Q1 2020 Earnings Call
To be Infinera Q1.
2020 earnings conference call, all participants will be insulin.
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I like to turn the conference over to Mike.
Managing director I see our please go ahead.
Thank you operator, and good afternoon welcomed generic first quarter fiscal 2020 conference call a copy of today's earnings Investor slides are available on the Investor Relations section of the website.
This call with me recording will be available for replay from our website.
Today's call will include projections estimates the constitute forward looking statements, including but not limited to statements about our business plan, including our product road map sale to our growth market opportunities manufacturing operations products technology and strategy statements regarding the impact of Koby 19 on her business plans and results of operations as well statements regard.
The future financial performance.
Over second quarter fiscal 2020 outlook.
These statements are subject to risks and uncertainties that could cause infineras results to differ material from management's current expectations.
Yeah.
Actual results may differ materially as a result, various risk factors as included in our most recently filed annual report on form 10-K, as well with the earnings release and that's your slides furnished with our 8-K filed today.
He reminded that all statements are made as of today and that's an arrow undertakes no obligation to update or revise any forward looking statements to reflect events or circumstances that may arise after data this call.
Today's conference call include certain non-GAAP financial measures pursuant to regulation G. We have provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures in our first quarter fiscal 2020 earnings release and if that's your slides each of which is available on the Investor Relations section of our website.
Now I'll turn the call over towards Chief Executive Officer, Tom Fallon Tom.
Good afternoon. Thank you for doing this.
Typically start getting financial highlights for the quarter I'm going to get begin today's call by talking about the impact of code at Nike, how they're responding to this unprecedented challenges.
First of all the avid everywhere to narrow I would like to extend our sincere appreciation and around the globe, we're working tirelessly Nicholas Gifford doesn't need.
Despite the obvious health risk they pick up on themselves.
The selflessness represents the very best of humanity embrace hooker anytime a fear and uncertainty.
Thank you.
Their perspective, and a high level, our employees remain say, our customer being service and our ability to deliver remains in place.
We were taking active measures to reduce cost and improve working capital efficiency during uncertain times.
And the first though our new Isix 800 gig clocks that on pace for delivery later this year with performance that we expect will set the benchmark pocket reached and cost.
For context, I'll give an update our operations before reviewing the quarter.
Well our production facilities operated below capacity during the second half of the quarter due to come in 19 relate constraints.
That majority of our development teams support functions work from home modest impact to productivity.
For a significant portion of the quarter, we experienced supply chain disruptions as many cut the country's imposed public health restrictions.
Pack for the production and delivery capabilities, our vendors around the world.
This disruption had a negative impact on our ability to fulfill certain customer request during the quarter.
For Q1, well our final non-GAAP revenue achievement of 331 million was within our guided range.
The customer mix varied significantly from our original expectations and our corporate non-GAAP gross margin was 28% for the quarter.
This morning was approximately 500 basis points below our expectation and that's the result of two separate events.
The first was recognition of revenue of a major liking country care, one sub sea consortium Bill that was accepted by the customer quarter earlier than anticipated.
The initial rollout this product was comprised primarily of common equipment, which contributed a negative gross margin impact of 300 basis points.
On the father side, because the plenty has now completed and this project is expected to produce high wording revenue as the consortium members begin to add capacity in the near term.
Martin was also compressed because a significant shipments of our 200 gig grew solution that is based on merchant optical engines.
He shipments were really particularly by a major North America I should be.
Well this had been anticipated for the quarter are constrained shipments of higher margin products limit our ability to offset this compression has planned.
Going forward as more of our customer base qualifies arssix hundred gig and eventually 800 gig solutions will be able to improve the martin or offering with vertically integrated technology.
[noise] from the bookings right customer demand in the first half it relatively in line with our view from the beginning of the year ahead of where we were last year at this time.
We've seen increased demand from some customers as they have reacted to new network requirements brought on by the pen pandemic.
As we look at the second half. However, we are seeing less clarity on demand because our customers to assess the economic impacts on their respective businesses and the customers they support.
Our regional perspective spreads continued from tier one tier two operators in North America in EMEA.
It's all Q1 bookings weakness in Asia due to the early impact from Koby 19 in that region, where we see demand from eight a recovery in Q2.
I P. P demand continued to be lumpy with Q1 bookings behind plan after significant shipments in the first quarter.
Cable was weaker than expected in Q1, but we also see some recovery in this segment in Q2.
Turning to product and technology highlights we saw record bookings in Q1 for Auryxia Metro platform, driven by wins in the past year and expanding opportunities with existing customers.
Group continued to perform well was substantially year over year bookings growth in delivery of 600 gig product to another customers in the quarter.
From an opportunity when perspective, we continued our 2019 momentum with several significant awards in Q1.
Further we were very pleased with the progress we are making them or high six 800 gig product, which remains on track for delivery during the second half of next year.
During the quarterly demonstrates technical performance leadership, and 800 gig transmission in a major North America operators I production network.
