Ciena Corporation

Ladies and gentlemen, thank you for standing by. Welcome to the Siena Fiscal Q2 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to Mr. Greg Lamp, Vice President, Investor Relations. Please go ahead.

Thank you, Sharon. Good morning and welcome to Ciena's 2020 Fiscal Second Quarter Review. We are conducting today's call from various remote locations. With me virtually today is Gary Smith, President and CEO, and Jim Moylan, CFO. Scott McFeely, our Senior Vice President of Global Products and Services, is also with us for the Q&A portion of today's call. In addition to this call and 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 fiscal Q2 2020 performance, developments in our business, and our view on current market dynamics, including with respect to COVID-19, as well as our outlook. Today's discussion includes certain adjusted or non-GAAP measures of Ciena's results of operations, A detailed reconciliation of these non-GAAP measures to our GAAP results is included in today's press release. Before turning the call over to Gary, I'll remind you that during this call, we'll be making certain forward-looking statements. Such statements, including our guidance and long-term financial targets, are based on current expectations, forecasts, and assumptions regarding the company and its markets, which include risks and uncertainties that could cause actual results to differ materially from the statements discussed today. These statements should be viewed in the context of the risk factors detailed in our most recent 10Q filing, as well as our upcoming 10Q filing, which is required to be filed with the SEC by June 11th, and we do expect to file by that date. CN assumes no obligation to update the information discussed in this conference call, whether as a result of new information, future events, or otherwise. We will allow for as much Q&A as possible today, though we ask that you limit yourselves to one question and one follow-up. With that, I'll turn the call over to Gary.

Thanks, Greg, and good morning, everyone. Amidst the uncertainty resulting from the COVID-19 pandemic, nearly every industry and company has been challenged in some way, and obviously, Ciena is no different. However, our deliberate strategy over the last several years centered around innovation, diversification, and global scale has yielded a resilient business more capable of navigating challenging times. And this served our business operations and financial results well during the second quarter. Throughout the pandemic, our focus has been on ensuring the safety of our people, our employees, customers, and communities. And it is because of the extraordinary Siena team and our partners that we have continued to enable connectivity around the globe and help customers advance their automation strategies to adapt to new reality. Our significant investment and focus in three critical areas over the past couple of years have played a pivotal role in our ability to execute through this crisis. Firstly, we completed a significant IT transformation, providing our increasingly distributed and flexible workforce with the collaboration tools to make for a seamless transition to remote working. And as we talked to you today, more than 96% of our employees are in fact working from home. Secondly, we established a truly agile services delivery model that has allowed us to continue providing customer support despite restrictions around the movement of people. And thirdly, we operationalize the supply chain that is deeply rooted in an ecosystem of leading manufacturers that have strong business continuity planning and multiple manufacturing sites globally. These have enabled security of supply across our business. I am incredibly proud of our team and their collective efforts to continue serving each other and our customers through this time. I'm also extremely proud of the volunteering and charitable actions of our global workforce to support their neighbors, communities, and frontline workers. Within our Ciena CARES program, we increased our corporate charitable match to three times for employees' donations and volunteering. Our employees have also been volunteering in important and heartwarming ways, including putting our engineering know-how to work to produce 3D printed face shields and components for healthcare workers. I'd like to take this opportunity to express my gratitude for our employees for their continued focus, strength, and kindness. As a result of all these efforts and continued execution of our strategy, we delivered outstanding financial performance in Quito. Revenue in the quarter was strong at $894 million. and gross margin exceeded expectations at almost 47%. We also delivered 18% adjusted operating margin in the quarter with adjusted EPS of 76 cents. It was also a great quarter for cash generation, and orders in the quarter were strong. It is the core attributes of our strategy, innovation, diversification, and global scale, that have put us in a position of strength and that are helping drive this industry-leading financial performance by essentially enabling us to better support our customers. Starting with innovation, we remain the leading enabler of connectivity. And as we've learned through this global event, bandwidth is a critical resource now more than ever. Ciena were first to market with both 100 gig and 400 gig. and now we are the world's first again with 800 gig. In Q2, WaveLogic 5 Extreme became fully commercially available. We've now shipped product to more than a dozen customers, and the technology is operational and proven in some of the world's leading Tier 1 service providers. In fact, we've made public announcements with Internet2, Telia, Verizon, Comcast, Southern Cross, and most recently Deutsche Telekom. Importantly, we are also on the leading edge of driving automation. While not as an immediate of an opportunity given the current focus on capacity needs, as network providers emerge from the crisis and begin to normalize, it is certain that network architectures will be more closely evaluated to adapt to new user behaviors. And essentially, we believe that over the medium to longer term, the rise of remote everything will accelerate the drive towards cloud-based models and virtualization, which is the sweet spot for our Blue Planet software. Moving to diversification. Q2 was a great example of how the diversification of our business serves to help mitigate the potential impacts and ebbs and flows that may result from unforeseen events and uncertainty. As COVID-19 began to affect various geographies and customer segments in different ways and at different times, in Q2, our business benefited from our strong positions in both North America and EMEA, as well as Tier 1 service providers, MSOs, and web-scale companies. All performed extremely well in the quarter, given our deep relationships and ability to provide the solutions and support our customers need even during these unique circumstances. And in fact, non-Telco revenue in Q2 comprised 42% of total revenue with direct web scale business representing 24%. I would also reiterate that the diversification in our supply chain served us well in Q2. As expected, we experienced some disruptions from our suppliers. including component constraints, extended lead times, and reduced or temporarily suspended operations. However, given our sophisticated ecosystem designed to ensure continuity of supply, we navigated those challenges extremely well, and their impact was in line with our expectations. I would emphasize that we are continuing to manage through these challenges very successfully. And finally, on global scale, we continue to possess the largest focused optical R&D investment capacity in the industry. And this gives us the ability to deliver leading innovation with the best time to market. This coupled with the largest world-class specialized sales force that is intensely focused on delivering for customers and driving toward opportunities. With the vast majority of our employees working remotely, Both of these teams were able to successfully execute on their plans in the quarter, creating a flywheel for faster-than-market growth and continued financial leverage. With respect to the broader market, obviously the full impact of this pandemic on the global economy and any particular industry or company is still largely unknown. However, In our space, it is clear that the uncertainty is further accelerating flight to quality in all of its dimensions. Our customers, more than ever, are seeking trusted partners that have the financial sustainability and reliable supply chain in the near and long term to continue driving innovation and to deliver it to them on a global scale. And importantly, they are leaning into those partners with whom they have longstanding and trusted relationships and that are increasingly deeply integrated into their business. As we said last quarter, we entered the COVID-19 pandemic better positioned than most to manage through the challenges and that absolutely remains the case. The challenges are largely related at this stage to the pandemic's adverse impact on the velocity of business in general. And specifically, with many of our large and long-standing, predominantly international customers, operating conditions have complicated and extended the time required to deploy and activate new equipment and services. And, as to be expected with some of our newer deals and customer wins, again, primarily in international markets, conditions have made it more challenging to ramp up and operationalize on original timelines. It is simply taking longer than normal to execute with certain customers, but we anticipate that it will shorten over time as conditions continue to improve. Notwithstanding these operational challenges, which we believe to be short-term orientated, the fundamental demand drivers of our business, including increased network traffic, demand for bandwidth, and the adoption of cloud architectures, remain very strong. Against this backdrop, our innovation, leadership, and competitive advantages are frankly amplified. Specifically, our resiliency and agility position us to support our customers through the current challenges and to accelerate their transformation journeys as we emerge from the COVID-19 pandemic. Our deep relationships with a diverse set of network operators, geographies, and applications Our testament to our status as the leading trusted advisor in the industry. And our investment capacity and financial position will allow us to emerge even stronger than we were before. Our competitors simply do not have the scale, focus, or balance sheet to compete. And we intend to use these advantages to continue differentiating ourselves and focusing on capturing further market share moving forward. With those comments, I'll turn over to Jim.

