Q4 2020 Ciena Corp Earnings Call
Yeah.
Ladies and gentlemen, thank you for standing by and welcome to the C and not Q4 between 20 and event.
And this time all participants are in the listen only mode.
After the speakers presenting from there will be a question and and sufficient.
To ask the question during the session you will need to press star one on your telephone.
If you require any further assistance please press star zero.
I would now like 200 conference over to your Speaker today, Gregg Lampf, Vice President Investor Relations. Thank.
Thank you. Please go ahead Sir.
Thank you.
Good morning, and welcome to the plan is 2020 fiscal fourth quarter and year end review.
On the call today is Gary Smith, President and CEO, and Jim Wei and CFO Scott.
Scott and feeling our senior Vice President of global products and services is also with us for Q1 EPS.
In addition to this call and the press release, we posted to the investors section of our website and accompanying investor presentation that request the discussion as roster and highlighted items from the quarter and fiscal year.
Our comments today each of our recent performance our view on current market dynamics and drivers of our business as well as the discussion of our financial outlook the.
Today's discussion includes certain adjusted or non-GAAP measures of CNS results of operations.
A detailed reconciliation of these non-GAAP measures to our GAAP results is included in today's press release.
Before turning the call over to Gary I'll remind you that during this call will be made and certain forward looking statements.
Such statements, including our quarterly and annual guidance and commentary about the long term financial targets are based on current expectations forecasts and assumptions regarding the company and its markets, which include risks and uncertainties that could cause actual results to differ materially from the state of discuss today.
These statements should be viewed in the context of the risk factors detailed in our most recent tend to filing and and our upcoming 10-K filing. Our 10-K is required to be filed with the SEC by December 30, and we expect the file by that date.
CMS assumes no obligation to update the information discussed in this conference call, whether as result of new information future events or otherwise.
As always we will allow for as much value in a possible today. The last that you limit yourselves to one question and one follow with that I will turn the call over to Garrett.
Thanks, Gregg and good morning, everyone.
Our fourth quarter and fiscal year 2020 of results moving illustrate the extent of our market leadership and resiliency amongst the challenging market conditions, we detailed last quarter, which are largely unchanged and that is mainly the combination of of slowing the of business velocity and.
Increased the risk aversion amongst many global services providers is adversely impacting the short term deployments of new architectures and network builds.
Despite this dynamic today's results reflect the strength and durability of our business model.
Include and continued strong profitability with adjusted operating margin of 15.8% and Q4 and 17.6% for the full fiscal year, which exceeded our forecast.
We also delivered strong of free cash flow with our cash balance up a 130 million from last quarter to approximately 1.3 billion.
Simply put we remain and the best financial position and the industry and we are extremely confident about our leadership position and the market.
We could not deliver this performance without the entire see on the team.
Which continues to persevere and perform at the highest levels.
The Sienna family remains focused and dedicated even when facing new challenges associated with the remote working and other COVID-19 related conditions.
Im pleased that many of taking advantage of a wide range of new wellbeing programs benefits and resources to support them and their families at this time and.
I'm also extremely proud of the way they are giving back to our communities throughout the globe through the services and donations as part of EPS Sienna cash philanthropy program.
As you probably read we're also collaborating with customers and partners through our digital inclusion commitment on innovative programs that help address the digital divide and promote broader opportunities, particularly from the serve students.
Turning to the highlights from the fourth quarter and fiscal year and.
Non core business, we continue to see tremendous momentum for Wavelogic fine of extreme.
Through the end of Q4, we had orders from 65 customers around the world.
And supported by our extraordinary supply chain, we're approaching 5000 unit shipped since general availability.
Looking ahead, our wavelogic five non of program remains on track so not only will be ready to intercept the opportunity for pluggables when market adoption beginning sometime in the second half of 2021, we will benefit from the advantage of integrating wavelogic five non owing to our system.
And as well.
Our packet networking business had a solid year from an innovation perspective. However revenue in this segment was impacted and lastly by pandemic related customer concerns around enterprise business, particularly SMB and some carry managed services.
But as demand increases for services applications and content of the network edge the opportunities for this portfolio remained very strong.
Including advancements and IP optical convergence virtualization, fiveg and the edge cloud.
In fact during the full fiscal year, we secured a number of awards for this portfolio, including seven deployments of our new adaptive IP solution and we expect to monetize these wins as we move through fiscal 2021.
Within our global services segment and network transformation offering is becoming increasingly strategic to our customer engagements and.
And we were very recently suggests selected by two tier one service providers for the legacy to next generation network migration projects.
We also had a strong year of within our platforms software and services business, which benefited from increased adoption of Emcp, which is our new domain control software platform and including customers transitioning from our legacy NMS software as well as an uptake of advanced applications that are done.
Floyd on top of our MCP platform.
The number of customers adopting emcp grew by more than 300% and 2020, including large carriers, such as 80 and feed Deutsche Telecom and other tier one operators.
With respect of our Blue Planet software, which is primarily focused on service land management Enablements and delivery. We are seeing increased engagement with network operators, who are looking for ways to drive digital transformation through automation.
