Q2 2022 Ciena Corp Earnings Call
Financial outlook.
Today's discussion includes certain adjusted or non-GAAP measures of <unk> results of operations of.
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'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 supply chain constraints on our business and results.
Just 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 our upcoming 10-Q filing which is required to be filed with the SEC by June eight and 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. So we do ask that you limit yourself to one question and one follow up with.
With that I'll turn it over to Gary.
Thanks, Greg and good morning, everyone.
This morning, we reported largely in line financial results.
When considering there's really a strong achievement against the backdrop of an increasingly challenging supply environment.
This included revenue of $949 million, reflecting year over year growth of 14% as we continue to take share and grow faster than the overall market.
Building off an historic first quarter order flows.
Order flow in the second quarter remained very strong with a book to bill ratio well in excess of one five.
As a result, we continue to grow our backlog.
In fact with continued strength in orders in recent periods, we have seen significant expansion in our backlog since the end of fiscal 2021.
From about $2 2 billion to more than $4 billion exiting Q2.
We are clearly seeing a number of positive demand trends at a secular level, but we believe a very durable over the long term.
And with our leading innovation scale customer relationships and investment capacity, we will continue to capture market share.
Okay.
Ironically this significant growth in demand for our technology as exacerbated the impact of ongoing global supply chain challenges on our business.
And in fact, Q2 really presented the most volatile set of supply chain conditions to date, which in fact worsened as we moved through the quarter.
Okay.
To put it simply demand continues to significantly exceed supply and availability of supply is the most impactful factor in our performance and rate of revenue growth at this time.
Within this context.
We continue to execute well in Q2 and navigate these challenges through supply chain mitigation strategies.
As a result, we delivered more product in Q2 than we did in the same quarter last year, including some notable highlights that illustrate our innovation leadership and the diversified business that we have.
Milt.
To start with non telco revenue in Q2 was approximately 44% or up 15% year over year.
This included direct web scale revenue of 22% an increase of 7% year over year, primarily for our waves of our platform.
Our top 10 customers in the quarter included for web scale.
And we made our first product shipments to a new large web scale customer in the U S.
We now have the top six global web scale companies as customers of wave logic five extreme in different stages of maturity of deployment.
Overall in the quarter, we added 16, new customers will wave logic, five bringing our total to 172.
Q2 was a record quarter for shipments of wave logic, five eight up 50% year over year and more than double that of last quarter.
To date, we've shipped more than 35000 wave logic <unk> modems to customers globally.
In routing and switching business is growing driven by tier one service providers as well as tier two three customers for our expanded routing and PON capabilities.
Quarterly revenue, there was up 27% sequentially and more than 70% year over year, including a strong contribution from the recently added by our platform.
And finally platform software and services revenue was up 22% from this time last year.
Looking at the overall demand environment.
The shifts in business and consumer behavior of accelerated positive trends for our business, including cloud adoption.
Greater focus on the network edge, which is really greater capacity closer to the customer.
And the need of course for increased automation.
These are strong and durable long term secular drivers for the industry create.
Creating an incredible demand environment for our business going forward.
And optical specifically, we are experiencing significant growth in our large installed base of customers around the globe.
Fuelled by exploding bandwidth.
Requirements.
Yes.
Adding to this positive dynamic is continued incremental opportunity to displace Huawei in many countries, particularly in Europe , as well as increasing public investments in network infrastructure.
In routing and switching we continued to secure new design wins around the world primarily associated with growth in wireless and accelerated cloud adoption again at the edge of the network.
And we continued to expand our addressable market in this space as we invest in new technologies and solutions to address additional use cases, such as residential broadband.
In Blue Planet demand continues for automation that enables differentiated digital services for a fully connected experience.
<unk>, we believe we will continue to fuel the need for Oss modernization as new innovative services require end to end service lifecycle automation.
These demand dynamics are present in our order book today.
And we expect continued demand to address these network requirements will result in a growing backlog as we move through the second half of the year.
Okay.
This level of demand far outpaces, frankly, our expectations for orders in the year driving our backlog that reflects strong underlying secular demand.
As a result, we have tremendous confidence in our forward growth opportunities.
Now with that said I want to be extremely clear.
In this environment, our revenue is not a function of demand.
Or even production capacity for that matter <unk>.
It is purely a matter of component supply availability.
Okay.
And that of course brings me to supply chain.
And as we all know we remain in a very constrained supply environment, particularly with respect to semiconductors and integrated circuits.
And I think it's important to remember that these particular parts are relevant to multiple industries from telecom to consumer electronics to automotive and others, which only serves to exacerbate this global supply challenge.
And of course, we continue to employ a range of supply mitigation strategies that we've previously discussed including place.
Placement of large advanced purchase commitments for critical components in short supply with extended lead times.
