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spk00: Good day and thank you for standing by. Welcome to the Cine Fiscal Q3 2021 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. If you require any further assistance, press star 0. I would now like to hand the conference over to your speaker today, Greg Lance. Thank you. Please go ahead.
spk12: Thank you, Stephanie. Good morning, and welcome to Ciena's 2021 Fiscal Third Quarter Results Conference Call. On the call 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 Q&A. 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 third quarter performance, our view on market dynamics, as well as a discussion of our outlook for the fourth quarter. Today's discussion includes certain adjusted or non-GAAP measures of standards 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 quarterly and annual financial guidance, discussion of market opportunities and strategy, and commentary about the impact of COVID-19 and supply constraints are based on current expectations, forecasts, and assumptions regarding the company and its markets, which include risks and uncertainties that could cause actual results to differ materially from the statements discussed today. These statements should be viewed in the context of the risk factors detailed in our most recent 10-K filing and in our upcoming 10-Q filing, which is required to be filed with the SEC by September 9th. We expect to file by that date. Deanna assumes no obligation to update the information discussed in this conference call, whether as a result of new information, future events, or otherwise. As always, we'll allow for as much Q&A as possible today, though we ask that you limit yourselves to one question and one follow-up, please. This call is being recorded and will be available for replay on the investors' page of our website shortly. With that, I'll now turn the call over to Gary.
spk13: Thanks, Greg, and good morning, everyone. The strong third quarter performance we reported this morning reflects a combination of our increasingly differentiated position in the marketplace and our robust demand environment. We delivered a record $988 million in revenue and a particularly strong gross margin that drove a 19.1% adjusted operating margin and a $0.92 adjusted earnings per share. Overall, COVID-related challenges remain dynamic around the globe, but most of what we saw in the last several quarters is ameliorating. Importantly, the things we needed to happen in the market and for our business as we move through 2021 are materializing largely as predicted. Specifically, industry and economic conditions have improved noticeably. Service provider spend globally continues to improve, and our customers' network investments and operations are normalizing. And we had strong order flow in Q3, and that outpaced revenue again. And this allows us to continue growing our backlog and positions us to deliver the stronger than typical uptick in our second half performance that we expected. Secular demand is very strong, and we are taking full advantage of our leading position to address the opportunities that are driving network investment, including capacity adds to address bandwidth demand, the shift to the cloud with new architectures and network builds, intense focus on edge applications, and obviously the need for network automation, as well as Huawei replacement opportunities. Within the strong demand environment, however, there remain global and industry-wide supply chain constraints. And as we have consistently proven, we have best-in-class ability to manage through this challenge and to deliver outcomes for our customers better than anyone else in our industry. However, as we've said before, we are not immune, particularly if supply challenges persist. And as has been, I think, widely reported, conditions have somewhat deteriorated and are posing headwinds for Ciena, including difficulty to fully address demand. We have also seen some extension of our lead times and some increased costs. As we sit here today, we believe these challenges will likely persist through at least the middle of calendar 22. Moving to highlights from the quarter, our competitive position remains strong and we continue to take market share. With respect to innovation, we are investing across three key sectors. Optical, where we are the world leader in optical systems and its associated technologies, and we continue to drive our leadership in innovation and market share. Routing and switching, where we are leveraging our optical expertise to offer a new architectural approach to disrupt the market with next-gen Metro and Edge use cases. And in software, where we are executing on and accelerating our automation strategy to digitize both service delivery and networking layers. In optical, we are clearly the undisputed 800-gig leader, having been in the market for 18 months. We have secured the vast majority of opportunities globally and are now approaching 20,000 modems shipped. In the quarter, we added 11 customers for WaveLogic 5 Extreme, including Barti and Windstream, bringing our total count to 106 customers. In addition, WaveLogic 5 Nano, our 400 ZR product, is generally available and currently with several key customers as part of our certification and adoption process. We are also excited about the opportunity Next Generation Metro and Edge. where we expect to significantly expand our total addressable market from about $13 billion total currently to roughly $22 billion over the next several years. New use cases and technology disruption has created an important insertion point within this space for our architectural approach, and we have all of the critical elements required to win. including IP routing, switching, optics, automation software, and professional services. And as many of you know, we've been laying the groundwork for expansion in this area for quite some time, including significant investment in both product development and our go-to-market resources. And as you probably saw this morning, we announced an agreement with AT&T to acquire its Viata virtual routing and switching technology. The artist technology and software engineering team will bring additional resources to our routing and switching R&D team to address the growing market opportunity that we see with Metro and Edge use cases. This includes continued development of our adaptive IP capabilities, and that in part increases our exposure to certain 5G use cases. We also obviously look forward to extending our strategic relationship with AT&T, by directly supporting this key piece of their network in their