And in fact, Q4 was our best ever quarter for this business, including record bookings.
We also acquired the 11, new logos for Blue Planet and Q4 alone.
Including our recently announced strategic partnership with dish as well as the major win with the global systems integrator.
As for the overall market demand for connectivity continues and the adoption of cloud architectures has accelerated and network traffic continues to grow.
And while the pandemic has driven the shift in traffic patterns largely towards the edge and access points and corresponding customer spend and resources.
Customer engagements and RFP activity for our core business and Blue planet continues to be robust.
The fact, we are winning more than our fair share of new business, including several significant new strategic design wins during this time.
This competitive success gives us confidence that we will continue to take share despite near term challenges to monetize these wins within the current climate.
So as we look ahead to 2021, we have a clear action plan to execute on our proven strategy.
Focused on innovation leadership diversification and global scale.
This enables us to manage well through current conditions and it positions us to continue leading as the macro environment improves, which we expect to happen and the second half of 2021.
The strength of our business model also of allows us to continue investing strategically and our portfolio and go to market capabilities, even in the face of uncertain short term market conditions.
Specifically, we will strengthen our technology market leadership during the course of the year and core networks, particularly in DCIX submarine and long haul networks, which are obviously on the constant pressure to keep pace with ever growing bandwidth demand.
We will also make significant incremental investments to address opportunities and increase our addressable market and fast growing next generation Metro and access networks, specifically around expanding our IP and automation capabilities and.
And we'll also capitalize on the momentum we are seeing with Blue planet. The guide customers on the digital transformation journeys.
These investments as always are a deliberate strategy to extend our leadership position and enable us to continue to take share over the long term.
With that I'll turn it over to Jim.
Thanks, Gary Hello, everyone.
We delivered a solid Q4 performance, which was certainly impacted by the effects of the pandemic.
Total revenue in the quarter was $829 million Q4, adjusted gross margin was 49.5%.
In addition to a higher percentage of software sales in the quarter Q4, adjusted gross margin again reflects a high degree of pandemic related dynamics, specifically, we continue to see a quarterly revenue mix that is comprised of a larger percentage of existing business versus new design wins and.
Early in life projects, which tend to generate lower margins.
Adjusted operating expenses in the quarter with $279 million. This was higher than expected due to an acceleration of investments in certain aspects of our business, including and our people and infrastructure, which we expect to continue.
Q4, Opex also included higher than expected variable compensation tied in part to our strong profitability metrics in the quarter.
With respect to profitability measures and Q4, we delivered adjusted operating margin of 15.8% adjusted net income of $94 million and adjusted EPS of 60 cents per share.
In addition in Q4, our adjusted EBITDA was $154 million and cash from operations was $188 million.
With respect to flow performance for the full fiscal year annual revenue was 3.53 billion.
This reflects a strong contribution from non telco customers of a record 40% of total revenue in fiscal year 2000 up from approximately 37.5% in fiscal year 19.
Also includes solid performance with MSO customers growth with two of our major web scale customers and a very strong year in government.
While we saw significant quarterly variability as we move through the year, including a challenging operating environment and the second half orders slightly exceeded revenue for the full fiscal year.
In fact orders and eight BJ and EMEA and aggregate were up 9% year over year.
Orders and sub sea were also up 9% year over year.
Moving the profitability adjusted operating margin in fiscal 2020 was 17.6% and adjusted EPS was $2 and 90 vs.
And finally free cash flow for the year was $411 million, which represents 66% of adjusted operating income.
As Gary mentioned, we ended the year with approximately $1.3 billion and cash and investments our balance sheet remains a significant competitive differentiator, particularly in the current environment and rich financial strength and resiliency of our critical.
Our strong balance sheet and cash flow generation also affords us the flexibility to continue investing in our business for the long term, while returning capital to shareholders.
And so the last point, we will be reinstituting, our buyback program and the first quarter of 2021 and are currently targeting repurchases and the range of $150 million during fiscal 2021.
Turning now to guidance.
Given the uncertainty stemming from the pandemic and the resulting market and industry dynamics that we've described we are not in a position to provide specific three year financial targets at this term.
However, our long term financial goals remain unchanged, we plan to deliver additional operating leverage while growing faster than the market as we've proven our ability due to do over the years.
Setting aside the temporary challenges driven by covert today, we see no change in underlying secular demand for bandwidth and automation that drives our business.
As a result, we believe that as the impact of the pandemic ameliorates. The market is likely to return to the growth in the low to mid single digits range as we've seen for so many years. We also believe that we will continue to take share I want to emphasize here that this market view as really unsure.
Changed from our outlook pre code.
As Gary mentioned, we will continue to invest strategically in the business and we expect to grow our opex at a rate below that of revenue growth for the next three years in aggregate.
And the comment of our gross margin, we've talked a lot of our gross margin and the effects of the on gross margin of the revenue mix caused by the pandemic.
We have also said that we believe that our current run rate margin once our revenue returns to a more normal percentage of new business is between 43 and 45%.
The based on what we are seeing we now believe that our current run rate margin has increased a bit to the mid fortys.
