Q1 2021 Ciena Corp Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Ciena fiscal Q1, and 2021 financial results Conference call at the time, all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session sounds. Good question. During the session you will need to press star one on your telephone please.
The advice of today's conference is being reported.
Part of any further assistance. Please press star Zero I would now like the hand, the conference over to Mr. Gregg Lampf, Vice President of Investor Relations. Please go ahead.
Thank you Sharon.
Good morning, and welcome to the end of 'twenty 'twenty, one fiscal first quarter results conference call.
On the call today, and it's Gary Smith.
And CEO and Jim Moylan, CFO, Scott Mcfeely, our senior Vice President of global products and services is also with us for Q&A.
In addition to this call and the press release, we have posted to the investors section of our website and the accompanying investor presentation that reflects the discussion as well of certain highlighted items from the quarter.
Our comments today speak to our recent performance point.
Our view on current market dynamics and drivers of our business as well as the succession of our financial outlook.
Today's discussion includes certain adjusted or non-GAAP measures of Cemig results of operations and.
A detailed reconciliation of these non-GAAP interest to our GAAP results is included in today's press release.
Before turning the call over to Gary all of you that during this call, we'll be making certain forward looking statements such statements, including our quarterly and annual guidance discussion of market opportunities and commentary about the impact of COVID-19, and the business and our and results are based on current expectations forecasts and assumptions regarding.
And the company and its markets, which is the risks and uncertainties the SKU.
Cause actual results to differ materially from the statements discussed today.
These statements should be viewed and the context of the risk factors detailed in our most recent 10-K filings and.
And our content and to filing which is required to be filed with the SEC by March of last night, we expect pop out of date.
He and assumes no obligation to update the information discussed in this conference call, whether as the result of new information future events or otherwise.
As always we will allow for as much Q&A as possible today. The last day, you limit yourself to one question and one follow up.
With that and turn the call over to Gary.
Thanks, Greg and good morning, everyone.
This morning, we reported solid revenue and strong profitability for our fiscal first quarter, including adjusted operating margin of nearly 15%.
This quarterly performance once again demonstrates the strength and durability of our business model, which enabled us to perform well and Q1. Despite continued challenging conditions due to COVID-19.
With these results and our fiscal 'twenty 'twenty, one is starting off essentially as we had anticipated including as we indicated during the Q3 'twenty earnings call in September the Pant.
<unk> related challenges would likely persist for a few quarters.
Specifically, we see continued operational caution and business philosophy challenges.
And really affecting prioritization by our service provider customers of new architectures and deployments.
And more generally tier one service providers, primarily in North America remained financially cautious.
However, we are seeing some early encouraging signs of improvement and fact orders in Q1 slightly exceeded revenue for the first time since the first half of 2020.
These indications all providing us increased confidence and a strong second half performance this year.
Achieving our annual revenue target requires of that performance and the second half of fiscal 2021 be stronger than our typical first half versus second half growth.
Obviously, the precise trajectory of the second half improvement is dependent upon the ongoing recovery and industry and economic conditions.
Specifically, the enabling continued growing order flow and building backlog as we move through the year.
We remain very confident and our competitive position and we continue to take share and winning more than our fair share of new business around the world.
Turning now to highlights from the first quarter at wave logic technology continues to lead the market.
The only generally available 800 gig capable platform and the market.
We secured 14, new customers and Q1, bringing our total wave logic five extreme customer count to 79.
And just over nine months of commercial availability, we have shipped to waive the logic <unk> coherent modem to more than 75 customers around the globe all of whom are actively deploying the technology in the networks.
In fact, the adoption rates of wave logic five extreme is impressive.
Just on available data it has been faster than the combined ramp of all competitive 600 G solutions that are and the market today.
Moving to packet networking, we recently renamed this portfolio of routing and switching.
This change, we think better aligns to the language used in the industry and by our customers and also reflects an increased strategic focus on IP technologies and our portfolio.
We continue to grow our customer engagements and this area, particularly given the unique advantages, we bring with our adaptive IP solution and the ability to address key use cases and areas like five <unk>, the internet of things and edge cloud.
And Q1, we secured our first private <unk> network, when using a $51 64 router for and building XO aggregation.
Revenue for Apple and planet automation software and services portfolio of increased 10% year over year and Q1 and we now.
Now count more than 200 customers worldwide.
With customer engagement continuing to expand it is very clear the blue planet can disrupt the status quo and deliver of software driven approach to digital transformation and service management and delivery.
Our fiscal first quarter was also strong with respect to diversification across customer segments and geographies.
Of particular note is the strength of our non telco business, which comprised nearly 40% of revenues in Q1.
This was led by our continued market leadership and web scale and in fact direct web scale revenue increased 25% year over year and represented more than 20% of total revenue in Q1.
And at this point and most of our large web scale customers are now deploying wave logic five extreme and addition to prior generations of wave logic.
