Q2 2023 Ciena Corporation Earnings Call

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Good morning everyone and welcome to the CNF 5th School 2nd quarter, 2023 financial results conference call.

All participants will be in a listen only mode. Should you need assistance, please single conference specialists by pressing the start key followed by zero. All participants will be in a listen only mode.

After today's presentation, there will be an opportunity to ask questions.

That's the question you may press star and then one, so it's all your questions you may press star and two.

We also note today's event is being recorded. K. Hartford's event is holding its second site.

At this time, I'd like to turn the floor over to Craig Lamp, Vice President and Investor Relations. Sir, please go ahead.

Thank you, Jamie. Good morning, and welcome to CN this 2023 fiscal second quarter results conference call.

On the call today is Gary Smith, President and CEO and Jim Moiland CFO .

Scott McPhilly, our Senior Vice President of Global Products and Services, is also with us for Q&A. In addition to this call and the press release, we have posted to the Investor section of our website and accompanying investor presentation that reflects this discussion as well as certain highlighted items from the quarter.

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

Today's discussion includes certain adjusted or non-GAAP measures of CNS results of operations.

A reconciliation of these non-get measures to our gap results is included in today's press release.

Before turning the call over to Gary, I'll remind you that during this call, we're making certain followers of the statements.

Such statements, including our quarterly and annual guidance and our long-term financial outlook, discussion of market opportunity, decent strategy, and commentary about impacts of supply chain constraints on our business and results, are based on current expectations, forecast and assumptions regarding the company and its markets.

which includes risks and uncertainties that could cause actual results to differ materially from the statements discussed today.

Some things relating to our outlook, whether mentioned on this call or included in the investor presentation, that we will post shortly after on important part of such boroughs of the statements, and we encourage you to consider them.

Our forward looking statement should also be viewed in the context of the risk factors, detailed in our most recent 10K filing, and in our upcoming 10Q filing, which we expect to file the SEC by June 8th. So he understands no obligation to update the information discussed in this conference call.

whether the result is new information, future events are otherwise. As always, we will offer as much Q&A as possible today to ask that you limit yourselves to one question and one follow. With that, I'll turn the call over to Gary.

Thanks, Greg, and good morning, everyone.

Today we reported outstanding fiscal second quarter results, including higher than expected quarterly revenue of 1.13 billion, an increase of nearly 20% year over year, and adjusted gross margin of 43.7%.

Our results included very strong profitability metrics as well with quarterly adjusted operating margin of 13.8 and adjusted DPS of 74 cents.

We also generated 230 million in cash from operations in Q2.

Overall, we performed better than expected with respect to revenue in the second quarter and indeed for the first half of fiscal 2023.

This was driven largely by the supply chain improving faster than anticipated, which enabled us to ship significantly more product to more customers in recent quarters.

And to help you understand the magnitude of this dynamic.

Supply chain improvements have enabled us to improve our lead times to customers by more than 50% year to date.

Consequently,

As the supply chain improves and lead times come down, customers no longer need to place advanced orders to secure supply.

As a result, and as expected, orders will lower than revenue in Q2. We are now clearly in a transitionary period.

One that is moving from an environment where orders vastly outstripped supply to one where supply and order flow are beginning to come into some kind of balance.

Consequently, this is driving a near-term shift in customer ordering and shipment dynamics and behavior.

Previously, we had discussed some pushouts of orders by our cloud provider customers that they reprofile their span to align with their budgets.

In recent weeks, we've begun to see similar behavior by certain of our large North American service provider customers.

And to be really clear, customers are not canceling orders. They are pushing some existing orders in the subsequent quarters to better align with their budgets and scheduling capabilities.

And this is purely a matter of timing. It is not the result of CAPEX cuts, rather it is one of operating within our existing CAPEX and logistical capabilities.

Therefore, we continue to expect to exit fiscal 2023 with a backlog that is at least double our historical levels on an absolute basis.

However, as a result of this transition period, as Jim will discuss, we do expect a wider range of potential revenue outcomes for fiscal year 2023.

I would also stress.

that none of these shorter term transitional supply demand dynamics.

are in any way a reflection of the durability and strength of the underlying demand drivers in the industry and of course our business. But rather, they reflect the transition back to a more balanced supply and order environment that is aligned to our annual cap expand. Overall, we are very encouraged by

on consistently for many years, including through difficult macro-conditions.

The key demand drivers behind this are strong and are very durable.

These range from continued 5G rollouts and increasing cloud adoption to broadband access and the growing need for more automation.

In fact, all of these were strong demand drivers prior to COVID and the supply chain challenges of the past few years and are arguably even stronger today.

And of course, AI could prove also to be transformative for service providers and cloud providers alike on top of these existing dynamics.

