Q2 2020 Ciena Corp Earnings Call
[music].
Ladies and gentlemen, thank you for standing by welcome to the CNO fiscal Q2, 2020 financial results Conference call.
At this time all participants are in listen only mode. After the speakers presentation. There will be a question and answer session ask a question during the session newly depressed start one on your telephone. Please be advised that today's conference is being recorded if you acquire any further assistance. Please press star zero I'd now like to hand, the conference over to Mr., Greg Lamb, Vice President Investor Relations. Please go ahead.
Thank you Shannon.
Morning, and welcome to see on his 2020 fiscal second quarter view.
We're conducting today's call from various remote locations.
With me virtually today is Gary Smith, President and CEO, and Jim Moylan, CFO, Scott Mcfeeley, our senior Vice President of global products and services is also with us for the Q when a portion of today's call.
In addition to this call and the press release, we have posted to the investors section of our website an accompanying investor presentation that reflects this discussion that's why certain highlighted items from the quarter.
Our comments today speak to our fiscal Q2 2020 performance developments in our business and our view on current market dynamics, including with respect to covert 19 as well as her outlook.
Today's discussion includes certain adjusted or non-GAAP measures that standards 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'll 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 discuss today.
These statements should be viewed in the context of the risk factors detailed in our most recent tend to filing as well as our upcoming tend to filing which is required to be filed with the FCC by June 11th and we do expect to fall by that date.
She and assumes no obligation to update the information discussed in this conference call whether as a result is new information future events or otherwise.
We will allow for as much to when a as possible today, though we ask that you limit yourselves to one question and one follow up with that I'll turn the call over to Gary.
Thanks, Greg and good morning, everyone.
The mix the uncertainty, resulting from the cobot 19 pandemic.
Nearly every industry and companies been challenged in some way.
Obviously see I know there's no different.
However.
A deliberate strategy over the last several years centered around innovation diversification and global scale has yielded a resilient business.
Okay navigating challenging times.
And this about business operations and financial results well during the second quarter.
Throughout the pandemic a focus has been on ensuring the safety of up people.
Our employees customers and communities.
Let me just because of extraordinary see I'm a team and our partners that we've continued to enable connectivity around the globe and help customers advanced automation strother juice to adopt the new reality.
Oh significant investments in focusing three critical areas over the past couple of years have played a pivotal role in our ability to execute previous crisis.
Firstly, we completed a significant might see transformation.
Surviving are increasingly distributed and flexible workforce with the collaboration tools to make for a seamless transition to a remote working.
And as we talk to you today more than 96% of our employees <unk> working from home.
Secondly, we established a truly agile services delivery model, but it's allowed us to continue providing customer support despite restrictions around the movement people.
And thirdly, we operationalize the supply chain buddies deeply rooted in an ecosystem of leading manufacturers that have strong business continuity planning a multiple manufacturing sites globally.
Do you have enabled security of supply across up business.
Hi, I'm incredibly proud about team and the collective efforts to continue serving each other in our customers through this time.
I'm also extremely proud of the volunteering them charitable actions about global work schools to support their neighbors communities in frontline workers.
We've been asked CNHTC has program, we increased our corporate charitable match to three times for employees donations emboldened peering.
Our employees have also been volunteering you an important on halt warming ways.
Including putting our engineering know how to work to produce three be pretty to buy shields and components the healthcare workers.
I'd like to take this opportunity to express my gratitude for our employees.
That continued focused strength.
I'm, calling us.
As a result of all these efforts and continued execution of strategy, we delivered outstanding financial performance in Q2.
Revenue in the quarter was strong that 894 million in gross margin exceeded expectations at almost 47%.
We also delivered 80% adjusted operating margin in the quarter with adjusted bps of 76 cents.
It was also a great quarter for cash generation.
The orders in the quarter with strong.
It is the core attributes of our strategy innovation diversification and global scale.
It does put us in a position of strength I'm going to helping drive this industry, leading financial performance by essentially enabling us to better support our customers.
Starting with innovation.
We remain the leading it may Bluetooth connectivity.
And as we've learned through this global event bandwidth is a critical resource now more than ever.
Fianna were first to market, we both hundred gig and 400 gig.
Now we all the world's first again with 800 gig.
In Q2, Wavelogic five extreme became fully commercially available.
We've now shipped product to more than the doesn't customers and the technology is operational improvement in some of the world's leading tier one service providers.
In fact, we've made public announcements with Internet to team, we have varieties and Comcast Southern Cross and most recently Deutsche Telecom.
Importantly, we also on the leading edge of driving automation.
Well not as an immediate of an opportunity given the current focus on capacity needs.
As network providers emerged from the crisis I'm beginning to normalize it is something that network architectures will be more closely evaluated to adapt to new user behaviors.
And essentially we believe that over the medium to longer term Budweiser Bud everything.
Will accelerate the drive towards cloud based models and virtualization.
Which is the sweet spot for I believe planet software.
Moving to diversification.