transformation journey. Overall, as customers seek out new architectural approaches and alternatives to the status quo, we've secured several significant architectural wins around the world for switching and routing. In fact, in Q3, we had 10 new wins for our routing and switching portfolio. And finally, our Blue Planet software business continues to enjoy strong momentum. with our adaptive network vision that is well aligned to network operators' automation priorities. With increasing customer engagements, we continue to win new significant deals, resulting in quarterly revenue growth of 47% year-over-year in Q3. We expect to deliver a strong fiscal 2021, therefore, for Blue Planet, likely towards the high end of the 65 to 75 million annual revenue range we previously provided. Shifting to overall diversification in our business across customers and regions, we had three 10% customers in Q3, including two Tier 1 service providers and a web-scale customer. And highlighting our diversification, our top 10 customers in the quarter included four web-scale companies, three North American service providers, one international service provider, one MSO, and a wholesale company. Non-telco revenue in the quarter was strong at 42%. Web-scale revenue specifically grew 24% sequentially in Q3, with direct DCI business contributing 25% of total Q3 revenue. Regionally, strength in EMEA continued, driven by web scale, growing more than 16% year over year. EMEA represents our fastest-growing region in the quarter and, in fact, year-to-date as well. In India, we continue to navigate through COVID challenges and make progress, with revenue up 48% year-on-year and 26% year-to-date. And I think, importantly, We are seeing investment by key customers for network upgrades in India, as well as replacement of Huawei equipment. As I mentioned earlier, we are investing to capture ongoing secular demand for optical, routing and switching, and network automation solutions, and to considerably expand our addressable market over time. really as the shift to the cloud continues, driving additional traffic growth and a greater need for network transformation. As a result, we are confident in our strong market position and in our ability to continue to outperform the industry. With that, I'll turn over to Jim. Jim.
spk03: Thank you, Gary. Good morning, everyone. We generated strong Q3 revenue at $988 million. Adjusted gross margin in the quarter was once again very good at 48.5%, reflecting a favorable customer and product mix, as well as a high concentration of capacity ads versus new bills. More specifically, we are not yet monetizing the new design wins to the extent we originally expected for this timeframe. Overall, we've been very pleased with the gross margins we have produced this year. They reflect the benefits of our scale and vertical integration, as well as a lot of hard work in lowering unit costs of both our products and our services. Adjusted operating expense in the quarter was $290 million. With respect to profitability measures, we demonstrated extraordinary operating leverage in Q3, including adjusted operating margin of 19.1%, adjusted net income of $145 million, and adjusted EPS of 92 cents. In addition, in the quarter, cash from operations was $69 million, free cash flow was $54 million, and adjusted EBITDA was $214 million. We ended the quarter with approximately $1.5 billion in cash and investments. Also in Q3, we repurchased approximately 483,000 shares for $26.2 million. Turning now to guidance. As Gary stated, the demand environment is very strong. This was reflected not just in our Q3 revenue that was well above the high end of our guidance, but also in our strong order flow in Q3 and an increased backlog. At the same time, Global supply chain conditions have deteriorated, and we've always said that we would not be immune if those challenges persist, or especially if they worsen. Taking these factors into consideration, we expect to deliver revenue in a range of $1.00 billion to $1.04 billion in Q4. At the midpoint of this guidance range, our revenue growth from the first half to the second half of fiscal 21 would be approximately 26%. This would be a very strong second half performance in line with the stronger than typical second half uptick that we forecast since the beginning of the year. Also, at the guide midpoint, we will deliver revenue growth for the year at just under 2% above the midpoint of our revenue guide for the year. For adjusted gross margin in Q4, we expect a range of 45% to 47%. This reflects our expectation for more monetization of new winds, as well as some impact of supply chain constraints. And finally, in Q4, we expect adjusted operating expense to be in the range of $295 to $305 million, slightly higher than expected. Our order flow is well above our plan, as is our operating income, and this will result in higher variable compensation levels in Q4. As always, we expect to provide detail about next fiscal year when we report our Q4 results in December. What I will say is that we are confident in a strong performance in fiscal year 22, even when factoring in supply constraints. As we have over a long period of time, we believe that we will outperform our competitors in both market share and financial results. Our technology leadership position, our expectations for continued strong demand environment, and a very solid backlog going into next year will enable us to continue the momentum we have developed. Before we move to Q&A, I'm going to hand it back over to Gary for some closing remarks.
spk13: Gary? Thanks, Jim. I'd just like to give a brief update on a new ESG effort recently underway with our partner, Digital Promise. With the return to school in many parts of the world, we're excited to launch the Siena Solutions Challenge, which invites middle and high school students around the world to design solutions that can address sustainable development goals within their local communities. This program, focused on computational thinking and digital skills, is one of several programs within our digital inclusion commitment. To learn more about our programs like this and what Siena is doing to help create a more sustainable and connected future, I'd encourage our shareholders and others interested to check our recently published sustainability report on our website. With that, operator, we'll now turn questions over to the sell-side analysts. Thank you.
spk00: At this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. Again, that is star, then the number one. Your first question comes from the line of Paul Liani with Bank of America.
