Q2 2020 ADTRAN Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to <unk> second quarter 2020 earnings release Conference call.
All lines have been placed on mute to prevent any background noise.
After the speaker's remarks, there won't be a question and answer period.
To ask a question you want me to press Star one on your telephone.
During the course other conference call at trend representative is fit to make forward looking statements, which reflect management's best judgment based on factors currently known.
However, these statements involve risks and uncertainties, including the continued spread and instead of the impact of the cobot 19 global pandemic the ability of component supply to align with customer demand be successful development and market acceptance of our product.
Competition in the market for such products, the product and channel mix component calls manufacturing efficiencies and other risks detailed in our annual report on form 10-K for the year ended December 31st 2019.
These risks and uncertainties could cause actual results to differ materially from both in the forward looking statement, which may be made during the call.
It is now my pleasure to turn the call over to Tom Stanton Chief Executive Officer attach ran Sir. Please go ahead.
Thank you to me a good morning, everyone.
We appreciate you joining us for a second quarter 2020 conference call with me today is airtran CFO, Mike fully auto.
Following my opening remarks, Mike will review the quarterly financial performance in detail and then we'll take your questions.
To begin I'd like to address the ongoing co. The 19 pandemic given our global operations, we have been carefully monitoring the code environment, all regions, where our employees and customers reside.
We continue to strive to deliver the rights solutions to help people stay connected through these difficult times.
Hi trend has been extremely proactive and taking significant measures to protect our employees partners and customers and I want to thank our employees for the diligence, they're using feet themselves and others safe.
One thing that is abundantly clear thus far through the pandemic is a vital importance in high speed broadband connectivity.
And AD trends is committed to providing an exceptional broadband experience to help drive the global economic recovery.
Whether its work from home school from home, enabling virtual health care.
Keeping businesses running or keeping families connected we're doing what we can to make that experience exceptional.
2020 continues to be actively pivotal year for it for the company.
The fiber investment cycles continue to accelerate globally aided by government actions to encourage broadband service providers to limit and or band the threat of high risk vendors in their critical infrastructure.
This timing aligns well with these operators plans to transition to next generation software defined architectures.
Kermit, creating tremendous new opportunities for AD trends, and our Stx and mosaic cloud platforms.
Furthermore, the need for network in hone virtualization to provide better connectivity enable remote customer connections and changes and provided better integrated experience is fueling our momentum with our mosaic software subscription services.
During the quarter, we've made tremendous progress and capturing new customer opportunities with next generation platforms shifted subscription software and services.
We exited the first half the 2020 was very strong momentum in our fiber business with a good mix of awards in both the GE PON and ex Gs part.
As a result as a result, we have been gaining market share and have jumped to the number two position to become the leading us based supplier in North America for all possibilities in the most recent market share reports.
From industry analysts from Delaware role.
Gaming seven share points.
And the next year than the 10 gig actually as part of multi category Airtran gained eight share points against our competitors and the strategic growth market.
Our market share gains that only include service providers that are moving from legacy fiber access solutions to next generation platforms.
Before we are also continued to see surge of new entrants in the market, including utilities municipalities developers and electric co ops in the U.S. and alternative broadband providers in Europe, and Australia, who have stepped up to deliver gigabit services.
Unserved and underserved communities.
We're very pleased that we added 33, new service provider customers during the quarter, bringing our new customer account for the year to 61.
These operators are not counting on that trend to help them accelerate the delivery of exciting new services and the communities that they sir.
We are making making excellent progress at each of our tier one operators in the UK, the EU and North America in which we have one major awards.
With our software defined Stx fiber access platform and we are on track to start seeing material revenue from these programs in 2021.
In fact, we will soon be announcing live customers on some of these awards this quarter.
These market share gain new customers.
And scale tier one awards position the company for solid growth for many years to come.
Given that backdrop the financial results for the second quarter demonstrated solid execution against our plan was strong demand in most of our segments.
With the domestic regional and emerging service provider market segment, leading the way.
From a top line perspective revenue for the quarter was 128.7 million with 41.5% gross margins.
Network solutions accounted for 80%, 86% other revenue at 111.3 Global services revenue contributed 17.4.
To provide some context our 2019.
Revenue included a major low Tam project.
Excluding this project revenue was up 12% and two in to Q.
On a year over year basis.
We continue to build a strong diversified customer base from a geographic product and market segment perspective.
For the quarter, our fiber access business grew 21% over the previous periods and increased 16% on a year over year basis and continues to be our top sales growth category.
In addition to growth of our partner royalty revenue the fiber CPG and owned Ti revenue grew 27% quarter over quarter and 37% on a year over year basis.
Our supply chain team continued to work hard and helping us delivering Q2, managing through logistics and component availability challenges.
During the quarter, we are affected by higher freight costs as available capacity has decreased in rates continued to rise.
From an organizational perfect perspective, we continue to execute and accelerate structural changes to improve our operational cost basis to to achieve the target operating model and our plan.