Q2 was a great example of how the diversification of our business serves to help mitigate potential impacts and ebbs and flows that may result from unforeseen events and uncertainty.
Lets coded 19 began to affect various geographies and customer segments in different ways in a different times <unk>.
The key to our business benefited from a strongly positions in both North America, and the media as well as tier one service providers and MISO some web scale companies.
All performed extremely well in the quarter, given a deep relationships and ability to provide the solutions and support that customers need even during these unique circumstances.
And in fact, known telco revenue in Q2 comprised 42% of total revenue with direct web scale business representing 24%.
I would also reiterate the diversification in our supply chain served us well in Q2.
As expected, we experienced some disruptions from our suppliers, including component constraints extended lead times and reduce still temporarily suspended operations.
However, given our sophisticated eco system designed to ensure continuity of supply we navigated those challenges extremely well and their impact was in line with our expectations.
I would emphasize that we are continuing to manage through these challenges very successfully.
And finally on global scale.
We continue to possess the largest focused optical R&D investment capacity in the industry.
And this gives us the ability to deliver leading innovation with the best time to market.
This coupled with the largest world class specialized sales forces that he's intensely focused on delivering for customers and driving toward opportunities.
With the vast majority of our employees working remotely both of these teams were able to successfully executing on that plans in the quarter.
Creating a flywheel for faster than market growth and continued financial leverage.
With respect to the brought to market.
Actually the full impact of this pandemic on the global economy in any particular industrial company, it's still largely unknown.
However, in our space. It is clear that the uncertainties further accelerating flight to quality in all of its dimensions.
Our customers more than ever.
Seeking trusted partners that have the financial sustainability and reliable supply chain in the near and long term.
The continue driving innovation and to deliver it to them on a global scale.
And importantly, they are leaning into those partners with whom they have long standing and trusted relationships.
That are increasingly deeply integrated into that business.
As we said last quarter, we entered the coded 19 pandemic better position the most to manage through the challenges and not absolutely remains the case.
The challenge is largely related at this stage to the Pandemics adverse impact on the velocity of business in general.
And specifically with many of our large and longstanding predominantly international customers operating conditions have complicated and extended the time required to deploy and activate new equipment and services.
And he has to be expected with some of our new deals in customer wins again, primarily in international markets.
Additions have made it more challenging to ramp up and operationalize on original timelines.
It is simply taking longer than normal to execute with certain customers. So we anticipate that it will shorten the time as conditions continue to improve.
Notwithstanding these operational challenges, which we believed to be short term orientated the fundamental demand drivers of our business, including increased network traffic demand for bandwidth and the adoption of cloud architectures remain very strong.
Against this backdrop, our innovation leadership and competitive advantages of frankly amplified.
Specifically resiliency and agility position us to supports our customers through the current challenges and took celebrate that transformation journeys as we emerged from the Cobiz nine thing pandemic.
A deep relationships with a diverse set of network operators geographers and applications are testament to our status as the leading trusted advisor in the industry.
And our investment capacity in financial position will allow us to emerge even stronger than we were before.
Oh.
I can patrick to simply do not have the scale focus or balance sheet to compete.
We tend to use these advantages to continue differentiating ourselves on focusing on capturing further market share moving forward.
With those comments I'll turn over to Jim Jim.
Thanks, Gary Good morning, everyone.
Q2 was yet another strong quarter for Ziana as Gary mentioned total Q2 revenue was $894 million, which reflects significant contributions from our North America and me a red regions.
Adjusted gross margin was 47%.
This performance was the result of two factors.
First we are realizing benefits of our multiyear efforts to improve operating leverage through continued cost reductions vertical integration and operating efficiencies.
This is resulting in an improvement going forward.
Approximately 100 basis points from our previous baseline gross margin range.
Therefore, we believe that our gross margin when we return to a normalized environment will be in the range of 43% to 45% higher than the ranges that we've talked about before.
Second the velocity challenges that Gary discussed specifically related to ramping new business or having a short term positive effect on gross margin.
Because engaging with new customers and displacing incumbents is more difficult in these times. Our gross margins are currently not being negatively impacted as much as they have been previously by the cost of early in life projects.
When we are able to reengage with these new customers and begin to displacing come see again, we believe that we will go toward that 43% to 45% gross margin I spoke about earlier.
Adjusted operating expense in the quarter was $259 billion as with many other companies opex in the quarter was lower than expected largely due to a significant reduction in travel expense.
With respect to profitability measures in Q2, we delivered adjusted operating margin of 17.9% adjusted net income of $117 million and adjusted EPS of 76 cents significantly above our expectations largely due to the higher gross margin.
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In addition in Q2 cash from operations was strong at $91 million.
Adjusted EBITDA in the quarter was $183 million and we generated free cash flow.
We ended the quarter with approximately $990 million in cash and investments as Gary mentioned, our balance sheet is yet another differentiator that speaks to our long term strength and resiliency, particularly when the current environment.