Geographically EMEA performed well and Q1, increasing 20% year over year, and we continued to see encouraging signs of recovery from India.
Finally, our subsea business was also strong in the quarter at 9% of revenue and five new wins and the quarter, including the Southern Cross next cable as well as upgrades on two large international cable systems.
Turning to the broader environment.
And our fundamental drivers remain strong because demand for connectivity continues and the move towards cloud architectures has in fact accelerated.
Our strategy is well aligned to these market dynamics, and we continue to invest and our portfolio to address these key opportunities.
The specific dynamics related to COVID-19 have accelerated bandwidth consumption and core networks and <unk>.
While many customers are running these networks hotter right now they ultimately will need to be augmented with additional capacity to maintain performance.
And we are extremely well positioned to meet this demand given our market leadership and high performance optical platforms and systems.
Including plug of bowls.
The connection of content, the content and users to content, particularly in Dci submarine and long haul and regional networks.
COVID-19 dynamics of also driven our focus on network operator of investments and next generation Metro edge and access networks due to the distributed nature of how connectivity is now being consumed.
This presents an opportunity for addressable market expansion, we are making investments to expand our IP and automation capabilities as well as our talent area for this particular opportunity.
Digital transformation has also grown and importance for our largest customers from five G to content delivery to cloud applications customers are direct and capex towards automating and streamlining how they deliver and new services to reduce operational inefficiency and their back office operations.
<unk>.
Accordingly, we continue to invest and our blue planet business to build of market leadership position and deliver of software driven approach to digital transformation.
With these investments and focus we believe we are well positioned to take advantage of the current market opportunities and intersect longer term trends and transitions.
And doing that we believe that we will continue to drive strong financial performance over the long term with that I'll turn it over to Jim.
Thanks, Gary Good morning, everyone.
We performed as expected in Q1, marking a good start to fiscal 2021.
Total Q1 revenue was $757 million.
Adjusted gross margin and the quarter was again strong at 48%.
Adjusted operating expense and the quarter was $253 million lower than expected as certain projects and spend shifted out into future quarters.
With respect of profitability measures and Q1, and we delivered adjusted operating margin of 14, 6% adjusted net income of $81 $3 million.
And adjusted EPS of <unk> 52.
And.
In addition, and Q1 cash used in operations was $7 million consistent with our first fiscal quarter typically being a seasonally soft quarter for cash.
Adjusted EBITDA and Q1 was $134 million.
We ended the quarter with approximately one 3 billion and cash and investments.
Our balance sheet continues to be a differentiator that speaks to our long term strength and viability.
Particularly in the current environment.
It also offers us the flexibility to continue investing and our business for the long term as Gary described while returning capital to stockholders.
To that point as we reinstituted our share buyback plans during the quarter, we repurchased approximately 250000 shares for $13 million and Q1.
And since the program began we have repurchased six 1 million shares for a total of $242 million.
Turning now to our guidance as Gary mentioned, our business has performed largely as we expected within the current market conditions.
And we are seeing the initial encouraging signs we were anticipating by this time.
We are benefiting from the unique advantages of our deliberate strategy to drive innovation and diversification and global scale across our business.
From our 800 gig leadership to our growing software business to the agility of our supply chain, we are well positioned to continue successfully navigating challenging times.
Therefore, we continue to expect to grow our annual revenue in fiscal year, 'twenty, one and a range of zero to 3%.
This level of growth is predicated upon the same variables that we talked about last quarter and.
Our service providers and returning to more typical levels.
Achieving our annual revenue target also requires that our performance and the second half of fiscal 'twenty 'twenty, one and the stronger than our typical first half versus second half growth.
And as Gary touched on earlier that is dependent upon our continued improvement and order flow.
Our ability to build backlog through the year as well as successful supply chain execution against the orders necessary to achieve our second half plan.
With respect to Opex as I said earlier, our Q1 Opex came in much lighter than expected.
Certainly.
The infrastructure and R&D projects, we expected in Q1 shifted into future quarters of the fiscal year.
While we have not.
Both of these two factors, we expect our opex for the remaining three quarters of the year to average between 280 and $285 million.
With respect to adjusted operating margin for the fiscal year, we continue to expect it to be and a range of 15% to 16%.
Yes.
Turning to our second quarter 2021 performance, we expect to deliver.
Revenue and a range of $810 million to $840 million.
Adjusted gross margin and the 45% to 47% range.
And adjusted operating expense of approximately $280 million to $285 million.
Before we close out our prepared remarks I wanted to take a moment to again, thank the entire Sienna team for their continued passion and commitment during a challenging period.
And as because of our people and their resilience that we continued to perform well and to meet our customers' needs.
I also want the highlight progress on our digital inclusion commitment, which promotes digital inclusion through greater activity.
First the technology and digital scaling.