We have achieved material reductions in operating expenses through operational control and expense management over the past five quarters and we're on track to achieve our target expense profile on plan overall, it was a solid quarter.
Let me now provide a little more detail around some of the product and segments.
Our continuing investments and the highly successful in widely deployed total access 5000 platform continues to pay grade does again dividends.
During the quarter, we deployed our ex Gs GPON combo card for the T., a 5000 that enables service providers to cost effective effectively accelerate 10 gig service delivery in new and existing markets.
We have also expanded our sdx portfolio to deliver a greater capability to operators that are migrating to software defined networks.
At trend continues to lead the industry in the development of an open this aggregated software defined fiber access solutions centered around our Sds product family and the mosaic cloud platform.
By offering our customers the flexibility to evolve their networks by adding 10 gig delivery in existing chassis or a new virtual solutions leveraging a common management flat platform. It enables them to accelerate service delivery, while significantly lowering their cost.
We're also providing service providers greater visibility network intelligence analytics and capabilities to deliver a more immersive connected home experience as we continue to build out our mosaic cloud services portfolio of software applications.
During the quarter, we introduce new software services that are gaining strong adoption by both new and existing customers. In fact 28 of the 33 new customers. This quarter also purchased software subscription services, enabling us to surpass over 2.4 million devices under management.
See software applications will work together in concert, providing operator with an end to end visibility network intelligence and automation and a unified view and the upcoming Mosaiq will and virtual control center enables operators to efficiently deliver a seamless customer experience to accelerate new subscription revenue streams, while reducing costs through automation.
Yeah.
In addition to the exceptional progress in our fiber access business. Our next generation fiber extension portfolio, coupled with our mosaic cloud platform remains strong.
A new tier one customer in central Europe selected Adtrans second generation G fast fiber stenson solution to further accelerate its delivery of high quality high capacity broadband services for business in residential customers.
Additionally, we announced do fast awards from Amnet in Germany, and from welcome net and Finland during the quarter.
Outside of our outside of Europe, Our international revenue performance was driven by our continued progress in Australia with fiber to the curve deployments for the National broadband network.
While the pandemic has hit small and medium enterprises the hardest.
Our enterprise CPD business remained resilient, given our long heritage and diversified sales channel.
Revenue for the enterprise CP business for the first half of 2020 was in line with the same period to the prior year.
Despite the coded 19 headwinds in this sector. We remain encouraged on our enterprise business and we have continued to invest in refreshing our highly successful routers, which portfolio business, which we will be announcing later this fall.
And the residential broadband markets. The current work from home and online school environment provided some tailwinds.
We had a strong quarter for our residential CPV portfolio, which with revenue growing 29% quarter over quarter and 40% on a year over year basis.
We are seeing strong demand from our residential gateways by regional service providers in North America developments in Europe and in the past.
From a market segment perspective, our revenue from regional service providers grew 29% in the quarter on a year over year basis and revenue segment grew 37% for the first half of 2020 over the same period of 2019.
We expect to see further uplift in our domestic regional and emerging service provider segments going through 2021, as the $16 billion FCC RF auction pays out. This fall plays out this fall and into the first half of next year.
During the quarter Hetronic announced the most comprehensive ardolph portfolio, which is ideally tailored to support to build out of rural broadband across a wide range of network topology.
And trend was heavily side in the FCC article order as we influenced the selection criteria to ensure the program provides maximum funding for low latency gigabit solutions to help ensure that we closed the digital provide for rural America.
We continue to be extremely active as we assist operators with network planning in their applications and we are well positioned to help for operators to participate as program Expectancy Award awards in revenues in mid 2021.
With that the possibility of the program accelerating earlier in Asia.
Several years ago, we embarked in addition to invest heavily in R&D to put the company in position to lead the industry paradigm shift to the next generation of software defined fiber access platforms.
Our success rate during this narrow window of next generation platform selection, which the company in a strong position in the next decade and beyond in addition to addressing the connectivity bottleneck.
Our vision includes redefining the subscriber experience and the investment is paying off as we are beginning to see strong adoption of subscription software across our customer base.
These technology advancements along with the flexibility we're building in our organization really puts us in a strong trajectory for growth.
The share gains we made.
Tier one awards and government focused on broadband initiatives will provide sustainable growth for the company for years to come.
And while this global pandemic has changed has created many challenges I continue to be extremely proud of our company's progress and strong execution.
We have performed access exceptionally well across all areas of the company with a strong focus on mitigating supply chain risks and helping our customers make today's demands while enabling them to quickly transition to the network for the future.
Our team remains safe and healthy as a result of early actions that we continue to ensure that health and wellbeing of our employees customers and partners are a top priority.
Our vision to enable a fully connected world, where the power to communicate is available to everyone everywhere could not be more relevant or more important than in our current environment.
Mike will now provide an overview of the financials and then we'll open the open it up for questions by.
Thank you Tom and good morning to all I will review, our second quarter results and provide our view for the third quarter of 2020.