Jim. Thanks, Gary. Good morning, everyone. Q2 was yet another strong quarter for Siena. As Gary mentioned, total Q2 revenue was $894 million, which reflects significant contributions from our North America and AMIA regions. Adjusted gross margin was 47%. This performance was the result of two factors. we are realizing benefits of our multi-year efforts to improve operating leverage through continued cost reductions, vertical integration, and operating efficiencies. This is resulting in an improvement going forward of approximately 100 basis points from our previous baseline gross margin range. Therefore, we believe that our gross margin when we return to a normalized environment, we'll be in the range of 43% to 45%, higher than the ranges that we've talked about before. Second, the velocity challenges that Gary discussed, specifically related to ramping new business, are having a short-term positive effect on gross margin. Because engaging with new customers and displacing incumbents is more difficult in these times than Our gross margins are currently not being negatively impacted as much as they have been previously by the cost of early in-life projects. When we are able to re-engage with these new customers and begin to displace incumbency again, we believe that we will go toward that 43% to 45% gross margin I spoke about earlier. Adjusted operating expense in the quarter was $259 million. As with many other companies, OPEX in the quarter was lower than expected, largely due to a significant reduction in travel expense. With respect to profitability measures, in Q2 we delivered adjusted operating margin of 17.9%, adjusted net income of $117 million, and adjusted EPS of 76 cents, significantly above our expectations, largely due to the higher gross margins. In addition, in Q2, cash from operations was strong at $91 million. Adjusted EBITDA in the quarter was $183 million, and we generated free cash flow. We ended the quarter with approximately $990 million in cash and investments. As Gary mentioned, our balance sheet is yet another differentiator that speaks to our long-term strength and resiliency, particularly in the current environment. This strong financial position enables us to continue to invest in innovation to ensure a strong inventory position to serve customers and to support working capital needs. In light of the uncertainty surrounding the COVID-19 related disruptions, we have temporarily suspended purchases of our common stock under our stock repurchase program. Prior to this suspension, we repurchased approximately 600,000 shares for $24 million during the quarter. That brought us to approximately $75 million of repurchases year to date. Turning to guidance. As we look ahead in our business, there remain important and unanswered questions about the length and breadth of the COVID-19 pandemic, and specifically, its resulting impact on both broader macroeconomic and industry-specific conditions. For Ciena, and for virtually all companies, this has obviously introduced a greater degree of uncertainty in the mid to longer term than is typical. As of today, however, we do anticipate that the challenges related to slower business velocity due to COVID-19 restrictions are likely to weigh somewhat on our second half performance. I would caution that it is difficult to discern which current dynamics in our business are directly related to COVID-19 and where, in some cases like India, the pandemic may be exacerbating challenging business conditions that previously existed. Demand for bandwidth is continuing to grow and competitive dynamics are playing in our favor. However, COVID-19 is creating uncertainty. With that context in mind, as always, we will give you our best forward-looking view based on the information available to us today. To start, in Q3, we expect to deliver revenue in a range of $955 to $985 million. gross margin in a range of 44 to 46%, and operating expense in a range of $265 to $270 million. As we exit the first half of the year, and despite the uncertainty around macroeconomic and sector-specific dynamics, we have sufficient visibility into the business to provide an update to the fiscal year 20 annual targets we provided last December. Specifically, We now expect to generate annual revenue growth of 2% to 4% for the year. Given that we believe the market ex-China will be roughly flat in 2020, due mainly to the effects of COVID-19, our 2020 growth rate would still represent continued share gain and faster-than-market growth. In addition, we now expect to deliver adjusted gross margin in the 44% to 46% range for fiscal year 20. This includes the 100 basis point improvement I mentioned earlier, resulting from supply chain improvements, as well as the COVID-related dynamics we previously discussed. We expect fiscal year operating expense to average $265 to $270 million per quarter. Based on these revised expectations, we are confident in our ability to achieve our profitability target this year. In fact, we now expect to achieve approximately 16% adjusted operating margin in fiscal year 2020. In closing, our business is performing very well, and we remain committed to and capable of serving our customers around the world during this time of crisis and beyond. As the industry leader, Ciena believes that people all over the world more than ever need connectivity to do their jobs and to stay connected with family and friends. Because we serve these needs, we believe that we will continue to deliver value to our customers and our shareholders over the long term. Most importantly, I would also like to thank our employees for their continued commitment to Ciena. as well as our customers and our investors, for their confidence in our ability to perform. Sharon, we will now take questions from the sell-side analysts.

