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Good morning. My name is James and I will be your conference operator today. At this time, I would like to welcome everyone to the Ciena Fiscal Q1 2019 Financial Results Call. All lines have been placed on mute to prevent any background noise. And after the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to the VP of Investor Relations, Gregg Lampf. Please go ahead.
Thank you, James. Good morning and welcome to Ciena’s 2019 fiscal first quarter review. With me today is Gary Smith, President and CEO and Jim Moylan, CFO. Scott McFeely, our Senior Vice President of Global Products and Services will join us for the Q&A portion of today’s call.
In addition to this call and the press release, this morning’s report includes prepared remarks that were made available earlier today on the Investors section of our website. We have also posted an accompanying Investor presentation that reflects this discussion as well as certain highlighted items from this quarter. Our comments today speak to our view of the market environment, our fiscal first quarter financial performance and our outlook for the fiscal second quarter.
Before turning the call over to Gary, I will remind you that during this call we will be making certain forward-looking statements. Such statements including our guidance and any commentary about our long-term financial targets are based on current expectations, forecast and assumptions regarding the company and its markets that 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. Our 10-Q is required to be filed with the SEC by March 14 and we expect to file by that date. Today’s discussion also 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. Ciena assumes no obligation to update the information discussed in this conference call whether as a result of new information, future events or otherwise.
With that, I will turn the call over to Gary.
Thanks, Gregg and good morning, everyone. With the outstanding Q1 results we reported this morning, we are off to a strong start in our fiscal 2019. Solid execution of our strategy once again enabled us to drive differentiated financial performance in the quarter, including meaningful year-over-year growth in both revenue and EPS. Additionally, orders in the quarter were greater than revenue and consequently we grew our backlog. This is a particularly strong performance in what is typically a seasonally challenged quarter. We are clearly well positioned today with all of the key customer segments and geographies, specifically given our distinct that is closely aligned to current market trends.
First, the webscale players, these are characterized by their rapid technology adoption cycles and deployment of best-in-class technology. They continue to have a significant influence on the industry structure, network architectures and customer consumption models. This key customer segment is already a meaningful driver of our growth and we expect that to continue. In fact, our webscale business comprised 22% of Q1’s total revenues reflecting a year-over-year increase of 64%.
From a regional perspective, we are seeing very broad demand and this is enabling us to continue growing our market share and expanding our footprint. In Q1, we delivered double-digit revenue growth in nearly every single geographic region. In Asia-Pacific, India had another strong quarter enhanced and supported by continued strength in Australia, Japan and Korea as well as opportunities across a broadening set of applications. Year-over-year, Asia-Pacific quarterly revenue was up 20% in Q1, including a significant contribution from Japan. In North America, we were also up 20% year-on-year and we continued to see further opportunities to drive additional share gains across our diverse customer base including as a result of new wins and increasing traction with our packet and software portfolios.
We are also seeing new market share capture opportunities in EMEA, where revenue was up more than 30% year-over-year and [indiscernible] also appears to be poised for some growth after a few slower years. We remain well positioned with our traditional service provider and cable operator customers. Particularly as content moves closer to the edge and spend shifts towards fiber densification initiatives like 5G and fiber deep in the metro aggregation and access segments of their network. We continued to expect that these initiatives will be drivers of our business over the medium-term to long-term. And interest continues to grow for our software automation solutions across a range of customers as they look to scale and gain insights from their networks while spending down their cost curves.
In Q1 we secured a key win with a Tier 1 service provider in APAC for a deployment that will span our Blue Planet and VSO and inventory solutions. We also had new wins from our Blue Planet Route optimization and assurance solutions. And we had several existing Blue Planet service provider customers purchasing new elements of the Blue Planet portfolio during the quarter. In addition to those positive market dynamics, the current competitive landscape is providing us the opportunity to take additional share. In particular, two factors are influencing some changes in customer behaviors and their views of the broader vendor community landscape. First, some of the smaller subscale equipment vendors are struggling from a financial standpoint and experiencing technology lags. Second, the Chinese equipment vendors are being viewed as holding a disproportionate amount of market share in certain markets and by certain customers.