spk01: Hi, good morning. I want to ask you about the verticals and if you can Speak about, I understand there is strength in orders. Can you tie it with what kind of projects do you see that are being forward now? What is the underlying service that carriers and clouds are offering that necessitate the investment cycle now? Thanks.
spk13: Thanks, Tal. I mean, I would say that, you know, from a vertical point of view, we're pretty much seeing, you know, solid demand across most, you know, pretty much most of the verticals. I would say it's a combination, sort of confluence of, you know, catch up on capacity. They've not, you know, the operational caution that has been around for the last sort of 12 months or so. So catching up on capacity, also modernization of the networks and architectures, particularly around the kind of metro edge, you know, facilitating 5G, et cetera, are also, you know, now ameliorating and people are investing and delivering operationally. Coupled with, I think, the increase in demand as the adoption for the cloud has basically accelerated over the last 12 months. So you've got those three dynamics in play. And really, I'd say the overall application is to drive in a greater capacity at the edge of the network for all of the sort of cloud applications that are well understood.
spk01: And Gary, can you talk about visibility? Earlier in the year, you had different kind of visibility. Now you sound a lot better. Does it mean that you have greater visibility into next year?
spk13: If you define visibility as order backlog, which is a key part of that, I think the answer to that is absolutely yes. When we went into this year, there was a considerable amount of uncertainty. We saw a great deal of caution from the carriers, both operationally and fiscally. I think we have seen that ameliorate as we thought it would. But, you know, as Jim said, that's resulted in a pretty significant uptick in our second half, 26% growth in the midpoint of our guide here. And I think that bodes well for 22. I think we're going to have a strong 22. Obviously, it's a little early for us to talk about that, and we'll talk about that next quarter. But, you know, I think we've got better visibility now, absolutely, than we had when we started the year. And I think the overall dynamics...
spk11: of demand you know i think are very very positive um going forward thanks thank you your next question comes from the line of simon leopold with raymond james thanks for taking the question i wanted to see if if we could discuss a little bit about how you see your gross margin trending and i'm not asking specifically about the October quarter. But when you consider your order trends, and what I'm struggling with here is it sounds like you've got pushouts of the new footprint expansion, which should be dilutive to gross margin. But I also suspect you've got a good order book on the routing of switching segment, which I imagine is accretive to gross margin. Help us understand the puts and takes, please.
spk03: Sure. I'm going to take you back, Simon, to pre-COVID days just to remind you of what we said. What we said then was we believed that our run rate for gross margin was in the mid-40s, and that included a reasonable amount of new bills. We also said, as we started COVID, that for the next several quarters, we would enjoy a higher than mid-40s gross margin because we would not have the level of new bills in our revenue stack. That's exactly how this has played out. Actually, we're experiencing a good level of capacity ads, which are, of course, accretive. We've done pretty well on software, and we're doing pretty well on routing and switching. So all of those things are impacting our gross margin as we have come through COVID. I would not say anything differently about what I think our gross margin is going to be once we get to the expected levels of new pills in our revenue stack, which is, you know, it's going to happen. We see that finally in our order book, and it's going to start hitting our revenue stack as we move into next year. Now, we also have the supply chain, which has impacted our fourth quarter. In fact, our fourth quarter guide, which is 45 to 47, does have a fair amount of expected premium cost in getting material for hitting our expectations for revenue. So that's what I'd say. We're going to be, we think, 45 to 47 Q4. As we enter next year, it depends upon how much of the new wins are in our revenue stack and what the costs of the supply chain generate. But that's the expectation as we sit here today. As I said, though, we've been very pleased with our gross margin performance. We've done a lot of work to take costs out of both products and services. We have scale.
spk11: we have vertical integration all of those things have helped us and we're very pleased with what we've done so far this year thanks for that jim uh and just as a follow-up i'd appreciate an update on the opportunities for huawei swaps i know you've counseled the investment community to be patient, but I want to sort of reflect on what's different versus your prior earnings call, whether you've seen some evidence. You did mention some India traction, but appreciate an update on that Huawei opportunity. Thank you.
spk13: Yes, Simon, I don't think anything has appreciably changed. You know, as we've said, we've seen this dynamic for a while, and it is, you know, clearly a multi-year tailwind, and it's It's infrastructure. These things take time, and those decisions take time. And then to execute on that, either cap and grow or migrate traffic operationally is very, very – it's a big undertaking by the carriers. But it's underway. And I would say, to your point about India, the one sort of exception to that is, you know, generally the two areas here are Europe and India, right? with a few other countries in Asia. India, I would say, in the last sort of six months has accelerated that move, and they are actively replacing Huawei networks in India, and we've certainly been the beneficiary of that. We have good order flow and good new wins in India, some of which is on the back of that. Obviously, it'll take a little while to deploy over multiple years, but I would say in-direction acceleration, EMEA on track.
spk11: Thank you very much.
spk13: Simon.
spk00: Your next question comes from the line of George Notter with Jefferies LLC.