This is increasingly evident with the recent introduction and surging interest in generative AI platforms, which are widely expected to be a driver of bandwidth demand over time and creating potential new opportunities, of course, for us.

Critical to supporting this demand are the underlying technologies that deliver optimal and future proof network architectures for both service providers and cloud providers.

We of course offer many of these key technologies today.

With our traditional portfolio, where we are the undisputed leader across Metro DWDM and DCI submarine and long call.

and we continue to increase our technology lead even further.

With WaveLogic 6, the first and only 1.6 terabit solution becoming available in the first half of next year, we are very excited about the opportunity in front of us.

particularly given their plans to integrate the technology across a range of our optical and routing and switching platforms and also to make it available for use in third-party solutions.

Importantly, we've been adding to our diversification and differentiation with an eye towards a creative tam expansion into faster growing markets.

Our TAM expansion in optical will target the emerging opportunity in coherent plugs and components.

including inside the data center over the years to come.

And as you've already seen, technologies to support next-gen Metro and Edge applications are another focus of our TAM expansion.

In this arena, the acquisitions of Viara, Tibit and Benou are driving new customer conversations and engagements about the opportunities in virtual routing and broadband access, including PON.

Additionally, we announce the game changing wave router platform.

An industry first, platform architecture, optimally designed for the converged Metro, which will come online this year.

An expansion of our family of purpose built co-heared routers.

This new product has generated significant interest from customers around the world as we aim to disrupt the edge routing market and capture share.

And as a reminder, combining these new markets and opportunities with our existing portfolio, we believe our total addressable market grows from something like 13 billion in 2020 to more than 22 billion over the next several years.

Moving to some quick highlights from the quarter that speak to our performance and really illustrate the custom and demand for our products.

On the portfolio side in optical, we added 14 new customers in Q2 for wave logic 5 extreme, bringing our total custom account there to 228.

And we have another record shipment quartering Q2 for WaveLogic 5E, bringing our total of modem ship to date to 75,000. In routing and switching, quarterly revenue increased 19% Euro per year.

And during the quarter, we secured new wins for our new broadband network gateway from the Benou acquisition. With respect to customer segments and regions, service provider revenue was up 22% year over year, and non-Talco revenue was 42% of total sales in Q.

over year and comprise 22% of total revenue in the quarter.

And in fact, direct cloud provide a revenue group 32% period over period in the first half of 23.

And we continue to expect growth with cloud providers this fiscal year that is above the corporate average, which will reinforce our leadership and market share position with this critical customer segment.

We also continue to drive growth outside of the US.

In particular, in Q2, Asia Pacific Ravinium was up 60% Euro via.

This was largely driven by continued revenue growth in India, which was up 88% Euro over Euro in Q2 to about 70 million.

reflecting consistent strong demand from service providers in that market. Summary, as supply and order flow are coming into balance, providing demand is proving strong.

and very durable.

We are incredibly well positioned with a market-leading set of technologies, including new platform releases that advance our leadership and expand our opportunities. With that, I will turn over to Jim to speak more on what we are going to provide additional detail on the Q2 financial analysis.

given improvements in component deliveries, particularly toward the end of the quarter.

Adjusted gross margin in the quarter was 43.7% due to a favorable product mix. Q2 adjusted operating expense was $338 million, reflecting continued investment in innovation and R&D, particularly around our WaveLogic coherent technology and investment aimed at several different areas of TAM expansion. With respect to profitability measures, the

In Q2, we delivered strong results, including adjusted operating margin of 13.8%, adjusted in that income of $110 million, and adjusted EPS of 74 cents.

In addition, we generated $230 million in cash from operations, adjusted EBITDA and Q2 was $181 million. And finally, we ended the quarter with approximately $1.3 billion in cash and investments.

As the operating environment continues to improve, inventory levels came down $80 million from Q1.

We expect to continue reducing our inventory levels as we move through the year, which will allow us to return to the consistent level of cash generation we drove before the supply chain disruptions. We did not repurchase any gears on fiscal second quarter. We will leverage a balance sheet this quarter.

to begin to return capital to share it to stockholders again. And we continue to expect that we will repurchase approximately $250 million in shares during this fiscal year.

Turning now to guidance. As with last quarter, the outlook I'm about to provide reflects the assumptions that we detail in our earnings presentation, including those related to supply and demand dynamics. As Gears mentioned, we are currently in a transition period.

as we move towards an environment where supply and order flow are more in balance with each other. This is driving some customers to push out their requested shipment days.

As a result of all of these phenomena, we are broadening the range of our fiscal 23 revenue growth outlook to 18 to 22 percent, which reflects a wider range of potential outcomes.

I'll just remind you that our previous range had been 20 to 22% for the year. We continue to believe that our adjusted gross margin for fiscal year 23 will be in the range of 42 to 44%.

