Q2 2018 Earnings Call
To the C&I fiscal Q2, 2018 financial results conference call all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer session. If you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad. If he would like to withdraw your question press spunky. Thank you Gregg Lampf Vice President.
Investor Relations you May begin your conference.
Thank you.
Good morning, and welcome to <unk> 2018 fiscal second quarter review.
With me today is Gary Smith, President and CEO , and Jim Moylan CFO Scott.
Scott Mcfeely senior Vice President of global products and services will join us for the Q&A portion of the call.
This morning's press release is available on national business wire and Ciena dotcom.
We have also posted to the investors section of Sina Dot com and accompanying investor presentation that includes certain highlighted items from the quarter.
Our comments today include detail on our fiscal second quarter results comment on the packet design transaction, we announced this morning, our views on the market environment and our outlook.
We'll then open the call to questions from the sell side analysts taking one question per person with follow ups as time allows.
Before turning the call over to Gary I'll remind you that during this call we will be making certain forward looking statements such statements are based on current expectations forecasts and assumptions regarding the company that include risks and uncertainties that could cause actual results to differ materially from the statements discussed today.
These statements should be viewed in the context of the risk factors detailed in our most recent SEC filings.
Our 10-Q is required to be filed with the SEC by June 7th and we expect to file by that date.
Ciena assumes no obligation to update the information discussed on this call whether as a result of new information future events or otherwise.
This discussion includes certain adjusted or non-GAAP measures of <unk> results of operations a detailed reconciliation.
Conciliation of these non-GAAP measures to our GAAP results is included in today's press release.
This call is being recorded and will be available for replay from the investors section of our website with that I'll turn the call over to Gary Thanks, Greg and good morning, everyone.
We are now two quarters into our three year financial performance targets that we outlined in December .
Our diversified business global scale, and clear technology leadership positions us well to achieve those goals as we expand our addressable market and continue to take market share with a focus on exposure to high growth markets.
Illustrating our early progress we delivered a solid topline performance in our fiscal second quarter.
Increasing demand resulted in record order flow and total bookings, which was significantly higher than our Q2 revenue.
That performance and backlog gives us even greater confidence in our ability to achieve and even exceed our target revenue growth rate for the fiscal year.
There are three principal drivers accelerating growth today.
India.
Web scale and international tier one service providers.
With respect to the latter.
As the industry structure continues to evolve we're seeing an additional set of tier one service providers approach us directly to help them with their network transformation plans.
This is principally because they view us as a financially stable partner with global reach and an ability to sustain our innovation leadership over the long term.
While these drivers are helping to grow our footprint and capture additional market share the combination of the sheer volume size and timing of these early deployments, primarily with the international service providers.
Is resulting in some pressure on our gross margins.
We believe that pursuing these opportunities is absolutely the right strategy for our business long term.
And we have a proven long track record of demonstrating that our business model can reasonably absorb these startup costs and recover gross margin overtime.
Also today, we announced the signing of a definitive agreement to acquire packet design.
Provider of network performance management software focused on layer three network optimization topology and route analytics.
As we said when we announced our long term financial targets.
Expanding our blue planet software business and our network automation capabilities is a key driver of growth competitive differentiation and expanding profitability.
Packet design, we will accelerate our software strategy and contribute towards our long term financial goal of growing our blue planet and associated services business by approximately 14% to 16% annually over the next three years.
I would also say that packet design as both additive and complementary to Blue planet.
Extending our intelligent automation capabilities beyond layers zero to two and then to layer three with.
With critical new features to support a broader range of closed loop automation and optimization use cases across multi layer multi vendor networks.
Packet designs portfolio is absolutely leading edge their IP experts are world class and the unique combination with Blue planet will give us a definitive advantage and software based network automation.
We expect to close the acquisition during our fiscal third quarter.
Before I turn it over to Jim for details on the quarter I'd like to share a few observations about the current market landscape.
Firstly, the continued move to cloud based services and rapid proliferation of over the top content with both consumers and enterprises.
