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spk07: Good day and thank you for standing by. Welcome to the CNA Announcement reporting date and web broadcast for fiscal fourth quarter and year end 2021 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 would need to press star one on your telephone. Please be advised that today's conference is being recorded. If we require any further assistance, please press star zero. I would now like to hand the conference over to Greg Lamb, Vice President of Investor Relations. Please go ahead.
spk05: Thank you. Good morning and welcome to Siena's 2021 fiscal fourth quarter and year-end review. On the call today is Gary Smith, President and CEO, and Jim Moylan, CFO. Scott McFeely, our Senior Vice President of Global Product 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 and fiscal year. Our comments today speak to our recent performance, our view on current market dynamics and drivers of our business, as well as a discussion of our financial outlook. Today's discussion includes certain adjusted or non-GAAP measures of standards for 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 follow-up updates. Such statements, including our quarterly and annual guidance and long-term financial targets, discussion of market opportunities and strategies, 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-Q filing and then our upcoming 10-K filing. Our 10-K is required to be filed with the SEC by December 29, and we 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. As always, we'll allow for as much Q&A as possible today, but we ask that you limit yourself to one question and one follow-up, please. This call is being recorded and will be available for replay on the investor's page of the website shortly after the call is concluded. With that, I'll turn the call over to Gary.
spk03: Gary Gensler, CFO Alphabet and Google Thanks, Greg, and good morning, everyone. Today, we reported strong fourth quarter and full fiscal year 2021 results. This performance further demonstrates our continued ability to successfully navigate challenging market conditions and to deliver on the objectives and financial outlook we laid out as we entered the year, including annual revenue growth of 2.5%, which was at the high end of our expectations, fiscal 21 adjusted gross margin of 48%, which exceeded our forecast, and adjusted operating margin of 16.8% for the full year, also above our original forecast. Revenue in the fourth quarter exceeded $1 billion for the first time and came in higher than expected. Additionally, orders in the quarter were once again significantly higher than revenue. And with our third consecutive quarter of orders outpacing revenue, we have substantial momentum and increased confidence in the demand environment. We ended the year with our highest ever backlog of approximately $2.2 billion, nearly double our backlog of a year ago. This performance, I think, reflects our market leadership within a very strong demand environment. Specifically, the combination of our differentiated balance sheet, leading innovation and R&D capabilities, and deep and growing customer relationships around the globe give us a distinct strategic advantage in the industry. And of course, our people continue to amaze us with their resilience and kindness as they continue to perform at the absolutely highest levels. One of the highlights from the fourth quarter and fiscal year, our focused investments are in three key areas. Optical, routing and switching, and software automation. And they are yielding great results. In optical, we continue to lead the market in high-capacity, coherent technology. Q4 was a record quarter for WaveLogic 5 Extreme. We added 34 new customers, including 13 new logos spanning all regions. Our total customer count for WaveLogic 5e is now 140 globally, and we've shipped nearly 25,000 modems to date. We also shipped our first customer orders in Q4 for our WaveLogic 5 nano coherent pluggable optics. We had a strong quarter in routing and switching, and we continue to build momentum in this space. In G4, we secured a dozen new wins, including significant multi-year deals with two of the largest US Tier 1 service providers, one of which is for a nationwide 5G cell site router deployment. Additionally, we've now closed the deal with AT&T to acquire its Viata virtual routing and switching technology, which will help strengthen our adaptive 5G capabilities and increase our exposure to certain 5G use cases. We also announced a partnership with Samsung to couple our X4 solutions, next-gen MCP domain controller, and services with Samsung's 5G core and RAN equipment to support global 5G networks. Moving to our software automation business, Blue Planet performed well in FY21, growing 23% in the year to deliver an annual revenue of $77 million, which again was above the high end of our target range, as well as record bookings for the year. Some of the marking wins in the year for Blue Planet included British Telecom, Vodafone, and Colt, as well as a major US Tier 1 service provider and large US MSO. I also want to highlight our global services business, which grew 7% year over year, with revenue growth across each of our service categories, and earning a 95% customer satisfaction rating in 2021. And also as part of that, really advancing a key part of our strategy, we landed major network migration wins, including three US Tier 1 service providers and an international Tier 1 service provider. Shifting to diversification in our business across both customers and regions, our top 10 customers for the year, including three US service providers, two international service providers, one MSO, and all four major web scalers. Strong illustration of the continued diversity in our business. In fact, our non-telco revenue was 41% of total revenues for the year. Also of note in FY21, we had more than 1 billion in orders from web scale customers. We also performed well once again in the submarine segment, gaining more than 2% market