With the goal of expanding opportunities for 100000 understood underserved students and our global for the entities.
We recently launched a new and.
Innovative new programs with customers, including Verizon Spark, New Zealand and Bharti and we're excited about other digital inclusion initiatives on the horizon.
And closing the fundamental demand drivers of our business are strong we are very confident and our competitive position and we continue to perform well and delivering strong profitability and returning capital to shareholders.
We are encouraged by the initial signs of improvement and market conditions and are increasingly confident and our ability to deliver a strong second half performance this year.
With that Sharon we will now take questions from the sell side analysts.
If you would like to ask a question at this time. Please press Star then the number of one on your telephone keypad. If you would like to withdraw your question that's the plan.
First question comes from Rod Hall with Goldman Sachs.
Yes, hi, Thanks for the question I wanted to start off with a question on the on the guidance just the fact.
Stacked at the margin guidance down a little bit maybe you guys could dig into that.
Help us understand why that's happening and then I've got a follow up.
Yes, Rod rethink that this sort of good news because we are starting to see the rollout of some of the deals that we want and so it's really the little faster on some of the deals that we've had and the hopper for a while but have not been able to roll out for various reasons.
Is there any regional color you could give on that Jim is the India or what.
And what types of projects are you seeing rollout now.
It's really generally I mean, it's Europe, India.
The U S. It's around the world.
Okay.
Thanks for that and then on my follow up I wanted to.
And just ask competitively I know the Infinera has talked about a couple of 800 gig wins you guys are obviously of a whole lot more.
Are you seeing them and the market with 800 gig can you just talk a little bit about the 800 gig competitive environment as it stands right now.
Yes, hi, good morning.
As we said and the press release for the.
I think with this at the end of the quarter of $78 79 customer customer wins.
Since the end of the quarter Thats actually increased by the way.
<unk> I think of those of the 79 were brand new logos to Sienna so lots of a lot of momentum there.
Last I checked a few weeks ago that equated the something like 7500 units shipped to customers.
And so as far as I know, we are the only commercially available 800 gig.
Our solution and the marketplace.
And you can see it and the status of those statistics.
Yeah.
And you guys think that these are just lot of deployments and that these guys are talking about.
75 of our units a lot of a lot of luck.
So the other income.
And bettors I don't know you'd have to ask the amount of I should've been proud of that the mylan and comment on that.
Okay, Alright, great. Thank you.
Thanks Robin.
Next question comes from George Notter.
Please go ahead.
Hi, guys. Thanks, very much I guess I wanted to ask.
The supply chain dynamics, obviously, it's been.
More of an issue for many companies I think over the last few quarters are you guys, having issues with supply chain and.
Is that factored into your guidance for Q2, and the full year of any kind of color and you could give us would be great. Thanks.
Good morning, George.
So the first of all of the.
As of to thank everybody probably knows George was referring to specifically the subset of the supply chain that is related to the the semiconductor supply chain and ecosystem and the dynamics that we're seeing and there is very similar.
And the dynamics, we would've seen and other challenges and not too distant past on the supply chain and whether you look at <unk>.
Components of that high concentration and areas that were hit hard by the early days of the COVID-19 or not not too far before that.
The capacitors and resistors and pumps and power supplies et cetera.
And what.
No.
And for some of that sits and the sort of system vendor.
Part of the ecosystem like us, what's really important to be able to navigate those challenges as they come up is the design of the supply chain and.
And the dimensions of that but also the willingness and ability to invest in it and from our perspective, and we were very deliberate and terms of investing and resiliency and a bunch of different dimensions geographical and multi component supply strategies.
The inventory strategies throughout the supply chain, including proponent levels.
<unk> and distribution partner networks.
And the the.
And the confidence and our business and the scale and financial strength to invest in that and that in that ecosystem and network and that served us incredibly well and the past challenges, particularly on the recently through the Covid challenges and you didn't see us back.
Back off from our service level agreements to our customers or half the talk about it being and a significant headwind for us delivering to our financial plans. So you are supposed to your specific question with that context, we had no impact and our Q1 results the supply chain execution, and we expect note and the little impact and the immediate quarters and the future.
If that situation.
Asian persist for a long period of time, obviously, we're not immune to it and multi industry.
<unk>, but given the design and giving our continued investment and it and giving how it's served us and the past I'm extremely confident that and our segment will be best the class in terms of our ability to continue the server customers.
Great. Thanks, a lot guys.
Thank you.
Next question comes from Simon Leopold with Raymond James.
Thank you very much.
Two things first one is I just wanted to see if you could help us understand what you're assuming in your outlook as it regards to the tier one international carriers, particularly those in Japan.
And Germany, and then I've got a follow up.
And I think it does it does differ between those and Japan, the the working assumption.
From <unk> point of view is that continues to be sluggish from our perspective I think for the remainder of the year, that's a working assumption.
