Q1 2023 Ciena Corp Earnings Call

Speaker 1: I.

Speaker 1: The.

Speaker 2: Good day and welcome to the CNN's Fiscal First Quarter 2023 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. For today's presentation, there will be an opportunity to ask questions.

Speaker 2: Please note this event is being recorded. I would now like to turn the conference over to Greg Lamp, Vice President of Investor Relations. Please go ahead.

Speaker 3: Thank you, Jason. Good morning and welcome to Ciena's 2023 Fiscal First Quarter Results Conference call. On the call today is Gary Smith, President and CEO and Jim Moylan, CFO .

Speaker 3: Scott McFeely, our Senior Vice President of Global Products and Services, is also with us for Q&A.

Speaker 3: As OFC begins today, our team today is taking calls from the different locations. We ask for your patience during Q&A as we coordinate our responses, please.

Speaker 3: In addition to this call and the press release, we have posted to the investors section of our website an accompanying investor presentation that reflects this discussion as well as certain highlighted items from the quarter.

Speaker 3: Our comments today speak to our recent performance, our views on current market dynamics and drivers of our business, as well as a discussion of our financial outlook.

Speaker 3: Today's discussion includes certain adjusted or non-gat measures of CNS results of operations, a reconciliation of these non-gat measures to a gap results included in today's press release.

Speaker 3: Before turning the call over to Gary, I'll remind you that during this call we'll be making certain forward-looking statements.

Speaker 3: Such statements, including our quarterly and annual guidance and our long-term financial outlook, discussion of market opportunities and strategy, commentary about our impacts of supply chain results and our business end results, are based on current expectations, forecasts and assumptions regarding the company and its markets.

Speaker 3: which include risks and uncertainties that could cause actual results to differ materially from the statements discussed today.

Speaker 3: Assumptions relating to our outlook, which mentioned on this call are included in the investor presentation that will be posted shortly after, are an important part of such forward looking statements and we encourage you to consider them.

Speaker 3: Our forward-looking statement should also 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 March 9th.

Speaker 3: and we expect to file by that date.

Speaker 3: Jan 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, the way I set you limit yourselves to one question, one follow-up please.

Speaker 3: As a reminder, we'll be hosting investor meetings with the Southside at OFC tomorrow and Wednesday, and we look forward to seeing many of you there. With that, I'll turn the call over to Gary.

Speaker 4: Thanks Greg and good morning everyone. Today we reported outstanding fiscal first quarter results including higher than expected quarterly revenue of 1.06 billion and adjusted gross margin of 43.7%.

Speaker 4: And in fact, Q1 was our largest revenue quarter ever, up to 25% year over year.

Speaker 4: We also reported very strong profitability metrics.

Speaker 4: with quarterly adjusted operating margin of 12.6% and an adjusted EPS of 64 cents.

Speaker 4: These results are a strong demonstration of our market leadership and continued demand for our market leading technology across our complete portfolio.

Speaker 4: While supply chain has not completely recovered and there is still some volatility in component deliveries, we are encouraged by the component availability in Q1 and our related strong shipment performance.

Speaker 4: This is both, I think, a proof point of our mitigation efforts.

Speaker 4: and a positive indicator of our expectation for continued, gradual improvements in the supply environment as we move through the year.

Speaker 4: We are very pleased with this progress as we continue to work hard to fulfill our customers' network capacity needs.

Speaker 4: With this strong momentum, we remain confident in our ability to grow faster than the market in both the short and long term, and of course take market share.

Speaker 4: This confidence is underpinned by three fundamental beliefs.

Speaker 4: First, the positive overall demand environment and the strengths of our customer relationships.

Speaker 5: Second.

Speaker 4: the market leading strength of our portfolio to best service customer demand.

Speaker 4: And lastly, the visibility particularly provided by our backlog.

Speaker 4: and with respect to demand.

Speaker 4: We remain positive about the fundamental drivers, including 5G, cloud, AI and automation, and continue to believe that they are very durable over the long term.

Speaker 4: Indeed, these drivers require network operators to increase capacity, reduce latency, and optimize power consumption, while also intelligently converging technologies. These are critical elements across the core, metro, and increasingly edge network segments.

Speaker 4: And our customers know that they must continue investing in key parts of their networks to address these areas of their business in order to remain competitive.

Speaker 4: there are clear signs including a Q1 order book that point to be happening.

Speaker 4: To service these demand dynamics, we continue to leverage the strength of our business model and our investment capacity to remain at the forefront of innovation across our portfolio and our leading technology and strategic focus on addressable market expansions.

Speaker 4: are closely aligned with our customers' investment priorities.

Speaker 4: And in fact, you probably saw we just announced the sixth generation of our wave logic technology, which will once again set a new standard in coherent optics.

Speaker 4: where we have led the market for generations of this technology.

Speaker 4: WaveLogic 6 will be the first to support up to 1.6 terabits single carrier wavelength.

Speaker 4: 800 gig across the longest links and footprint optimized 800 gig pluggables that yet again will have the lowest energy consumption.

Speaker 4: Our newest generation modem technology will be supported across a range of our optical and routing and switching platforms and will also be made available for use in third party solutions.

Speaker 4: These breakthrough innovations in WaveLogic 6 are made possible through our unique expertise in coherent DSP and high bandwidth electro-optics, leveraging state-of-the-art 3 nanometers silicon technology. In Metro lineage

Speaker 4: We continue to invest in market expansion and further solidify our role as the disruptive challenger in this space with a very compelling value proposition.

Speaker 4: These investments are positioning us to both pursue new opportunities and leverage our position with current customers to address use cases deeper in the network.

Speaker 4: And since we last spoke to you in December ,

Speaker 4: We closed the acquisition of Tippet Communications, which further strengthens our solution in broadband access. Benefiting now from our vertical integration and a modern open architectural approach, we believe we are very well positioned to attack this rapidly growing market.

Speaker 4: that is the focus of private and public investment across multiple regions.

Speaker 4: These portfolio investments will be supported by similar efforts on software and services designed to enable customers to realize additional benefits of network automation and execute on their network transformation strategies.

Speaker 4: And lastly, let me pick up on this point of we have a very strong visibility given our back log.

Speaker 4: As a reminder, going into 2020, we had accumulated a multitude of new design wins.

Speaker 4: And WaveLogic 5 Extreme was only just beginning initial commercial deployments at that time.

Speaker 4: Now, given the dynamics of COVID and supply chain conditions, those winds only started to translate into orders during the last several quarters.

Speaker 4: As a result of these wins and industry dynamics during this period, our backlog grew from 1.2 billion at the end of fiscal 2020 to 4.2 billion as we entered fiscal 2023.

Speaker 4: With that, it is clear that in recent periods our backlog has far exceeded historical levels.

Speaker 4: In Q1, our backlog came down slightly because we significantly outperformed our revenue expectations.

Speaker 4: And of course this is good news on a variety of fronts. First and most importantly it means that we are delivering more product to our customers.

Speaker 4: Second, it's an indicator that the supply chain challenges are improving.

Speaker 4: And lastly, our market share gains are becoming evident as we convert this backlog to revenue.

Speaker 4: And while we expect ebbs and flows with orders given the supply chain dynamics,

Speaker 4: as we move through 23 orders for the year off to a pretty good start.

Speaker 4: and even with these expected fluctuations.

Speaker 4: We expect to finish the year with backlog that is higher than our historical levels, albeit down from the extraordinary level we had at the beginning of the year.

Speaker 4: Moving to additional highlights from the quarter that I think speak to our efforts to meet custom-edimand.

Speaker 4: in optical. WaveLogic 5 Extreme continues to be the world's most widely deployed 800 gig coherent technology, including 13 new customers in Q1, bringing our total customer count to 214.

Speaker 4: And Q1 was our biggest modem shipment quarter ever overall, including for WaveLogic 5e, for which we've now surpassed 60,000 modems shipped to date.

Speaker 4: It was also, of course, our strongest WaveLogic 5e modem production quarter ever as well.

Speaker 4: In routing and switching, with a focus on next-gen, metro, and edge, we continue to press down our efforts and to expand our addressable market and gain market share.

Speaker 4: Overall, quarterly revenue for a routing and switching segment increased 39% year over year and Q1 was of course also a record shipment quarter for these platforms.

Speaker 4: And within this portfolio, we secured new in-thing Q1 for our broadband access solution, which includes the recently acquired technology from both the new networks and TIPIC communications.

Speaker 4: Shifting to customer segments and regions in the quarter, non-Telco revenue was 40% of total sales in Q1.

Speaker 4: This reflects a strong performance with web scale, which included a 10% customer in the quarter.

Speaker 4: Direct web scale was 24% of total revenue in the quarter and increased 47% year over year.

Speaker 4: We remain very positive about the year with this group of customers. In fact, in FY23 we expect record revenue in web scale and growth well above the corporate average.

Speaker 4: As we continue to focus on driving growth outside the US, Q1 revenue in the APAC region was up 41% year-over-year. This was largely driven by revenue growth in India, which was up 150% year-over-year in Q1 to 64 million.

Speaker 4: reflecting the strong demand environment in that market.

