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Dear, ladies and gentlemen, welcome to the Conference Call of ADVA Optical Networking for the First Quarter 2021 IFRC Financial Results. This call is being recorded. [Operator Instructions] May I now hand over to Mr. Stephan Williams, ADVA Optical Networking, Director, Treasury and Investor Relations. Please go ahead, sir.
Thank you, and welcome to ADVA's Q1 2021 financial results conference call. In addition to this call and the press release, we have posted a presentation, which is available for download from our homepage adva.com on the conference call page in the financial results section of the About Us/Investors section.Before turning the call over to Brian, please be reminded that this presentation contains forward-looking statements with words such as believes, anticipates and expects to describe expected revenues and earnings, anticipated demand for networking solutions, internal estimates and liquidity. These factors are discussed in greater detail in the risk and opportunity report section of our annual report 2020. Please also be reminded that we provide consolidated pro forma financial results in this presentation solely as supplemental financial information to help the financial community make meaningful comparisons of our operating results from one financial period to another. This pro forma information is not prepared in accordance with IFRS and should not be considered a substitute for historical information presented in accordance with IFRS. Pro forma operating income or loss is calculated prior to noncash charges related to the stock compensation programs and amortization and impairment of goodwill and acquisition-related intangible assets. Nonrecurring expenses related to restructuring measures are not included. Unless stated otherwise, all numbers are presented in euro. We will target to limit this conference call to 60 minutes. As usual, Brian will start and provide a business update, then ULI walk us through our Q1 financials and outlook. And finally, we will have sufficient time for questions, which we'll be happy to answer.And with that, I'll turn the call over to Brian.
Thank you, Stephan. Let's move to Page #4, standard start. Q1 2021 highlights. Today, we report the best Q1 results in history of ADVA. We've never posted higher revenues in the first quarter of financial year, and we've never achieved higher profitability, generated more cash or recorded a better order intake. For more than 12 months, the COVID-19 pandemic has caused global turmoil. However, throughout this time, our customers have continued developing and expanding their high-performance digital infrastructures using our technology. This network infrastructure has ensured that large parts of the world's economy continue to function even under the most challenging conditions. Our quarterly revenues were up 8.9% year-over-year and reached $144.5 million. Pro forma operating income increased significantly to EUR 12.9 million, which represents 8.9% of revenues and is EUR 14.5 million higher than in Q1 2020. Furthermore, we had an excellent cash generation, which allowed us to reduce our net debt by EUR 57.1 million over the last 12 months. The pace of digitization in many countries has increased noticeably as a result of the pandemic. This has had a positive impact on our industry and created numerous new opportunities for us as a company. This positive demand development comes at a time where we see increasing returns on the business transformation that we started in 2019.On the following slides, I will recap the 3 pillars of our transformation and comment on Q1-specific highlights within these pillars.Page 5, accelerating traction in growth applications. Our investments in new technologies give us access to new markets in which we can operate in a highly differentiated and much profitable manner with growth rates above our corporate average. We will address new high-quality applications for communications service providers and internet content providers, and especially in Europe and the U.S., we will seek to take market share from Chinese suppliers. In the context of 5G and wholesale operators, we expect our business with communication service providers to grow. In Q1, we showed great strength in Europe and expect that we can gain further market share in this region. Furthermore, we are working diligently with our expanded partner base to help enterprises on their journey to become more digital. We are upscaling our own sales force and applications that drive growth. This is part of an overall strategy to open new markets outside of the traditional carrier market. More and more industries require secure network infrastructure, in the best case, a private network and seek a trusted partner for these solutions. In Q1, we had great traction with state and federal government projects in Europe and the U.S. In order to achieve these results, we are leveraging our innovation leadership in synchronization, security and network operating systems. The revenue contribution from customer segments outside the carrier space is expected to grow from currently around 30% to over 40% over the next 3 years.Page 6, expanding software and services. Software and services have always been an integrated part of our solutions portfolio. However, in the early years of our company, we had a little focus on breaking these areas out, licensing our management