During my report I will be referencing both GAAP and non-GAAP results.
With respect to non-GAAP financial measures that are discussed on this call, but are not presented in our earnings release reconciliations to their comparable GAAP measures are published in the supplemental financial schedule that appears on our Investor Relations Web page at Www Dot add transact.
For non-GAAP measures discussed on this call that are presented in the earnings release reconciliations are contained within the release.
The supplemental financial schedules on our web page also present certain routing information by segment being category and other non-GAAP, reconciliations, which I will be discussing today.
With that now let's get to the numbers add trend second quarter revenue came in at $128.7 million compared to 114.5 million in the prior quarter and $156.4 million in the second quarter of 2019.
Breaking this down across our operating segments, our network solutions revenue for the second quarter was $111.3 million versus $97.4 million reported in Q1 of 2020 and $139.2 million in Q2 of 29.
Team.
Our services and support revenue in Q2 of this year was $17.4 million compared to 17.2 million reported for the first quarter 2020, and also for the second quarter of 2019.
Across our revenue categories access and aggregation revenue for quarter, two of 2020 was $82.8 million compared to $66 million in the prior quarter.
And $109.4 million in quarter two of 2019.
Revenue for our subscriber solutions and experienced category was $40.4 million for the quarter versus $42.2 million for quarter, two of 2020 and $40.5 million for quarter two of 2019.
Traditional and other products revenue for the quarter was $5.5 million compared to 6.4 million for quarter, one of 2020 and $6.5 million for quarter two of 2019.
Looking at our revenues geographically domestic revenue for Q2, 2020 was $84.5 million versus $79 million reported in Q1.
And $75.3 million in quarter two of 2019.
Our international revenue for the quarter.
Plus $44.3 million compared to $35.5 million per quarter, one of 2020.
And $81.1 million in quarter two of 2019.
For the second quarter, we had to 10% of revenue customers, one domestic and one international.
Our GAAP gross margin for the second quarter of this year was at 41.5% as compared to 45.1% last quarter and 41.6% in second quarter of 2019.
Non-GAAP gross margin for quarter, two was 41.6% as compared to 45.4% in the prior quarter and 41.4% in the second quarter of 2019.
The quarter over quarter decrease in both GAAP and non-GAAP gross margin were driven by product in geographical mix increases in freight related expenses and these were partially offset by increased volume efficiencies.
The change in gross margins in both GAAP and non-GAAP on a year over year basis were minimal, resulting from favorable product in geographical mix and lower manufacturing expenses, which were offset by lower volume increased freight related expense.
Total operating expenses on a GAAP basis or $59.5 million for quarter, two of 2020 compared to 56.5 million reported for the prior quarter.
And $65.7 million per quarter two of 2019.
The quarter over quarter increase was primarily related to market driven increases in our deferred compensation expense contract services and restructuring expenses, partially offset by an expense reductions in R&D and SDMA as a result of our restructuring program and.
She added in 2019 and also reduced travel expenses.
The year over year decreases in operating expense were a result of lower expenses in both R&D and SGN may and lower travel expenses, partially offset by market driven increases in our deferred compensation expenses and an increase in R&D contract services.
On a non-GAAP basis, our second quarter operating expenses were $52.3 million compared to 56.7 million in the prior quarter and $61.2 million in quarter two 2019.
Both the non-GAAP quarter over quarter and year over year decreases in operating expenses were primarily the result of expense reductions and lower travel expenses.
These reductions were partially offset by an increase in R&D contract services.
Our operating loss on a GAAP basis for the second quarter.
2020.
Was $6 million compared to an operating loss of 4.5 million in the prior quarter and an operating income of 562000 reported in Q2 2019.
Non-GAAP operating income for the quarter two of 2020 was $1.3 million compared to a loss of 4.6 million in Q1 of 2020 in an operating income of $3.6 million in quarter two of 2019.
The higher quarter over quarter operating loss was driven primarily by the higher deferred comp expense contract services and restructuring costs and partially offset by higher gross profit on increased revenue.
The quarter over quarter, non-GAAP profitability was driven by higher sales and reduced operating expenses.
On a year over year basis, the lower operating income on both GAAP and non-GAAP basis was the result of reduced sales volumes.
Other income on a GAAP basis for the second quarter of 2020 was $8.4 million compared to a loss of 9.4 million in the prior quarter.
And other income of $2.8 million for quarter two of 29 team.
Our non-GAAP other income for the quarter, just standing was $5.7 million compared to a loss of $7.5 million in Q1 of 2020, and an income of $2.4 million for quarter two of 2019.
The increases in both the GAAP and non-GAAP other income as compared to quarter over quarter in year over year comps are primarily market driven caused by changes in the valuation of our investment portfolio.
The company's tax provision for the second quarter of 2020 was 1.6 million dollar expense as compared to a benefit of 4.4 million in the prior quarter and a benefit of $588000 in second quarter 2019.