Is resulting in continued investment in the transition to more open programmable and adaptive networks.
Specifically those trends are fueling a corresponding increase in the need for fiber to be built out to data centers and continued demand for high capacity optical solutions in all of their various forms to maximize fiber utilization.
This plays directly to our strengths and aligns perfectly to our portfolio with both our wave logic coherent technology and Blue planet automation platform.
From an industry structure perspective, as I alluded to earlier, we continue to see a growing bifurcation amongst vendors.
There are the smaller niche players who are quite frankly struggling to maintain relevance.
And there are those that have a diversified business and global scale.
<unk> clearly has these additionally, we have the leading technology in the industry.
In addition.
<unk> to these competitive advantages. We also remain the only player in the market with all of the necessary pieces to address customer needs.
Systems components software and services.
As a result, we are still the only company in our space that is growing and profitable.
And finally, let me address the pricing environment.
It has been and continues to be challenging.
But we do not believe there is anything new to this dynamic despite some recent comments from others in the industry.
We've been talking about this competitive landscape for a long time and in my view it certainly won't be going away anytime soon.
Within these dynamics, we have proven and demonstrated that we can thrive.
We've been successfully executing on our strategy to diversify our business and delivering differentiated financial performances as a result.
With that I'll turn it over to Jim for details on our second quarter performance and guidance.
Thanks, Gary Good morning, everyone.
Today, we delivered fiscal second quarter revenue of $730 million led by continued growth in APAC service providers as well as with our global web scale customers.
Notably, India alone delivered $79 million in quarterly revenue up 20% year over year.
And our web scale business, where we have number one market share across multiple categories more than doubled over the same period last year as a percentage of revenue.
In Q2, our gross margin was 47% as.
As Gary mentioned, we've been successful in securing a high volume of new opportunities, resulting in pressure on our gross margin predominantly due to several early deployments at international service providers.
As we have said before early stages of deployments often carry correspondingly lower gross margins. However, we are very confident in our ability to improve our gross margin profile over time and we have demonstrated this in the past repeatedly.
We also reported Q2 adjusted operating expense of $246 million.
With respect to profitability measures in the second quarter, we delivered adjusted operating margin of seven 7% adjusted net income of $33 $8 million and adjusted EPS of <unk> 23 per share.
In addition in Q2, our adjusted EBITDA was $77 $1 million, we generated $37 $4 million in cash from operations and our free cash flow was $31 1 million.
We ended the quarter with approximately $980 million in cash and investments.
And we are executing on our share repurchase plans, having repurchased approximately one 4 million shares of common stock for an aggregate amount of $33 4 million.
I'll now turn to some performance highlights from the quarter that illustrate the continued momentum across our business.
With respect to regions.
<unk> was once again, our fastest growing region.
India contributed more than 10% of total global revenue in Q2 and remains our fastest growing country.
We also continue to see strength in Australia, South Korea, and Japan, and we are exploring new market opportunities in emerging geographies such as Indonesia.
EMEA also had a strong performance in Q2 up 15% year over year.
Notably our global scale and strong position with web scale customers contributed to the growth in EMEA this quarter.
We also secured a significant win with a tier one service provider in the region, which will begin to rollout later this year.
Moving to the web scale vertical our direct web scale business comprised more than 17% of total revenue in Q2, which is the highest its ever been.
This vertical continues to be a significant upside opportunity for us.
In fact, two of our top five customers. This quarter were web scale customers, including one that was nearly a 10% customer.
Direct revenue from this customer vertical in the first half of fiscal 2018 was more than double that of the same period last year.
And finally with respect to our portfolio our wave logic AI remains the only viable 400 gig coherent technology in the market today we.
We secured 12, new wins in the second quarter alone, bringing us to 29 customers now deploying 400 gig capable wave logic AI in their networks.
Our wave server platform, which is both best in class and currently unmatched competitively continues to be an extremely high demand.
The platform generated $93 million in revenue in the second quarter nearly approaching the entire annual revenue figure for last year.