And India, we all see and increased activity.
Both in terms of beginning deployments that were held up because of Covid. That's beginning and also the award of.
New business there.
Primarily I would say driven by the desire to replace Huawei, we are seeing that being expedited and India and.
And we've won a number of those awards. So we're seeing good activity.
And in India, We're also seeing strength and in EMEA and service providers.
And to some extent and North America, what we're seeing is a bit of and amelioration of the caution around operational deployments as Jim noted.
The little perverse statistic, but we expect gross margins to go down slightly because theyre beginning to deploy the things that we've won.
And the last 18 months. So those are all actually.
Encouraging signs the Bill and then in Germany and.
And in Europe, we've had a number of wins that we are beginning to deploy.
Deploy again as I said, that's both with tier one mainly with tier one service providers, but also in Europe as the dynamic around a lot of the.
The wholesale players providing capacity for the web scale folks as well, including Germany.
I appreciate that and then just the follow up you did ramp rates North America I'm, assuming you did not have 10% customers in the quarter.
But that you expect some improvement in your April quarter from your historic comp.
Customers and maybe the reason for the caution is that all related to spectrum auctions and what they're paying or are there other issues at play here. Thank you.
Right.
No.
The only sensors and difficult to truly discern Simon.
Simon, but I think it's a combination of those things.
The amount of capital required to that just the general caution of the Covid environment financially and operationally, but we are seeing a little flooring out of that there are some signs for that and now that needs to continue for us to achieve our plan and the second half, but we are expecting a much better second half and part of.
And that is.
Tier one service providers in North America, beginning to.
Deploy some of their plans frankly, I would express it like that another way of saying this is.
Generally across our business, we expect Q1 to be the low point for the year.
Obviously, thank you.
And I would also add debt would not be surprising if we ended up the year with the one.
Possibly and 10% customers, because we do expect to come back and.
The tier one service providers.
Thank you.
Thanks, Tim.
Next question comes from meta Marshall with Morgan Stanley.
Okay, great. Thanks, and just wanted to spend the second on the Hyperscale customers and given that you're at early days of the deployments.
There any better visibility.
And Theyre, just trying to get their hands on kind of a new generation of product and then maybe second question you noted the private LTE.
Product and are you partnering with anybody.
The point of that.
Yes, just on the.
On the web scale generally obviously, we've got a number one market share and we've got a massive installed base.
And with the web scale players and all of the four major players now customers. The vendors. We said at the end of last year. The fourth one we've now secured so we've got the large market share there and you.
And see the strength of Q1, it was 20% directly of our business and a considerable amount of indirectly through other carriers around the world.
They are all now deploying wave logic five extreme and addition to the prior generations of wave logic, and we think we're extremely well positioned to grow with that market tough for us to really increase market share there given that and given the size of our share, but where we're very confident of growing with the market, which we think will.
And the mid single digits in 2021, I think the was some challenges I think certainly last year and bleeding into this year in terms of their ability to deploy a day.
Data centers and build around the world that very focused I think on ramping that up as best they can and so we do expect to see some growth this year with the web scale folks Scott Jones, again, and just sort of.
EMEA.
Added color and that one when we talk about the web scale customers and the big ones and all of them I think and our almost all of the we're certainly and multiple applications. So I think of the submarine.
Core networks their metro deployments, and even managed services to them through the service providers. So to Gary's point. They are deploying multiple generations of technology as they may turn on the new generations and one of those applications are a couple of to get started so thats why.
And you see us with <unk>.
Our large installed base and multiple generations of technology and there to your question on the on the ex Halloween and that particular, one and that was that was and over the next fall. So I was a direct sales by us to the customer there was obviously some work on it.
The integration and interoperability of but that was the direct sales.
Great. Thanks, guys.
Thank you.
Next question comes from Paul Silverstein with Cowen.
Thanks.
And the streets.
Worrying about and impacted plausible ZR and ZR plus for awhile and such.
And considering your thoughts.
And certainly what we're seeing obviously that's been pushed back some work boots, commenting and Jim what are you seeing in terms of the price environment for the largest of Nokia.
Well I would think would moderate.
Yes.
Are you seeing any improvement in price.
And let me call. Let me, let me try the plug of <unk> XR and a question first.
So and what we said last time was we.
We expect to see some potential early deployments of the application and that technology.
Later in 2021, which was quite a push later in time from what people probably with the proceeds that was going to be 12 months or so ago.
Our perspective hasn't changed on that so I think potentially some early get started deployments, but really material deployments starting in 2021.
For our play in there.
We're basing our product offer off of our way of logic five nano technology.
And again no change from what we said last time, there we expect the half generally available product.
And the first half of 'twenty, one and the program and is executing well on the comp.
And I'll ask maybe pass of the gym on the on the pricing environment and Scott.