With respect to OPEX for the fiscal year, we now expect it to be approximately $1.33 billion, slightly higher than we last projected, as we continue to see opportunities to invest for tan expansion.

For the fiscal third quarter, we expect to deliver revenue in a range of $1 billion to $1.08 billion. And adjust to gross margin in the low 40s range.

Finally, we expect adjusted operating expense in the quarter to be approximately $335 million.

At this rate of revenue growth, we will deliver significantly higher than market growth and continue to take care.

Our business has never been stronger, backed by strong demand characteristics and the best set of customer relationships in the industry.

We are well positioned to expand our adjustable markets for future growth opportunities and other markets over time.

Of note, we expect tailwinds as we bring new products to market, including WaveRodgix VI, WaveRouter, and several solutions, stemming from the acquisitions we've made over the last couple of years. We are incredibly confident in our business, and in the future demand for networking products.

services and software. But before we move to questions, I would like to announce that we recently published our new sustainability report. This report details our commitment to sustainability and provides our stakeholders a comprehensive discussion of our programs and the great progress we have made as a company.

on sustainability. If you'd like to read the report, it is available on the sustainability pages of our website. Or you will welcome to email our IR team and we will send you a PDF copy.

Jenny, we will now take questions from the social side analysts.

Ladies and gentlemen, at this time we'll begin that question and answer session. Once again, to ask a question you may press star and then one. To withdraw your questions you may press star and two.

In the interest of time we do ask that you please limit yourselves to a single question and a follow-up. Our first question comes from Simon Leopold from Raymond James. Please go ahead with your question.

Great. Excuse me, sorry. Thanks for taking the question. I want to start out with the WaveRouter announcement. You talked about, I think, General Delbility this year. I'd like to get a sense of when you think about revenue recognition for that product and how we should sort of think about weaving that to the model.

First of all, we got tremendous reception from the customer base with the announcement at the show and lots of press available on that. I will remind you that it actually is a part of our broader...

Obviously we knew this was coming, so it was part of our overall three-year growth rate that we gave you historically. That was an art thinking there.

Great, thanks. And just just a quick follow up. Love to get kind of an update on where the India progress is. I know historically, I'm a small revenue base. It peaked around 9% of revenue. It looks like it was 6% or 7% of revenue this quarter. How should we think about the cadence of the India business for the, yeah?

for the balance of the year. Thank you. I would expect it to continue to be strong, so I'm in both, you know, in the second half and as we get through 24, I think.

You know, there's a, as opposed to the rest of the industry, which is not particularly cycle based, I think India is going through a big cycle of 5G rollout and extension. And I think that's going to happen over the next one to three years. I would agree with number one market share there across a large number of carriers. So we're very enthusiastic about that.

you know what that can be is a percentage of our revenues tough to tell because the rest of our business is growing well too you know including the cloud players the cloud players are also playing a big part in India I would also say that both in you know the submarine elements to it and obviously directly via carriers into the into the India market it's the

It's the fastest growing internet market in the world right now. Great, thank you.

growing internet market in the world right now. Great, thank you. Thanks, Simon.

Our next question comes from Tim Long from Barclays. Please go ahead with your question. Thank you. Yeah, two if I could. First, Jim or Barry, can you just give us a little bit more color on kind of the, you know, order book to bill backlog drawdown in the quarter just so we can get a sense of, you know, how we're working down that balance and maybe related to that. Okay.

I guess there's no way to use other backlogs to fill in holes. It looks like the second half was lowered a little bit, so maybe a little bit on the fungibility of that backlog, and then I had a margin follow-up.

Yes, Tom.

Backlog went down by roughly $600 million.

billion dollars. Remember we said that our backlog at the end of this year will be roughly double our sort of historical backlog at the end of the year so we did expect and we continue to expect a decline in backlog and remember that's mainly because lead times.

Our customers no longer have to order so much advanced gear. So all of this is in keeping with the general situation in the industry.

Okay, great. And then on the gross margins, obviously there's a lot of mixed shifts. I think you had talked about some new network construction coming, which is lower, but can you kind of walk us through the moving parts and as you gain back some margin from supply chain logistics, et cetera, how would that balance over the next year or so? Thank you. Thank you.

On the supply chain dynamics, we said last year that we thought that the exception costs, meaning the costs we pay to brokers to buy components, as well as the higher logistics costs were roughly $150 to $160 million last year, 4% or so.

return to historical levels which were essentially in the single-digit millions of dollars. So that's going to happen. Might not happen all next year, but it will happen over the coming years.

The other thing I'd say is that the driver for our gross margins historically has always been product mix. That's been the single largest component of swings in gross margin. Typically in the past.

When we put out new line systems, which are low capacity in terms of capacity to deliver bandwidth demand, those are lower growth margins. And as we add capacity, adding modems to the systems, those are higher growth margin. And it's the mix of those two that determines in large part our growth margin. Of course.

