Casa Systems Inc (CASA) 2018 Q2 法說會逐字稿

Greetings, and welcome to Casa Systems Second Quarter 2018 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. I would like to turn the call over to your host, Lindsay Savarese. Please go ahead.

Thank you, operator, and good afternoon, everyone. Casa released results for the second quarter of 2018 ended June 30, 2018, this afternoon after the market closed. If you did not receive a copy of our earnings press release, you may obtain it from the Investor Relations section of our website at investors.casa-systems.com.

With me on today's call are Jerry Guo, Chief Executive Officer; and Shaun McCarthy, who will be taking over as Interim Chief Financial Officer. This call is being webcast and will be archived on the Investor Relations section of our website.

Before I turn the call over to Jerry, I'd like to note that today's discussion will contain forward-looking statements based on the business environment as we currently see it, and as such, does include certain risks and uncertainties. Please refer to our press release and our SEC filings for more information on the specific risk factors that could cause our actual results to differ materially from the projections described in today's discussion. Any forward-looking statements that we make on this call or in the earnings release are based upon information that we believe as of today, and we undertake no obligation to update these statements as a result of new information or future events.

In addition to U.S. GAAP reporting, we report certain financial measures that do not conform to generally accepted accounting principles. During the call, we may use non-GAAP measures if we believe it is useful to investors or we believe it will help investors better understand our performance or business trends. And with that, I'd like to turn the call over to Jerry.

Good afternoon, everyone, and thanks for joining us today. My prepared comments today will review 3 items. First, I will review our performance for the quarter, and some of the issues that caused the deceleration in our top line growth. Second, I will review our revised guidance for 2018, and the factors driving our reduced expectations; and third, I will review how we view the business and why we remain confident in the strategic direction of the company, as evidenced by the $75 million share buyback that we announced today, in conjunction with our earnings release.

Turning now to the specifics of the quarter. As we have discussed, our quarterly results tend to be very lumpy due to the size and nature of the projects we are involved in, particularly, for our largest customers. The second quarter typically is the most difficult to predict, and has historically been our slowest quarter. We believe that the same holds true for the industry in general. This year was no exception. Our revenue in Q2 was up 3% year-over-year to $69 million, but down 23%, as compared to the first quarter of 2018. Our adjusted EBITDA decreased 12.4% year-over-year to $19.8 million due to our continued investment in the business. However, our non-GAAP net income rose 15.6% to $22.2 million, or $0.24 per fully diluted share, driven by a tax benefit. Shaun will discuss both of these items in his prepared remarks.

Our second quarter results reflect the continued sales of cable network upgrades and capacity expansions across the globe to enable the rollout of gigabit services with DOCSIS 3.0 and 3.1. We achieved significant growth in software-based capacity expansion revenue. This revenue increased 214% over the second quarter of 2017 to $24.6 million.

During the quarter, we entered new geographies with new and existing customers. As part of our land-and-expand business model, we believe these deployments will lead to high-margin capacity expansions in the future.

The moderation in our top line growth during the second quarter was the result of timing for several projects that were already signed or related to new contracts. These are now being pushed out to later in the year.

Procurement cycles for large-scale service provider network transformations are generally undertaken as multiyear, multiphase projects. While we generally have visibility into the scope and sizing of the projects to be launched, it is difficult to forecast with a high degree of certainty the precise timing for spending and deployment of these projects. Customer concentration intensifies business lumpiness with spending pauses or resumes with multiple customers at once.

This obviously makes giving guidance quite difficult. In fact, in many instances, we do not typically receive a lot of lead time ahead of receiving a large order, and orders that we might expect to fall in any 1 period can slip into subsequent quarters.

As we look to the second half of the year, we are revising our guidance to reflect delays in the timing of large-scale customer network upgrades. We are seeing certain customers defer chassis based CCAP purchases as they finalize plans to implement Distributed Access Architecture or DAA. We believe that DAA represents our next growth inflection point in the cable space.

To add some color, since we began shipping our first product, our revenue trajectory has been characterized by high growth upgrade periods that are driven by the introduction of new technologies. These are followed by periods of more moderate growth or digestion, which have typically been characterized by capacity expansion, rather than widespread appliance purchases.