Sharon, before we get started, I understand that there's been some difficulty with the webcast, so I wanted to make sure the participant line is known to everyone in case that's easier for people. The participant line is 844-848- Again, the participant line to dial in is 844-848-0674. We apologize for the inconvenience.

At this time, I would like to remind everyone, if you would like to ask a question, please press star for the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Your first question comes from George Notcher with Jefferies. Please go ahead.

Hi, guys. Thanks very much. I guess I wanted to start by you know, asking about the revenue guidance. Jim, you mentioned 2 to 4%. If I take the midpoint there, I take kind of the midpoint of your guide for July implies the October quarter is not going to be as strong as it is, has been historically. So it looks like we're pulling forward some revenue or can you just talk about the dynamic there on the October quarter and I guess I assume that some of this may be a byproduct of, you know, customers pulling forward, you know, build in response to the coronavirus-related work-from-home-related demand. But can you just talk about the dynamic there? Thanks.

Yeah, first of all, to the last point on pulling forward, we definitely saw some orders pull forward, but our revenue in the quarter really didn't represent a lot of pull forward, George. It was a solid quarter. We did see the effects that we expected to from the supply chain. uh but not a ton of full forward revenue in the quarter if you go back historically uh q3 and q4 sometimes have uh each of q3 and q4 sometimes have been our biggest revenue quarter so you know movements up and down between those quarters are not expected but i would say most importantly we're in very uh extraordinary times and We have not been able to engage with customers, mainly international. that we had expected to be part of our second half revenue. And that's the main reason for the fact that we've taken our revenue growth rate down a little bit. It's just impossible to get to their offices. Yes, you can engage with them telephonically. But in order to win new business, you have to be eye to eye with people. You have to sit across the table with them. You have to work with them in an engineering sense. And so that just hasn't happened. as much as we would like it to, again, mostly internationally. And so, therefore, our revenue is going to be in that range.

Got it. And then just to be clear, you guys had talked about a $30 million logistics type issue that you're talking about here. Is that exactly what you got then in the April quarter? And then, you know, what does that number look like for July and October?

That's exactly what we got in Q2. What will happen in those numbers is that maybe we'll catch up on some of the stuff that we missed in Q2, but additional challenges will arise. So I'd say that for the year, the effect of the supply chain is, you know, it's in the tens of millions of dollars overall. But things will move in and out of the quarters as we go through this year.