The current quarter tax expense was primarily due to profitability in our international operations as the deferred tax benefits generated by our domestic operations continue to be offset by changes in our valuation allowance.
As a reminder, the significant tax benefit realized last quarter was primarily related to the passage of the cares Act in us partially offset with tax expense in our foreign operations as the deferred tax benefits generated by our domestic operations were offset by additional changes in the valuation.
In the allowance.
The tax benefit in the second quarter of last year was the result of provision to return adjustment that was related to the completion of a transfer pricing study, which was partially offset by tax expense related to pretax profitability.
GAAP net income for quarter, two of 2020 was $752000 compared to a net loss of $10 million in the prior quarter and a net income of $4 million for the second quarter of 2019.
Non-GAAP earnings for the second quarter of 2020 were $1.6 million as compared to a loss of $2.2 million in the prior quarter and net income of $5.9 million through the second quarter of 2019.
Earnings per share assuming dilution on a GAAP basis.
Two cents per share.
As compared to a loss of 21 cents per share last quarter and an earnings of eight cents per share in the second quarter of 2019.
Non-GAAP earnings per share assuming dilution for the second quarter of 2020 was four cents compared to a loss of five cents per share in the prior quarter and earnings of 12 cents per share in the second quarter of 2019.
Turning to the balance sheet unrestricted cash and marketable securities at the end of the quarter totaled $136.7 million after paying $4.3 million in dividends during the quarter.
For the quarter, we generated $1.7 million of cash from operations.
Net trade accounts receivable was $95.3 million at quarter end, resulting in a DSL of 67 days compared to 69 days in the prior quarter.
And 68 days at the end of the second quarter of 2019.
The variability in dsos quarter over quarter in year over year, mainly attributable to the timing of shipments during the quarter and the customer mix.
Net inventories were $106.1 million at the end of the second quarter compared to $99.5 million in Q1 of 2020 and $95.1 million at the end of Q2 in 2019.
The increase in our inventories for the quarter was related to strategic inventory buffer purchases.
That were designed to ensure supply continuity during the pandemic.
We do believe that we are positioned to maintain adequate liquidity in the current environment.
Looking ahead to the next quarter.
The possible effects of the ongoing coded 19 pandemic.
The ability of components supplies to align with customer demand the book and ship nature of our business the timing of revenue associated with large projects variability of order patterns and the customer base into which we sell as well as fluctuations in currency exchange rates.
May cause material differences between our expectations and actual results.
Having said that we do expect that our third quarter 2020 revenue will be in the range of $127 million to $137 million.
After considering the projected sales mix, we expected our third quarter gross margin on a non-GAAP basis will be about 41%.
We also expect non-GAAP operating expenses for the third quarter of 2020 will be in the range of $51 million to $52 million.
Finally, we anticipate that consolidated tax rate for the third quarter.
On a non-GAAP basis will be in the high twentys percentage rate.
We believe the significant factors impacting revenue and earnings realized in 2020.
We will be the following.
Continued component availability.
The macro spending environment for carriers and enterprises.
The ongoing effects of the code of 19 pandemic.
Variability of mix and revenue associated with project Rollouts.
The proportion of international Relet revenue relative to our total revenue.
Professional services activity levels, both domestically and internationally.
The adoption rate of our broadband access platforms.
Any potential changes in tax loss currency exchange rate movements and inventory fluctuations in our distribution channels.
Once again additional information is available at AD trends Investor Relations Web page at Www Dot AD trends Dot com.
Now I'll turn the call back over to Tom.
Thanks, very much bye bye.
All right May were at this point rented open up for any questions people may have.
Maybe you there.
Thanks.
Thank you at this time you would like to ask your question. Please press Star then the number one on your telephone keypad, we'll pause for a moment to compile the culinary roster.
Our first question comes from Rod Hall from Goldman Sachs. Your line is open.
Yes, hi, guys. Thanks for the question I guess problem I wanted to start off with.
Where we are in terms of demand for broadband I know that just naturally there's been an increase in demand does than we've heard other.
Vendors talked about.
Errors utilizing virtualized enhancements.
Initially just to provide service to people as they all go to work for enrollments along but then maybe people haven't seen as much equipment spending as they would expect received I'm. Just curious whether you think you've seen the bulk of the impact from all the for when you say for a bulk of.
Equipment spending might comment I've got a follow up to that.
Yes, I think theres them.
Ill try to segment in a way to the middle East away I think about it and see if it makes it so I think where carriers could move quickly.
We've seen an increase in probably the most.
Pronounced increase as a segment would probably be into tier three space, which has done.
Pretty well.
And we've seen significant fiber shipments into that area and automotive is because their size are able to move quicker or whatever but we've definitely seen that there on the larger carriers oral.
I think they move a little slower typically.
And other we've seen some I really wouldnt say I've seen the bulk of that a lot of that is still yet to come so.
[music].
Lot of them right now and Didnt did in different regions are affected differently.