Whilst these factors are not necessarily new, however, we are seeing network operators increasingly pursue what I would describe as a flight to quality. With vendors who offer leading innovation, global scale, financial strength and sustainability and a world class customer engagement model. Clearly Ciena is well positioned. In fact we are in a highly enviable position. With respect to our innovation agenda, we continued to deliver market leading technology across our portfolio and our customers’ confidence in our roadmap has never been stronger. Not only do we still have the only 400 gig capable coherent technology in the market today, we have recently detailed our WaveLogic 5 technology. This will deliver single wave length 800 gig systems later this year which will be another Ciena first in the industry. WaveLogic 5 will also provide for a range of footprint optimized solutions, including 400 ZR pluggables next year.
Our growth overall continues to be enabled by diversified business model across products, customers and geographies. For example, more than 35% of our revenues in the first quarter came from non-telco customers. Specifically our Waveserver platform comprised 18% of Q1’s revenue. This platform continues to be a meaningful driver of our growth including with non-web scale customers as evidenced by our recent news with British Telecom. And of course our global scale gives us the capability to invest in both R&D and the front end of our business to capture additional market share and fuel future growth. These attributes gives us a unique advantage over the competition and helped us to both gain 3% of global optical market share in 2018 and deliver a very strong set of results in our fiscal first quarter of 2019.
With that I will turn over to Jim for more details on our performance and guidance. Jim?
Thanks Gary. Good morning everyone. Overall we delivered strong performance in Q1 with revenue of $779 million. We had three 10% customers in the quarter, one of which was a webscale customer. In addition to our highest ever quarterly revenue in direct sales to our webscale customers, Q1 service provider revenue was up 16% year-over-year. Our Q1 gross margin was 42.2% in line with our outlook. Q1 adjusted operating expense was $254 million also in line with our guidance. With respect to profitability measures in the first quarter, we delivered adjusted operating margin of 9.6%, adjusted net income of $52.8 million, and adjusted EBS of $0.33 per share. In addition, in Q1, our adjusted EBITDA was $96 million and we used $14 million in cash for operations. We ended the quarter with approximately $788 million in cash and investments.
Finally, we are executing on our share repurchase plans. In the first quarter, we purchased approximately 600,000 shares for about $21 million and we are on target to buyback approximately $150 million in share value by the end of our fiscal year. Looking ahead in fiscal second quarter 2019, we expect to deliver revenue in a range of $800 million to $830 million, adjusted gross margin in the 42% to 43% range, and adjusted operating expense of between $255 million and $260 million. With respect to the full fiscal year given our strong first quarter results and our second quarter outlook, we now expect to achieve revenue at the high-end of our annual revenue guidance of 6% to 8% for fiscal year ‘19.
In closing, we have the right strategy for this dynamic business and we have proven our ability to execute. Our first quarter performance is yet another demonstration of this continued execution of our strategy to deliver the industry’s leading innovation while diversifying our business and leveraging our global scale. We are taking full advantage of our strong industry position and today’s positive industry dynamics to capture additional share and to continue delivering differentiated financial performance in fiscal 2019 and in the years to come.
With that, James, we will now take questions from the sell-side analysts.
[Operator Instructions] And your first question comes from the line of Paul Silverstein from Cowen. Go ahead please. Your line is open.
I would like to ask two questions, one of which is obviously revenue diversification for quite sometime now. When you look to strengthen the business, what are you most excited about Gary, as you look out over the next 12 months in longer term if you could share it? And then from the perspective, it doesn’t sound like it’s an issue, I trust you and I felt it’s not, but obviously 600-gig systems are now launching off of the vacation, I believe in [indiscernible], can you comment on what you are seeing in terms of market dynamics? Again, I trust you are going to tell us that there is no pause as it impacts your business with the 800-gig coming, but if you can share any insight? That will be appreciated? Thanks guys.
Paul, let me take the first part of that. I think what I am most excited about is the broad base of demand. We have got to a very diversified customer base and while certain segments can ebb and flow, we continue to take share and grow and that’s why we are so confident around our outlook for this year, which we have taken up and also for the 3 years as well. And you can see that in the service provider strength this quarter, you can see it in the geographic perspective, EMEA had a very strong quarter, obviously, webscale, but webscale will probably moderate, you can’t keep growing at 64% year-on-year growth, but we expect that was very strong year in webscale. So it’s just really I would say the breadth and depth of the overall demand. That’s what we are most excited about from a business point of view. Scott, you want to talk about that?