Thank you.

Thank you.

Next question comes from Rod Hall with Goldman Sachs.

Hi, this is Rocky on behalf of Rod. Thanks for taking my question. Could you give us an update on demand trends by geographic region, particularly on what geographies drove the buy-down? Any other follow-up?

Yeah, I'm going to take that, Rocky. Overall, you know, the demand characteristics have been strong. It's more an issue of sort of the velocity elements, particularly internationally. I think we're able to navigate through a lot of the stuff in North America. But we've seen, you know, weakness in India, as Jim said, particularly they've had a very, you know, extreme lockdown situation. We're having some, you know, I think, issues before then from a rollout point of view, but I think that's exacerbated it. I'd also point places like Japan where a lot of deployments have really slowed down. So I think particularly certain parts of Asia Pacific and certain parts of Europe, you know, we're seeing this access to sites and the ability to travel across border has really been has really been impactful, and as Jim said, you know, he's probably going to weigh down on the second half. So, you know, that's what we're seeing from a geographic point of view. I mean, obviously not to be confused with sort of secular demand. I think they'd all like to deploy more bandwidth, and many of them are. Most of them are running hotter on their networks because they can't get all the equipment in that they'd like, and I'd characterize that as particularly within the international markets.

Thank you. Your WebScale revenue was very strong in the quarter. Could you give us some more color there, what products grew that strength, and how sustainable you think that is?

Scott, do you want to take that?

Yeah, sure, Gary. You know, WebScale, from an application perspective, we deal with them on their campus metro DCI, on their core backbone networks, and on their submarine networks. It is largely in our optical portfolio, and a good approximation for it is what you see in our wave server product, but it's not just the wave server product. We also deal with them on photonic line systems as well, which would show up in our 6500 product number.

Thank you. We'll take the next question, please.

The next question comes from Jeff Qual with Numera. Please go ahead.

Yes, thank you very much. I was hoping actually to dive into the web scale a little bit more if possible. It sounds as though obviously there's another strong quarter. You had talked about rising visibility at web scale in prior quarters. I'm wondering if you could help characterize where you are in web scale, what has changed at 600 gigabit products from rivals and how it's ramped and how you are feeling about visibility at the moment. Thank you.

Jeff, why don't I take that? You know, I think we're seeing pretty robust demand across most of the web scale players, as Scott said, in a lot of their different applications, be it submarine, be it connecting data centers. You know, we particularly saw strength in Europe amongst the content players. We've got good visibility to them. Obviously, we've got a very large market share in that space, but we think we, you know, will absolutely maintain that market share this year. If not, frankly, increase it a little bit. You know, and obviously we're engaging on 800 gig with them. We've got deep relationships with them into their back office as well and on their supply chain. So, you know, we've got all of them players now as customers. So, you know, it's a key segment both directly and indirectly on our business as well. And obviously their business, you know, which is the point I'd make around most of this, All the Tier 1 carriers are obviously in pretty good financial strength around the world, and particularly, obviously, the content players. So, you know, they're looking to continue to deploy bandwidth to support the increase in demands that they're seeing.

Okay. I was just going to add, Jeff, that it's clear the world is going to be different going forward. We're going to be virtualized everything, remote everything, cloud everything. And that's good for our web-scale customers' business model. It's good for our service providers as well. But in particular, the web-scale businesses are those that are basically the cloud. And so I think that's really good for us for the long term.

Okay, great. That makes sense. And let me clarify, the deployment – challenges that you may have or operationalizing challenges that you may have are generally not in the web scale community that's mostly in APAC or tier two carriers.

Absolutely not in the web scale category. It is international and in particular India and APAC. Excellent. Thank you both. Thanks, Jeff.

Next question. Next question comes from Simon Leopold with Raymond James.

Thank you for taking the question. First of all, I wanted to ask if maybe you could dig a little bit deeper on the top customers. It was certainly a good sign that you had just one 10% customer, but if you could maybe help us understand a little bit of the nature of that customer's business. Is it a telco, North American as usual, or has a web scale come in? And also, in the past, you've talked about several customers close to 10% but not quite there. Maybe if you could elaborate on how many are in sort of that high single-digit neighborhood, and then I've got an easy follow-up. Thank you.

Okay, so let me take that. We have a number of customers in the sort of 7% to 9%. I would say that generally, you know, very strong in North America, Tier 1 carriers, normal suspects, I would also highlight a couple of other, you know, cable, MSL, particularly strong in the quarter and looks like being strong for the year, again, predominantly North America. And we had a couple of content players, as you can imagine. that were also given the fact we had 24% directly from web scale, you know, we had two of them that were very close to 10% as well. So, you know, a big cluster around that. I mean, just talks to, you know, the diversification of our customers. But, you know, if you were to summarize it, I mean, you'd say North American tier one carriers including cable and then obviously the content players.