This strong financial position enables us continuing to invest and innovation to ensure a strong inventory position to serve customers and to support working capital needs.
Well why did the uncertainty surrounding the go with 19 related disruptions, we have temporarily suspended purchases of our common stock under our stock repurchase program.
[noise] prior to the suspension, we repurchased approximately 600000 shares for $24 million during the quarter.
That brought us to approximately $75 million of repurchases year to date.
Turning to guidance.
As we look ahead in our business there remain important and unanswered questions about the length of the breadth of the covered 19th endemic and specifically, it's resulting impact on both broader macro economic and industry specific conditions.
Of course, Sienna and for virtually all companies. This is obviously introduced a greater degree of uncertainty in the mid to longer term than is typical.
As of today. However, we do anticipate that the challenges related to slower business philosophy to covert 19 restrictions are likely to weigh somewhat on our second half performance.
I would caution that it is difficult to discern which current dynamics in our business are directly related to go but my team and were in some cases like India. The pandemic, maybe exacerbating challenging business conditions that previously existed.
Demand for bandwidth is continuing to grow and competitive dynamics are playing in our favor.
However, cobot 19 is creating uncertainty.
With that context in mind as always we will give you our best forward looking view based on the information available to us today.
To start in Q3, we expect to deliver revenue in a range of $955 million to $985 million.
Gross margin in a range of 44% to 46% and.
And operating expense in a range of $265 million to $270 million.
[noise] as we exit the first half a year and despite the uncertainty around macro economic and sector specific dynamics, we have sufficient visibility into the business to provide an update to the fiscal year 20 annual targets. We provided last December.
Specifically, we now expect to generate annual revenue growth of 2% to 4% for the year.
Given that we believe the market ex China will be roughly flat in 2020, due mainly to the effects of covert 19, our 2020 broke right would still represent continued share gains [noise].
After the market growth.
In addition, we now expect to deliver adjusted gross margin in the 44% to 46% range just for your 20.
Includes the 100 basis points improvement I mentioned earlier, resulting from supply chain improvements as well as the cobot related dynamics, we previously discussed.
We expect fiscal year operating expense averaged $265 million to $270 million per quarter.
Based on these revised expectations, we are confident their ability to achieve our profitability target. This year. In fact, we now expect to achieve approximately 16% adjusted operating margin in fiscal year 2020.
In closing our business is performing very well and we remain committed to and capable of serving our customers around the world. During this time of crisis and beyond.
As the industry leader Sienna believes that people all over the world more than ever need connectivity to do their jobs and to stay connected with family and friends.
Because we serve these needs. We believe that we will continue to look to deliver value to our customers and our shareholders over the long term.
Most importantly.
I would also like to thank our employees for their continued commitment to sienna as well as our customers and our investors for their confidence in our ability to perform.
Sure well now take questions from the sell side analysts.
Yeah, sure I'm oriented or did I understand that there's been some difficulty with the webcast I want to make sure that participant line is known to everyone. In case, that's easier for people that participant line is 844.
848, 0674 again, the participant line to dialing 84484 80674, we apologize for inconvenience.
That is that at this time I'd like to remind everyone. If you'd like to ask a question. Please press star It doesn't number one on your telephone keypad. It's like much of your question press. The pound key your first question comes from Jordan Archer with Jefferies. Please go ahead.
Hi, guys. Thanks, very much I guess I wanted to start by.
You know asking about the revenue guidance, Jim you mentioned, 2% to 4% if I take the midpoint, there I take and the midpoint of your guide for July It implies the October quarter.
Is not going to be a strong is it is.
Had been historically.
So it looks like for for pulling forward some revenue or can you just talk about the dynamic there on the October quarter, and I guess I assume that some of this maybe as a byproduct of customers pulling forward you'll build in response to the Corona virus related or work from home related demand, but can you just talked about the dynamic there. Thanks.
Yeah first of all to the last point on going forward, we definitely saw some orders go forward, but our revenue in the quarter really didnt represent a lot of pull forward George It was a solid quarter. We did see the effects that we expected to from the supply chain.
But not turn to go forward revenue in the quarter. If you go back historically.
Q3 in Q4, sometimes of each or Q3 in Q4, sometimes I've been or our biggest revenue quarter. So.
Movements up and down between those quarters are not unexpected, but I would say most importantly, we're in very extraordinary times and.
We have not been able to engage with customers mainly international.
We had expected to be part of our second half revenue and that's the main reason for the fact that we've taken our revenue growth rate down a little bit it's just impossible to get to their offices, yes, you can engage with them telephonically, but in order to win new business you have to be eye to eye with people.
You have to sit across the table with them you have to work with them in an engineering sense and so that just hasn't happened.
So as much as we would like it to again, mostly internationally and so therefore, our revenue was going to be in that range.
Got it and then just just to be clear you got you talked about a 30 million dollar logistics type issue that you're talking about here is that is that exactly what you got then in the in April quarter, and then you know what does that number look like for July in October.
