Q3 2021 Ciena Corp Earnings Call
Yeah.
Our commentary today speak to our fiscal third quarter performance, our view on market dynamics as well as a discussion of our outlook for the fourth quarter.
Today's discussion includes certain adjusted or non-GAAP measures of <unk> results of operations at.
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 we will be making certain forward looking statements such statements, including our quarterly and annual financial guidance discussion of market opportunities and strategy and commentary about the impact of COVID-19 at supply constraints 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 statements discussed today.
These statements should be viewed in the context of the risk factors detailed in our most recent 10-K filing and in our upcoming 10-Q filing which is required to be filed with the SEC by September nine we expect to file by that date.
<unk> assumes no obligation to update the information discussed in this conference call, whether as a result of new information future events or otherwise as always we will allow for as much Q&A as possible today.
But we ask that you limit yourselves to one question and one follow up please.
This call is being recorded and will be available for replay on the investors page of our website shortly with that I'll now turn the call over to Gary.
Thanks, Greg and good morning, everyone.
The strong third quarter performance. We reported this morning reflects the combination of our increasingly differentiated position in the marketplace and a robust demand environment.
We delivered a record $988 million in revenue and a particularly strong gross margin that drove a 19, 1% adjusted operating margin.
And a 92 adjusted earnings per share.
Overall COVID-19 related challenges remain dynamic around the globe.
But most of what we saw in the last several quarters is ameliorating.
Importantly, the things we needed to happen in the market and for our business as we move through 2021, all materializing largely as predicted.
Specifically <unk>.
Industry and economic conditions have improved noticeably.
Service provider spend globally continues to improve and our customers network investments and operations are normalizing.
And we had strong order flow in Q3 and that outpaced revenue again.
And this allows us to continue growing our backlog and positions us to deliver the stronger than typical uptick in our second half performance that we expected.
Secular demand is very strong and we are taking full advantage of our leading position to address the opportunities that are driving network investment including <unk>.
Capacity adds to address bandwidth demand.
The shift to the cloud with new architectures and network builds.
Intense focus on edge applications, and obviously the need for network automation.
As well as Huawei replacement opportunities.
Within this strong demand environment, however, there remain global and industry wide supply chain constraints.
And as we have consistently proven we have best in class ability to manage through this challenge and to deliver outcomes for our customers better than anyone else in our industry.
However, as we've said before we are not immune, particularly if supply challenges persist.
And as has been I think widely reported conditions have somewhat deteriorated and are posing headwinds for sienna, including difficulty to fully address demand.
We have also seen some extension of our lead times and some increased costs.
As we sit here today, we believe these challenges will likely persist through at least the middle of calendar 'twenty two.
Moving to highlights from the quarter, our competitive position remains strong and we continue to take market share.
With respect to innovation, we are investing across three key sectors.
While we are the world leader in optical systems and its associated technologies, and we continue to drive our leadership in innovation and market share.
Routing and switching where we are leveraging our optical expertise to offer a new architectural approach to disrupt the market with next Gen Metro and edge use cases.
And then software, where we are executing on and accelerating our automation strategy to digitize, both service delivery and networking layers.
In optical we are clearly the undisputed 800 gig leader having been in the market for 18 months.
We have secured the vast majority of opportunities globally and are now approaching 20000 modems shipped.
In the quarter, we added 11 customers for wave logic, five extreme including policy and Windstream, bringing our total count to 106 customers.
In addition wave logic five nano.
400, ZR product is generally available and currently with several key customers as part of our certification and adoption process.
We are also excited about the opportunity next generation Metro and edge, where we expect to significantly expand our total addressable market from about 13 billion total currently to roughly $22 billion over the next several years.
New use cases and technology disruption has created an important insertion point within this space for our architectural approach.
And we have all of the critical elements required to win.
Including IP routing switching optics automation software and professional services.
And as many of you know we've been laying the groundwork for expansion in this area for quite some time, including significant investments in both product development and our go to market resources.
And as you probably saw this morning, we announced an agreement with AT&T to acquire its by onto virtual routing and switching technology.
Biotics technology and software engineering team will bring additional resources to our routing and switching R&D team to address the growing market opportunity that we see with metro and edge use cases.
This includes continued development of our adaptive IP capabilities and that impasse increases our exposure to certain <unk> use cases.
We also obviously look forward to extending our strategic relationship with AT&T by directly supporting this key piece of the network and that transformation journey.
Overall as customers seek out new architectural approach as an alternative to the status quo, we secured several significant architectural wins around the world for switching and routing.
In fact in Q3, we had 10 new wins for our routing and switching portfolio.
And finally, our Blue Planet software business continues to enjoy strong momentum with our adaptive network vision that is well aligned to network operators automation priorities.
With increasing customer engagements, we continue to win new significant deals, resulting in quarterly revenue growth of 47% year over year in Q3.