Great. Thank you. And then just the follow-up is just in terms of your supply chain risk, could you talk about the potential for if factories were to shut down in Mexico, what would that mean to your business? This is a question I've gotten a lot, and it would be helpful to understand that exposure. Thank you. Scott, do you want to take that?

Yes, I'm in Scott here. So, first of all, I must say that, you know, we're dealing with two-on-one contract manufacturers that take their business continuity extremely seriously. We have five contract manufacturers around the world. Two of them are in Mexico, a very resilient network. And we haven't lost a single day in a CM in Mexico or in Asia Pac to, you know, to anything related to COVID. Having said that, we're actively working on pulling finished goods inventory through the supply chain as fast as we can to mitigate any potential impact. And where we have seen impact in some CMs around the world that aren't necessarily in Mexico, it tends to be closed for a very short period of time. you know, cleaning if they had an incident of an individual employee, industrial cleaning, and right back at the manufacturing site. That hasn't been anything that impacted our CM specifically, but I have seen others in the industry. That's sort of how it's played out.

Thank you. Next question. Thanks, Sam. And just back to your first question. The top customer was AT&T. It will be – that would be named in the queue. So I just wanted to give you that information.

Thank you very much, Jim. Appreciate that. Next question comes from Paul.

Yep. Ms. Cohen, please go ahead. Hey, Jim.

Can you – can you hear me? Can you hear me?

We have an echo there, Paul.

Bad echo.

Yeah, that's not going to work, Paul. Yeah, we may need to go to the next. Paul, we'll try to get you back on. Sorry about that. Hello?

The next question comes from Michael Genovese with MKM. Please go ahead.

Great. Thanks very much. First of all, can you help – I mean, you said orders were strong. Is there any further quantification you can give of the orders in the quarter?

They were very, very strong, and our backlog grew pretty meaningfully during the quarter. What I'd say, though, is that many of our customers took the opportunity to place their orders on us for the full year or for more than just the current quarter because we encouraged them to do so so that we would have visibility to their needs and we could make sure that our supply chain was capable of delivering them. It was a great quarter. One of the reasons why we have such strong visibility into Q3 is because of those orders. but some of those were orders ahead of their normal schedule.

So, it needs us to say books and bills above one, clearly.

Oh, yes. Oh, absolutely. We built backlogged by quite a bit.

Right. Okay. Great. Thanks for that. So, now, given the timing questions that are impacting the 4Q outlook, and then I guess there's probably uncertainty on how fiscal 21 begins, because we just don't know yet, right, how COVID and all this is going to play out, but... I guess my question, though, is as we think ahead with the higher bandwidth demand and the positive competitive situation, particularly I think Huawei being weaker now, my question is, you know, shouldn't we at the end of this be at the higher end of 6 to 8? Am I getting ahead of myself here? Do you not want to comment on that? But I'm just thinking we should be at the higher end of 6 to 8 when we come out of this, and I'd love to get your view on that.

It's going to be very hard for us to make any kind of beyond these two quarters, Mike, just because it's such an uncertain period. I would say that the demand for bandwidth is going to continue to grow, but my God, it's been growing at 30% annually for a long, long time. Could it be higher than that? Yeah, it could. But that's a pretty high growth rate. So I guess the bottom line of all of this, despite the uncertainty over the next, you know, several quarters, we feel very, very good about our position in this business. We're just not prepared to, you know, sort of comment on next year right now or our three-year guide.

Thank you.

Thanks, Mike. Thanks, Mike. Next question comes from Paul Silverstein with Cohen.

Can you all hear me now? Much better, thanks, all. Much better. My apologies.

First question, with respect to competitive landscape, Gary, I think I just heard you say that you're actually expecting to maintain or increase share with web scale. And interesting statement, because you've got Infinella coming in shortly. At some point, it sounds like in the next 6 to 12 months with 800 gig, or at least their latest coherent DSP. I know there's been a lot of concern in the investment community about that. You don't seem to be overly concerned from your web scale comment, and I assume it's more than just web scale. Let me ask you the question, what do you see in the competitive landscape looking forward? And I want to also ask you about Huawei. We just had an obstacle company last week along with a broadband access company that was very vocal in saying Huawei is absolutely being cut back. We saw some announcements in the wireless arena, same thing. That obviously should be to your benefit, the previous question, but if you could address the federal landscape in general, then I've got a follow-up.