Speaker 4: And finally, we are placing an intense focus on customer experience.

Speaker 4: specifically the combination of our investment in inventory over the last 12 months.

Speaker 4: and a ramp-up of our service team's readiness to deploy for our customers as fast as possible as we ship product.

Speaker 4: In summary, we have great momentum in the market today, supported by robust fundamental demand drivers.

Speaker 4: a market leading set of technologies and platforms and strong visibility with our backlog.

Speaker 4: And with that, we are confident that we will deliver outsized year-over-year revenue growth in FY23, and that we remain on track to achieve the three-year revenue KAGR outlook we previously provided.

Speaker 4: With that, I will now turn over to Jim to speak more on those items, as well as to provide additional detail on the Q1 financial results. Jim? Thanks, Gary. Good morning, everyone.

Speaker 4: and an especially good very early morning to those on the West Coast at OFC. As Gary mentioned, we had a tremendous performance in Q1 that demonstrates our strong position as the market leader.

Speaker 4: Total revenue was $1.06 billion, higher than expected. We shipped more product than expected due to improvements in vendor component deliveries, particularly toward the end of the quarter.

Speaker 3: Adjusted gross margin was strong at 43.7%, reflecting a favorable product mix and, specifically, a high volume of modems.

Speaker 4: Modems carry higher gross margins than average, and they made up a significant percentage of the late quarter shipments.

Speaker 3: Q1 adjusted operating expense was $329 million, reflecting our investments in TAM expansion, and it included OPEX from the acquisitions of BNU and Tibbitt.

Speaker 4: With respect to profitability measures, in Q1, we delivered strong results, including a Justin operating margin of 12.6%.

Speaker 3: adjusted net income of $95.6 million.

Speaker 3: adjusted EPS of 64 cents per share.

Speaker 4: In addition, we used cash from operations in the quarter primarily related to increases in inventory and accounts receivable.

Speaker 6: Our inventory levels reflect our continued investment in components and other raw materials.

Speaker 6: to manage the impact of supply chain volatility on our customers.

Speaker 6: As supply conditions gradually improve, we expect inventory levels to come down as we move through fiscal 2023, but to remain elevated relative to historical levels.

Speaker 6: We do believe that inventory will be lower in Q4 this year than in Q4 of 2022. And finally, adjust to the $1,155.1 million dollars.

Speaker 6: We are benefiting from our successful term loan transaction in Q1. We ended the quarter with approximately $1.2 billion in cash and investments.

Speaker 6: And just as a reminder, during Q1 we acquired the new and tibet for an aggregate price of approximately $292 million. With our strong balance sheet, we intend to return capitalist stockholders, including our continued expectation for the repurchase of approximately $250 million in share.

Speaker 6: including those related to supply chain conditions.

Speaker 6: This latter point is particularly important in a still uncertain supply chain environment.

We believe that gradually improving supply conditions of the type we saw in Q1

will begin to allow for greater deployments of our accumulated design wins, as well as for new business from customers pursuing best-in-class technology across our portfolio.

Accordingly, in Q2 we expect to deliver revenue in a range of $1.035 billion to $1.115 billion.

Adjusted gross margin in the low 40% range and adjusted operating expense in Q2 of roughly $335 million.

With respect to the fiscal year, we expect to achieve strong share gains as already reflected in our significant revenue over performance in Q1 and our expectations for Q2.

Therefore, we now expect to achieve fiscal year 23 revenue growth in a range of 20 to 22% up from 16 to 18%.

for adjusted gross margin. We continue to believe that our gross margin for fiscal 23 will be in a range of 42 to 44 percent.

This reflects our expectation for a greater proportion of line systems in our product mix over the next few quarters. And for adjusted operating expense, we expect to average approximately $335 million for $330 million for quarter for fiscal year 2023.

This reflects our intent to continue investing strategically in our future.

primarily targeting opportunities for TAM expansion in NextGen, Metro, and Edge. This latter area is very rapidly growing and we see potential to gain share with our best-in-class offerings.

It's clear from the quarterly results we reported today, as well as our outlook for Q2 and fiscal year 2023, that we are performing extremely well.

We have never felt better about our position in our business. The combination of robust demand drivers, our market-leading technologies and platforms, an expanding addressable market, and strong visibility with our sizable backlog gives us high confidence in market share gains over the next few years.

Jason, we will now take questions from the cell side analysts.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch tone phone.

If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. In the interest of time, please limit yourself to one question and one follow-up.

please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. In the interest of time, please limit yourself to one question and one follow-up. At this time, we'll pause momentarily to assemble our roster.

Our first question comes from George Nautter from Jefferies. Go ahead.

Hi guys, thanks very much. I guess I wanted to ask a bit about backlog. You said it was down slightly. Could you just give us a precise number? I think you said it was $4.2 billion last quarter, but I just was curious on the update. And then also wondering if you're seeing any cancellations on that backlog.

any more detail you could give us there. And then just also product lead times. Obviously, lead times have been extended in a lot of areas of the business. I'm just curious what the update is there. Thanks a lot guys. Let me take that George. We don't normally give sort of a precise sort of backlog, but given the environment to it, I would say this. If we'd have finished at the midpoint of our guide.

think this level of backlog is sustainable or frankly desirable. Customers, you know, want equipment. They don't want it sitting on our backlog. And that really bleeds into the second part of the question on the sort of cancellation. We're not seeing any change in update to that, you know, it's a very small and minor and just normal normal.

if you're able to make a dent on this.

Yeah, George and Scott, product lead times have improved as we've shipped more products and have sort of built a bigger ship going forward. They will continue to improve throughout the year, although I don't think we will get them back to historical levels in this fiscal year.

I'm not sure what the new norm will be, but they will be significantly improved as we go throughout the year.

Okay, thank you guys. Thanks, George. Our next question comes from Tal Leoni from Bank of America. Please go ahead.

Hi, good morning. I have a follow-up on the previous question, and I have another question on cloud. So the first one is, when I look at the results of all the companies in the space, and I'm general networking, let's say, it's all the same, meaning very strong revenues, margins are going up because of higher revenues, but the backlog is coming down.

Good morning. Um, I have a follow up on the previous question. Um, and I have another question on cloud. So the first one is when I look at the results of all the companies in the space and I'm general networking, let's say it's all the same, meaning very strong revenues. Martins are going up because of higher revenues, but the backlog is coming down. And the question is

And I'm asking on the other side, I mean, George asked you about the backlog, I'll ask about the environment. The question is how much you sound very confident as well as Cisco sounded confident. How much of this strength is really a backlog flush in historical orders with the risk that this will end when the backlog going down to normal levels?

and how much of it is basically a strong environment that really needs a strong network, underlying network. So if you can talk about the environment, the orders, the kind of projects and customers, et cetera. So that's first question, and I'll ask both questions together because they're linked.

The second question is about cloud. Another thing that we've seen with Arista, for example, is that cloud is strong. And for you, if you don't mind to repeat the numbers, but I think cloud was up 47%.

And the question is how much risk is there in the concentration of maybe one big customer, one big order, with their budgets coming down, what's the risk here that cloud will slow down throughout the year?

Let me take the first part of those multiple questions, Tel. I would say, first of all, one has to step back from the environment that we're seeing, which is this sort of whipsaw around the whole COVID piece.

then enormous pent up demand, then supply chain issues, etc. So you're seeing a very, you know, a turbulent set of dynamics over the last couple of years and we're still living through it this year.

If you sort of look through that dynamic, and when we get to some kind of new normal, let's assume that's 24, then I think you can look back on this and say that the consistent market demand has been strong, mid-single digits, which I think it is concerned.

Unabated.

But that is typically translated into an optical market growth of the mid single digits.

If you look at Siena over that period, and again, similar to historical norms, we are a few percentage points above that. And if you look at our CAGA for the next three years, which we gave, basically last quarter,

It's in the 10 to 12 percent range. So clearly, we're going to be taking a lot of share mainly because of the winds that we secured in 19 and 20.

and 21 now coming into into revenue. So I think, you know, yes, we've got outsize revenue this year. There's no doubt about that and that will obviously normalize at some point, but we will continue to grow faster than the market and the overall demand tile continues.

be strong, you know, from that perspective.

Moving on to web scale, obviously we have, you know, relationships with all of the major web scalers. It's not just one single one that we did have a 10% this quarter, but it's across the board. And we're going to be up significantly for the year, as I said, 47% for the year. We expect growth this year.

to continue to be above our corporate average. So you can see it's pretty strong, and we're continuing to see good activity with these guys as well.

Just to add on to that a little bit, Tal, we've been through a period over the last three or four years with the web scalers of tremendous growth across just about every metric in their businesses. I think it's sort of natural that they are looking at their business in the wake of what's going on in the world. We've seen a lot of growth in the world.

and things like that, but we don't see any significant change in the fundamental nature of their business. They're growing.

Thank you. Our next question comes from Samik Chatterjee from JP Morgan. Please go ahead.