Paul we're not really seeing any appreciable change and the pricing environment as of yet now we've seen announcements by Nokia that there.
The changing their segments theyre going to look at the profitability of each of those segments and we think thats the positive sign but it's really too early for that to be.
The sort of in the market yet no real change.
Scott with respect to your comments, please slide timeline.
In terms of the magnitude of of the impact of magnitude perspective threat.
Again, and so you can sort of what you heard from customers, both web scale and come through there.
Communications and response.
So if I look at it.
Short answer is no on a little bit.
The color on it if I look at.
The the ZR application and particular as it applies to potential <unk>.
Ci and Metro and campus, we have said in the past that and the fullness of time that might be a total market opportunity of $500 million on annual basis, our perspective and that Hasnt changed.
And by the way.
You articulated as a threat and I think it's also an opportunity because there are some non coherent technologies that serve that market today.
Of that moving into coherent as an opportunity for those that lead and coherent and I would say the same thing on the service provider side and as an opportunity on the access side not necessarily ZR, but the applicable technology is becoming more and as an opportunity.
Thanks, Paul.
Next question comes from John Marchetti with Stifel.
Thanks, very much Gary.
I was just wondering with the renaming of the packet networking business and and seeing some of the focus now on the edge of the network.
And with some of the investments you are talking about making there can you talk about particularly in Europe, where that's been a focus what youre seeing and Youre looking through the rest of this year and maybe a little further out and if you feel like you need some significant additional efforts, there and that portfolio and maybe even and the taxability of some M&A focus there.
Okay.
Let me try and and then Gary can add some color.
So the first of all.
And what we believe is the winning hand and that part of the network and.
And as.
And.
The combination of what we've called adaptive IP and sort of a next generation I think of it as within IP not necessarily burdened by.
The applications of our protocols of the.
The router that was built for the Internet 15 plus years ago.
Combined with the convergence of best in class optics, and intelligent photonic layer and the software automation tools that go along with that convergence in order to be able of operationalize that and the network. We think that is the architecture of the future and it is.
The long game and.
And we've been investing on that for a period of time now and Youre starting to see the products come to fruition from those investments both in our routing the software or sorry of running and switching portfolio, but also and our software assets.
The Blue plan and yes, but also in our and our domain controllers MCP.
So John just to reemphasize that this is not sort of obviously as Scott said sort of an epiphany to us I think we've been talking around this kind of convergence of key.
Holli for decades and the industry.
And I really do think of that opportunities presents and itself as the metro edge, particularly.
Evolves and we've been investing heavily and I think basically we have doubled the amount of of technical talent that we've had on this area and in the last couple of years.
And also invested heavily on the go to market side. We think we're very well placed we have and architecture that we think delivers a much more simplified and operationally better economic.
Solution, we think its very compelling we think we have all the elements to that to be successful obviously wouldn't.
And wouldn't rule out additional scale and technology and that space of core.
But right now we think we have a good path with the architecture and the investments that we've made.
Thank you very much.
The next question comes from Polyone with Bank of America.
Hi, guys.
Two questions first of all and probably I'm going to ask it for the next 25 years and he can give us and update on Huawei share replacement share gain.
And the.
The second one.
Both of you cautioned us enough about second half guidance that.
And I wanted to ask about.
The specifics of your guidance, meaning what are the project.
With what type of customers, maybe not the customer names, but the types of customers and types of projects that meet the materialize in order for you to hit the our second half guidance what is assumed.
The Gorky, what is assumed in the guidance.
Okay. Let me let me take the first part of that and then I'll hand off to Jim. So the question that you're going to ask me for the next 25 years.
So at the same kind of answer I think.
I think I would describe the major opportunity.
And with Huawei is really in Europe and that.
Again.
Your point about 25 years, probably.
Probably not that long, but what and the infrastructure business of this takes time, both time for decisions and time to operationalize.
And to get all of the back office and that it was of multi year program.
This has had a lot of focus for all the reasons that we know and the last sort of 18 months to two years. We saw signs of this before basically just and I would describe it more of around reducing the dependency such a large market share in Europe, and all facets of infrastructure and I think the carriers began to realize that Frank.
About three years ago, and you look at some of the wins, we've had with Deutsche Telekom with Vodafone etcetera.
And those wins I think where we're centered a long time ago and this dynamic I expect that to continue.
I'd also comment that with this on the EMEA side.
And whilst we've seen that and the trans mountain that opportunity is very much a.
And what tailwind for US I think the priority right now is on the ran side because I think that's the one that's got the.
And the particular.
Geopolitical focus.
And that's why I think this will be of multiyear element and we are winning more than our fair share of that.
As I mentioned sort of earlier.
On India, I think he is moving faster and all dimensions of that.
<unk> out and I think because of the relationships between.
Between the two countries and we.
We are seeing that being expedited and.