[laughter], that's exactly what we got in the up in Q2.
What will happen in those numbers is that maybe we'll catch up on some of the stuff that we missed in Q2, but additional challenges will.
Right. So I'd say that for the year the effect of the supply chain is you know tend the tens of millions of dollars overall, it'll be <unk>, but things will move in and out of the quarters as we go through this year.
Thank you. Thank you.
Next question comes from Rod Hall with Goldman Sachs.
Hi, this is asking on behalf of fraud. Thanks for taking my question.
Could you give us an update on demand trends by geographic region, particularly on what geographies drove the died down and I'll follow up.
Yeah, but when I take that Rafi.
Overall, the you know the demand characteristics of a have been strong as more and issue of sort of the velocity elements, particularly internationally I think we're able to navigate through a lot of a stuff in North America, but we've seen a you know weakness in India as Jim said, particularly they've had a very.
You know extremely locked down.
Having some you know I think.
Issues before then from a rollout point of view, but I think that's exacerbated it I'd also point to places like Japan, where a lot of deployments of really are really slowed down so I think particularly certain parts of Asia Pacific.
And certain parts of Europe, you know, what we're seeing this access to sites and the ability to the traveled across border has really been has really been a impactful and as Jim said, you know is probably going to weigh down on a on the second half. So that you know that's what we're seeing from a geographic point of view I mean, obviously not to be can.
Views with sort of secular demand I think they'd all like to deploy more bandwidth and many of them are most of them.
Running costs over on the networks, because they can't get all the equipment in that they'd they'd like and I'd characterize that as particularly within the international markets.
Thank you your Vetscans revenue was very strong in the quarter could you give us some more color there what products will that change then how sustainable do you can better.
Scott do you want to take that.
Yeah sure you're very.
Web scale from an application perspective that we deal with them on on their campus Metro DC eye on there.
Their core backbone networks and on their submarine networks.
It is our largely in our optical portfolio and a good a good approximation for it is what you see in our or wave server product, but it's not just the way server product. We also deal with them on photonic line systems, as well, which would show up in our 6500 product on it.
Thank you well take the next question please.
Next question comes from Jeff quality Nomura. Please go ahead.
Yes. Thank you very much I I was hoping actually do.
Five into the web scale bit a little bit more if possible.
It sounds as though obviously it was another another strong quarter, you had talked about rising visibility a web scale.
In prior quarters I'm wondering if you could you could help characterize and where you are in web scale. What has changed at 600 gigabit products from rivals has ramped and how you are feeling about visibility at the moment. Thank you.
[noise], Jeff Jeff what about what on I take that I think we're seeing pretty robust demand across most of the web scale players as Scott said in a lot of bad difference applications. They submarine b connected data.
And could you know, we particularly saw strength in Europe amongst the content players. We've got good visibility to the obviously, we've got a very large market share.
In a in that space, but we think we will absolutely maintain that market share. This year, if not frankly increase it a little bit.
You know when obviously, we're engaging on on 800 gig with them, we've got deep relationships with them into the back office as well I know in their supply chains. So you know would go all the.
And players now is a as customers. So it's a it's a key segment, both directly and indirectly own out business as well and obviously bad business you know to the point I'd make around most of this.
Well the tier one carriers are obviously in pretty good financial strength around the world and particularly obviously the content players. So you know they're looking to continue to deploy bandwidth to support the increase in demand that the Betsy.
Okay. So.
Right.
I would just going to add Jeff that it's clear that.
World is going to be different going forward, we're going to be virtualized everything remote everything crowd everything and that's good for our web scale customers business model is good for service providers as well, but in particular the web scale businesses are those that are basically the crown and so.
I think that's really good for us for a long term.
Okay, great that makes sense as let me clarify.
The.
The deployment.
Challenges that you may have or Operationalizing challenges that you may have are generally not in the wesco community, that's mostly in a pack or tier two carriers.
Absolutely not in the web scale.
Category, It is international and in particular, India and Asia back.
Excellent. Thank you both that thanks, yet no question next question comes from Simon Leopold with Raymond James.
Thank you for they get question <unk> first of all wanted to ask if maybe you could dig a little bit deeper on the on the top customers. It was certainly a good sign that you had just 110% customer, but if you could maybe help us understand a little bit of the nature of that customers businesses. It telco North American is.
Sure has a web scale come in and also in the past you've talked about several customers close to 10%, but not quite there maybe if you can elaborate on how many are in sort of that that high single digit neighborhood and then I've got to easy follow up thank you.
Okay. So summing up let look but let me take that we have a number of customers in the sort of 70 to 90.
The sand I would say that generally very strong in North America tier one carriers normal suspects.
I would also highlight a couple of other cable MSL, particularly strong.
In the quarter it looks like being strong for the year again predominantly no North America, and we had a couple of content players or as you as you can imagine.
That were also given the thought we had 24% directly from web scale, we had two of them. It would very close to 10% as well so again, a big clustered around that I mean, just talks to.