But.
The larger ones seem to be putting together.
Infrastructure plans and starting to buy infrastructure towards a bigger upgrade but I wouldn't say, we leased from our perspective that we seen those larger carriers make a big move yet.
Instantly recently when you if you were to gas would you say they do it by the end of this year.
Or.
Well into next year to entity load for when some of their think carry that will deliver totaling one spring.
Yes, I think I honestly I think a lot of it will be next year. There are some plans right now and we are negotiating deals right now that would affect this year.
But those are just the negotiations as to whether or not that actually pull the trigger. This year. Some of that may weather has an impact of that as well, so whether or not they are able to actually do that.
I I will tell you there are discussions and kind of negotiations going on but I would still taking.
The majority of that is going to be next year.
Okay and then my follow up question I have for use on the Opex. The Opex died with.
Little bit below we'd expect that I'm. Just curious are you upticking actives measures to reduce opex or.
This is just sort of the natural flow of not having as much traveled big like that.
Now, we we've actually I mean travel has helped us on the Opex line, but we have been.
Moving towards a 50 million.
Goals towards the end at the end of this year.
For the last year, we it's about last year or so so it's really just on plan to what we have been targeting.
Okay, and you don't think you'll understand because of the travel that travels hedges continue.
I would like I wouldn't say that right now our 50 goal of their 50 going to the extent travel picks back up.
Then you'll see us continue to.
Keep things that will allow us to be around that 50 goal.
Okay alright, thank you.
Okay.
Your next question comes from the line of Michael Genovese with MKM partners.
Okay.
Great. Thanks.
Can you give us any examples yet where you had examples.
Or I guess, we do know of a couple of already but have you seen new examples about while way replacement opportunities can you talk about.
The way you're seeing there in terms of number of trials and where that goes we are regionally.
Yes, so it's Europe.
Yeah.
We've seen that and most pronounced in the UK and Germany.
We have.
Some of the customers that actually mentioned in my notes were actually rahway customers that have decided to move away.
There are.
There are.
Some large deals that you're right we've talked about in the past I think have been positively influenced by the move like I said, most notably in Germany in the UK.
Where there are plans being put in placing for instance in the UK their government mandates now too.
Limit.
A little they're called hostile vendor.
The equipment being installed in network and in some cases are actually pointing equipment now so.
It's all through Europe, less though in the us because there's just less of a footprint in the us it's not really happening in Latin America in any big places the Brazil. There is some where some of that really isn't as widespread as it is in Europe, because the dominance.
Hum.
Those vendors were pretty strong in Europe.
Okay great.
We cannot do share gains in in pawn.
Fiber to the home.
So I mean, you are those primarily coming in North America or are they in other regions as well and then I imagine they must you really only have two competitors is that is that right. I mean in those factors kind of share shifts in say North America, you up against two players or or is it a bigger group of players that have any meaningful share.
Fair in North America in more North America's fundamentally two players one of them Europe and one of us.
The European of course is a very very large.
Player.
So yes to hit there and then in Europe, It's really two players, but its two different players that as.
Wildly being one of those and then the European carriers will define European skews the vendor as well. So are there. She gave US a date for you already mentioned already happening in both in both regions.
Yes, without a doubt absolutely positively the numbers I showed you say because we only have it was the number that came out of the most recent delauro report.
That's moving up to that second place, which is still behind that Europeans vendor and.
What was a really solid new for us I mean picking up eight points and then I think it's a quarter is pretty strong.
Okay, and I, just two more quick wins.
So did that you'd given since you announced and Theyve talked a lot about it the British telecom win.
It sounds like from your comments that Thats shipments of maybe started but revenue so not starting to me and my reading that right.
Shipments have not started well let me put this material shipments have not started in fact in that case shipments have not even started at all so that is one that we expect to be shipping sometime in 2021 and the more pointed we expected to ship in the first half of 2021, we.
We are going to the lab process right now there will be.
Customer trials on will happen before.
Mass deployment, but that deployments should start in the first half of next year.
Okay, Great and then finally do you just do you have an estimate yet there is a meaningful yet I mean to talk about.
An estimate of overall recurring revenues and then you are for your comments and how that would trend in the future.
The percentage of recurring revenues in your business.
We haven't really broken that out yet so.
We're in the midst of looking that we've launched a lot of new software products and services over the last probably five months.
That are starting to take.
Fruition, but we have not Dick.
We will be looking at doing that but probably more towards next year than this year.
Thank you Tom.
Okay.
Your next question comes from the line of Rich Valera with Needham and company.
Thank you.
Tom you gave some pretty specific color on one of the I think tier one win that you referenced in your prepared remarks, the British Telecom one can you give us any color on the other two they should have the status and Dan and expected.
Timing of shipment.
Sure. Yes, my color was really meant to cover all three so all three are on track all three will be shipping.
The next year.
Honestly I believe all three will will.
The shipping for the first half of next year, but give me some legally because they're carriers.
