Ciena Corp (CIEN) 2020 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Ciena Fiscal Q2 2020 Financial Results Conference Call.

(Operator Instructions) Please be advised that today's conference is being recorded.

(Operator Instructions)

I would now like to hand the conference over to Mr. Gregg Lampf, Vice President, Investor Relations.

Please go ahead.

Thank you, Sharon.

Good morning, and welcome to Ciena's 2020 fiscal second-quarter review.

We are conducting today's call from various remote locations.

With me virtually today is Gary Smith, President and CEO; and Jim Moylan, CFO.

Scott McFeely, our Senior Vice President of Global Products and Services, is also with us for the Q&A portion of today's call.

In addition to this call and the press release, we have posted to the Investors section of our website an accompanying investor presentation that reflects this discussion as well as certain highlighted items from the quarter.

Our comments today speak to our fiscal Q2 2020 performance, developments in our business and our view on current market dynamics, including with respect to COVID-19 as well as our outlook.

Today's discussion includes certain adjusted or non-GAAP measures of Ciena's results of operations.

A detailed reconciliation of these non-GAAP measures to our GAAP results is included in today's press release.

Before turning the call over to Gary, I'll remind you that during this call, we'll be making certain forward-looking statements.

Such statements, including our guidance and long-term financial targets, are based on current expectations, forecasts and assumptions regarding the company and its markets, which include risks and uncertainties that could cause actual results to differ materially from the statements discussed today.

These statements should be viewed in the context of the risk factors detailed in our most recent 10-Q filing as well as our upcoming 10-Q filing, which is required to be filed with the SEC by June 11, and we do expect to file by that date.

Ciena assumes no obligation to update the information discussed in this conference call, whether as a result of new information, future events or otherwise.

We will allow for as much Q&A as possible today, though we ask that you limit yourselves to 1 question and 1 follow-up.

With that, I'll turn the call over to Gary.

Thanks, Gregg, and good morning, everyone.

Amidst the uncertainty resulting from the COVID-19 pandemic, nearly every industry and company has been challenged in some way, and obviously, Ciena is no different.

However, our deliberate strategy over the last several years, centered around innovation, diversification and global scale, has yielded a resilient business, more capable of navigating challenging times.

And this served our business, operations and financial results well during the second quarter.

Throughout the pandemic, our focus has been on ensuring the safety of our people, our employees, customers and communities.

And it is because of the extraordinary Ciena team and our partners that we have continued to enable connectivity around the globe, and help customers advance their automation strategies to adapt to new reality.

Our significant investment and focus in 3 critical areas over the past couple of years have played a pivotal role in our ability to execute through this crisis.

Firstly, we completed a significant IT transformation, providing our increasingly distributed and flexible workforce with the collaboration tools to make for a seamless transition to remote working.

And as we talk to you today, more than 96% of our employees are, in fact, working from home.

Secondly, we established a truly agile services delivery model that has allowed us to continue providing customer support despite restrictions around the movement of people.

And thirdly, we operationalized a supply chain that is deeply rooted in an ecosystem of leading manufacturers that have strong business continuity planning and multiple manufacturing sites globally.

These have enabled security of supply across our business.

I am incredibly proud of our team and their collective efforts to continue serving each other and our customers through this time.

I'm also extremely proud of the volunteering and charitable actions of our global workforce to support their neighbors, communities and frontline workers.

Within our Ciena Cares program, we increased our corporate charitable match to 3x for employee's donations and volunteering.

Our employees have also been volunteering in important and heartwarming ways, including putting our engineering know-how to work to produce 3D printed face shields and components for health care workers.

I'd like to take this opportunity to express my gratitude for our employees, for their continued focus, strength and kindness.

As a result of all these efforts and continued execution of our strategy, we delivered outstanding financial performance in Q2.

Revenue in the quarter was strong at $894 million, and gross margin exceeded expectations at almost 47%.

We also delivered 18% adjusted operating margin in the quarter, with adjusted EPS of $0.76.