And our software business continues to make progress marked by our largest ever bookings quarter for blue planet orchestration and a growing footprint at three major customers.
Yeah.
Looking ahead to our fiscal third quarter 2018, we expect to deliver revenue in the range of $775 million to $805 million.
Gross margin in the low $40 range and operating expense of approximately $242 million to $245 million.
In light of our success in leveraging the increased market opportunities that we referenced and our confidence in continuing to grow the top line. We now expect to achieve a revenue growth rate of 7% to 9% for fiscal 2018.
You will note that this is up significantly from our previous guidance and it clearly shows the number and size of opportunities to take market share that we are seeing.
In closing.
We delivered another solid quarter of revenue growth in Q2, as well as a record quarterly order flow and continued market share gains.
We are going through a period of gross margin pressure, because we are seeing new opportunities to take market share mainly with international service providers, we are responding to that demand.
However.
We are confident that this gross margin pressure as a short term phenomenon. We have demonstrated that we can recover over time from the lower gross margin levels associated with early deployments.
That is why we remain confident in our three year financial targets that we laid out in December .
Thank you for your time today, Sharon we will now take questions from the sell side analysts.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, we'll pause for just a moment tick of how the Q&A roster.
Your first question comes from Doug Clark with Goldman Sachs. Please go ahead. Your line is open.
Okay, great. Thanks for taking my question.
Don't unpack the gross margin piece a bit so first in the April quarter kind of backwards looking you didn't address some mix at all software and packet sales were both a bit weaker than we had anticipated, which I would expect would be a gross margin headwind.
Can you kind of addressed that a little bit and then secondarily on a go forward basis beyond the July quarter at what point do you think that we start to get back to the mid 40% level.
Yes, as you noted Doug we did.
Decline a bit in software Thats typically a high gross margin area for us.
So that did affect our margins for Q2. We think this is just sort of the ebbs and flows of what happens in our software business. As we mentioned, we had a great bookings quarter and Blue planet orchestration, we're rolling out our new.
Control plane and network management system today to a bunch of customers and so we expect a very strong year for software that should recover.
With respect to what's going to happen here in our gross margin what I'd say is that as we move into Q4.
Given the size of the revenue guidance that we have put out there mainly with big International service providers we.
We don't think that we can get to sort of the mid forty's in Q4.
We would expect it to improve slightly from where we sit today and in Q3, but it will frankly depend upon.
The size of the opportunity ahead of us.
As far as when we recover the one thing I can say is we're very confident in our three year.
Forecasts, which do depend upon a recovery in gross margins in fact, an improvement in gross margins from the sort of mid <unk> level. So we're confident about that.
Alright, thanks for the detail and then my follow up is actually focusing on the North American market can you talk about the dynamics with your two largest customers here in particular, it looks like on our largest customer was down about 20% year on year, so visibility into spending patterns in North America would be helpful.
Yes, I think the.
Hi, Doug I think both Verizon and AT&T I.
I think AT&T, our expectations were to be flat to down for the for the year and I think.
It would be consistent with that I would expect them to be a bit stronger in the second half from where they are now Verizon has been pretty steady throughout the year and I would expect that to be the to be the case, we've got multiple engagements with them not just on the metro but on long haul and noted our packet business as well.
Thanks to alright, Thanks, a lot good luck guys.
Thank you your.
Your next question comes from George Notter with Jefferies. Please go ahead. Your line is open.
Okay.
Hi, guys can you hear me yes.
Hey, How're you doing.
Great. Thanks very much.
I was interested in the commentary about bookings and backlog you said that.
I think you had a record quarter in terms of bookings and backlog I mean can you talk about.
Magnitude there give us any sense for how well you did it sounds like there was quite a big differential relative to to revenue in the quarter and then also I'm just curious about that.
The narrative about.
Improving opportunities internationally I mean is any of that related to what we're seeing in the marketplace with ETE. Thanks.
Thanks George.
Yes, I think the order flow was our record order flows for us.
And it exceeded frankly, our expectations and I think principally around this demand that we're seeing with international tier one carriers.
