Q3 2020 Ciena Corp Earnings Call
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Ladies and gentlemen, thank you for standing by welcome to the Seattle, Let's go to Q3 2020, <unk> financial results Conference call. At this time, all participants' lines are in the listen only mode. After the speakers presentation, there will be a question and answer session.
Asked a question during this session, we'll need to press star one on your telephone.
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I would now like to hand, today's conference over to Greg Lang. Please go ahead.
Thank you Garen.
Good morning, and welcome to she had a 2020 fiscal third quarter here.
We've been talking todays call from batteries and not locations on call today, It's Gary Smith, President and CEO and give moylan CFO.
Got it would be elite, our senior Vice President of global products and services is also with us.
In addition to this call and the press release, we have posted to the Investor section of our website, an accompanying investor presentation that reflects this discussion as lawsuit highlighted items recorded.
Our comments today speak to our fiscal Q3, 2020 performance development type business and our view on current market diamonds, including with respect to call the 19 as well as Ralph.
Today's discussion includes certain adjusted or non-GAAP measures as James 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 contain 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 mark.
It's a good risk I believe from statements discussed today.
These statements should be viewed in the context of the risk factors detailed in our most recent tend to filing as well as in our upcoming 10-Q, which is required to be filed with the FCC by September 11th.
That could fall by that date.
He has no obligation to update the information discussed in this conference call whether as a result, the newer for major future events or otherwise.
As always we will allow for as much gionee as possible today. So ask that you limit yourselves to one question and one follow.
With that I'll turn call over to Garrett.
Thanks, Greg and good morning, everyone.
Today, we delivered outstanding third quarter results across the board.
Similar to last quarter.
Performance in Q3 demonstrates that our strategy.
Focused on innovation leadership diversification and global scale.
That's enabled us to manage well through the challenges.
Current environment.
The C M a team as being a key elements of outperformance and businesses as we know are all about people.
That focus resilience and drive to innovate and serve our customers is unrivaled in the industry.
I remain incredibly proud about global workforce and that collective efforts, including that continued volunteerism and charitable activities.
Notwithstanding a strong quarterly performance from the resiliency of our business model, we are seeing negative effects of the pandemic.
Great So economic uncertainty weigh on our near term outlook.
We believe that this is being driven by an impact on the velocity and to some extent de prioritize they shouldn't have new business initiatives in general.
As well as them increasing customer caution on budget decisions on the timing of span, namely with service providers.
They are in turn beginning to feel the negative effects from large segments of their enterprise business.
As we said last quarter, despite the favorable increasing bandwidth requirements. We are not immune to these dynamics as they continue to play out in the market.
We will provide more color on perspective, so on this momentarily.
Firstly I'd like to discuss the key performance metrics enough food quarter and provide a few highlights from across the business that really emphasize the inherent resilience and competitive strengths of our business.
So far this year, we believe we've taken an additional one plus the sense of global market share.
And I would stress. The this is largely without the benefit of an increasing number of significant strategic design wins that we haven't yet been able to monetize given the current client ending financial performance in Q3, we had a great revenue quarter and our gross margin Opex management and operating margin, we're all very strong.
In fact better than expected.
Indeed, our adjusted operating margin exceeded 22%.
And I think this really demonstrates the differentiated operating leverage in our business model that we've created.
And we had excellent cash flow, finishing the quarter with approximately 1.2 billion in cash.
Outperformance this quarter also reinforced our innovation leadership and strong competitive position in critical areas of the network.
Our latest generation modem Wavelogic fire remains the only 800 gig solution available in the market and it's been volume production today.
We're not just sampling or Trialing this leading technology, we're actually shipping it for commercial deployments with a range of customers, including service providers Web scale is sub sea operators and research and education institutions.
In fact, we've already secured.
Good roughly 50 design wins for Wavelogic five extreme and this is a rate faster than previous generations.
As the networks today already been before for a step function in capacity to support demand.
And just over three months of coverage will availability, we shipped more than 1000, wavelogic five coherent modems to almost 40 customers around the globe with several of those networks already carrying life traffic.
I think this is a strong testament to our innovation leadership and clear validation of our ability to execute and deliver against aggressive techniques.
Knowledge, you Roadmaps supported by a very robust supply chain.
In addition to our market leading optical performance, we had several new wins in Q3 for our packet business. We now have more than a dozen customers for our adaptive IP solutions, including Telefonica, UK and SK Telink.
Which we announced in Q3 and this is amongst additional tier one service providers, who value to our automated open and lean approach to IP architectures.
And of course, we also continued to see strengths with existing customers of our packet portfolio like 18 TV.
On the Blue Planet side in Q3, we delivered on our strategic mobile transformation in the Asia Pacific region secured significant upside to the overall market.