Yes. Paul, in regards to the competitive environment, we have lived in a competitive segment of the industry for sometime as you know characterized by a set of customers that are extremely informed – well-informed buyers. Lots of things go into their purchase decisions, but clearly technology leadership is one that we have led the way with, particularly around coherent optics. They make those decisions with full visibility of what’s on the shelf today, but also all the competitors roadmaps and their track record of delivering on them and as witnessed by our position with 400-gig over the last 15 months and our recent WaveLogic 5 announcements around 800-gig through believable will lead again in the industry in terms of performance benchmarks being available in our system by the end of this year. I think it’s clear by the share gains that we have made over last a little while that those dynamics are playing in our favor, 3 points of share gain in the optical space in a single year, it’s quite phenomenal. And you can see by our guidance for 2019 and over the next 3 years that we are quite confident that we are going to continue to gain share in those – with that competitive environment.
So Scott just to be clear, you are not concerned, you are not hearing from any of your webscale customers that they are looking to move on to 600-gig and not wait for the 800-gig to come out in terms of how it impacts your revenue growth?
No.
Thank you, Paul.
I appreciate it.
Your next question comes from the line of George Notter from Jefferies. Go ahead please, your line is open.
Hi guys. Thanks very much. I guess I wanted to really expand on that last question a bit, as I look at the WaveLogic 5 announcements both the Extreme and Nano version, obviously you have got different products that you will deliver those WaveLogic DSPs with certainly Waveserver and 6500, can you give us any more precision on when the products become available, I know you are talking about by year end, but does that mean Waveserver, does that mean 6500, I mean anymore detail on specific product deliveries would be helpful? Thanks.
Yes. We will certainly like we have with WaveLogic AI deliver the WaveLogic 5 family into a number of product sets, so Waveserver for sure, the 6500 family both if you are familiar with it both S series and the T series will be hosted for that technology as well. And then as we look at the Nano platforms we have started to see that rollout in 2020 into – integrated into our packet portfolio and also available in pluggable form factors for a different consumption models.
Got it, okay. So then is it fair to say that Wavesever and 6500 versions of these products would then be available by the end of this year, is that the right target?
That’s correct.
Okay, great. Thank you.
[Operator Instructions] Your next question comes from the line of Simon Leopold from Raymond James. Go ahead please, your line is open.
Thank you very much. I wanted to see if you could maybe get into a little bit more color regarding which market verticals or market opportunities you see as driving the most growth in the coming year or the current year, I guess now if I look back at calendar ‘18 it appears that the webscale group was the huge contributor as well as India, I am just wondering how much that change is in calendar ‘19, in other words Tier 1s internationally as just the example, if you could help us understand what are the drivers for the strong growth? Thank you.
I think to the point around sort of broad based, I think from a geographic point of view if we look at the sort of drivers of growth, yes we will see webscale, yes we will see submarine, yes we will see datacenter interconnect. So those will continue to be growth drivers. If you look at it from a regional point of view, we actually expect to have a very good year in North America in strength across the board there and certainly in some of the Tier 1 service providers in North America very encouraged by that. EMEA, we are seeing I think a market that is basically underinvested for the last few years. We are beginning to see an up-tick in our new wins there people like Deutsche Telekom which we won last year, so increasingly encouraged by what I am seeing in Europe. And then of course Asia-Pacific was been led by India, but as we saw in Q1 Japan was very strong as well as in terms of its demand. Australia, we feel quite bullish about as well. So I think we have got a very broad base of growth drivers for the year and that’s why we are already guiding to the high end of our range. So I will say just a broad based geographic demand.
It is broad based on everything….
I just want to clarify what you are saying is that it sounds like what’s different is improving in North America, EMEA lead by Deutsche Telecom, Asia-Pac pack getting beyond India, sorry Jim for cutting off, but I just wanted to….
Yes, Simon, that’s a good summary yes. Jim, go ahead.
No, I was going to emphasize what you just said, Simon. North America is strong. And the big Tier 1 service providers in North America are going to be a nice driver for us given all relationships in newer wins.
Thank you very much.
Your next question comes from the line of John Marchetti from Stifel. Go ahead please. Your line is open.