It was also a great quarter for cash generation, and orders in the quarter were strong.

It is the core attributes of our strategy, innovation, diversification and global scale, that have put us in a position of strength and that are helping drive this industry-leading financial performance by essentially enabling us to better support our customers.

Starting with innovation, we remain the leading enabler of connectivity.

And as we've learned through this global event, bandwidth is a critical resource, now more than ever.

Ciena was first to market with both 100 gig and 400 gig.

And now we are the world's first again with 800 gig.

In Q2, WaveLogic 5 Extreme became fully commercially available.

We've now shipped product to more than a dozen customers, and the technology's operational and proven in some of the world's leading Tier 1 service providers.

In fact, we've made public announcements with Internet2, Telia, Verizon, Comcast, Southern Cross and most recently, Deutsche Telekom.

Importantly, we are also on the leading edge of driving automation.

While not as an immediate of an opportunity, given the current focus on capacity needs, as network providers emerge from the crisis and begin to normalize, it is certain that network architectures will be more closely evaluated to adapt to new user behaviors.

And essentially, we believe that over the medium to longer term, the rise of remote everything will accelerate the drive towards cloud-based models and virtualization, which is the sweet spot for our Blue Planet software.

Moving to diversification, Q2 was a great example of how the diversification of our business serves to help mitigate the potential impacts and ebbs and flows that may result from unforeseen events and uncertainty.

As COVID-19 began to affect various geographies and customer segments in different ways and at different times, in Q2 our business benefited from our strong positions in both North America and EMEA as well as Tier 1 service providers, MSOs and webscale companies.

All performed extremely well in the quarter, given our deep relationships and ability to provide the solutions and support our customers need, even during these unique circumstances.

And in fact, nontelco revenue in Q2 comprised 42% of total revenue, with direct webscale business representing 24%.

I would also reiterate that the diversification in our supply chain served us well in Q2.

As expected, we experienced some disruptions from our suppliers, including component constraints, extended lead times and reduced or temporarily suspended operations.

However, given our sophisticated ecosystem designed to ensure continuity of supply, we navigated those challenges extremely well, and their impact was in line with our expectations.

I would emphasize that we are continuing to manage through these challenges very successfully.

And finally, on global scale, we continue to possess the largest focused optical R&D investment capacity in the industry.

And this gives us the ability to deliver leading innovation with the best time to market, this, coupled with the largest world-class specialized sales force that is intensely focused on delivering for customers and driving toward opportunities.

With the vast majority of our employees working remotely, both of these teams were able to successfully execute on our plans in the quarter, creating a flywheel for faster-than-market growth and continued financial leverage.

With respect to the broader market, obviously, the full impact of this pandemic on the global economy, in any particular industry or company is still largely unknown.

However, in our space, it is clear that the uncertainty is further accelerating the flight to quality in all of its dimensions.

Our customers, more than ever, are seeking trusted partners that have the financial sustainability and reliable supply chain in the near and long term to continue driving innovation and to deliver it to them on a global scale.

And importantly, they are leaning into those partners with whom they have long-standing and trusted relationships, and that are increasingly deeply integrated into their business.

As we said last quarter, we entered the COVID-19 pandemic better positioned than most to manage through the challenges, and that absolutely remains the case.

The challenges are largely related, at this stage, to the pandemic's adverse impact on the velocity of business in general.

And specifically, with many of our large and long-standing predominantly international customers, operating conditions have complicated and extended the time required to deploy and activate new equipment and services.

And as to be expected with some of our newer deals and customer wins, again, primarily in international markets, conditions have made it more challenging to ramp up and operationalize on original timelines.

It is simply taking longer than normal to execute with certain customers, though we anticipate that it will shorten over time as conditions continue to improve.

Notwithstanding these operational challenges, which we believe to be short-term orientated, the fundamental demand drivers of our business, including increased network traffic, demand for bandwidth, and the adoption of cloud architectures, remain very strong.