Nothing with our new Isix power group GE F series platform, which we announced in the first quarter. We successfully carried an 800 gig single wavelengths over 950 kilometers in the trial.
Other than the industry are taking the position that 800 gig technology will mostly be about 400 gig and 600 gig deployments are demonstrated performance highlights the ability of our isix technology to address approximately 40% North America backbone network legs with 800 gig transmission speed another 75% of links with 600 gig.
There are isix solution network operators will be able to maintain 800 gig signals rates long after alternative solutions need to be dialed back to lower speed.
The net result is a highly differentiated 800 gig solutions that provide savings of greater than 25% in cost per bit power per bed capacity for fiber. The three most significant bike ride through your network operators versus other fifth generation coherent solutions at a network level.
Compared occur third generation 400 gig solutions, we believe isix will enable savings of more than 65% and the same typical North America backbone network.
As a consequence of this superior performance.
It is taken to publishing white papers that challenge our result, as violating the laws of physics, I candidly can't think of a higher complement and look forward to competing in the field.
As highlighted before I've six is targeted at a high performance 400 gig and above optical transport market, where we see a narrowing set a viable competitor going to non Chinese suppliers, having those products.
This is one of the fastest growing segments overall hopkins networking market forecasts, a compound annual growth rate of 35% and excluding China is expected to reach over $4 billion like 2023.
We're also continuing to invest in longer term disruptive technologies that open up new accretive markets XR Pluggable optics progressing at a rapid pace.
Note that our leadership in DSP technology independent ARCEP carrier advances XR optics fundamentally redefined south aggregation network architectures that can be built.
Purpose built for the evolution of wireless access and backhaul cable and Metro core networks, XR optics is gaining increasing interest and support from tier one providers around the globe.
This quarter, we conducted several technology demonstrations for customers and industry analysts that showcased a powerful capabilities of the technology and the transformative impact on the cost structure of the networks and its operations the potential to drive down costs by as much as 70%.
XR optics, leverages, our proven leadership and expertise and DSP technology.
Critical pick integration capabilities that deliver lower power and cost.
Well I six gx and XR, we're positioning our company to intercept the biggest market trends and lead and three of the fastest growing segments of optical networking high speed optics compact modular platform and network fluff.
Enabled by our unique approach to vertical integration. These also create a path for product driven step function improvement in gross margin to our business beginning in 2021.
As we look at Q2, we see continued improvement in our factory utilization in signs of increased stabilization for manufacturing partners around the world that we do not expect all constraints to go away.
Further we anticipate ongoing access restrictions at certain customer sites that could delay our ability to deploy certain networks in Q2.
As a response to these constraints, we had extended lead time expectations to our customers. They are responding favorably with this change like celebrating worse.
The second half the year mixed macroeconomic uncertainty felt by customers could more than offset the continued expansion of bandwidth demand that is projected to remain intact to.
To address this uncertainty we were taking proactive measures to reduce operating expenses and improved gross margin.
These measures include both the temporary reduction of salaries for senior management Board of directors and staffing reductions largely any area contract positions with another impact to our regular global workforce.
These actions are expected to yield a savings of approximately $5 million to $7 million a quarter from a Q1 opex level and are being a company buying in sense at all going drive to optimize our supply chain and improving our working capital efficiency.
With that process, which has any key focus areas since beginning of year.
The impact on our cash position to these decisions considering the cash conversion cycle is expected to be meaningful in the second half of the year [noise].
Well, our near term view assigned by the fact is always 19, we remain extremely optimistic about the opportunity we see for Infinera medium and long term driven by our focus on delivering differentiated solutions for the fastest growing segments of the market.
This demonstration is enabled by our long held vertically integrated approach to DSP photonic integrated circuit intellectual property development and manufacturing, which we view as mandatory capability to compete successfully markets we serve.
In summary, we are pragmatic about the near term macroeconomic challenges, we face and are intensely focused on cost discipline and improving our cash conversion cycle.
As an organization we are motivated by the opportunity to serve our customers who are bringing people communities and business together at a critical time, a physical separation and remote connectivity.
We're also excited about the opportunity to prove that while pushing the boundaries of physics optical networking innovations will bring significantly improved economics in the market.
Actually improving our gross margin and operating profit as bandwidth continues to grow and the economic environment improves we'll be ready could lever on that opportunity.
With that certain column [noise].
Good afternoon, everyone. Today I will begin by covering our Q1 results and then provide a framework from which to think about Q2 and the remainder of the year. As a reminder, my comments today will be directed to our non-GAAP result.
For your reference we have posted slides with financial details tour Investor Relations website to assist with my commentary.
Despite the challenges associated with the Cobot 19 pandemic our results for the quarter included year over year growth in revenue decreased operating expenses and modest operating margin improvement.
Q1, non-GAAP revenue was 331 million above the midpoint of our 315 to 335 million dollar guidance range and up 12% year over year.