Thanks for taking the question. So I had a couple and maybe just to start with one of the questions we're getting this morning. I think Greg you mentioned, sorry Gary you mentioned that overall you would have replenished the backlog if you had hit the midpoint of the…

for one Q. I think last quarter you had said you would be building backlog with the assumption that you hit the midpoint. So I think one of the questions coming up is did even within the robust order number were there pockets of weakness that sort of led to a modest sort of slightly below on the order numbers than you had expected? And I have a follow-up, please. I would not describe it as that. It's a very, very strong Q1 for us if you think about it. That kind of number is very strong.

with less backlog than we went into it. And that is a good result for our customers and a good result for us. So I think we actually had a very strong Q1 orders, but I would caution particularly on just taking order metrics on a quarterly basis right now. We're going to see some.

ebbs and flows during the year. There's no doubt about that. I mean last year...

We had 25% order growth last year. And if you look at the end of, I think it was Q3 in FY22, if you look at the trailing 12 months, it was up 60%.

That is not sustainable. And whilst it's wonderful and it's a great demonstration of all the wins that we've had, we've got to take them to revenue in this next phase of the business.

And we still believe we're going to have a very good 24 and go in with it with a strong backlog.

But you know, it's not going to be a linear line from an order point of view. That's for sure.

Second part of your question, Tariq. Yeah, I understand we're hopping on small numbers here, but maybe switching gears here to WaveLogic 6, you just mentioned that the WaveLogic 5 autos had really started to sort of come in more in the recent quarter. So how do you think about the likelihood that with the release of WaveLogic 6?

quick in succession that customers start to push out sort of their move to WaveLogic 5 and wait out till WaveLogic 6 is in the market just given that it's sort of following on the heels of the WaveLogic 5 orders starting to pick up. So first of all just a point of clarification, the WaveLogic 5 orders were a big part of that.

so just a point of clarification there. I think about WaveLogix 6, you know the timing as we said is first half of 24. Obviously we'll start to see design wins against that earlier than that, I suspect, but I will point out that it takes several cycles for next generation of technology to actually overtake the previous generation of technologies.

in terms of shipments or revenue. For example, this past quarter is the first quarter where WaveLogic 5 was the biggest number of units that we shipped across all of our generation of technology and it's been available for a couple years. Thank you.

For example, this past quarter is the first quarter where WaveLogic 5 was the biggest number of units that we shift across all of our generation of technologies, and it's been available for a couple of years. Thank you.

Our next question comes from Paul Silverstein from Cowan. Please go ahead. Gary, Paul is us returning to the issue, but we seem to be a slow bunch, so I'll add to it. Well, it's investor concerns about catbacks.

from both carriers and web scale. What do you, from your comments, it doesn't sound like you're seeing any weakness. It sounds like the strength is pretty broad-based if I understood your comments correctly. What's driving that? What's the disconnect between these, and I'm mindful that CapEx trends and the individual companies revenue are far from one and the same. Oh, right, what?

Can you give us any incremental insight in what's driving your strengths relative to the outlook for this year, those cutbacks that a lot of your customers have been talking about? Well, you know, I think first of all, you're dealing with a lot of pent-up demand, you know, orders that have been placed because of extended lead times.

carriers, I mean let me be really clear, carriers and web scale want the equipment. There's no doubt about that they want the equipment.

I would say for the first time in the web scale sort of area, we're seeing them manage to their budgets. So even though they want all the equipment, they can't take all of the equipment in the year. And we are seeing that and that is built into our guide. Even with the massive uptick that we're seeing in web scale, that is built into our guide.

So they are scheduling stuff out into 24, which is great because it gives us backlog and visibility there. We know they want the equipment to complete the networks that they're driving. So that actually is sort of a positive dynamic, but the web scale particularly are managing to their budgets.

And we are seeing that and seeing that for the last few quarters. On the carrier side of things, again, they've got pent up demand and they are, as usual, managing to their budgets and capax. But I would say that the priority for them is actually in this space and is on.

Then they had pent up demand. Then we couldn't ship it to them in time. And so it is a priority for them right now to roll out these networks.

Obviously, they're not immune to all of the economic uncertainty out there, but given the particular demand dynamics around capacity in their networks, we've got good visibility to that and not just in the backlog, but in the activity that we're seeing with them. So that's how I would characterize.

the two groups. We are not seeing any push-outs on the carrier side from a budget point of view. We're not seeing it.

All right, as a follow-up, the numbers clearly indicate that Z are at least at present.

is not having an adverse impact. And I'm mindful that you guys, I keep all our checks to indicate that you've got the lowest power solution on the market, which obviously is a critical factor. You've now announced WaveLogic 6 on three nanometer. I don't think anyone else has announced three nanometer, which presumably would contain, I recognize it's not necessarily CR, but presumably that'll...

the last time we reach out it. We firmly believe we've got...

the best, floodable product in the marketplace, both from you mentioned power and but also reach. And, you know, there's starting to be some external references to validate that. We still think that market in terms of the ZR market for campus DCI is still very much your front of us, but it's a merely.

early movements. I don't think they've moved into the network as fast as people had expected. But as that inventory position in those customers bleeds off, we think there will be opportunity in front of us. Jim, can you just clarify something? Any meaningful contribution from Sibbit and Ben in the quarter? No, it was not, Paul. They were a little bit later in the quarter and there was no meaningful

little bit about kind of, you know, growth and use cases or, you know, sales or what it takes to, you know, to keep that business scaling. And then secondly, a little bit higher level looking at, you know, kind of the service businesses as a whole, continue to lab product.

most companies in the peer group seem to match revenue there. So could you talk a little bit about why we've seen service under performance in a pretty weak gross margin accordingly this quarter? Thank you.

The only time is to take the second one first, the services piece. So it really has more to do with project mix and timing of sort of product revenue delivery versus sort of installation projects. I don't think there's a sustainable...

difference in the performance of the services business relative to our equipment business here. It's really just timing and project based, particularly on the installation based services. And that has both the revenue ratio that you pointed out, but also has a margin implication because we carry a bit of fixed cost on the services piece and the revenue timing is

is off a bit then you see it as a bit of a headwind from a margin perspective in the short term. So that's the services dynamic. On the routing and switching piece, you're absolutely right. Good quarter in routing and switching. It's been a few in a row so we're pretty excited about the momentum there. In many of the use cases, we are challengers that are building I'll say to next generation.

architectures. So we think that the future is still very much in front of us in terms of getting at that expanded TAM that we talked about. And just to remind you, the key use cases that we've been focused on include wireless transport.

next generation residential broadband with XGS PON, Enterprise Edge and both the physical and virtual capability and then a converged Metro core benefiting both from our IP capabilities but also our optical strengths there. So we're pretty excited about you know being the challenger in that space and that continued.

opportunities in front of us. Thank you. Our next question comes from Simon Leopold from Raymond James, please go ahead. Thanks for taking the question. I'm going to ask sort of the two combined because I think they're related, but I wanted to see if you could talk a little bit about your expectations for India. I picked up the

comment from Gary on the quarter at 64 million. I think last year you were about 2% of revenue. So just want to get a better sense of the sustainability and outlook for India and the related question is more broadly your thoughts and updates on being able to displace

Huawei, not just India, but outside China globally, how you see your position to win share from Huawei versus your competitors. Thank you.

Simon, let me pick the India one. Yeah, I think we're beginning to see what we generally anticipated in the industry, which is a strong build out in India. We saw that in our results. I would expect India to have a very, not just a good year, but probably a good three years for us.

and a well-positioned there. So we're very positive about India. It's gonna be a strong cycle. And Huawei, and actually to pick up on Huawei in India and then broaden out the question that you had, Simon, a lot of those decisions have...

already been made. I think I would characterize India as moving very quickly relative to other parts of the world on the displacement of Wale and we've certainly benefited from that. We've had winds that were that we're now rolling out which is direct replacement. I think Europe is the other sort of market area.

few years as they replaced their infrastructure. Their initial focus was not building with them in the wireless space.

the kind of transport stuff is they kind of get into it when they get to it and They are beginning to get to it And that would that will continue other parts of the world are less sort of responsive Generally speaking you look at Africa You look at Latin Latin America. You know there's not as much movement

I'll add that Huawei has a pretty significant market share in the pond area. That's one of the reasons why it's interesting to us because we believe that they will have the same resistance in the pond area as they're having in the core of the networks. Thanks for that. That's why the India comment.

I think the prior peak, I think 2018 was about 9% of revenue, so smaller revenue base. Just wondering, is this business likely to be material enough to not maybe consistently but at least get close to 10% of revenue or is this sort of 64 million-ish a sustainable level? How do we think about that?

I think it's possible to grow in absolute percentage terms as part of our revenue. Now, you know, everything else is growing as well. And you look at sort of the uptick in switching and routing, and you look at the uptick particularly in web scale, etc. So, you know, would it touch 10% again? That's probably a little high, but it can certainly be a...

starting on gross margins, just as you think about the year and supply chain, you know, seemingly releasing a little bit sooner than expected, understanding you're leaving kind of gross margins about the same for the year, but just is there anything that we should think of differently as, you know, more new deployments, less supply chain overhead, just anything to consider there.

for you guys. Thanks.