software or developing stand-alone software solutions. We evolved, by 2019, we were able to increase the share of software and services to 20% of our sales. In 2020, the contribution increased further to 23% and of our almost 1,000 engineers, about 60% now work in software development. In addition, we are leveraging new tools and products, such as our state-of-the art software licensing platform. Our Ensemble software solutions are getting stronger, and especially the newly launched network operating systems on Ensemble connector and Ensemble activator have high growth potential. Furthermore, and as I mentioned on the previous slide, our new partners for enterprise IT have started to build us a pipeline for software business. As important, we are also expanding our competencies in our service portfolio to bring new professional services offerings to the market. We are combining the use of highly skilled engineers, able to address differentiated services with AI and ML capabilities in order to upgrade and expand our customer services opportunity. Software and services have a high attachment rate with our existing customers and will continue to support our positive margin development. In Q1, software and services jumped to more than 26% of revenues. We plan to continue to grow this contribution to more than 30% over the next 3 years.Page 7, new revenue streams through verticalization. ADVA has always stood out for its open solutions that work well with technologies and solutions from other suppliers. We've also built an open ecosystem on the supply side so that we always have access to the best technologies from a wide range of best and great suppliers, which we then integrate and support within our system solutions. At the same time, it is important to maintain control over crucial parts of the value chain. This includes components and subsystems that either ensure additional differentiation on the product side and thus increase competitiveness or decisively improve the cost base of our own solutions. We have started numerous activities in the field of photonic integration. These include optical transmitter and receiver modules as well as highly integrated multiplexing solutions, which we successfully market. These pluggable modules are required in our own systems and provide added value for neighboring technology areas such as switching, routing and 5G RAN technology. With the activities in the field of photonic integration, we are sustainably improving our cost base and opening new markets. The revenue contribution from these modules is expected to grow to over 10% over the next 3 years and to 15% by 2025. This should be one of our strongest growth areas. Earlier in Q1, we had announced the expansion of our MicroMux family of pluggable multiplexers. The new nano version is now going into production. We expect nice revenue contributions from new OEM customers interested in the product over the coming 12 months.And to my last slide, Page 8, macro dynamics, opportunities and challenges. As stated in our previous earnings call, we experienced some nice tailwinds on the demand side. The pandemic accelerated digitization efforts in many regions and countries, while at the same time, we observed a trend around deglobalization. The realization that communications infrastructure is an invaluable asset for all economies and companies has also prompted a rethink in politics and business. Rather than just delivering cost-effective bandwidth, the focus is increasingly on security and creating a trusted network infrastructure. This change in perspective comes at a time when years of industry consolidation have reduced the number of credible players in our space, limiting the choice that operators have. For ADVA, this new dynamic creates additional opportunities. Our profile as a western network equipment supplier with a European American corporate culture, strong innovation and a solid business model is being perceived extremely positively. In a network operating environment that increasingly favors local value creation and secure technologies, we can open new doors and gain market share in Europe, the U.S.A. and other parts of the world. While the demand environment continues to be strong, we also have our challenges to conquer. Since the beginning of the COVID-19 crisis, production and supply chain complexity has increased substantially. Higher transport costs and bottlenecks in various components currently require a lot of flexibility and agility. More specifically, we see a number of shortages and longer lead times from the semiconductor component suppliers. We are working with our customers on extended forecasting so that we can secure the necessary quantities of the required components at an early stage. Nevertheless, the current boundary conditions will result in temporarily larger inventories and longer delivery times for select products in our portfolio. ADVA has already demonstrated the necessary flexibility and agility in the last 24 months to solve both trade war challenges and the pandemic, and we will continue to do so moving forward with component shortages. Much of the savings that we are realizing in travel and events are being reinvested into inventory accruals and freight costs. So a natural hedging is occurring.In summary, business is good, challenging and interesting. Order entry is very strong, and ULI will now walk us through the financials. Thank you very much.