share year-over-year, bringing our SLTE market share to the mid-50s. And finally, international growth was also strong, led by EMEA and India, which each grew at 13% year-over-year. Overall, secular demand remains very strong, driven by increasing bandwidth needs, the shift to the cloud, and also the focus on edge applications, as well as digital transformation and the growing need for network automation. And we continue to take full advantage of our leading position to address these network priorities. And we're making forward investments in our portfolio and go-to-market resources that are aligned to these trends and longer-term opportunities. As an example, we are leveraging our optical expertise to offer where we are investing to expand that total addressable market in this growing market from about 13 billion overall currently to roughly 22 billion over the next several years. I would also like to highlight the development of critical assets in software automation, including network layer automation with MCP. This is our microservices-based domain controller that has now been adopted by the vast majority of our customers around the world. Also, our differentiating software for our adaptive IT approach. And this can be deployed and embedded in a routing and switching portfolio on white boxes or virtually. And finally, our multi-vendor blue client services automation software, which is now deployed at 30 of the largest global carriers around the world to help drive their digital transformation efforts. These software elements are delivering unique innovation in the marketplace and expanding our relationships with customers. Our overall software business currently constitutes less than 10% of our total revenue. We do see this growing over time as we expand both the adoption and applications and move to more recurring and subscription-based models. Of course, the strong sector demand for bandwidth and ordination remains challenged by the global supply chain constraints in the current environment. And we continue to believe that these supply challenges are likely to persist through at least to the middle of calendar 22. And to be clear, supply conditions are adversely impacting product costs, availability, and lead times, as well as our overall supply chain operations. We expect these variables to affect our gross margin as well as the level and timing of revenue during fiscal 22. And we've obviously incorporated all of these elements and considerations into our guidance accordingly. However, as you can see from our performance today, we continue to manage these challenges well. And while we are obviously not immune, we expect to continue to outperform others in this regard going forward. In fact, we've entered fiscal year 2022 with increased confidence and visibility. And in a moment, Jim will provide our outlook for FY22, which we believe will be a year of outsized revenue growth for CNF. And that is driven by several factors, including, number one, strong order flow and additional visibility to short-term customer purchasing decisions. Number two, overall return to historical customer spending levels to address the continued bandwidth demand following about two years of slow investment due to the pandemic. And thirdly, and most uniquely to Sienna, increased monetization of wins, both those that we've secured over the past couple of years, as well as new awards. Jim will also provide a new set of long-term targets that we are confident in providing now, given the positive demand environment and strength of our business and overall financial position. Jim.
spk05: Thanks, Gary.
spk06: Good morning, everyone. We delivered a solid G4 performance. Total revenue in the quarter was $1.04 billion, somewhat above our expectations. It is an awesome quarter. It is the first-ever billion-dollar revenue quarter for Siena, and there will be many more to come. And the orders in the quarter significantly exceeded revenue. Q4 adjusted growth margin was 46.3%, which was within our guidance range and reflects the dynamics we highlighted last quarter, primarily the impact of increased supply and logistics costs, as well as increased monetization of new windows. Adjusted operating expense of the quarter was $307 billion to the higher variable comp as a direct result of extremely strong order flow at the end of the year. With respect to profitability measures, in Q4, we delivered adjusted operating margin of 16.8%, adjusted net income of $132.7 billion, and adjusted EPS of 85 cents. In addition, in Q4, our adjusted EBITDA was $199 million, and cash from operations was $255 million. Also in Q4, we repurchased approximately 494,000 shares for $26.7 million, for a total of approximately 1.7 million shares repurchased in fiscal 21. Regarding our performance for the full fiscal year, annual revenue was $3.62 billion, which was at the high end of our annual guidance range. As Gary mentioned, the end of the year was $2.2 billion in backlog. Adjusted gross margin was very strong for the year at 47.9%. And adjusted op-ex for fiscal 2021 totaled $1.13 billion, largely as we expected. Losing the profitability, adjusted operating margin in fiscal 2021 was 16.8%. At the high end of our guidance range, an adjusted EPS was $2.98. Free cash flow for fiscal 2021 was near risk at $462 million, almost 75% of adjusted operating income. Our balance sheet remains a significant competitive differentiator. The end of the year is approximately $1.7 billion in cash and investments. Looking to the full fiscal year, we believe fiscal year 22 will be a year of health-sized growth for our business. We have strong visibility to our near-term opportunities, including a record backfall in the interim year. Customer spending is returning to historical levels following two years of lower investment due to the pandemic and related economic uncertainty. More brands, perhaps, and you need to see them. in fiscal year 22 is that we are now monetizing our new units and seeing increasing numbers of deployments for