Routing switching software tends to be a little higher overall and so that helps. As those grow as a percentage of our business over time, we think that'll add to our gross margin. We also said this year that we're having a particularly heavy mix.

of line systems and that is impacting our gross margin this year. So all of those things are...

working together to produce the 42 to 44% that we expect and goes margin for this year. Over time we think we'll get back to the mid-40s. Maybe even better.

to produce the 42 to 44 percent that we expect in gross margin for this year. Over time we think we'll get back to the you know mid 40s maybe even better. Okay thank you.

Our next question comes from Amit Dauriani from Evercore. Please go ahead with your question.

If thanks for my question. Yes, even the start went. You know, you folks are talking about a broader range of outcomes in the back half. And I think the way you kind of talk about it was, it's push outs of deliveries that you're seeing with not the America service provider. Is that the extent of where you see these delivery push outs? Or could you maybe talk about, are you seeing it elsewhere? Or do you think there's a list that it spreads?

but you know, fairly early on, where it really I think is the ability, those two sets of customers, both the cloud players and North American T1s, were in a position to place larger forward orders given the supply chain challenges. We did not see that dynamic particularly internationally, for example.

We did not see that phenomenal, or really in a lot of tier two, tier three players in North America. So we think it's really isolated to those two groups. The cloud ones, we saw that earlier on and that's all we profiled and now rolling out. And you've seen the strength, notwithstanding that, you're still seeing the strength of the cloud players increasing.

and they're all kind of coming at once to them. And these carriers are dealing with both alignment to budgets, the logistical aperture that they have, and deployment and absorption. So it's understandable much the same as we saw with the cloud players that they're balancing this out. We are not seeing cancellations with them.

I would also say really haven't, you know, had any conversations around this being a macroeconomic caution. It's really one kind of to be expected around the WIPLASH effect of supply and demand.

Got it. That's really helpful. And maybe if I just kind of follow up on this a bit, let's say the magnitude is 80, 100 million, I think something there about from this push out basis. Do I just think about this as something that's going to flow into fiscal 24 for you? So essentially the way you still end up with the revenues, but maybe growth is a little lower than what you thought, but

a lot smoother with extended duration. So, I guess we'll just talk about, does this just flow into 24 and does that just imply that growth rates will be more steady as we go into the outskirts? So, I guess we'll just talk about, does this just imply that growth rates will be more steady as we go into the outskirts?

Well, clearly some of this is moving to 24. I wouldn't, right now I wouldn't do anything to change all for 24. I wouldn't suggest that you change your numbers for 24. We think 24 is going to be very strong for us by the way, because we see the demand from our customers and we have the opportunity.

to take some of that expanded TAM. So it's going to be a good year, but I wouldn't just sort of take whatever number you're projecting that I'm not going to deliver this year and add it to your call for new year.

some of that expanded town so it's gonna be a good year but I wouldn't just you know sort of take the whatever number you projecting that we do I'm not gonna deliver this year and add it to your call for next year. I don't think that's the right way to take this.

But to your point, I do think it should give us greater visibility into next year. And if we play that dynamic through, we're still going to enter the year with sort of double what our backlog levels would normally be.

You know, I think this transition period will be, as we start to exit the year, you know, and things get more into balance than I think we get into a more normalized set of dynamics around order and delivery and shipment. But I do think we're gonna have better visibility into 24 as a result of this scheduling.

Thank you very much. Our next question comes from Alex Henderson from Needham and Company. Please go ahead with your question.

Great, thank you so much. So just a couple of quick clarifications. What do you think the normal backlog is that you're going to stabilize around? And how is that going to be different from where you were prior to the supply chain pressures? And I think it's...

probably a little longer than normal historical. Well, it's hard to make an exact prediction of where a backlog is going to end up, because it will depend upon two critical variables. One is where our lead times are, and second, what customer behavior is with respect to lead times, and how safety cannot be expressed and passed. And third, telling me how to remove waste due to climate change and the growing trend of gamblers. Well my last comment and last comment is half of the time,

much security they want to have in terms of making their demand visible to us. If you go back historically, our backlog, the year for many years was roughly a third of the coming year's revenue, roughly a third.

Now, as we came into this supply chain situation and we had massive orders, you know, extended orders and extended lead times, it went up to something like 65% of our expected revenue for 22.

and 90% of our expected revenue for 23. We think that it's gonna go back down towards that 35% of expected revenue, but it might not go all the way down because our lead times might not be quite as short as they were in the past, and customers may choose.

to give us advanced order. So it's hard to know, but we're gonna have a, probably a higher backlog at the end of this year than we will as the situation totally gets back to something approaching normal. So, we're gonna have a higher backlog at the end of this year.

give us advance orders. So it's hard to know. But we're going to have probably a higher backlog at the end of this year than we will as the situation totally gets back to something approaching normal.