But all three of them are going well and we're either we have shifts product.
To all three including software. So we're just going to lap process. We will have some announcements later on this quarter about customer deployments with some of those three but we.
Let's wait for those announcements, but those will be initial let's get it up and running and get it started they won't be the mass deployment piece can be fully operational operationalize until early next year.
So can you remind us what you said about the shoe that aren't British telecom like what you said publicly about then to date.
We have announced.
We announced the the European one we have not named the last one okay. So is it the tier one in the us.
And as we haven't announced that was for a sdx mosaic disaggregated.
Start deploying this across the entire footprint.
And it's 100% at this point really only provider that is going to doing that and that'll happen like I said get operationalize this year.
It is a customer that we've had before.
And we received its our wireless carrier, so that kind of narrowed it down.
Okay and Europe in Europe.
Longstanding relationship with a.
German.
Service provider that is moving forward with our disaggregated solution.
Got it okay. That's helpful. Thank you.
And then just on.
Fourth quarter, I know, you don't give guidance more than a quarter route but.
Wondering if you could comment sort of on if you think this year, you're going just the typical seasonality or maybe if some of these programs you're talking about which might hit might might change the profile of that.
I guess, maybe even defining typical seasonality is is it literally the last couple of years I've been flattish threeq to Fourq, you and historically I think it's been a down quarter, but any thoughts at all there would be would be helpful.
We usually is down in the single digits kind of like high single digits.
I really don't I don't think that these will move that needle. This year materially I think I mean, we're trying to get through the last as quickly as possible. There are there are I've mentioned before that there are some.
Negotiations going on for kind of.
To to actually help some of that helped some of the business get kick started in the fourth quarter for these carriers because they're wanting to get on with it but I think I think those are speculative at this point, so I wouldnt do anything other than to say, if nothing that look materially different than seasonality with the fact that there is.
Delayed coated.
Impact to everything and sometimes at the positive.
Impact sometime this negative impact biggest issue that we have today is not really demand. The biggest issue. We have today is making sure that we have enough supply so.
Where there are some still material shortages out there if you look at semiconductor industry right now it's on lead times are ridiculous and it's good it's not getting into looser. So thats probably is that that is the biggest hurdle. We have I think that Mike mentioned that in his comments as well I think it's really making sure that we have the materials.
Got it just one more if I could you mentioned it real strong growth in the fiber portion of your business I guess with quarter over quarter year over year can you give us a sense of what that is as a percent of either total revenue product revenue. However, you want to slice that.
Thank you we break that out.
Let me turn that over to Mike just the we have not reported that in the past, but the the fiber revenue piece is definitely growing faster than than any other piece as as copper is a little more spotty. So it tends to be up and down but over over time is declining and fiber is actually.
A larger than the copper piece of our of our business, but we haven't actually broke it down to percentages.
Got it thanks very much.
Yes, I mean, either Harry Mateer piece of our business is bigger than copper today than it is growing really strong.
And Thats before we actually start shipping any of the tier one awards that we have one.
It's not a bad place to be revenue.
Okay.
Yes, that's great. Thank you.
Your next question comes from a line of for Hot Nation with Cowen and company.
Thank you for taking my question.
Tom If you look at some of your.
Hello.
Customers the Usbs windstream that is about to virtual desktop C.
Frontiers further along as restructuring Centurylink reported last night.
Decent financial operating results.
Are you beginning to see any kind of Bob.
Evil stepped up engagement, especially with the more.
Restructure those service was a big restructuring are you seeing more engagement with debt can you provide some outlook as to how youre thinking about your business at these.
Providers in the U.S.
Yes, sure. So we had mentioned.
That actually tier twos in tier threes I believe we mentioned that my comments were actually strong in the quarter I think we actually did that in the press release actually last night.
And so thats speaks directly to what you're talking about so.
The carriers that have come through the process or are very much through that process seem to be opening backup and have set public goals on what they want to cover.
And they believe that.
Fiber deployment and broadband is their growth path and are executing on that and we're seeing a benefit from that.
I would expect that just to continue on from where we are right now.
In the tier one spaces, maybe a little bit more muted I think that they tend to.
I think that they have some really need real needs in their planning their process right now but.
The same same thing happening with at least a longstanding customers and have there and thats part of that whole award with a disaggregated piece.
And thats through their lab, so that they actually have a platform that they want to grow in the future.
So the direct to answer your question is yes that space has gotten better it was a business last year, but it's definitely gotten share.
Okay appreciate the color.
A related question is can you walk us through your customer concentration can you give us color on.
How much top.
Five customers accounted for the person as opposed to top 10 customers as a percentage of total revenue just trying to get a sense of how concentrated get revenue beat is well let me.
We don't really go through that detail, but I will tell you that.
Quarter ending quarter out over the last year or so.
[music].
What always shows up in that top five or six customers is.
Distribution channel.
To the RSP, so to the regional carriers, the tier twos, the tier threes in the municipalities really more tier threes in tier twos.