We believe we are currently in a digestion phase, but are also approaching a new technology inflection point marked by the shift to DAA and the move of certain core network functions to the outside plant closer to the end customer.

This shift is difficult. It represents a complex change in network architecture, and a redirection of network CapEx. As a result, our customers are understandably being more deliberate in finalizing their rollout plans. As based on trials of DAA equipment, our customers are also being more prudent about large-scale upgrades to their existing architectures, choosing to focus primarily on hotspots in their networks.

We believe that this will create a softening in our cable segment for the remainder of 2018. However, while they weigh the next generation architecture decisions, capacity demands will continue to place pressure on their networks. As a result, we may see a few large-scale capacity purchases closer to the end of the year.

Despite the recent moderation in our growth, we are confident that our cable business is healthy and it will continue to grow. There are 3 reasons for this. First, we believe that we are still in the early innings of DOCSIS 3.1 upgrades and will continue to see additional capacity purchases, including the swapping of smaller CCAP appliances for larger ones. Second, we believe that the move to distributed architectures, as well as virtualized services, will drive additional spend on software, CCAP appliances, capacity and the DAA nodes. By the way, DAA nodes represent an entirely new revenue stream for Casa. Finally, large-scale deployments of small cells for the 4G and the 5G wireless markets will place the cable operators in an ideal position to provide a backhaul, given their large footprints. We believe this dynamic will drive higher capacity utilization of our solutions.

Let me now turn to the wireless and fixed telco parts of our business and our outlook for the remainder of 2018. As you know, early in the year, we announced wins with the 4 large wireless operators. Initial orders for these wins, to date, exceed $20 million. We believe that we will see material revenue from these wins beginning in Q4 of this year. As a reminder, revenue recognition in our new wireless business will be based on customer acceptance and not the timing of shipments.

We are also beginning to see increased traction in the fixed telco market. As you may recall, in April, we introduced our virtual BNG router. Based on the positive feedback we are receiving from service providers on this product, we now anticipate that we will see initial revenue from this product in Q4 of this year.

To give you a sense for the progress we are making in these business areas with existing and new customers. We are currently engaged in 49 active trials with the 40 customers, including 22 in wireless, 7 in fixed telco and 20 in cable, for both our CCAP and Remote PHY products.

While we are disappointed with the top line results for the second quarter and our more conservative outlook for the remainder of 2018, we view this issue as one of timing. We are as enthusiastic as ever about the outlook for our business when measured over a multi-quarter and a multiyear period. We believe that the new products we have introduced in cable, wireless and fixed telco will significantly expand our total addressable market from $9 billion in 2018 to $20 billion in 2021. We believe that we will be effective in each of these markets because of our Axyom software platform. Axyom was designed to meet the needs of service providers, regardless of access technology as they transform their networks. Axyom is the product of our multiyear experience in developing virtualized and disaggregated solutions for all broadband providers, as they meet the needs of delivering increased bandwidth.

As network architectures across all access technologies converge, we believe that our innovations and insights gained over the past decade uniquely position us to continue taking share in the cable, wireless and the fixed telco markets.

To wrap up, we remain enthusiastic about the business. We are also confident in our ability to deliver strong results. As a result, we have chosen to initiate a $75 million share buyback, which we announced today.

Finally, I would like to update you on our CFO search. I want to thank Gary Hall for his service to the company. Casa is committed to hiring a top-notch CFO, with experience in running finances of a public company and interfacing with the investors in a collaborative fashion.

In the meantime, we are fortunate to have Shaun McCarthy, who has been our Vice President of Finance and Corporate Controller for the past 4 years, assumed the interim CFO role while we search for a permanent successor. Shaun has the support of the board and his experience and company knowledge will help ensure a seamless transition.

And with that, I would like to turn the call over to Shaun for a detailed review of our financial performance and our revised outlook for 2018.

Thank you, Jerry, and good afternoon, everyone. I will start by reviewing our second quarter financial results, and then provide an update on our full year 2018 outlook.

As Jerry mentioned, our second quarter financial results were negatively impacted by the delay in some of our customers deployments, which can vary from quarter-to-quarter as well as the timing of revenue recognition.

Total revenue for the second quarter of 2018 was $68.7 million, an increase of 3.1% from $66.6 million in the second quarter of 2017.