spk07: Hi, guys. Thanks very much. I guess I want to kind of revisit the gross margin discussion. So you guys have printed significant upside relative to your guidance on gross margins for two quarters in a row now. And I guess I'm kind of curious around why, you know, we've expected much more significant new build activity, you know, across these two quarters and then, you know, actually, you know, not seeing that new build activity, you know, as the quarter has progressed. Why has that business shifted out so much?
spk03: Well, as we come into any quarter, we have expectations of what our mix is going to be, and things move around. So I certainly wouldn't read anything ominous in the fact that it's been a little slower to develop than we thought. COVID has had some effect. I'd say that we have started to see in our order book the effect of some of these winds. And we're definitely going to see those things come into our revenue next year. So I wouldn't read anything into it other than there's an ebb and flow in our business. And I think the good news is we're doing so well with our, you know, our mature customers, and we have such a high preponderance of capacity ads.
spk13: Just to add to that, if I can, I do think – You know, Jim, you talked about it at the end there. I do think generally capacity ads in catch-up has been prioritized over new business rollouts. Those rollouts are absolutely going to happen. In fact, we've won a number of new deals in the last quarter, indicating, you know, the modernization of these networks. But I think carriers, and we'll be generalizing here, but I think have prioritized the capacity, you know, a little bit more than we thought, and that is resulting in better margins for us in Q3.
spk07: Got it. Okay. And then I guess I also thought I'd just ask about the Viata transaction. I think that was an asset that came over from Brocade back in 2017, and we really haven't heard much about it within AT&T. Maybe you can kind of talk about why you're buying that asset and what it really gives you going forward. Thanks a lot.
spk09: Yeah, George. Scott here. You know, by assets itself, you're right in terms of the history. AT&T has used those to further their network transformation and a couple of different use cases around the edge and virtualizing their capabilities around cell site routers for their 4G and 5G backhaul and their enterprise business services for SMB. So those use cases, you know, are very much in the sweet spot for what we're trying to accomplish in our next generation of Metro and Edge campaign. So, you know, if you look at the assets that we're picking up, it adds a capability set to enhance our routing and switching portfolio as we address the increased market size of next generation Metro and Edge. It obviously deepens our relationship with a really important customer of ours, AT&T, and we pick up an engineering resource in a location that we had no presence before in the UK. So those are really the three dimensions of of value for us.
spk07: Is there a revenue run rate that comes with that product line?
spk09: There is. It's not material to our business, really, but there is a revenue run rate. We'll reflect that in our 22 plan when we get to that.
spk12: Thanks, George.
spk00: Your next question comes from the line of Ron Hall with Golden Stats.
spk02: Hey, guys. Thanks for the question. Good morning. I guess I wanted to start off with the revenue guide, and Jim, maybe just ask you if you've taken a shot at estimating how much impact of that guide there was from supplies, or if you can give us any color on how much of an impact on revenue the supply situation is in the guidance.
spk03: Yeah, I'll start by saying, remember, we overperformed in Q3. When you take everything into account, we're probably low tens of millions below what we could have done were it not for the supply chain issues.
spk02: And that's in the guidance? Yes, it's in the guidance. For the full fiscal year, it's low tens of millions. fiscal year, but also low tens in the fiscal Q4 guidance. Is that the way we should think about it? Yeah, I think you should. Yeah. Okay. And then the other thing I wanted to just check, the gross margin guidance, you kept the high in the range unchanged and you dropped the bottom, I guess. The 45% level, I was curious what that corresponds to. Is that if some of these expediting costs and so on, you know, go up or continue to go up in 47, assuming kind of they hold where they are? Can you give us some color around either end of that margin guidance, you know, what it takes to get to 47 and what happens if you end up printing 45?
spk03: There's always going to be variation in our gross margin because, as I said earlier, we start the quarter with an expectation of what's going to roll through and things change. So I think the difference between 45 and 47 is mostly going to be mix. Is the mix going to be different from what we expect? I mean, we've already set up our supply chain for the quarter, so I don't expect any more costs out of the buying of parts or anything like that. I'd say it's going to be mix that's going to drive the ends of the range.
spk02: And is it fair to say that mix would be driven by these deployments, I guess the big North American deployments in particular? What in the mix might change one way or the other in the forward quarter?
spk03: It could be the deployment of the new winds. But remember, we have a lot of different customers. We have a number of different products. We have software mix. We have a lot of things. that can impact our margin. And so generally speaking, it's going to be the mix of all of those things. And 45 to 47 is where we think we'll come out.
spk02: OK. Great. All right. Well, thanks a lot.
spk03: I appreciate it.
spk02: Thank you.
spk00: Your next question comes from the line at Bader Marshall with Morgan Stanley.
spk16: Hi, team. This is Eric on Bermuda. Thanks for taking our question. Congrats on the quarter. So maybe I just want to ask, given some of the order flow you were seeing and presumably that being gated by supply chain converting into revenue, does that have any impact in smoothing some of the normal seasonality you would typically see into the first half? I understand it's early to comment on 22, but if anything, you can tell us there.