significant deals that we secured over the past couple of years, as well as some new awards. Accordingly, we expect to grow our revenue in fiscal year 2022 in the range of 11% to 13%. With respect to growth margin, We expect the dynamics that we saw in the report to continue into the year. Specifically, the impact of all the morning supply chain challenges that are manifesting in significant cost increases and higher logistics fees will continue. And the increased monetization of multiple new LIMs with initial deployments and rollouts will also affect those LIMs. Accordingly, we believe our gross margin for fiscal year 2022 will be in the range of 43% to 46%. For operating expense, we intend to continue investing strategically in our business, in particular, in our routing and switching and software automation portfolios to leverage our opportunities in these growing addressable markets. Therefore, we expect adjusted operating expense to average $300 million per quarter in fiscal 22. As always, this number will vary quarter to quarter and is expected to start a bit lower and increase through the year. We expect adjusted operating margin in fiscal 22 will be in the range of 15 to 16%. In addition, during fiscal 32, we will be making investments in inventory and account receivables in order to continue mitigating the impact of the ongoing supply chain challenges. As a result, we expect that our free cash flow in fiscal 22 will be 50 to 60% of adjusted public income. For the coming quarter, June 1 of 22, we expect to deliver revenue in a range of $870 to $910 million, adjusted gross margin in the 43 to 46% range, and adjusted operating expense of approximately $290 million. As you can imagine, strong secular demand is driving solid business and greater visibility for us, which puts us in a position to resume providing long-term financial targets. Three-year targets give the best indication of our long-term view of the industry and what to expect in Siena over the next three years. Overall, we believe that we are well-positioned to continue delivering a combination of top-line growth, profitability, and cash flow. We believe the most important indicators of our performance and progress are revenue and ETF growth. On the top line, we expect industry growth to flow to mid-60s, in line with recent historical news And particularly in 2022, we intend to continue to gain and take market share as we have over the last decade. Beginning in 2023, we expect to present annual revenue growth range of approximately 6% to 8%. With respect to adjusted earnings per share, as we return to historically revenue growth rates, and continue to focus on driving increased profitability in our business, we expect our EDS to resume growth. Specifically, we expect to grow our adjusted earnings per share in the 10% range annually over the next seven years. Also, as part of our long-term outlook, beginning in 2023, we are targeting annual free cash flow generation approximately 75 to 85% of adjusted operating income over the next few years. Finally, with respect to operating margin, we continue to focus on driving leverage from our operating market. In particular, growing our operating expense at a lower rate than expected revenue groups will enable us to increase profitability. As a result, we are targeting to achieve adjusted operating margin of 17% for fiscal 2021. With our strong balance sheet and our expectations for cash generation over the next several years, we are now in a position to increase significant return of capital to our shareholders. We previously announced a program to repurchase up to $500 million of our common stock with the goal of completing those purchases by the end of fiscal 21. We didn't achieve this target in several weeks. Most importantly, we suspended the repurchase plan for almost a year due to the pandemic and the resulting industry and market dynamics. Today, we announced that our board of directors has authorized a new brokerage to repurchase up to $1 billion of common stock. Under this new authorization, we also announced our intent to enter into a $250 million ASR, whereby we will more than make up the unused portion of our previous repurchase authorization. Final settlement of the ASR is expected to be completed in the second quarter of fiscal 2022. Following completion of the ASR, the timing of the remaining $750 million in repurchases will be based on our stock price, general business and market conditions, our liquidity, and cash flow and other factors. Our intent is to fully utilize the repurchase authorization by the end of fiscal year 2022. We expect to finance the program with cash on hand for our cash-directed operations. This new share repurchase authorization and the ASR represent the next phase of our cash deployment and demonstrate our commitment to return capital to shareholders while maintaining meaningful liquidity balance. In closing, we delivered very strong fiscal 4-4 and 21 results despite challenging supply chain conditions. With continued market leadership and a very strong demand environment, as well as significant back-and-forth over the year, we are confident in another strong performance in fiscal 22, including outsized revenue growth. For the longer term, our differentiated financial position will enable continued investments in innovation, to address end-to-end, new edge applications through routing and switching technologies, and digital transformation with our growing software automation portfolio. And we are in a strong position to return capital to our shareholders, and we intend to do so.
spk05: Dimitris, we'll now take questions. Before we start the Q&A, we recognize there are some audio quality issues with the webcast. Please note that all of this information is on the earnings presentation, including our guidance, and we'll be happy to clarify anything that you'd like to in the Q&A.
spk07: As a reminder, to ask a question, you would need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Rod Hall with Goldman Sachs.