We began to see as we turned the year frankly, it's just strengthened.
That's included.
<unk> really taken up expectations for revenues for the year to be about 7% to 9%.
<unk>, which is above where we started clearly and that's really.
As a result of this so.
The order flows gives us great visibility into the into the second half and that gives us a lot of confidence in the sustaining of this.
This momentum I would say that principally.
Around the announcements with DTE I've got to say I don't think that has really been a tool impactful to us we really haven't seen any change in the dynamics. This sort of demand I think started before that and I think it's.
I think it's largely as a result of the sort of bifurcation of the industry.
It's about these large carriers looking for a long term secure a partner that has global scale and the ability to continue to fund innovation.
Funding of innovation in this space is getting more and more expensive. So it makes sense that you're going to get fewer larger players being able to.
Supply the marketplace.
Thank you.
Your next question comes from meta Marshall with Morgan Stanley . Please go ahead. Your line is open.
Great. Thanks.
I just wanted to get a sense on on the international wins like how much of the gross margin pressure should we think of.
No.
International pricing versus kind of initial chassis and then we kind of see upside as you move to the line cards later on.
And then maybe on the second question on the web scale business, obviously, that's doing really well.
Do you think that that strength can carry ended the second half or do you think that there is some lumpiness that will kind of come with stronger first half orders.
On the question of international customers.
Definitely the latter matter. It's all about early deployments, we know from our long history of winning deals that early deployments are going to have startup costs and lower initial gross margins. Those gross margins will recover over time, as we upsell and we move to.
<unk>.
Card fill so certainly its the ladder.
Now, we would say and we said that outside of the U S where we have the Chinese players. There is some margin differential but that's not the predominant piece of what's happening today.
And with regards to the web scale.
I think it's very broad based with them across multiple customers now multiple applications and we're seeing particularly that global expansion.
And we are sort of uniquely positioned around that given our global reach and scale.
And I would say the predominant characteristic about this marketplace is they really appreciate leading technology and that's really.
Really where they're focused Scott you want to you want to talk about some of the 400 gig stuff.
Rolling out with them.
Thank you.
One thing just to remind you of.
The state of the art stay on the shelf today for coherent.
<unk> technology is 100 gig and we're really still the only viable shipping 400 gig capability.
So they are buying into technology Theyre also buying into the technology roadmap that we put in front of them. So we're very confident that we can continue to add that that technology leadership and the relationships with those folks going forward.
We like where our market shares with those customers.
Thank you are going to like it as well when we show up.
Thank you next question. Please ask your question. Your next question comes from Vijay <unk> with Deutsche Bank. Please go ahead. Your line is open.
Thanks, Hey, good morning, Gary Jim Hi, Vijay Yeah, Hey, My question is on your on your U S business and how do you contrast.
India, Youre, obviously seeing growth and strength in India, how would you compare and contrast that with the U S. As the U S pretty much more of the same or you do expect.
Order acceleration or improving activity heading into next year. Thanks.
Yeah.
They're very controlling state marketplaces in terms of their dynamics, one is a mature more mature market. The other one is the fastest growing internet market in the world. So correspondingly you're seeing the the difference in demand in terms of percentage growth rates et cetera.
But I would say in North America, I actually would expect an uptick in the second half.
From what we're seeing both in terms of the tier one north American carrier as web scale, particularly.
And just even into the sort of regional carriers Msos.
Actually think the second half will be stronger for North America regards to India.
And we've said this pretty consistently I think this is a multiyear fundamental growth dynamic that's underpinning.
The fastest growing internet market in the world and I don't see any sign of that of that stopping.
Forget it quickly if you'd.
Multiyear strength in India is that also kind of reasonable to assume that gross margins will be pressured for quite some time, because the willingness to pay in places like India is much lower than here in the states.
Frankly that hasn't been our experience in India, I think because of our total cost of ownership and our architecture I think that's been well received in India and bear in mind, we've been in India for a long time. So we understand the dynamics of that of that marketplace. We have a very broad base of customers in India all of the major tier one carriers now.