From the point of long term guidance as visibility improves we will revisit issuing these long term financial targets.
With respect to fiscal 2021, we are providing our typical level of annual guidance. However.
However, it is important to consider the key assumptions that underlie our current outlook for the year.
Specifically, our 2021 guidance is predicated on a discernible improvement to the current industry and economic conditions, including.
A more balanced prioritization and our service provider customers of new architectures and deployments that enables us to operationalize and monetize the design wins, we have secured with several key accounts.
With that context and set of assumptions, we expect the girl, our annual revenue at or slightly faster than market and a range of zero to 3% with a stronger than typical second half as conditions improve.
We expect continued strong adjusted gross margin in fiscal 21 for the full year.
Specifically first half adjusted gross margin is likely to be in the mid to high Fortys range, driven by our revenue mix tilted heavily towards existing business.
As conditions improve and begin the operator operationalizing. The wins are second half adjusted gross margin will likely come down from those levels and return to the mid Fortys range by the end of the year.
We believe that our gross margin for the full fiscal year will be between 45 and 47%.
With respect to Opex, we are deliberately maintaining our investments in certain aspects of our business across people operations and product development to ensure that we strengthen our leadership position and emerge from the current environment with an even greater competitive advantage and we have today.
Accordingly, we expect adjusted operating expense the average between 270 and $275 million per quarter in fiscal year 21, although it will vary from quarter to quarter as it always does.
We are making these investment decisions because of the strength and durability of our business and operating model as well as our competence and future secular growth and bandwidth and demand for our products.
Finally, we expect adjusted growth, our operating margin and fiscal 21 and to be in a range of 15% to 16%.
Finally for our fiscal first quarter 2021 performance, we expect to deliver revenue and a range of $735 million to $765 million adjusted gross margin and the 47% to 49% range adjusted operating expenses of approximately 265 to 270 million.
$1 and we expect our adjusted tax rate will be between 20 and 21%.
In closing, we are performing well and we are very competent and the future fundamental demand drivers are strong and we are winning new business as the market leader positioning us for even greater performance overall conditions begin to improve in the second half of fiscal 2021.
Importantly, we are demonstrating that our scale focus and financial stability, our competitive advantages that enable us to meet our customers needs deliver strong profitability and return capital to shareholders.
With that operator, we'll now take questions from the sell side analysts.
Thank you.
I see remain down so ask the question Union Super Star one on your telephone.
So we try your question press the pound all cash.
The standby, while the compiled the Q on Eros now.
Your first question comes from Rod Hall of Goldman Sachs. Your line of.
Yes, hi, good morning, guys. Thanks for the question I wanted to start off I guess with the Opex question.
Since that came in a little bit higher and I know, Jim and you commented on that could you maybe dive into a little bit more detail on.
And why you're deciding to and invest now given it's such a tough environment and and where you're investing one low high to the people you're hiring and what is it that you're focused on from an investment of point of view.
And then secondly, I thought I would go back to the visibility you are talking about each two of next year being stronger than each one.
What is it the gives you confidence in that and why why don't we start the seats and recovery and Q2 I know people are beginning to talk about for instance, the accelerated fiveg investment by mid year. So could you talk a little bit about what and what sort of visibility you have or is this just the general assumption that income it starts to slow by the second.
GAAP and the carriers begin the investigating thanks.
Thanks, a lot and I assume your Opex question really has to do with 21 year good on the quarter.
Well no I was I was really asking about the quarter just reported Jem and the.
And as a little bit higher than usual and and you are talking about spending a little bit more it sounds like in the short term 21 is more or less and align with our forecast so I hope and actually there and it doesn't seem like your it seems like it's more of a short term first the couple of quarter phenomenon, we're looking and hearings and investing in that and it is not clear and what is your investing and exam.
Really.
Fair enough well a couple of things one is that.
We've come through this year and the situation in which all of our employees basically all are working from home and through the year, we have made investments in there.
Wellbeing comfort and computer connections personal computer connections and we accelerated that a bit in Q4, it's really mostly about making sure that our people can operate comfortably and productively and the home.
Also the variable comp.
That has to do with the fact that our profitability for the quarter came in a bit higher than we thought it was going to in the us.
Many of our people, including sales people haven't and elements of their variable comp that's tied to profitability. So that was another piece that came in.
So rod on the on the okay. Thanks.
On the second part of your question what gives us what gives us confidence I guess and the it and the uptick and and the second half I guess, it's the number of elements.
First of all I think what we're saying is that right now service providers generally and I love of very risk of us for any sort of new business rolling out new network and new architecture.
And running the networks hotter.
You know that's that's for sure and there also I think the to some extent you know focused on access points as opposed to the you know the metro and and the.
Core, which is which is understandable.
Things the gives us confidence of the wins that we've already had footwear robin.
Slower to monetize obviously, it's not binary we are.
Rolling out some of those but at a much slower.
Right and the assumption is.
The the cobot overhang ameliorates during the the course of the of the first half and then this pipeline that we've built up of new business activity.