And qualifying engineering alternatives to expand our sources of supply.
Okay.
However, as I mentioned earlier supply chain conditions appreciably worse and as we moved through Q2.
Specifically, we saw a significant increase in both the volume and magnitude of supplier Decommit that we werent able to fully mitigate in two areas that are critical to our business.
Firstly, a number of key optical sub component suppliers as they themselves are publicly noted.
Been unable to fulfill their supply commitments due to constrained access to semiconductors.
Second we've seen additional supplier decommit for a number of integrated circuit suppliers centered really on low value commoditize parts that are essential to the operation of our finished products.
The second dynamic has been largely related to the Covid lockdowns in China.
And while we have by design, a very low overall supply chain exposure to China.
Our revenue is being affected given that China has effectively the primary source of many of these low value commoditize parts that are essential to the production of IC and <unk>.
On both of these issues there simply aren't enough parts to go around and satisfy demand across a number of industries and market segments.
Just to reiterate these dynamics do not represent a CNS specific challenge rather this is an industry wide global challenge.
And despite the willingness of network operators to spend we expect that the length and severity of current supply conditions will impact both overall industry growth rates and of course, our own revenue growth.
That said when our industry begins to see improvement in supply dynamics.
Our scale investments customer relationships and strong balance sheet puts us in the best possible position to service industry demand.
With that I'll turn it over to Jim for more detail on Q2 and to discuss our guidance Jim.
Gary Good morning, everyone.
We delivered Q2 revenue of $949 million in line with our guidance.
Adjusted gross margin in the quarter was 43% also in line with our guidance and consistent with our expectation for a revenue mix that includes a larger proportion of lower margin common equipment.
It also reflects significantly higher component costs and also higher logistics expense.
We expect expect these dynamics to continue as we move through the remainder of this year.
Adjusted operating expense in Q2 was $301 million.
It is important to point out that while our results were in line with guidance. This achievement was a significant task in the current environment and required outstanding execution across a number of functions inside of Ciena.
Moving to profitability measures, we delivered adjusted operating margin of 11, 3%.
Adjusted net income of $76 million.
And adjusted EPS of <unk> 50.
In addition in Q2 cash from operations was $106 million free cash flow was $86 million and adjusted EBITDA was $129 million.
We ended the quarter with approximately $1 $6 billion in cash and investments.
Also in Q2, we repurchased approximately one 5 million shares for $87 million and received 900000 shares of common stock pursuant to the final settlement of the accelerated share repurchase program, which we implemented earlier in the year.
We continue to expect to repurchase approximately $250 million of shares in fiscal 2022. In addition to the ASR.
Turning to guidance.
<unk> industry supply chain conditions make providing guidance extremely challenging at this time.
Conditions were more difficult in Q2 than in previous quarters, mainly because of a higher number of decommit from our supply base.
Cause both by semiconductor availability and China Lockdowns.
Manned drivers are very robust, but as Gary said.
In this environment, our revenue is not a function of demand it is purely a matter of component supply availability.
Also with the current state of the supply chain and the resulting greater uncertainty there is a wider range of potential outcomes in the coming quarters than has been the case.
As always though we are providing our best perspective today about our expected performance in Q3 and for the fiscal year.
Importantly, this view assumes that our component suppliers deliver on their most recent commitments and that we don't encounter any substantial new decommit that we cannot successfully mitigate.
With that in Q3, we expect to deliver revenue in a range of $870 million to $930 million.
This lower range for expected revenue is entirely driven by conditions in our supply chain.
We expect gross margin for Q3 in the low <unk> percentage range, which reflects a continuation of the same dynamics that we saw in the second quarter, a higher percentage of revenue from line systems and common equipment again, coupled with greater than expected component costs and higher.
Logistics expense.
And finally, we expect opex of $305 million to $310 million.
With respect to the full fiscal year, we are adjusting our expectations for exactly the same reasons and with the same assumptions.
We now expect to deliver annual revenue growth in fiscal 2022 in the mid single digits.
Gross margin for the fiscal year, we expect to be in the low 40 percentages.
Our operating expense will be roughly consistent with an average of $300 million per quarter for the full year, perhaps a little bit higher in Q4.
Mostly due to compensation expense.
And finally operating margin in the low double digits.
Generally speaking the growing consensus view in the industry is that supply chain conditions will take at least several more quarters to return to a normalized state.
Given the persistence and.
Unpredictability of these challenges to date, we believe that is a reasonable assumption at this time.
But it is entirely possible that this timeline, we will continue to change it is an incredibly dynamic situation.
Furthermore, it is critical to remember that there will not be a light switch moment that is a single moment in time when conditions improve in the flow of supply returns to normalized levels.
Any recovery when it begins will be gradual and will occur over time.
In summary <unk>.