spk13: I would say this, Eric. I think it's definitely too early to tell. We haven't finished this. We're just about finishing up this year. I do think that, as Scott said earlier, I do think that the supply chain issue, our view is, will likely continue for the first part of the year. And obviously, when we do give you know uh fy 22 guidance as we come out of the year we'll take that into account uh as we have you know for the uh for the last couple of quarters here i would say that you know i think we're very well placed to navigate it you know through it better than anybody else in our industry but we're you know we're clearly not immune from from that uh but our scale and vertical integration and very sophisticated supply chain enables us to mitigate a lot of those customer delivery issues, but we aren't immune from it.
spk16: Got it. That's helpful. Thank you. And if I could squeeze one more in on hyperscale. As you're seeing the strength there, and it looks like EMEA continuing, Is that just a continuation of some of the scaling build-outs the hyperscalers are doing in that region? You kind of mentioned 800GB products starting to test, but if you could update us on maybe some of the expectations for timing and share as 800GB starts to ramp even more.
spk13: I'll take the first part of that and then maybe Scott can comment on the 800 gig adoption there. But I think, you know, the engagement with those web scale folks is multifaceted. You know, it's connecting their data centers both long haul, it's their global networks as well. We do a lot with them in different countries with a number one supplier to all of them on the submarine cable side. You know, so we have a pretty intimate relationship with them across a very broad range of applications. And I would say that they're continuing to roll out both additional data centers and increasing connectivity within their existing data centers both within North America and internationally. So, you know, we're seeing pretty healthy demand dynamics across the board on that. Scott, do you want to talk about that?
spk09: Yeah, and Eric, just one thing to add to what Gary said. The other part of the relationship with them is, you know, they still do a lot of business in parts of the world, EMEA, Europe, as well through managed service providers. So our relationships with the service providers and those GOs, you know, also benefits them. the relationship and we get benefit from that. So that's part of that EMEA growth as well. Your 800 gig comment, I just want to clarify something that we said. So our 800 gig product is represented by our WaveLogic 5 Extreme product, and that's been in the marketplace now for almost a year and a half, approaching a year and a half. So it's well beyond trials. It's mainstream deployment. What you might be referring to is our WaveLogic 5 Nano, as Gary referred to in the script, as our 400 gigs ER product, which just recently went generally available. And that's the derivative of the same technology that's going through trials. So hopefully that clarifies it.
spk17: Thank you. Thank you very much. Derek?
spk00: Your next question comes from the line of Paul Silverstein with Cowan & Company. Mr. Silverstein, your line is open.
spk15: Sorry, I need to get the mute button. Guys, relative to the light revenue guidance, first off, are you seeing any demand weakness or is that all a function of supply chain? Second, Jim, if I recall for a while, you've been talking about restraining OpEx growth to low single digits, which with any decent revenue growth should result in some strong operating leverage. But after OpEx declining for four straight quarters, you grew OpEx by 15% year-over-year in Q3, over 15%, almost 8% in Q2. And if I did the math right, your guidance works out to over 6% in Q3. The question being, Has something changed in your OpEx growth plans, or do you still plan to go back to that low single-digit growth that you've been previously referencing, and this is just a transitory issue? And finally, are you seeing any impact for relative to street concerns about 4-0 in particular, or are you seeing any impact from either of those? I know it's still early in 4-0. Those are the questions.
spk13: Okay, so the first of your three questions I'll try and answer, Paul, and then maybe Jim on OPEX. On the revenue guide, I wouldn't describe it as light. I would say 26% kind of uptick in the second half is pretty solid, and it's also in the higher end. You know, in the midpoint of that, it's kind of in the high end of our original kind of guide at the beginning of the year where we had very little visibility. So it's largely kind of playing out as we thought. And I would categorically say nothing to do with demand. We would be able to get greater revenues in Q4 probably by, you know, low tens of millions if we were, you know, had unfettered access to everything we wanted as normal from a supply chain. So, you know, read into that, you know, $20 million or so. But if we also look, we overachieved by more than that in Q3. So it's all about supply chain. And I do think those challenges will continue for the first half of the year, but the demand dynamics are incredibly strong.
spk03: And on the OPEX call, we also said consistently that we are committed to growing our OPEX at a lower rate than our revenues. And we've done that consistently over the past decade. The COVID years were a brief exception to this because our revenue was affected by COVID, and our plan for OPEX, well, we continued to invest. But, again, we've grown revenue faster than OPEX for a long, long time, and that would be our expectation going forward. Now, with respect to the specifics of OPEX for this year, we're right on our plans overall. If you'll recall, we went through a whole recitation of how we expected our OPEX to perform. At the beginning of the year, we said something like we thought we would average about $280 million a quarter. We were very low in Q1, and we said that we were going to be a little higher for the last three quarters, 285 to two – I guess it was 285 for the last three quarters of the year. And – Yes, we're a little higher than that this quarter. We are seeing a bit of FX with respect to the weaker dollar effects. And for Q4, it's really all about the fact that we're so outperforming on orders and our operating income that our incentive compensation will have to reflect this overperformance in Q4. We are absolutely, though, on plan with respect to our OPEX for this year.
