Ciena Corporation (CIEN) Q2 2021 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the Ciena 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. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Gregg Lampf. Thank you. Please go ahead.

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 James 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 on the press release, we have posted to the Investors section of our website an acCompanying investor presentation that reflects this discussion, as well as certain highlighted items from the quarter. A commentator speaks to our Fiscal Third Quarter performance. Our view on market dynamics, as well as the discussion of our outlook for the fourth quarter. Today's discussion includes certain adjusted or non-GAAP measures of Ciena's results of operations. A detailed reconciliation of these non-GAAP measures to our GAAP results is included in today's press release. Before turning the call over to Gary, I'll remind you that during this call, we'll be making certain forward-looking statements. Such statements, including our 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 time. Ciena 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 yourselves 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 our website shortly. With that, I'll now turn the call over to Gary.

Thanks, Gregg, 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 a 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 on materializing largely is 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 a 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 a 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, it's a shift to the cloud with new architectures and network builds intense focus on edge applications and 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 the 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 widely reported, good conditions have somewhat deteriorated and are posing headwinds with Ciena, including difficulty to fully address demand. We have also seen some extensions 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. Concerning innovation, we are investing across 3 key sectors optical, where we are the world leader in Optical Systems and its associated technologies, and we continue to drive our leadership and 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're 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 [Indiscernible] 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're also excited about the opportunity for 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 Vyatta virtual routing and switching technology. Vyatta's 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 that 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, which 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 ten percent customers in Q3, including two Tier 1 service providers and the web-scale customer. And highlighting our diversification, our top ten customers in the quarter included full web-scale companies, three North American service providers, one international service provider, one MSO, and the 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 IMEA continued driven by web-scale, growing more than 16% year-over-year. IMEA 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 at 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. Is 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 will turn over to Jim.

Thank you, Gary. Good morning, everyone. We generated strong Q3 revenue with $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, adds versus new builds. More specifically, we're not yet monetizing the new design wins to the extent we originally expected for this time frame. 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 and lowering unit costs of both our products and our services. Adjusted operating expense in the quarter was $290 million. Concerning profitability measures, we demonstrated extraordinary offering leverage in Q3, including an adjusted operating margin of 19.1%, adjusted net income of $145 million, and adjusted EPS of $0.92. 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 will 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 two percent above the midpoint of our revenue guide. For adjusted gross margin in Q4, we expect a range of 45% to 47%. This reflects our expectations for more monetization of new wins, 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 the 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, we believe that we will outperform our competitors in both market share and financial results. Our technology leadership position, our expectations for a 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. Gary.

Thanks, Jim. I'd just like to give a brief update on a new ASGF, but recently underway with our partner, Digital Promise. With the return to school in many parts of the world, we're excited to launch the CNS 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 are one of several programs within a digital inclusion commitment. To learn more about our programs like this and what Ciena 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 these sell-side analysts. Thank you.

[Operator instructions]. Your first question comes from the line of Tal Liani with Bank of America.

Hi, good morning. I want to ask about the verticals and if you can speak about them -- I understand there is strength in orders. Can you tie with what kind of projects do you see that are being forward now? What is the underlying service that carriers in clouds are offering that necessitates the investment platform now? Thanks.

Thanks, Tal. I mean, I would say that from a vertical point of view, we're pretty much seeing a solid demand across most -- pretty much most of the verticals, I would say it's a combination of sort of a confluence of catch-up on capacity. They've not -- 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, facilitating 5G, etc, are, now ameliorating and people are investing and delivering operationally. Coupled with this, I think the increase in demand as the adoption for the Cloud is accelerated over the last 12 months. So you've got those three dynamics in play, and I'd say the overall application is to drive greater capacity to -- at the Edge of the network for all of the sort of cloud applications that are well understood.

And Gary, can you talk about visibility? Earlier in the year, you had a different kind of visibility. Now, you sound a lot better. Does it mean that you have greater visibility into next year?

If you define visibility in order backlog, again, which is a key part of that, I think the answer to that is absolute yes. When we went into this year, there was a considerable amount of uncertainty. We sort a great deal of caution from the carriers, both operationally and fiscally. I think we have seen that ameliorates as we thought it would. But 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 I think we've got better visibility now absolutely than we had when we started the year. And I think the overall dynamics of demand, I think a very, very positive going forward.

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 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 pushed out of this 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 it's accretive to gross margin. Help us understand the puts and takes, please.