Thanks very much. Gary, I was wondering if you could just go back for a second or maybe expand a little bit on some of your EMEA comments. I mean obviously you do have the new Deutsche Telecom win, but it sounds like beyond that you are starting to see a real sort of return to growth if you will or at least a return to spending by some of those customers there. And I was wondering if you could just maybe spend a moment there and maybe also talk a little bit if that’s one of the areas particularly with your comments about some of the Chinese OEMs and the market share that they have that you think you are starting to see that even out a little bit?
Yes. I think I characterize sort of EMEA in my perspective is really having underinvested in the last few years in infrastructure. And I think we are seeing a sort of general improvement in sentiment. We saw that little bit towards the end of last year and that’s carried through. I also think you have got a dynamic there where we have got a number of wins, not just Deutsche Telecom is one we have talked about publicly, but we have had a number of wins that are coming to fruition now in terms of rollout during the course of the year. And I think this is not a new dynamic, but I think you have seen a sort of perspective around rebalancing if you like of the market shares in Europe specifically where you have got very, very high market share of the Chinese vendors. And I think this is just a normal sort of market balance to that. So you have got a number I think of positive dynamics happening in Europe and we actually invested sort of in the downturn if you will over the last sort of 18 months in Europe as well.
And maybe just as a quick follow-up to that Gary, I mean given that they have underinvested for a number of years is this sort of the start of something where maybe this goes beyond ‘19 and can be a little bit more of a longer term driver or would this maybe a little bit more of a catch up spend if you were to kind of get them back to level?
Yes, I am sort of hesitant around sort of catch-up spend, but listen, I do think this is sustainable and it’s more than 2019 for sure. The plans that we are engaged with on a number of these carriers stretch way beyond that and I think that gives us lot of confidence in the sustainability of this. And I’d reiterate again it’s in addition to strength in North America, I think we feel very good about for the year and beyond and also of course Asia-Pacific, where India continues to be very strong augmented by Japan and some other geographies now. So I think we have a very diversified and broad-based demand.
Thank you.
Thanks John.
Your next question comes from the line of Rod Hall from Goldman Sachs. Go ahead please. Your line is open.
Thanks. This is Balaji on behalf of Rod. Maybe just on India if I could ask you to size that a little bit for us and then we saw that you made those two announcements with Bharti and Jio last week on 5G. Do you think those have the potential to continue driving growth in fiscal ‘19 or are those fiscal ‘20 opportunities? And then I have a quick follow-up after that.
Yes. I mean we have seen very strong growth in India in the last couple of years. We saw actually – we do see growth in India this year as well. Obviously, it will moderate the sort of rate of growth that we have seen and that’s to be expected as it gets bigger, but I think year-on-year in India to give you a perspective in Q1 we were up 20% year-on-year. So we are still seeing very healthy growth in India. I think the 5G rollout is in front of us. I think we will see some of that in ‘19 but that will stretch into ‘20 and beyond. So, we are seeing very solid dynamics in India and we have a very broad base of customers there as well including the Department of Defense.
Got it. And just quickly follow-up on gross margins, it did come down a little bit year-over-year despite 20% revenue growth, what are the puts and takes there maybe?
There are always a lot of variables in our gross margin, lots of things move in and out and it’s a little difficult to call the direction of margin from one quarter to the next. One thing I would say is that we have said and we reiterate that we believe we are a 42% to 43% gross margin company. This year as we are in the early deployment stage of a lot of wins, we have said that our strategy is to get market share that certainly proved out. We gained 3 points of market share last year, I think we will gain some share this year as well. But I would say this. We do think that gross margin is going to improve over time. I think directionally it will be up in 2020 as compared to 2019, that’s my feeling today. And the other thing I would reiterate is that we are targeting a 15% operating margin in fiscal 2020, although that will come mainly by the way of higher revenue growth and a very disciplined approach to OpEx management, not necessarily giving to a mid-40s gross margin range next year.
Okay. Thank you.
Your next question comes from the line of Tejas Venkatesh from UBS. Go ahead please, your line is open.
Thank you. I had two questions on topics that have come up before, one on sort of the timing of WaveLogic 5, when I look at the prior iterations WaveLogic AI and so forth, I think it’s taken you more than 1 year to get meaningful revenue, do you expect sort of a similar trajectory here or is there something different going on that will sort of compress the trial cycle so forth?