Begins to kick in and because the secular demand you know as you say for things like Fiveg and all the rest of it it needs this network infrastructure to be to be successful and.
It's sort of I'd describe the environment right now with some of bifurcated from the new business wins and deployments definitely slower, but the actual activity of RF pays planning engagements and the rest of it of continued unabated and the set of my comments, we're winning more than our fair share of that is.
Good day as you'd expect given our low tech.
And all of your leadership and scale so.
As best we can tell the you know our businesses is normally fiscally second half low date, but I think it's kind of be a more extreme hockey stick. The this time around as best we can tell so those are the you know the underlying assumptions and the engagements with the customers that give us give us and confidence that we're going to see the.
Uptick and and the second half and sort of and.
Normal services the his resume kind of thing the other thing I would add to that the rod is that.
Many of the or much of our revenue in any given quarter.
The results from orders taken in the quarter before that and so we do expect a pickup and orders in our Q2, it just won't ever.
Evidenced itself in the form of higher revenue, we don't believe the until sort of Q3 Thats our view.
Okay, great. Thank you guys thats helpful. Thanks.
Thanks, Rob.
Your next question comes from charge non tire of Jefferies. LLC. Your line is open.
Hi, guys. Thanks, very much I guess I wanted to stay on the discussion of the of Opex and so if I look at it.
So look at your share.
Selling and marketing costs day.
They were quite a bit higher than they were for example, and the July quarter.
And your gross margins are down incrementally higher and then July not not tremendously higher so I guess.
I guess I'm wondering if it's just simply the profitability that's driving the increased compensation expense or if theres something else in there that's driving that I guess I'm getting at is and I'm wondering what bookings look like.
In the October quarter, obviously, I think you guys incentivize the your sales people based on bookings as well, but what's the narrative there. Thanks.
Our.
Bookings came in.
Close to what we expected maybe a little bit the.
Better.
But I'd say the us remember George that in the fourth quarter of the every year is when people start hearing their accelerators and sales people start hitting their accelerators and.
Okay, and Thats really what drives the.
The sales comp in the Q and Q4, we typically have higher sales comp in the fourth quarter as compared to other quarters as well, but it just that the the mechanics of the computation worked out that are of that our sales comp was quite a bit higher core.
Got it Okay Thats helpful. And then this is the right.
I guess, a follow up on that and you guys have of backlog number or should the wait for the 10-K for that.
Backlog and.
Just under 1.2 billion.
Non interest them.
For the product sales one point.
1.19.
That's right yes.
Yes, okay.
Perfect. Okay. Thanks, guys I appreciate it thank you very much.
Your next question comes from Simon and can you pause of frame on team the aligned.
Thanks for taking the question.
I wanted to see if maybe you could update us on your views of a long debated topic around white box competition.
And the optical space I know you've mentioned that you plan on having your pluggable products out later this year, but just want to get a sense of what you're seeing there, particularly how it affects your thoughts on your web scale business in fiscal 21, thanks, and I kind of follow.
Hey, Rob it's Scott.
The rest of the long the with the long debated the white box topic the.
So I put it this way rod.
I don't see white boxes, and the optical space as being the dominant deployment scenario.
Per day for lots of reasons, primarily which the economic system and drive it like it has and some of the other segments of the marketplace. Having said that there are there are places and the market that are.
Pursuing that and our play there is a couple of flow number one is still an end to end system play even in that scenario because people have to deploy software and line systems and and control. This.
But also.
The pluggable market.
There are very few folks I think are capable of delivering those high performance Pluggables and were being one of them. So the hub of we would have exposure to that market as well.
All of those dynamics I'd say are factored into our perspective, the 2021 and by the way I actually don't think it will be much of the much of the dynamic of 21 at all.
Great.
All right.
Sorry time and go up.
The the follow up hopefully it's pretty simple.
Your your top that traditional.
North American operator customers, ATP, and the rise and a bit of bit softer.
One topic I've heard the data and and I'd like your view is how their spending patterns with yen may or may not be related to spectrum auctions, and and where and going with it the what will be the factors that lead them to come back to more normal spending patterns. Thanks.
I think what you're seeing if you look at the sort of the large tier ones and we are a couple of the large tier ones and North America, and we're very kind of front end loaded and.
And the 20 some of the I think it was also about.
And our supply chain.
Provisioning and making sure. The you know they've got that when the overpaid first half and so to some extent, it's sort of normal ebbs and flows so that and I and dialogue with non engagement you know as we get into the 21 I think you are going to see a stronger second half for some of those large carriers and I and I.
I don't think thats, particularly affected by and this whole sort of notion of the of the auction cost I think what we're seeing is pretty steady visibility in terms of now you know we're engaged with these major carriers pretty much on all of the strategic platforms and across all of that business and.
We see it pretty steady and but with where the forecast for an uptick and in the second half.
Thank you.
Thanks Simon.
Your next question comes from me, Tom Shaw of from Morgan Stanley. Your line is open.
Great. Thanks.
And the spoke to kind of conservatism around the planning around some of your customers I just wanted to get a sense of.
Whether you the attempted to quantify maybe kind of international installation and talent is our kind of flow or lab testing, just as kind of a drag right now and and covet the.