So let me take it in the context, first of all, on the content players' baseball. Listen, we have very long-term relationships with them. We're super integrated into all of their back offices. We now have very large, complex networks. We partner with them. You know, it's multifaceted. It's in submarine. It's an international market. So we have very broad and deep relationships with them now. And, you know, we have a lot of co-development work that goes on with them in terms of our platforms. Obviously, you know, we were first with 100, 400 with them, and we're the first with 800. We think we've got a significant technology lead on 800 gigs. And the different variants that will be coming out with 800GB as well will absolutely be the industry leader on it. So we've got significant time to market advantage. We've got broad and deep relationships that go back many years and we've got number one market share. So, you know, we're not complacent about any of that but I think we're in a, you know, we're in a very, very strong position. As regards to Huawei, you know, obviously the geopolitical elements that are in play there have been in play for quite a while. I would say two things. One, yes, I think it's a very good long-term opportunity for Siena, and we're incredibly well-placed about that. They've got such a large market share in telecom infrastructure generally, and particularly in Europe, I think really, you know, irrespective of all those other concerns, it's just really a rebalancing that frankly is long overdue. Now, I think that momentum is absolutely there, but I'd say two other precautions for it. One, these are large strategic decisions. And number two, it's infrastructure. After those decisions are made, it takes time to ramp up. You know, one example of that that I would give to you is Deutsche Telekom, which we won, you know, a couple of years ago. and that's taken time to begin to ramp up. So I think it is a very positive dynamic for us. I'd just caution for folks around the amount of time that those kind of infrastructure wins take to ramp up. And particularly, I think, with COVID, it's been challenging on the new business side to, you know, ramp up these new customers, which we've seen, and particularly, particularly internationally, and I think that's going to weigh on us for a little bit as well. But, you know, it's absolutely a very, you know, positive dynamic for us in the medium to long-term.

Unless you could lean into my follow-up, which is the site access that you all referenced. And I just want to clarify and be sure, when you talk about site access having impacted demand as made by revenue, or orders, is that purely in Europe or would that also apply to the weaknesses on Japan? To what extent is it just like access as opposed to demand weakness?

It's not really demand. I don't think of it as demand weakness. You know, two manifestations of it, Paul. is with existing large customers where sometimes we're not even installing. It's the customer. But it's the customer's ability to digest and to get that deployment out has, you know, been impacted. It has slowed. It is predominantly international. We're seeing some of it in North America but not as much. We're seeing it in Europe and the biggest effect I think of it all is in Asia Pacific. in India and Japan and some other geographies in Asia. It's just been very challenging. You know, really, it's not so much demand. It's more about digestion, Paul, and the ability to get that stuff out.

I appreciate the response. Thanks, guys.

Thanks, Paul. Next question comes from Taliani with Bank of America.

Hi, guys. I have a few questions on the business. Converged packets still underperforming. Why and when are we going to see growth? And then on 800 gig, is it targeted mostly to web scale? That's where you think the deployment is going to be or are we going to see also telcos?

Scott, do you want to take that? Yeah. Hey, Scott. portfolio and you simply say, yeah, you would have been referring to the revenue number. I would say that, you know, on the long-term targets, we still expect the packet networking business to grow faster than our aggregate growth rates. And, you know, the actual order book for the first half of the year, year-on-year growth, gives us the confidence that that is the case. So we still very much are... comfortable with the sort of growth targets we have put out there on the packet piece. On the 800-gig question, I come back to just reminding folks that WaveLogic 5 Extreme is actually an optical engine that, you know, addresses multiple applications. In a sense, sort of a doubling of the performance on an optical network from what you would have been able to get in the past. And In that context, it is going to be applicable to all the segments that we serve. The 800 gig application specifically is addressing where you have high cross-sections of bandwidth in a fairly constrained reach environment, you know, a few hundred kilometers type environment. Those types of deployments are dominated by the web scale of the data center interconnect, but not 100% exclusively. Got it.

I also mentioned, Scott, you might have mentioned this, but we had very, very strong orders in the packet segment in Q2.

So that's another reason why we're a company strong in Q2 and strong year over year for the first half as well.

If I can sneak in one more question. You spoke about difficulties in the operations in India. Can you expand on this?

This is a virtual call, Sal, as you know.

We're not able to look at each other and point at each other as we do in person. As you know, India was shut down. I mean, the whole country was shut down. and basically people could leave their homes once a week or something to go get food. And so there was, other than the normal sort of engagement with the customer in terms of telephone and e-mail and the occasional Zoom call, we were not able to engage with their engineering staff and continue their plans to build out their networks. As we've said, we don't think this is a demand issue. We believe that our big customers in India, in fact, all of our customers, but particularly our big ones, GEO and Barkey, are still intent on building out the entire subcontinent with a network, and we're in good position to continue to win a lot of that business. They had sort of paused last year, you'll recall, those two customers, because they had spent a ton of money. and they were in a digestive phase already. And I think the COVID-19 shutdown only exacerbated that situation. We think it will continue. We are reengaging with them. We got some orders in the quarter that were a little bit earlier than we thought we might get, and we think it will come back, but it's going to be a little slow.

Thank you.

Next question comes from Jim Zuba with Citigroup Investments. Thank you.

On the international, specifically Asia-Pac and India challenges concerning coronavirus, am I correct at concluding that it isn't share loss at all? It's just the logistical challenges of not being able to meet and get the new design ends. And so, when it comes back, it should come back quite strongly. It sounds like nothing about share loss like incumbency or being, you know, not closer to them. It's just everybody can't get into the selling process. Is that correct?