Secular demand drivers for connectivity, obviously remains very much intact as network traffic grows and the adoption of cloud architectures continues apace.
So the fundamentals of our business are absolutely unchanged as we look to the future.
Nevertheless, as I alluded to in my opening remarks late in the fiscal third quarter, we began to see some of the effects of Koby had 19 manifest in our business to a greater degree than anticipated as well as increased economic uncertainty.
Specifically, we began to experience a meaningful slowdown in orders on a softening of our outlook.
I would stress that decline is broad based across our service providers customers globally.
Who spend now appears to have been somewhat frontend loaded in the calendar year, resulting in lower orders in our third quarter from a number of our large customers in this segment.
We believe the softness in our order flow now reduced visibility is the result of a couple of customer related dynamics.
Firstly cobot 19 continues to have an adverse impact on the velocity of business in general and particularly new business initiatives.
Limitation on physical access at hours and our technology partner sites continue to create challenges for executing on some network projects that we've already won.
And generally then this uncertain environment customer's ability and willingness to move forward with new business initiatives is constrained.
In fact, the best evidence for this dynamic is evident in our recent gross margin performance, which reflects a larger percentage of revenue from existing businesses versus from new design wins and early life in projects, which tend to carry somewhat lower margins.
The second dynamic is customers have grown more cautious about the near term outlook for their businesses and are beginning to exercise greater restraint in respect to their capex spend.
This is particularly evident without service provider and MSO customers at certain large segments of their enterprise businesses are being negatively impacted by the pandemic and economic uncertainties.
Overall, I would say that customers are running their networks hotter and they are carefully prioritizing where and when to AD network capabilities.
And they proven their ability to do this for extended periods of time as we've seen before with previous economic conditions that are challenging.
Conversely, with our web scale customers the eurs pretty much so far played out as we expected directionally with some co.
Oh, good related reduction in spending.
Specifically in fiscal 2020 as expected one of our large web scale customers reduced its optical.
Textural when we had one of the major player is there is new to Sienna.
We now believe that overall optical spend growth in this web scale segment will be flat to low single digits for this year versus the 7% to 10% that was expected at the beginning of.
Given the year.
And I would stress that our competitive position remained strong in this key vertical and we remain confident that we have gained share in all of the other accounts. Despite wild one large customer absorbing during the year.
Therefore over our market share continues to expand in this sector.
Well the strong diversity in our businesses generally enables us to manage through ebbs and flows in any one customer segment to a geography, the Brett the magnitude of co. Good 19 challenges and economic uncertainties are making get more difficult to do so.
As a result of the broader.
What are economic conditions and related market dynamics, we now expect overall market optical growth, excluding China will slow.
In fact, we now believe that the market will be roughly flat to down for this year.
And this dynamic is already being reflected in some of the latest industry analysts forecast and we expect that sentiment to continue.
Accordingly, we expect our orders and revenue to be adversely impacted for the next few quarters.
However, I would stress and that we believe that these challenges will be short term in nature.
Importantly, our competitive position is incredibly strong and we remain that clear market share leader.
We believe that on certain conditions will only reinforce and possibly accelerate a flight to quality in terms of vendor selection and the ability to maintain investment velocity.
And we have the scale focus and balance sheet to not only continue differentiating ourselves, but also managed through these conditions effectively.
And we intend to press down on that advantage to ensure both our own and customers long term success.
With that I'll hand over to Jim to talk you through our Q3 results and outlook.
Thanks, Gary Good morning, everyone.
We're pleased to report another strong quarterly performance with our Q3 results today. There has that continued execution of our strategy.
Total Q3 revenue was $977 million, which like last quarter reflects strength in our North America and EMEA regions.
Q3 was also remarkable with respect to customer diversification with non telco customers generating more than 43% of total weather.
This included direct Webscale revenue, 25% revenue or any and enterprise, 9% MSR rose 9%.
Adjusted gross margin was 48% this is higher than our estimate of current run rate gross margin.
I remind you that we said last quarter, we believe our current run rate margin is between 43 and 45% it's higher now because as Gary mentioned, our revenue mix in the quarter included a larger percentage of revenue from existing business as opposed to revenue from new design wins and early in life projects.
Which tend to carry lower gross margins.
Adjusted operating expense in the quarter was $251 million lower than expected, mainly due to continued lower travel costs as a result of covert 19.
With respect to profitability measures in Q3, we delivered adjusted operating margin of 22.4% adjusted net income of $166 million and adjusted EPS of one dollar and six cents above our expectations largely due to the higher gross margin.
In addition in Q3 cash from operations was very strong and $175 million.
Adjusted EBITDA in Q3 was 241 follow in the quarter of $116 million.
We ended the quarter with approximately $1.2 billion in cash and investments.