As Tom mentioned revenue and margin were impacted by a large scale sub sea consortium deal completed in Q1, a quarter earlier than we had anticipated.
This was coupled with the impact of cobot 19 on our ability to fulfill certain customer demand, which ultimately impacted the overall revenue mix.
We had 110% customer in the quarter and continued to see strength from a leading cloud provider.
That's once again came in just under 10%.
Our geographic mix continued to be skewed more toward North America, driven by strength from our tier one customers the 52% of revenues coming from that region.
Non-GAAP gross margin was 28.3% below our 31% to 34% guidance range due to due primarily to the following three drivers.
First the timing of the initial deployment of our previously mentioned large scale sub sea network implementation, which represented approximately a 300 basis points sacrament to Q1 margin.
Now that the initial installation is complete it is anticipated that this consortium deal will favorably impact gross margin in the second half a year.
Second the impact on product and margin mix from the expected I see p. deployment that represented approximately a 200 basis point impact in Q1, which we were unable to entirely offset in the quarter as plant. This skewed our mix significantly to merchant optics.
And third Cobot 19 related market dynamics resulted in the us absorbing higher freight and logistics premium which represented approximately 35 basis point.
We have a good at these types of premiums in our estimate for Q2 guidance.
All told these three drivers negatively impacted our Q1 gross margin by approximately 535 basis point.
We also note that our Q1 non-GAAP gross margin excludes one time impact of $2.9 million and other cobot related one time expenses.
These expenses consist of higher replacement costs associated with certain warranty part customers were unable to return for repair due to logistics issues and public health mandate.
We were also impacted by the necessity to source key components from an alternate supplier at substantially higher cost in order for infinera to fulfill delivery commitments and the normal course.
In both cases, we only excluded the incremental cost.
Our Q1, non-GAAP operating expenses were $124.9 million better than our 128 to 132 million dollar guidance range.
As discussed in our call Q4 call, we're committed to maintaining appropriate investments in key technologies.
Technology programs driving or innovation pipeline at the same time, we're very focused on cost discipline and actively bringing down our overall operating expenses and anticipation of a possible protracted market downturn and while still positioning the company to effectively scale with the launch of new products later this year.
In Q1, we recognized a 31 million dollar non-GAAP operating loss or lots of 9.4%, which was within our guidance range below the line interest expense was $3.6 million, which reflected a few weeks of interest from our new to 2027 convertible notes and also an intra.
Just a credit interest from a supplier.
In Q1, we recognized $12.9 million and a foreign exchange loss heavily impacted by the approximate 20% devaluation of currencies and the Latin America region in countries, where we have a presence.
Our non-GAAP EPS was a loss of 27 cents.
But if the impact of foreign currency had been excluded non-GAAP EPS would have done a lots of 20 cents.
Which would have been at the low end of our guidance range.
Historically, our guidance does not incorporate any projected foreign exchange gain or loss had beginning with this new fiscal year, we will provide guidance down to the operating margin to remove the rest of currency fluctuations that are beyond our operating control.
We ended the quarter with $284 million in cash up from $133 million exiting Q4 in March we raised $195 million in the quarter through a convertible offering in the last days prior to the cobot 19 market decline.
During the quarter, we drew an additional $55 million on the A.B. out for a total of $85 million drawn on the hundred 50 million dollar facility.
As I mentioned in our previous call, we remain focused on cash generation and driving working capital efficiency and early results include a reduction and Dsos from 83 days in the December quarter to 75 days in Q1, a portion of the cash generated from receivables was utilized to reduce.
Payable.
In parallel we began the implementation of the supply chain optimization efforts I highlighted in our last call focused on planning logistics and inventory efficiencies.
And in the quarter, we reduced inventory by $20 million.
This work requires time and dedicated focus to generate optimal benefits and we are in the early stages of realizing these benefits as we enter Q2.
As a reminder, we have approximately $80 million in one time cash outflows this year, resulting primarily from actions taken in 2019.
During Q1, these onetime items totaled $30 million.
Excluding these one time items, our cash utilization from operations was $62 million.
Importantly, as we drive improvements in our working capital efficiency, we're also driving to margin improvement and consistent cash generation.
Overall, despite the impact of cobot 19 on our customer and revenue mix. We maintained revenue results within our guidance range well. This mix resulted in our gross margin being below our expectations. We are encouraged by the initial results of our operating expense efficiency efforts and the early signs of working capital improvement.
Each of which will continue to drive throughout this fiscal year.
We do not currently foresee a similar magnitude of customer mix at Ethree, resulting gross margin impact occurring during the remaining quarters of 2020.
I'd now like to share how we're thinking about Q2 and planning for the remainder of the year.
Certain customers appear to be focused on keeping their supply chain optimized and accordingly are placing orders inline with our revised expected lead time.
We currently anticipate Q2, non-GAAP revenue to be up year over year, and the range of 300 and tend to $330 million and expects non-GAAP gross margin to be in the range of 31% to 35% in both cases, we project a minimal.