You know the diversification of our customers, but if you were to summarize it Simon you'd say North America in tier one carriers, including.
Including a cable and then obviously the content players.
Great. Thank you and then just to follow up is.
Just in terms of your supply chain risk or could you talk about the potential for a if factories where to shut down in Mexico, what would that mean to your business or is a question I've gotten a lot and it would be helpful to understand that exposure. Thank you.
Scott you want to take that.
Yes, I'm in Scott here. So first of all I must say that we were dealing with.
Q1 contract manufacturers or take their their business continuity extremely seriously we have five contract manufacturers around the world two of them are in Mexico, a very recently in network and that we haven't lost a single day, Anna Sui in Mexico or or in Asia Pac too.
You know to anything related to cobot.
Having said that you know we're actively working on pulling a finished goods inventories through that through the supply chain as fast as we can to mitigate any potential impact.
And where we have seen impact and in some cmes around the world that aren't necessarily.
In Mexico.
It tends to be closed for a very short period of time a.
Oh, a cleaning if they had an incident of an individual employee industrial cleaning right back at the manufacturing site that hasn't been.
Anything that impacted our CIO, specifically, but I have seen others in the industry, that's or how it played out.
Thank you.
Next question. Thanks, Rob Salmon, just just back to your first question the top customer was a DMT it will be there would be named in the queue. So.
So to give you that information.
Thank you very much can appreciate that.
Next question comes from College Yep.
With Cowen. Please go ahead.
[noise] Jerry.
[noise], yeah that nacco, there Paul that though [noise].
[noise] Yep.
Our phone it yeah, we need to go to the next step all we'll try to get it back on sorry about that hurt.
So next next question comes from Michael Genovese with MKM. Please go ahead.
Great. Thanks very much.
First of all can you help and he said orders were strong is there any further quantification you can give up the orders in the quarter.
[noise]. They were there were very very strong.
And our backlog grew.
Pretty meaningfully during the quarter.
What I'd say, though is that.
Many of our customers took the opportunity to place their orders.
I want to us for the full year or for more than just the current quarter, because we encourage them to do so so that we would have visibility to their needs and we could make sure that our supply chain was capable of delivering them. It was a great quarter.
We're.
But one of the reasons why we have such a strong visibility into Q3 is because of those orders.
But some of those were orders ahead of the normal schedule.
So needless to say book to Bill was above one clearly Oh, yes, Oh, that's what we don't we built backlog by quite a bit.
Right, Okay, great. Thanks for that so so given the timing questions that are impacting the for Q outlook, and then I guess, there's probably uncertainty on how.
Fiscal 21 begins because we just don't know yet right how cold it and all this is going to play out but I guess my question, though is as we think ahead.
With the higher bandwidth demand and the positive competitive situation, particularly I think long way being weaker now. My question is you know shouldn't we win at the end of this be at the higher end six to eight am I getting ahead of myself here do you do not want to comment on that or but I'm just thinking we should be at the higher into 16, when we come out of this.
And I love to get your view on that.
It's going to be very hard for us to make any kind of beyond these two quarters, Mike just because it's such an uncertain period I would say that the demand for bandwidth is going to be a computer is going to continue to grow but my God. It's been growing at 30% annually for for a long long time and.
Could it be our then that you had good but that's a pretty high growth rate. So I guess the bottom line of all of this despite the uncertainty over the next several quarters, we feel very very good or better position in this business, we're just not prepared to.
Sort of comment on next year, right now or or three year Guy.
Thank you. Thanks, Mike. Thanks. My next question comes from Paul Silverstein with Cowen.
[noise] can you will hear me now.
Much better thanks, so much better my apologies no talk.
First question with respect to go to landscape.
I think there's a certain it say they are actually expectations, so I'd maintain or increase shareholder web scale.
The interesting thing you've got it never coming in shortly at some point sounds like in the next there's four months with 800 gig.
Or at least their latest a coherent DSP I know there's been a lot of concern investment community about that.
You don't seem to be overly concerned.
From your what school comment and I assume its mortgages flips go let me ask question.
What are you, saying it's bit of landscape, we're going forward.
I want to also asking about walk away.
We just had an optimal company last week, along with Robin assets, probably that was very vocal and saying we're always absolutely been cut back you saw some announcements in the wireless arena same thing.
That obviously should be your benefit previous question, but if you could address instead of landscape in general.
So let me take it in the in the context first of all on the on the content content players baseball.
So we have very long term relationships with them with Super integrated into all of that back offices. These now have very large complex works we partner with.
Multifaceted it seems submarine it's in international market.
So we have very broad and deep relationships with them now when we have a lot of co development work that goes on with them in terms about platforms.
Obviously, you know we were a first with 104 hundreds with them.
800, we think we've got up to.
Significant technology lead on 800 gig.
The different variants that will be coming out.
With 800 gig as well when kids will will absolutely be the industry leaders on it so we've got.