spk09: And on your last one, Paul, on the 400 gigs ER, the short answer is no, we're not seeing any impact on our business right now. You know, I don't think our perspective of the opportunity set has changed. We sort of see the market being... on total addressable market in the sort of half a billion dollars per year range as it gets up to full maturity. We think 2022 is the first year where you start to see some significant revenue opportunities there. uh product addressing that is the wave logic 5 nano just recently went ga we think it is the best performing plug in the industry in terms of optical performance and power so we're quite excited about its opportunity and i'll remind you the folks that i think will be the first movers in this uh a couple of the large web scalers for that particular application it is uh it is upside opportunity for us because we don't largely participate in those applications today
spk12: Thanks, Paul.
spk00: Next question, please. Your next question comes from the line of Alex Henderson with Needham.
spk08: Just a quick one to start with, just a data point. You gave up 24% quarter-to-quarter growth in the web scale. Can you say what that was on a year-over-year basis? The question I wanted to address, though, is around the supply chain issues and the mix. Did the supply chain impact capacity add differently than new footprint bills? Is there any variance in that as a result of the parts that you're able to get, or is that completely independent of the conditions?
spk13: Alex, let me take the first part of that. I think I'm right in saying that if you looked at year-over-year direct DCI, I think it's about 1% growth currently as you close out of Q3. I think that might be greater as we look at Q4, but I think it's just over 1%.
spk03: Just you'll remember that the first part of this year, our revenue stream was very much impacted by COVID. All customers were. down, or well, they were lower than what they would have been. Including web scale. Including web scale. So that 1% reflects that phenomenon.
spk09: And Alex, to your second question, I mean, another challenge is in the supply chain is the much written about semiconductor challenges that is, you know, multi-industry really. And, you know, that doesn't have a, you know, a concentrated impact. It's actually pretty widespread across the whole portfolio. So I wouldn't draw any conclusion as to one part of the portfolio versus the other being more hit.
spk08: Yeah, the follow-up I wanted to ask was on Viata. You said it wasn't material revenues, but you're obviously bringing in assets. And to that extent, I assume that you're bringing in costs associated with it. And I would also assume that that's predominantly in the R&D line. Is that an accurate, you know, calculus? And if so, what's the scale of this?
spk03: Not a material number, Alex. We'll address all of that, revenue, OPEX, et cetera, once we get to close and once we
spk09: Just to confirm the opening part of your question, yes, it is largely, if almost entirely, in the R&D line.
spk08: Thank you very much for letting me ask questions. Thanks, Alex.
spk00: Your next question is from Sameek Chatterjee with J.P. Morgan.
spk10: Hi. Good morning. Thanks for the questions. I guess if I can just tell that you have an understanding of constraints and supply conditions, capacity a bit here, but investors that we that you have and the strong backlog, it should feed into some pent-up demand for next year and help in above typical level of revenue growth. I know you don't have a guide for next year yet, but most investors seem to be still benchmarking you to the 6% to 8% prior long-term growth guidance that you have. So I was just curious, how should we think about the digest backlog once supply constraints ease and leverage what investors think will be pent-up demand that is reflected in your strong backlog? Okay.
spk13: Thanks, Amit. I would say that. I mean, first of all, it is too early for us to talk about 22. We haven't even finished the year that we're in yet, and we never give guidance at this time for 22. We've said a couple of forward-looking comments around supply chain challenges continuing, so I would certainly consider that as we turn into the year. I think strong secular demand. We've won a lot of new business. We're incredibly well positioned, you know, offset that against the sort of supply chain challenges. And I would also say that, you know, we've been running with lower backlogs than normal. So, you know, to some extent, we've just kind of replenished the coffers there. So, you know, I think we're in a much more normalized position going into 2022. And, you know, decent market growth next year, and we will outperform the market. We will continue to take share. There's no doubt about that.
spk10: And if I can follow up, I think, Jim, you mentioned that the new award pushouts, new award-related deployments and pushouts related to that is largely kind of ebbs and flows in the business. Just curious, how is it different from what we saw last year only on COVID, just given some of the pushouts that happened back then? What's giving you the visibility that it's not kind of the similar situation as we saw last year?
spk03: Well, I think, first of all, the new wins are showing up in our order book now. And so it's just a question of time before we get to revenue on them. That's the main thing I would say. I'd also say that, as we said earlier, COVID has certainly given people to add capacity as opposed to new build-outs. And that's caused the dynamic that we've seen. But it is coming. The new business will show up in our revenue stack. Thank you. Thanks for the question.
spk00: Your next question is from the line of Faha Najam with MKM Partners.
spk05: Good morning. Thank you for taking my question. I have a clarification. You have not already provided the breakdown of the 310% customers. How much is it?