We expect to deliver a strong fiscal 2021, therefore for blue planet likely towards the high end of the $65 million to $75 million annual revenue range. We previously provided.
Shifting to overall diversification in our business across customers and regions.
<unk> had 310% customers in Q3, including two tier one service providers and the web scale customer.
And highlighting our diversification our top 10 customers in the quarter included full web scale companies three North American service providers, one international service provider, one NSO and wholesale company.
Non telco revenue in the quarter was strong at 42%.
Web scale revenue, specifically grew 24% sequentially in Q3 with direct Dci business contributing 25% of total Q3 revenue.
Regionally strength in EMEA continued driven by web scale growing more than 16% year over year EMEA represents our fastest growing region in the quarter and in fact year to date as well.
In India, we continue to navigate through Covid challenges and make progress with revenue up 48% year on year and 26% year to date.
And I think importantly, we're seeing investment by key customers for network upgrades in India as well as replacement of Huawei equipment.
As I mentioned earlier, we are investing to capture ongoing secular demand for optical routing and switching and network automation solutions and to considerably expand our addressable market over time.
Really as the shift to the cloud continues driving additional traffic growth and a greater need for network transformation.
As a result, we are confident in our strong market position and in our ability to continue to outperform the industry with that I'll turn it over to Jim.
Yes.
Thank you Gary good morning, everyone.
We generated strong Q3 revenue with $988 million.
Adjusted gross margin in the quarter was once again very good at 48, 5%.
Selecting a favorable customer and product mix as well as a high concentration of capacity adds versus new builds.
More specifically, we are not yet monetizing the new design wins to the extent, we originally expected for this timeframe.
Overall, we've been very pleased with the gross margins we have produced this year.
They reflect the benefits of our scale and vertical integration as well as a lot of hard work and lowering unit costs of both our products and our services.
Adjusted operating expense in the quarter was $290 million.
With respect to profitability measures, we demonstrated extraordinary operating leverage in Q3, including adjusted operating margin of 19, 1%.
Adjusted net income of $145 million and adjusted EPS of <unk> 92.
In addition in the quarter cash from operations was $69 million.
Free cash flow was $54 million and adjusted EBITDA was $214 million.
We ended the quarter with approximately $6.0 billion in cash and investments.
Also in Q3, we repurchased approximately 483000 shares for $28.0 million.
Turning now to guidance.
As Gary stated the demand environment is very strong.
This was reflected not just in our Q3 revenue that was well above the high end of our guidance, but also in our strong order flow in Q3 and an increased backlog.
At the same time global supply chain conditions have deteriorated and we've always said that we would not be immune if those challenges persist or especially if they worsen.
Taking these factors into consideration, we expect to deliver revenue in a range of 1.1 billion to $5.0 billion in Q4.
At the midpoint of this guidance range, our revenue growth from the first half to the second half of fiscal 'twenty, one would be approximately 26%.
This will be a very strong second half performance in line with the stronger than typical second half uptick that we forecast since the beginning of the year.
Also at the guided midpoint, we will deliver revenue growth for the year at just under 2% above the midpoint of our revenue guide for the year.
For adjusted gross margin in Q4, we expect a range of 45% to 47%.
This reflects our expectation for more monetization of new wins as well as some impact of supply chain constraints.
And finally in Q4, we expect adjusted operating expense to be in the range of $295 million to $305 million slightly higher than expected.
Our order flow is well above our plan as is our operating income and this will result in higher variable compensation levels in Q4.
As always we expect to provide detail about next fiscal year. When we report our Q4 results in December.
What I will say is that we are confident in our strong performance in fiscal year 'twenty, two even when factoring and supply constraints.
As we have over a long period of time, we believe that we will outperform our competitors in both market share and financial results.
Our technology leadership position, our expectations for continued strong demand environment and a very solid backlog going into next year will enable us to continue the momentum we have developed.
Before we move to Q&A I'm going to hand, it back over to Gary for some closing remarks, Gary Thanks, Jim.
I would just like to give a brief update on our new ESG effort recently underway with our partner digital promise.
With the return to school in many parts of the World. We're excited to launch the CNS solutions challenge, which invites middle and high school students around the world to design solutions that can address sustainable development goals within their local communities.
This program focused on computational thinking digital skills as one of several programs with them in a digital inclusion commitment.
To learn more about our programs like this and what CNN was doing to help create a more sustainable and connected future.
I encourage our shareholders and others interested to checkout recently published sustainability report on our website.
With that operator, we'll now turn questions from over to the sell side analysts. Thank you.
At this time I would like to ask a question. Please press Star then the number one on your telephone keypad again that is star then the number one.
Your first question comes from the line of Paul Liana.
With bank of America.
Hi, good morning.
I wanted to ask about the verticals and if you can.