Oh, good related supply chain impact and more normalized customer mix.
Tom described the cost cutting efforts, we are undertaking to position ourselves to endure a protracted macro economic downturn. Our current expectation. That's for Q2 operating expenses to be between 120 at $124 million at these levels. We will continue to focus our investment in key programs that drives vertical enough.
Gration and gross margin expansion.
Finally, we expect a non-GAAP operating margin of a loss of 4% plus or minus 3% below the operating line interest expense will be approximately 6 million in Q2, we will no longer be guiding on S.
Cash management, although always important becomes even more so and this time.
Our working capital efficiency efforts discussed earlier are intended to improve our operating cash flow and 2020.
In Q2, we expect that we will continue to utilize cash from operations, although less than in Q1, taking into consideration both the timeline to improve supply chain efficiencies progressively during the year and one time cash outflows, which will again be approximately $30 million in Q2.
Substantial majority of our projected $80 million and onetime cash outflows will be completed in the first half of the year.
In Q2, we reduced our inventory by $20 million and our plan is to further reduce inventories by $60 million over the balance of the year.
Through the implementation of this plan, we should continue to see improvement in our working capital utilization in the second half of 2020.
In closing last quarter, we shared our long term business model with an outline for margin expansion driven by vertical integration and a plan to be cash flow from operations positive excluding one time cash outflows.
Fundamentally this long term model remains intact and the drivers to achieve it our sound. However, given current market conditions. At this time, we are refraining from providing an outlook for the remainder of the year.
In closing I'd like to Echo Tom's acknowledgement of those working tirelessly to keep us safe and thank our infinera team for their steadfast commitment and tremendous effort working over the past several rigs in this new and challenging environment.
Operator ill turn it over for questions now.
We will now begin the question answer session. Please ask your question My Press Star then one on your Touchtone phone.
If you're using a speakerphone please pick up your handset before prostrate keys.
Withdraw your question. Please press Star then too.
At this time, we'll pause momentarily to assemble our roster.
Oh.
My first question will come from Alex Henderson with Needham and company. Please go ahead.
Great. Thank you very much.
You talked a lot about cobot impact in the quarter and you detail there relative to your gross margins, but it was there also an impact on your ability to deliver revenue was up and to what extent did your orders exceed your you reported revenues in the quarter a and then.
Second question I have for you is.
You, obviously have a lot to show a.
Service providers with this 800 gig product.
However, you found a the reception to what extent or have you been able to demonstrated the despite the fact that.
There's obviously a huge constraints around that and how do you see that impacting the time to realize orders for that product.
Once its shiite.
Thanks.
Yeah, Alex So first in regard to revenue impact when we went into in guided for Q1.
We had talked about contemplating $15 million, so supply constrained impact and that impact did occur.
The thing we did not take into consideration was customers around the globe, who actually shut down their ability to receive product or shut down their ability to implement networks, which turned out to be about another $15 million, which could we had not contemplated so we see disruption in the Q1 timeframe.
So in the neighborhood of total between supply and the ability to see product of about $30 million. So there was a fairly significant.
Impact because of Covanta, not only supply but logistics.
Moving forward into Q2, as we talked about we see it easing somewhat but not going away, we're not specifically identifying co bad related impacts that you could assume in our guidance. We have incorporated both expected supply disruptions and deployment disruptions so that.
Gives us to the three tend to $330 million range without that we would we see the we'd see the opportunity.
We do more than that customers would like us to do more than that from a bookings perspective, you know Alex we don't typically talk book to Bill for bookings were slightly under a Q1 is a.
Typically slower.
Quarter in our industry, but Q1 bookings for us were actually up pretty strong in comparison to outlook at the beginning of the year.
In regard to trials for 800 gig.
Yes, one of the disappointments, we are certainly having with Kobe is we have a series of trials lined up with a number of customers.
That continues to be delayed based upon their ability to open up a network to us tried to make sure. They keep their employees safe, which we certainly appreciate and understand we're doing a lot of.
Reviews, with analysts and customers over the internet showing the performance of the.
On the street, our technology, both the 800 gig 600 gig and 400 gig not and so far those are being very well received and it's actually increasing desire by customers to actually tested in on their fiber in their factories are in their plants. We have a number of them lined up for as soon as Kobe restrictions are released.
And we will.
With these customers we are lining up not making sure that they're interested in doing PR. So that we can actually talk with more detail around the results hopefully that answer your question.
Great. Thank you very much.
Our next question will come from.
Metal Marshall with Morgan Stanley. Please go ahead.
Great. Thanks, just wanted to dive into you know you mentioned kind of ice peas, and cable customers coming in but at least.
Sure of expectation.
And or at least bookings kinda coming in slightly short of expectations I wanted to get a sense.
Is that purely a matter of.
Access and that they just are you know it's all these aren't open and they can't get to bomb or do you have you seen kind of a.