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 the mid-40s gross margin because we would not have the level of new bills in our revenue stack. That's exactly how this is played out. We actually are experiencing a good level of capacity ads which are forced 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 different about what I think our gross margin is going to be once we get to the expected levels of new skills and our revenue stack, which is -- 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 costs in getting material for hitting our expectations for revenue. So that's what I'd say. 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 revenues 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, 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. 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 reflecting 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.

Yes. I mean, I don't think anything because -- is [Indiscernible] changed. As we've said, we've seen this dynamic for a while and it is clearly a multi-year tailwind and its infrastructure. These things take time, and those decisions take time, and then to execute on that. Either traffic grows or migrates 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 generally the two areas here or Europe and India. With a few other countries in Asia. India, I would say in the last sort of six months is 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 are on the back of that. Obviously, it will take a little while to deploy over multiple years, but I would say India acceleration, IMEA are on track.

Thank you very much.

Simon.?

Your next question comes from the line of George Notter with Jefferies LLC.

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 2 quarters in a row now, and I guess it's -- I guess I'm curious around why we expected much more significant new-build activity across these 2 quarters. And then, actually, not seen that new-build activity as the quarter has progressed. Why is that business shifted out so much?

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 wins and we're definitely going to see that those things come into our revenue next year. So I wouldn't read anything into it other than there's an even-flow in our business. And I think the good news is we're doing so well with on the tour customers and we haven't such a high preponderance of capacity.

Just add to that if I can, Jimmy talked about it at the end. I do think generally capacity adds in catch-up have 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 the modernization of these networks. But I think carriers will be generalizing here, but I think of prioritizing the capacity a little bit more than we thought, and that is resulting in better margins for us in Q3.

Got it. Okay. And then I guess I also probably just ask about the Vyatta 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 and maybe you can kind of talk about why you're buying that asset and what it really gives you going forward. Thanks a lot.

Hi, George. Scott, here. May ask that the software 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 are known cell-site routers for their 4G and 5G backhaul and enterprise business services for SMB. So those used cases are very much in the sweet spot for what we're trying to accomplish in our next-generation Metro and Edge campaign. So if you look at the assets that we're picking up it has a capability set to enhance our readiness-switching portfolio as we address the increased market size of next-generation Metro and Edge, It obviously deepens our relationship with really important customer buyers 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 3 dimensions of value for us.

Is there a revenue run rate that comes with that product line?

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.

Thanks, George.

Your next question comes from the line of Rod Hall with Goldman Sachs.

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 take n 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 that the supply situation is in the guidance.

I'll start by saying and remember we have performed in Q3. And when you take everything into account, we're probably low tens of millions below what we could have done. Was it not for the supply chain [Indiscernible] .

And that's [Indiscernible] in the guidance?

Yes. It's in the guidance for the full fiscal year, it's low tens of millions.

For the 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. I know you kept the high end of 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, and go up or continue to go up and 47 assuming a hold where they are? Or can you give us some color around either end of that margin guidance? what it takes to get to 47 and what happens if you end up printing 45?

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 a mix. It's 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 mixed that's going to drive the ends of the range.

And is it fair to say that mix will be driven by these deployments, I guess the big North American deployments in particulars. What is the mix might change one way or the other in the fourth quarter?

It could be the deployment of the new wins. But remember, we have a lot of different customers. We have a number of different products. We have a 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.

Okay.

Thanks, Rod.

All right. Well, thanks a lot. Appreciate it.

And so as you.

Your next question comes from the line of Meta Marshall with Morgan Stanley. Hi team. This is Eric am from Meta. Thanks for taking our question. Congrats on the quarter. So Meta just wants 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?

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 there's got to be -- 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 FY '22 guidance as we come out of the yield, we'll take that into account as we have the further year for the last couple of quarters here. I would say that I think we're very well-placed and navigated through it better than anybody else in our industry but we're clearly not immune from that. But our scale and vertical integration and very sophisticated supply chain enable us to mitigate a lot of those customer delivery issues, but we aren't immune from it.

Got it. That's helpful. Thank you. And if I could squeeze one more in hyper-scale. As you're seeing the strength there and it looks like EMEA continuing. Is that just a continuation of some of the scaling build-out, the hyperscalers are doing in that region. You mentioned these 100 Gig products starting to test. But if you could update us on maybe some of the expectations for timing and shares as 800 Gig starts to ramp even more.