Perfect and time to market advantage, we've got broad and deep relationships that go back many years and we've got number one market share. So you know we don't complacent about any of that but I think we're in a you know we're in a very very strong position.
As regards to walk away you know obviously the geopolitical.
Elements that are in play there have been in play for quite awhile.
I would say two things one yes, I think it's a it's a very good long term opportunity for CN room were incredibly well placed about that they've got such a large market share.
In telecom infrastructure generally.
Nick Hiller League in Europe, I think really you know irrespective of all those other concerns. It's just really a rebalancing that frankly is long overdue.
No I think about momentum is absolutely bad, but I'd say two or this or the cautions through it won these are large strategic decisions.
And number two its infrastructure after those decisions are made it takes time to ramp up.
One example of that but I would give to you is Deutsche Telekom, which we won a couple of years ago and that taking time to begin to ramp up. So I think it isn't very positive dynamic for us. So I'd just caution from folks around but the amount of time, but those kind of infrastructure wins take to ramp up.
Particularly I think we'd code bid.
It's been challenging on the new business side to ramp up. These these new customers, which we've seen them, particularly particularly internationally and I think not going away on us for a little bit as well, but you know it's absolutely a very ER positive dynamic for us in the medium to long term.
Well, that's a good leading smartphone which is the cytof. So to go reference you can I just want to clarify be sure. When you talk about site access heavily impacted man, it's measured by revenue.
Our orders is that truly in Europe or was that also but also apply to the weakness you saw in Japan, producing that will come to what extent as an outsider outlets as opposed to demand weakness.
It's not really demand I I don't I don't think of it it's demand weakness.
Take care to manifestations of at pool one.
With existing large customer is where sometimes we're not even install and get to the customer, but it's the customer's ability to digest and to get that deployment out has as you know been impacted it has slowed.
It is predominantly international we're seeing some of it in North America, but not as much as seen in Europe and the biggest effect I think of the all his in his in Asia Pacific.
In India, and Japan, and some other jump up it's going to Asia.
It's just been just been very challenging.
You really it's it's not so much demand, it's more about digestion pool and the ability to get that stuff out.
I appreciate the response access.
Thanks, Paul.
Especially in comes from tally any with bank of America.
Hi, guys.
Have a few questions on the business.
Converged packet sit on the performing why and when are we going to see growth.
And then on 800 gig or is it targeted mostly to web scale, that's where you think that deployment is gonna be or are we going to see also telcos.
Scott you're going to take up.
Hey, so his home Scott and on the first one you said converged packet I think you mean, the packet networking packet portfolio and use that we see yeah. You would have been referring to the revenue number I would say that on the long term targets, we still expect will packet networking business to grow faster than.
Our aggregate growth rates and.
The actual order book for the first half the year year on year growth right gives us confidence that that is the case. So we still we still very much or around our.
Comfortable with the sort of growth targets, we have put out there on the packet piece on the 800 gig question.
I come back to or just reminding folks that way budget five extreme is actually an optical engine that Matt or.
Dresses multiple applications.
In a sense sort of a doubling of the performance on an optical network from what you would have been able to get past.
And in that context, it is going to be applicable to all the segments that we serve.
The 800 gig application specifically is.
Is addressing where you have high cross section of bandwidth in the fairly.
Constrain reach environment and a few hundred kilometers type type environment. That's those types of deployments are dominated by the web scale, the data center interconnect, but not 100% explicitly.
Got it.
Hi, fit I am I not I'd also mention.
Got you might have mentioned this but we had very very strong orders in the Bakken segment.
Yeah, that's another reason in Iowa.
We're pretty strong in Q2, and a strong year over year for the first half as well.
If I can sneak in one more question are you spoke about difficulties in the operations in India can you expand on this.
Yeah, it's all going away.
Right right here.
No we haven't got Toronto [laughter], yes.
Hey, one of his time [laughter] virtual calls now as you know at night.
We're not able to look at each other and pointed to each other as we do in person.
As you know India was was shut down I mean, the home country was shut down.
And basically people could leave their homes, a once a week or something to go get food and so there was.
Other than the normal sort of engagement with the customer in terms or.
Right.
Telephone an email and the occasional resume call we were not able to engage with their engineering staff and a continued their plans to build out their networks.
As we said we don't think this is a demand issue, we believes that our big customers and we in fact, all of our customers, particularly our big ones Geo and Bharti are still intent.
On building out.
The entire subcontinent with a network and we're in good position to continue to win a lot of that business.
They had sort of caused last year, you'll recall those two customers because they have spent a ton of money.
They were in a digested phase already and I think the cobot 19 shutdown.
Only exacerbated that situation, we think it will continue.
We are reengaging with them, we got some orders in the quarter that were.
A little bit earlier than we thought we might yet and we think it'll come back, but it's going to be a little slow.
Great. Thank you.
Next question comes to enhance does that with Citigroup investment.
Thank you on the international specifically Asia Pac and India Challenge is concerning krona virus am I correct. It concluding that it isn't share loss at all it's just the logistical challenges of not being able to meet and get the new design in.