Thank you, Brian, and welcome also from my side. Let's move to Slide 10, Q1 2021 key financials. Revenues in Q1 2021 reached EUR 144.5 million, up by 8.9% from EUR 132.7 million in Q1 2020. This is within our guidance range of between EUR 143 million and EUR 148 million. Pro forma gross profit was EUR 55.3 million, substantially up by 30.9% compared to Q1 2020. We made further progress with our business transformation strategy and were able to increase our software and service revenue share to 26.1%. Additionally, the network synchronization business continues to perform on a high level. And finally, the favorable customer mix contributed nicely to our margin. This quarter was also a record Q1 in terms of pro forma operating income. We achieved 8.9% of revenues, up from negative 1.3% in Q1 2020. This result was at the top end of our guidance range of 7% to 9% of revenues. In addition to the strong gross profit with substantial margin improvement is also due to lower operating expenses.Net income reached EUR 11.2 million, significantly up from a loss of EUR 7.2 million in the year ago quarter. Our Q1 net Q1 2021 net income exceeds 50% of the net income for the full year of 2020. Earnings per share increased from negative EUR 0.14 to EUR 0.22. Cash generation and deleveraging was once again outstanding, and we reduced net debt by 84.3% compared to Q1 2020. Excluding IFRS 16, this corresponds with a net cash position of EUR 16.4 million. I will discuss this later in more detail.Let's move to the next slide, please. IFRS versus U.S. GAAP comparison. For the purpose of transparency and due to the fact that most of our peers reported U.S. GAAP, we added this slide to provide our analysts and investors an enhanced comparison. As mentioned before, this presentation contains certain unaudited limited analysis, the U.S. GAAP numbers here has not been audited. So the main drivers for the differences between the 2 views, IFRS versus U.S. GAAP on the capitalization and amortization of R&D expenses under IFRS. If we calculate under U.S. GAAP, our gross margin would be approximately 6 to 7 percentage points higher on average. For Q1, the difference would have been 7.2 percentage points. GAAP gross margin would have been 45.5% compared to 38.3% under IFRS. Applying U.S. GAAP, on the other hand, increases our OpEx since we would not capitalize a portion of our R&D expense. The overall impact on pro forma operating income depends on the fluctuations in the timing of R&D capitalization and amortization and can vary from quarter-to-quarter with U.S. GAAP being higher in some and lower in other quarters.Next slide, please. Regional revenue development. EMEA revenues significantly increased by 47.4% year-over-year, now representing 66.6% of revenues. We had a very good quarter with private enterprise networks, in particular, state and federal government projects and also the carriers continued, to be strong. Americas are below expectations and decreased 33.9% year-over-year, noted presenting 25.4% of revenues. The U.S. dollar to euro exchange rate was EUR 1.21 versus one EUR 1.10 in the year ago quarter, which explains a part of the decrease. On top, we experienced some temporary softness with a few accounts due to more aggressive inventory management and the adoption of next-generation equipment. Since we saw a booking search in the past quarter that also continues in Q2, we expect Americas to return to growth soon. Still, with significantly grown EMEA revenues, we expect the revenue share for 2021 to be more weighted towards EMEA. Revenue in the Asia Pacific region was stable, and the region now represents 8% of our Q1 revenues.Moving to the next slide, cash flow and balance sheet. Q1 2021 was also a record quarter when it comes to cash generation. We achieved a free cash flow of EUR 15.1 million compared to negative EUR 6.2 million in Q1 2020. Our cash balance reached EUR 79 million and increased by around EUR 26 million year-over-year. This is the result of our outstanding Q1 profitability as well as lower capital expenditures. With a debt leverage ratio of 0.6x EBITDA and an equity ratio of 53.3%, we have a very solid capital structure and further solidified our investment-grade credit metrics. For the first time of the company's history, our Q1 ROCE is positive. It was 12.4%, even in the double digits. We are on the right path to exceed our capital costs for the full year and drive value creation.Let's go to my last and final slide, outlook. We had an excellent start to the new fiscal year. We achieved a record Q1 with revenues, margins and cash generation as was never experienced