spk12: Yeah. Hi, guys. Thanks for the question. I guess I wanted to dig into this guidance for next year. I mean, it's very strong relative to what we had expected. And I wonder if you could talk a little bit about some of the drivers within that. I know the cell site routing seems like a really big opportunity. I don't know, Gary, if you think that goes beyond this just, you know, this one installation or not. Curious how big hyperscale is in that. So that's kind of the first question is can you, you know, can you give us more color on what's driving that growth? And then I have one follow-up for you as well.
spk03: Yeah, Rod, thank you. I would describe it as sort of, you know, it's the monetization of new winds that have sort of been on hold for a couple of years plus the new winds that we're seeing. And, you know, the Southside router opportunity, I think, you know, we've secured in this last quarter, you know, the two large service providers in North America for our switching and routing portfolio. So I think this is... I view this as just the start, quite frankly. So we're very encouraged by the opportunities that we're seeing there. And I think, you know, if you step back from those specific things to Ciena, which is really the new business and the portfolio, the new innovations in the portfolio, we're seeing, you know, carriers return to sort of a catch-up on their capacity builds. basically get into more normalized views around the modernization of their network. And I think you're also seeing a step function increase in overall traffic demand. So it's a blend of all of those things. I would also mention in terms of the order book, some of that is customers wishing to get security of supply in this environment. So it's a blend of all of those dynamics. You know, I think the secular demand for the industry, I think, is very positive. And I think our own particular position, you know, is unique around the wins that we've had in the last few years. And you're beginning to see that flow through.
spk12: Okay, great. And then my follow-up, Gary, was on the software comment you made. You said it was below 10%. I wonder, is it... By saying that, do you mean it's close to 10% or is it quite a bit below? I'm just curious how big that software element is now in the revenue stream.
spk03: Yeah, so that's the sort of three elements that I outlined. And I think for last year it's about 8.5% if you put it all together. And, you know, I highlight that because I think we're focused on growing that in absolute, you know, dollar terms and over time as a percentage of our overall revenue. So Blue Planet, MCP, and the Adaptive IP.
spk12: Great. Okay, thanks a lot. Appreciate it, Brian.
spk07: Your next question comes from the line of Paul Silverstein with Cowen and Company.
spk10: Jimmy, can I ask you to just repeat the long-term guidance? I was having trouble hearing you. My apologies. My question is, what gross operating margins have been on a normalized basis? How much of an impact are you getting hit from supply chain? And I assume as your routing and switching business grows, that that's going to have a positive impact on gross margin and operating margin. Anything you can say on that? And what type of growth are you expecting there? And I've got one follow-up to that. Thank you.
spk06: A lot of questions in there, Paul. Let me try to read the last one first, which is routing and switching. We do believe that routing and switching overall will provide accretion to our gross margins as we move through time. And we do expect routing and switching to grow as a percentage of our revenue. With respect to what our profitability might have been, what I'll tell you is that the last time we gave sort of run rate gross margins was right before COVID, I believe. And we said that they were centered around 45%. And I still believe that to be true. And that 45% or so, you know, call it 44 to 46%. represents a one-rate percentage of new business in our revenue stack. So that's what I'd say. You can kind of, based on our guidance for the year, which is 43 to 46, you can sort of get somewhere close to what we think the effect of the supply chain challenges will be this coming year. And I'll just summarize our long-term targets here. What we said was we expect the industry will return post-22 to a sort of a low to mid-single digits growth rate. Not going to be that different from that in 22, by the way. But our growth rate, we think, will return to the rate that we've seen historically for a long time, which is 6% to 8% range, which will reflect a continued taking of market share We also said that we expect our adjusted EPS will grow in the 10% range over the next several years. We gave some other metrics, but those are the key ones we believe.
spk10: I appreciate that. And my follow-up, it doesn't appear from the numbers, but I'll ask the question. Are you seeing any impact? From Xeor in particular, as well as open line systems, what type of impact are you seeing? Obviously, it's just at the award stage, but any concerns?
spk11: Yeah, Paul, Scott, on the ZR piece, I don't think our perspective has changed since the last time we spoke. We really think the starting of the event is really 2022, so no, we're not seeing any impact in the short term on that. And as you may know from the press release, we shipped our first ZR plugs to the marketplace from a commercial perspective and certainly expect the participation tuition. Open line systems, that's a game that we've been playing for some time. And we've actually benefited from it, by the way. So technology leadership, both on the line system side and on the coherent motive side, in whatever consumption model our customers want to choose, is a good thing for us. So no negative impact on open line systems.
spk10: Scott, just to be clear, when you say no impact from ZR, we all know they're just starting to ship. You're not seeing meaningful awards by whether WebScale or traditional service providers?