A change and plans for the years or kind of end demand.
Yeah.
I CP and cable Bryce CP or things that are very significant deployments in Q1, there's a digestion period and that business is invariably fairly lumpy or we see good opportunity this year, Oh I see piece.
So I would consider that more reflection of digestion of a significant Q1 and lumpiness.
They are there plans change and don't always a loss on early in cable.
Apple is usually stronger in the first half, particularly Q2.
Seeing that come back I don't think it was related to cover that in Q1 I think it was just a planning as well we started at the beginning of the year well, we had more linear you a quarter on quarter the year.
We were seeing more in Q2 less in Q1, we did see strong European Uh huh.
Excess demand from a cable provider with our axiom platform, which had a record bookings.
For access both in cable and in other areas.
Got it thanks.
[laughter].
Our next question will come from Rod Hall with Goldman Sachs.
Please go ahead.
[noise], Yeah, hi, Thanks, a question I well first of all I want to does their thoughts or would you guys. We know topped off rid of business in this environment.
Let me, let me start Tom you've been through this before you've been around the industry along time I Wonder if you could you characterize what you're hearing back both from the Hyperscale providers and the carriers. So that you talked to in terms of.
How do you spending through this recession.
You know do you think it's likely to be disrupted that wasn't no nine or we're all the credit market functioning problems back then kind of been esoteric thing in here it will be maybe less cyclical. So that's kind of a big picture question given all your experience Mi industry.
And then I. The second question I have is on subsea I Wonder if you guys. Good in any way quantify how much revenue pull forward that was the night I was kind of.
I know that normally chassis deployments are low margin, but sub sea tends to be higher so I wonder could you dig into those margin impacts a little bit and.
It's kind of help us understand why that drove margin so much in the quarter. Thank her.
Yeah.
I'll answer the first question and Nancy Alaska answer the second one but.
In regard to demand that we're creating our impression around two things and clearly we see a second half that has risk around macroeconomics, because we are taking fairly significant actions at the company.
Both at a personal but also within the company's perspective, so we're taking it sounds very seriously.
We get our position from two things one as I read we all read the analyst reports are talking about people pulling in a network build into the first half and the probabilities from an analyst perspective that it's actually going to be a pull in its not going to be that's something that build upon whether that's right or wrong I don't.
No, but that's part of what.
We think about the second thing comes from talking to a number of customers a in the number of customers I talk to that ranges. Some are going to be business as usual some are going to be we are pulling in because we see demand needs right now and we don't think it'll affect our capital plans for the second half of the year and others.
Our more cautious, saying, we're definitely pulling in because we see bandwidth today.
But we're not planning on replenishing that capital in the second half of the year, that's more correspondent to what I read in the analyst reports.
I think that you know in comparison to the last big.
Transition.
I don't see the same type of impact I think bandwidth demands have fundamentally changed.
How the way we work has fundamentally changed I think the Internet has done a remarkable job of keeping up with the capacity.
I don't think anybody believes that are sufficient today for this new model of how we live work and play.
I do think that there is.
Not a liquidity issue out in the market there our capital expenditure plans I read some of the reports that the customer, saying, we spent 70% of our capex budget for the year now I think that they're going to be evaluating just like we are what does that mean.
For the next half of next year. So I think there's a reasonable number of customers who are approaching this cautiously and clearly we are seeing customers as we've extended lead time give us orders in Q2 is there a chance that they continue to do that Q3 in Q4, absolutely is there a chance that they're going to be a pause.
We are preparing for that and hoping that that does not occur.
Nancy on cell C store, so the sub sea deal that we spoke about had a 300 basis points impact on the margin I'm. So you can you can ascertain that it was a reasonable size relative to the total revenue, although we're not going to disclose the total amount, but that deal was implementing the comp.
An aspect of the installation and as we move forward and we're already starting to see small orders as we move through the remainder of the year. The gross margin impact from those additional orders that come in through that consortium will be significantly higher gross margin and as I mentioned.
Will positively impact our margin in the second half of the year.
So that the fact that this occurred earlier than we expected I'm coming in in Q1 versus Q2, coupled with the I.C.P. deployment that we talked about in Q1 really was you know much more of a significant impact and then we would have anticipated starting in the here, but we're very glad to have the consortium.
Installation complete its allowing us now to move forward with them and to see the benefits of that deal in the back half of the here yes.
Addition, this was our historically lowest are highest consumption of merchant optics. So for those of you who follow players like Acacia and others, who may supplied to us. It was our highest consumption given that I CP deployment and that had again at 200 basis point impact in quarter year over.
A year when you do the comparison.
Quarter to quarter it was.
Significant impact again or how much merchant integration, we had in this first quarter this year versus last year.
Okay. Thank you.
Our next question will come from George Notter with Jefferies. Please go ahead.
[noise] hi, there. Thanks, a lot guys I guess I wanted to go back to the gross margin question. You I think there were some positives also that I guess, we've talked about in the past it from a gross margin perspective, certainly you guys were getting past the manufacturing transition I think there was a view that that was gonna help more.
