.
[music].
[noise] [noise] [noise].