spk11: No. As I said, I think the game on that really starts in 2022. Okay. I appreciate it.
spk10: Thanks, guys. Thanks, Paul.
spk07: Your next question comes from the line of George Nutter with Jefferies LLC.
spk08: Hi, guys. Thanks very much. Congratulations on the terrific results and guidance. I guess I wanted to ask about market share opportunities. You certainly are implying that you'll take continued share. I think Huawei obviously is one of the opportunities out there. What are you seeing in terms of new wins competitively against them? What are you seeing in terms of the opportunity to mine out the installed base? Any additional color you could provide would be great. Thanks.
spk03: George and Gary, I would say efforts around that have been ongoing for a while. We've seen this dynamic, and really it's around two regions. It's Europe and India. And what we have seen in both of those regions, even during last year, we've seen an ongoing move to migrate their dependency, these carriers away from Huawei, on the optical transport side and in other areas. And we're getting more than our fair share of that. The fact that we saw good growth in Europe and India, some of that is absolutely directly attributable to that move. And we think that's going to continue over the next one to three years. And as I said, we're taking more of our fair share of that, George.
spk06: The other thing I'd say, George, is that you see market share gains in our revenue numbers. We actually see them quite a bit before that. We see them at the contract awards. We see them in our order book. And all that's been going on in our business over the last couple of years. And particularly, you look at our backlog at the beginning of this year, it's $2.2 billion. It's hundreds of millions higher than we've ever seen it. Of course, some of that is visibility of future orders, but it reflects the fact that we have been taking market share, and it's going to show up in our revenue this year in 22.
spk08: Great. Thanks very much. Thanks, George.
spk07: Our next question comes from the line of Tim Long with Barclays.
spk09: Thank you. I was hoping we could talk a little bit about the web scale business. It was down a bit sequentially in the core. I'm assuming that's kind of lumpiness. If you can just touch on that, as well as the billion in orders is good for the year, it looks like 1.2 or so book-to-bill. It seems other in the web scale world are seeing doubling plus of orders, so probably more growth. Is there something... going on there where maybe there's a little less forward ordering than maybe some of the networking folks are seeing? And then as a follow-up, if you can just touch on Asia, you know, with India up, Asia still under a little bit of pressure. Can you talk about what's going on in the other parts of the Asia theater? Thank you.
spk03: Yeah. Let me take the web scale first. I would just say in the quarter, just lumpy. I think during the year, I think the supply chain stuff weighed a little bit on revenues into that space, but we certainly maintained share as expected. I would say the fact that we had all four web scalers for the first time in our top 10 customers, You know, it's testament to the position that we have there. And more than $1 billion in orders is a significant milestone from them. And a lot of the, you know, and that features in our backlog as well. So we have good visibility into the year. And we expect actually web scale, you know, in the guidance that Jim gave for our overall business, web scale growth in 22 will probably be above that corporate average, if that's helpful to you. And we've got very good visibility into that. In terms of other parts of Asia, India, we expect to, again, I would make the same comment actually about India. I think that will grow faster than our corporate average as well. Other parts of Asia, a little more challenging to us. I think Australia, New Zealand, I think we'll have a very good 22. We've had a couple of new wins there and new customers for us. Japan continues to be challenging, but we additionally have had a couple of new wins there, one of them with the large tier one there. So I think over time, our position in Japan over the next probably 18 months or so will improve. Obviously, we're not We're not focused on China. The rest of Asia, I think, has been a bit of a challenge, and I think that the pandemic continues to weigh on a lot of those countries. Okay. Thank you.
spk06: And also, it's also Huawei's sort of home turf, and they're not under as much pressure there as they are in Europe, for example, and India. So that's part of it.
spk09: Okay, makes sense. Thank you. Thank you.
spk07: Your next question comes from the line of Simon Leopold with Raymond James.
spk13: Thank you very much for taking the question, too, as well. First, I want to understand what actions you may be taking in terms of the prices to your customers, whether you're planning on or have made adjustments, and if so, how successful are Have you been in getting any price increases to stick to pass on the higher input costs? And then I've got a follow-up, please.
spk03: yes i mean i think you know our perspective is really driven by you know a lot of that stuff we just absorb in the normal you know uh bumps and moves of uh supply chain in the ecosystem but i think there's elements to this which everybody's seeing you know the cost environment we do not think is transitory or you know i'd split it into two elements there's all the expedite fees and logistics and the rest of it eventually that will ameliorate but um you know some of these costs from a chip point of view, we do not see that being transitory. I would say we're actively engaged with our customers on how best to navigate this from a partnership point of view and how do we do that in an equitable way. We don't expect any of those to really impact FY22, largely because we've got such a large backlog already, but we are engaged with our customers on that.