So WaveLogic 5 actually had a very substantial early ramp and continues to ramp, sorry, WaveLogic AI had a very aggressive ramp early on. If you remember we introduced that about 18 – almost 18 months ago, now. We expect the same aggressive ramp on WaveLogic 5. In fact if I look and I go back all the way to WaveLogic 1, the ramp on a per modem basis what we call them has been more aggressive, we think its successive generation and I expect that to continue with WaveLogic 5.
Thank you. And you sort of touched on the Tier 1 spending in North America being strong through the rest of this year, I was curious if you could sort of double click on that AT&T was particularly weak last year if you see them kind of back and what’s driving the growth?
I expect AT&T to be up year-on-year, I expect Verizon to be up year-on-year and of course I expect CenturyLink to be up year-on-year as well.
And as a very broad driver of those growths, with a number of them we have multiple different rollouts characterized as long haul core networks and specifically around sort of converge metro in all of these accounts.
Thank you.
Thank you.
Your next question comes from the line of Jim Suva from Citi. Go ahead please. Your line is open.
Hi, this is Josh Kehoe on for Jim. Thanks for taking my questions. What do you make of one of your competitor’s recent comments that the relationship with Verizon continues to expand, have you seen any impact to your business and position with Verizon there?
No, well, quick answer to that question is no. Verizon was up year-on-year. We expect in the quarter and we expect Verizon to be a good growth for us year-on-year and we are basically everybody knows the sort of structure of the relationship with Verizon across all of the various elements. So I can’t comment on competition, but Ciena is very confident in our relationship and the strength of our business in Verizon.
And you are right, 10% or greater customers, one was the webscale, was the other two your typical 10% customers?
That would be a reasonable guess, yes.
Thank you. Thanks.
Your next question comes from the line of Samik Chatterjee from JPMorgan. Go ahead please, your line is open.
Hi, good morning. Thanks for taking my question. Just wanted to start off with the dynamics on the packet networking side, it was strong outlook over the next 3-year time horizon for that, but we have seen growth coming towards the lower end of that. Can you just help me understand what’s kind of driving the confidence and some sort of stronger outlook for that as well as how should we think about timing in terms of an acceleration there?
Yes. So, I think the couple of comments about sort of where our packet businesses come from historically and then where we see the growth coming from may give you some insights into why we are bullish about it going forward. So, historically we have had strength in wireless back-haul and strength in business services. As we look forward particularly in the Amex and wireless backhaul, we see the fiber densification activities going on by the service providers, we see that becoming more and more of a Ethernet optimized with integrated optics, some sort of starting to play to our strength. So, we see substantial growth opportunities there. The same dynamic will play out I think in the MSO space in fiber deep, a little bit different instantiation of the technology, but essentially the same dynamic. So, both of those opportunities are still very much in front of us. We saw some growth this quarter sort of year-over-year and quarter-over-quarter, but when we look at the 3-year horizon and we are very confident about the dynamics that play into our strengths. The other one that is starting to show some positive momentum for us is the whole progression in the service provider infrastructure of TVM infrastructure moving into packet and a number of our service providers are engaged with our portfolio and particularly the PTS platform that we launched last year starting to show some revenue. So those three dynamics really give us the confidence about our future packet growth.
Got it. Can I just ask for a quick clarification on loop planet, we saw revenues kind of move to $15 million a quarter roughly from the $10 million, $11 million that you had, was all of that growth kind of organic or did you see any kind of contribution there from the acquisitions?
It was both. And that’s encompassed in our – I think our guidance for the year is about $50 million, 60 million, got obviously off to a good start for that out of the gates. Orders were strong as well and we see very positive pipeline and engagement around Blue Planet. So, the elements of that coming together both inorganic and organic where the integration is going extremely well, very encouraged by what we are seeing and I think would be on target for the year.
Thank you.
Your next question comes from the line of Meta Marshall from Morgan Stanley. Go ahead please. Your line is open.
Thanks. With such a kind of broad base of webscale customers at this point, are there any trends there as far as are they kind of focusing more on international build-out or subsea or kind of prep for 400-gig, just any patterns that might exist there? And then maybe particularly kind of with your 10% webscale customers is there any kind of digestion kind of period that may exist kind of into full year ‘19 that we should be aware of? Thanks.