Nick and drag and then I know, we kind of talked about last quarter that you sell thought the open the line systems or maybe a.
And we're not going to be a method of flyway replacement and just kind of getting and update as as far as what youre seeing as far as customers looking to to kind of replaced while Wayne and what timeline that could be thanks.
Okay, and I take the first part of that matter in terms of the what was saying from the from initial impact of of Colgate. It was really around just the velocity ban of installation, that's largely been ameliorated with various protocols and stuck and stuff people can get the sites et cetera.
But then what we saw was really a you know.
At the prioritization of new builds because they didnt want to risk mentioned.
Messing around with the network.
The time when you've got all this capacity going on it so really the I think they've made the decision to run and offer for a little bit.
It's not complete the binary I mean, we are deploying stuff. We are engaged in lab and as we figured out ways of doing that so that's what I said its sort of a feel somewhat bifurcate the theres lots of planning going on and activity and RFP activity and awards, but it's just not being deployed very quickly.
Play and we haven't really seen much of a change to that which and since last quarter relate.
And you look at the you know the the demand continues to build the engagement with them around the.
The New awards continues unabated, so thats pretty much of the dynamic we've got I mean, obviously, particularly in Europe more recently youre seeing more restrictions because of the covis pace, that's not particularly impacting us.
The somewhat perversely, because we're not actually doing a lot of those new business deployment. So you know we're.
We're not seeing too much impact from that if the if the answers you question.
Yes, that's helpful.
Okay. Scott the wanted the the line some of them into the maybe the open the line system concept and and an approach to actually.
Take us and next generation optics technology and run it over legacy system is not new.
You want to think about it.
And just curious form and we got into the submarine business by doing exactly that.
Overlaying line system, some of the doing that for a decade or close to a decade.
So that's not new as it applies to walk away and our comments and the path I think were that's not necessarily the trigger the trigger is twofold number one is just the lift of actually moving.
Operationally all of those circuits and maybe sitting on a while the network to.
Touching the customers touch and the back office of them is the heavy lift for our customers and that will take time. The other thing, though is their prioritization around moving away from low rate a lot of press around the ran network and that is getting the priority of that.
We see around the world as opposed to I'll say the core infrastructure the core optical infrastructure with possible exception. We are we are seeing some activity in India.
Got it okay. Thanks, guys.
And stuff.
Your next question comes from Paul Silverstein of Cowen and company Your line open.
[music].
Thanks, Jim can you truly and price environment are you seeing the change the better or worse and.
And on from it and what you're seeing from web scale customers, and particularly where consumer spending and of those project flow. This.
The impact from the longer term simple.
That was more than one question per hour.
But I'd say that the pricing environment really is is not meaningfully changed we do have.
One company, that's been a very significant price aggressor and.
The industry.
The company that.
The doesn't have the and 800 gig product and so I think the using price to try to maintain or organic market share in some cases.
So I'd say, it really hasn't changed very much.
But I think that at the margin we have improved our gross margin slightly because of all of the things that we're doing to take costs out of our systems.
And with respect to the web scale.
We still think the theres been this year is a bit lower than we ended the year. It's.
Difficulty in getting Davis, and his bills and all that sort of thing, but by and large we're doing well, we think essentially we retain share with them.
And.
With regard to the specifics about anywhere and customer we just can't do that but we do know that.
Certain web scale customers are experimenting with from.
The might say grow your own technology.
We think weve adequately capture the in our guidance for the year.
Appreciate it thanks.
Thanks, Thanks, Paul.
Your next question comes from John Marchetti of T cell equals the line.
Thanks, very much Tim.
In regards to your outlook for 21, you talk about the second half being better but I'm. Just curious if you know we've often seen the the first quarter still be the trough of the business and then it moves up from there and I am wondering if at least that seasonal pattern you expect to hold true as you're going through fiscal 21.
The pattern is going to be the same as it has always been our first quarter has always been the lighter and then we've strengthened as we move through the year second half has typically been better than the first half we expect that trend to be the same however, because we will have.
Meaningfully lower first half.
And maybe our trend line has been the difference between the first and second half will be more exaggerated this year.
In fact, if you just do the numbers the John and and through you have it's pretty obvious our second half is quite a bit higher than the first and.
Right and then maybe just on a different topic, Gary he and you're looking at you know a lot of the interest of the activity around the the new wave logic.
Chipset.
For the service providers, how much of that is true 800 gig focus versus improving performance of 400, and maybe even 100 or 200 gig systems in terms of increasing the distance and their efficiencies and whatnot I'm. Just curious how we think about that dynamic playing out as the as we're looking more and.
And the second half of next year and maybe even in the 22.
And Johnny.
The talk about this before.
The use 800 gig as.
As an easy handle for basically.
Twice the performance of the previous generation and that that performance of use in various different applications and actually is quite difficult for us the even keep keep keep track of.
How much of that is going to be dialed up at 800 gig versus 750 gig versus 700 gig centric as you can set the dial the work to wherever you needed to be to get the maximum.