We're mindful of the variability of outcomes the supply challenges present in the near term, but we are prepared to benefit when a meaningful and sustained recovery in supply dynamics occurs.
Importantly, we are extremely positive about the durability of the underlying secular drivers, which continue to drive a significant and growing backlog that reflects not only a strong demand environment, but also our continued market leadership.
Combined with our relationships with customers and suppliers and the mitigation steps. We are taking to address current challenges we are very well positioned for long term growth and success.
With that we will now take questions from sell side analysts Rob.
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. As a reminder, we ask that you. Please limit yourself to one question and one follow up your first question comes from the line of Paul Silverstein from Cowen Your line is open.
Thanks for taking the questions.
Jim and Gary can you also discuss what linearity look like in the quarter and perhaps even more importantly.
What has been what our bookings look like over the past four weeks, leading up to today and then I've got a in Jim related to that.
Our guidance for July .
For the October fiscal year.
For the supply chain impacts how much revenue was impacted what was the gross margin impact.
Got it.
Okay.
Yes with respect to linearity.
As has always been the case, we are backend loaded typically it's because of the timing of our orders, but in this case it has to do with the delivery of components to our contract manufacturer. So we've had we've had a <unk>.
Very non linear flow of orders they've been strong really the entire year and not necessarily in the last month of the quarter.
Even though it's strong in the last month of the quarter. It is not as backend loaded on the order side, but on the supply side. It has been back end loaded and therefore our revenue.
Has been backend loaded.
So Paul the other thing I would add in terms of the.
Linearity of orders as Jim said, it's been it's been pretty consistent.
Q2 was over one five.
Our ratio of revenue and we expect to continue to build backlog for the for the second half of the year as well. So we are seeing very consistent demand, which is really driven by just the increase in traffic and the adoption of cloud at both the consumer and enterprise level on a global basis. So.
Initially there was a little bit of catch up and then there's some forward ordering but it's not that it's not that much we thought we've only got in.
In 'twenty three.
Our requested we've only got a few hundred million most folks would take everything we've got right now.
So that's why we talked to you know this is very sustainable.
Order flow demand.
And to your specific question about what our guide would have been.
A number that is.
As almost.
Beyond the pale.
Paul because we've got a backlog of over $4 billion as Gary said only a few hundred million dollars of that is true 2023 demand all the rest of it is is asked for by the customers in this year. So.
Our revenue for this year would have been.
Extremely high if we were able to get the components to manufacture. It now I don't think people should take that as the if.
If you just run the numbers there and figure out what our revenue could be this year you shouldnt take that as a run rate. This is a catch up it's the fact that theyre all trying to get ahead of everybody else with their orders, but it does speak to the strength of demand and what we think is very durable demand.
Jim just to be clear you all I don't think you provided the backlog number last quarter. It was $2 7 billion equivalent of October what was the backlog increase in April .
Quickly clear with respect to my question about linearity and order strength.
Forward indicators, you're looking at order growth.
All of the other leading indicators that speak to future demand. There has been no attenuation of recent vintage August .
CERN widespread concern about a macro slowdown translating the slow economic activity for virtually everybody yourself included you're arguing that's not what's going on this is purely supply driven but again. My question here is looking at demand trends looking at all the different forward indicators youre not seeing any attenuation strength.
No we're not Paul.
The rough rounded numbers, we came out of the year to over 2 billion and we came out of last quarter with over 3 billion and we came out of this quarter with over 4 billion.
And we think that we're seeing in forecast with our customers tells us that.
Might not continue at that pace, but we're going to continue to grow backlog.
With the with the order flow and the other thing I'd say about macroeconomics.
No.
Whilst no industry is immune from that I do think that cloud adoption has proven to be incredibly resilient and the ups and downs of various economic moves.
Sort of fundamental.
So how the world works now around getting greater bandwidth closer to the customer I'm not we're not seeing any signs of that letting up at all in fact, the opposite if you look at web scale, they're planning to build more and more data centers again closer to the customers around the world.
And we are obviously in partnership with them about their long term planning, we're not seeing any slowdown on that whatsoever.
Hey, Doug it's.
As my follow up just to be clear the numbers critical supply chain situation, but the strength youre referencing that was broad based geographically across product markets and across customers.
Yes, yes, absolutely verticals regions products.
Particular strength in our routing and switching business, which as you know thats a focus for us.
I appreciate it thanks guys.
Yes.
Your next question comes from the line of Amit <unk> from Evercore ISI. Your line is open.
Good morning, Thanks for taking my question after as well.
First of all maybe Simplistically think about it is the backlog has ramped up from $2 2 billion to 4 billion in the last four quarters.
Over the last year.
Should we think about how much of this is due to just demand is stronger and its a natural buildup of backlog.
So as customers that are placing longer duration orders because they won't get supply.