Our customers the government.
The department of Defense networks, and obviously, we help a number of the web scale players there as well so that has not been our experience in India.
We have witnessed some large particular expansions, where we've gone into new areas with these carriers on the pressure on margin for that is sort of Jim said is less about pricing are more about just the startup costs frankly, and it's a very similar dynamic that we've seen in other parts of the other parts of the world. It's just Donna on a large scale.
Bill.
Okay. Thank you. Thank you Joe.
Your next question comes from semi chatter G. With Jpmorgan. Please go ahead. Your line is open.
Hi, good morning, Thanks for taking my question.
Wanted to start off.
Tom just on the quarter again on the gross margin front just wanted to understand.
Over time, you issued guidance last quarter, you mentioned software as one of the things that probably drove some of the weakness for your guidance, but.
I just wanted to check if there's anything else that changed in terms of visibility into this particular quarter, because you mentioned international deployment.
Sort of J&J have do your expectations or what are the contributing factors there.
Sanjay just to be clear you are talking about Q2 or Q3, yes, Q to Q2.
Yes.
Yes, the biggest change for US was that software it was a little light that contributed a big portion of the <unk>.
Drop in gross margin from the 42, 6% to 47.
There is always changes in mix as we move through a quarter.
We clearly had some international wins in the quarter been affected our gross margin to the downside, but the biggest thing was the software change.
Okay got it and so just to follow up on the because when I look at gross gross margins when you're in the initial phase of deployment and then sort of ramp up later.
How should I think about incremental gross margins at the initial fees horses in the later stages when you start to ramp up.
Yes, there is no general answer for that Sanjiv, it depends upon the customer and.
How is deploying in all of that so I can't give you.
Way to think about it what I can say is that we have demonstrated in deals all over the world for many years that we can recover from the early stage deployment gross margins and get to a <unk>.
Sort of mid Forty's or thereabouts gross margin range for the customer over the life lifecycle of deals.
Okay got it thank you.
Your next question comes from Simon Leopold with Raymond James. Please go ahead. Your line is open.
Great. Thanks first wanted to just confirm what it is hopefully obvious and then a quick question.
Im assuming youre, 110% customer was the usual 110% customer.
Just want to make sure that that in fact is the case and then I also wanted to talk a little bit more about the the packet networking segment.
That among your products has the best growth outlook.
And your three year horizon, you've talked about 6% to 8%.
I wanted to see if you still feel that way given the recent weakness and let me know if it's correct to think about initiatives like five G.
And fiber deep in the cable space as driving improvement and if we can expect that kind of improvement in the second half of 2018 or we have to be more patient on packet networking growth. Thank you.
Yes, the top customer was was the customer that you are.
[laughter] and Simon it's Scott here I'll take the packet one if I look at it.
In the rearview mirror, we've been successful growing our packet portfolio sort of in the 10% range year over year for several seasons.
We do expect by the way the second half to be stronger than the first half and packet.
What youre seeing is some quarterly variability.
The growth.
With us or it comes from multiple applications you mentioned, a couple of coupons for us <unk> and fiber deep would actually opens up the addressable market for that portfolio and that's what makes us bullish about.
Our long term three year projections on that part of the portfolio.
Okay.
Thank you.
Alright. Your next question question. Your next question comes from Jim Suva with Citi. Please go ahead. Your line is open.
Thank you very much and I have two questions one very.
The other one a little bit more insightful, so I'll ask them both at the same time.
The first question is for your annual guidance in the quarter outlook.
Should we think about.
From your announced acquisition.
Does it help for revenues.
My other question is on the international service providers with the gross margin pressure and you mentioned you'll be.
I'm confident that the gross margins.
Improve as you go forward.
Question is is there anything.
The duration of time.
Joining the ramp of these international service providers compared to.
Past contracts that we've seen from the company in the past and what I'm getting at is I wonder are these a little bit longer duration.
For the first six months are a pressure because you have much longer it's a lot more attractive to you.