And at the beginning to be awarded and what.
We'll begin to rollout and that and that reflects the second point.
Some of the assumptions around the second half.
Uptick basically I think we're very confident that the second half of it is going to be a significant uptick to the first.
And if there are certain assumptions to meet the targets that are obviously going to continue and one is India continues to recover and I think we're pretty confident around that second element overall I would say is that the tier one service providers, most notably in North America begin to deploy some of the.
The plans that they are cautiously not deployed.
And we are beginning to see that so I would say a combination of service provider tier ones and North America Europe continues as it is and that we see this uptick in India Web scale I think we've got pretty good visibility to that I think theyre going to have a good year you saw.
And my comments around mid single digit growth and web scale, and we will grow at least with the market that Jim any other comments on the the specifics for yes.
The first thing I'd say is that we've now gone through one quarter of the year and things are developing as we expected we feel very confident about the second half of the year, but we didn't want to employ anybody is that.
All of the spending is at the levels that they need to be at.
In order to get to our numbers for the year that was that was why we repeated the variables put out at the beginning of the year and it's still the case with respect to how we get to those.
We do a lot of forecasting and Thats all bottoms up from our sales force.
And so that number of that set of numbers were talking too comes from sales force indications of what customers are saying, they're going to spend for the rest of the year as Gary said its tier one service providers around the world.
But I'd also say that the.
The floor of our backlog is still not where it needs to be.
To get to those numbers it will be we think as the orders start coming in at stronger rates, but we just wanted everyone to know that things have to continue as they have started to begin.
So Jim I have a just a follow up.
Is the is the carriers get frequencies and December that's the 100 gig in December.
And they deploy radios, assuming they're going to deploy the equipment, that's what the Ericsson and the saying theyre going to start before the time not after theyre getting the frequencies.
Where is your portion of the network and tens of timing, meaning is it before you put radios or is it. After you put radios. The you prepare the backbone optical before after and all of our routers portfolio. So can you just give us kind of the.
The understanding of a typical deployment, where you are timing wise, where you are in the process.
Tell the answer to your question is yes to all of the above.
And I'm not being cute.
And.
I think about it and some of the real World. Examples we've had of that we've had the carriers the build out in advance of that spectrum because of their building out converged metro, particularly the very mindful around putting capacity and the ability to go support that when they put it out there we've got others that are very high.
And the mouth with the perspective around getting capacity into that that spectrum as they deploy and so you've got all shades around that obviously there is a correlation and it's good news for us basically the <unk>.
More of a they deploy out there the more speed.
The faster we're going to require.
The fed capabilities. So generally it's a big positive, but we are seeing signs.
And it's not I.
I would say, it's not particularly from our perspective spectrum led to the stage.
And they had a number of plans to build out the got slowed down, but we're now seeing them and these of wins that we've had design wins that we have the man now beginning to deploy.
Now the some correlation to spectrum coming on and then leveraging non investment, but it's not it's not as simple as a direct line into all of that.
Got it thank you.
Thanks, Tom.
Comes from Alex Henderson with Needham.
Thank you very much.
I was hoping you could talk a little bit about.
And issue around the.
The timing.
And the cadence of the inventory.
Purchases, obviously, there are some constraints around some supplies.
On the inside of the coin year inventory increase.
And sequentially quite a bit and I was wondering.
Youre planning and bringing the inventory down or where the see the constraints that you're struggling with the.
Assisting and therefore anticipating continuing to build of inventory can you just talk about the direction of that.
Good morning, Alex.
So it really primarily two things driving the.
And the inventory dynamics that you pointed out one is.
It goes back to the second half of the year ramp that we talked about.
We have.
The significant bigger second half and first half and we are we are working for success and sort of priming the pump if you'd like to be able to deliver to the customers on on that ramps. That's number one and that is by far the bigger.
The bigger of the two dynamics of the second one is and I'll, just say our own and security of supply and so I talked about.
Having the confidence and our business and having and having the ability to invest and that supply chain. That's what youre seeing happen there in terms of the security of supply and it's not just the most recent semicon piece, but it's also the activities that we've done protect ourselves from from Nicole the dynamics that we've talked about and the path we do.
And our turns will improve.
Yes.
And as a function.
The more chassis and less the.
The line card and therefore because of the footprint though.
And then the second question I wanted to also really was around the mix of on the revenue guide.
Sequentially it looks to me.
And you probably wouldnt have a recovery and the service sequentially and therefore, the majority of the pressure and the quarters sort of want.
The product side can you talk a little bit about the paid between those two.
Going into the April quarter.
Thanks.
On the first question.
The.
The chart of the mixed dynamic is and really isn't really what's driving it.
Paul it's more it's more of just.
Prepping, the PREPA and the pump for a big.
A big uptick and the second half and the security of supply dynamics of Dr.
The.