This is the way to think about yes. The backlog has gone up how much of that is due to duration extended by your customers versus all of the supply chain issues you talked about.
Okay, Yes.
That's a good question Amit let me, let me give you a sort of a data point here that I think will help with that.
I think <unk> got a confluence of three things going on you've got a little bit of catch up that certainly was the case sort of probably 12 months ago.
Our carriers, we're very conservative during Covid, both concern both from an operational perspective and from a fiscal perspective that we're playing a bit of catch up that's largely flowed out then we are seeing a little bit of certain customers looking at security of supply and are giving us more visibility longer into the cycle that's absolutely.
But an interesting data point around <unk>.
Traffic, they're trying to buy four and address or is it just a security of supply chain.
Of the $4 billion.
Plus in hardware, we've only got a few hundred million that is requested for 'twenty three.
All the rest of it is requested for 22 now.
Not going to happen clearly for all the reasons that we've just talked about but it does give you I think a great insight into the fact that there's not that much forward ordering in that backlog, which is real demand.
Folks want.
And just another clarifying couple of points here, our backlog is definitely a double edged sword here, it's great to have the demand. It's great that the orders are placed on us as compared to our competitors, but part of the reason that we have such a big backlog is because our lead times are longer than we'd like them to be.
And we're not making our customers delighted as we like to do.
And so the fact is that when we get new orders, which we've had a ton of this year.
Most of them are being scheduled.
<unk> out in the latter part of this year in some cases into 2023 as Gary said, it's not really 2023 demand, but that's when we can deliver it so it's as we say it's.
Double edge sword, we're glad we have the orders, but wed like to delight our customers.
Okay fair enough that's really helpful.
Just my follow up would be up.
Perhaps wouldn't have had a revenue.
Challenge or headwind gross margin that typically doesn't really want to be the mix of new projects versus existing ones.
So Brian I wanted to see the revenue headwind, but we see a gross margin offset our tailwind. So maybe you can talk about.
Why aren't we seeing that yet because it hasn't historically low revenues has been better gross margins of the company. So why is that not happen this time around.
Amit.
I'll take the first part of that and then maybe Jim or Scott can talk to the actual sort of increase in cost.
The first part of it is really mix and so what we're seeing is remember we've won a lot of new global.
T J carriers in web scale build outs that we're now deploying so a lot of that is really think Commons online systems, which tends to be tends to be lower margin. So just the general mix on the business given the size of it even though routing and switching is doing well in software is doing well.
It really the large part of the of the mix is around those lines systems right now now it bodes extremely well for the future.
Then we can put in.
Cards, modems, which tend to be higher.
Higher gross margin so you've got it.
You've got a different mix really based on on the demand that we're seeing in a lot of it new builds that were both with new customers and with existing folks.
Yes, and just to put some numbers on it and that remember the last time, we've talked about what we believe to be our long term gross margin run rate gross margin I should say is.
Around mid forties, we said, 44% to 46%, so I'm going to short handed at 45%.
When we went into Covid there was a.
The smaller percentage of new builds because of the difficulty of getting supplies and people out to locations and so we had a higher percentage of capacity adds which are higher in gross margin. So we enjoyed that.
But we said as we entered this year that we thought that our gross margin. This year was going to be 43 to 46 overall, because we did expect a higher proportion of new builds and Commons in photonics, which are inherently lower margin that was our expectation coming in.
This year now what's happened is we are seeing that but we're also seeing significantly higher premiums that we're paying to get parts. We're trying our best to supply our customers, even if it costs us money and gross margin, which it is and also higher logistics costs.
The rough math for the effect on this year's gross margin of those two latter points, meaning premiums and.
Logistics costs is roughly 400 basis points, you can think of it that way. So you can do math.
Get to where you think our gross margin might be without these we are reasonably confident that we're going to get back to those mid forty's at least as we come out of the supply chain situation, but we can't give you a prediction as to when it's going to occur.
Thanks, Amit I appreciate the question. Thank you.
Yes.
Our next question comes from the line of Tim Long from Barclays. Your line is open.
Your next question comes from the line of George Notter from Jefferies. Your line is open.
Hi, guys. Thanks, very much I guess I wanted to ask about purchase commitments I think you said in the monologue that one of your mitigating.
Initiatives was to ramp up purchase commitments can you tell us what that purchase commitment number was and I think if I recall correctly. When you printed the 10-K that number was about $430 million. So I'm. Just curious if that number is up yes, thats up quite significantly George it's up to about $1 8 billion today.
We've essentially laid out to our supply chain at least the next 18 months of what we see is demand.
If they deliver on that we're going to do very well.
Got it Okay and then the other thing I wanted to ask about was you.
Your inventories started to inflect I think just a couple of quarters ago.
Look obviously the supply chain environment has been around for a couple of years and.