I will take the first part of that and then maybe Scott can comment on the 800 Gig adoption there. But I think the engagement with those web-scale folks is multifaceted. It's connected in the datacenters, both long-hauls is that global networks as well. We do a lot with them in different countries. We're the number one supplier to all of them on the submarine cable side. 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 traditional data centers and increasing connectivity within their existing datacenters. If both within North America and international agent. So we're seeing pretty healthy, healthy demand dynamics across the board on that. Scott, you [Indiscernible]

[Indiscernible] and just one thing to add on what Gary said the other part of the relationship with them is, 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 [Indiscernible] also benefits the relationship, and we get to benefit from that. So that's part of that EMEA growth as well. Your 800 Gig comment, Eric, 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 year-and-a-half. So we're almost at 20,000 units shipped to that suite well beyond trials. It's mainstream deployment, where you might be referring to as our WaveLogic 5 Nano and as Gary referred to in the script, as our 400 Gig ZR product, which just recently went generally available and that's what that's derivative of the same technology that's going through trials. That clarifies it.

Thank you very much.

Okay.

Your next question comes from the line of Paul Silverstein with Cowen and Company. Mr. Silverstein, your line is open.

Sorry [Indiscernible] some mute button. Guys relative to the light revenue guidance. First off, are you seeing any demand weakness, or is that all assumption 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 up OpEx declined for four straight quarters, you grew OpEx, but 15% year-over-year in Q3 over 15%. Almost eight percent in Q2. And if I did the math right, the guidance works out to over six percent 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 impacts relative to street concerns about 400 or near in particular? Are you seeing any impact from monitoring those? I know it's still rolling forward as ZR. Those are the questions.

Okay. So let me get -- so you -- the first of the three questions. I will try and answer Paul and then maybe Jim on OpEx. On the revenue guide, I wouldn't describe it as light. I would say a 26% uptick in the second half is pretty solid. And it's also in the higher-end, the midpoint of that is kind of in the high-end of our original guide at the beginning of the year where we had very little visibility. So it's largely 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 low tens of millions. If we would add on separate access to everything we wanted as normal from a supply chain. So read into that 20 million or so. But if you also look, we overachieved by more than that in Q3. So it's -- it's all about the supply chain. And I do think those challenges will continue for the first half of the year, but the demand dynamics are incredibly strong.

And on the OpEx call, we also said consistently that we are committed to growing our OpEx at a lower rate than our revenue. And we've done that consistently over the past decade. The COVID years were a brief exception to this because we -- our revenue was affected by COVID and our plan for OpEx we continue 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 recall, we went through a whole recitation of how we expect that 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 3 quarters 285, I guess it was still 285 for the last 3 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 FX. 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 going on a plan with respect to our OpEx for this year.

And on your last one, Paul, in the foreign Gig ZR, that's the short answer is no. We're not seeing any impact on our business right now. I don't think our perspective of the opportunity set has changed. We see the market being on the total addressable market in the $0.5 billion 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. Our product addressing that is the WaveLogic 5 Nano recently went GA. We think it is the best performing plug in the industry in terms of optical performance and power. So quite excited about its opportunity. And I'll remind you that folks that I think will be the first movers in this, a couple of the large web - scalers. For that particular application, it is an upside opportunity for us because we don't largely participate in those applications today.

Thanks, Scott.

Next question, please.

Your next question comes from the line of Alex Henderson with Needham.

I'm Alex, Jim. Just a quick one to start with the just a data point that is -- give 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 was around the supply chain issues and the mix. Did the supply chain impact capacity differently than new footprint builds, 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?

Alex, let me take the first part of that. I think I'm right in saying that if you look to 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 that's just over 1%.

On your second --

Just you will remember that the first part of this year, our revenue stream was very much impacted by COVID. All customers were down or wealthy, they were lower than what they would have been.

Including web-scale.

Including web-scale. So that 1% reflects that.

Alex, your second question, I mean, another challenge in the supply chain is the much written about semiconductor challenges that are multi-industry really. And that doesn't have a concentrated impact, it is 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.

Yeah, the follow-up I wanted to ask was on the buy Vyatta, you said it wasn't material revenues, but you're obviously bringing in assets. And to that extent, most seem 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 calculus? And if so, what's the scale of the costs that you are bringing in?

Not a material number, Alex. We'll address all of that revenue, OpEx, et cetera, once we get to close and when we talk about next year.

Just to confirm, the opening part of your question, though. Yes, it is largely almost entirely in the R&D line.

Okay. Great. Thank you very much for letting me ask questions. Thanks.

[Indiscernible]

Your next question is from Samik Chatterjee with JP Morgan.