Against this backdrop, our innovation leadership and competitive advantages are frankly amplified.

Specifically, our resiliency and agility position us to support our customers through the current challenges and to accelerate their transformation journeys as we emerge from the COVID-19 pandemic.

Our deep relationships with a diverse set of network operators, geographies and applications, are testament to our status as the leading trusted adviser in the industry.

And our investment capacity and financial position will allow us to emerge even stronger than we were before.

Our competitors simply do not have the scale, focus or balance sheet to compete.

And we intend to use these advantages to continue differentiating ourselves and focusing on capturing further market share moving forward.

With those comments, I'll turn it over to Jim.

Jim?

Thanks, Gary.

Good morning, everyone.

Q2 was yet another strong quarter for Ciena.

As Gary mentioned, total Q2 revenue was $894 million, which reflects significant contributions from our North America and EMEA regions.

Adjusted gross margin was 47%.

This performance was the result of 2 factors: first, we are realizing benefits of our multiyear efforts to improve operating leverage through continued cost reductions, vertical integration and operating efficiencies.

This is resulting in an improvement, going forward, of approximately 100 basis points from our previous baseline gross margin range.

Therefore, we believe that our gross margin, when we return to a normalized environment, will be in the range of 43% to 45%, higher than the ranges that we've talked about before.

Second, the velocity challenges that Gary discussed, specifically related to ramping new business, are having a short-term positive effect on gross margin.

Because engaging with new customers and displacing incumbents is more difficult in these times, our gross margins are currently not being negatively impacted as much as they have been previously by the cost of early-in-life projects.

When we are able to reengage with these new customers and begin to displace incumbency again, we believe that we will go toward that 43% to 45% gross margin I spoke about earlier.

Adjusted operating expense in the quarter was $259 million.

As with many other companies, OpEx in the quarter was lower than expected, largely due to a significant reduction in travel expense.

With respect to profitability measures, in Q2, we delivered adjusted operating margin of 17.9%, adjusted net income of $117 million, and adjusted EPS of $0.76, significantly above our expectations, largely due to the higher gross margin.

In addition, in Q2, cash from operations was strong, at $91 million.

Adjusted EBITDA in the quarter was $183 million, and we generated free cash flow.

We ended the quarter with approximately $990 million in cash and investments.

As Gary mentioned, our balance sheet is yet another differentiator that speaks to our long-term strength and resiliency, particularly in the current environment.

This strong financial position enables us to continue to invest in innovation, to ensure a strong inventory position to serve customers and to support working capital needs.

In light of the uncertainty surrounding the COVID-19-related disruptions, we have temporarily suspended purchases of our common stock under our stock repurchase program.

Prior to this suspension, we repurchased approximately 600,000 shares for $24 million during the quarter.

That brought us to approximately $75 million of repurchases year-to-date.

Turning to guidance, as we look ahead in our business, there remain important and unanswered questions about the length and breadth of the COVID-19 pandemic, and specifically its resulting impact on both broader macroeconomic and industry-specific conditions.

For Ciena and for virtually all companies, this has obviously introduced a greater degree of uncertainty in the mid- to longer term than is typical.

As of today, however, we do anticipate that the challenges related to slower business velocity due to COVID-19 restrictions are likely to weigh somewhat on our second-half performance.

I would caution that it is difficult to discern which current dynamics in our business are directly related to COVID-19 and where, in some cases, like India, the pandemic may be exacerbating challenging business conditions that previously existed.

Demand for bandwidth is continuing to grow and competitive dynamics are playing in our favor.

However, COVID-19 is creating uncertainty.

With that context in mind, as always, we will give you our best forward-looking view based on the information available to us today.

To start, in Q3, we expect to deliver revenue in a range of $955 million to $985 million, gross margin in a range of 44% to 46%, and operating expense in a range of $265 million to $270 million.

As we exit the first half of the year, and despite the uncertainty around macroeconomic and sector-specific dynamics, we have sufficient visibility into the business to provide an update to the fiscal year '20 annual targets we provided last December.