Our balance sheet remains a significant.
Okay competitive differentiator, particularly in the third environment, where financial strength and resiliency are critical.
And it affords us the flexibility to continue investing in our business for the long term.
Before I provide our guidance for the fourth quarter I'll reiterate gary's comments around long term secular demand drivers specifically that the underlying trend of growth and bandwidth demand remains intact and that our competitive position has never been stronger.
However, the length and breadth of the Coca 19 pandemic.
And its effect on the global economy remains uncertain and it is leading to more cautious customer spending behaviors and ongoing difficulties with operationalizing projects.
This resulted in Q3 orders coming in significantly below revenue something we have not seen for some time as softening of our near term outlook.
Taking all of that into account, including our revised view on market growth for this year of roughly flat to down we expect our Q4 performance will be as follows.
Revenue in the range of $800 million to $840 million.
Adjusted gross margin in a range of 46% to 48%.
And adjusted adjusted operating expense of approximately $255 million to $260 million.
Importantly, based on our year to date performance and these projections, we now expect to achieve approximately 17% adjusted operating margin for fiscal year 2020 above the revised target that we provided last quarter.
At this level of expected performance for fiscal 2020 reflects a combination of current market dynamics as well as deliberate initiatives. We've taken in several key areas of our company over the last few years to reduce expenses.
It also demonstrates the long term operating leverage potential of our business model.
I'll close by looking beyond Q4.
Based on what we see today and with our limited visibility we expect current market dynamics in particular, the challenges around restrained customer spending as well as business velocity will persist for a few quarters.
As always we remain focused on executing our strategy.
We have experience and a consistent track record of success set successfully managing the business through difficult times.
Today, we are an even stronger stronger and more diversified business then during this challenging macroeconomic environments and as a result of our fundamental strengths. We have the unique capability to continue investing in our business.
People in our products and in our customers with a focus on managing the business for the long term and continued market leadership.
And we expect even during this time of lower revenue to generate strong gross margins and profitability.
Carbon we will now take questions from the sell side analysts.
Thank you and your first question will come from the line Simon Leopold with Raymond James. Please go ahead with your question.
Great. Thank you very much.
So in terms of what's going on with these trends and what sounds like some absorption and weaker trends.
Is there a split in terms of what's going on us telcos versus international telcos and the web scale. It sounds meeting impression I have is that the issue is more acute with us telco and cable.
And are you seeing that behavior extending outside the U.S through into hyper scale. Thank you.
Thanks, Simon I would say that it's it's quite widespread both both domestically North America and internationally and it service provider, it's largely service providers in MSR goes.
So it's sort of across the board that and I think even the dynamic to that.
It's the fact that they can run their networks, a little hotter, but I also think in terms of the could economic caution.
They're beginning to see impact of large sections of their enterprise customers. You know have challenges and I think thats a consistent tissue not just in North America, but in Europe in and around the world. So there's some there's some logic as to why we'd see it's in international carriers as well, obviously some carriers are more X.
Those than others in this did various expense, but it is quite wide spread amongst the service providers on web scale I think it's much less so because I think it's a different different set the dynamics there and I think they largely performing as we use around building out data centers et cetera that has slowed particularly.
Internationally their ability to do that and yet.
You had one.
One web scale player in particular had a large absorption and.
Is running their network culture, as well, but we feel pretty good growth with all of via the web scale players. So I think it's less web scale more service provider Simon for sure.
Just.
One other thing on entered salmon is that we're seeing particular weakness in India and remember India's started the year with a view secular factors covert is it India, India has been shut down basically for several months. So India has been a clear effect on us.
Great and as the follow up but wanted to see if you could maybe offered us an update on.
And the prospect for winning business as a result for the long way backlash, whether it's because operators choose to move away from our way or why way simply can't build products.
This is something we've been hearing more about the U.S. government is taken further action. So we'd love to hear your latest on that topic. Thank you.
Yeah, I think thats generally a positive dynamic for us and as sort of tailwind that I think is going to stretch out over the next one to three years.
I would I would say that that dynamics going to take time. These are big strategic decisions by large.
Carriers.
And predominantly in Europe is what we're talking about we are engaged with those carriers. We have secured some of those design wins and I will roll out, but I think it is a one to three year dynamic and.
The operational challenges around those kinds of decisions are non trivial as well you know, they're very ensconced into those networks. The back office and it's not just an economic challenge for the carriers, it's a big operational challenge too so.
Yes, we think it's a very positive dynamic for us I think it plays out over a longer period of time than perhaps the.
The media might.
Lead one to believe but it is happening and we are we on securing wins as a result of that dynamic you know they are in our design wins, but they're not showing up in revenue yet.
Thank you very much.
Thanks Simon.