Hi. Good morning and thanks for taking the questions. I guess if I can just start with the strong backlog that you have and I understand your constraining supply capacity a bit here, but in this tale that we speak to generally is that because of the constraints that you have in the strong backlog, it should be into some pent-up demand for next year. And help me above the typical level of revenue growth. I know you don't have a guide for the next few years, but most investors seem to be benchmarking due to the six percent to eight percent prior long-term growth guidance that you have. I was just curious, how should we think about degree by just backlog one, supply constraints ease and leverage all investors think will be pent-up demand. And that is reflected in your strong backlog of three.

Thanks Samik. I would say that, 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 set 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 we've got this dynamic where you've got very strong secular demand. We've won a lot of new business. We're incredibly well-positioned. Offset that against the supply chain challenges. And I would also say that with the effects of COVID are basically we've been running with lower backlogs than normal, so to some extent, we've just kind of replenish the coffers there. So I think we're in a much more normalized position going into '22. And when we absolutely think that you'll see decent market growth next year and we will outperform the market. We will continue to take share, we've no doubts about that.

Okay. Got it. And if I can follow up, I think Jim, you mentioned that the new award pushouts, new digital deployments, and pushouts to that is largely ebb and flow in the business. Just curious, how is it different from what we saw last year during COVID? Just give some of the push-out that happened back then. What's giving you the visibility that it's not the similar situation as we saw last year?

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 that the -- as we said earlier, COVID has certainly driven people to add capacity as opposed to new build-outs. And that's the cause of the dynamic that we've seen but it is coming out about it. The new business will show up in our revenue stack.

Thank you, thanks for answering, James.

Your next question is from the line of Fahad Najam with MKM Partners.

Good morning. Thank you for taking my question. I had a clarification if you have not already provided the breakdown of the three 10% customers. What -- how much [Indiscernible] ?

Sorry, you wanted the three 10% customer?

How much?

How much in total?

[Indiscernible]

Certainly over 30%. Hang on a sec, will get that for you [Indiscernible] .

It's around 38%.

38.

Okay. I want to kind of follow up on [Indiscernible] question and I think you've historically said that you think the industry is going low to mid-single digits. Do you still have that view?

I think if you look at the last decade, pretty consistently. It's been in the mid-single-digit growth. And we've been able to continue to outgrow that. Now I think a lot of all that was all disruptive with COVID like most -- most industries where you -- we had, pretty much I think flat from an industry growth point of view. I do think that we will return to some point here and more normalized growth in those mid-single-digits. I don't see any reason that that wouldn't be the case. Secular demand and getting higher bandwidth closer to the customer is absolutely everywhere in every application around the globe. Whatever you look at, be it 5G, be it fiber-to-the-home, FTTP, Internet of Things. So the secular demand I think is very positive. So yes, I would expect the industry to return to a more normalized pace. And as I said, I think we will continue to grow faster than that.

Gary, if I can ask you, maybe double-click on that comment because I think I want to tie one of your comments in the prepared remarks about the emergence of this new Edge cloud opportunities. I think it's an entirely new build-out of network infrastructure. And so I just wanted to make sure that is that significant TAM expansion that you're talking about contributes to the overall industry growth or does that really influence industry growth to the next level because coherent optics is this getting pushed deeper and deeper into the macros.

Yeah, Fahad, actually that's a good question. When I answered your question, I'm generally talking about the Optical Systems 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 expanding term and you've also got certain segments of that market that are growing faster than the mid-single-digits as well. You've got someone who made any overall core routing is 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--that market space over -- over time. And that will -- I think in the long term provide us a better growth opportunity than -- than even the one we're seeing now.

Thanks, Gary.

Thank you.

Your next question comes from the line of Jeff Kvaal with Wolfe Research.

Thank you very much. Also struggling with the new button a little bit. Two questions for you, I guess. First, is, what can you tell us about your inventory balances? A lot of other folks in networking if it not necessarily in optical, greatly expanded 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 [Indiscernible] that you talked about.

Yes. So Jeff, for sure, we are reaching out to our supply chain and making increased commitments, both in terms of volume because we are growing the business and duration so that is going to have an impact on the inventory Balance Sheet. You've seen some of that already in that's going to continue. So you will -- you will see higher than what may have been our normalized inventory levels and lower turns as a result for the foreseeable future.

Okay, are we going to expect them to go up from where we are now, I guess? Scott, if that is your point. 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 -- is -- is -- is ongoing and how much of that was one time.