Speak about I understand there is strength in orders can you can you tie it with what.
What kind of projects do you see that Theyre being forward now what is the underlying service that carriers carriers and clouds with our offering.
That necessitate the investments cycle now thanks.
Thanks, Paul I mean, I would say that.
From a vertical point of view, we're pretty much seeing solid demand across most pretty much most of the verticals.
I'd say its a combination of sort of confluence of cash.
Catch up on capacity.
The operational caution that has been around for the last sort of 12 months or so so catching up on capacity also modernization of the networks and architectures, particularly around the kind of metro edge.
Facilitating <unk> et cetera are also now ameliorate thing and people are investing in delivering operationally.
Coupled with I think the the increase in demand as the adoption for the cloud is basically accelerated over the last 12 months. So you've got those three dynamics in play and really I'd say the overall application is to drive greater.
<unk> at the edge of the network for all of the sort of cloud applications.
Well understood.
And can you talk about visibility.
Earlier in the year.
You had different kinds of visibility now you sound a lot better does it mean that you have greater visibility into next year.
If you define visibility order backlog, which is a key part of that I think you answered about it absolutely yes.
When we went into this year there was a considerable amount of uncertainty.
We sold a great deal of caution from the carriers, both operationally and pitch delay I think we have seen that ameliorate as we as we thought it would but.
Jim said, that's resulted in a pretty significant uptick in our second half of 26% growth at the midpoint of our guide here and I think that bodes well for 'twenty. Two I think we're going to have a strong <unk>.
Two obviously, it's a little early for us to talk about that we'll talk about that next quarter, but.
I think we're we've got better visibility now absolutely than we had when we started the year and I think the overall dynamics.
Of demand I think a very very positive.
Going forward.
Thanks, Thank you.
Your next question comes from the line of Simon Leopold with Raymond James.
Thanks for taking the question.
Wanted to see if we could discuss a little bit about how you see your gross margin trending and I'm not asking specifically.
About the October quarter, but.
When you consider your order trends and what im struggling with here is.
It sounds like you've got push outs of the new footprint expansion, which should be dilutive to gross margin, but I also suspect you've got a good order book.
On the routing or switching segment, which I imagine it's accretive to gross margin help us understand the puts and takes please.
Sure.
I'm going to take you back Simon.
Pre COVID-19 days, just to remind you of what we said what we said then was we believed that our run rate for gross margin was in the mid 40 <unk>.
Mid forties.
And that included a reasonable amount of new builds. We also said is we started with COVID-19 that for the next several quarters, we would enjoy a higher than that higher than mid <unk> gross margin because we would not have.
The level of new builds in our revenue stack that's exactly how this has played out.
We're actually we're experiencing a good level of capacity adds which are of course accretive we've done pretty well in software and we're doing pretty well on routing and switching so all of those things are impacting our gross margin as we have come through COVID-19.
I would not say anything differently about what I think our gross margin is going to be once we get to the expected levels.
Sales in our revenue stack, which is what's going to happen, we see that finally in our order book and it's going to start hitting our revenue stack as we move into next year. Now. We also have the supply chain, which has impacted our fourth quarter and in fact, our fourth quarter.
Got which is 45 to $47 does have a fair amount of expected premium cost and getting materials board hitting our.
Our expectations for revenue so that's what I'd say I'd say.
We're going to be we think 45.47 Q4 as we enter next year that depends upon how much of the new wins are in our revenue stack and what the cost of the supply chain generate but that's the expectation as we sit here today.
As I said, though we've been very pleased with our gross margin performance. We've done a lot of work to take costs out of both products and services. We have scale. We have vertical integration all of those things have helped us and we're very pleased with what we've done so far this year.
Thanks for that Jim and just as a follow up I'd appreciate an update on the opportunities for Huawei swaps I know you've council of the investment community.
Patient.
I wanted to sort of reflect on what's different versus your prior earnings call. Whether you have seen some evidence you did mentioned some India.
Traction, but appreciate an update on that Huawei opportunity. Thank you.
Yes, so I mean, I don't think anything appreciably change.
As we've said we've seen this dynamic for a while and it is clearly a multiyear tailwind and it's it's.
Infrastructure these things take time and those decisions take time, and then to execute on that.
Catherine grow.
Great traffic operationally is very very it's a big undertaking by the carriers.
But it's underway.
I would say to your point about India, the one sort of exception to that.
Generally the two areas here are Europe and India.
With a few of.
Countries in Asia.
India I would say in the last sort of six months has accelerated that move EMEA are actively replacing.
Huawei networks in India, and we've certainly been the beneficiary of that we have good order flow and good new wins in India. Some of which is on the back of that.
Obviously, it will take a little while to deployed over multiple years, but I would say, India acceleration EMEA on track.
Thank you very much.
Tom.
Your next question comes from the line of George Notter with Jefferies LLC.