Your next question is from the line of George Notter with Jefferies. Please go ahead with your question.
Hi, guys. Thanks, very much I appreciate it.
Yes, the funny thing about this is which came through in earnings season of course.
Yeah companies on a on a June quarter and yeah, we didn't see this sort of guidance from companies like into naira.
Certain juniper is anything that I tend to comp with you guys in terms of service provider exposure.
Could you just talk about why your experience here seems to be quite a bit different relative to some business.
Yes, I'd say George that he will be hearing this from our competitors peers and even customers frankly.
We have a quarter that slightly off in terms of most of our peers competitors and customers and so.
Since this phenomenon really occurred late in our quarter and specifically in the last month as the quarter it might not have been evident to them at the time they did their earnings.
We believe this is very broad and everyone. We'll be talking about this over the next several quarters.
We have the kind of global stability that others don't quite have particularly with global service providers, which is where this focused and and so Patrick Thats why were seeing it a bit earlier than others.
So is it fair to say that sort of the Nicole the the pressure on orders really came in the month of August.
I would say that from an outlook point of view orders I mean Q3, we delivered a fabulous Q3 break in so it really didn't impact.
Q3, much but our outlook towards the end of.
The end of Q3, I think it it began to change yeah. Remember, we said that our orders in Q3 were meaningfully lower than our revenue, which is the first time that's happened a long long time.
So we definitely saw the orders effect in Q3, Didnt see a revenue effect in Q.
Got it Okay, which is their book to Bill ratio you could you could share with us.
We haven't given that but I'd say, our backlog did come down.
Okay. Okay, all right. Thanks, thanks very much.
Thank you.
Your next question is from the line of John Marchioni with Stifel. Please ask your question.
Thanks, very much I, just like the follow up a little bit on that that timing question that George just asked.
Gary is it a situation as your customers are starting to get their own operations back to normal and as you suggested they are starting to look at what their business prospects are that you think really drove the sort of sharp deceleration in what you're expecting for the second half of the year.
I think it's a combination of these factors John I think there's a certain extent with pull forwards you know you had a number of carriers.
Who were in a position to secure continuity of supply, placing those orders on we had a very strong Q O Q2 orders as we said something you've got that dynamic and a little bit of bleed off an absorption and I think you've got these other two elements that well STOVL roll into the logistical issues around co veritiv ease delay.
Little bit I think Thats fair I think they're looking at it insane then not prioritizing the new business initiatives sort of you know new route wins on new adoption of technology generally they're focused on how do we keep the network going on run a little bit hotter and I think there also bumping into you know Fran.
The realities of some of their enterprise customers really.
Suffering significantly in whole sectors.
Such as a retail and transportation hospitality, you know restaurants, and thats beginning to impact there.
Our perspective phone on outlook. So I think John it's all sort of three of those elements coming together if you will.
Okay, and then maybe as a follow up there Gary how do I think about.
Your expectation for the continued momentum in 800 gig adoption, obviously, you've gotten off to a stronger than expected starter were very strong start with wavelogic five in particularly extreme how do we you do you expect that to slow down as customers keep evaluating this or how should we think about that it if they're sort of.
Pulling back on some new projects. So thank you.
Strip, Scott do you want to take that.
That triggering.
Thanks, John.
It's interesting because as you as you pointed out.
Hey, so new design wins is actually.
His way pleasing to us and I sort of compare back to previous generation and we've got over 50 design wins in the interim back pocket now probably about twice the rate of design wins in the previous generation in time period.
But interestingly enough that I look at the volume shift against those it's actually probably little bit smaller than in the first season I think there.
Exactly a microcosm of of the broader picture that we're talking about.
You know, obviously monetizing new technology goes through a couple of phases, but simplify and others as selections days and then there is a operationalized stations day.
So I can phases everything from the competitive our enters the last big Master No trials.
Virtual negotiation contact et cetera, we've gotten through that at a great rate and.
Our Pts hasn't hasn't slowed down at all what has slowed down is the operate offer operationalization of this stuff is just sort of enough and a slightly lower set of a volume units that are shipped against the a bigger number of design win those design wins don't go away by the by monetize those going forward future. It's just.
It's slower than we would like.
Thanks, John Thank you.
Your next question is from the line of NEDA Marshall with Morgan Stanley. Please go ahead with your question.
Great. Thanks, a couple of questions for me one.
In one of your competitor is talking about one of the way is falling opportunity to kind of come to fruition and moved to open lines with them.
In Europe in particular, and just wanted to kind of get your attack that you know how do you.
Hi.
Our way opportunity kind of coming.
In over the next couple of years do you think that that could be the trigger that would complement to open line and then maybe second point you noted earlier in the year into your visibility with what scale customers is pretty high just a sense.