[Indiscernible] services business had a really simple level singled out in 3 bins are the maintenance or the existing installed base networks and the customer relationships. That's pretty stiff steady-state-like and predictable. There is the second piece of it is around installation projects has very tied to our new projects and business wins. So that will ebb and flow with the projects. The third piece of it, which is we're quite excited about is a set of professional services around helping our customer transform their networks from legacy networks into next year. And that's actually had quite a good run. It's still relatively smaller of the 3 utilize pieces, but that's actually contributed to the good services mix that you saw in the quarter.

Obviously [Indiscernible] Scott. Services go back to a more normal run rate in future quarters?

We think that they've been -- the professional services mix in 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.

Your next question comes from the line of Amit Daryanani with Evercore ISI.

Good morning, everyone. Thanks for answering my questions. I want to as well, I guess [Indiscernible] Maybe I missed this, but could you talk about the gross margin impact from supply chain headwind in the October quarter, sort of how you could give that? And then [Indiscernible] supply chain headwinds [Indiscernible] ? October quarter or [Indiscernible] continue to get worse and deteriorate as most of the first half of the fiscal year?

We haven't talked about an effect in Q3. There was very little effect on 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 just -- in constraints state, but how much and how that's going to affect gross margin it's really too early to say.

Blue Planet growth, I think two quarters in a row it seems to have inflected as much higher, 45, 60% of the growth sector can you just touch on what if a couple of big projects that are ramping up and that's what drove it or just sort of what drove that growth and the durability of new planner growth as you are followed would be helpful to understand.

Well I'd say, first, helping full disclosure, it's from a relatively small base. So those numbers look spectacular, but they are from a small base. I would say that what we are seeing now is adoption by significant tier 1s around the digitization of their service layer. Basically replacing the old legacy back-office systems. And we are seeing that move forward and 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 perhaps even more importantly with that, we are getting significant footprints in potentially multiyear rollouts of the digitization on the service layer and things like inventory management, service provisioning, etc. So 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 -- we talk about 22 and beyond, as we -- as we talk about that at the end of this year. But very encouraged by -- by what we're seeing.

Your next question comes from the line of Tim Long with Barclays.

Thank you. Two, if I could as well. Gary just wanted to go back to the Metro? Edge TAM and kind of challenge your piece there. Could you maybe just click down double -- 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 Vyatta assets, is that a part of it, is it leveraging installed base because it's an area that obviously could be a big growth factor for you guys? And then second, if you can just touch on a few point markers, India, given the macro issues there, as well as a submarine. Thank you.

Let me just talk on the Metro EDGE. Obviously, this has been a journey we've been on for a while. We've to underinvest in key strategic assets in the packet space, in routing switching in the software. The convergence with optical and our architectural vision with the Adaptive IP is a much simpler, highly automated architecture. And we all have a challenger in that space. We all securing wins with that as you've seen over the last sort of 18 months or so and I think that's going to bring momentum. We're excited about what we're seeing still early days. I think this is a two to the five-year expansion of our opportunity. And whilst it's a big market, we're challenging there some very strong incumbents. But I think we're proving we've got a very compelling, that differentiated value proposition with the assets that we've got. And I think that will be an important market for us and it's a key investment. And we're scaling investments both at the front-end of our business and our go-to-market capabilities and support. And also as Scott talked about in our engineering capabilities, and by the order is another key ad to that we're bringing some really tremendous specialist talent into the Company. So what was the second question?

It's India.

India.

Submarines and we said earlier that India is a place that has moved very aggressively to exclude Huawei from their builds, there are opportunities for us. We have taken advantage of those opportunities. We have several new wins. We expected this year that those would -- 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 to submarine, Submarine is up a lot this year, 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.

Thanks.

We'll take one more question.

Your last question comes from the line of Jim Suva with Citi.

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 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 or 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.

Jim, and to -- Just if your -- first question was around our costs. We are certainly seeing the 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. On your second question.

Your second question was that about orders on us or orders that we're placing on our supply chain.

Kind of orders are on both sides coming in as customers or their chance that there double ordering and fee you guys seen shortages. Does it make sense to order a little more to have some buffer as we progress in the quarters ahead?

I think given the nature of the industry is extremely unlikely. The intimacy we have with these customers on the system side. So I think that's just sort of 0 risks, frankly, on that side and on the supply chain side, I think the relationships that we have again on the supply side there are very intimate and longstanding.

Thank you so much.

Thanks, Jim.

Thanks to everyone for joining us today. We appreciate it. We are looking forward to catching up with folks [Indiscernible] today. And over the next several days, we've got the number comp just spending. Thanks and stay safe.

Thank you. This concludes today's conference. You may now disconnect.