On the second one Gary Yes, Alex I think as I think about the the <unk>.
Rest of the year I would make my commentary around the around the rest of the year and I think the overall trend that we're seeing.
Is the deployment of essentially scarring of the wins that we've had over the last year or even 18 months and as Jim said.
And that will.
And then.
Weigh on our on our gross margins, which is kind of a good news thing perversely and that that will get deployed and will now of gross margins improved overall and our baseline as we've said, but this fluctuation has really been about.
Not deploying the new business, which we're now seeing in terms of the mix between services and product.
Generally speaking the services for installation of low margin, which go with the investment and the product side.
Early days, you could express it to the chassis and cards, but.
It's getting a little fuzzy the Matt, but lower margin of the start of it and some of that is increased installation services as well, which we expect to see through the year, but that's all.
Contained within <unk> and.
And our guidance on the on the gross margins.
On the other thing I would say Alex is when you look at our services revenue very big chunk of over 50% of maintenance and so forth.
The deployment is not the big number for many of our customers.
Don't do the point.
The submarine customers as many of our non U S customers and.
And including in Europe.
The sequence is not tariff hotel and except deployment is going to come in at lower gross margins than maintenance of our most of our products as well.
Thank you.
Thanks, Alex.
Next question comes from Amit, Gary <unk> with Evercore.
Thank you for taking my question and you said.
Questions will be on the wet seal business, which did really well this quarter of and was up 20% and I'd love to understand how do you view of the wet seal business to the April fiscal 'twenty, one and the context of the aggregate growth the zero to 3% and then secondly.
What do you make the complicated environment today, and especially the Cisco Acacia deal formally done how does the panel also the environment of Sienna.
Hi, Matt in terms of web scale, yes, we had a very very good good quarter and we expect to have a good year overall on web scale.
I think they've had some challenges deploying.
And spend and up data centers around the world and the velocity that they generally would have liked and the last 12 or 18 months.
So based on the plans that we're seeing right now we would expect growth and the mid single digits and that space for the.
For the year we've.
We've got a very high market share the probably not going to grow that share, but we're certainly going to maintain it.
And we've got all of them now taking wave logic five extreme and addition to the prior generations and we.
We're engaged in a lot of the planning around the expansions both and all of their applications in terms of submarine Dci connectivity and in the metros as well so.
And I'm very very strong engagement until and the web scale and we think we're going to have a good year I think is even the potential for some of them to be a top 10 customer.
During the year that so thats the possibility of one or two of them. We will see how that goes but I think generally we expect the Goodyear and web scale.
And then with respect and the second question about Cisco and Acacia and remind everybody that we've been competing against Cisco and various parts of the network really for a long long time and they have been using Acacia technology for a while so this is not of a change in and of itself I.
I would say that the excitement and our space is the fact that all of the.
Architectural terminals of what's going on and the metro and and the edge and all of those things.
And our opportunities for us and we think that as Scott said earlier and I'm sure you want to add something to this we think that we have of winning hand, and there with the best optics and the business and increasing the capabilities.
The other thing I would add Jim is these net.
Architectures.
And Im play out of play out and our customers network and another important dimension of it is actually going to be the software capabilities.
The operationalized us and we think and.
We've been investing for a while and both organically and inorganically on that path and that's going to that's gone into.
And really important part of of the winning and as you said.
Thank you violence and all of the clarity.
Thanks for that.
Next question comes from Sami <unk> of Jpmorgan.
And your line is open.
The next question comes from James is that with Citi Research.
Thank you very much Gary and Jim and I'll ask both of my questions at the same time.
The first question is when you alluded to or specifically called out the opex kind of some push out.
Sometimes that happens because R&D for some of your key customers. They've asked you to change some of the specs on it or sometimes it's just internally at the company like CN, and maybe you're deploying and the ERP upgrade or system upgrades and you just decided to do it later of with Covid could you help us understand about why the Opex Scott.
The outlook of customer driven or was it more CNS driven and then my second question is as you.
And you definitely laid out the risks of the second half ramp when you look at the orders bookings and discussions with customers.
Is it aligned to that ramp looking pretty.
The probable or is it aligning to that ramp having incremental risk that you've kind of identified today. Thank you.
Hey, Jim I'll deal with the Opex question, and then Gary I think we'll deal with the second half with respect to our Opex Theres there were no customer push outs are.
Really any intentional push out by us our opex does have projects in it and the timing of those projects and the timing of which we can complete them and record them just moves around a little debt and so I don't think you should read anything into that.
The shift out except that it has shifted out and we are going to spend that money as I said, we haven't changed our opex plan for the year, we will spend the exact amount of.
The time and ours and money except that.
And sorry for the full year, except that we will be a little higher because of the weakness of the U S. Dollar.
Gary Yes on the on the.
The forecast for the for the second half I would say sort of contextually. This.