Clearly there has been a slowdown in international goal, but just how do you view your visibility with web scale customers.
Hello targets.
Thanks.
So when I take the first one millimeter.
And Scott feel free to add for this for answer the second piece I think it's unlikely to move to an open line system in Europe with the walk away. The wall way replacement is quite a complicated set of issues.
Around backoffice operational elements et cetera. So you know I think thats going to take a while to play out as I said, it's probably a one to three your opportunity we're already beginning to deploy it you know on a couple of those.
We believe we've won an architecture really I don't think thats going to creates any kind of shift to open line systems frankly.
I don't don't really see that Scotland, and whether you have any.
Just following up.
I would agree with that Gary I have no classes.
Huh.
From a technology perspective.
Okay housing our some of the less dealers because in the technology. The issue for the large European are already global global carriers as all the operational challenges of the new vendor whether that's just.
You know the.
Transponder systems or or close to system does it doesn't really change that dynamic and not the gating factor for actually switching off of Oklahoma.
On the second question later on the on the web scale pace, we have very good visibility with the web scale folks here, obviously, you've got less.
No less less customers that are more concentrated set of players.
You know and that's largely played out as we thought we do have a significant new design win with a new web scale player, which is new to CNN. We were always missing one of the large web scale players, which we've now added to our design wins and that'll start to roll out as we go as as we go through next year, we are pretty good visibility to there.
Demand dynamics Denny dynamic, we really saying there is a slight slowdown in the build out of data centers, which again is largely a logistical issue and largely outside of the outside of the U.S. to do that submarine cable provisioning et cetera, which is you know to be to be expected.
Okay. Thanks.
Your next question is from the line of Rod Hall with Goldman Sachs. Please go ahead with your question.
Hi, guys. Thanks to the question I wanted to focus in on the margins a little bit and.
I know Gary I am trying to piece together your commentary that you know the margins so much better the gross margins so much better because the new toward existing projects that will make sense to me.
Then.
The fact that you're talking about the the weakness developing late in the quarter and then you guys are guiding market down a little bit for next quarter I am just curious or we would you than they were at a new normal for more growth margin year due to that mix shift or does that makes it continue to play out over the next few quarters that.
New business, maybe a little bit weaker so disconnect curious what the trajectory of gross margin should be here and then my second question is on Opex I, just I get that you're getting and natural benefit in opex from the lack of travel but could you just talked maybe Jim a little bit about are you going to take any proactive opex control.
This year or do you really need to take measures because you're getting that natural opex impact from the Lockdowns is born thanks.
Thanks, a lot.
On the gross margin point.
We are and we expect to be.
In a range higher than our sort of run rate margin of 43% to 45% as long as our revenue remains at a slower pace and thats because our revenue is going to be at a slower pace because our mix of revenue consists mostly of existing business and not.
A lot of the new wins that we've not yet monetized or the new wins that we're going to get once the corona virus effects on the business Ameliorates. So yes, our gross margin is likely to be above our run rate margin for the next several quarters.
We do think that once we get passed this because again, we said it's a few quarters, we will be back in the business of monetizing new wins and winning new business and we think that our margin will trend toward that 43% to 45% that's our view today.
On Opex, what I would say is that we're actually quite a bit below our opex expectation for this year, mainly due to travel and some other things that drove it has affected and our ability to get things done.
Actually when we go into next year, we intend to invest in our business significantly we think that it's the right thing to do strategically.
We believe that we can attack a number of new markets and architectures with the things that we're bringing to market in our innovation machine and so we don't intend to reduce our kept our opex binding significant amount of course, we're going to be trending around the edges sure, but not in any meaningful.
Right.
The other thing that add broad around that is that.
During the course of the last two to three years because of the last two to three years.
We have significantly.
Improved our operating efficiencies from an expense point of view when we've done that during a very deliberate move too.
Optimize our operating expenses, which we basically have reduced consistently during the last two to three years, which has helped you know produce the bottom line performance that we've got and I. Thank you know what just emphasize what Jim said earlier around profitability.
And I think it talks to a the strength of our overall business model and what we've done and to our competitive position that even during this.
Reduced outlook period, we will still be profitable.
As a business and we will still generate cash. So I think much says a lot for the strength of both the business model and our competitive position.
Okay. Thanks, I guess I was assuming that.
On the gross margin I was assuming that.
There ought to be trajectory continued trajectory upward or it seems like there might be a mix shift continuing to be things don't all always happen overnight, so, but it sounds like you're saying that due to that mix shift and now we'll stay at that level for the foreseeable future I guess is that the right with it.
Jim or or am I right to think that that I think I think we iterate on for give us the Jackie.
I think that what you just said is correct. Our margins are very high 48 cents and we don't expect every 6% to 48% range in Q4.