before in the first quarter of the fiscal year. Macroeconomic trends continue to be intact and provide us a firm tailwind. Focus on security aspects in the data transmission and concerns on the use of Chinese technologies are further success factors for our development, particularly in the EMEA region, but also others. Bookings are at an all-time high. Our business transformation strategy develops well and contributes nicely to our margins, allowing us to progress on our goal for exceeding 10% pro forma EBIT margin. Of course, there are still risks in the supply chain, as Brian mentioned earlier. Many industries -- the current bottlenecks in the semiconductor industry confronts all telecommunication equipment suppliers with challenges. Nevertheless, we already demonstrated our flexibility and agility during the pandemic, and we are working closely with all of our customers and suppliers to ensure product delivery. There could be revenue shifts during the year, but we do not expect any negative impact on our full year outlook. With this excellent Q1 in the bag and more visibility into Q2, we now believe that our pro forma operating income of 10% is achievable. For the full year 2021, we now expect revenues of between EUR 580 million and EUR 610 million and a pro forma EBIT margin of between 6% and 10%. We maintain the 6% at the lower end of the guidance range in case of any supply chain-related adverse business effects. With that, thank you, and I now hand over to the operator to open the Q&A session.
[Operator Instructions] We have our first question from Simon Scholes.
I have a couple of questions. Firstly, on the module business. I was wondering how far behind you see your competitors in developing comparable products. And on -- just on the outlook for Q2. I mean, you said in the release yesterday that Q2 has got off to a very good start. I mean, presumably, you haven't given guidance for Q2, although you did give guidance for Q1 because of the uncertainties about revenue shifts. I was just wondering if you could comment on that.
So I'll to the first one, the module business and how far behind. I'd say that, first of all, it's a very complex technology. The multiplexing pluggables, that's highly complex stuff. And the market is not that big that we have -- that we see any competitors at all right now. So that's going to be an interesting one to watch, but we'll be well ahead of anybody else because we're going to have a full family here over the next 12 months, from very low bit rates all the way up to high bit rates. And for every, let's say, node, when you look at 10 gig, 100 gig, 400 gig. So good, strong differentiation. And it's not a market that's $500 million in size, which is going to attract a lot of other players. The second area, though, there's already lots of competition for CFP 2 and CFP, 100 gig, 200 gig and ultimately, 400 gig. But what we see there is that we still can drive cost out through photonic integration, silicon photonics and some of the things that we are actually enabling and will be a part of that industry. And there'll be lots of competition, but it's still benefiting gross margins, still giving us opportunity to drive revenues to third-party players, specifically outside of the direct competitive environment. And therefore, it's not that easy to give you a very consolidated answer. That's the module business. So maybe ULI can answer the Q2 question.
Sure. So we walked away from the quarterly guidance last year because we believe that the quarterly guidance is -- the quarters do not reflect the nature of our business. So for us, it makes more sense to focus on mid- and long-term that we provided yearly guidance and also our midterm goals and targets. We provided a guidance for Q1 because we knew Q1 2021 will be extremely good and totally different than any other Q1 we have seen in the past. So we do not want to provide a particular guidance for Q2 due to a few reasons. So you heard earlier that we have record order entry levels. I mean, we have an order pipeline that is bigger than we've ever seen in the past. However, we have, on the other hand, as Brian explained and I tried to explain, we have the semiconductor crisis that may have an impact on quarterly revenues. So I mean, we could provide a guidance, but it would be such a huge window that it makes no sense, and this doesn't give you any additional information. So that's why we agreed that we would focus on the yearly guidance and not provide a quarterly guidance for Q2. However, you can expect with how the yearly guidance looks that, I guess, Q1 is a pretty good basis for Q2.