So purchase commitments are just inflicting now inventories are just reflecting on the last quarter or two I guess I'm wondering if like this is more an execution issue at Sienna or do you think by and large you guys have executed as well as anybody else.
Let me, let me take the first part of that George and maybe Scott can.
To the inventory a little more precisely I mean listen I think that.
I think to date, we've navigated it extremely well I mean, you look at the performance we shipped more than in the second half than we did in the first and the first half than we did in the.
The previous year.
Revenues are up 14% in the quarter. So I think the numbers talk to themselves, particularly when compared to the competition. So we're a much larger installed base, where a much larger business with larger market share, but we're still growing the business and shipping more it's not where we want to be or where we could be if we.
If we had supply so I think generally we're navigating through better than anybody else, but it's not.
It isn't it isn't where we want to be from a as Jim said from a customer satisfaction point of view.
And George just to speak to a little bit to the inventory position.
Couple of dynamics, there that are all related and conscious decisions and it really relates back to Jim's comment that we're not we're not pleased with the way we are servicing our customers. So we are making investments in component inventory, where we can get our hands on it.
In preparation for.
The last remaining items that come in in order for us to turn it into finished goods. So that we can do that we can do that very quickly for our customers. When they become available. We've also complemented that with manufacturing capacity expansion. So again, we can turn components and finished goods as fast as possible for our customers. So it was a conscious decision.
If you look inside that inventory.
Number youll see it more of it has shifted actually to the component level versus the finished goods level as well and you can see that dynamic happening.
And then just to the point of purchase commitments George.
If you read the statement in how we describe it we talk about noncancelable purchase commitments. If you think about the.
And there are certain procedures that we have to go through in order to cancel but our actual total purchase commitments, even a year ago, we're much higher than the $400 million that we disclosed because we considered that a lot of it was canceled today.
Given the demand situation, we've sort of viewed.
Essentially all of them, perhaps not all essentially all of our forward purchase commitments as noncancelable, because we're not going to cancel we need the stuff. So.
If you could see inside that.
Logic, you would have a different view of what our purchase our total purchase commitments were even a year.
A lot higher.
The other thing I would add to that George is that I'd, just remind everybody that's rule component cost.
No transformation on that that doesn't include the inventory that we've got on site. So if you add all of that together.
We basically have provided commitments out too.
Supply chain for key elements for the next 18 months.
As I think about the kind of manufacturing side of this.
I know for example, going back to OFC, we were talking to some of your customers I know lead times were more than a year.
Where our lead times now and do you think there is some potential for you guys to lose share now that we're hitting get longer and longer lead times.
It's frustrating for customers.
Yes lead times GA, 100%.
A function of the component availability, it's not it's not a function of our manufacturing capacity. So I point that out and the numbers you sort of quoted as kind of.
In the range of where we're sitting today from a lead time perspective.
Bending the curve on that again goes back to when when do you believe the components supply industry.
It starts to start to show better performance.
You wanted to do you want to talk to the durability of the demand and I think I think in terms of.
The competitive environment.
Our market share.
Let's look at a couple of data points here our market share in the first half we think increased 1%.
During all of all of this that's revenue that is not absolute revenue, yes, that's not shipments I mean, we shipped actually more than that but.
Excluding China. So we grew 1% and I think the other two data points as revenue grew more than the competition in the first half. So we're shipping more and we're a much bigger company than a lot of those folks and optical sure and then the other testament to it is the order flow I don't think anybody youre seeing the kind of order valid.
<unk> from the customers knowing what our lead times are.
Still increasing backlog, we've been very transparent with our customers, but remember our products are highly differentiated we have by far the best technology and relationships with these customers and I think global scale and balance sheet and those relationships are absolutely critical to coming through this with a win.
<unk> hand.
And that's what we're focused on and just as importantly, all of our competitors are looking at the same supply chain conditions that we are and so it's unlikely.
That anybody is looking at wildly differently.
And what we're able to provide.
Great. Thank you.
Sure.
Your next question comes from the line of Fahad <unk> from loop capital. Your line is open.
Again. Your next question comes from Fahad <unk> from loop capital. Your line is open.
Good morning.
Got it if I look at your backlog commentary and the quantification you provided and across Europe .
Your competitor.
The cynical New Yorker and me.
You know the networking.
Uh huh.
The optical networking.
The market hasnt been growing to that.
Broadband speeds to my home hasn't really changed much.
Since the Covid pandemic started so where is this all incremental demand coming from or is it just the.
Pure functional customers double ordering but what we're targeting but double ordering in order to secure more supply.
What do you say to that.
I would say to that.
We're not seeing that.
There may be some minimal amount of that but given the fact that this is not commodity stuff you can't swap and change around it.
And the relationships, we have with our customers I think that is not a dynamic that were.
We're seeing.
What's driving that sees real bandwidth growth.