Remember your comment about not happening overnight remember we've enjoyed pretty good rosemarie.
Margins so far this year.
And part of that is in fact, the most of the large part of it was in Q2, because Q2 was affected by the lack of new wins so.
This hasn't happened overnight, it's been a function of moving through this year.
Thanks, Okay, alright, thanks, a lot that.
Thanks, Rob.
Next question is from the line of Paul Silverstein with Cowen.
Regarding holding off the growth low single digits.
Next or beyond.
Yes, I called it previously, though I did not make no.
Did not make the comment that we're going to hold our opex growth too.
So to below revenue.
Over the lack of travel and so we're done.
Next year as we returned to travel.
And.
But now it's.
Definitely our intent.
Five operating leverage.
By sorry.
In June the direct booking.
It's a low single digit you were able to put in place.
So think of it below revenue growth.
Well I don't have a number in place for 21, but I could just to sort of Modelers alone you.
Our opex this year is on.
Artificially low.
So the comparison between 20 and 21.
On Opex, there's got to be affected by the fact that 2020 Opex is artificially low it can go back and.
Compare over longer periods, absolutely, we're committed to that trend.
In the going back to the scan is through the softness youre referencing.
Right.
You know who will review instances for.
<unk>.
When it hit.
But was still seeing erosion.
Going week by week over the course last month.
And have over and above.
I think let me let me take maybe the last month alluded to it you know and I.
Seen operational challenges around on a co vid thing going the accumulate.
But the RFP Act.
Good day.
As continued.
We are winning more than our fair share on that if you look at the market growth that we've had in the first half of the you know we think we took.
Over a percentage point of view.
I'm not you know me.
Subject five we've got a number of.
We've not monetized, yet and we keep adding to those every quarter. So we are.
Winning more than our fair share of it so we're growing market share and we're growing importantly.
The design wins for the future wins against you know.
Some.
Inherent competitive when a very strong position from.
From a competitive point of view, Jim give and take the first pony.
So there Paul as we said a lot of fast we do a lot of forecasting and we do a weekly look at.
What we're seeing in the quarter and what I would say is over the past few weeks as weve rolled up our view for Q4 its bidding the range of the number that we're talking about.
Or siblings the company.
Doug.
With that have lined others sorry.
Thanks, Paul.
Your next question is from them.
The line of Tal Liani with Bank of America. Please go ahead.
Hi.
Two questions.
First.
I'm trying to understand that kind of weakness you're seeing.
How do you described is it project and it.
Just don't see.
Follow on orders or new projects or.
Are there any projects designed the middle and basically corporate <unk> carriers are customers are putting a hold on.
Right.
I think.
What's leading to it mainly Tal focused on new business initiative. So.
Aware.
You know either.
You know put stuff through their lab and go through all of that kind of process and into great into their back office.
Or doing large deployments, that's where they need to get out to you know multiple sites et cetera, we've seen a slowdown in those new business initiatives, we have not seen to your point, which you would see another you know certainly I've seen in other economic recessions, where things get cancelled projects get can.
Clearly put on ice we havent seen any of that.
It's more about just the velocity all new business initiatives in general slowing down.
And then I think what we've seen more recently and that's something we've pointed out you know in Q2 that we were seeing and the cumulative effect of that is certainly accelerated so it's more about new business.
No I think there's really a I'm folks aren't saying Hey, you know, we're not going to continue with this project absolutely none of that and as I said, you know we've seen plenty of RFP activity and planning its continued apax I think what we've seen in the last you know couple of months or so is just a you know increased scrutiny.
But you expand Tal and really I think not related to just caution on behalf of the service providers as they are being hit by issues with the end certain segments of their enterprise customers. So that's very much what were saying you know a now running the networks Horta you know the secular demand.
And and the RFP activity and the General planning has continued to play through which is why we think this is you know a relatively short term issue.
Also come back to India.
Oh vehicles, we've had several wins and India this year.
But India has been shutdown and the spend and ending the is very very low we gain share while way as being pushed out of India, but we're not seeing the activity to roll those projects out. So that's that's a significant piece of what's going on here.
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My second question is about gross margin. So I heard what you said about gross margin that is gonna be 46 to 48 and I want to take you back a little bit than to the history of the company.
In prior down cycles gross margin fluctuated in a great way and talking about.
45 to 37.
Thanks.
This time, you're talking about a slow down but not much impact on gross margin why why don't we see.
With lower volumes and maybe less project starts why don't we see greater impact on gross margin.
Well first of all where a lot bigger than we were during that time period and have a much broader set of customers. But secondly, this is an interesting situation town and that the effect of this pandemic is to slow down the rollout of new projects, which typically carry lower gross margin.
As you know we always have this.