Our next question is from Alex Henderson.
First off, I was wondering, you said your orders was really strong. Could you translate that into a book-to-bill number? Was it -- are you running a book-to-bill as well? Any sense of quantification of how much that would be great.
We haven't got actually moved to book-to-bill ratios. But I guess our statements are in excess of one, and that was strong, and that's been for a while. So -- but we haven't gone to issuing that data. I think maybe ULI and I need to look at that going forward. Since we're not doing quarterly, maybe that's actually an addition that we should move to going forward. So -- and I promise to look at that, but -- strong. I mean it's good numbers.
Yes. The second question is related to the semiconductor side of it. What's the revenue hold back as a result of the study shortages in 1Q? And if so, can you quantify any dollar value or euro value around that?
So you're asking a very difficult question now because you -- the industry is evolving quickly, and there's lots of moving parts out there. There's even things like decommits out in the industry right now. So a lot of people are planning with stuff and all of a sudden, things are moving. Therefore, it's tough.I think of a rule of thumb would be something like -- we've been working with something like a EUR 10 million to EUR 20 million over the last quarters because the pandemic, I would say the silicon shortage is probably a EUR 20 million nut. That we have to deal with, handle overdrive since we have very good order backlog. Overdrive, let's say, shipping and dispatch to compensate for some of that stuff. But it's a big one. And I think most companies are facing that. Some are being more transparent than others on that one. But it is probably in excess of 10% of the number, and now, you've got to manage that. And again, there's a bunch of levers that we, as an organization, can pull to offset that, and we'll just see how successful we are and how bad the crisis gets. Some people are saying that it gets worse into Q2 and it stays all the way into next year. I can't imagine that because all the other crisis that we face don't seem to last that long from a supply chain perspective. But let's face it and work with it. I think as a very agile, very close to our suppliers, good relationships, working relationships, executive relationships, and I think that will help us during -- if it gets -- the crisis gets bad. So I can't give you too much more detail than that right now, and let's manage it and monitor it together.
So it sounds like something like a EUR 20 million kind of number, 10% kind of number. So if I were to look out into the second quarter, 2 aspects of this. One, is the impact larger in the second quarter? And second, have you already got in hand -- I know you haven't given guidance, but relative to your expectations for the quarter. Do you have in hand visibility to the components for the second quarter to get you to that? And the flip of that is, would that then limit any upside to that number assuming that you can't get any more than what's already baked in.
So lots of detailed questions there. Alex, and I'll try to do my best to answer them. My sense is that it's -- the crisis is getting a little bit more acute moving into Q2 than it was in Q1, but as has never had a higher backlog, giving us more levers than ever to drive and manage that. So I feel comfortable with Q2, but you've got this risk out there. The one thing that we can't judge is this decommit issue. Is it going to happen? People are -- other people saying, "Hey, I think decommitted products less and right and stuff." So I guess it's a really complicated one, but I would say ADVA's incredibly well positioned to handle it based on where we are at as a company. So there's that risk. We've had risk over the last year. We've always managed it over -- actually in the last 18 months, and we've managed it extremely well. And it's my plan as an organization to manage it extremely well. We're all over it, very close to it. So I guess I can't quantify like, oh, expect Q2 to be harder than Q1, no, that's not what we're saying at all. What we're saying is, we feel comfortable. We're reaffirming our annual guidance. We feel comfortable we're going to manage this somehow. But the risks are there, and therefore, we wanted to make sure that you guys, as an analyst community and our shareholders know that their risk there, but ADVA is prepared.
Perfect. So one last question, then I'll cede the floor.
You're breaking up, Alex, can you start from the beginning again?
Yes, let me try it better. Is that better?
Yes.