spk06: Sorry, you wanted three 10% customers? How much?
spk13: Yeah, how much?
spk05: How much in total?
spk13: Certainly over 30%, yeah. Hang on a second, we'll get that for you. It's around 38%.
spk05: Okay. I want to kind of follow up on Soneek's question. I think you sort of said that you think the industry is growing, no mixing of digits. Do you still have that view?
spk13: Yeah, I think if you look at the last decade, pretty consistently, it's been in the mid-ish single-digit growth, and we've been able to continue to outgrow that. Now, I think... you know a lot of uh all that was all disrupted with covid like most most industries where you you know we had pretty much i think flat uh from an industry uh growth point of view i do think that we will return to you know at some point here more normalized growth in those you know the mid single digits i don't see any reason that that wouldn't be the the case Secular demand and getting higher bandwidth closer to the customer is absolutely everywhere about every application around the globe. Whatever you look at, be it 5G, be it fiber to the home, FTP, Internet of Things. So the secular demand, I think, is very positive. So, yeah, I would expect the industry to return to a more normalized piece. And as I said, I think we will continue to grow faster than that.
spk05: Gary, if I can ask you to maybe double-click on that comment, because I think I want to tie this to one of your comments in your perspective, Mark, about the emergence of this new edge cloud opportunity, which I think is an entirely new build-out of network infrastructure. And so I just wanted to make sure that if that significant TAM expansion that you are talking about correlates to the overall industry growth, or does that really kind of make the industry go to the next level because, you know, coherent optics is getting pushed deeper and deeper into the network?
spk13: Yeah, Fahad, actually, that's a good question. You know, when I answered your question, I'm generally talking about the optical system space. And I think you are seeing, particularly as we're a challenger in this edge metro convergence, basically. And so for us, it's an expanded TAM. And you've also got certain segments of that market that are growing faster than the mid-single digits as well. You know, you've got some in the overall core routing that's actually going down. Obviously, we're not targeting that. I don't think the world needs another core router vendor. But in the convergence space, we have some unique assets that we think we can disrupt and challenge that market space over time. And that will, you know, I think in the long term provide us a better growth opportunity than even the one we're seeing now. Thanks, Brian. Appreciate the opportunity. Thank you.
spk00: Your next question comes from the line of Jeff Kowal with Wolf Research.
spk06: yes thank you very much also struggling with the new button a little bit um two questions for you i guess first is um what can you tell us uh about your your inventory balances you know a lot of other folks in networking although not necessarily in optical have greatly expanded either inventory balances or the purchase commitments. I'm wondering what you're able to do there, what you might be able to get done in the future to help give us a little bit better visibility on your ability to reach that demand that you've talked about.
spk09: Yeah, so Jeff, for sure we are reaching out to our supply chain and making increased commitments, both in terms of volume, because we're growing the business, and duration. So that is going to have an impact on inventory balance. You've seen some of that already, and that's going to continue. So you will see higher than what may have been our normalized inventory levels and lower turns as a result for the foreseeable future.
spk06: Okay, we can expect them to go up from where we are now, I guess. Scott, those are your points. Okay. And then secondly, it looks like the services business had a strong quarter. I'm wondering if you could deconstruct that a little bit and let us know how much of that is ongoing and how much of that was one time.
spk09: Yeah, think of our services business at a really simple level. Think of it in three bins. There's sort of the maintenance of the existing installed base networks and the customer relationships. That's a pretty steady state, if you like, and predictable. The second piece of it is around installation projects. That's very tied to our new projects and business wins, so that will sort of ebb and flow with the projects. And the third piece of it, which we're quite excited about, is a set of professional services around helping our customer transform their networks from legacy networks into next-gen. That's actually had quite a good run. It's still relatively smaller, the smaller of the three of those pieces, but that's actually contributed to the good services mix that you saw in the quarter.
spk06: How sustainable is that, Scott? Should services go back to its more normal run rate in future quarters?
spk09: We think that that third bin, you know, that professional services mix and helping our customers migrate their networks is going to be an opportunity for us going forward in the future, and we think that we have an opportunity to grow that.
spk00: Thank you. Your next question comes from the line of Amit Daryani with Evercore ISI.
spk04: Good morning, everyone. Thanks for taking my question. I have two as well. I guess first off, maybe I missed this, but could you talk about the gross margin impact from supply chain headwinds in October quarter, sort of how you think of that? And then, Bobby, do you think supply chain headwinds peak in October quarter, or do you think they continue to get worse and deteriorate as you go through the first half of your fiscal year?
spk03: We didn't talk about an effect in Q3. There was very little effect of the supply chain situation in Q3, Q4. is going to impact us. Now, with respect to next year, we do know that the supply chain is going to continue in its sort of constrained state, but how much and how that's going to affect gross margin, it's really too early to say.
spk04: And then, you know, Blue Planet growth, I think two quarters in a row, it seems to have inflected much higher, 45%, 60% kind of growth vectors. Can you just touch on, you know, were there a couple of big projects that were ramping up and that's what drove it? Or just sort of what drove that growth and the durability of Blue Planet growth as you're following would be helpful to understand?