Agents, a there's a new ERP I think you guys. It just instituted.
And also.
I guess I would imagine there would have been some instant bandwidth sales in the quarter given the gross in work from home traffic, that's where there's some positive aspects to the quarter from a margin perspective also that a part of the narrative here.
Yeah, I think great question. Thank you I think we are absolutely seeing the benefits of the transition to the outsource manufacturing model. We are also seeing operational efficiency is with the new ERP system and are in the early stage.
Ages of the supply chain, a transition that we're going through what we're optimizing our our efforts around logistics and planning an inventory management. So we are starting to see the early benefits of those Ah. We wanted the detail out the bridge really explicitly between where we landed on margin and.
Where we would have been had these three items not occurred really the two largest that we've been spending time on but the other aspects that we're very focused on and the supply chain World and we mentioned it in the prepared comments is.
The optimization on the inventory management side, and we are in Q1 brought inventory down $20 million with the expectation of bringing that down and our plan another $60 million during the year. All of these efforts that we are undertaking in the early part of the yearend well move on through the air will benefit us in that.
Back half so absolutely there there are positive things happening we had a very heavy owed overshadowing this quarter with the impact of covered a the that earlier consortium deal one quarter than expected and then the implementation of the IC piece, so a lot happening in Q1.
A balance between ER positive and some that impacted our margin a little bit more negatively in Georgia about it on high bandwidth you asked a question do we see as Serge.
Certainly not we did not we had kind of anticipated one.
When we guided we just the beginning of come in so I had anticipated like you did that there would be a survive bandwidth. There really was not I think a lot of these congestion today, you're seeing in the in that isn't access saw I don't think I think as that continues to be built out that bleeds over to regional in core but today, we have not seen a surprising uptick.
In instant bandwidth. The other thing we laid out last time, which is beginning to take hold you 600 gig they're transitioning from 200 gig to 600 gig we see about 1000 point a basis point improvement as that migration happens, it's certainly taking longer than most of the industry would have anticipated. That's one of the reasons I, specifically said we ship.
To 11 customers in Q1.
The real opportunity comes when any significant IC piece are buying it as a replacement for 200 game, we talked about that being a second half event, we still feel we're on track for that occurring.
But it is taking longer than we had anticipated in the real opportunity. Obviously is when we go to 800 gig.
Got it okay very good thank you very much.
[music].
Our next question will come from Jim Suva with Citi. Please go ahead.
Thank you very much and I'm very impressed with how detailed you've given out the gross margin challenges and associated with the sub sea. So that's very good. So I just have one question, it's pretty simple sub sea got pulled in about 60 days and the reason why I mentioned 60 days.
By the time you gave guidance one quick one month was already gone for the corner. So sub teekay meeting by no more than 60 days.
Why wouldn't you have come in materially above your guidance for the corner.
Thank you yes.
Good question and I, we try to laid out but is a lot of.
Puts and takes on that.
Was actually less than 60 days, we had been tracking to Q2 acceptance.
Our customer had a significant fiber cut that they were dealing with so we did not anticipate that they would get that fiber cut resolved all of our gear and links tested and accepted they actually.
Truncated a little bit of the testing cycle because they wanted the capacity that was their decision and the agreement was when they started carry like customer carrying revenue that would transition with their agreement to being reckon news for revenue for us. So that was a fairly late in the quarter less than 60 days.
And certainly after the earnings call.
The question of why wasn't revenue more as I talked about we had contemplated $15 million of co that impact.
From a supply perspective that came real we also contemplate did not contemplate about $15 million of shipping delays because customers basically close their receiving dock so that the customer accelerating their acceptance actually branded offset yeah bridges that $15 million that we.
Not contemplated.
That's very clear. Thank you so much I appreciate your additional commentary thank you yeah.
Our next question will come from Michael Genovese with MKM partners. Please go ahead.
Thanks for the questions.
When a what do we think about the second half visibility and sort of the change that we've seen since since covert started.
Oh, I'm wondering about the hyperscale market versus the top the telco market.
As the visibility changed more in one than the other.
He said 600, he is taking longer in hyperscale market is that.
That worse or better than what you're seeing in the telco market generally.
You know that I see piece have always been lumpy and as Tom said in Q1, we had a very large deployment demand, which impacted revenues and margins as a result of that vertical integration as we talked about as they start to onboard 600 gig that again, I guess accretive by kind of in that thousand basis.
Points a range, obviously that takes more time in this environment.
So we think demand will continue to be lumpy from their perspective. This is we do see growth in datacenter to datacenter, we do see surge capacity even in Q2 odd demand are coming in on that front I think from the service providers perspective, it's a mixed bag depending on their service mix of consumer small business.
What will happen given they've fueled up to the bandwidth and the first half of the year. So that's why I think we're just maintaining caution.