Yes, and so when it comes back it should come back quite strongly it sounds like nothing about share loss like incumbency or being you know not closer to them. It's just everybody can't.
Get into the selling process is that correct.
Yes, yes, yes I would.
That's a fair characterization, Jim it is definitely not share loss in fact, we've got a number of wins.
In the new business side that we're you know what do we have challenges ramping up that we would expect and.
No to ramp up in Europe, you know, we've got a number of wins the you know people like TV.
Et cetera.
I would have been challenging on the ramp up so it's absolutely not market share or in fact, you know as we as we have sold for the Euro you know just until it's about the overall market probably being flat because of cope it.
Yeah, we're talking about growing the has so therefore, we are going to take and continue to take market share. So did I don't think has any any question about that it's just the you know and it's kind of to be expected. It's just the logistics of velocity have been able to get the sites have access fly across.
For those you know all those are just slowing down.
And that sort of way and go on the the second half, but as Jim said relative to other people. We actually have good visibility you know into those kinds of dynamics.
You know who knows how long this will last in terms of you know Nicole good piece play out.
But we think it's still we'll we'll we'll weigh on it but the overall sort of secular demand.
It is extremely extremely robust in pretty much all geographies.
The other diminishing over the this velocity seem.
Not only on your logistics I think Gary talked about but where we are the new attacker and account where we may have won the logo in or trying to get through the certification process without requires people getting in lines and when the world just sort of working from home that slows things down.
So there's a sort of a new product introduction pace into our customers domains that probably Anders us more where we're trying to grow market share like to me in a PJ.
Where we haven't tenancy.
And then my follow up is does incumbency of Sienna, having such a good first movers advantage in 100 gig and 400 gig does that help out even more so with eight gig. When you then layer on next Rona virus additional challenges or is it similar.
To the other technological rollouts as far as the competitive landscape of opening up for RF piece for rolling out for 800 gig.
Jim I I would say, where I was it the vary but a very strong competitive advantage you know because you've got the largest market share, but really that's about relationships and trusted relationships that we have with most of the major tier ones around the world and all the content players not only how about at scale and so.
So not only do we have the best technology, but that's been trusted us for a number of yours and they have very confidence about roadmap and the fact that we have the global scale to continue to innovate and support them. So you know frankly, it's a situation where the strong you get stronger and we all the income.
But player in most of the major carriers around the world. So whilst it's a challenge for US as Scott said in terms of getting new stuff out there like anybody else.
We are you know much better positioned than than any other competition to be able to do that because of our incumbency and track record and deep integration into the back office and many of these carriers.
Yeah.
Right.
Fortune one because we are we.
As you May have known me, we've released the way of budget five technology on both our 6500 and our way of server platform in the fact that it's on those platforms at our existing customers know lugs just reduces the he'll that they have declined integrated into their their operation or back office et cetera, and as you know others that.
Those platforms are well distributed around the world.
Thank you so my question.
Next question comes from John Machete with Stifel.
Thanks, very much Gary I'm curious it with some of the strength that you saw in the quarter with the web scale guides, particularly at one in 400 gig. If you think that pushes out at all the adoption of 800 by those customers. Your understanding you're seeing the same traffic growth demands and in some cases, even seeing that increase but if there.
You know sort of ordering what they need per day in and buying the one in 400, because that's what they already have qualified do you think that this may be slows the at least the early stages of adoption of 800 gig.
Yeah. That's it that's it that's a good question John I'll go them and Scott can probably put up provide more color to it but I I don't think so when what we've seen to date with every action.
Due to the coal good pace, they had pretty strong plans anyway for rollout this year on 100 400 gig.
Like picnic 400, but you know, we sort of based sort of step function and demand them reacted to it then obviously yeah right now it's it's 400 gig what we are a very encouraged by what we're seeing in terms of engagement on 800 gig Scott you want to give a little more color on that.
Yeah, I think I.
Just reiterate that Gary I mean, we've we've shipped already to date hasn't been commercially available for that long north of a dozen customers across multiple applications, that's where it seems to have the most urgent immediate demand is anybody that has.
Significant bandwidth growth and has a fiber or fiber constraints, and thats, where proves out and whether they're going to run that 800 gig application or in some multiples of 100 gig.
That's where we're seeing the demand, but it's across all the applications submarine.
Terrestrial the metro and long haul networks and in DC dynamics.
So to be.
Well, we sorry go ahead Sir.
Yeah, we off what Scott said, we are talking about the contemplates yep.
And I I think that's a good follow up I mean, you talked about the expectations for sort of flat market growth last quarter, we talked about 7% to 10% growth for this market has that outlook changed for the year I am assuming no. The more flattish outlook is more on the on the telco side I'm curious what your outlook is.
On the I'm sort of the web scale side, and if you've seen any change with all this going on really on the competitive front relative to ZR. Thank you.