Total product revenue rose 5% year-over-year to $58.5 million for the second quarter of 2018.

Sales of our software-based capacity expansions increased 214% to $24.6 million for the second quarter of 2018, as our customers in North America, Europe and Latin America continue to provide additional bandwidth and services to their subscribers.

One highlight from the quarter was a large, strategic DOCSIS 3.1 upgrade win with an existing customer in Europe.

During the second quarter of 2018, we received additional orders for our wireless products, demonstrating that these continue to gain traction in the market. These orders will be recognized as revenue in future quarters, once the products are shipped, deployed and accepted by our customers.

As Jerry mentioned, to date, we have more than $20 million of orders in backlog from our wireless customers, and we expect to recognize material wireless revenue in the fourth quarter.

Our GAAP gross margin for the second quarter of 2018 rose to 71.9%, compared to 68.7% in the second quarter of 2017. The increase in gross margin was primarily due to a higher mix of software-based capacity expansions, partially offset by the deployment of certain hardware by a few customers to support DOCSIS 3.1. As a reminder, our gross margin fluctuates from quarter-to-quarter based on the mix of sales of our software-centric broadband products and software-enabled capacity expansions.

We expect our revenue mix will shift slightly more towards hardware in the second half of the year, as our wireless business begins its initial ramp.

To put a finer point on this, we expect these initial rollouts to be more focused on the deployment of small cell hardware ahead of 4G, 5G core software rollouts. As a result, we now expect our gross margins to be in the high 60s for the full year of 2018.

Turning to expenses. Total GAAP operating expenses in the second quarter of 2018 were $32.9 million, or 47.8% of revenue, compared to $26.9 million or 40.4% of revenue in the second quarter of 2017. The increase in total operating expenses was due to an increase in personnel and related costs to support the growth of our business, the development and sales of our new products, an increase in research and development spending to address our customers' rapid deployment timelines as well as transaction costs related to the follow-on offering.

Adjusted EBITDA for the second quarter of 2018 was $19.8 million, compared to $22.6 million in the second quarter of 2017, primarily due to the increase in operating expenses.

During the second quarter of 2018, we recorded a tax benefit of $10.2 million related to exercises and sales of equity awards by our employees, upon expiration of the IPO lockup and completion of the secondary offering.

We currently expect that our effective tax rate for the full year will be approximately 2%, but our effective rate may further benefit from the impact of additional equity award transactions in future quarters.

Non-GAAP net income for the second quarter of 2018 was $22.2 million, an increase of 15.6% over the second quarter of 2017, primarily driven by higher revenue and gross profit as well as the tax benefit I just mentioned, partially offset by the increase in operating expenses.

Non-GAAP diluted net income per share was $0.24 for the second quarter of 2018.

Free cash flow during the second quarter was $29.3 million. We ended the second quarter of 2018 in a net cash position with cash and cash equivalents of $343.9 million, and total debt of $296.5 million.

I would now like to turn to our guidance for the fiscal year 2018. As Jerry mentioned, we are seeing certain adjustments in our customers' deployment plans that have caused us to revise our guidance for the full year 2018. For the full year of 2018, we now expect total revenue to be between $330 million and $350 million, non-GAAP net income to be in the range of $76 million to $83 million, and non-GAAP diluted income per share to be in the range of $0.80 to $0.88. Stock-based compensation is expected to be approximately $10 million to $11 million for 2018. Average diluted shares outstanding for the full year are expected to be approximately 94 million to 95 million shares. Although the timing of deployments may vary from quarter-to-quarter, we believe we remain well positioned to grow our market share and deliver long-term growth.

I will now turn the call back to the operator to open the call for questions. Thank you.

(Operator Instructions) Our first question comes from the line of James Kisner with Loop Capital Markets.

Thanks for all the additional [BTO] and background on the cut in expectations. I just wanted to dig into it a little bit more. It sounds like it's primarily one customer that's driving this, this cut in expectations. This is obviously pretty big in magnitude. Do you have any insight as to what the delay is here? Is it inability to get labor or the final architecture being mulled over here? Are they just worried about the business disruption? Just any kind of additional insight there? I'm just kind of wondering, one of you large customers -- and you mentioned this -- is in the midst of divesting some assets and I'm wondering if that is having any impact on this quarter or the guidance for the year?