Hi, guys, thanks very much.
I guess I want to kind of revisit the gross margin discussion. So you guys Dave.
Printed significant upside relative to your guidance on gross margins for two quarters in a row now and.
I guess I.
I guess I'm kind of curious are around why we've expected much more significant newbuild activity across these two quarters, and then actually not seen that newbuild activity.
As the quarter has progressed.
Why is that business shifted out so much.
Well as we come into and any quarter, we have expectations of what our mix is going to be and things move around so.
I certainly wouldn't read anything ominous and the fact that it's been a little slower to develop than we thought COVID-19 has had some effect.
I'd say that we have started to see in our order book the effect of some of these wins.
We're definitely going to see those things come into our revenue next year. So I wouldn't read anything into it other than there is ebb and flow in our business and I think the good news is we're doing so well with our mature customers and we are in such a high preponderance of capacity adds.
Just to add to just add to that if I can I do think Jimmy talked about at the end.
I do think generally capacity adds in catch up has been prioritized over over new business rollout. Those rollouts are absolutely going to happen and in fact, we've won a number of new deals in the last quarter.
Indicating the modernization of these networks, but I think carriers are going to be generalizing here, but I think a prioritize the capacity.
A bit more than we thought and that is resulting in better margins for us.
In Q3.
Got it okay.
And then I guess I also just ask about the viano transaction.
I think that was an asset that came over from brocade back in 2017, and we really haven't heard much about it within AT&T.
Maybe you can kind of talk about why you are buying that asset and what it really gives you going forward. Thanks a lot.
Hi, George its Scott here.
No.
That asset itself Youre right in terms of the history of the AT&T is use those to.
Further their network transformation and a couple of different use cases around the edge and virtualized their capabilities around.
So cell site routers for their <unk>, and <unk> backhaul and <unk>.
Enterprise business services for Smbs, so those use cases.
Very much in the sweet spot for what we're trying to accomplish in our next generation <unk> and edge campaign. So.
If you look at the assets that we're picking up.
Has the capability set to enhance our routing and switching.
Portfolio as we address.
The increased market size of next generation Metro edge.
Obviously deepens our relationship with a really important customer of ours, AT&T and we pick up an engineering resource.
And in a location that we had no presence before and the U K. So those are the three dimensions.
Value for us.
And is there a revenue run rate that comes with that product line. There is it's not material to our business really but there is a revenue run rate.
We'll reflect that in R 22 plan, when we get to that thanks.
Thanks George.
Your next question comes from the line of Rod Hall with Goldman Sachs.
Hey, guys. Thanks for the question good morning I.
I guess I wanted to start off with the revenue guidance, Jim maybe just ask you if you've taken a shot at estimating how much impact of that guide there was from supplies or if you can give us any any color on how much of an impact on revenue.
The supply situation is in the in the guidance.
Yes, I'll start by saying I remember we over performed in Q3.
When you take everything into account.
We're we're probably low tens of millions more.
We could have done.
Not for the supply chain.
And thats been.
So thats been the vessels in the guidance.
Yes, it's in the guidance for the full fiscal years, it's low tens of millions.
But as fiscal year, but also low teens then.
Fiscal Q4 guidance is that the way, we should think about it.
Thank you Sir.
Okay and then the other thing I wanted to just check the gross margin guidance I know you.
Kept the high end of the range unchanged and dropped the bottom I guess.
The the 45% level I was curious what that corresponds to <unk> is that if.
Some of these expediting costs and so on.
Go continue to go up in 47, assuming kind of a hold where they are can you can you give us some color around either end does that mean.
Margin guidance, what what it takes to get to 47 million and what happens if you ended up printing 45.
Theres always going to be variation in our gross margin because as I said earlier, we start the quarter with an expectation of what's going to roll through and things change so.
I think the difference between $40047.0 is mostly going to be mix is the mix is going to be different from what we expect I mean, we've already set up our supply chain in the quarter.
So I don't expect any more costs out of the buying.
Parts or anything like that.
I'd say, it's going to be mix that is going to grab the ends of the range.
And is it fair to say that mix would be driven by these.
These deployments I guess, the big North American deployments in particular.
The mix might change one way or the other in the in the fourth quarter.
It could be the deployment of the new wins, but remember we have we.
A lot of different customers, we have a number of different products. We have software mix, we have a lot of things that can impact our margin. So.
Generally speaking it's going to be.
The mix of all of those things and 45% to 47 is where we think will come out.
Okay, Great alright, thanks, a lot I appreciate it.
In Colombia.
Okay.
Your next question comes from the line of meta Marshall with Morgan Stanley.
High teens is Eric on for meta thanks for taking our question congrats on the quarter.
So maybe I just wanted to ask given some of the order flow you were seeing.