spk13: And then it's a follow-up.
spk06: If we are able to share these costs, it won't affect the current backlog. It will affect orders going forward just to make that point.
spk13: Thank you for that. Thank you for that. On the follow-up, Gary mentioned, you know, web scale growing faster, India, but you didn't mention the cable TV vertical, which in the fourth quarter was really strong, and we've been observing some spending shifts in that vertical. How are you thinking about your cable TV market in your 2022 guidance? Thank you.
spk06: We're going to have a good year with the MSOs, but we had a very, very strong year, particularly with our biggest customer there, which is Comcast. And we're going to have a good year with them. We're just not going to see a kind of growth rate in that vertical.
spk03: What I would add to that, though, I do think from a specific, from a Blue Planet point of view, we've had, you know, two additional MSO wins for Blue Planet that will begin to roll out into the year. So we've got a pretty good footprint now from Blue Planet, mainly on the inventory side across a number of those large cable companies.
spk05: Thank you. Thanks, Simon.
spk07: Your next question comes from the line of Jim Suva with the Citi Group.
spk04: Thank you and good morning. My question is regarding some of the countries like India and Australia, it seems like during COVID that they are coming back a little bit later than other parts of the world, just given the timing of when COVID hit those societies. Is it fair to say that your growth outlook in those is not only higher than corporate average, but also kind of multi-year sustainable, as I believe some of those countries kind of put spending and infrastructure on pause during COVID a lot more than others? If you can just kind of talk a little bit about that. Thank you.
spk03: Yeah, Jim, I think, you know, it does sort of ebb and flow depending on some, you know, particularly India. India's gone through a number of challenges, some of which, you know, pre-COVID were industry-based. I do believe that they've dug out from that. Obviously, they had this sort of other wave of COVID, which really dampened down demand, but we're seeing a very strong set of dynamics in India. And obviously, we have number one market share in India. And I think if I look at it from an RFP and an order point of view, we've actually grown share in India in the last 18 months, even during that period. And I think we've said this before that you know, while deployments may have been very patchy in some of these territories in different countries, the RFP activity, you know, has largely gone on unabated, which is why we've got, you know, new wind in addition to the stuff that we had prior to the COVID piece. So I think, you know, we feel very positive about some of these territories. And I would agree. I think this is a multi-year dynamic. Obviously, you know, everybody's supply constrained right now, but if I look over the next one to three years, I feel very bullish about Australia, New Zealand, India, and longer term, I think our position in Japan as well, but that's going to take a little more rebuilding.
spk04: Thank you so much for the details and clarifications.
spk07: Thank you. Your next question comes from the line of Amit Daryani with Evercore.
spk14: Thanks a lot, and congrats on a good printed guide. I have two questions as well. The first one maybe, when I think of this 11% to 13% revenue guide for fiscal 2022, I think you talked about web-scale Asia being better. I was wondering if you could just touch on what are you seeing in North America and Europe just from a geo basis in the context of the guide for fiscal 2022?
spk03: I would say that Europe, I think will also be probably, you know, above our average corporate average. So then you get to the question, what is not above our corporate average? I guess you end up at that point. And that would be North America. And it's mainly, you know, the law of big numbers, and also we've got such a large market share in North America across the board. But we do expect growth in North America. You know, let me be really clear about that. But I think the dynamics in Europe, And I'd say there's two dynamics in Europe. One is they basically have underfunded their infrastructure for a period of time now. This is way prior to COVID. And then in COVID, obviously, it's affected like everybody else. But so I think Europe, and then you've got the Huawei dynamic there as well, which you don't really have in North America. There's not much deployed. And what is, is being taken out. So I think, you know, we do expect a good year in North America for sure. And I look at the number of wins that we've had that will help drive that. But I think Europe will have another strong year in 2020.
spk14: Perfect. You know, Ainsley, if I could just follow up. I think when you talked about the long-term guide, you kind of said we expect the industry to grow low single digits, and I think that's the same assumption you have for fiscal 22, if I'm not mistaken. It's clearly, I think, the implication that your share gains are much more outsized in fiscal 22 versus what you can happen beyond that. If that's fair, I guess my question is, why do you think the outsized share gains that you have this year are are a one-time phenomenon versus perhaps something that's more endearing and durable?