Specifically, we now expect to generate annual revenue growth of 2% to 4% for the year.

Given that we believe the market, ex-China, will be roughly flat in 2020, due mainly to the effects of COVID-19, our 2020 growth rate would still represent continued share gains and faster-than-market growth.

In addition, we now expect to deliver adjusted gross margin in the 44% to 46% range for fiscal year '20.

This includes the 100basis- point improvement I mentioned earlier, resulting from supply chain improvements as well as the COVID-related dynamics we previously discussed.

We expect fiscal year operating expense to average $265 million to $270 million per quarter.

Based on these revised expectations, we are confident in our ability to achieve our profitability target this year.

In fact, we now expect to achieve approximately 16% adjusted operating margin in fiscal year 2020.

In closing, our business is performing very well, and we remain committed to and capable of serving our customers around the world during this time of crisis and beyond.

As the industry leader, Ciena believes that people all over the world, more than ever, need connectivity to do their jobs and to stay connected with family and friends.

Because we serve these needs, we believe that we will continue to deliver value to our customers and our shareholders over the long term.

Most importantly, I would also like to thank our employees for their continued commitment to Ciena as well as our customers and our investors for their confidence in our ability to perform.

Sharon, we will now take questions from the sell-side analysts.

Sharon, before we get started, I understand that there's been some difficulty with the webcast.

So I want to make sure the participant line is known to everyone in case that's easier for people.

The participant line is (844) 848-0674.

We apologize for the inconvenience.

Sharon, go ahead.

(Operator Instructions) Your first question comes from George Notter with Jefferies.

I guess I wanted to start by asking about the revenue guidance.

Jim, you mentioned 2% to 4%.

If I take the midpoint there, I take kind of the midpoint of your guide for July, it implies the October quarter is not going to be as strong as it is -- has been historically.

So it looks like we're pulling forward some revenue.

Can you just talk about the dynamic there on the October quarter?

And I guess I assume that some of this may be a byproduct of customers pulling forward build in response to the coronavirus related -- work-from-home related demand.

But can you just talk about the dynamic there?

Yes.

First of all, to the last point on pulling forward, we definitely saw some orders pull-forward, but our revenue in the quarter really didn't represent a lot of pull-forward, George.

It was a solid quarter.

We did see the effects that we expected to from the supply chain, but not a ton of pull-forward revenue in the quarter.

If you go back historically, Q3 and Q4, sometimes -- each of Q3 and Q4 sometimes have been our biggest revenue quarter.

So movements up and down between those quarters are not unexpected.

But I would say most importantly, we're in very extraordinary times.

And we have not been able to engage with customers, mainly international, that we had expected to be part of our second half revenue and that's the main reason for the fact that we've taken our revenue growth rate down a little bit.

It's just impossible to get to their offices.

Yes, you can engage with them telephonically.

But in order to win new business, you have to be eye-to-eye with people.

You have to sit across the table with them.

You have to work with them in an engineering sense.

And so that just hasn't happened as much as we would like it to, again, mostly internationally.

And so therefore, our revenue is going to be in that range.

Got it.

And then just to be clear, you guys had talked about a $30 million logistics-type issue that you're talking about here.

Is that exactly what you got then in the April quarter?

And then what does that number look like for July and October?

That's exactly what we got in Q2.

What will happen in those numbers is that maybe we'll catch up on some of the stuff that we missed in Q2, but additional challenges will arise.

So I'd say that for the year, the effect of the supply chain is -- it's in the tens of millions of dollars overall.

It will be -- but things will move in and out of the quarters as we go through this year.

Next question comes from Rod Hall with Goldman Sachs.

This is RK on behalf of Rod.

Could you give us an update on demand trends by geographic region, particularly on what geographies drove the guide down?

And I have a follow-up.

Yes.

Why don't I take that, [Rafi]?

Overall, the demand characteristics have been strong.

It's more an issue of sort of the velocity elements, particularly internationally.