That's a that's a very good question on market share growth. So let's go to take the outpaced I'll take the.
But yet because we overall for the optical space, excluding China, we think it's going to be pretty flat as an overall market now within that we think that GCN, but you know I think the as you said the expectation for the year was about seven to five seven to 10 sorry.
I think you know the latest stuff that I saw from it is probably five to 10, we absolutely expect about space to grow.
Within the overall context of the of the optical market. So I I do think you're going to see growth.
We are going to grow at least that that kind of right, which is what is forecasting for a you know guidance for the for the year Scott you want to take the ZR.
Okay, Yeah zero zero as you know specifically is.
An industry standards around in the profitability that really targets a application space. That's very short reach transmission, it's called any congress or less single span.
With you know a very simple network in between and come up Atonic perspective.
So that really talks to really campus or Metro DC I. We've we've said I think consistently for the hospital, while there we expect reinforce the time.
Market opportunity for that applications that will be somewhere around the 500 million mark against the backdrop of the total optical market of getting our you listen to 13 or $14 billion.
What I do see so that hasn't changed our perspective of the overall market size opportunity hasn't changed when I do see is probably the timing of that moving a little bit to the right and I think it's going to be 2021 event, maybe a little bit later in 2021 that people even anticipated we will have a as you know we're gonna have price.
Kick off of our Wavelogic five nano.
Development activity a lot of product that addresses as your application space at the end of this calendar year.
Thank you thanks John.
Next question comes from semi Chatterji with Jpmorgan.
Hey, guys. Thanks for taking my question Oh, I just wanted to start off by Austin jumps off the North American dental schools in Europe.
Claims and the Glenn you mentioned that the challenges on more kind of international here.
In the meantime, you kind of seen large customer like Verizon kind of raised that got big so even during the call would tend to make happening.
It is somewhat that dedicated to bandwidth expansion I know more to open up no current expectation for growth would be large north American del goes if you can help us with that.
Yeah, I would say big.
Greg.
Jim do you want to go up.
I'll be brief and then you can follow up here.
Generally speaking we are.
The most incumbent in the North American we have the old and establish relationships and very very solid market share and yes, they will probably be spending more over the coming quarters.
Orders from them were particularly strong in the first half of this year.
And our expectation frankly is that for the North American.
Telecoms that they will be somewhat better.
And we expected for this full year the weakness as we've said for a couple of times is on the international service.
Gary.
Yeah, I would just add that you've obviously got the normal suspects that you know the large carriers, but I would also emphasize again very strong performance on the cable side, we expect for the euro.
Obviously, we bought new wins at places like Centurylink, but we're ramping up charter etcetera. So we expect to have a very strong and strong year in North America.
Okay.
And just follow up more in dumps of Opex, but in terms of topics planning obviously some of the change here in opex in the quarter. It was more I'm pretty and probably related but when you kind of thinking about next deal and the all the different factors about increasing bandwidth need then get up its market share gains how you think.
All banks.
What are you going into next year, you're looking to kind of keep some structure and a reduction on your opex or are you more to come to kind of increased headcount in kind of.
Hi, your demand.
That's rather than talk about next year in particular I won't say this for me.
It is our goal every year as we go into our planning process to reduce opex as a percent of revenue and therefore as to our profitability. We've done. It every year frankly for the last Tim and I think we'll continue to do that going forward, we're going to continue to invest though and that's that's really critical.
For us to maintain our lead across the function.
Its R&D or.
Sales for the support functions, so that's where I'm sorry.
Operator, we'll take one last question and just so everyone knows we will try to get the transcript up on the website as soon as possible again, we apologize for any of the problems on the webcast.
And the other question for me to Marshall with Morgan Stanley.
Great. Thanks, I, just drilling down one last time on kind of 800 gig and just weather event and clearly most of the.
Restrictions are our international but are you seeing kind of labs to do the 800 gig testing by your customers is still open and progressing or were they kind of far enough through the testing process that the trajectory of 800 gig doesn't change and then maybe just second question I know you mentioned the op.
Like savings from travel, but if you could just call out kind of what is a quarterly travel budget traditionally for you guys. Thanks.
Yeah, Matt It's got off the 800 gig one I'll, let Jim talk to the to the second piece on travel.
On the 800 gig.
We have we have engagements with customers across talked a little better various stages of maturity on on their optical technology. Some of the testing this technology for quite some time someone them there, we're bidding and new commercial.
Our of peace and everything in between I'll say this if I take a summary of it.
Our plans and forecasts for 800 gig for the year haven't really changed from what they were three or four months ago.
And on the T. in a typical quarter or TNT Opex DNA is $10 million to $20 million and we're running at less than half that now.
Okay, great. Thanks, guys.
Okay.
Thank you everyone for joining.
Thank you try and again, thank you everyone for joining we apologize for couldn't get everybody's questions with authority catching up with everyone over the next step falling couple of days. Thanks for joining thanks for the interest.
This concludes today's conference call you may now disconnect.
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