So you talked about the optical line systems being a larger percentage of sales this year than normal And I assume that that's also the case with your backlog But when you sell optical line systems almost invariably that turns into additional

future sales of optical transmission components. So can you talk about whether that additional capacity to light up the optical line systems is in backlog or is that something that we should expect?

Once these are delivered, once they're installed, once they're put in with the rotums, that we start to see those additional orders coming in for the high margin transceivers.

You are exactly right. We do tend to get higher orders for the capacity after a period of time during which we put out line systems. So yes, that does happen. As far as whether that's in backlog now,

Some of it is. I mean, a customer is going to give us a set of orders that consists both of the line systems and the capacity to add. But the bulk of it is not. The bulk of it will come over the coming years.

Some of it is. A customer is going to give us a set of orders that consist both of the line systems and the capacity to add, but the bulk of it is not. The bulk of it will come over the coming years. So that implies that there's.

A time lag from the time the order comes in, or that's installed to the new order sure, Transfewers, what is that lag? Is it, is that a 24-demo order opportunity?

It varies tremendously between customers. Some large customers place the line systems out with a small amount of capacity in it, then that gets layered in after that. Submarine cables tends to be higher initial deployments. For example, they tend to put more capacity out there from day one.

So, you know, we're very encouraged by, you know, the new builds that are going on there, but the mix does vary.

Thanks, Alex. Our next question comes from George Nautter from Jefferies. Please go ahead with your question.

We have a broad portfolio so mileage may vary a bit from product to product. But in general, what we said going into the year, our lead times were nominally around 52 weeks. As we said in the script, we've cut that by more than half year to date and we would expect to continue to improve that as we go through the rest of the year. George, on the second question...

they were fairly aggressive around, you know, securing future orders. Now, you know, when all of that comes together at the same time and our lead times come down significantly, as Scott talked about, we're kind of turning up with the truck and their ability to absorb all of that both from a budget point of view in that particular period.

and from a logistical point of view is sort of challenged. Whether you call that excess inventory or not is tough to tell, but clearly they're not able to absorb the equipment all in one hit like that. So we saw that re-profiling with the cloud players, and we're seeing that re-profiling and rescheduling with the tier 1s.

But frankly, that's kind of, you know, to be expected given the whiplash that is going on here. But I think we've now got pretty good visibility with that from a profile point of view. And it's sort of, I think, part of the normalization process that we're going through as the supply chain lead times.

of come down. Are your lead times still longer than your competitors just out of curiosity? We don't think so. Well, you know, by the way,

Any competitive into our best customers and shift ahead of others. We tend not to do that, we tend to play it fairly like in the minutes. But competitors can provide certain customers if they choose to and it could appear.

limited circumstances that their lead times along are shorter now. But as a general rule, we do not need to. Well, I think the other sort of point just to underline that is, you know, you look at our revenue growth, even the bottom end of our range, you know, you're talking 18% growth. I don't know any other optical player, you know, of our size and scale that's doing that kind of piece. We're clearly taking market share.

Thank you very much.

cs

okking.

And our next question comes from to me, Tatterty from JP Morgan. Please go ahead with your question. Yeah, thanks for taking my questions. I guess if I can start with the orders, I think the just the Rothmath indicates your orders. Last quarter were about 900 million they're moderating the board.

So when do you think the stabilizers lead time, sort of the duration of the order book becomes more consistent going forward? And I will follow. Well, the first thing I'd say is that if you just run the math on our comments around backlog, we do expect that orders will be a bit lower than revenue for each of them.

for each of the next two quarters, most likely. Now, who knows, as we approach the end of the year, sometimes customers start to order in advance, and so that might change our view. But if you just take the rough math over the next couple of quarters, we do think that orders will be less than our revenue. Now, as we go into next year, we'll see you in the next quarter.

We think that orders will recover. We can't give you a date on that precisely, but underlying demand for bandwidth is continuing to grow. All of our conversations with our customers show that the market will continue to grow. We've gone through a very tumultuous time with respect to lead times and availability of supply.

to the service provider, timing sort of issues that you're seeing a bit more in North America. I mean, is it more of delays of complete project that you're seeing from them, or is it more of downsizing of how much capacity that they're looking to deploy, and if you can compare it to on a related magnitude house?

How much of a push out are you seeing later for the web skater that you had highlighted the issue with last quarter? Thank you. I would say that it's largely the larger North American tier one players. It's more about their ability to absorb and deploy and deal with logistics with all of this stuff coming.

really seeing a high influx of equipment and product and they're having to manage that both from a logistic point of view, a budget point of view, a deployment point of view, all those various elements.