spk03: I would describe it as this. I think you've got a bit of a catch-up. We've had a bit of a backlog of wins that have not deployed or monetized, and I think that's now beginning to turn into revenue, albeit slower than everybody anticipated because of the supply chain. But, you know, I think it is a bit of a catch-up year, and I think it is somewhat unique to Siena. Because I think the market rate overall is probably going to be in the single, low to single digits for 22. And I expect that to, you know, and it's the further out you get, more difficult to tell. But if you look over the sort of, you know, 23, 24, I would expect it to be similar. And I would expect us to continue to take share, which is why you get into that sort of 68%. And that, you know, if you look at it over the last sort of decade, that kind of number is that kind of dynamic and structure is what we've seen play out. And, you know, I don't expect that to be any different, you know, and, you know, we're also, you know, potentially, as we've said, opening up our TAM and the switching and routing, which, you know, I think will be helpful to reinforce our outside growth.
spk14: Thank you.
spk07: Your next question comes from the line of Sameek Chatterjee with JPMorgan. Hi.
spk00: Thanks for taking my question. I guess I wanted to start with Jim. I know you mentioned some headwinds to cash conversion, I think, next year, if I heard you right. But as you return to a more normal level of growth post-Fiscal 22, I think you'll be generating about 400, 500 million of cash. Given the needs for deployment of cash that you have, I don't see any major M&A requirements unless you're thinking of any. Why shouldn't we be thinking that the shareholder returns can be as much as 100% of free cash flow with the strong balance sheet that you highlighted? And I have a follow-up, please.
spk06: Yes, what I'd first say is that we would like to consider good M&A transactions. You can't see it because it's in our offices, but we've been very active in thinking about things. We just have not been able to find something that worked for us. We hope to be able to do that. So that's why we're going to keep a very good and solid cash balance and a strong balance sheet. But I would say this, that you're right. We're going to be generating a lot of cash over the next several years. And if we can't deploy that either in the business or in M&A, then you can probably expect to see more share repurchases.
spk00: Got it. And for my follow-up, just going back again to the long-term guide beyond F522, the 6% to 8%, that's largely similar to what you had pre-pandemic for your long-term guide as well. But if you can share any thoughts about how similar or dissimilar is that in composition to how you thought about it pre-pandemic, is there...
spk03: more growth coming out of telcos or is there maybe less share gain in certain verticals just how to think about how similar or dissimilar it is to pre-pandemic levels thank you i i would say broadly from trend point of view i would say uh international growth would be outside pretty much as we talked about in 22 i would expect that to continue you know largely function we've got such a large market share in in north america It will grow, but it's more difficult to do that in the law of big numbers. I also think the web scale will be a fantastic opportunity for us over the medium to longer term and the time we're talking about there. So I would expect a lot of that growth to be from international and from web scale and further diversification of the customer base. Also, routing and switching.
spk06: That's a great opportunity for us. We've said that our TAM has increased from around $13 billion to $22 billion because of this convergence of optical and IP technology. And now routing and switching investments and engagements are going to increase our revenue over the next several years at a very high rate. Thanks, Nick.
spk07: Your next question comes from the line of Alex Henderson with Needham.
spk02: Thank you. Could you just repeat the order backlog that you have? And is that primarily a product backlog?
spk06: It's $2.2 billion. It is products and services. Some very small portion of that, you know, in the small and low hundreds of millions is services and maintenance that will continue beyond fiscal 22. So the vast bulk of that backlog will be delivered in fiscal 22.
spk02: What do you think your normalized backlog would be, you know, if you were in a normal environment? How much of that is outsized backlog?
spk06: Scott, I want to address this, but we've talked about that internally. The business really, because of the COVID situation and what quickly followed, which was a supply chain imbalance, the way the ordering pattern of our customers occurs has changed. And Scott, you ought to address that as we've talked about it.
spk11: I think, Alex, if you look at a couple of data points, number one is the backlog grew from beginning in 21 to the end of 21 by a billion dollars. The environment going into 21, I wouldn't say was normal either, so that might have been a bit low. And going into 22 is probably a bit high, so somewhere in between there is the normalized rate. If you go back in historical numbers, through pretty much the last decade, we sort of entered the year typically somewhere between 30% and 35% of the annual revenue plan for the year in backlog. So that may give you some indication of what sort of normal state is. I personally think we'll be living in this new environment where we have longer visibility and therefore more backlog for quite a while, probably through all of 2022.
spk02: So the primary reason I'm asking these questions is I wanted to get at the mechanics of how the backlog normalizes. So over the course of CY22, FY22, will we see a book-to-bill start to run below one and therefore the backlog start to trim lower, or do you expect in your guidance that the backlog stays at elevated levels? And we don't bring that down. I mean, if I'm looking at the backlog, it's 61% of your total, you know, trailing revenues and 75% of product revenues. So it's a very large backlog. What's the mechanics for normalizing that? And does it happen all in 2022, or do we actually end up with a large chunk of that backlog being realized in 2023, in which case the guidelines seems conservative for 2023.