So that is always in that top.
Let's say copsix.
And so that piece of it and if you aggregate all of our distributors that sell into that market.
They are usually.
In the top two.
Got two or three largest yet or sometimes the largest so there is a big chunk of our business that has moved from.
Kind of like the Telmex's over the world to that distribution component, which sells to hundreds of our Sps that portion is very so that literally the biggest portion of our business usually is a very distributed piece. The problem is is any one of those carriers by themselves domain a lot.
When you aggregate them Theyre very large piece of our business.
Getting dealing with a sense on how big that is is that date.
30%, 40% of your over that and just I would say over that let me just let me say to be over 30% of our business.
Mike I'm looking like just to give them to not yes yep yep.
All right appreciate the answers I'll pass it.
Okay.
Your next question comes from the line of Tim Savageaux with Northland capital.
Hi, good morning.
We're going to drill down on the guidance a little bit.
For Q3.
In light of I guess, what you just mentioned, which I reprising kind of the rural broadband.
PCR barrier for higher distribution that we are 30% plus or revenue.
And also looking at their fiber performance.
In Q2, I think you mentioned it was up 21% sequentially. So as you look into Q3.
When would you expect trends in either one of those markets understanding they overlap.
Slower bit.
From because it seems like Youre a continuation of those trends were would drive you to the stronger levels are you seeing offset anywhere either on the copper side or internationally.
Thanks.
And.
So now also desk. Your first question I think that trend will continue.
I will.
I will tell you that unit that we exited the quarter with.
Strong backlog in.
Some of our trepidation has to do with just making sure that we have.
But we don't have any supply chain issues that would allow us to meet that demand.
Like I said, there's there's very strong demand in that in that segment of the business.
As far as offsets.
I don't I will tell you that some of our carriers are little more seasonal so usually.
The.
German our strong drilling carry usually slows down some in Q3.
And then the other big component that right now.
Yes.
Not quite the visibility is wet Australia will do whether that be up or down that's probably the only offsets.
And I can put some thank you everything else is up.
And in Australia, very well could be up but I think everything else.
If I could just follow up on that and it seems like Australia will be working from home for quite some time.
Time, so maybe that will be up.
But any sense you could size.
Any potential supply impact that you might be seeing.
In Q3.
Every time, we've gone into if we went into this quarter. It looks big Amendment Whittle it down and I would say the same things is here today I mean, it's.
I don't actually.
Right now what's happening is people give you dates and then they try to be today to make it they give your terrible and then they try to come in at and improve on that as a.
The difficult.
Supply environment that in I think thats going to be the same case here. So whatever I gave you would not be correct.
I would just tell you we're working through we've worked through it every quarter. So far we've been able to keep.
All of our customers happy with what we've been able to deliver to them.
And is truly is just a there.
Okay.
Vendors that are just having.
Real capacity issues and they're trying to keep up we have we have enough capacity here to be able to manufacture.
Planning if that's not the issue, it's really just a matter of us making sure we get all the components.
Thank you.
Okay.
Your next question comes from the line George Notter with Jefferies.
Okay. Thanks, a lot guys, maybe just along those lines.
How much of the gross margin impact CCJR seats, because earlier component supply chain issues. This quarter Q2 in going forward in Q3 and I've got another question also.
Yes, it's probably a.
The biggest impact that we saw because we really don't see prices escalating there are some components, where we've had to buy and they are more expensive, but I would say that thats. The thats not that material apart I wouldn't call. It material, where we've seen the biggest impact is on freight where we've seen our spending afraid seminar impact on freight.
I know, we're paying about twice of what we're paying a year ago on freight.
Matt just has to do with the number of lanes that are open and the last minute kind of component shortages things coming through in us having to flattening. So it's it's not.
We typically like to do but so the biggest impact is on Fracing. My guess would be we're talking about a couple million dollars on Friday.
In a quarter that's right.
Got it a couple million dollars incrementally this quarter contingency gross margin. If that's okay, great and then materially off which is material for us on gross margin at this rate so the between one and two percentage points.
Okay.
Great.
[music].
And then is high and then looking forward for Q3 I.
Created with do you think that would be the same level or what do you think that might abate is that does that can be with us for the rest of the year, what's the perception.
My guess will be the b with us for the rest of this year.
Just it's just really hasnt eased up and like I said, it's not the entire supply chain optics have gotten better it's really silicon, where we're seeing biggest issue in.
[music].
Yes, my senses is going to be that way through the rest this year.
Got it Okay, and then I also wanted to ask about.
Your opportunity in Europe PGT Rahway.
Yes, certainly your comments about the DG project in into it should telecom, but if you look elsewhere in Europe are you seeing opportunities also presenting themselves to displace Wally.
Obviously, you've got a big competitor Nokia over there.
Which is an income in a lot of those accounts, but how do you kind of fear positioning for that opportunity relative to Nokia.
Turn to ticking up incremental business. Thanks.