Sure. So our Q2 push-outs were really related to a few customers. The delay in DAA is really an industry-wide event that we are seeing and the DAA decisions that we had expected in late 2018 were concentrated amongst a few customers who are technology leaders in their respective markets. The deals that did push out were approximately $15 million. We do expect this revenue to be recognized over the third and fourth quarter of 2018, but to be clear, this will not be enough to offset the short-term softness that we expect to see in cable for the remainder of 2018, and that's really associated with the push out from delayed DAA decisions.

Okay. Just to clarify, also, just -- you said a couple of things about things that might happen or would happen or might happen in Q4. One thing you said was that you thought you might get some capacity issues in Q4. I -- to clarify it sounds like that's not in your guidance right now, and also -- I think you also said that you probably are going to some small cell revenue recognized in calendar Q4 2018. Is it all that $20 million or can you just give any idea of how much that might be? It sounds like maybe the margin -- it sounds like that is going to be lower, but talk about the margin in Q3. You gave us the margin for the year, but what are you anticipating in Q3 what's implied for that? Sorry for the barrage of questions, just -- you gave a lot of detail.

I would note that for the second half of the year, we are not forecasting our typical end-of-year orders that we generally see from customers related to year-end spend. We chose to be a little bit more conservative with our revisions to guidance, such that those are not in there, and those are things that we wouldn't have visibility to until later in the year.

Okay. What about on the (inaudible) sounds like you're not (inaudible) the capacity additions, but about small cells? I think you did say that you would have that in Q4, I mean is it all that $20 million, some of it? Any thoughts on what you're seeing from mobile small cell in Q4 that you mentioned in [breaking up]?

Yes, we continue to expect to have material wireless and small cell revenue in the fourth quarter of the year.

But we don't think we're going to be able to recognize all of it. The recognition of the revenue depends on the customer acceptance and other things, so we believe a portion of that will be recognized.

Okay, that helps. And just -- I'll pass here and give someone else an opportunity. It'd be easier to sort of follow-up on my other questions. I think you said that the gross margin would be in the high 60s for the year and that's partially because of that low margin small cell revenue, but I'm just wondering are you implying here that in Q3 that -- I know you don't guide for the gross margin, but it sounds like it's kind of going to be closer to perhaps low 70s, or what are you expecting for Q3, if you wouldn't mind sharing that?

We typically don't give guidance on a quarter-to-quarter basis with respect to margins.

Our next question comes from the line of Jason Ader with William Blair.

I'm just trying to understand the delay and -- is what you're saying that customers are evaluating these new architectures, the DAA architectures, and as they evaluate them, they just stop spending on CCAP? Can you elaborate on that? That's a little unclear.

We're not saying it's just one thing which caused the delay. There are multiple items, which are pushed out. That caused the top line to be less than what we expected. But on the other hand, when we look at the position we have in the marketplace, we did not lose market share. As a matter of fact, we gained new customers and new geographies. And as of Q1 2018, that's the latest data we have, according to S&P Global, our share of channel shipments increased to about 30%, so we actually gained. So we didn't lose market share and then -- thus in -- during a certain period of time when the spending was softer or pushed out, we end up with the results.

Okay. That wasn't what I was asking though. I wasn't asking about market share, I was asking about as -- so you said there were a few different things that caused the delays. So one of them it sounded like was customers looking at this DAA architecture and as they evaluate that, they just sort of put a freeze on a bunch of stuff, including CCAP. Is that, first of all, is that correct? And then if you can explain why they would put a freeze on CCAP, that would be helpful. And then what were the other reasons for the delays?

Well I wouldn't use the word freeze, and we do see that the spending is a little bit more conservative. They cannot freeze the spending because they are under bandwidth pressure so we continue to see spending. So from customer to customer, we see different strategies, but we do see certain softness in spending, and also we had a few projects that were pushed out, and those are -- those were projects and we -- actually some of them were close, as more for delivery, some of them were still in the process for closing.