I think we're able to navigate through a lot of the stuff in North America.

But we've seen weakness in India, as Jim said, particularly they've had a very extreme lockdown.

They were having some, I think, issues before then from a rollout point of view, but I think that's exacerbated it.

I'd also point to places like Japan where a lot of deployments have really slowed down.

So I think particularly, certain parts of Asia Pacific and certain parts of Europe, we're seeing this access to sites and the ability to travel across border has really been impactful.

And as Jim said, it's probably going to weigh down on the second half.

So that's what we're seeing from a geographic point of view.

I mean, obviously, not to be confused with sort of secular demand, I think they'd all like to deploy more bandwidth, and many of them are.

Most of them are running hotter on their networks because they can't get all the equipment in that they'd like and I'd characterize that as particularly within the international markets.

Your webscale revenue was very strong in the quarter.

Could you give us some more color there?

What products drove that strength?

And how sustainable do you think that is?

Scott, do you want to take that?

Yes, sure, Gary.

Webscale, from an application perspective, we deal with them on their campus metro DCI, on their core backbone networks and on their submarine networks.

It is largely in our optical portfolio.

And a good approximation for it is what you see in our Waveserver product, but it's not just the Waveserver product, we also deal with the non-photonic line systems as well, which would show up in our 6500 product number.

And the next question comes from Jeff Kvaal with Nomura.

I was hoping actually to dive into the webscale bit a little bit more, if possible.

It sounds as though, obviously, it was another strong quarter.

You had talked about rising visibility at webscale in prior quarters.

I'm wondering if you could help characterize where you are in webscale.

What has changed as the 600-gigabit products from rivals has ramped?

And how you are feeling about visibility at the moment?

Jeff, what about -- why don't I take that?

I think we're seeing pretty robust demand across most of the webscale players, as Scott said, in a lot of their different applications, be it submarine, be it connecting data centers.

We particularly saw strength in Europe amongst the content players.

We've got good visibility to them.

Obviously, we've got a very large market share in that space, but we think we'll absolutely maintain that market share this year, if not frankly increase it a little bit.

And obviously, we're engaging on 800 gig with them.

We've got deep relationships with them into their back office as well and on their supply chain.

So we've got all of the content players now as customers.

So it's a key segment, both directly and indirectly on our business as well.

And obviously, their business -- to the point I'd make around most of this, all the Tier 1 carriers are obviously in pretty good financial strength around the world, and particularly, obviously, the content players.

So they're looking to continue to deploy bandwidth to support the increase in demands that they're seeing.

I was just going to add, Jeff, that it's clear that world is going to be different going forward.

We're going to be virtualized everything, remote everything, cloud everything.

And that's good for our webscale customers' business model.

It's good for our service providers as well.

But in particular, the webscale businesses are those that are basically the cloud.

And so I think that's really good for us for the long term.

Okay.

Great.

That makes sense.

And let me clarify the deployment challenges that you may have or operationalizing challenges that you may have, are generally not in the webscale community, that's mostly in APAC or Tier 2 carriers.

Absolutely not in the webscale category.

It is international and, in particular, India and Asia-Pac.

Next question comes from Simon Leopold with Raymond James.

First of all, I wanted to ask if maybe you could dig a little bit deeper on the top customers.

It was certainly a good sign that you had just one 10% customer.

But if you could maybe help us understand a little bit of the nature of that customer's business.

Is it telco?

North American as usual?

Or has a webscale come in?

And also, in the past, you've talked about several customers close to 10% but not quite there.

Maybe if you could elaborate on how many are in sort of that high single-digit neighborhood?

And then I've got an easy follow-up.

Okay.

Simon, let me take that.

We have a number of customers in the sort of 7% to 9%.

I would say that generally, very strong in North America Tier 1 carriers, normal suspects.

I would also highlight a couple of other cable, MSO, particularly strong in the quarter and looks like being strong for the year, again, predominantly in North America.