Presumably that being gated by supply chain converting into revenue does that have any impact in smoothing. Some of the normal seasonality you would typically see in for the first half I understand it's early to comment on 'twenty, two but anything you can tell us there.
I would say this Eric.
It's definitely too early to tell we haven't finished this where just about.
Finishing up this year I do think that you know.
Scott today, I do think that the supply chain issue our viewers will likely continue for the first part of the of the year and obviously when we do gave.
FY 'twenty two guidance as we come out of the <unk> will take that into account.
As we have.
For the for the last couple of quarters here I would say that I think we're very well placed to navigate it.
Better than anybody else in our industry.
We're clearly not immune from from that but at scale and vertical integration.
No.
Very sophisticated supply chain enables us to mitigate a lot of those.
Customer delivery issues, but we aren't immune from it.
Got it that's helpful. Thank you and if I could squeeze one more in on Hyperscale.
Seeing the strength, there and it looks like EMEA continuing.
Is that just the continuation of some of the scaling build outs, the hyperscale or as you're doing in that region.
Kind of mentioned the 800 gig products starting to test, but if you could update us on maybe some of the expectations for timing and chairs 800 gig starts to ramp even more.
I'll take the first part of that and then maybe maybe Scott can comment on the on the 800 gig adoption there, but I think the engagement with those web scale folks who is multifaceted.
It's it's connecting that data centers, both long haul is that global networks as well, we do a lot with them in different countries with the number one supplier of all of them on the submarine cable side.
We have a pretty intimate relationship with them across a very broad range of applications and I would say that theyre continuing to rollout.
Additional data centers and increasing connectivity within their existing data centers.
Within North America, and internationally, so we're seeing pretty healthy healthy demand dynamics across the across the board on that Scott.
Scott you want to.
Yes.
One thing to add to what Gary said, the other part of the relationship with them is they still do a lot of business in parts of the world EMEA and Europe.
Well through managed service providers, so our relationships with the service providers in those Geos also benefits.
The relationship and we get benefit from that so that's part of that EMEA growth as well.
Our 800 gig comment there I just wanted to clarify something that we set so our 800 gig product is there.
As referenced as represented by our wave logic, five extreme product and that's been in the marketplace now for.
Almost a year and a half of crushing year and a half. So we're almost at 20000 units shipped to that so it's well beyond trials, it's mainstream deployment, where you might be referring to as our wave logic, five nano and as Gary referred to in the.
The script as our 400 gig ZR product, which just recently won gen.
Generally available generally available.
Yes.
Derivative of the same technology that is going through trials.
That clarifies it.
Thank you. Thank you very much Eric.
Your next question comes from the line of Paul Silverstein with Cowen <unk> Company.
Mr. Silverstein your line is open.
So.
Got it.
Relative to the light revenue guidance first off are you seeing any demand weakness or is that all a function of supply chain.
Jim if I recall for a while you've been talking about restraining opex growth to low single digits.
Really decent revenue growth should result in some strong operating leverage split out your opex declining for three quarters.
We grew opex plus 15% year over year in Q3 over 15% almost 8% in Q2.
I did the math right guidance works out to over 6% in Q3, we question being has something changed in your Opex growth plans or do you still plan to go back to that low single digit growth that you've been previously referencing.
And this is just a transitory issue.
Finally are you seeing any impact relative to concerns about four zero.
In particular.
Any impact from model.
Although important zero.
Yes.
Okay. So let me say.
The first of your three questions I'll try and answer Paul and then maybe Jim on Opex on the revenue guide I wouldn't describe it as light I would say, 26% kind of uptick in the second half is pretty solid and it's also in the higher end. The mid point of that is kind of in the high end of our <unk>.
Original kind of guide at the beginning of the year, where we had very little visibility. So it's largely kind of playing out as we as we as we thought.
And I would categorically say nothing to do with.
Demand, we would be able to get greater revenues in Q4, probably by low tens of millions if we add.
Add unfettered access to everything we wanted to as normal from a supply chain. So.
Read into that.
$20 million also.
But if we also look we over achieved by more than that in Q3.
So it's all about supply chain.
And I do think those those challenges will continue for the first half of the year, but the demand dynamics are incredibly strong.
And on the Opex called.
Also said consistently that we are committed to growing our opex at a lower rate than our revenue.
And we've done that consistently over the past decade, the COVID-19 years.
A brief exception to this because we have our revenue was affected by Covid and our plan for Opex, we continue to invest.
But again, we've grown revenue faster than opex for a long long time and that would be our expectation going forward now with respect to the specifics of Opex for this year, we're right on our plan overall, if you will.
Recall, we went through a whole reputation of how we expect that our opex to perform at the beginning of the year. We said something like we thought we would average about $280 million a quarter. We were very low in Q1, and we said that we were going to be a little higher for the last three quarters.
$87.0 to two I guess it was 285% for the last three quarters of the year.