The price per bit performance, that's the one of the value propositions around around the the technology I will say this and this may help sort of the surrogate true it up until now about two thirds of the the volume that Gary talked about has been on 6500 platform and third and wave services that may give you some idea of the split between service provider.
His and and lip sales not perfect, but that's that's an indicator.
Thanks very much.
And John.
Yes.
Your next question comes from Onyx Henderson of the time.
Line Opex. Thanks.
Thank you very much and I was hoping you could the focus a little bit on the India market.
And talk a little bit about what you're seeing there in terms of the.
They are reopening the implications of the China and the the Chinese.
Vendors all being banned the my estimate that the that's about.
Somewhere between 30, 35% market share opportunity in that geography, and you guys and the number two player.
Yeah, and if his foot Wally the GP and fiber home and to what extent the how long do you think it'll take for that the open up and then I know one of the vendors one of the service providers. There has the vast majority of their network on that how do the approach or how do you think they'll approach.
The replacement process.
And any timelines for for those decisions and the implications hitting your of PML would be extremely helpful. Thank you.
And Salix.
Yes.
The and.
India market of spend the you know obviously by the challenge in the last sort of 18 months of so you know initially from just the economic issues there and some of this issue around the taxation of the service providers et cetera, and that also done large buildings you know in the previous couple of years. So it's definitely was the low and then the impact of Kobe day. Thank you.
Moving disproportionately affected on the you know the rolling out the new network services.
It's been it's been a very down market for the last sort of couple of years.
At the low.
As you say the still the activity is continued around the new architectures and build outs because it's still got a long way to go I think specifically as it relates to walk away I mean, what we're seeing in India is.
If you compare and contrast, it to me and.
Europe, India moving much faster I think the two.
The two really mitigate the better exposure to walk away, which is about you know as you say roughly about 25% to 30% of the total infrastructure is with Wawa right now it's like anything you know.
It takes time, because you got the back office systems et cetera, but they seem to be approaching this more aggressively than the European carriers.
I think thats for sure and clear exactly how that will play out Alex but we've we've seen a couple of opportunities on the packet side, but we've won and the won't get deployed and till the second half of this year, but we are beginning to see that movement and we do see that as a tailwind for us, particularly.
We think that the effects of kind of it ameliorate the little in the first half and then the India market begins to move again and then there's really sort of you know two to three carriers and as you say deferred carriers very dependent on walk away and they all making plans to migrate away from that always takes longer than you think.
But were actually.
Quite quite bullish around the of the India market.
As we move forward into the second half of 21, and an intent to 22.
And again, just going back to the point.
It's obviously, a very large decision process for some of these vendors the.
Can you give us any sense of when you think the.
Wholesale network deployment decisions of might be made and that geography and and.
And taking that.
Ample of one customer with that 80% of the network of something of that sort on walkaway, obviously thats a huge decision and then the other piece of that as you have seen geo range from $20 billion.
What do you think the impact of that is thanks, and I'll I'll cede the floor.
I think.
I think we want to be clear and we've already seen some of that movement. We've won some of that business, we have not deploy the it yet, but we've seen some of the migration away from Wawa in India more aggressively than the exceeding it in Europe.
And even Jay and the cost of the last couple of quarters, we've won business.
Specifically around the world by replacement now always takes longer than you think of you ask me for a timeline, which one to three years before you really low play that's true, but it's moving and decisions are being made now by all of these carriers around the mitigating the our exposure to while away some have.
From our exposure than others.
But those decisions all day made and we are winning more than our fair share of the of.
Of of that business.
Thank you.
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Thanks, Alex.
Your next question comes from Amit Daryanani of Evercore ISI your line of.
Yes, thanks for taking my questions.
I guess the first one could you just maybe touch on how should we think about the web scale of growth in fiscal 21 versus the expectation I think overall of zero to 2% growth and then very specifically within that segment I think the last week talked about a new customer win in the web scale side, how fast ramping up in any way to dimensionalize how of that revenue stream could look like and 21.
Yes, So let me.
Gary.
The net loss the.
Gary there.
The fact that is around driving the datacenter expansion et cetera, just logistically mold and anything else.
We expect that.
We expect that will target.
The reason, we lost and Gary nightlife restart your answer I apologize.
I'm sorry.
I thought of as we lost and at the beginning you may want to restart your answer.
Okay, Yes.
Alright so.
If we look at both the web scale it start sort of the top.
We think the web scale market and 2021 will grow in total.
The old digit.
And we expect to maintain market share of 50% plus and grow basically in line with the market. This year. We've got is we've talked about it's largely dominated by four main players and we've now as we've said GAAP. The fourth player of which we are beginning to roll out and we are beginning to.
Deploy during the course of issue.
The.
It will be second half and we did have good designated the to that we'll see that ramp up and we'll see a pretty good and maintenance across all of the web scale players during the June 21.
Perfect and the kind of just follow up on the Pluggables discussion.
We havent all the or.
And just how do you how would you think about the revenue opportunity on the Pluggable side and then importantly, do you think the gross margin structure. There is any different horses, what it is for oral sienna. Thank you.