To think about.
Contracts versus the historical London.
We have seen thank you so much.
Thanks, Jim just to be clear our revenue guidance does not really have much.
Anything material from our acquisitions. So this is all our organic business that we're talking about in terms of revenue upside.
And Jim on the on the dynamics around this international pace I would say.
Not particularly different than we've seen in the past and its always its always going on what we're seeing now what is different is we're seeing more of it going and at greater scale. So more customers. So to give you some context to this.
One about eight new international tier one carriers this fiscal year alone.
Given the already high market share globally, that's particularly extraordinary and I think it talks to this dynamic around their sort of flight to.
<unk> quality around a global player that Scott got scale and can continue to invest so we are seeing the number of them is different than we've seen in the past and also the scale.
We're seeing their initial build outs be larger than we've seen in the past and also some of our existing players places like India. Their expansion is more ambitious and more aggressive than we've seen in the past. So normally as Jim was talking about with our balance and diversification of our business are growing.
<unk> business and the other things that we're doing we can we can keep that gross margin in the middle of the road is as we've done the sheer nature and scale of this right now provides a challenge for us, but let me emphasize this this is a very good news story. These are quality tier one customers that will be with us for more.
Many years and getting the relationships and footprint in place is fantastic news for us to drive our three year goals.
Thank you thanks, James for the details.
Clarification, that's greatly appreciated thank you.
Thank you Jim Thank you.
Question comes from Michael Genovese with <unk> Partners. Please go ahead. Your line is open.
Our Australia and as Jim said in some of the other southern Asian markets that are smaller for us, but growing we're seeing sort of a buoyant demand.
Thanks, Mike.
Next question comes from Dmitry <unk> with William Blair. Please go ahead. Your line is open.
Great. Thanks, a lot guys. So I.
I have two questions.
One.
I look at your revenue your revenue is three times larger today than it was back in 2008.
Your gross margin is down 20% from that timeframe. However, you've done a very nice job controlling expenses to drive leverage on a higher revenue base.
Well, what I'm trying to get to is there anything you could do to you know.
Drive the change in the industry landscape or change the competitive dynamic a little bit.
Given your commentary that some of the guys out there that you know.
It seemed to be pretty aggressive out there.
Yet you're calling them.
As you know, they're losing kind of business or going out of business almost in.
There's a bunch of them out there potentially on the metro side of the business, but.
Trying to get to this.
Kind of landscape topic, if you will and the margin pressures, we've been seeing for almost 10 years now.
And whether there's anything you can do about that.
Sorta performance and good steady growth.
And I think we should be able to get to that sort of 14% kind of.
Growth rates in the software space and that will help.
That will also help our gross margins as well as we as we move forward.
And on Opex, Tim we're right on plan with our Opex for the year.
As far as Q4.
We're not prepared to give guidance right now the range that we're talking about is not a bad base, but we're having such a very strong order flow year that we expect to continue for the next two quarters that if anything we might have higher sales commission as we move into Q4, that's what I can say and as far as from there.
Who knows what we said repeatedly is that our plan is always to grow revenue faster than we grow opex. That's one of the primary reasons why we've shown operating leverage over the past seven or eight years that will be our plan for 2019, I can assure you of that.
Okay. Thank you.
Your next question comes from Alex Henderson with Needham. Please go ahead. Your line is open.
Great. Thank you very much I was hoping you could talk a little bit about the backlog of orders that you are building.
Parsing between how much of that growth is coming from India, and how much of that growth is coming from other international markets.
And then second question is on the.
The mix between.
Services and platforms I would assume that as youre doing more footprint build you would be seeing less.
<unk>.
Or a higher mix of installation services, which generally carry lower margins and if you could parse on that I would appreciate it.
Two questions for you.
Hey, Alex Yes.
Growth in our backlog really has two major places one is India and the other is gcs is we've had a big inflow of orders from our web scale customers that are sitting in our backlog is one of the reasons why we've called up our revenue for the year.
And Youre right Alex.