Yes, we're a little higher than that this quarter, we are seeing a bit of FX with respect to the weaker dollar effects.
And for Q4, it's really all about the fact that we are so outperforming on orders and our operating income that our incentive compensation will have to reflect this over performance in Q4, we are absolutely.
On plan with respect to our Opex for this year.
And then on your last one Paul in the foreign income ZR. The short answer is no we're not seeing any impact on our business right now.
I don't think our perspective of the opportunity set has changed with sort of to see the market being.
On total addressable market in the sort of $5 billion per year range as it gets up to full maturity. We think 2020 twos with first year, where you start to see.
Some significant revenue opportunities there are.
Product addressing that as the wave logic five nano recently went GA.
We think it is the best performing plugged in the industry in terms of optical performance and power. So we're quite excited about its opportunity and I'll remind you.
The folks that I think will be the first movers in this.
Couple of other large web scale.
For that particular application. It is it is upside opportunity for us because we don't largely participate in those applications today.
Thanks, Paul.
Next question please.
Your next question comes from the line of Alex Henderson with Needham.
I'm not sure.
Just a quick one to start.
Art with.
A data point.
<unk> is up 24% quarter.
Quarter to quarter growth in the web scale can you say what that was on a year over year basis.
Question.
I wanted to address that was around the supply chain issues.
And the mix did the supply chain impact.
Capacity add differently then.
Footprint builds is there any variance.
And that is a result of the.
The part that you are able to get or is that completely independent.
The conditions.
Alex Let me take the first part of that I think I'm right in saying.
If you looked at year over year direct Dci I think it's about 1% growth currently as you close out of Q3, I think that might be greater as we look at Q4, but I think thats.
I think it's just over 1% and on your second Europe, just you'll remember that the first part of this year. Our revenue stream was very much impacted by Covid all customers were.
Down or will they were lower than what they would have been included in web scale, including web scale. So that's 1%.
No.
That phenomenon.
And Alex to your second question.
The challenges in the supply chain is there.
Much written about semiconductor.
Challenges that is multi industry really.
And that doesn't have a.
A concentrated impacted it's actually pretty widespread across the whole portfolio. So.
Wouldn't draw any conclusions as to one part of the portfolio versus the other being market.
The follow up I wanted to ask was on the <unk> you said it wasn't material to revenues, but.
Obviously, bringing in assets and to that extent those seem that youre, bringing in costs associated with it and I would also assume that thats predominantly in the R&D line.
Is that an accurate.
If so how much what's the scale of the.
Well.
The cost that you are bringing in.
Okay.
Not a material number Alex will address all of that revenue opex et cetera, once we get to close and once we and when we talk about next year.
Just to confirm the opening part of your question, yes. It is largely almost entirely in the R&D line.
Great. Thank you very much for letting me ask the questions.
Yes.
Your next question is from Sami <unk> with J P. Morgan.
Hi, good morning, Thanks for taking the question I guess, if I can just start with the strong backlog that you have.
And then just constraining supply capacity a bit here.
In this room that we speak to <unk>.
Those are the constraints that you had on the strong backlog it should feed into some pent up demand for mixed use and helped me a typical level of revenue growth. I know you don't have a guide for next few years, but most investors seem to be some benchmark and use the six to eight.
Brian long term growth guidance that you have.
How should we think about the ability to digest backlog once supply constraints, even leveraging what investors will be pent up demand.
Given your strong back dollar base.
Thanks, Amit I would say this I mean first of all.
It's too early for us to talk about 'twenty, two we haven't even finished.
The year that we're in yet.
We never give guidance at this time for 'twenty, two which set a couple of forward looking comments around supply chain challenges continuing so I would certainly.
Consider that as we as we turn into the year I think we've got this dynamic where you've got very strong secular demand. We've won a lot of new business, we're incredibly well positioned.
Offset that against the sort of supply chain challenges and I would also say that we have.
The effects of Covid basically we've been running with lower backlogs normal so to some extent, we've just kind of replenish the coffers.
So I think we're in a much more normalized position going into 2002.
And we absolutely think that Youll see decent market growth next year, and we will outperform the market. We will continue to take share with no doubt about that.
Okay got it and if I can follow up I think Tim you mentioned that the.
The New Board will show you what we do.
The government and.
That is largely kind of ebbs and flows in the business.
Uh huh.
How is that different from what we saw last year in Oregon, and Covid just given some of the pushout that happened back then.
What's giving you the visibility that is not kind of a single institution as we saw last year.
Well I think first of all the new wins are showing up in our order book now and so it's just a question of time before we get to revenue on them. That's the main thing I would say.
I'll also say that.
As we said earlier.
<unk> has certainly driven people to add capacity as opposed to new build outs and that's.
There are cars the dynamic that we've seen.
But it is coming no doubt about it the new business will show up in our revenue stack.