Meta, I would say, as I sort of think about your question now, we are seeing a very broad based demand. Particularly to your point around international, we are seeing a lot of international expansion with the webscale and that obviously is very helpful to us and that we can bring a lot of value to them via the submarine elements that we have we got number one market share there. Also a lot of a countries that they want to go to, we have got a very strong footprint and good relationships, so whether they take the fiber directly or depending on the regulatory environment, they have to go with a carrier, that relationship continues to broaden out with all the of the – most of the major webscale players. So, we are seeing very broad set of applications for them. I would say, Scott on the 400-gig?
I think in general first of all they are ubiquitous, so they are not at all exactly the same, but the one thing that is in common with them is they all have tremendous bandwidth demand in growth and that instantiates itself in a couple of different applications basis. It’s in their campus, Flash [ph] Metro DCI, for some of them it’s in national core backbone networks. For many of them, it’s in submarine and for almost all of them now it’s as Gary pointed out them trying to put some more attention of focus internationally and in a lot of those cases, it’s through carrier. So in all those cases the bandwidth growth comes down to cost per bit, so whether it’s the state-of-the-shelf today being 400-gig and the state-of-the-shelf tomorrow being 800-gig, that’s what’s really driving the conversations.
And our business last year grew enormously with the web-scale players, and we’ve said before that we expect that growth to moderate a bit this year, but we still see growth in that business this year and it’s just not going to be at the rate that we grew last year.
Got it. Thanks, guys.
Thanks, Meta.
Your next question comes from the line of Jeff Kvaal with Nomura Instinet. Go ahead, please. Your line is open.
Yes. Thank you. Jim, I was hoping to start with a question on the gross margin line. It seems as though you have a number of tailwinds going your way, right, software in general seems to be on the right trajectory package you discussed earlier, and some of these deals from last year ought to be maturing. So, I guess, why wouldn’t we see a little bit more of that progress passed through to the gross margin over the course of this year and next?
Well, I did say that over time, we do expect our gross margins to head up, and we’ve said before and I firmly believe we’re going to get back to mid-40s gross margin, but we’ve also signaled that’s not going to happen this year, probably not next year, but we’re on a trajectory to get back to that point. Everything you said is true, Jeff. All of those things are good for us, but we’re still taking share, a lot of share, and we still have early stage deployment. So, we think it’s good for the long-term, taking share is good, and if we experience a little bit of margin difficulty this year, it will be good for you in the long-term, I can assure you of that.
Okay. And then perhaps Gary for you, there’s still a decent amount of consolidation, obviously, you’re doing it organically, but inorganic as well. What’s your sense of where things are in the industry? Do you think that there is more consolidation that is likely to happen, I mean, obviously you’ve talked about you’re doing it yourself organically, but on the inorganic side?
Listen, I wouldn’t rule that out. I mean, I think what you’ve seen is sort of a combination of consolidation, it’s taken a long time. It’s been particularly painful and you’ve also seen a number of a competitors frankly just atrophy, and I think you will continue to see that. I think if you look at the players that are taking market share and growing, it’s us, number 1, Huawei, number 2, and Nokia, number 3. I would expect that dynamic to continue and that’s kind of the structure of the industry and that’s one frankly, that is favorable to us given our ability to focus, our ability to achieve scale and a diversified and balanced business. So, I actually think if we think about the state of the industry compared to 5 years ago or 10 years ago, it is in a much, much better place, and that’s how we are able to put the financial performance that we’re doing. So, when Jim talks about taking share, we’re talking about doing that in a very disciplined way and a gross margin that’s between 42% to 43%. That’s best we can tell this year, I think that will improve next year as we get the combination of software and we also get to a point where some of these larger builds get a little more mature, but it’s clearly the right thing for us to do when we can grow at these kinds of percentage on the top-line and the return the kind of EPS growth we’re talking about and we’re taking market share, that says a lot around the strength of the business.
Thank you, both.
Thank you.
Your next question comes from the line of Tim Long with BMO Capital Markets. Go ahead, please. Your line is open.
Thank you. Yes, just first Jim maybe on the guidance, I just wanted to look into the full-year guide here with a really strong first half kind of implies flat or up a point or 2 in the second half. Could you talk a little bit about that? Is that just difficult compares, is there conservatism, is there something about the aging of the backlog? And then just the follow-up for Gary, particularly in North America in the markets where there are 5G, you’ve talked about what’s driving the service provider strength there. Do you think this is 5G related or do you think that is potentially another leg that could keep those markets moving to 5G a little bit more quickly strong for the next few years? Thank you.