I guess I guess with the the revenue question first of all from.
From a 2021 perspective, we don't see this as being a significant market opportunity knowledge and I think per for anybody index is timing wise. The industry has moved to the right from the really be much of 2000 and event I think specifically pluggables in the coherent space.
Think of and three different ways. One is that very specific application around a very short reach metro slash cap is the high.
And that would be substitutive.
To the some of our the some of our dedicated transfer way of Sir.
Yes.
Think of it as coherent moving in the access which is and net new business for all co and players.
That will take some time that won't be the 2021 event and then I think of it as just the natural.
The miniaturized station.
Of the technology still and body in the system business.
And the most no different than the other previous generation of technology.
Margin wise.
No.
At the across those three things.
I don't see of a discernible difference in the margin versus the business. The revenue opportunity on that first application I talked about obviously of smaller because you're not selling the system yourself on the book.
The margin of Eisenberg.
From.
Hi.
The next question operator.
Your next question comes from Fahad Najam of MKM partners. Your line is open.
Thank you for taking my questions I have two questions first on the Opex outlook.
Seems like a pretty how the increase I suspect most of it is and R&D.
Does that suggest the maybe the step up in.
Cadence on your part, especially in light of.
Our checks of correct that the teachers going and like you announced the one terabit solution in the first half of 21.
Are you seeing and increasing design cadence in the industry overall.
And then on the question related to while the rates if I'm not mistake and it sounds like a 700 million to of $30 total revenue opportunity for you.
So why not give up.
Two or three year and outlook as to what your revenue growth would be potentially given the substantial opportunity for you.
Why don't you can't.
The letter.
The three year outlook on what what's the revenue trend could be.
Okay. Thank you Todd.
On the Opex situation the.
Just to remind everybody we've renovated 20 percentage and guided opex to the 270 to 70 from for the average for the quarters for 2020, that's exactly the number that we have posted this year has got the the year. So this is it's not really a step up.
Generally speaking, but it is a higher number than 20 of the 23 and one number is higher than 2020, because we didnt spend in some areas, including travel, including medical et cetera.
As the result of the pandemic. So generally speaking this is not a big the.
Increase its flat to what we expected for 2020.
We are stepping up some investments and the in R&D and non spending and other areas that mainly has to do with the.
And and access portion of our portfolio.
On the on the wall way comments.
Yes, and I understand that the it's getting a lot of geopolitical attention and a lot of publicity. The that this is not particularly I knew of dynamic to us. This has been and play for a couple of years now and.
And you know, it's going to take a while because first of all you've talked about and Europe, they've got massive amounts of installed base.
The integrated into all of their back office systems. These cash very expensive for these carriers to make those kinds of wholesale movies and the operational issues associated with that are of very large so even though you know many governments et cetera would like that to go faster. It's also caution.
All of the money and.
And so you factor of all of that and then the reality of yes, it's a great tailwind and will happen, we think over a period of time, but not as fast as folks will think possibly with the exception of India and as I talked about earlier and over.
Overall, you know your number around the share of that they have in Europe, and then India. You know is it half a billion 2 billion dollar total market something like that yes, but it will be felt that day and it's already kind of that into our forecast for the euro and has paid and for the last couple of years. So you know I don't think of the appropriate.
Because of that out and apart from which.
No, it's having visibility to that degree of granularity for years out you know is certainly challenging but it is the tailwind. It's a very positive dynamic for US we are winning business. There, we've just one from and India.
We've won some business in Europe that we are now deploying you look of people like Deutsche Telekom Vodafone group pace say those are existing customers that we are expanding with because of this dynamic and that is happening, but it's factored into our overall business now.
Thank you appreciate the answers thanks.
Thanks for the hub.
Your next question comes from Samik Chatterjee of JP Morgan Your line is open.
Hey, guys. Thanks for taking the question just flow.
The start up with non asking you about the and.
And the bulk of the Nick.
The investments, but as of some of the discussions on Fiveg and.
Being the.
The large income.
How should we be thinking about the opportunity per share gains over the next few years and.
And that part of the next book and helpful.
Subsequent to the yes, so the first of all our edge and access piece.
Our next generation Metro included in that.
Fiveg is one driver there and also the evolution of and enterprise business services and general is another driver.
I think we've talked in the past around our existing business is very strong and those areas.
The backhaul and and enterprise services, and North America and India.
And.
I'll, just add to distribute and the rest of world partially because historically.
And that's not playing and the in the IP space the investments that we're making there is really around.
And next generation IP capability with a with a ground up IP.
Wes integrated.
Integrated with our optics integrate it with our and multilayer domain controllers, and and a series of products optimized for things like Fiveg fiber deep.
The next generation sort of the aggregation networks for for for converged traffic all of those things.
We think of the is the is an opportunity that will show up and our metro and our packet business and we expect that to grow faster than our aggregate part of the business going forward now Fiveg, specifically I think what's going on right now is sort of augmentation on their existing architectures.
That will benefit us, where we have or the wireless backhaul installments today by our real opportunity longer term is as they start to look at Standalone arc.