Thank you, Madam. Jim, why don't you take the first part of that, whether it's gross margin question?

Thanks, Gary. As we've always said, Matt, the most important element of our gross margin.

Well, thanks Gary. As we've always said, Metta, the most important element of our gross margin historically and for the future is mix.

And we have won a lot of deployments and new projects with customers all over the world, including the web scanners, which call for our new reconfigurable line system.

We expect that this year we will deliver a much higher proportion of what we call RLS, Reconfigurable Line System, to a bunch of customers. And those deployments will have a dilutive effect on our gross margin. It hasn't happened to a great extent so far, but it's been a long time since we've had

and we'll begin to come down. And these are the costs that we pay to brokers.

for components on the broker market as well as higher logistics costs. So it's the combination of a mix shift and these exception costs which is influencing our margin right now. We did say in Q1 we had a higher percentage of modems which are higher than average gross margin. We do think that that percentage of modems will come down a bit.

as we go through the year and start to deliver RLS. Now for the future...

We think that all of these things will tend to average themselves out. And we do think over the next few years we'll get back to the mid 40s gross margin that we enjoyed back pre-COVID.

Do you have any more questions? Gary on AI? Yeah, on your AI question, you're right, the community of interest right now is largely in the back end of the data center. But as you look at sort of those data center architectures becoming more distributed due to the requirement of...

having to get more and more power to service the applications and you look at the traffic that AI is going to generate, that's going to have a bleed over effect on the land side traffic which is a good thing for those of us that are in the bandwidth business and it will be both in the web scale direct networks as well as the service providers that service those web scales. The second thing I'd say, there's a lot of interesting dynamics going on in the architectures as well.

in that generation of technology for us to take advantage and participate in those architectures. So that's a new space for us. Not necessarily in the timeline of our three-year revenue guidance, but just beyond that horizon to start to see those opportunities.

generation of technology for us to take advantage and participate in those architectures. So that's a new space for us. So necessarily in the timeline of our our three-year revenue guidance, but just beyond that horizon, it starts to see those opportunities. Great, thanks.

to take advantage and participate in those architectures. So that's a new space for us. So not necessarily in a timeline of our three-year revenue guidance, but just beyond that horizon, start to see those opportunities. Great, thanks. Thank you. Madam.

The next question comes from David Vogue from UBS. Please go ahead. Great. Thanks, guys. And I apologize if I'm going to belabor the point about backlog and orders. And so maybe Gary, just from the comments on the call, it certainly sounds like based on the backlog draw that maybe Book to Bill was less than...

point nine in the quarter. Is that correct? And if we extrapolate that trend going forward for the full year, does that mean backlog comes down in the mid-teens based on sort of your expectations? And then maybe if I roll that forward, is my second question into the three-year model, can you kind of square your comments about share gains in optical if the optical industry is going sort of mid-single digits? Because you know, if I just take the midpoint of your guide,

would assume that in the back half of your three-year plan, 24 and 25, C&R revenue would only be growing around 6%. So I just would love to get some clarity on that, thanks. Okay, sure David. First of all, on the backlog, no, that isn't the right assumption. It was more than 0.9 for Q1, it was about that. It was about that backlog for the year end, as we said.

I think everybody needs to get their head around the fact that we're not going to have 25% order growth year on year, you know, in the specific dynamics that have built up for that. We expect to go into 24 with a bigger backlog than we would normally take into any fiscal year. That backlog is still going to be very strong. The focus right now is to ship the backlog that we have and to reduce.

our lead times. If you look at the, you know, we gave a three-year guide, you know, a Kaga over that. We only gave it last quarter. So we're 36, you know, months out into that. And I don't know as many companies that give that specificity. So, you know, we're very confident around 10 to 12% growth in that Kaga. Obviously, we're having an outsize year this year.

given the investment profile and scale of the customers that we have.

That we think is a very, very strong performance. And so, you know, I think, I don't know many companies of our size and our space that are talking about a midpoint of the range of 21% for the year. And just to be clear, our view.

future has not changed. We still feel great about our position in the Markner and our ability to grow. We did give a range, David. And so, you know, to come quickly to a mathematical equation there is probably not the right idea in this time of...

of turbulence and change. We feel great about our ability to grow faster than market. Great, very clear. Thanks a lot, guys. Thanks, David.

The next question comes from Amit Daryani from Evercore ISI.

Yep, thanks for your question. Gary, maybe towards the end of what you were talking about on the backlog dynamic, is you going to think about where do you think your backlog exits this year? And then I think historically I've talked about if memory serves me a backlog number in a normalized range should be in the 750 to maybe a billion range.

how long does it take you to get to the normalised backlog? Is it a 24 process or much beyond that as well? I admit the only standard that is, honestly, don't know what the new normal is going to look like. And I think, you know, the dynamics of this are largely driven.

Bazaali not necessarily by demand. Demand has been very consistent and is very solid. It's by the ability of lead times to meet that demand. And so lead times in this space, even in very large infrastructure of projects, were 10 to 12 weeks, I'm not sure they will return to that level for that kind of product.

For the access and the edge and the rest of it absolutely, two weeks or whatever the dynamics should be around that. But I'm not sure of what the new normal will look like for that and when that new normal absolutely kicks in, because you've still got volatility around the supply chain. It's getting better. There's no doubt about it. That's great. So it's very difficult to predict, you know, exactly when we'll get back to some kind of new normal.

And indeed even, you know, I met what that new normal like look like, but it will be better lead times than we're seeing right now. There's no doubt about it. And that will reflect in carrying a lower backlog into the business. And that's the same sort of everybody in this space. It's a little bit.

different for us in that we had enormous amounts of backlog because of the new winds that we had in the sort of 19 to 21 timeframe that have now translated into orders and backlog. So that's what gives us you know fantastic visibility over the next you know 12 months or so.

Got it. And then you know, it's could maybe spend a minute talking about, you know, that think about the 20, 22% growth rate. You talked a fair bit about A-pack and Indian in fairly well. How do you think Amir stacks up for the year from the growth perspective? You sort of think about it and then, you know, I think John , what is a little bit weaker there versus the rest of the geo? So maybe just touch on what you've seen in Amir for the year. That would be helpful. Thank you.

Jim, do you want to take that? We believe that all of our regions are going to grow pretty meaningfully this year. Amia is going to grow. I'm not sure that it's quite at this company average, but it will grow very significantly in this year.

India is probably going to grow above average, web scale well above average. Thanks, Emmett. Thanks.

The next question comes from Jim Souver from City Group. Please go ahead.

Thank you so much and congratulations and thank you for all the details. My question is a little bit on gross margins. You'd mention that I think you'd said lower, I'm sorry, around low 40% range. I want to make sure that I'm just very quickly. You're not saying 40% you're just kind of saying lower part of 40% because I believe you're range for the police. I'm sorry.

Miss Herde, thank you. It is low for range. Low 40 is not below 40. Now, look, there's a range in gross margin and mix can change. Our expectation is low 40 percentages.

So, what is that? 41, 42, 43. I don't know, but it's some number like that. And it is absolutely related to a mixed change toward line systems and away from modems. And there's nothing sinister about that. It just has to do with the flow.

of our deliveries and the fact that as we said, we've won a lot of new projects, a lot of new deployments, and they start with line systems. So that's it precisely, and that's why we think it'll be low 40s and Q2. We believe that we will average 42 to 44 for the year.

I do want to say that again that our expectation is to return to the mid-40s and maybe even beyond that we'll see with business mix changes more. But we've had a lot of change, we've had a lot of exception costs and we've had this mix shift between modems and line systems which should equalize over time.

and get us back to the mid-40s. Thank you so much for the details. It's appreciated. Thank you, Jason. Thank you, Jason. We'll take one more question, please. All right. The next question comes from Fahad and the Jam from Loop Capital. Please go ahead.

Thank you for taking my question. I apologize if I'm going to ask you to read on the backlog. Hey, to revisit it, but it's too early here in the west coast. So, can you remind us?

for taking my question. I apologize if I'm gonna ask you to repeat on the backlog. Hate to revisit it, but it's too early here in the West Coast. Can you remind us...

What portion of your 4.2 billion dollars backlog was longer duration, meaning beyond the next 12 months? And then I have a real question that I wanted to ask you. Well, I can't hear you very well, but I think the question was, what percentage going in of the 4.2 billion was outside of FY 23? I don't think we broke that down.

Okay. I would say that a lot of it would be taken by customers if we could deliver it to them. A very significant percentage of it would be taken but at lead times component availability etc are sort of disturbing the situation as we know.

got it. Now to my question, on your wave logic 6 product announcements, you also announced a wave logic 6 nano, the 800GB VR. It seems to suggest that if you, against the timeline, wasn't announced, but I'm assuming this course has 24. And if that's the case,

It sounds like you guys are preempting the existing market leaders in the 400s, the applicable market by kind of accelerating the cadence. How big of an opportunity do you see for Sienna in 24, maybe 25, really from the year? How big of a catalyst could that be to your business, especially in cloud? Yeah.