And when you think about what's happened during the pandemic.
People were using more bandwidth, but carriers werent spending in this market was kind of flat for about two years and we expected an uptick.
Which we began to see.
18 months ago.
I think it's.
The demand from the customers has continued to increase from the consumers of this both the consumers and the enterprise space.
What we're saying is just an uptick in cloud adoption, both at a personal level and at a global enterprise level, it's about getting bandwidth much faster closer to the customer in their various forms.
That's why we're seeing an uptick across all of the sectors submarine data center interconnect Metro edge.
All of all of the.
Engagements that we have a role about how do we get more capacity more efficiently out to that so.
This is not embedded in some false security of supply demand piece absolutely not.
This is about real demand of traffic and for all the reasons that I think we can all understand them, we see in our daily lives.
One thing I would say the cohort is this.
<unk>.
Yes.
For a long long time this industry has grown at low to mid single digits overall, and we've grown at sort of 8% and our last guide for three years.
We do expect the industry to continue to grow at that historic rates and we expect to grow at 6% to 8%. So none of that has changed and argue the world continues to act as it has been acting so we're not saying that this kind of order flow is going to continue for the long term.
That order flow will be good it's not going to be at the.
Higher levels that we're seeing this year so.
I don't want you to think that we're calling up our growth rate I would say this.
Think given what we think our backlog will be at the end of this year and assuming that our suppliers deliver on their commitments to us will have a growth rate in revenue next year.
Well above the 6% to 8% that we've seen in the past and I can't give you a number on that but it's going to be good.
But again, our long term view of the future of the industry is grows at 3% to 5%.
And we're going to grow in that world, 6% to 8%, that's what we think today.
My follow up.
Kind of really piggyback on George's question on the extended lead times that the supply chain shortages.
What extent are these orphan your customers to change architectures, maybe we'll pivot to more plug and <unk>.
And you can plug to plug into an existing router you don't have to.
The new power system power supply.
Et cetera. So.
Do you think there is a risk of customers adopt a plausible factor because they still need that bandwidth.
No.
Not at all in fact, I think ironically, the dynamic may be the opposite because in order to take advantage of this positive is you actually have to upgrade your entire switching and routing infrastructure to a 400 gig infrastructure.
That is constrained by the supply the supply chain as well.
Okay.
I appreciate the answer thank you.
Hi.
Your next question comes from the line of Tim Long from Barclays. Your line is open.
Thank you sorry about that before.
Two questions if I could first let's just beat a dead horse and then the second one.
Jim.
Jim and Gary.
The last guidance implied no decommit and when we look at Q.
Q4 to get to the full year, it looks like a pretty big sequential increase probably something like 20% I'm not sure exactly what mid single digits for the year means why why would we assume that the deep that everything gets delivered as expected what visibility do we have that.
The supply chain is going to live up to the commitments they have when that hasnt happened over the last multiple months here.
That's number one and then number two I was hoping you could just dig more into the switching routing part of the business. Obviously you added the auto if you could just talk about how much that helped the numbers and you talked about expanding Tam and use cases. So if you could just Gary maybe give us a little color.
On how you see the trajectory of that business potentially moving over the next next few years here.
Tim I'll take the first part.
Sure.
What we've always tried to do and what we continue to do today is we're trying to give you.
I'll give the world a set of numbers that are reasonable and reflect our view of what the world looks like today.
We.
I expect that there will be some decommit I will say this that we had <unk> in Q2, which we were largely able to mitigate and therefore, we came in line with our revenue.
Hopefully we've built in enough.
Sort of margin for error that we can handle some decommit.
But again, it's our best view.
<unk> of the future and yet.
If you look at the entire year were roughly $250 million or so below.
But.
What we've said about the year in the past.
Roughly half of that is because of the.
The fact that our optical sub component vendors are unable to get parts and the other half is because of the China lockdowns, it's not precisely 50%, but roughly half and half.
And then to your question about.
Breaking down a little bit the dynamics that are going on in the routing and switching business I'll say say this just to repeat.
The business itself was up 27% sequentially quarter on quarter and about 70% year on year, that's a combination.
Organic growth and inorganic growth of Byetta, I'd say roughly split.
Half and half roughly.
Between the two.
What's driving that primary use cases for that portfolio that we're focused on.
Are all centered around the evolution of the.
The metro and the edge.
We see.
Growing interest in our wireless transport infrastructure transport infrastructure as people build out fiber to the tower and look at architectures moving to <unk>.
Enterprise connect as Gary talked about enterprise connecting to the cloud.
<unk>.
A new space for us around residential access.
Hitting on interest in the architecture, there and then backing off from that bringing all three of those use cases back deeper into the network a common routing and switching aggregation platform. So those are the four areas that we're investing in.
We think it.
Presents a significant Tam.