Also say that from my perspective, the tear ones into your twos have been quicker to respond to short term changes in the meantime, and capacity demands a than the internet content providers. We have I would say a more open relationship with mostly the to your ones in the tier twos.
When we do more network planning with them Oh, we have.
Less engagement I would say as a typical practice with the icy piece. They just do not share and perhaps don't have as clear plans as it were seeing with the to your ones and twos. So I don't think that's different it's just normal yeah. We've also seen obviously with the chair ones. There's a there's a bit of push income.
Passed to the on the access network. So that's fundamental to the portfolio that we'd sir.
A bit more pushed there in terms of creating capacity at the edge.
That's helpful.
Yeah, yeah, but.
I'm very interested though in this the 600 g. and when we're going to start to see the.
1000 basis points [noise], because it's you know it sounds like the certainty that it would be in second half 20 is.
Not not what it was and so so again focusing on that change that's happened recently.
Think it's 100 per cent due to <unk> and the other question was equipped with his raised or what was it.
Was it was the visibility getting you know slipping away because they weren't you know telling you what was going on or when orders might come in there.
And it's also you know do you think there's any other potential competitive issues or do you think they might skip 600 altogether and just go to 800, sorry to ask so many questions at once but no no no no ask questions. Thanks.
<unk>.
What was that we lay out than what we saw opportunity for 600 gig for those opportunities are still progressing and <unk> not speeding anything.
Oh sure.
But I do believe that opportunity for us to have meaningful shipments in the second half.
I see peace on 600 gig. They said last time not all I.C.D.'s are going to 600 gig. So it is not a universal decision you know to go for <unk>.
But I do believe the cost reduction that they get.
Criminal capacity and lower dollar permit.
And to have enough that there is a <unk>.
Intent to move to some portion being 600 gig I also see 200 <unk> technology remaining in their network and continue to buy for a long period of time, just like in the carrier World 100 gigs silly.
<unk> significant <unk>, but I do think that 600 gig.
As a reasonable chance of being meaningful for us in the second half a year and I do believe that the vast majority will move to 800 gig, but not necessarily 800 gig exclusively 800 gig or whether it's from us or other people I think is making great progress in the English.
<unk> I think that into marketable savings are going to be substantive enough that they're going to be impossible to ignore having said that 600 getting was introduced over a year ago and the adoption cycle takes a while I think 800 game is still nominally not to market. So I think that there's a period of time.
That the people will be utilizing the best economics, that's available today.
It sounds great well it sounds like they need some more edge bandwidth and <unk> wherever.
You should tell you I need some more I have met and whether there's no question.
Thanks, a lot.
Thanks.
Again, if you'd like to ask your question that as far as on one.
Farther than one tusker question.
Or next question will come from Simon Leopold with Raymond James Please correct.
Great. Thank you for it for taking the question couple of things I I want to check on one in terms of the the 600 gig progress.
I presume a lot of the trials have been deployed pre co bid and I've been going through sort of a classic soak phase. So when you when you talk about the second half of the year 600 gig revenue rack is it safe to assume that some portion of it has has been deployed in the field and it's just.
Matter of meeting a a soap period to get revenue recognition and therefore that part of the higher competence.
Yeah, Yeah, so as as I think was in the script. We we shift 11 customers of 600 gig out <unk> that are out today, we had a number that were qualified and also needed some surge capacity that they filled at 200 gig 'cause they needed that like yesterday before the qualification was.
But maintain their current course in speed to 600 gig in the second half. So again I think we feel good about that continuing to grow in the second half, albeit you know, we're watching very carefully that growth and bandwidth across all sectors.
Thanks, and then in terms of of generating the cash from working capital My rough guesstimate to to get 60 million of cash from inventory would.
Need the turns the inventory turns to get up two maybe 3.53 0.6 and you you you definitely have had an improving trend, but it was below three times most of last year. Just wondering if there are any specific hurdles, we we should be aware of.
For you to achieve increasing your inventory returns.
So I think there's a couple of things that we're doing internally. One is we talked about at the end of last year and then again this quarter.
Last year was a year of integration right 2019 was all about integrating coriant. If they move into 2020, we are driving operational efficiency is and one of the key areas is around our supply chain, whether that's the logistics are and then Tory management.
In Q1, we reduced inventory by $20 million and we have a plan, which would drive an additional $60 million in the next three quarters, we feel very good about that plan with the actions laid out to complete and that you are you are correct right by liberating that.
Much inventory our turns would be I'll say in approximately that same region. In you know you also know that driving an improvement in inventory terms is a a challenging process and takes time, but we have b. gun the execution in the implementation of this plan and.
Feel very good about our ability to achieve that through the here. So I'm I'm asking questions. This 3.6 turn sounds like a really well run operational organization.
Amy <unk>, it's it's an improvement over it where it was it <unk> yeah. So that's my point. This is not saying, we're going to take 60 million out and go from six turns to eight this is and I'm not trivializing. The task. It's a it's a big task and as Nancy said getting or manufacturing strategy aligned last year and getting an E.R.P. system that goes.