So one last question on the technology side. Ciena went out with [Audio Gap] going to launch soon. There's a lot of talk around open line systems, and there are a lot of people saying they're going to outsource components, chips to other people like Infinera's looking for partners on the XR. Can you talk about how the 400 gig ZR impact to -- open line systems is impacted and whether you would be a buyer of components from other players now that Cisco has acquired Acacia? And how are you thinking about that supply chain impact?
Well, first of all, we've always had -- since -- we've always had modules come into our business and take a part of the business. That was -- whether it was 10 gig, 100 gig, now at the 400-gig level. And yes, something's always different this time. It's all the same footprint, but that is not quite true. And we go into details at some other point, Alex, but we see this as just one part of the industry opportunity. We are the leader in open systems. We have the best platforms. We have business in all of our customer segments in this area. We look forward to it because we believe that we can actually take market share with our OLS capability end-to-end. Most companies are going to want one throat to choke, and yes, we will purchase 400-gig ZRs. We do not intend to make those because we see that as a mass market, and we will become a commodity, and therefore, that's not one of the areas that we intend to necessarily spend our time and energy on. There's a number of other things we're spending our time on. In other nodes and speeds and feeds and a different modulation formats, you're going to see a lot out of ADVA. But we see that as not an area that we need to spend time on. But we see ourselves going to 800 gig and 1.6 gig, et cetera, or terabits per wavelength. So we see a lot coming. We see ourselves benefiting from this transition. And I'd say we don't need to manufacture the products ourselves. That's different than Ciena's strategy and somewhat different than Infinera's strategy.
Our next question is from Michael Junghans.
I have a couple of them. First, on your order entry. You just made the clear remark that order entry has been very strong so far. Presumably fueled by the current security concerns around Chinese suppliers. Could you please elaborate which customer groups and which regions are now giving you these current tailwinds? And do you see any temporary demand headwinds which might somewhere pop up in the course of the year? Would be my first question.
ULI, you want to take this one?
Can -- I can. So interestingly, and I try to make it clear. To remind a part of the presentation, we had a very strong order entry from the North American region from the Americas. So also, of course, from EMEA, EMEA continues to be extremely strong. Americas, the order entry was more carrier based. In EMEA region, it's more -- a little bit more balanced, strong carrier, but also strong, strong enterprise business.
Okay. Understood. And then the second question is about your -- the lower end of the pro forma margin guidance. So could you elaborate on the short term risk, which would have to come through altogether so that you would end up on the lower bound -- on the lower end of your guidance here. So kind of what are the short-term risks that you see to the downside, which you would regard as the most likely that could occur as we progress towards the end of the year?
So let me...
You start, Brian, then I'll fill in.
Let me draw a picture and then you fill in the pieces out of here. So the picture would be, there's clearly problems in the supply chain. There's decommits, and there's massive increasing in prices in the industry out there on a global level, where you'll see this impacting many companies, regions and industries. In the case of that, we are only able to get out at 580 because we're having challenges actually being able to service our customers with their growth opportunities, point one. And point two is that we'd have to spend extra dollars to source products through brokers, limited competitive bidding environments, open auctions, et cetera, et cetera. So there's a scenario out there that this truly doesn't get under control and that we have a global issue. And we see it in some industries. In the car industries, we hear some issues surrounding that. But they went from starting slow to the vehicles booming and not having planned correctly and having all these challenges that actually shouldn't be hurting the communication space nearly as much. Now let's see what happens. But that's the environment, is that extra costs come at us from left and right, and we're not able to get out what we should be able to get out according to our order entry and our backlog.
Okay. Understood. And then regarding the metrics...
Sorry?
ULI?
And that's why we left -- what Brian just explained, we left the lower end of our guidance at the 6%. I guess, without a semiconductor crisis, we would have most likely increased the lower end of the guidance to up and maybe even the revenue guidance. But of course, we need to be -- we need to bake this risk into our guidance, and that's why we left the lower end of the profitability guidance where it was.