Architectures and make architecture decisions that will allow us to expand our addressable market beyond our historical.
Install base of wireless backhaul.
Okay.
And if I can follow up with.
A question James.
And just if you can give us good the on you talked about investing.
And then.
Kind of flow.
If you're going to be the beach sort of.
But how long is that kind of.
And run for price because if I think about kind of where do you see where you feel out low can you and the 17.6 book.
Hi of and your long range.
Thanks book gross margins moderating, but you also kind of cool.
And opex leverage so the view or do we end up kind of three years out of the.
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Non-GAAP range.
The weighted of 16 to 17.
Without giving a specific number I would say that we would expect operating margin to increase from what we're going to deliver and 2021 and three of our brands. So yes, we said that we are going to grow opex.
More slowly than revenue will grow and the two years beyond 2021.
We did the indicates that our gross margins, we think our base rate of the gross margins of improved a little bit. So yes, we do expect our operating margin over the next couple of years to increase and the work, we're going to post and doing 21.
That's correct.
Your next question comes from Brian Cool of Rosenblatt Securities. Your line is open.
And thanks for the question.
As we look ahead of the impact from ZR on the DC segments, assuming we're able to retain share with your income of customers. There how should we think about the deflationary price per wavelength there seems like free.
Free disruptive impact to the pricing and when we think about that the flooding the market share a little bit. Thank you.
And Ryan Here's the here's how I think about of the if the drought sort of the the typical price erosion curve over the last decade and the optical space.
And and you think about the timing of CR and some of the price points that we sort of see and the marketplace. You get you can use and extrapolate the curve. It's the natural price erosion that we see from technology introduction.
So I don't see that being any different than we've had to deal with for years and this industry and the.
The sort of demonstrated.
You can survive and floors and that space if you actually.
Lead from a technology innovation and actually control.
The vertical integration of the.
Of your supply chain and Thats, what we intend to do on the are as well.
Okay. Upon just a quick follow up on the Q4.
The soft packet number there and how should we think about that in terms of the just lumpiness and customer concentration and kind of affecting the business or is there any kind of secular demand change and packet.
I think it was impacted by the sort of some of that business is around the edge delivering sort of Ethernet type services and I think that was impacted by.
So the the challenges and enterprise SMB and the carrying managed services piece and then probably a little bit of ebbs and flows we had a couple of and logic customers built out heavily in the first half.
Over the last year some of it a little bit around sort of Covance planning, you know pull forwards, but in the normal ebbs and flows to that but we expect to have a pretty good year. As we go forward now we've got a lot of the new technology, we developed the end market and as I said and some of that adaptive fight Gary We've got seven installations.
Now and and scaling so we actually think that packet business, we'll we'll do well do and 21.
And over the next day.
The faster than our base business, we believe.
Okay. Thanks, so much.
Thank you.
Yes. Your next question comes from Jim Suva of seed your line is open.
Thank you and I just have one question from when you mentioned in your prepared comments that the carriers are kind of sweating, the assets and the useful life and bandwidth.
You mentioned that you expect them to come back the spending on the email and metro and the core is there any risk that they continue to spend more on the edge and actually.
Continued sweat the assets in the met.
Metro and core a lot longer and the reason why asking maybe have some contracts in place or you have some you know and.
Green, it's where you actually have the visibility into where it will come back because of just more of the hope of continual bandwidth used the believe it's going to come back any comments on that that'd be great as good yes, Thats a good question, Jim and I think what you did see with the initial traffic flows go to the edge, obviously, the carriers and focused on.
I'm, just making sure that those access points, mainly our homes.
Sufficiently supported which is what the kind of and focused on the when we when we look at our model and I and our forecast for the year. It takes into account. The you know a number of things in terms of what we've got is visibility you know some of it is price project plans and engagements with our customers some of its orders its pipeline.
And its RFP activity its executive engagement with those customers around what the climbing to do and obviously, we've got pretty deep and the long term relationships with many of the service a low.
And service providers so.
We have pretty good visibility into that now you know the the.
The things we are there and noting there are.
What happens when Colgate and the and the the economy writ large the overriding assumption.
I think of all of this is the that begins to ameliorate during the course of the Euro and you know the dynamics around the traffic flows are such that they will be under a lot of pressure to build out the metro and and.
The core and it's it's not the they don't want to do that right now, it's not really even a budget issue.
It is really about interest risk aversion of and focus of messing with the network for those kind of upgrades and.
During this kind of time when they can't deploy all of the people and support that they would normally do for those kinds of activities. So.
It's really a combination of all of those elements and the visibility that we have the give us some confidence the.
As Jim said it flow right about that we will meet the see an uptick in orders as we go through Q2.
And that'll be a big hit the big testing test of that assumption, but based on what we see right now that looks like.
A pretty good assumption, we always have a stronger second half of them first it's just going to be more accentuated. We believe this year.
Thank you so much of the there and some clarification.
Thank you James.
Thanks, Doug how the drilling and when we appreciate your time and we look forward the following up and everybody today and over the next from days of and everyone well.
Well at least of remotely over the next few weeks and happy holidays happy new year everyone.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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