Thank you.
Question.
Your next question is from the line of Fahad <unk> with MK M partners.
Good morning, Thank you for taking my question.
Yes.
Classification.
Have not only provided the breakdown of the 310% customers how much of it.
Sorry, do you want to 310% plus how much and tell you how much how much in total.
So.
We have a 30%.
Yeah.
I'm going to say it.
I'll get that for you for us it's around 38% 38.
Okay.
I wanted to kind of follow up answer. The question then I think you've historically said that you would think that industrial blind low to mid.
Mid single digits.
Still have that view.
Yes, I think if you look at below us.
Kate.
Pretty consistently.
It's been in the mid ish single digit growth.
And we've been able to continue to outgrow that now I think.
A lot of.
That was all disruptive with Covid like most most industries, where you had.
Pretty much I think flat from.
From an industry growth point of view.
Do think that we will return to some point here more normalized growth in those mid single digits I don't see any reason that that wouldn't be the case secular demand and getting higher bandwidth closer to the customer is absolutely everywhere about every application around the globe.
Whatever you look at five GB fibre to the home.
<unk> Internet of things so the secular demand I think is very positive. So I would expect the industry to return to a more normalized pace.
And as I said, I think we will continue to grow faster than that.
If I can ask.
Maybe double click on that comment because I think I wanted to tie this.
Why don't you comment in your prepared remark about.
On margin.
Edge cloud opportunities.
Entirely new build out.
And network infrastructure, and so I just wanted to make sure that.
That significant Tam expansion that you're talking about the overall industry growth.
Or is that going to kind of.
And definitely go through a max level, because optical coherent optics is getting deeper and deeper into.
Into the network.
Yes, absolutely.
Thats a good question when I answered your question on generally talking about the optical system space.
And I think you are seeing particularly as we're a challenger in this edge metro convergence basically and so for us. It. So it's an expanded Tam and you've also got certain segments of that market that are growing faster than the mid single digits as well you've got some.
And the overall core routing thats actually going down obviously, we're not targeting that.
I don't think the world needs another core router vendor.
But in the convergence space, we have some unique assets that we think we can disrupt and challenge that that market space over over time and that will I think in the long term provide us a better growth opportunity than even the moment, saying now.
Thanks, Bob.
Okay.
Thank you.
Your next question comes from the line of Jeff <unk> with Wolfe Research.
Yes. Thank you.
Very much also struggling with the mute button.
Two questions for you I guess first is.
What can you tell us.
About your inventory.
Inventory balances.
Lot of other folks in networking of them not necessarily optical.
Greatly expanded either inventory balances in the purchased commitments.
Im wondering.
What you are able to do there or what you might be able to get done in the future to help give us a little bit better visibility on your ability to reach that.
The demand that you've talked about.
Yeah, So Jeff.
For sure we are.
Reaching out to our supply chain and making.
<unk> increased commitments both in terms of volume because we're growing the business and duration is going to have an impact on inventory balance you've seen some of that already.
To continue so you will see higher than what may have been on a normalized inventory levels and low returns as a result for the foreseeable future.
Okay. We can expect them to go up from where we are now I guess, Scott investments with point Okay.
And then secondly, it looks like the services business had a strong quarter I'm wondering if you could.
Deconstruct that a little bit and let us know how much of that is.
Is ongoing and how much of that was one time.
Yes, Thank you <unk>.
Services business had a really simple level I think of it in three bins of sort of the maintenance of the existing installed base.
<unk> networks and the customer relationships, that's pretty steady steady state if you like and predictable.
There is.
The second piece of it is around installation projects, that's very tied to our new projects and business wins, so that it will sort of ebb and flow with with the projects and the third piece of it which is we're quite excited about is.
Set of professional services around helping our customers transform their networks from legacy networks into Nextgen, that's actually had quite a good.
Ron it's still relatively smaller the smaller of the three of those pieces, but thats actually contributed.
To the.
The good the good services mix that you saw in the quarter.
While this contango that Scott.
Services go vacuum as more normal run rate in future future quarters.
We think that.
Third Ben.
Professional services mix and helping our customers migrate their networks is going to be.
An opportunity for us going forward in the future and we think that we have an opportunity to grow that.
Thanks, Jim.
Yeah.
Your next question comes from the line of Amit <unk> with Evercore ISI.
Good morning, everyone. Thanks for taking my question I have.
Well I guess, both maybe I missed this but could you talk about the gross margin impact from supply chain headwinds in October quarter for how you could do that and then Bob maybe can you supply chain headwind.
Can you can after the quarter, leading to continued to get worse and deteriorate as you move through the first half of the fiscal year.
We didn't talk about in effect in Q3, there was very little effect of the supply chain situation in Q3 Q4.
Is going to impact us now.
With respect to next year, we do know that the supply chain is going to continue.