Yes. Yeah. That's a fair characterization, Jim. It is definitely not share loss. In fact, we've got a number of wins, you know, on the new business side that we're, you know, that we have challenges ramping up that we were expecting, you know, to ramp up in Europe. You know, we've had a number of wins there, you know, people like Delia, et cetera, that have been challenging on the ramp up. So it's absolutely not market share. And, in fact, you know, as we fast forward for the year, you know, Jim talked about the overall market probably being flat because of COVID. You know, we're talking about growing there. So, therefore, we are going to take and continue to take market share. So, I don't think there's any question about that. It's just the, you know, and it's kind of to be expected. It's just the logistics of velocity of being able to get to sites, have access, fly across borders, you know, all those are just slowing down. And that's sort of weighing on the second half. But as Jim said, you know, relative to other people, we actually have good visibility, you know, into those kinds of dynamics. And, you know, who knows how long this will last in terms of, you know, in the COVID piece play out. But we think it still will weigh on it. But the overall sort of secular demand is extremely robust in pretty much all geographies.

The other dimension, Jim, of this velocity theme is not only on the logistics side that Gary talked about, but where we are. the new attacker in an account where we may have won the logo and are trying to get through the certification process. Well, that requires people getting in labs. And when the world is sort of working from home, that slows things down. So there's a sort of a new product introduction pace into our customers' domains that probably hinders us more where we're trying to grow market share, like in APJ, than where we have in competency.

And then my follow-up is, Does incumbency of Sienna having, you know, such a good first mover's advantage in, you know, 100 gig and 400 gig, does that help out even more so with 800 gig when you then layer on the coronavirus additional challenges, or is it similar to the other technological rollouts as far as the competitive landscape of opening up for RFPs or rolling out for 800 gig?

Jim, I would say they're the very strong competitive advantage, you know, because we've got the largest market share, but really that's about relationships and trusted relationships that we have with, you know, most of the major tier ones around the world and all the content players, and we have that at scale. And so not only do we have the best technology, but, you know, they've trusted us for a number of years, and they are very confident about our roadmap and the fact that we have the global scale to continue to innovate and support them. So, you know, frankly, it's a situation where the strong get stronger, and we are the incumbent player in most of the major carriers around the world. So whilst it's a challenge for us, as Scott said, in terms of getting new stuff out there like anybody else, we are, you know, much better positioned than any other competition to be able to do that because of our incumbency.

that because of our incumbency and these carriers.

Yeah, that is an important one because we, as you may have known, we've released the WaveLogic 5 technology on both our 6500 and our WaveServer platform, and the fact that it's on those platforms that our existing customers know and love just reduces the hill that they have to climb to integrate it into their are well distributed around the world. Thank you so much.

Thanks, Jim. Next question comes from John Marchetti with Stifel.

Thanks very much. Gary, I'm curious if with some of the strength that you saw in the quarter with the web scale guys, particularly at 1 in 400 gig, if you think that pushes out at all the adoption of 800 by those customers, understanding they're seeing the same traffic growth demands and in some cases even seeing that increase, But if they're, you know, sort of ordering what they need today and buying the one in 400 because that's what they already have qualified, do you think that this maybe slows the, at least the early stages of adoption of 800 gig?

Yeah, that's a good question, John. I'll go there and then Scott can probably provide more color to it. But I don't think so. And what we've seen to date with their reaction is, really to the COVID piece, they had pretty strong plans anyway for rollout this year on 100 and 400 gig, you know, anyway, particularly 400. But, you know, they saw a step function in demand and reacted to it. And obviously, you know, right now it's 400 gig. But we are very encouraged by what we're seeing in terms of the engagement on 800 gig. Scott, do you want to give a little more color on that?

Yeah, I think I'd just reiterate that, Gary. I mean, we've shipped already to date and hasn't been commercially available for that long. We're north of a dozen customers across multiple application sets. Where it seems to have the most urgent immediate demand is anybody that has significant bandwidth growth and has fiber constraints. And that's where it proves out whether they're going to run that in an 800 gig application. or in, you know, some multiples of 100 gig. That's where we're seeing the demand. It's across all the applications, submarine, terrestrial, metro, and long-haul networks, and in DCI networks.

So to be clear on that, you know, we are talking about the content guys there. Yeah, we are. We are talking about the content players, yeah.

And I think, you know, that's a good follow-up. I mean, You talked about the expectations for sort of flat market growth. You know, last quarter we talked about 7% to 10% growth for this market. Has that outlook changed for the year? You know, I'm assuming the more flattish outlook is more on the telco side. I'm curious what your outlook is on the sort of the web scale side and if you've seen any change with all this going on really on the competitive front relative to ZR.