As mentioned over the years for us and the early signs as you can see in the results year over year.
We're having some really good early success there.
Thank you.
Okay.
Your next question comes from the line of David <unk> from UBS. Your line is open.
Great Good morning, and thanks for taking my question.
I just want to come back with my line cut out earlier I, just want to come back to the lack of supply and specifically Ics.
I guess, it's our understanding that this is a fairly well known headwinds and I guess I'm just curious how do you square that commentary that.
The book to Bill and backlog are strong, but I would imagine your customers are incredibly sophisticated they know that there's shortages of Ics. So is there a risk that they've already adjusted their order cadence a little bit earlier, and so that raises some risk that there could be an air pocket later, maybe not this year, but into 2023, and then I didn't hear any discussion of maybe what.
A recession might look like.
Next year, if we do move into a more slower growth GDP environment, what that would look like for your not only your order growth in your backlog, but what your customers' customers might respond to and then I have a follow up on on the numbers being pushed out into next year.
David Let me take the recession, one first and I'll take that Scott.
For the first part of your question.
I think we're obviously.
Mindful of the macro sort of economic challenges that it looks like the world is going to go through but I would say a couple of things in our conversations with.
All of our customer base and its diversity, we are not seeing any.
Let up in that forecast and demands on their long term plan I mean, we've got pretty good visibility into the next.
One to three years around the overall dynamics of what they're saying to do in semi.
Listen I think the industry has never immune to a recession, but it's generally performed extremely well during the recession because people need access to the network.
<unk>.
Network operators and web scale are going to continue to invest in.
Work in getting.
More traffic out there so.
I think we feel very good around the durability.
The demand that we're seeing in terms of.
Fulfilling what we've got I think what we're trying to do right. Now is just really catch up with the with the backlog on the.
On the pent up pent up demand I mean, as Jim said I don't think were going to see order flows at the rate that we're seeing them right now or this year, but I don't think its going to fall off a cliff will go through an app pocket Eva.
I think <unk> seen a change in the dynamic around this is really an infrastructure business and I think people are getting used to ordering out longer term and I think you will see that these lead times will get better over time for sure, but I think you will see greater long term visibility with our customers.
And remember that we're advertising and talking to our customers about longer lead times.
Absolutely imperative that they have in place longer duration orders on us than has been the case in the past because they do need the gear.
And we're not as we said, we're not claiming that this rate of order intake is sustainable but we are we do strongly believe that demand for our served our products and services. We will continue to grow and we will continue to take market share.
Great and maybe just as a quick follow up that's helpful. So you've given lead times at least appear to be persistently long Ed not tightening here in the near term.
How would you handicap sort of that $250 million revenue shortfall.
Head of being able to capture that next year, given where lead times are and where commits are at this point and your purchase order commitments right.
I mean, obviously, it's a difficult visible it's difficult visibility to predict but.
You mentioned that Youll, obviously think you'll grow faster than 6% to 8% next year, but is the expectation based on your order book and where you are with your supply chain is today that you'd be able to capture most if not all of that next year.
Well.
I mean, if you just.
Look at the delivery dates.
Probably would be in next year's budget.
All we can say about next year today really.
Is that.
Given where we think our backlog will be at the end of this year, we do expect to have a significantly higher growth rate in 2023 than the 6% to 8% we promised in the past.
I can't give you an exact number because I don't know the number but I think it is going to be a great year next year.
And I would just add that I think sort of and again, we're not talking about 23 right now but.
I sort of view is what's going to happen is we've got to get greater predictability from supply chain.
And we've got to get the volumes that supply chain of committed for 'twenty three we're not really banking on improved lead times from our suppliers.
Thank you David.
Okay.
Your next question comes from the line of Rod Hall from Goldman Sachs. Your line is open.
Yeah, Thanks, guys I appreciate it.
I just had five more questions on supply and then I wondered if you could pick the call.
Five more answers for you.
Rod.
No I wanted to I wanted to dig into the verticals a little bit.
I'm just looking at.
The cable number was kind of usually that seasonally up in April and it kind of Flatlined I don't know if that supply oriented. So I just wondered if maybe you could talk a little bit about.
The demand dynamics, there and then likewise government.
Is up a lot I mean that was a big number in April just curious if you guys could dig into those vertical demand dynamics, a little bit how much is affected by the supply how much of this is.
Demand, but just curious what's happening there. Thanks.
Yes, I would say the cable paces is purely supply I mean, we're seeing very very strong demand out of that and it could have been a lot greater if we'd have had hate to use the word again.
Our supply so I.
I don't think there's anything to that government was a couple of larger projects that we that we delivered in the quarter you got a lot of ebbs and flows on the government stuff very project.
Very project based.
But I think the cable space together with the sort of tier one carriers in North America very very robust.
Demand and again, its really a function of just a supply.