And you know, it's still going to be up year over year because they need the care. But their ability to actually absorb and schedule all of that is obviously challenging for them at anyone and anyone given point in time. But if you look through all of that,

you look at pretty steady growth. And in fact, even if you drew a line, you know, pre-COVID, right to the end of the year, depending on what your assumptions are, you're looking at very good growth within the North American tier one carriers with us. And even if you look through this rescheduling, you're still seeing very healthy growth this year.

And obviously the cloud players we're saying is actually going to grow faster than whatever we end up with our corporate average as well. So it's a healthy environment. They're just dealing with this transitional period on the supply and demand dynamics.

Thanks for taking my question. Thank you. And our next question comes from David Vogt from UBS. Please go ahead with your question.

Great, thanks guys for taking my question. I had a near term question, and then maybe a longer term question. I think, you know, midway through the quarter, you announced that, you know, obviously you were gonna make the quarter, you weren't affected by some of your partners, sort of variable, variability in their numbers. But I think I also heard Jim say that improvements in components late in the quarter really drove.

sort of the upside. So can you maybe just help us understand how the quarter is tracking from a linearity perspective and was the upside in the quarter, I guess, in the third month? And then I'll give you the second one as well from a long-term perspective. I think I also heard Jim talk about, you know, expect a fiscal 24 to be relatively strong year as well. Would imagine that would mean, I would take that to mean that's above the long-term average in the growth of the optical industry and your ability to take share. If that's right.

particularly affected us in our ability to deliver modems, which are capacity units and are typically higher volume.

That has been the most significant constraint as well as we experienced the highest degree of volatility and variability in delivery of those components. What's happened is that we have now come to a point in time where the volumes of deliveries of those components and the timing have been reduced.

as is approaching normal. And when I say timing, I mean relative to expected dates. The lead times are still a bit extended. But we're getting the components that we order now on time.

and in the volumes that we ordered. That was not true for any of the last six or seven quarters. But in this most recent quarter, we still had an experience where we estimate as to what we would get in terms of these modem components was less than what actually came in. It did come in in the last month of the quarter.

And we, so consequently, that drove a revenue upside and a bit of a margin upside to be honest with you. We don't expect that to recur because as I said, now these component suppliers are delivering per their lead times and in the volumes that we order. So that's what I think.

We're obviously going to go in with a strong backlog, good visibility to North America and cloud players into the first part of 24. That's for sure. We're seeing very good engagement around pipeline and demand for 24. And obviously we've got a lot of new products and technology coming into market.

You know, WaveRouter, et cetera, WaveLogic 6, we've got all of the PON stuff that's coming through. So, you know, we do feel that it's going to be a strong year in 2014. All right. Thanks, guys.

router, et cetera, WaveLogic 6. We've got all of the PON stuff that's coming through. So we do feel that it's going to be a strong year in 24. All right, thanks, guys. Thanks, David.

Our next question comes from Paul Leoni from Bank of America. Please go ahead with your question. Hi. Hey, good morning. Thank you. What is the risk of cancellation of backlog, given that we're seeing push-outs? Where's the borderline between a push-out and a cancellation of order?

And the second question is, can you give us the, what are the differences in the trends you're seeing in terms of push outs, the trends you're seeing with cloud versus service providers versus cable? Are these all the same or are you seeing different trends in each one of them? Thanks.

Hey, Tal. I'll take a stab at it and Gary will probably chime in as well. There's a clear line between a cancellation and a push out. Cancellation means that they take the order away from us. We're not seeing that anymore. As you'll recall, we did see a bit of that at the end of last year, but it was a trickle and we really haven't seen much in the way of cancellations.

What we're seeing is push-outs, and what they're saying is they want the gear and they want it at a later date. So that's what I'd say. It's a very clear line, not questioned at all. And I also say this. As they're looking at their needs and what they've already placed, they certainly had the opportunity to cancel these orders if they wanted to. And we're not seeing it. They didn't do it. They pushed it out. They want the gear.

And in terms of the segmentation, Tal, in there, I think we saw this phenomenon happen with the cloud players a little bit earlier. You know, they're all re-profiled and playing through. We've got good visibility to the second half and for the first half of 24 and we're involved in their projects. But in that aspect, necessarily, that's all there is.

North American one is a bit more of a recent phenomenon with them as we've now sort of improved lead times to them. I would include some of the larger cable players in there as well to your point. When I talk about large North American tier ones, I would actually include the larger players in there as well. We're seeing the same phenomenon with them.

Got it. Thank you. Thanks, Rob. And our next question comes from Michael Genovese from Rosenblatt Securities. Please go ahead with your question. Okay, thanks a lot. First question, I just wanted to double-check some of this backlog math. I thought that backlog was over 4 billion.

the end of one queue so if it came down by 600 million it should have been about three and a half billion and and I just can't I didn't hear earlier whether that was the number you gave

So if it came down by 600 million, it should have been about 3 and 1 half billion. And I just can't, I didn't hear earlier whether that was the number you gave. Yes, that's the number we gave.