Thank you. That's a very good question on market share growth. I'll let Scott take the VR piece, but I'll take the share piece. Overall, for the optical space, excluding China, we think it's going to be pretty flat as an overall market. Now, within that, we think that GCN, you know, I think the, as you said, the expectation for the year was about 7 to 5, 7 to 10, sorry. I think, you know, the latest stuff that I saw from it is probably 5 to 10. We absolutely expect that space to grow, you know, within the overall context of the optical market. So I do think you're going to see growth there. And we are going to grow at least at that kind of rate, which is what's forecast in for our, you know, guidance for the year. Scott, do you want to take the ZR piece?

Yeah, ZR, as you know, specifically is, you know, an industry standard around interoperability that really targets an application space that's very short-reach transmission. Let's call it 80 kilometers or less, single span, with, you know, a very simple network in between it from a photonic perspective. So that really, you know, talks to really campus or medical I think consistently for the last little while that we expect in the fullness of the time, you know, that market opportunity for that application set will be somewhere around the $500 million mark against the backdrop of the total optical market of, depending on who you listen to, $13 or $14 billion. What I do see, so that hasn't changed our perspective of the overall market size opportunity. hasn't changed. What I do see is probably the timing of that moving a little bit to the right. I think it's going to be a 2021 event, maybe a little bit later in 2021 than people even anticipated. We will have, as you know, we're going to have product off of our Way of Lazard 5 nano development activity. We'll have product that addresses that ZR application space at the end of this calendar year. Thank you. Thanks, John.

Next question comes from Sameek Chatterjee with JP Morgan.

Hey, guys. Thanks for taking my question. I just wanted to start off by asking in terms of the North American telcos and your outlook there. Multiple times on the call you mentioned that the challenges are more kind of international here. In the meantime, we've kind of seen large customers like Verizon kind of raise their capex even during the COVID kind of pandemic happening. is some of that dedicated to bandwidth expansion and what's your kind of now current expectation for growth with the large North American telcos, if you can help us with that.

Yeah, I would say that... Go ahead, Gary. Jim, do you want to go?

I'll be brief and then you can follow up, Gary. Generally speaking, we are... The most incumbent in the North American, we have probably be spending more over the coming quarters. Orders from them were particularly strong in the first half of this year. And our expectation, frankly, is that for the North American telecoms, that they will be somewhat better than we expected for this full year. The weakness, as we've said a couple of times, is on the international side. Gary.

Yeah, I would just add that, you know, you've obviously got the normal suspects there, you know, the large carriers. But, you know, I would also emphasize again, you know, very strong performance on the cable side we expect for the year. Obviously, we've had new wins at places like CenturyLink that we're ramping up, Charter, et cetera. So we expect to have a very strong year in North America.

And if I can just follow up more in terms of OPEX, but in terms of OPEX planning, obviously some of the change here in OPEX in the quarter was more temporary and travel-related, but when you're kind of thinking about next year and kind of all the different factors about increasing bandwidth needs and kind of market share gains. How are you thinking about OPEX, particularly going into next year? Are you looking to kind of keep some structural reduction on your OPEX, or are you more looking to kind of increase headcount and kind of gear up for kind of higher demand?

Rather than talk about next year in particular, I'll say this to make It is our goal every year as we go into our planning process to reduce OPEX as a percent of revenue and, therefore, add to our profitability. We've done it every year, frankly, for the last 10, and I think we'll continue to do that going forward. We're going to continue to invest, though, and that's really critical for us to maintain our lead across the functions, whether that's R&D. are sales or the support functions. So that's what I'd say.

Operator, we'll take one last question. And just so everyone knows, we will try to get the transcript up on the website as soon as possible. Again, we apologize for any of the problems on the webcast.

And we have a question from Nathan Marshall with Morgan Stanley.

Great, thanks. Just drilling down one last time on kind of 800 gig and just whether you mentioned clearly most of the restrictions are international, but are you seeing kind of labs to do the 800 gig testing by your customers, you know, still open and progressing, or were they kind of far enough through the testing process that the trajectory of 800 gig doesn't change? And then maybe just second question. I know you mentioned the OPEX savings from travel, but if you could just call out kind of what is a quarterly travel budget traditionally for you guys. Thanks.

And that has got off the 800 gig one, and then I'll let Jim talk to the second piece on travel. On the 800 gig, we have engagements with customers across the globe that are various stages of maturity on travel. Under optical technology, some have been testing this technology for quite some time. Some of them, you know, we're bidding in new commercial RFPs and everything in between. I'll say this if I take a summary of it. You know, our plans and forecasts for 800 gig for the year haven't really changed from what they were three or four months ago.

And on the T&E, in a typical quarter, our T&E, our FX T&E is $10 to $12 million, and we're running at less than half that now.

Okay. Great. Thanks, guys.

Thank you, everyone, for joining. Again, thank you, everyone, for joining. We apologize. We couldn't get to everybody's questions. We look forward to catching up with everyone over the next following couple of days. Thanks for joining. Thanks for the interest. Stay well.

This concludes today's conference call. You may now disconnect.