Right. But what I'm trying to get a better handle on is, when you gave the guidance for the year at the end -- at the beginning of 2018, now we sit here in August and you just lowered by about $50 million for the year. You're going to have some significant wireless contribution, it sounds like in Q4. So the cable business is clearly the thing that surprised you most substantially here. What -- from your perspective, what really changed in the last whenever, few months? It's one thing to say that there were some delays and there was some softness, but what are those -- from your perspective what are the specific reasons that the cable market is weakening now for you?

Well over that, the last few weeks, it has become clear to us, we are witnessing a pattern shift in procurement in the cable market. While our customers -- with the timing for their large-scale rollout of the next network architecture, they are choosing to only procure capacity on a short-term basis, and they're not making those very long-term upgrades of the chassis-based products, in some cases.

That's the big thing that changed, or is it the DAA or is it both? The DAA or it's both?

[Both]. Well, we do DAA is delayed industry-wide in terms of large-scale deployment, and that -- and given that a lot of customers or operators are contemplating DAA, They are slowing down their spending in their current capacity expansion.

Why would they do that? Why would they slow down? On the current capacity if they're evaluating DAA?

Well they will spend what they need to satisfy the current customer demand, and while they make the long-term architecture decisions.

And the long-term architecture decisions you are confident that they are going to make in what time frame?

We believe a larger scale DAA deployment will begin in 2019.

First half, or do you have a sense of that yet?

We have seen evidence that certain deployments will start in the first half. But not everyone.

Let me just clarify before we go to the next question. We have seen periods of expansion and digestion in our business before. In fact, if you go back -- and we talked about this during the IPO, in fact if you go back, we see that in periods of technology upgrade there is a very significant growth in our business, and then there's periods of digestion, where our customers are buying increments of capacity. Now what Jerry has just described is that, in particular in this year, while we had expectations of moving much more quickly with DAA, we are now understanding that given the materiality of this decision, those decisions are getting pushed further back. We thought maybe some in Q4, but it's now likely looking like a 2019 event. As a result, given the significant shift in CapEx this entails, rather than making large-scale capacity decisions, and this mostly affects our appliance business, they're doing fillings of capacity. So if they were running their networks up to 65% to 70%, and then procuring additional capacity, we now see them running their networks at 80%, 85%, in some instances 90%, before they buy software-based capacity to put out fires. Now what this suggests to us, and this is the hardest thing to forecast because we always see a few surprises in the fourth quarter, is that capacity demand has not abated. And there is a likelihood -- and we can't assess a probability of that, but there is a likelihood that pent-up demand, if they continue to delay decisions on DAA, will lead to some large-scale purchases of capacity, so appliance based capacity, toward the back end of the year. And that's what we're grappling with in the revised forecast.

So what Shaun had outlined was a push out of revenue we expect to be recognized in the second quarter of approximately $15 million to around $20 million, that accounts for some of the $50 million, and it is our best estimate right now, that the remainder of that revised guidance is coming in this slower cadence of capacity purchases. That may shift in the fourth quarter, but from where we sit now, it's hard to forecast that.

Our next question comes from the line of Meta Marshall with Morgan Stanley.

I guess the main question is, I think, previously we had expected the DOCSIS 3.1 upgrade to gain some speed and then a lot of DAA decisions to be made with full-duplex when that was introduced. And so just trying to get a sense of, are you seeing that people are trying to make a fuller DAA decision with DOCSIS 3.1? Or is it that DOCSIS 3.1 is maybe further along than we thought it was? What's the perception?

So the DOCSIS 3.1 situation is quite different for different customers. In North America, we see more deployments, and we also see some deployments in advanced places in Europe and Asia, but we still see a lot of operators still yet to deploy DOCSIS 3.1. So it's quite different from place to place. So we see a lot of potentials, still, going forward in chassis-based 3.1 deployment. At the same time, we are seeing that there is a mix of strategies in deploying DAA. There are operators, which will start deploying, which may start deploying gen 1 node while others are looking at FDX deployment as the true volume deployment.

Got it. And then just a sense of, are you starting, I would expect that DAA would be kind of rolled out. They would trials of these and then do fuller stage deployments later. And so is it that you're expecting trials of these in early 2019 and then maybe decisions to be made in 2019? Just trying to get a sense of where the progress will be on DAA? Is it trials or is it full deployments in 2019?