Yes, thanks, Tim. We started the year by saying we are going to grow 6% to 8%, and then we guided pretty strongly for Q1, and now we’re saying that we’re going to be at the top end of our guidance range for the year. So, what I’d say is that all the signals that are coming out of us are positive for this year, and we’ve also always said quarter-over-quarter comparisons can be misleading as far as trends. I think if you look over the 6-month, 12-month period and look at the growth rate that we have enjoyed and we expect to enjoy, I don’t think you would be concerned about our growth rate. We feel really good about what we’re going to do this year and the coming years.
So, in terms of the North American what’s driving that growth, I think a couple of things, one, I think you saw a little bit of a quiet year last year, if that’s the right expression in terms of infrastructure spend overall, and, in fact, I think the market was probably flat to down expected to be slightly up, but with our share continuing to grow, it’s difficult to draw a bright line on what’s 5G and what’s the applications as they are building sort of more converged networks. But I would say right now it’s as much around just the dealing with the sheer bandwidth growth and trying to get fiber closer to the customer in its various forms. There’s network densification and the cable space, but fiber deep, it’s all of those kinds of dynamics and some of those resources are obviously going to be shared with 5G. Some of the carriers, it’s apparent in their architecture that they’re spending in a converged metro type application with 5G in mind and probably Verizon and AT&T and CenturyLink come to mind around that. But I do think as we start to get to the end of this year and beginning into ‘20 that you’ll see more specific 5G build-outs. My own view on this is this always takes longer than everybody, thanks, but I’m actually of the view that it’s a very positive set of dynamics in the service providers in North America for the next couple of years at least.
Okay, thank you.
Your next question comes from the line of Catharine Trebnick from Dougherty. Go ahead, please. Your line is open.
Thank you for taking the question. Gary, could you say that your pipeline for 5G is mostly Asia-Pac, followed by U.S. by then EMEA [ph]. Give us some color around where you’re really seeing the most demand for 5G? And then the follow-up question is you’ve done very well in Japan. Any particular application stronger in Japan 400G Subsea other than others that you’re seeing in that particular region for the strong growth? Thank you.
Catharine, let me answer the Japan one first and then back into the sort of 5G piece. I think we’re seeing a number of dynamics in Japan. We’ve been there for a very long time. We’ve invested in Japan and I think that’s beginning to bear substantial fruits to us. We’re a trusted – we’re a trusted partner there. I think you’re seeing on the broader industry structure stuff some concern around their indigenous vendors frankly, and the sustainability of them back to the sort of flight to quality and I think we’re benefiting from that. You’re also seeing across Japan a pretty substantial build over the next 18 months or so in terms of infrastructure. They are focused on 5G. They are also focused on things like the Olympics and that tends to be a catalyst for infrastructure build. So, you’ve got a combination of all of those elements, including some of the web-scale players in Japan as well and you saw our recent announcement there. So, I’m very bullish around what I see in Japan moving forward.
I think from a application space point of view, Catharine, we’ve been doing business Subsea wise and – that touches Japan for a while, that really hasn’t changed much, What has changed actually recently is the infrastructure build that Gary is talking about and it tends to be metro regional infrastructure very much triggered by I think two things, the general bandwidth demands that every one of us in the world sees, but also trying to build more resilient networks, and there’s a lot of emphasis on things like our resilient control plane in the agile networks that we’re building with some of those carriers there.
Yes, Catharine, in terms of the 5G question, it is a little difficult for us to sort of discern exactly the application for some of that because it gets converged into their overall network spend. But I would – I would sort of, if you were to push me on it, I’d say, Asia-Pacific first, North America, second, and then EMEA probably third.
Alright, thank you very much. Excellent quarter.
Thank you. Appreciate it.
Your next question comes from the line of Vijay Bhagavath from Deutsche Bank. Go ahead, please. Your line is open.
Yes, hey, good morning, Gary, Jim. Yes, my question is on the competition and your thoughts on the differentiation of Ciena as we head into the rest of the year and next year in particular in cloud optical, lot of competitive products coming out on the pluggable front, how would your Waveserver product continue to differentiate and compete? And then also in just Packet Optical, Metro Optical, once again many more competitive products coming up. So, just give us your idea of the competitive landscape and the differentiation? Thank you.