I feel really good about picking up incremental business. So in most of these carriers and by the way there are other tier ones I mean.
I don't want to Preannounced processes that are out there, but there right now software deals that are literally going to be decided this week with a major tier one there is.
Upon SGS EMG on deals that are going to be amounts by major tier ones over the next probably three to four months I just announced that I. Just mentioned on is that we had one a tier one account another tier one accounts in Europe that will be announced.
By us.
Lets say within I think September or so.
So I mean, the benefit that we have is most of these carriers.
Have two vendors.
And they don't want to single source.
So our ability to pick up share in relation to who is already a source within these accounts is very strong.
And.
As you probably understand this as well as anybody.
We're coming at it with a truly just aggregated.
The next generation.
Next year this.
Capable system with that SDN control orchestrated and everything and.
Thats, what they so they're going to make a choice.
It's really easy for them to say will now the time to do this and it works right, it's up and running so I think we have a good we have the best competitive product out there and at the same time, they don't want to single source. So we're just in a really good position in Europe, which is.
It's a good place to be like this it.
Okay, and then timing on those opportunities.
I guess, there's a lot of faster the probably play into this I mean, certainly the direct product rule may have an impact on.
People's ability to continue source, while way gear.
That would make this I think skew faster and then on the flip side.
Yes, I think in a lot of those situations you havent historically been a supplier in a lot of those types of accounts and so.
He takes longer to qualify a product training people and so on I mean, how do you kind of thinking about the Yin and Yang of timing.
I think so so what we did.
Sometime back as we started really we put a footprint in Europe.
Outside of what we normally did in Germany, and what we were trying to do is to grow revenue recognition within the community there that in the EU about our fiber expertise right. So we started winning a bunch of all met carriers and.
Those kind of helped us.
Yes credibility within the larger carriers and we did have a relationship for instance, with BT prior although we weren't showing them anything they have known as and we had been through a couple of processes with them.
I can't.
Really.
Over emphasize the importance of having.
DT.
NBT.
Buying our next generation desegregated solution as being a proof point for other carriers that are trying to figure out what to do.
They are the two you'd want to have.
And so not only do we have small carriers, but we have two very large carriers that are moving forward and have selected our our next generation system. So.
I think it's done widen as far as the timing.
I mentioned before that.
What were doing.
Doing I, just I want to make trista trouble here versus what we've already announced book we have is a very accelerated timeframe on getting these things operationally. So there's been no slowdown because of lack of knowledge in fact, the feedback that we've been.
Getting is has been very positive on on where we are positioned relative to what their historical experience has been.
Things are pretty simultaneously.
Great. Thanks very much.
Okay.
Your next question comes from the line of Paul Silverstein with Cowen.
Theres much suitors earlier solid july's foot.
Pursuit of your comment about rig cost associated with the two person sports or gross margin.
I just curious what what's to pursue gross margins as bill gross orders were injured we consistently the.
40 would result, those cases.
So Tom distribute down this quarter. So we're historical seasonality. The that's always been we will gross margin.
Why would.
Gross margin, what's keeping gross margins Ross is firing on that same why.
Suitable when these large wins.
Two day hope gross margin as I think there just as a solution Jewell Coke boozer pmall use to the junior to depress. Your further gross gross margins consistent with historical disparity gross margin profile between us.
I'll, let I'll, let Tom cover the new tier one wins, but I do want to say what I've said overtime is low to mid Fortys is the target not not necessarily mid so you might be modeling the long term target at 45, and I'm thinking it's somewhere around 40 to 42 and a half somewhere in there so.
It generally that's about where we then depending on mix. So we continue to work to improve gross margins through our cost basis, and a lot of different things, but at the same time, Theres always theres always price pressure and new wins and all the rest of that so we do continue to expect that will be in the low.
To mid so that's that's what I would keep in your mind.
In normal one or two issues with these new rules.
I wouldn't expect the new wins I'm not going to.
Hi.
[music].
I wouldn't expect the new wins to change the margin profile than where we are now I mean, when when we talk about mid Fortys that includes new wins.
It's just too Todd soft, but do you see being down your expertise with GE to be down third quarter consistent.
Why do you want that hope improved gross margin erosion us where would sort of a one quarter what to offset goods pushing grows more detail.
First of all of that DT itself, depending on if they're buying line cards, as you well aware or buying chassis or buying switch modules. The margin profile of those is dramatically different.
Unfortunately, but they are dramatically different.
So.
Although there may be lower revenue MDT, depending on the mix of what we're shipping that quarter. It can have.
A negative impact on gross margins.
We're also seeing strengthen CB so the the endpoints by the fiber network and those things tend to also have a lower margin than the rest of our access in AG business for fiber and we do have some cost reduce products that are coming out later this year, but without a doubt omontys or a drag on margin.
Yeah.
I appreciate pursuits with okay.
At this point I think we're at a time. So I appreciate everybody that joined US on the conference call today look forward to talk into next quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.