I wouldn't look at it as trying to disrupt necessarily the natural full 400 gigs. The R is the next step that you know customers that are interested are expect to take and there's a whole ecosystem around you know moving to these generations including all the entire switch fabric has to get up upgraded. So

We are doing it because there's some efficiencies are doing it in parallel with our wave logic 6.6 stream. And we want to be ready for that market. But I wouldn't necessarily think it was driven by trying to disrupt the <expletive> or kick the R market. We just think it's the natural evolution for our customers at play in that space.

Thank you. And thank you everyone for joining us today, especially again Jim said those of us on the West Coast at OFC. We're looking forward to meeting with a lot of you the next couple of days. And we'll see you then. Thank you very much.

Thank you for attending today's presentation. You may now disconnect.

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Good day and welcome to the CNF fiscal first quarter 2023 financial results conference Spyro.

All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions.

Please note this event is being recorded. I would now like to turn the conference over to Greg Lampp, Vice President of Investor Relations. Please go ahead. Thank you, Jason. Good morning. And welcome to CNAS 2023 fiscal first quarter results conference call. On the call today is Gary Smith, President and CEO and Jim Moilan CFO .

Scott McFeely, our Senior Vice President of Global Products and Services, is also with us for Q&A. As OFC begins today, our team today is taking calls from the different locations. We ask for your patience during Q&A as we coordinate our responses, please.

In addition to this call on the press release, we have posted to the Investor section of our website an accompanying investor presentation that reflects this discussion as well as certain highlighted items from the quarter.

Our comments today speak to our recent performance, our views on current market dynamics and drivers of our business, as well as the discussion of our financial outlook. Today's discussion includes certain adjusted or non-get measures of CNS results of operations, a reconciliation of these non-get measures to a gap results 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 and our long term financial outlook, discussion of market opportunities and strategy, commentary about our impact of supply chain results and our business end results.

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. Assumptions relating to our outlook, which mentioned on this call, are included in investor presentation that will be posted shortly after, are an important part of such forward-looking statements and we encourage you to consider them. Our forward-looking statement should also be viewed in the context of the risk factors in Valhalla.

detailed in our most recent 10K filing and in our upcoming 10Q filing, which is required to be filed with the SEC by March 9th. And we expect to file by that date. CNN 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.

that we ask that you limit yourselves to one question, one follow-up please. As a reminder, we'll be hosting investor meetings with the sell side at OFC tomorrow and Wednesday, and we look forward to seeing many of you there. With that, I'll turn the call over to Gary. Thanks, Greg, and good morning, everyone. Today, we reported outstanding fiscal first quarter results, including higher than expected quarterly revenue of $1.06 billion.

adjusted gross margin of 43.7%. And in fact Q1 was our largest revenue quarter ever up to 25% year over year.

We also reported very strong profitability metrics, with quarterly adjusted operating margin of 12.6 percent and an adjusted EPS of 64 cents.

These results are a strong demonstration of our market leadership and continued demand for our market leading technology across our complete portfolio.

While supply chain has not completely recovered and there is still some volatility in component deliveries, we are encouraged by the components availability in Q1 and our related strong shipment performance. This is both, I think, a proof point of our mitigation efforts and a positive indicator of our expectation for continued.

gradual improvements in the supply environment as we move through the year. We are very pleased with this progress as we continue to work hard to fulfill our customers network capacity needs.

With this strong momentum, we remain confident in our ability to grow faster than the market in both the short and long term, and of course take market share. This confidence is underpinned by three fundamental beliefs. For first, the positive overall demand environment and the strength of our comfortable relationship.

Second, the market leading strength of our portfolio to best service customer demand.

And lastly, the visibility particularly provided by our backlog.

And lastly, the visibility particularly provided by our backlog. And with respect to demand.

We remain positive about fundamental drivers, including 5G, cloud, AI and automation, and continue to believe that they are very durable over the long term.

Indeed, these drivers require network operators to increase capacity, reduce latency and optimize power consumption while also intelligently converging technologies. These are critical elements across the core metro and increasingly edge network segments.

And our customers know that they must continue investing in key parts of their networks to address these areas of their business in order to remain competitive. And there are clear signs, including our Q1 order book, that point to be happening. Service these demand dynamics, we continue to leverage the strength of our business model and our employees.

generation of our way of logic technology, which will once again set a new standard in coherent optics where we have led the market for generations of this technology.

Wade Logic 6 will be the first to support up to 1.6 caravans, single carrier wavelengths.

800 gig across the longest links and footprint optimised 800 gig plug-ables that yet again will have the lowest energy consumption. Our newest generation modem technology will be supported across a range of our optical and routing and switching platforms and will also be made available for use in third-party solutions.

These breakthrough innovations in WaveLogic 6 are made possible through our unique expertise in coherent DSP and high bandwidth electro-optics, leveraging state-of-the-art 3 nanometers silicon technology. And in Metromon Edge,

We continue to invest in market expansion and further solidify our role as the disruptive challenger in this space with a very compelling value proposition. These investments are positioning us to both pursue new opportunities and leverage opposition with current customers to address use cases deeper in the network.

And since we last spoke to you in December , we closed the acquisition of TIPPIT communications, which further spramps in our solution in broadband access. Benefiting now from our vertical integration and a modern open architectural approach, we believe we are very well positioned to attack this rapidly growing market.

that is the focus of private and public investment across multiple regions. These portfolio investments will be supported by similar efforts on software and services designed to enable customers to realize additional benefits of network automation and execute on their network transformation strategies. And lastly, let me pick up on this point.

Given the dynamics of COVID and supply chain conditions, those wins only started to translate into orders during the last several quarters.

of COVID and supply chain conditions, those wins only started to translate into orders during the last several quarters. As a result of these wins.

and industry dynamics during this period. Our backlog grew from 1.2 billion at the end of fiscal 2020. So 4.2 billion as we entered fiscal 2023. With that, it is clear that in recent periods, our backlog has far exceeded historical levels.

In Q1, our backlog came down slightly because we significantly outperformed our revenue expectations. And of course, this is good news on a variety of fronts. First and most importantly, it means that we are delivering more product to our customers.

Second, it's an indicator that the supply chain challenges are improving. And lastly, our market share gains are becoming evident as we convert this backlog to revenue.

And while we expect abs and flows with orders given the supply chain dynamics, as we move through 23, orders for the year are off to a pretty good start.

And even with these expected fluctuations, we expect to finish the year with backlog that is higher than our historical levels, albeit down from the extraordinary level we had at the beginning of the year. Moving to additional highlights from the quarter that I think speak to our efforts to meet customer demand.

In optical, WaveLogic 5 Extreme continues to be the world's most widely-deployed 800-gig coherent technology, including 13 new customers in Q1, bringing our total customer count to 214. And Q1 was our biggest mode-em shipment quarter ever overall.

including for WaveLogic 5e, for which we've now surpassed 60,000 modems shipped to date. It was also, of course, our strongest WaveLogic 5e modem production quarter ever as well.

In routing and switching, with a focus on next-gen metro and edge, we continue to press down our efforts and to expand our addressable market and gain market share. Overall, quarterly revenue for a routing and switching segment increased 39% Euro over clear! You

and Q1 was of course also a record shipment quarter for these platforms. And within this portfolio, we secured new end-in-the-NQ1 for our broadband access solution, which includes the recently acquired technology from both the new networks and tibit communications. Shifting to customer segments and regions in the quarter.

Non-Telco revenue was 40% of total sales in Q1. This reflects a strong performance with web scale, which included a 10% customer in the quarter. Direct web scale was 24% of total revenue in the quarter and increased 47% year over year. We remain very positive about the year with this group of customers.

In fact, in FY23, we expect record revenue in web scale and growth well above the corporate average. As we continue to focus on driving growth outside the US, Q1 revenue in the APAC region was up 41% year over year. This was largely driven by revenue growth in India, which was up 150% year over year in Q1 to 64 million.

reflecting the strong demand environment in that market. And finally, we are placing an intense focus on customer experience, specifically the combination of our investment in inventory over the last 12 months, and a ramp up of our service team's readiness to deploy for our customers as fast as possible as we ship product. In summary, we have great momentum in the market today, supported by robust fundamental demand drivers.

a market leading set of technologies and platforms and strong visibility with our backlog. And with that, we are confident that we will deliver outside year-over-year revenue growth in FY23 and that we remain on track to achieve the three-year revenue cagar outlook we previously

With that, I will now turn over to Jim to speak more on those items as well as to provide additional detail on the Q1 financial results. Jim. Thanks, Gary. Good morning, everyone. And an especially good, very early morning to those on the West Coast at OFC. Gary mentioned we had a tremendous performance in Q1. The demonstrates our strong position as the market leader.

Total revenue was $1.06 billion, higher than expected. We shipped more product than expected due to improvements in vendor component deliveries, particularly toward the end of the quarter. Adjusted gross margin was strong at 43.7%, reflecting a favorable product mix and, specifically, a high volume of modems. Modems carry higher gross margins than average, and they made up a significant percentage of the late quarter shipments.