We've been running our business for the last few years going into each quarter with quite a large backlog quite a large relative backlog each quarter and.
So our ability to forecast over the last few years has been.
It's been pretty accurate and a large part of that is you've got the backlog and you've got the.
Pretty accurate forecast of when things are going to happen I think with Covid that has been disrupted for the reasons that we've talked about and I think of in the process.
Think of building building that back up again, and so it is a little more challenging for us which we've expressed.
The last year and as we came into this year.
As Jim also said things are beginning to roll out as we as we had anticipated when you think about it at a high level.
There is more capacity demands going into these networks that running the networks hotter. We've had a period of time, where there's been a general caution around not wanting to operationalize any additional capacity or changes to architecture and also some caution around financial spend.
No one has taken the budgets down no ones.
Stop the projects, but they are not spending of the velocity that they had.
And the planned and that's the period, where I think we're beginning to we're beginning to come out of but that.
And that adds to the uncertainty, but so far so good in terms of what we're seeing for the year.
We're very confident about predicting a substantial uptick and the second half of the year, our ability to be completely precise about that is really dependent on that.
That momentum continue and building up our orders and backlog, we have a very sophisticated forecast process, that's well tested and it combines as you would imagine backlog of detailed order over the forecasting by customers many of which of long term partners of ours, and we have very good visibility into.
And the project plans of things like submarine and some of these new metro of architecture. So that all gets taken into account to it but I think.
Huawei Huawei sort of focusing and this is really because we are now operating with the large amount of backlog that we normally used to.
But we're seeing the activity pick up and we've been very explicit I think around the assumptions that we think all of the headwinds and the tail wins for us to hit the plan and I don't think there are many companies.
Actually giving guidance for the full year, but we think that we've got some visibility that we couldnt, we can share that with you and hence our guidance.
Thank you so much for the details and the clarifications. Thank you.
Thank you.
The next question comes from Fahad Mahjong with MTN.
Thank you and good morning.
My first question for Jim.
And I looked at your last.
And your.
Overall on your operating margin.
On the average two percentage points higher than the fourth quarter reported operating margin.
And you expect that trend to continue this year, if not why not and do you expect the current model with the continue over the next two years, if not why not and then.
All of a follow up for Gary on Scott.
Got it thanks to the hard.
Sure.
Here's what I'd say.
It is absolutely true that our Q1 operating margin tends to be the lowest operating margin for the year.
That is mainly because the Q1 revenue has.
And is tended to be lower than that of other revenue and our opex has generally been sort of flattish through the year I know there is some movement.
There is but that's the basic reason opex as a percent of revenue in Q1 has tended to be a bigger number.
And then the other quarters.
As we move through the year first of all I'd say that we do expect because of the year to average 15% to 16%. So we think that we will show higher operating margins in the later quarters.
But I'll also say that sort of offsetting that point is that as we've said, we expect that gross margin will move down from high <unk> to the mid Forty's as we move through the year and so if you just run the math on that.
I don't think that.
No.
And do 3% better for the year I think we're going to do 15% to 16% of the year.
Thank you.
Bulgaria of Scott.
I think you guys alluded to the price if you are increasing and exactly what we our IP and goudy or back.
And the abilities, but.
Or are you comfortable debt do you have sufficient capabilities.
The majority of the edge and fight the use cases or do you think you need more heavy lifting the kind of get to the majority of the opportunities that are out there.
Yes, I'll take that far ahead of it.
First of all of the focus of the investment as we said was on the metro and the edge the use cases that we're pursuing.
I would say is combined agri.
Aggregation networks.
The five G.
The Iot and enterprise and.
The clients.
Connectivity use cases.
If we were if we were building to a legacy architecture.
We would certainly have a steeper hill to climb in terms of capability sets, but we're actually build into what we we believe that our customers are telling us.
And as the architecture of the future.
Which is on the back of thin earlier of IP, where a lot of the application capabilities are no longer embedded in a rather theyre getting disaggregated onto general compute.
The capabilities and it really becomes a.
And again back to the winning and.
Adaptive IP layer ruled the best optics of programmable of Photonic later and the software automation systems to allow you to drive that converged architecture, that's the lowest cost per bit that's the most flexible network for our customers and thats whats going to win and the future.
With that definition, we're feeling.
Pretty good about our capability set gary's comments earlier and or if there was an opportunity of that.
Do something inorganically the that at the scale, we would look at that but we're pretty comfortable on the capability of the steps we have today and you can see that and the <unk>.
The portfolio that we've released and the last six to nine months on that on that.
That part of the portfolio.
Thanks, Bob.
Moving onto the call.
<unk>.
And.
And thank everybody for joining us today and look forward to seeing everyone on that.
And hopefully not too long.
And so well and thank you again.
This concludes today's conference call you may now disconnect.
Net.
Okay.
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Right.
And.
And.
And.