And we had a couple of content players, as you can imagine, that were also -- given the fact we had 24% directly from webscale, we had 2 of them that were very close to 10% as well.

So a big cluster around that.

I mean this talks to the diversification of our customers.

But if you were to summarize it, Simon, you'd say North American Tier 1 carriers, including cable and then, obviously, the content players.

Great.

And then just a follow-up is just in terms of your supply chain risk, could you talk about the potential for -- if factories were to shut down in Mexico, what would that mean to your business?

This is a question I've gotten a lot.

It would be helpful to understand that exposure.

Scott, do you want to take that?

Yes, Simon, Scott here.

So first of all, I must say that we're dealing with Tier 1 contract manufacturers that take their business continuity extremely seriously.

We have 5 contract manufacturers around the world, 2 of them are in Mexico, a very resilient network.

And that we haven't lost a single day in a CM in Mexico or in Asia-Pac to anything related to COVID.

Having said that, we're actively working on pulling finished goods' inventory through the supply chain as fast as we can to mitigate any potential impact.

And where we have seen impact in some CMs around the world that aren't necessarily in Mexico, it tends to be closed for a very short period of time.

A -- cleaning if they had an incident of an individual employee, industrial cleaning and right back at the manufacturing site.

That hasn't been anything that impacted our CM specifically, but I have seen others in the industry, and that's sort of how it's played out.

Simon, just back to your first question.

The top customer was AT&T.

It will be -- that would be named in the Q. So just wanted to give you that information.

Next question comes from Paul Silverstein with Cowen.

Jim, Gary, can you all hear me?

You have an echo there, Paul.

Bad echo.

Yes.

That's not going to work, Paul.

Yes.

We may need to go to the next -- Paul, we'll try to get you back on.

Sorry about that.

The next question comes from Michael Genovese with MKM.

First of all, can you help -- I mean, you said orders were strong.

Is there any further quantification you can give of the orders in the quarter?

They were very, very strong, and our backlog grew pretty meaningfully during the quarter.

What I'd say, though, is that many of our customers took the opportunity to place their orders on us for the full year or for more than just the current quarter because we encouraged them to do so, so that we would have visibility to their needs and we could make sure that our supply chain was capable of delivering them.

It was a great quarter.

And we're -- one of the reasons why we have such strong visibility into Q3 is because of those orders.

But some of those were orders ahead of the normal schedule.

So needless to say book-to-bill was above 1, clearly?

Yes.

Absolutely.

We built backlog by quite a bit.

Right.

Okay, great.

So now given the timing questions that are impacting the 4Q outlook and then, I guess, there's probably uncertainty on how fiscal '21 begins because we just don't know yet, right, how COVID and all this is going to play out, but I guess my question, though, is as we think ahead, with the higher bandwidth demand and the positive competitive situation, particularly I think Huawei being weaker now, my question is, shouldn't we would, at the end of this, be at the higher end of 6% to 8%?

Am I getting ahead of myself here?

Do you not want to comment on that?

Or -- but I'm just thinking we should be at the higher end of 6% to 8% when we come out of this, and I'd love to get your view on that.

It's going to be very hard for us to make any comment beyond these 2 quarters, Mike, just because it's such an uncertain period.

I would say that the demand for bandwidth is going to continue to grow.

But my God, it's been growing at 30% annually for a long, long time.

And could it be higher than that?

Yes, it could.

But that's a pretty high growth rate.

So I guess the bottom line of all of this, despite the uncertainty over the next several quarters, we feel very, very good about our position in this business.

We're just not prepared to sort of comment on next year right now or our 3-year guide.

Next question comes from Paul Silverstein with Cowen.

Can you all hear me now?

Much better.

Thank you, Paul.

Yes.

Much better.

My apologies.

First question, with respect to the competitive landscape, Gary, I think I just heard you say that you're actually expecting to either maintain or increase share with webscale, an interesting statement because you've got Infinera coming in shortly at some point, it sounds like in the next 6 to 12 months with 800 gig or at least their latest coherent DSP.