Chassis versus line card effect and we always are very often have the fact that four to win new projects, we path to.
Make concessions to customers and we're not seeing those kinds of early in life projects roll through our revenue right now so it's.
It's just interesting.
We're seeing a improves gross margin in this period of lower revenue now and I think this persists for a while because we have expectations of a bit lower revenue. However.
Once you get back to normal and we're winning with we think our gross margin is going to come in little Im a little bit and as we've said our run rate margin is 43% to 45%. We believe it once we get back to this.
Fully incorporating new wins and two business.
Thank you.
Yeah.
Your next question is from the line of unmet Tarrant County with Evercore. Please go ahead.
With my question you guys are you stop who is well first of when I think about the softness you guys have been talking about.
Lighter side could you, perhaps maybe reflect and tell us when you see that happened historically, how long do the soft pockets typically last do you think.
And I guess I think about service providers wanting to run that network hotter without adding more bandwidth.
I would imagine they have a lot of flexible capacity lying around so when you talk the service providers are they would obviously be holding off these projects for a quarter or two or do you think they'll deployed for much longer than not.
But I haven't lived through.
A number of these downturns personally to it.
I think you know a couple of things I would say generally that you know carriers can run their networks also for longer than we all see what I expect I would say that but I would also say that you know each of these downturns have their own particular.
Dynamics.
And this one obviously is driven by the sort of pandemic and where you've also got this this rather.
You know unusual dynamic where capacity increases have happened is we're all working online. So it's a bit sort of counter intuitive and in many ways or paradox to it. So you know I think you look at all of those things you look at the planning activity as I talked about and that's why you know we're inclined to a view that.
Depending what happens with the global economy, all things being equal than we've seen amelioration of the impacts of co fade.
It's probably you know a few quarters you know given given those dynamics. So that's the sort of perspective around it.
Perfect. That's helpful. And then it doesn't follow quickly you had extremely impressive free capital generation this quarter sounds like it's sustainable it seemed like a one off thing how does your capital allocation process change given the something classes everything good we'll just see the end markets right now thank you.
Yes, I'd say that we've had strong cash flow really for a couple of years three years now going back to 2016 or something like that so that has continued and I believe that it will continue now with respect to capital allocation.
Essentially our first and most important capital allocation is to fund our business and invest our business in a way that will drive continued leadership and in fact expanded leadership that means spending on R&D for the projects that we need to spending to put enough people in the field that.
We can address customer needs and finally in the support functions. So that we make all that happened, though that's our top priority other than that in terms of capital, we do spend a little bit on the servers and lab equipment and that sort of thing.
But.
Even during this period of time of lower revenue, we're likely to generate excess cash that's our expectation and we have had a share repurchase program in place we did suspended.
In the middle of Q2, it just out of an abundance of caution if things continue I would expect we would do something like that going forward now by the way. We're also interested in doing acquisitions, but we haven't done anything big enough you know and alone.
That's today.
Thank you.
Your next question is from the line of Michael Genovese with MKM Partners. Please go ahead.
Hi, Thanks, very much on first just a clarification can you give us any color on her uptake hi.
Well like five.
Anymore wave, so who were in the quarter.
Yes.
Scott Scott has some good statistics on that and I'll fill in when.
He talks.
Scott you want to take that yes on the robot decline.
He's like we said we shipped over a thousand and in.
Order.
Extend beyond the quarter to today in the beginning of the general availability from pushing more towards the 2000 Mark today.
On a fortune respect those are split roughly equally between 6500 family in laser with them.
Did that answer your question Mike [noise].
Yes, that's correct.
You might like what my question is really I wonder.
The competition question on a more detailed basis on you had such a strong experience at 400 key leadership, but now some of the suppliers and industry you're talking about other vendors finally years late coming to market with with four Hundredg and then also given your your four hundredg experience.
Hello.
It does seem like one competitor has a pretty compelling 800, she offering in trials right. Now on can you just talking about the competitive environment going forward and you know how vigilant you are and I understand up until now it's been green, but looking forward 'cause it change and what are your thoughts on that.
Well I'd say, it's got you want to take up.
Yes, it is like.
We.
Design and the a.
Logic five cycle than you do that.
Your budgeting cycle and I think that the.
He was a competitive strength of the offer.
Mormons one thing and we're very comfortable with your performance, but it's also system capabilities that go along with that everything from the client Nick study support.
In structured we support the protection needs.
Propylene schemes.
The back office, Apiay et cetera, that's the number of product areas all of those dimensions, we feel very comfortable that we have a leadership position all of them are important in terms of customers Lucky criteria.
Michael I would add I would add the you know the best way of measuring that is obviously customer reaction and if you look at the design wins that we've had you know going forward that pretty significant and that takes away from you know a lot of from competitive.