spk13: Well, you know, I'd say, first off, in full disclosure, it's from a relatively small base, you know, so those numbers look spectacular, but, you know, they're from a small base. I would say that, you know, what we are seeing now is adoption by significant tier ones around, you know, the digitization of their service layer. You know, basically replacing the old legacy back office, you know, systems. And we are seeing that move forward in a sort of step function this year. It's not necessarily showing up in all of the numbers. We're seeing very good numbers both on orders and revenue relative to the plan. And I think we'll probably be over on both and the high end of our guide on revenue. But, you know, perhaps even more importantly with that, we're getting significant, you know, footprints in, you know, potentially multi-year rollouts of the digitization on the service layer and things like inventory management, service provisioning, et cetera. So, you know, it's very encouraging with Blue Planet. And we'll talk a little bit more about that, I'm sure, as we go through the, you know, we talk about 22 and beyond as we talk about that at the end of this year. But very encouraged by what we're seeing. Thank you, Matt.
spk00: Your next question comes from the line of Tim Long with Barclays.
spk14: Thank you. Two, if I could as well. Gary, just wanted to go back to the MetroEdge TAM and kind of challenger piece there. Could you maybe just click down, give us a little more info on how timing to attack that extra TAM and how are you going to get there? Is it adding the Viata assets? Is that a part of it? Is it leveraging installed base? Because it's an area that obviously could be a big growth vector for you guys. And then Second, if you can just touch on a few point markets, India, given the macro issues there, as well as submarine. Thank you.
spk13: Yeah, let me just talk. On the metro edge, obviously, this has been a journey we've been on for a while. You know, we've been investing in key strategic assets, in the packet space, in routing, switching, in the software, you know, the convergence with optical. And our architectural vision with the adaptive IP is a much simpler, highly automated architecture. And, you know, we are the challenger in that space. We are securing wins with that, as you've seen over the last sort of 18 months or so. And I think that's gathering momentum. We're excited about what we're seeing. Still early days. I think this is, you know, a two- to five-year expansion of our opportunity. And whilst it's a big market, we're challenging there, you know, some very strong incumbents. But I think we're proving, you know, we've got a very compelling differentiated value proposition with the assets that we've got. And, you know, I think that will be an important market for us, and it's a key investment. And we're scaling investments now. both at the front end of our business in our go-to-market capabilities and support, and also, as Scott talked about, in our engineering capabilities, and Bayada is another key add to that with bringing some really tremendous specialist talent into the company. So what was the second question? It's India.
spk03: India. We said earlier that India is a place which has – moved very aggressively to exclude Huawei from new bills. There are opportunities for us. We have taken advantage of those opportunities. We have several new wins. We expected this year that India would start to show in our revenue stack a little higher, and that has been the case. It's not quite 5% of our revenue, but it's up very nicely year-to-date. It's up 26%. Quarter over quarter, it's up a lot more than that, but I think the year-to-date number is much more meaningful, up 26%. It's going to be a great place for us to be for a long time. On the submarine, submarine is up a lot this year, or at least in the quarter. It's up 27% in the quarter. It's about flat year-to-date. We've done extremely well in the submarine market. It plays to our strengths. The submarine market requires long reach at high capacity, and we're the best in the world at it. I think we'll continue to win there.
spk12: We'll take one more question.
spk00: Your last question comes from the line of Jim Suva with Citi.
spk17: Thank you. When we think about the supply chain issues, have you materially changed your pricing for things also about like, say, shipping and have they fully folded into your gross margins? Are they still kind of being calibrated? And then on your bookings and orders, Is there any concern about customers double ordering or ordering ahead knowing that they have supply chain issues or in the optical components is it just kind of not as much of a concern as maybe other sectors that we see where there's double ordering? Thank you.
spk09: Jim, if your first question was around our costs, we're certainly seeing costs of both procuring components and the logistics costs having an impact on the margin. That's fully baked into our gross margin guidance for Q4.
spk13: On your second question... Your second question, was that about orders on us or orders that we're placing on our supply chain?
spk17: Kind of orders on both sides, you know, coming in as... Is, you know, customers, are there a chance that they're double ordering? And for you guys seeing the shortages, does it make sense to order a little more to have some buffer as we progress in the quarters ahead?
spk13: I think given the nature of the industry, it's extremely unlikely. You know, the intimacy we have with these customers on the system side, you know, so I think that's a sort of zero risk, frankly, on that side. And on the supply chain side, I think the relationships that we have, again, on the supply side there is, you know, very intimate and longstanding. Great. Thank you so much. Thanks, Ken.
spk12: Thanks, everyone, for joining us today. We appreciate it. We're looking forward to catching up with folks today and over the next several days. We've got a number of conferences pending. Thanks and stay safe.
spk00: Thank you. This concludes today's conference. You may now disconnect.
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