Across our product a line last year puts us in a place where we have the tools to do it. We also have a significant.
Necessity to go do this we understand that we have taken very significant factions in regard to how we're managing the M.R.P. extending lead times.
Frankly, I supports that initiative. So now we can actually be buying what people want versus what we think they've won that's a non trivial in fact, so I appreciate the candor.
I will tell you three six turns out to me is a very very first step cool yeah.
And and the question and then just one last one as you think about your positioning in in 800 gig and and we start to think about the set up into 2021 <unk>.
We haven't seen a lot of of the detail yet, but my impression is that your expectation is on on a competitive basis, you'll you'll have certain advantages how do you sort of see that market shaping up it. It I think in the past you've talked about kind of have being happy with the do wobbly could you may be talk a little bit about what you're <unk>.
<unk> once that markets really shipping.
Yeah, I think that.
Yeah, I think the 800 gig fifth generation D.S.P., that's not quality kind of games fifth generation D.S.P. technology will allow customers too.
<unk> significantly lower five dollar per bit and utilizing or scares fiber assets Reproductively I think that the stuff up in cost savings is very very significant and there is significant desire within the market for this to come out sooner rather than a later I believe that the market.
Anxious as I've talked to customers have to have more than one supplier. This is going to be a main technology.
I think that having the ability to have supply continuity and also competitive pricing between at least one other participant is highly desired are 800 gig as we've demonstrated 950 kilometers. So some people are positioning 800 gig.
Being designed for short reach type of applications.
Our performance is such that we believe we can get or any type of fiber Oh 600, 800 kilometers at 800 gig 'cause 40% of backbone links in North America and at 600 gig of the 75% of the links so we're calling an 800 getting for everybody right because we can cover a significant portion.
Backbone network build with this technology I think that the real test right now needs to be getting into market. This year, we have a customer who's ready to take it into their labs and to play as soon as we are ready and I think that this will spur a lot of activity by other customers also so it's it's up to us.
US to go and do what we say we're going to do.
Thank you very much for taking my question.
<unk>.
Oh next question will come from just <unk>.
<unk>.
Please go ahead.
Yeah.
Q I have two questions I guess one for you then you use the gross margin trajectory from the first quarter gross margin headwinds <unk> being for the second one which is what it sounds like.
And 600, <unk> plus or minus on track how how much you gotta initial gross margin goodness for the year.
We still anticipate abide by the end of the fiscal year.
Yeah, I think you know what what we laid out fundamentally last quarter before coven. It's foundation, we sound tried the benefits that we will start to see and gross margin with.
With 600 gig and then really importantly, with 800 gig as we <unk> this year and move into 21 are exceptionally meaningful you could see that even in our commentary on the I.C.P. deployment. This quarter, where we were more heavily skewed toward merchant optics and you see the impacts to our overall <unk>.
<unk> so as the 600 gig deploys and you know becomes a larger part of our revenue base in the next quarter and then into the second half, that's really where you'll see that expansion starting to her but really the fundamental step up will occur with 800 gig.
Okay, Alright, so the two to 400 is more or less intact, there's just shifted out by a quarter or so.
I think that's fair yeah, Okay, and then I guess, maybe Tom for you.
You know with is 800 gig your next inflection point for market share <unk> is that when I'm understanding you're saying or do you think that you'll be able to real some market share in with the with the 600 gig ramp. Thank you.
You are our group platform today is picking up significant market share we have a significant customer growth last year and again in Q1.
We had shipment growth again in Q1 bookings grossing Q1, it's been a very very worthwhile received a platform and when I talked about in my script was three fundamental significant growth marking drivers in optical one is the desegregated type of platform, which is a group.
Ah leadership platform today that for us and it's it's winning customers can growing market share.
Putting the 600 gig an 800 getting that we believe will continue the trajectory it's already on.
Another major growth area is high capacity optics as defined as 400 gig and above.
Today, that's an under certain market, it's a very fast growing market I think in my prepared remarks, I said, it's targeted outside of China has to be a 4 billion dollar market by 2023.
And it's growing about 35% a year.
The whole thing about the G.S. platform is it takes a long and I'll fix in pairs it with the platforms. They're both growing the most we think it's a significant opportunity for.
Returning a position leadership position in that space.
We also are continuing we believe certainly in Q1 picking up some market share with R.S.T.M. platform as it's targeted at access space, both for a carriers and cable providers.
Okay, Oh, thank you both very much.
<unk>.
This will conclude our question and answer session, Oh, I'd like to turn it back to Tom fallen C.O. pretty close your remarks.
I want to think all of you for your time today I also want to extend my appreciation to our employees more focused our customer success by supporting them when and where they are needed for the rest of the employees I also want to thank you for your spirits up in heads down as we attack the rest of this year. Thank you very much.
The conference. So smell concluded thank you for something today his presentation.
<unk>.