And that's sort of constraints date, but how much and how.
That's going to affect gross margin, it's really too early to say.
And then.
NUPLAZID growth I think two quarters in a row.
Let's get much higher 45, 60% kind of growth.
Can you just touch on.
What a couple of big projects that are ramping up and Thats, what drove it or just sort of what drove that growth and the durability of movement of growth as we go forward would be helpful to understand.
I'd say first offering full disclosure, it's from a relatively small base. So those numbers look spectacular but.
But from a small base.
I would say that what we are seeing now as adoption by significant tier ones around the digitization of their service layer.
Basically, replacing the old legacy back office.
Yes.
Systems, and we are seeing that move forward in a sort of step function. This year.
Necessarily showing up in all of the numbers, we're seeing very good numbers, both on orders and revenue relative to the plan and I think it will probably be over on both in the high end of our guide on revenue, but perhaps even more importantly, even with that we're getting significant.
<unk> footprint in.
Potentially multiyear rollouts of the Digitization on the service layer and things like inventory management service provisioning.
At cetera. So.
Very encouraging with Blue planet, and we will talk a little bit more about that I'm sure as we go through the we talk about 'twenty two and beyond.
As we talk about that at the at the end of this year, but very encouraged by by what we're saying.
Thank you Matt.
Your next question comes from the line of Tim long with Barclays.
Thank you.
Two if I could as well.
Gary I just wanted to go back to the to the Metro edge Tam and kind of challenger piece. There could you maybe just click down give us a little more info on.
Timing to attack that extra Tam and how are you going to get there is it adding to the out of assets is that a part of it is it leveraging installed base because.
It's an area that obviously could be a big growth sector for you guys and then.
Second if you can just touch on a few point markets India.
Given the macro issues there as well as submarine thank you.
Yes, let me just talk on the Metro edge. Obviously this has been a journey we've been on for a while we've been.
And then investing in key strategic assets and packet space in routing switching and the software the convergence with optical and our architectural vision with the adaptive IP is a much simpler highly automated architecture.
And we all have a challenger in that space, we are securing wins with that as <unk> seen over the last sort of 18 months or so and I think Matt scattered bring mentum. We're excited about what we're saying it's still early days I think this is.
A two to five year expansion.
Of our opportunity and whilst it's a big market with challenging there some very strong incumbents, but I think we're proving we've got a very compelling differentiated value proposition with the assets that we've got and.
I think that will be an important market for us and it's a key investment and we're scaling investments both at the front end of our business and our go to market capabilities and support and also as Scott talked about in our engineering capabilities and by order is another key ad.
To that with bringing some really tremendous specialist talent into the company.
So what was the second question.
India, India submarines.
We said earlier that.
India is a place which has moved very aggressively to exclude Huawei from new builds there are opportunities for us we have taken advantage of those opportunities. We have several new wins, we expected this year that those would that India would start to show.
In our revenue stack, a little higher than that has been the case its not quite 5% of our revenue, but its up very nicely year to date, it's up 26% quarter over quarter its up a lot more than that but I think the year to date number is much more meaningful up 26%, it's going to be a great place for us to be for.
Our long term.
On the submarine submarine is up this.
This year or at least in the quarter, it's up 27% in the quarter. It's about flat year to date, we've done extremely well in the submarine market. It plays to our strengths.
The submarine market requires long reach at high capacity and we're the best in the world at it I think we'll continue to win there.
We'll take one more question.
Your last question comes from the line of Jim Suva with Citi.
Thank you when we think about the supply chain issues.
Materially changed your pricing for things also about like say shipping.
They fully folded into your gross margins or are they still kind of being calibrated and then on your bookings and orders.
Is there any concern about customers.
<unk> ordering or ordering ahead, knowing that they have supply chain issues or optical components is it just kind of not as much of a concern as maybe other sectors that we see where there was double ordering thank you.
Jim just.
First question was around our costs.
We're certainly seeing.
The costs of both procuring components and logistics costs, having an impact on the margin and that's fully baked into our gross margin guidance for Q4 on your second question.
Okay.
Second question was that about orders on ASO orders that we're placing on our supply chain.
Current orders are on both sides coming in is as customers.
Customers grow their chance that they are double ordering or are you guys seeing the shortages does it makes sense to order a little boy to have some buffer because we progressed in the quarters ahead.
I think given the nature of the industry is extremely extremely unlikely the intimacy we have with these customers on the system side.
So I think thats, a sort of zero risk frankly on that side on the supply chain side I think the relationships that we have again on.
On the supply side there is.
Very intimate and long standing.
Great. Thank you so much thanks.
Thanks, Ken.
Thanks, everyone for joining us today, we appreciate it we're looking forward to catching up with folks just today and over the next several days, we expect that number just from spending thanks and stay safe.
Thank you. This concludes today's conference you may now disconnect.