We are doing multiple trials today, and we're going to continue to see more trials throughout the rest of the year. We cannot rule out production deployment towards late 2018, but we cannot forecast that accurately. But we believe with high confidence, that 2019 will see quite a bit of production deployment.

Got it. And then just last question for me. Did you see -- obviously you talked about the decisions being dampened by architecture decisions, but did you see any dampening of customer activity due to pending M&A amongst them?

We haven't seen that yet and, historically, M&A didn't impact us, and we haven't seen any of the M&A dampening the activities at this point.

(Operator Instructions) Our next question comes from the line of Simon Leopold with Raymond James.

Just a handful. Let me first get a housekeeping question out of the way if I might. If you could give us detail on 10% customer contributions, how many, how big in the quarter?

Sure. We had 2. One of them was the same as the quarter ago, that was Charter. And then the second one was a tier-1 European customer that chose to upgrade their networks to DOCSIS 3.1.

And combined, how big was the combination? You're looking?

48%.

48%. Great. And nobody else asked this so I'm going to have to ask it, but you didn't pre-announce, I'm just wondering if you could walk us through the decision process of what you knew, when you knew it, why you chose not to pre-announce this quarter, given how weak these results and outlook were?

No, we didn't -- we don't normally give quarterly guidance. We are still not giving quarterly guidance. Of course we want to be -- we are taking our communication with the Street very seriously, and so -- but and we expected better numbers at the beginning of the quarter, and some of the deals didn't materialize towards late Q2, and so we didn't know until fairly late.

Okay. And then during your prepared remarks, you talked about the wireless opportunity and indicated that you expect material contributions in the fourth quarter. I just want to make sure I understand your definition of material in that, I guess, traditionally we think of 10% of revenue as a threshold. I just want to, at least, clarify that much, if we can?

We have the same understanding in terms of quarterly revenue.

And then in terms of some of the trends you're observing in the industry, you talked about your virtual platform as being available and being involved in trials. Is there an aspect of this pause or slowing related to consideration of virtual platforms versus the traditional appliance platforms? Or is the delay really related to distributed access versus centralized or deployment in the head end? I'm just trying to -- I don't know if I'm putting too fine a point on it, but just trying to understand whether virtual plays into these delays or whether it's strictly the debates between how much would be distributed versus head end?

We -- just based on our understanding of the -- our customer needs and their preferences, we see actually interest in both, appliance-based CCAP core and the virtualized CCAP core. So there is not a single preference for that. And in terms of delays in rolling out these things in production, there are many factors, especially, this requires a big change in the outside plant, and it's much bigger a system-level job than upgrading a chassis in the hub.

Our next question from the line of Sarah Hindlian with Macquarie group.

When we last spoke, in I think it was reasonably early June, there was a fairly high degree of confidence expressed in the fiscal year outlook. And with the magnitude of the cut that you guys have just done on the fiscal year, and I certainly understand the details you've outlined with the on boarding of wireless, some revenues there in Q4, although most of the $20 million, given the timing of the acceptance and the push out of some larger deals, what I'm trying to really get at is, given the magnitude of the cut, do you feel that you've confidently de-risked the year? And do you even feel you have that visibility right now?

Sure. What we did as we set this guidance was looked at all of the opportunities that we were tracking. We did assess them from a probability perspective, and came up with numbers that we were -- we felt were very conservative. As I said before, they don't take into account any material amounts of what we would call a year-end spend that we would traditionally see. And then, I guess, as we look at the back half of this year and really out into the future, we have the highest confidence when we look out in the 1 to 2 year outlook period versus any specific quarter. We are very confident about our long-term prospects. We're very confident that the things we're seeing today are really just some delays in decisions, and some push outs, and some decisions by our customers to really kind of hold it all in for a little while until they can make these really big network decisions. And we do think that, that pressure that's building in the pipe, at some point, is going to release and they're going to release these decisions. And some of our larger customers will go out first and they'll make these decisions. And then what will happen is, the smaller scale customers will wait, they'll see what the larger customers were going to do, and then they're going to make their decisions and it'll kind of follow on from there. But for us, it is very difficult from quarter-to-quarter to look out 3 months and project. But on the whole, when we look out 1 or 2 years, we are very confident about where we're going to be and it's just very difficult from quarter-to-quarter.