The services makes him that is one of the things that weighs on margins when you look at new customers.
Cost for that tier one customer to deploy its also had a cost for us and we end up sharing that.
So it's not just current technology that they are attracted to its what's coming next.
Thanks, Jim.
And wave logic AI, obviously is a key component to it but also the.
Work that we've done with him over the last couple of seasons on their operational fit software interfaces et cetera.
Are very important to them as well.
Okay, great. So would it be fair to say that they have accelerated their own plans versus what you were thinking a quarter ago or youre, just doing better within the plans that they already had in place.
I'd say, both I think we're seeing expansion of the number of logos that we have in terms of the customer relationships within those customer relationships I think the amount of capacity that we're putting in is exceeding our expectations and I think probably even theirs.
Okay. Thank you all very much.
Thanks, Jeff.
Next question comes from Catharine <unk> with Dougherty. Please go ahead. Your line is open.
Thanks for taking my call I appreciate it two questions on vertical markets. One last year, you talked a lot about there was this undertone of some federal business that was to come and pull through could you give us a little idea or color behind the opportunity there heading into Q3 and Q4 and the other one is.
Could you touch upon the subsea business, that's a healthy business and is that a major part of where some of your wave server on new business opportunities are coming thank you.
On the government side I would say that.
Because of the.
Things that have been happening and hard government in it spending theres been a delay in government spending over the past really year, we're starting to see some movement. Finally, we have a nice position in that business and hopefully we'll get some recovery as we get into Q3 and Q4.
And then on the submarine business. It continues to be a great business for us I'll remind you that sort of went from nothing five years ago to the number one market share position largely driven by.
Our innovation leadership in optics.
You mentioned.
As wave server.
Sort of the major deployment model I would say wave wave logic AI. The optical technology is absolutely key in terms of us continuing our leadership there and that is getting deployed in those submarine networks. It tends to be today, though not necessarily in a waves or platform. It tends to be more on a classic service provider platform 60 pipeline specifically.
Okay.
The international piece of that or you're doing a lot of the business through Google and Amazon and Facebook or is that mostly coming from the carriers.
Yes, both.
Certainly.
The influence of the folks that you mentioned the googles the Facebooks and the Amazon is significant in both whether they're doing it direct on.
Cable is that they take.
Equity positions in or through the service providers. They are influences as significant and thats sort of back to Gary's point of having both sides of those relationships are critical alright. Thank you very much.
Catherine.
Not included in our second half perspective, but I think it has steadied and I do think we will.
As we get into 19 and 20 I think there is an opportunity for growth in <unk> for sure.
Thank you very much.
Thanks, James Your last question comes from <unk> <unk> with Bloomberg Intelligence. Please go ahead. Your line is open.
Great. Thank you for taking my question.
So Gary Jim you guys mentioned, a couple of times that we've been here before in terms of these large footprint wins.
Pressure on gross margins, but as these footprint wins transition over to capacity to drive the margin growth you've had fits and starts on that could you just talk about the visibility on the timing of the Rollouts to give you some confidence into 2019.
Yes.
Well, we're not really saying anything specifically about 2019 right Jim.
We have said that we are confident that there are three year targets are good we are.
I will say this that when we look at these big footprint wins, we look at a multi year financial outlook.
And we weigh the early.
The early stage margin declines as compared to the late stage margin increases we look at the strategic nature of the customer and we look at the country. We looked at all of these things and we make our decisions based on that strategic view of a customer win.
What we're seeing now is no different from what we've had in the past and we've repeatedly shown that we recover from these periods of gross margin pressure I believe we will do that this time as well.
Great and then for my follow up.
Clearly you guys are upbeat on the technology lead you have with the wave logic AI chip.
How much has that influenced your telco deals.
I would say that I think the three elements when you specifically talk about the telcos I think what they're seeing is.
Yes, they want the technology leadership in this next generation architecture, and just as importantly, the ability to continue to innovate on that leadership.
No.
Make no mistake I mean, we've got technology leadership right now.