Okay, perfect. So none of it did disappear. So that's good. So then I guess my real question is broadband strategy in terms of fiber to the home. Could you just talk to us a little bit more about that? And I'm particularly interested in what types of carriers, you know, what tier of carrier.

what geographies you think they'll have the most success with there. So Mike, you know, our clear strategy on the and pieces to go after, I'll say the next generation technology as a as a wedge of opportunity in the marketplace. It was specifically, you know, Tang-Dig, next generation pond.

above and not chasing sort of the legacy gig pawn or other technologies there. So that was the motivation for our acquisitions of Hibit and BnU. In terms of the market traction, we are seeing it actually across the board in terms of examples of tier one service providers that have a very broad...

very broad broadband access business today to some of the smaller municipality types that are chasing the rural broadband opportunities, but also the cable codes that are looking at when they will be on their existing footprint.

building out fiber versus their DOCSIS approach. So it's sort of pretty broad brush in that sense, but it is an interception of sort of a next generation technology. And the only thing I'd add to that is Mike, we are seeing that in a lot of different places around the world, you know, there's a lot of countries really having various broadband, you know, similar to exactly what Scott was saying.

Great, thanks. Maybe just, is there any more trends on the push outs in just whether they're kind of specific regions or new markets or, you know, lower speed maintenance purchases that maybe they feel like they have enough or the higher speed refreshes, just trying to get a sense of

Are there any trends as to kind of what orders are getting pushed out more than others? And then maybe a second question for me. Any changes you've seen so far in just kind of the makeup of the cloud architectures as some of this generative AI traffic starts to change traffic patterns within the data center? Thanks. I'm going to take the first part of that. I would say it's not specific to any particular architectural part of the network. It's really about they placed forward orders. They didn't know exactly when they were all going to arrive. They're sort of all arriving in a very tight timeframe. And it's just purely their ability to deal with that both from a budget point of view, you know, CapEx point of view, and from a logistical point of view. You know, think deployment, warehousing, you know, et cetera. So it's not specific to any, you know, PON or Metro or Long Haul. It's really impacting all of their projects.

and they're trying to prioritize certain projects and certain things that they're working, but there's no commonality of that, I think, through any of the carriers. It's purely a high-level logistical budget issue as a result of the whiplash. So there's no really...

refined to firm, you know, around the actual elements that they're reprofiling and rescheduling. AI, we believe it's an incredibly exciting technology. And with generative AI coming to play.

it's certainly going to change the world, there's no doubt about it. Now, the first part of the world that's going to change is inside the data center, because the demands for compute are growing, will grow at astounding levels. And that will certainly rub off onto our business over time. But I can't say that to date.

we've seen any effect on orders or customer behavior with us. It will, though. Great, thank you. And our next question comes from Craig Mesnieth from West Park Capital. Please go ahead with your question. Thank you for taking my question.

I was wondering if you can just quickly touch base on your software business, Blue Planet specifically. I guess that's been kind of pushed to the back burner.

and if any of that technology can be reincorporated or repurposed.

or included in some of your new product offerings, including WebLogix 6. Thanks. Thanks, Greg. Now I understand, given all the supply chain challenges of the last sort of 18 months or so, we haven't talked too much around our software business, which continues to do well. We are taking various elements of that whole automation strategy and putting it in products like MCP, which

line systems in the world and so you know we very much see automation as a key thread throughout you know all of our portfolio. And a very specific example of that technology reuse if you look at what we've announced in our wave routing family one of the one of the key attributes of that is to be able to manage a multi-layer network in our customer domain.

There's key technology in the blue planet family around that. If you're familiar with the portfolio, it's the robot part of the portfolio, which we have used and integrated into our MSTP platform to provide that multilayer administration, which is a key stumbling block for our customers to actually be able to recognize convergence.

Thank you. And a quick follow-up. Can you give us an update on the Huawei replacement timeline both in the US and in the US?

elsewhere in the world. Thanks. Greg, I would say in the US, you know, it continues to roll out particularly. Now, they didn't have a lot of long-haul networks. It's relatively small. You know, you've got some broadband stuff, but again, relatively small. We're involved with most of that.

You know, customers of ours, so that's playing through. In Europe , I think that's a longer, it was a larger installed base. And that takes longer to play through. I still think that's gonna take even on the transport infrastructure side, probably an X one to three years.