You know incumbency, so we're putting new business you know against the incumbent incumbent suppliers and that's the best way of measuring that on those design wins will translate into into money as we as we go forward.
And just to emphasize about away there is no other 800 gig in market right.
And we don't know when there will be a competitive 800 gig in market.
I appreciate it.
Thanks, Michael.
Question is from the line of Alex Henderson with Needham. Please go ahead.
Thank you very much.
I was hoping you could talk a little bit about the split between.
The degree to which this is a pure macro event associated with weakness and outlook at the service providers versus.
The ability to do new installs the ability to do new cities deployments.
Clearly you had a lot of design wins, but those design wins are.
Stuck in the pipeline as result of visibility that you all deployment.
Conversely.
One could argue that yeah. The service provider weakness is somewhat independently.
So that ability to do installations. So can you split between those two and I I think the primary question everybody's dancing around here in terms of the question and I know you don't give guidance beyond one quarter, but.
Should we expect that you're hitting the low market in the October quarter or is there with that the in the January quarter, which is normally seasonally weaker quarter.
I would actually be down as well.
Alex Let me take the first part of that.
Right and I want to be clear around this whole new business paid first of all the answer your question, it's very difficult to discern you know this stuff happening in real time.
And it's really difficult to discern the precise delineation between.
Between how much of it is you know covanta logistics et cetera, and how much is economic caution.
I would say this end to end the velocity of new business, yes.
You know when we started out in actually it was largely logistics getting people to sites in just the speed of all of that stuff. That's still there I would say that eased a little bit.
The second element to it though is the prioritization within these carriers of these new business things that also you know I think that de prioritizing that to focus on running their networks hotter.
And you know various operational challenges that they've got so you know this too nuanced, but important elements gotta go in on that.
So it's not old just about Shia logistics, it's about their prioritization of those new business initiatives as well.
Second pieces, which is you know I would say more current.
So more of a recent phenomenon is just you know there their hesitancy to release budget and I think that's really largely by you know in talking with the executive certainly service providers that beginning to feel the impact.
Of exposure to certain enterprises elements, particularly you know things like hospitality retail transport all the things that we do know we now have been dramatically impacted that's beginning to show up to the service providers around the world and that's you know I think encouraging caution on their part.
So I.
You know I can't give you a 50% 50% answer Alex but it's it's a blend of those.
And with respect to yours. The second part of the question, Alex we're not making it any easier on the folks out there who have to do.
Numbers and consensus and all that sort of thing, but we're not in a position right now to talk about 2021, we.
We are as and as low visibility point as we've been in sometime we're just now.
Working up our 2021 plan and we'll give you as much information as we can frankly, when it's appropriate but for now we really can't talk about 2021.
Right well if I could just follow up one one last point on that same question could you just talked about what the book to bill might be below one again in the October quarter, because might have some visibility to that.
Well show it will be because our revenue was lower we're definitely have a much better book to bill and before that we had in Q3, I'll say that [laughter] Alan.
Thank you.
Thanks, Alex.
Your next question is from the line of Sunny Chatterji with JP Morgan. Please go ahead.
Hey, Thanks for taking my question I guess, if I can just talk with how should I be thinking about.
Oh, the artist slowdown Youre on unit.
Me too long, but no revenue model that you have 60, plus it's good for anyone friendly because it sounds like you wouldn't be falling short of that Olympics right you see appealing the wheel is.
Good morning, and what do you want you'd be below that dumb order, but anyway weve had goal weighed which has accident bandwidth needs. So maybe any got another on that how you're thinking with respect to anyone and what are we missing here.
Well, so maybe you know I.
I think obviously, we're not talking about longer term stop here.
Right now given what we're saying, but you know just remind in 2019, we grew over 15% if you're talking about revenues.
This year I think has been sort of unprecedented in terms of the.
The code that pace I think I am I think you know as you say, there's a paradox here in the bandwidth demands of a have gone up and that's why we think this will be a more and more short term.
You know.
Forecast.
At this stage as as I'm sure you depreciate.
We're only just finishing at Q3 anyway. We're one of the few companies that has continued to provide guidance both before.
Full year, and we have three your targets out there as well and obviously at some point, we'll we'll as we get to probably towards the end of the Euro. We will we will look to a advice on those well one thing we are confident about is given our fundamental strengths our market position.
And our technology are people that we're going to continue to gain market share as we go through the next couple of years or several years, because we think that.
We have the strategy and we have to package to do that and we intend to.
Thank you for me that will be last question that today, both into speaking with everyone. During the course today excess channel.
During the holiday season.
And thanks for joining us today.
Thank you. Thank you again, everyone for joining today's conference call. This concludes the conference you may now disconnect.
Okay.
Yes.
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