Yes. Understood. And about -- could you elaborate on the measures that you have taken to protect your gross margin, especially given the short-term risks that you see, especially on the supply side of things here on the sourcing side?
Well, I mentioned some of it is that, in this year, there's going to be longer pandemic challenges, and therefore, we are saving money in travel and events that we did plan originally. So there's some natural hedging. So that was my -- I think my last statement in my presentation, I did that on purpose, just to say that what have we taken into account? We had taken into account that we have extra costs that should -- will come our way, but that's hopefully been offset just with the savings that we have. Could they go beyond? Yes, it could go beyond, and we need to be prepared for that. What are the steps that we're taking? Clearly, we're trying to order and fill, let's say, the pipeline accordingly from a supply chain out in 6 to 12 months in advance. And in the past, it was more in the 2, 5 months area, sometimes -- often half a year in the future. So that could yield then some more risk as well in the -- ultimately, if we don't get it right from the product metrics. Now it's just certain silicon parts, and we have a lot of other comps, chassis and optical parts, et cetera, et cetera. So we have to manage it closely. You say, what are we doing it, we're managing it incredibly closely. It's an executive-driven program. We're very close to our suppliers. We're doing -- having all sorts of initiatives. We're ordering off under the future and managing that, and we're planning conservatively from an OpEx perspective. All of those flow into our managing of the crisis. If it's a small crisis and/or a large one, it's a similar strategy.
We have a next question by Tim Savageaux.
I want to follow-up on the order strength, especially your commentary around U.S. or North American carrier strength. And that's very much in line with what we've seen out on some of the big U.S. carriers in the last couple of days, including this morning, in terms of much stronger than seasonal kind of start to the year and increases in overall spending levels. Although, obviously, your revenues are still down pretty sharply in Q1.So -- and I think you made some comment about returning to growth, and I don't know the context in which you meant that. But you had been running kind of in the EUR 50 million, EUR 55 million a quarter range in the Americas previously until things dropped off a bit. Can I assume that that's probably where your orders were in Q1? And do you think you can get back to that level as we work throughout the year in calendar '21 in terms of America's revenue given that order strength?
From an order perspective, yes, we're quite strong. We're quite strong as a whole, and America was relatively the strongest. But like ULI already said, EMEA was also quite strong. So positives there. Yes, we believe that we'll return back into that same level at some point because we haven't lost any customers. We continue to win a deal here and a deal there. We don't see a massive shift, but we do believe that we should be back in that same range of business opportunity going forward. But work to do to get there, and hopefully, it goes fast, but let's continue plugging along. I guess my assessment is that the U.S. carriers, they take a lot more money in their hands to drive big programs, large infrastructure investment dollars to build-out, where the European carriers tend to steady -- as it goes. They don't have the same massive programs, and they spend similar year in, year out, good times, bad times and evolve, just almost like incremental spending versus program spending. And I just think it gets the ability for the U.S. carriers and service provider group to actually pull back for a period of time because they do have a lot of bandwidth available in their networks, planning for radical growth going into the future, essentially. And therefore, I think they can pull back for a period of time, and I think they did. And Tim, as you said, we saw that in some of our competitors' numbers as well. It seemed that the U.S. was weak from a number of players in this industry. And they all are along the same lines, I believe, is that it's going to return. Business who's going to be good. And in fact, U.S. is coming out of the pandemic, probably faster than other areas and regional areas. One, because just the willingness to get more aggressive early with pandemic going on; and two, because vaccinations, et cetera. So I feel that it is going to come back and steady as it goes. And then I just believe that we, company specific, have some really interesting products and have some opportunities to drive growth nicely if we're able to deliver on our innovation roadmaps as further upside. So I guess that's kind of the framework I'm looking at. Coming back to steady-state business, opportunity to win market share in some of these other interesting application spaces back to our business transformation and some of them outside of the telco space. So that's the way I'd assess it.