Q1 adjusted operating expense was $329 million, reflecting our investments in TAM expansion, and it included op-X from the acquisitions of the new and TIPET. With respect to profitability measures,

In Q1, we delivered strong results, including adjusting operating margin of 12.6%, adjusted net income of $95.6 million, and adjusted EBS of 64 cents per share.

In addition, we used cash from operations in the quarter primarily related to increases in inventory and accounts receivable.

Our inventory levels reflect our continued investment in components and other raw materials to manage the impact of supply chain volatility on our customers. As supply conditions gradually improve, we expect inventory levels to come down as we move through fiscal 2023.

but to remain elevated relative to historical levels. We do believe that inventory will be lower in Q4 this year than in Q4 of 2022. And finally, adjust to the $1.155.1 million. Benefitting from our successful term loan transaction in Q1.

we ended the quarter with approximately $1.2 billion in cash and investments. And just as a reminder, during Q1 we acquired the new and pivot for an aggregate price of approximately $292 million.

With our strong balance sheet, we intend to return capitalist stockholders, including our continued expectation for the repurchase of approximately $250 million in shares.

With our strong ballot sheet, we intend to return capital stopholders, including our continued expectation for the repurchase of approximately $250 million in shares during this fiscal year.

Turning now to guidance. I want to be clear that the updated outlook I'm about to provide reflects the same set of key assumptions that we discussed last quarter and which are also in our earnings presentation, including those related to supply chain conditions. This latter point is particularly important in a still uncertain supply chain environment. We believe that gradually improving supply conditions of the type we saw in Q1 will begin to allow for greater deployments of our accumulated design.

With respect to the fiscal year, we expect to achieve strong share gains as already reflected in our significant revenue over performance in Q1 and our expectations for Q2.

Therefore, we now expect to achieve fiscal year 23 revenue growth in a range of 20 to 22 percent up from 16 to 18 percent.

For adjusted gross margin, we continue to believe that our gross margin for fiscal 23 will be in a range of 42 to 44%.

This reflects our expectation for a greater proportion of line systems in our product mix over the next few quarters. And for adjusted operating expense, we expect to average approximately $335 million for $330 million for quarter for fiscal year 2023.

This reflects our intent to continue investing strategically in our future, primarily targeting opportunities for TAM expansion in NextGen, Metro, and Edge. This latter area is very rapidly growing, and we see potential to gain share with our best-in-class offerings. It's clear from the quarterly results we reported today, as well as our outlook for Q2 and fiscal year 2023,

that we are performing extremely well. We have never felt better about our position in our business. The combination of robust demand drivers, our market-leading technologies and platforms, an expanding addressable market, and strong visibility with our sizable backlog gives us high confidence in market-shared gains over the next few years. Jason?

We will now take questions from the self-satisfaction analysts. Thank you. We will now begin the question and answer session. And to ask a question, you may press star then one on your touch tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. In the interest of time, please limit yourself to one question and one follow-up. At this time, we'll pose momentarily to assemble our roster. Our first question comes from George Nauder from Jeffries. Please go ahead.

Hi guys, thanks very much. I guess I wanted to ask a bit about backlog. You said it was down slightly. Could you just give us a precise number. I think you said it was $4.2 billion last quarter about just curious on the update. And then also wondering if you're seeing any cancellations on that backlog, any more detail you could give us there. And then just also product lead times. Obviously, lead times have been extended in a lot of areas I'm just curious what the update is there. Thanks a lot.

over our expectation for the corner. So we still have a...

incredibly healthy backlog that we expect to come down during the year. We do not think this level of backlog is Sustainable or frankly desirable customers, you know want Want equipment. They don't want it sitting on our don't want it sitting on our backlog And that really bleeds into the second part of the question on the sort of cancel

What was the third question, George? I guess it was just about product lead times. I know they've been extended for some time now. I'm just wondering if you're able to make a dent on this. Yeah, George and Scott, product lead times have improved as we've shipped more products and have sort of built a bigger ship going forward. They will continue to improve throughout the year, although I don't think we will get them back to historical levels.

in this risk earlier, and I'm not sure what the new norm will be, but they will be significantly improved as we go throughout the year. Our next question comes from Tal Leoni from Bank of America. Please go ahead. Guy good morning.

I have a follow-up on the previous question and I have another question on cloud. So the first one is when I look at the results of all the companies in the space and I'm general networking, let's say it's all the same meaning very strong revenues. Martians are going up because of higher revenues but the backlog is coming down. And the question is, and I'm asking on the other side, I mean George asked you about the backlog, I'll ask about this.

that really need a strong network, underlying network. So if you talk about the environment, the orders, the kind of projects and customers, et cetera. So that's first question, and I'll ask both questions that together because they're linked. The second question is about cloud and other things that we've seen.

with Arista, for example, is that cloud is strong. And for you, if you don't mind to repeat the numbers, but I think cloud was up 47%. And the question is how much risk is there in the concentration of maybe one big customer, one big order, with their budgets coming down, what's the risk here that cloud will slow down throughout the year?

Okay, let me take the first part of those multiple questions, tell. I would say, first of all, one has to step back from the environment that we're seeing, which is this sort of web saw around the whole COVID piece, then enormous pent-up demand, then supply chain issues, etc. So you're seeing a very turbulent set of dynamics over the last couple of years and we're still living through it this year. If you sort of look through that dynamic and when we get to some kind of new normal.

Let's assume that's 24. Then I think you can look back on this and say that the consistent market demand has been strong mid-single digits, which I think it is consistently and historically being. And I think all of the dynamics and signals that we see are consistent with that. The desire for bandwidth in all its various forms closer to the end user consumer continues unabated. But that has typically translated into an optical market growth of the mid-single digits.

If you look at Sienna over that period, and again, similar to historical norms, we are a few percentage points above that. And if you look at our Kagga for the next three years, which we gave, basically last quarter, it's in the 10 to 12 percent range. So clearly, we're going to be taking a lot of share mainly because of the winds that we secured in 19 and 20. And we're going to be taking a lot of share.

and 21 now coming into revenue. So I think, yes, we've got outside revenue this year. There's no doubt about that, and that will obviously normalize at some point. But we will continue to grow faster than the market. And the overall demand tile continues to be strong, you know, from that perspective. Moving on to WebScale. Obviously we have, you know, relationships with all of the major web scalers. It's not just one single one that we did have a 10% of this.

with the web scalers of a tremendous growth across just about every metric in their businesses. And I think it's sort of natural that they are looking at their business and the wake of what's going on in the world, which aim a lot of noise out there in the market about what they're doing with their people and what they're doing with their catbacks. But if you look through all of that, underlying business remains strong. Their cloud businesses are strong. So we don't see any.

impact on their demand, their turbulence, and pushouts and things like that, but we don't see any significant change in the fundamental nature of their business. Our next question comes from Semi-Chatterjee from JP Morgan. I heard a couple and maybe just to start with one of the questions. We're getting this morning, I think, you mentioned, sorry Gary, you mentioned that.

overall you would have replenished the backlog. If you had hit the midpoint of the guide for one queue, I think last quarter you had said you would be building backlog with the assumption that you had hit the midpoint. So I think one of the questions coming up is that even within the robust order number, you would have made it on orders in the backlog. The backlog cannot and should not.

maintain the levels that it is. So the order flows, you know, whilst they're good, will not match our shipments. You know, we expect that during the year. So we expect very simply to end the quarter, end the year with less backlog than we went into it. And that is a good result for our customers and a good result for us.

So I think we actually had a very strong Q1 orders, but I would caution particularly on just taking order metrics on a quarterly basis right now. We're going to see some ebbs and flows during the year. There's no doubt about that. I mean, last year we had 25% order growth last year. And if you look at the end of I think it was Q3 in FY22.

But you know it's not going to be a linear line from an order point of view. That's for sure. Second part of your question to me. Yeah, I understand we're having on small numbers here, but maybe switching gears here to wave logic 6, you just mentioned that the wave logic 5 auto had really

more in the recent quarter. So how do you think about the likelihood that with the release of wave logic six, so quick in succession that customer starts to push out sort of their move to wave logic five and wait out till the wave logic six is in the market, just given that it's so sort of following on the heels of the wave logic five auto starting to pick up. So first of all, just a point of clarification. The wave logic five orders were a big part of that order growth that we saw.

In the last 18 months, so it's really a microcosm of the whole order dynamic that Gary said. What we are doing now is we are in an accelerated way, converting those to revenue, converting them to shipments to our customers. I thought I heard you say something a little bit different, so just a point of clarification there. I think about WaveLogic 6. The timing, as we said, is first half of 24. Obviously, we'll start to see design lens against that. Earlier than that, I suspect. But I will point out that it takes several cycles for next generation of technology to actually...

So I'll call out to it.

What relatives and investor concerns about CAPEX from both CARES and WebScale?

What do you attribute, from your comments, it doesn't sound like you're seeing any weakness. It sounds like the strength is pretty broad based, if I understood your comments correctly. What's driving that? What's the disconnect between these, and I'm mindful that CapEx trends and the individual companies revenue are far from one and the same. Well, what, can you give us any incremental insight in what's driving your strengths relative to the outlook for this year, those cutbacks?