Okay. I wanted to follow-up and thinking about -- I wanted to follow-up a little bit on the competitive landscape, and I understand customer spending has been soft and that's certainly been the case industry-wide, but it would be very helpful for you to put a fine point for us on whether or not you're seeing any pivot in the competitive landscape, a pickup from, in particular in the core from somebody like Cisco or anybody of that nature. It would be very helpful if you could elaborate on what you're seeing there?

While we -- based on what we have seen from a cable perspective, we actually gained geographies, gained new customers. So from a competitive point of view, we believe we are a net gainer for the first half of the year, and also that -- and when we look at the cable production is several categories, on the chassis-based I-CCAP side, we believe we are leading in terms of total density as well as the feature set and the flexibility of our software-centric approach, and when you go to DAA, we have a mature deployable product and, I think, the competition is actually going to be more focused on -- for duplex going forward. We believe we are in a very good position. And as to the core, we have 2 different cores. One is appliance-based CCAP core and we also have a virtualized CCAP core. Our virtualized CCAP core is a very feature complete CCAP core, which has our accumulated knowledge of the last dozen years. We believe we are in a very good position in all the product categories in the cable space.

And just one more out of me and then I'll cede the floor. I'm a little bit confused as to the gross margin guide down, because in your prepared comments, it seems as though you're certainly seeing more capacity expansion, but you also called out more hardware shipments as wireless starts to ramp. So can you help me quantify the magnitude of the guide down in gross margin in terms of what is coming from what please?

I'm not sure that I have that level of detail. However, I can give you a little bit of color on that. There's really 2 things. Sure, yes, we see a couple of things. Some of our customers will, from time to time, elect to purchase additional CCAP hardware at the same time as they are upgrading their networks to DOCSIS 3.1. It allows them, to some extent, to future-proof their networks. So we do sometimes see that where they'll wish to purchase additional hardware, which gives them even more capacity and then additional software enabled licenses as they switch over to DOCSIS 3.1. So we see that, number one. And then number two, when we look to our fourth quarter in particular with some of the new product shipments and the things that we have going on in that quarter, we do see margins come down a little bit in that quarter. Our prior guidance was, I believe, high 60s to low 70s, and our current guidance is high 60s. And really, I think, high 60s is where we are for the year and how we are thinking about it as we look out toward the future as well.

It also depends on how much of the new hardware we will ship during that quarter.

Our next question come from the line of Tim Savageaux with Northland.

A couple of questions. First, from a customer standpoint in the quarter. When it looks like you had one of your major European customers take a pause and another really ramp up, I wonder if that was consistent with your expectations, or that was a surprise in the quarter and in any way impacting results or outlook? And second question really speaks more to the competitive environment really on a go forward basis and to what extent you are seeing changes amongst the traditional group, the ARRISes and Ciscos, with their focus on the CCAP market and whether any new players coming to the market are changing that competitive dynamic, making it more challenging, whether it's Nokias or Harmonics or what have you, either on a virtualized or distributed access basis?

Well we cannot comment on a particular customer's purchases, and we -- as we mentioned earlier that, that delay -- or that the delay is related to multiple projects, not a single customer. So that's for the push out of certain revenue.

As to competitive landscape, we are very confident about our capability in executing on both the access side, the node side, and the full duplex side as well as our multiple core capabilities, including our virtual CCAP core as well as our appliance-based CCAP core. I don't want to make comments about our traditional competitors' capabilities in those spaces, but we believe that we are in a great position to gain market share.

If I may follow-up on that quickly, I mean, at least from a U.S. standpoint, it seems like increased market share would necessitate some penetration of the largest U.S. cable operator where you haven't been active historically. I wonder if you could discuss the dynamics around that, sort of in the context of both of these architectural changes, both DAA and virtualized, and also some of the change in competitive dynamics we were just discussing?

I know what are you referring to, and I don't think I can make a comment about the things, which is not public information. But we do believe that we have the opportunity to gain due to the changing architecture.

Ladies and gentlemen, this does conclude our question-and-answer session. And now I would like to return the call back over to Jerry Guo for closing remarks.

Well, thank you, and this concludes our Q&A, yes.

This does conclude today's teleconference. You may now disconnect your lines. Thank you for your participation.