Great. And just to follow-up on that briefly. I mean, if you go back maybe to the beginning of the year, or I guess the Capital Markets Day was fairly recent, but still getting on a month ago. As you entered the quarter, would you say the -- to what degree were you surprised by either the magnitude of the continued strength in EMEA or the rebound in U.S. orders in terms of your initial expectations? I guess which one of those factors was more positive than you might have thought?
Exactly. One is we were well above what we planned. That's clear from our statements here. Two factors, I believe. One is we outperformed our plan. But the second factor on top of that, I do believe that there's some customers that are out now looking at saying, you know what, there is a semiconductor shortage out there, I'm ordering in advance. So we've looked at that data and information. We're still outperforming on our order entry plan. So all good. Giving us further stability is, if people are now placing advanced orders, giving us further stability out into the future. So all positive.
Our next question is by Paul de Froment.
Yes. I have 2 quick questions. The first one is regarding the synchronization business. Did you observe a specific shift in the order book in Q1? Or is it sales growth comparable for the other quarters? So that's my first question. And the other one is the same, but for the software in the Cloud Access Division, what is the feedback that -- I mean, the trend in the order increase in Q1?
I'll take this, ULI, maybe. I'd say steady as it goes. Nothing extraordinary. I think from a planned perspective maybe a little bit better than plan perspective, but we were conservative from think perspective. And then the software, I think there's lots of potential, and we are looking at some very interesting large opportunities, but really gets down. But you look at the bits and the bites, it's contributing, but it's not where it needs to be for us for the investment dollars and actually, the opportunity, the market size is quite large. So we continue to plot along. We're winning some deals here and there. We've got competitive bids out there for some quite large deals. But I would say it's steady as it goes for both of those areas in Q1.
We have no further questions at the moment. [Operator Instructions] We have a follow-up question from Michael Junghans.
I have 2 follow-up questions. The first is on your capitalization rate of development expense. So do you see good chances that this ratio will stay roughly unchanged throughout of the year? And if not, why would you make this assumption? And the last question is a housekeeping one. So currently, you came out at a tax rate of roughly 6% for Q1. So what would be a fair tax rate assumption for the full year?
I will take this, Brian. So capitalization, should stay the same. I guess, what's most important is that the level of capitalization and amortization should almost offset -- I guess, currently in our framework, we assume a slight negative impact, so we would amortize more throughout the year than we capitalized, but it's in EUR 1 million -- around EUR 1 million, probably. The second one is the tax rate. Yes, the tax rate is low and will remain low throughout the year, and this is due to the fact that we are finally able to make use of some of the NOLs we have in the SE since we generate much more profits in the SE. We can utilize that. So I would assume in your models for 2021, the tax rate that is just below 10% for the year.
And I just didn't get it acoustically. So about -- you said just below 10%, 1-0, you said?
Yes. 1-0.
Okay. And for the medium term, it would be a fair assumption to assume conversions back to like 20% from 2022 onwards?
Yes, 15% to 18%, maybe 20%.
There are no further questions, so I hand back to Brian Protiva.
I have two comments. One, I'd like to highlight that you guys -- I mean, our pro forma EBITs are rock-solid because we're actually from a -- and again, you look at that on our U.S. GAAP on what the pro forma EBIT was in Q4 and Q1, it's actually quite a bit higher than the IFRS results. And the reason is because we're actually -- like ULI just said, the whole R&D capitalization process is costing us EBIT. For many years it helped us, and everybody complained that it was helping us. Now it's hurting us. So I hope that we all complain the other way around now. So one comment. Two -- second comment that I don't think we maybe highlighted just enough for no questions is our cash generation was outstanding from an annual number, but also in Q1. I think that's fundamentally important to us. You'll see that as long as we can go get our numbers, you'll see us really focused on strong cash generation. And in general, thank you for the interest. Great questions, and we're available to follow-up. Go ADVA. Ciao.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.