And do you think I mean, the government number Gary does that ratchet back down again April was the pulses project oriented revenue or is that.
I think the forecast for it depending on the ability to ship, but I think I think that's likely to go down in Q3, but we are seeing.
Let's step back from those ebbs and flows we are seeing a sort of consistent investment by the government.
In our networks for all kinds of reasons that we're going to probably probably now and so we do feel good around that space.
You highlight the net we feel good around that for the next few years.
There's a lot of network build outs of network modernization, that's going on within the various government networks our technology.
Their needs very well too.
Great. Okay. That's all I've got thank you very much thanks Jack.
Your next question comes from the line of <unk> from Bank of America. Your line is open.
Hey, guys.
<unk> got the risk that things get canceled next year, because customers don't get the products. So if I'm thinking about the cloud or the service providers.
Having their side of the operation ready for products and not running any operation. So they don't get the revenues associated.
I started project.
There is still supply chain issues. So so the question is about the sensitivity of demand to supply basically.
Okay.
Don't think thats, the driving force so I think the driving force here tall as underlying demand for bandwidth.
That has continued to grow through every economic condition, we've had for <unk>.
20 years or 30 years so.
I don't think lack of supply is going to constrain their demand.
I think it's.
They're going to have the demand as long as their customers.
Are demanding services from them and as I've said, we've seen no reduction.
On the web scale, specifically there is no point building a data center if you can't connected.
Get the point, but.
I wanted to get to sort of context to this right. We are shipping more than we did last year. So we are shipping stuff. So we are providing connectivity to these folks and they're just not getting the full capacity that they wanted.
This is not a sort of binary situations.
We are growing we just posted a quarter with 14% revenue growth. Despite all of this stuff.
So it's not as if we're not getting stuff out there. So we are satiating some of the demand for our customers, but it's not everything but they they want.
<unk>.
Yeah.
No one else is doing it better than we are so there's not a lot of other other alternatives to that and people wouldn't want to get out of the queue I'm sure and by the way, we've got our leading technology and continue to have that so.
Those are the dynamics that we saw in the fundamental constraints. If you follow the chain is common to everybody.
Right.
Maybe a follow up follow up question is what.
Isn't it isn't this environment.
<unk> up more voices within cloud to self manufacture solutions, rather than buy from vendors just because they will have better control over the supply chain do you think that may be white box solutions or any anything that is more about self serve design self manufacturing.
Do you think that this can actually grow as a response to the current environment.
I think Tal from the conversations that I personally have a I think the opposite is actually true frankly, I mean, we're able to navigate through it because we're a specialist focused player.
Onward.
Vertically integrated so we're actually in a better position to better positioned to go and do that and I think to Scott's point on the ZR plug a bold thing exactly the same reason is actually pushing that market out because it's more difficult to get the infrastructure to support that so.
So the DIY stuff is actually more difficult than it was before.
Got it. Thank you thanks to our operator, we'll take one last question.
Your final question comes from the line of Simon Leopold from Raymond James Your line is open.
Hey, Thanks for taking the question kind of surprised nobody has asked this actually.
You talked about the supply chain worsening.
Get that but it does seem to somewhat contradict some of the commentary we heard from some of your optical component suppliers basically guided to improving telecom shipments in there.
<unk> June ending quarters.
And I just want to make sure I understand whether or not you're indicating that that's not really going to be the case or if this is more about timing and why you don't sound more constructive if theres something else informing that.
The challenges in optical components and then just a quick follow up if I might is just an update on your own shipments of VR plausible. Thank you.
Yes, Simon do the first one.
Simple summary is yes, it's timing so the history says of when they see improvement when we actually get it through our supply chain and <unk> customers. It is timing.
They did talk though about the gap or some of them talked about specifically to the GAAP that they had in their in their June quarter. So if you map that to our timing. It has an impact on our Q3 and to some degree on our Q4 as well.
I'll just remind you though that we also said there was two dynamics one was the optical sub components that you pointed out the other one was.
Integrated circuits that largely was due to China again there.
It's the.
Second order effects in the supply chain that take a while to work their way through from China being open up again to us being able to turn that into finished goods for our customers. So again.
100% timing based.
ZR ZR.
So.
On the ZR side, Simon I don't think our perspective has changed at all.
We have shipped.
<unk> into a number of customers around the globe.
Working through their evaluation.
Cycles.
As Youre, probably aware the majority of the volume.
Over the next next season or so is going to be dominated by a couple of players.
We are fully engaged in those players and we expect to be successful there.
In those because we firmly believe we've got the <unk>.
First plug in the market.
For us and for the industry, it's largely going to be a 2023.
Went from any materiality.
Thanks.
I appreciate it and thank you everyone for taking the time to connect with us.
Connecting with everyone here the balance of today and the next several days thanks very much.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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