spk11: I actually think one of the things that we probably need to change our mind around a little bit is sort of looking at a short-term period and trying to figure out how much revenue moves from one to the other. Because in the old world, we used to go to a period and a relatively low proportion of that period's revenue was actually in backlog. And we had pretty fast conversion cycles. So it made sense to ask The question of how much should you miss? Right now we're in a different world. The demand profile has given us long visibility. It's a very significant portion of the delivered revenue in a short period of time, and therefore you're less dependent on new workflow. I think we're going to be living in that world for most, if not all, of 2022. So, you know, what it does mean is unlike in 21 where we said the demand dynamic was really what was shaping the timing of our revenue being back unloaded, it's going to be not the demand in this case. It's going to be similar shape to 21, but it's going to be the supply environment that's going to be the thing that's shaping it. You can naturally expect then with the revenue increasing as we go through the year, there's going to be a convergence on the book-to-rev ratios that was the question you asked. Whether it flips to being less than one, we don't know. But I think you'll still see an oversized backlog relative to historical measures going into 2030.
spk02: So are you assuming a reduction in the book-to-bill because of the parts elements becoming more available over the course of the year, and when do you expect that to actually start to improve in the guide is what I'm really trying to get at. Thanks.
spk11: I would say it this way because I don't think – It's difficult to give you a precision in terms of the quarters, but I would say this. We do expect our book to bill in the year to be still greater than one on an annual basis. And we do expect the supply chain environment to largely persist through most of our fiscal 22. We think we will start to see some improvements in lead times. as we get to the back end of the year. So, you know, that will probably change the ratios on the backlog to revenue in 23, but not back to sort of the historical norms.
spk04: Thanks, Alex.
spk07: Your next question comes from the line of Maida Marshall with Morgan Stanley.
spk01: Great. A couple of questions for me, maybe just a little bit more market focused. You know, clearly you're seeing a strong what skill order flow and just what are you seeing in terms of that upgrade activity? You know, is it wholesale upgrades to wave logic five like we maybe saw with the 400 gig cycle? Are you seeing more of a mix of speeds being installed kind of in in the data center? And then maybe a little less of a question for fiscal 22. But, you know, you talked about there needing to be kind of a partnership with the service providers as you look towards making price increases. Just trying to get a sense of, you know, when you look at low to mid-single digits and 23 and beyond kind of for the industry, do you think that will be more pricing-driven or unit-driven just in terms of how much of the price increases will be absorbed by the suppliers versus the service providers? Thanks.
spk11: I'll try the first one on the web scale piece. So as you know, we've got exposure to the web scale in multiple parts of their infrastructure, their campus, metro, data center, interconnect. In some cases, their natural back-home networks and certainly a lot of activity around the submarine networks. I think in all three of those use cases, what you're seeing is certainly capacity augments. Those capacity augments hit us in typically the cost per bit as aggressive as they can. They're not all on WaveLogic 5 yet, but that transition is happening as we speak. The second thing that we are seeing is expansions in terms of their reach. So that comes at us in terms of new route builds, both in terms of photonics and WaveLogic modems. And then with media that's unique to us and We had talked in the past around new logo wins, and that's based over significant, and you're starting to see those come to revenue.
spk03: Matt, on the other part of your question on the industry growth, whatever happens on the pricing environment, I don't think that will have a major impact on the actual size of the growth, to be honest, because I think You know, wherever the pricing dynamics end up, I think certainly from our point of view is that we will absorb the vast majority of the additional costs associated. You know, I just want to be clear, I do not think that'll be able to be passed on to our customers. And that's all encompassed in our guide. And I don't think it'll really impact 22 from a price increase point of view. Well, what I would say is over time, you know, similar to our gross margin, if you look at the guidance we've given for the sort of three-year piece, you know, I do think that we will be able, through innovation, our own cost reductions, our vertical integration and mix, and also our increased levels of software exposure to the growth in routing and switching, that will help our gross margin. And as Jim said, it's probably, you know, if you look at a, you know, the baseline gross margin, we're somewhere between 44 and 46 right now, if you didn't take into account these component increases.
spk01: Great. That's very helpful. Appreciate it.
spk05: Thank you very much. And thanks, everyone, for your time today, your attention. We look forward to catching up with everybody today and the next few days. Happy holidays, everyone, and a happy, healthy new year. Thank you.
spk07: This concludes today's conference call. Thank you for participating. You may now disconnect.
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