That a lot of your customers have been talking about. Well, I think first of all, you're dealing with a lot of pent-up demand, you know, orders that have been placed because of extended lead times. And carriers, I mean, let me be really clear. Carriers of WebScale want the equipment. There's no doubt about that. They want the equipment. Now.

I would say for the first time in the web scale sort of area we're seeing the managed to their budget. So even though they want all the equipment they can't take all of the equipment in the year. And we are seeing that and that is built into our guide. Even with the massive uptick that we're seeing in web scale that is built into our guide. So they are scheduling stuff out into 24, which is great because it gives us backlog and visibility there.

We know they want the equipment to complete the networks that they're driving. So that actually is sort of a positive dynamic, but the web scale particularly are managing to their budgets. And we are seeing that and have seen that for the last few quarters. On the carrier side of things, again, they've got pent up demand, and they are, as usual, managing to their budgets and capex, but I would say that the priority for them is actually in this space and is on capacity.

to build out their networks. Particularly when you think about it, the last two to three years, first of all, they did not during the sort of COVID period that they were operationally conservative and really the growth in the market was pretty flat. Then they had pent up demand. Then we couldn't ship it to them in time. And so it is a priority for them right now to roll out these networks. So...

Obviously they're not immune to all of the economic uncertainty out there, but given the particular demand dynamics around capacity in their networks, we've got good visibility to that and not just in the backlog, but in the activity that we're seeing with them. So that's how I would characterize the two groups. We are not seeing any pushouts on the carrier side from a budget point of view. We're not seeing it. Sorry, it's a follow-up. The numbers clearly indicate that ZR, Elisa present, is not having an adverse impact. And I'm mindful that you guys, I keep...

All our checks indicate that you've got the lowest power solution on the market, which obviously is a critical factor. You've now announced WaveLogic 6 on 3 nanometer. I don't think anyone else has announced 3 nanometer, which presumably would – I recognize it's not necessarily ZR, but presumably that will continue your trajectory in terms of power efficiency. But let me let you respond. Any update on where ZR activity is at on your participation? Any relative to that opportunity?

I think our perspective has changed much since the last time we reached out of it. You know, firmly believe we've got the best, plugable product in the marketplace, both from you mentioned power and but also reach. And you know, there's starting to be some external references to validate that. We still think that market in terms of the ZR market for campus DCI is still very much in front of us. So it's been some early.

early movements. I don't think they've moved into the network as fast as people had expected. But as that inventory position in those customers bleeds off, we think there will be opportunity in front of us. Jim, can you just clarify something? Any meaningful contribution from Sibbit and Ben in the quarter? No, it was not, Paul. They were a little bit later in the quarter, and there was no meaningful revenue contribution at this stage. A bit of contact. Thanks, Gus. Our next question comes from...

Tim Long from Barclays, please go ahead. Thank you. Yeah, too if I could as well. First, I wanted to touch on routing and switching, which seemed to like a little bit higher in the quarter. You talked a little bit about growth in use cases or sales or what it takes to keep that business scaling. And then secondly, a little bit higher level, looking at the service businesses as a whole continue to lag product. Most companies in the pair group seem to match revenue there. So could you talk a little bit about why we've seen.

service under performance in a pretty weak gross margin accordingly this quarter. Thank you. On the time we take the second one first the service is peace so really has more to do with project mix and timing of sort of product revenue delivery versus sort of installation projects.

I don't think there's a sustainable difference in the performance of the services business relative to our equipment business here. It's really just timing and project based, particularly on the installation based services. And that has both the revenue ratio that you put, but you pointed out, but also has a margin implication because we carry a bit of fixed cost.

on the services piece and at the revenue timing is not as off a bit and you see it as a bit of a headwind from a margin perspective in the short term. So that's the services dynamic. On the writing and switching piece, you're absolutely right. Good quarter on writing and switching. It's been a few in a row, so we're pretty excited about the momentum there. In many of the use cases, you know, we are challengers that are building, I'll say, to next generation architectures. So we think that.

You know, the future is still very much in front of us in terms of getting at that expanded time that we talked about. And just to remind you, you know, the key use cases that we've been focused on include wireless transport, next generation residential broadband of XGS PON, enterprise edge, and both a physical and a sort of virtual capability. And then that converged MetroCore benefiting both from our IP capabilities, but also our optical strengths there. So we're pretty excited about, you know, being the challenger in that space and that continued opportunities in front of us.

the future is still very much in front of us in terms of getting at that expanded time that we talked about. I just to remind you, you know, the key use cases that we've been focused on include wireless transport, next-generation residential broadband, the XGS PON, enterprise edge, and both a physical, sort of virtual capability, and then that converged metro core, benefiting both from our IP capabilities, but also our optical strengths. So we're pretty excited about, you know, being the challenger in that space, and that continued opportunities in front of us. Thank you.

And our next question comes from Simon Leopold from Raymond James. Please go ahead. Thanks for taking the question. I'm going to ask sort of the two combined because I think they're related. But I wanted to see if you could talk a little bit about your expectations for India. I picked up the comment from Gary on the quarter at 64 million. I think last year you were about 2% of revenue. So just want to get a better sense of the sustainability and outlook for India. And the related question is more broadly your thoughts and updates on being able to displace Huawei, not just India.

but outside China globally, how you see your position to win share from Huawei versus your competitors. So I'm going to let me pick the India one. Yeah, I think we're beginning to see what we sort of generally anticipate in the industry, which is a strong build out in India. You saw that in our results. I would expect India to have a very

in not just a good year, but probably a good three years for us, quite frankly. There's a whole investment cycle there driven primarily by the 5G build out, but just generally the investment there is the fastest growing internet market in the world, and we have number one market share and a well positioned there. So we're very positive about India. It's going to be a strong cycle. And Huawei, and actually to pick up on Huawei in India and then broaden out the question that you had Simon, a lot of those decisions have...

already been made. I think I would characterize India as moving very quickly relative to other parts of the world on the displacement of Huawei. And we've certainly benefited from that. We've had wins that were now rolling out, which is direct replacement. I think Europe is the other sort of market area, particularly where they are changing out Huawei. That is a multi-year process in Europe , and I think we're winning our fair share of that in Europe . And that will continue over the next few years as they replace their infrastructure.

Their initial focus was not building with them in the wireless space. The kind of transport stuff is they kind of get into it when they get to it. And they are beginning to get to it. And that will continue. Other parts of the world are less sort of responsive, generally speaking. You look at Africa, you look at Latin America. There is not as much movement to replace Huawei as you see.

the same resistance in the pond area as they're having in the cord and networks.

Thanks to that. Just to clarify the India comments, I think the prior peak at the 2018 was about 9% of revenues, a smaller revenue base. Just wondering, is this business likely to be material enough to not maybe consistently, but at least get close to 10% of revenue or is?

this sort of 64 millionish sustainable level. How do we think about that? I think it's possible to grow in absolute percentage terms as part of our revenue. Now, you know, everything else is growing as well. And you look at sort of the uptick in switching and routing and you know, well, you look at the uptick particularly in web scale, et cetera. So, you know, would it touch 10% again? That's probably a little high, but it can certainly be a major contributor to us. There's no doubt about that.

sort of 64 millionish sustainable level. How do we think about that? I think it's possible to grow in absolute percentage terms as part of our revenue. Now, you know, everything else is growing as well. And you look at sort of the uptick in switching and routing and you look at the uptick particularly in web scale, et cetera. So, you know, would it touch 10% again? That's probably a little high, but it can certainly be a major contributor to us. There's no doubt about that. Thank you.

a sustainable level. How do we think about that? I think it's possible to grow in absolute percentage terms as part of our revenue. Now, you know, everything else is growing as well. And you look at sort of the uptick in switching and routing. And you're like, well, you look at the uptick particularly in web scale, et cetera. So, you know, would it touch 10% again? That's probably a little high, but it can certainly be a major contributor to us. There's no doubt about that. Thank you. Thanks, Simon. Thank you.

The next question comes from Meta Marshall from Morgan Stanley . Please go ahead. Great, thanks. A couple of questions for me. Just maybe starting on growth margins, just as you think about the year and supply chain seemingly releasing a little bit sooner than expected, understanding you're leaving kind of growth margins about the same for the year, but just is there anything that we should think of differently as more new deployments, less supply chain overhead, just anything they consider there? And then second, just given the topical nature of it right now, just wondering how you guys see the AI opportunity for DCI and whether it's relatively small because it's mostly in data center traffic or whether you think that that can be kind of an additional growth driver for you guys. Thanks. Thank you, Meta. Jim, why don't you take the first part of that growth margin question? I will. Thanks, Gary.

As we've always said, Matt, the most important element of our gross margin, historically and for the future, is mix. And we have won a lot of deployments and new projects with customers all over the world, including the web scanners, which call for our new reconfigurable line system. We expect that this year we will deliver a much higher proportion of what we call RLS, reconfigurable line system to a bunch of customers. And those deployments will have a dilutive effect on our gross margin. It hasn't happened to a great extent so far, but it will happen.

across margin, we do think that that percentage of modems will come down a bit as we go through the year and start to deliver RLS. Now, for the future, we think that all of these things will tend to average themselves out. And we do think over the next few years, we'll get back to the mid 40s across margin that we enjoyed back pre-COVID.