Obviously, we're getting more than our fair share of that play out, but to take embedded transport equipment out of the network is a non-trivial thing, and it's very expensive for these carriers as well. So that journey continues.

and the whole Huawei replacement. In other parts of the world, you know, it happened very quickly. India being a case in point, that sort of happened, you know, and it's got a little more to finish up, but happened over an 18 months to two-year period. Europe , I think, is going to be a much longer tail than that. Thank you. That's great. Thank you. And our next question comes from…

Dave Kang from B. Riley. Please go ahead with your question. Thank you. Good morning. First, just a clarification is that did you reiterate or reconfirm next three-year CAGR of 10 to 12%? We haven't said anything about next year recently. We think it's going to be a great year. We haven't changed anything about our views.

for the coming years? We would typically update our long-term CAGR at the end of the end of this fiscal year.

And then regarding your backlog, before in recent quarters, I believe you said most of your backlog was for immediate shipments. What is the current mix now?

or immediate shipment stay? Is that what yours is? Yeah.

or immediate shipments day? Is that what you're asking? Yeah, yeah. Well, what we say is this.............

Historically, we operated on kind of a just in time, ordering pattern by our customers and delivery to them with lead times of four to six to eight weeks. That was the way the business worked. The supply chain disruptions have changed people's views about the amount of inventory they want to hold. Lead times are...

probably not going to get back down as low as they were. I say that guardedly because I'm not sure. And customer behavior is going to revert closer to what it was, not necessarily all the way to where it was in terms of the just-in-time ordering pattern. So that's what's going on. We have a fair amount of orders in our backlog, which are for 24 deliveries. Now, most of those are early 24 deliveries, but we have those today.

And those are, you know, longer, in most cases, than our backlog because customers still want to give us visibility to their demands outside of our lead time. So that's what's going on. And I think it'll, it'll revert closer to the old model. It might not get back down to that just in time model that we used to operate on. And that's what we're doing.

We have reached the end of our time. We appreciate everybody joining us this morning and we look forward to seeing several of you on the road over the next few weeks. For those we don't see, have a great summer and we'll talk to you again in a couple of months.

Ladies and gentlemen, that will conclude today's conference call and presentation. We thank you for joining. You may not disconnect your lines.

I have you.

I.

Good morning, everyone, and welcome to the C&F Fiscal Second Quarter 2023 Financial Results Conference Call. Welcome to the C&F Fiscal Second Quarter 2020 Financial Results Conference Call.

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At this time, I'd like to turn the floor over to Greg Lamp, Vice President of Investor Relations. Sir, please go ahead. Thank you, Jamie. Good morning, and welcome to CMS 2023 Fiscal Second Quarter Results Conference Call. On the call today is Gary Smith, President and CEO , and Jim Moylan, CFO . Scott McPheely, our Senior Vice President of Global Products and Services, is also with us for Q&A. Gary Smith, Vanessa Heather loses to Steve is another in in in in

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.

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. Today's discussion includes certain adjusted or non-GAAP measures of standard results of operations.

A reconciliation of these non-GAAP measures to our GAAP results is included in today's press release. Before turning the call over to Gary, I'll remind you that during this call we'll be taking certain followers of these statements.

Such statements, including our quarterly and annual guidance and our long-term financial outlook, discussion of market opportunities and strategy, and commentary about impacts of supply chain constraints on our business and results, are based on current expectations, forecasts, and assumptions regarding the company and its markets, which includes risks and uncertainties that could cause actual results to differ materially from the statements discussed today.

Assumptions relating to our outlook, whether mentioned on this call or included in the investor presentation that we will post shortly after, are an important part of such forward-looking statements and we encourage you to consider them. Our forward-looking statements should also be viewed in the context of the risk factors detailed in our most recent 10-K filing and in our upcoming 10-2 filing, which we expect to file with the SEC by June 8th. She understands no obligation to update the information discussed in this conference.

an increase of nearly 20% year-over-year and adjusted gross margin of 43.7%.

Our results included very strong profitability metrics as well, with quarterly adjusted operating margin of 13.8 and adjusted EPS of 74 cents. We also generated $230 million in cash from operations in Q2. Overall, we performed better than expected with respect to revenue in the second quarter and the second quarter.

of this dynamic. Supply chain improvements have enabled us to improve our lead times to customers by more than 50% year to date.

As the supply chain improves and lead times come down, customers no longer need to place advanced orders to secure supply. As a result, and as expected, orders were lower than revenue in Q2.

We are now clearly in a transitionary period, one that is moving from an environment where orders vastly outstrip supply to one where supply and order flow are beginning to come into some kind of balance. Consequently, store-and-ife questions can be Breanneck, et al. older and

This is driving a near-term shift in customer ordering and shipment dynamics and behavior. Previously, we had discussed some push outs of orders by our cloud provider customers as they re-profiled their spend to align with their budgets. In recent weeks, we've begun to see similar behavior by certain of our large North American service provider customers.

the results of capex cuts, rather it is one of operating within their existing capex and logistical capabilities.