So, Vijay, I think it goes back to what we were talking about before and actually what we announced with WaveLogic 5, we do believe we will continue to lead in terms of Optical performance in the market with WaveLogic 5 in our 800-gig capability, performance translates into a bunch of different dimensions, it’s amount of capacity, component of fiber, it’s cost per bit, it’s reach performance et cetera, so, across many, many applications.
The other part of the WaveLogic 5, of course, was four more footprint power optimized applications with the Nano and that’s where we’ll see pluggables come into play. Pluggables as you know is not a new phenomena in the transport industry from a line side capability. We’ve dealt with them for generations. They have specific application, but they’ve never been, I’ll say the dominant deployment scenario. I think that will be true going forward as well. I think where they will play is going to be in the campus/metro DCI space and of course, with our WaveLogic 5 Nano, we will have an offer there in the 2020 timeframe. I think the other place where that same technology base will play whether it instantiates itself as a pluggable or integrated into a system, the answer will probably be both. But as Coherent pushes out into the access network, which is a totally new space for Coherent Optics as again bandwidth increases the fiber densification programs of the service providers start to take place, Coherent will make its way out there and it’s a new opportunity for all of us. I think what is different this time from previous generations of miniaturization are pluggables as it’s Coherent-based. And I think that brings a new set of challenges and opportunities on the technology side and I think what that will mean is the same players that may have led in pluggables in the past won’t necessarily be the same players that will lead going forward.
Okay, thank you.
Your next question comes from the line of Paul Silverstein from Cowen. Go ahead, please. Your line is open.
I appreciate you [indiscernible] appreciate that. Jim, can you comment on pricing. Has there been any change in the rate of price erosion over the last 90 days and your visibility going forward? And I trust it’s clear from your previous comments, but I’m going to ask anyway. With respect to operating leverage, how much historically, if you went back years ago, you and everybody else no one could get below 35% in terms of OpEx as a percentage of revenue. You’ve obviously proven the ability to do that quarter-after-quarter and to drive it lower, and that raises two thoughts. One, you’ve done it, so, I guess, it’s possibly get you more, on the other hand, you’re in unchartered territory, but the question being, how much more can you drive from here and how do you get there, if you could offer us any detail in terms of where that comes out of R&D, SG&A, et cetera? Thanks.
I’ll take the leverage question, Paul. We’re very confident in our ability to continue to drive OpEx down as a percent of revenue. We are growing more rapidly than just about anybody in this industry and that provides an opportunity for us to leverage our OpEx and increase the distribution of our R&D expense across a much higher revenue base. So, we are very confident about our ability to continue to drive operating leverage out of this business. And we say we’re going to get to 15% in 2020. And we’ve also said, we don’t think we’re going to be back at the mid-40s gross margin next year. So, that implies a degree of operating leverage that, that will show improvement. And on the pricing environment situation, really unchanged, I mean, yes, we’ve had some things happen. We’ve had consolidation. We’ve had discussion about the Chinese and whether they’re going to be able to play in some markets, but these pricing trends have not changed significantly over the long-term. You see different people come in and out as the price aggressors, but overall, it is a very competitive industry and you have to show good technology and you have to keep taking costs out of our products – out of your products and we have done that successfully over a long period of time.
And Paul just as it relates to the R&D part of the OpEx as Jim keeps reminding me, I’m one of the bigger consumers of it, so maybe make a comment here. I think the fact that we’ve been disciplined around staying focused on who we are is really, really important and that allows us to put a lot of wood behind the arrows that we are – that we have. We are not being outspent by anybody in the industry in the key areas and that’s witnessed by the fact that was – look at our WaveLogic 5 launch, the two parallel DSP modem investments going on. So, we’re pretty comfortable at the scale that we are. Scale is important, but at the scale we are that we have enough fuel to continue to lead on innovation.
Alright, appreciate it. Thanks guys.
Thank you, Paul.
And with that, I’d like to turn the call back over to Mr. Lampf for some concluding remarks.
Thank you, everyone. We appreciate your attention today. We’re looking forward to following up with everyone during the day today and seeing people at OFC today and tomorrow. Thanks again. Look forward to connecting with you.
This concludes today’s conference. You may now disconnect.