We do think that that percentage of modems will come down a bit as we go through the year and start to deliver RLS. Now for the future, we think that all of these things will tend to average themselves out and we do think over the next few years we'll get back to the mid-40s gross margin that we enjoyed back pre-COVID. Here you're on AI. Bye.

I'm going to add on your AI question. You're right. The community of interest right now is largely in the back end of the data center. But as you look at sort of those data center architectures being becoming more distributed through the requirement of having to get more and more power to service the applications. And you look at the traffic that AI is going to generate. That's going to have a bleeder effect on the land side traffic, which is a good thing for those of us that are in the bandwidth business. And it'll be both in the web scale direct networks as well as the service providers that service those web scale. And the second thing I'd say.

There's a lot of interesting dynamics going on in the architectures as people look forward into the future of the SAI world inside the data center. And those architectures are starting to yield conversations around where does the coherent technology play of those architectures in the future. And you would have saw in our Way of Logic 6 announcement.

I started to talk about industry as kind of phrase coherent light and the capability being in that generation of technology for us to take advantage and participate in those architectures. So that's a new space for us. Not necessarily in the timeline of our three-year revenue guidance, but just beyond that horizon you start to see those opportunities. Great thanks.

talked about industries kind of phrase coherent light and the capability being in that generation of technology for us to take advantage and participate in those architectures. So that's a new space for us. So necessarily in the timeline of our three year revenue guidance, but just beyond that horizon it starts to see those opportunities. Thanks. Thank you. Madam.

The next question comes from David Hope from UBS. Please go ahead. Thanks guys. And I apologize if I'm going to belabor the point about backlog and orders. And so maybe Gary, just from the comments on the call, it certainly sounds like based on the backlog draw that maybe booked a bill was less than 0.9 in the quarter. Is that correct? And if we extrapolate that trend going forward for the full year, does that mean backlog comes down in the mid teens based on sort of your expectations? And then maybe if I roll that forward, is my second question into the three year model, can you kind of square your comments about share gains in optical, if the optical industry is going sort of mid single digits because you know, if I just take the midpoint of your guide, you would assume that you know in the back half of your three year plan 24 or 25.

You know, seeing a revenue would only be going around 6%, so just would love to get some clarity on that. First of all, on the backlog, no, that isn't the right assumption. It was more than .9 for Q1, you know, it was about that. Backlog for the year and as we said, you know, I think everybody needs to get their head around the fact that we're not going to have 25% audit growth year on year. You know, on the specific dynamics that have built up to that. And we expect to go into 24 with a bigger backlog than we would normally take into any fiscal year.

So that backlog is still going to be very strong. The focus right now is to ship the backlog that we have and to reduce our lead times. If you look at the...

We gave a three-year guide, a cagga, over that. We only gave it last quarter. So we're 36 months out into that. And I don't know as many companies that give that specificity. So we're very confident around 10 to 12 percent growth in that cagga. Obviously, we're having an outside year this year as we ship the backlog. But if you look through all of that and the dynamics around various quality...

I don't know many companies of our size and our space that are talking about a midpoint of the range of 21% for the year. And just to be clear, our future has not changed. We still feel great about our position in the market and our ability to grow. We did give a range, David. And so to jump quickly to a mathematical equation there is probably not the right idea in this time of...

of turbulence and change. We feel great about our ability to grow faster than market. Great, very clear. Thanks a lot, guys. Thanks, David. The next question comes from Amit Daryani from Evercore, ISI. Please go ahead. Yep. Thanks for your question. Gary, maybe it's towards the end of what you were talking about on the backlog dynamic. Is it really think about where do you think your backlog exits this year? And then I think historically I've talked about it memory serves me.

a backlog number in a normalized range should be in the 750 to maybe a billion range. How long does it take you to get to that normalized backlog? Is it a 24 process or much beyond that as well? The only answer to that is, honestly, don't know what the new normal is going to look like. And I think, you know, the dynamics of this are largely driven, bizarrely, not necessarily by demand. Demand has been very consistent and is very solid. It's by the ability of lead times to meet that demand. And so, you know, lead times in the space, even in very large infrastructure of problems.

some kind of new normal and indeed even, you know, it meant what that new normal like looked like. But it will be better lead times than we're seeing right now. There's no doubt about it. And that will reflect in carrying a lower backlog into the business. And that's the same sort of everybody in this space. It's a little bit...

different for us in that we had enormous amounts of backlog because of the new wins that we had in the sort of 19 to 21 timeframe that have now translated into orders and backlog. So that's what gives us you know fantastic visibility over the next.

for us in that we had enormous amounts of backlog because of the new winds that we had in the sort of 19 to 21 timeframe that have now translated into orders and backlog. So that's what gives us you know fantastic visibility over the next you know 12 months or so.

Got it. And then you know, it's could maybe spend a minute talking about you know, that think about the 20, 22% growth rate. You talked a fair bit about A-pack and Indian in fairly well. How do you think Amir stacks up for the year from that growth perspective? You sort of think about it and then, you know, I think John quote is a little bit weaker there versus the rest of the geo. So if you're just talking what are you seeing in Amir for the year? That would be helpful. Thank you. Jim, do you want to take that? John , we believe that all of our regions are going to grow pretty meaningfully this year. Amir is going to grow. I'm not sure that it's quite at this company average, but it will grow very significantly in this year.

India is probably going to grow above average, web scale well above average. The next question comes from Jim Suva from Citigroup. Please go ahead. Thank you so much and congratulations and thank you for all the details. My question is a little bit on gross margins.

You'd mention that I think you'd said lower, I'm sorry, around low 40% range. I want to make sure that I'm just very quickly. You're not saying 40%, you're just kind of saying lower part of 40% because I believe you're range for the four years 42 to 44. But with long backlog and lead times, shouldn't you have kind of more visibility and pricing power? So is it just less modem shipping that you're going to be experiencing in the next quarter?

number like that. And it is absolutely related to a mix change toward line systems and away from modems. And there's nothing sinister about that. It just has to do with the flow of our deliveries and the fact that as we said, we've won a lot of new projects, a lot of new deployments and they start with line systems. So that's it.

precisely and that's why we think it'll be low 40s in Q2. We believe that we will average 42 to 44 for the year. I do want to say though again that our expectation is to return to the mid 40s and maybe even beyond that. We'll see with other business mix changes more but we've had a lot of change. We've had a lot of exception costs and we've had this next shift between modems and line systems which should equalize over time and get us back to the mid 40s.

And that's why we think it'll be low 40s in Q2. We believe that we will average 42 to 44 for the year. I do want to say that again, that our expectation is to return to the mid 40s. And maybe even beyond that, we'll see with business mix changes more. But we've had a lot of change. We've had a lot of exception costs. And we've had this nick shift between modems and line systems which should equalize over time and get us back to the mid 40s. Thank you so much for the details. It's appreciated.

Thank you, Jim. Thank you, Jason. We'll take, just thank you, Jim. The Jason will take one more question, please. All right. The next question comes from Fahad and the Jam from Loop Capital. Please go ahead. Thank you for taking my question. I apologize if I'm going to ask you to repeat on the backlog. I hate to revisit it, but it's too early here in the west coast. So, can you remind us what portion of your 4.2 billion hours backlog was long ago? What longer duration means beyond the next 12 months? And then I have a...

The real question that I wanted to ask you. Well, I can't hear you very well, but I think the question was, what percentage going in of the 4.2 billion was outside of FY23? I don't think we broke that down. Okay. I would say that a lot of it would be taken by customers if we could deliver it to them. I'm a very significant percentage of it would be taken, but at the lead times component availability is set or sort of disturbing the situation as we know. Got it. Not only my question, on your V-logic 6 product announcement, you also announced a V-logic 6 nano.

the 800-GIGZR. It seems to suggest that if you, against the timeline, wasn't announced, but I'm assuming it's 4.5.24. And if that's the case, it sounds like you guys are preempting the existing market leaders in the 400-GIGZ pluggable market by kind of accelerating the cadence. How big of an opportunity do you see for Sienna in 24, maybe 25 really from the R, how big of a catalyst could that be to your business?

with our wave logic 6.6 stream. And we want to be ready for that market. But I wouldn't necessarily think it was driven by trying to disrupt the point of KXER market. We just think it's the natural evolution for customers that play in that space.

We have logic 6.6 stream and we want to be ready for that market, but I wouldn't necessarily think it was driven by trying to disrupt the foreign or kick ZR market. We just think it's the natural evolution for our customers at play in that space. Thank you.

And we want to be ready for that market. But I wouldn't necessarily think it was driven by trying to disrupt the foreign-to-kicks VR market. We just think it's the natural evolution for our customers at play in that space. Please should be up to thank you. Thank you. Thank you, bye.

And thank you everyone for joining us today, especially again Jim said those of us on the West Coast at OFC. We're looking forward to meeting with a lot of you the next couple of days and we'll see you then. Thank you very much Conference has now concluded. Thank you for attending today's presentation. You may now disconnect you