I know there's been a lot of concern in the investment community about that.

You don't seem to be overly concerned, it's -- from your webscale comment, and I assume it's more than just webscale.

Let me ask you the question.

What are you seeing in the competitive landscape looking forward?

And I want to also ask you about Huawei.

We just had an optical company last week, along with a broadband access company that was very vocal, in saying Huawei is absolutely being cut back.

We saw some announcements in the wireless arena, same thing.

That obviously should be to your benefit, to the previous question.

But if you could address the competitive landscape in general, then I've got a follow-up.

So let me take it in the context, first of all, on the content player space, Paul.

Listen, we have very long-term relationships with them.

We're super integrated into all of their back offices.

We now have very large complex networks.

We partner with them.

It's multifaceted.

It's in submarine.

It's an international markets.

So we have very broad and deep relationships with them now, and we have a lot of co-development work that goes on with them in terms of our platforms.

Obviously, we were first with the 100, 400 with them and we're the first with 800, we think we've got a significant technology lead on 800 gig.

And the different variants that will be coming out with 800 gig as well, that could -- we will absolutely be the industry leader on it.

So we've got significant time-to-market advantage.

We've got broad and deep relationships that go back many years, and we've got #1 market share.

So we're not complacent about any of that, but I think we're in a very, very strong position.

As regards to Huawei, obviously, the geopolitical elements that are in play there have been in play for quite a while.

I would say 2 things.

One, yes, I think it's a very good long-term opportunity for Ciena, and we're incredibly well placed about that.

They've got such a large market share in telecom infrastructure generally and particularly in Europe.

I think really, irrespective of all those other concerns, it's just really a rebalancing that frankly, is long overdue.

Now I think that momentum is absolutely there, but I'd say 2 others sort of cautions to it: one, these are large strategic decisions; and number two, it's infrastructure after those decisions are made, it takes time to ramp up.

One example of that that I would give to you is Deutsche Telekom, which we won a couple of years ago.

And that's taken time to begin to ramp up.

So I think it is a very positive dynamic for us.

I'd just caution for folks around the amount of time that those kind of infrastructure wins take to ramp up.

And particularly, I think with COVID it's been challenging on the new business side to ramp up these new customers, which we've seen, and particularly internationally, and I think that's going to weigh on us for a little bit as well.

But it's absolutely a very positive dynamic for us in the medium to long term.

Well, this could lead into my follow-up, which is the site access that you all referenced.

And I just want to be sure, when you talk about site access having impacted demand as measured by revenue, or orders, is that purely in Europe?

Or was that also -- would that also apply to the weakness you saw in Japan?

Or are you seeing that globally?

To what extent is it just site access as opposed to demand weakness?

It's not really demand -- I don't think of it as demand weakness.

Two manifestations of it, Paul: one, is with existing large customers where sometimes we're not even installing it, it's the customer.

But it's the customer's ability to digest and to get that deployment out has been impacted.

It has slowed.

It is predominantly international.

We've seen some of it in North America, but not as much.

We've seen it in Europe.

And the biggest effect, I think of the all, is in Asia-Pacific, in India and Japan and some other geographies in Asia.

It's just been very challenging.

Really, it's not so much demand, it's more about digestion, Paul, and the ability to get that stuff out there.

Next question comes from Tal Liani with Bank of America.

I have a few questions on the business.

Converged Packet still underperforming.

Why?

And when are we going to see growth?

And then on 800 gig, is it targeted mostly to webscale, that's where you think the deployment is going to be?

Or are we going to see also telcos?

Scott, do you want to take that?

Yes.

Tal, it's Scott.

On the first one, you said Converged Packet.

I think you mean the Packet Networking private portfolio, and you certainly see, you would have been referring to the revenue number.

I would say that on the long-term targets, we still expect the Packet Networking business to grow faster than our aggregate growth rates.

And the actual order book for the first half of the year, year-on-year growth, gives us the confidence that that is the case.

So we still very much are comfortable with the sort of growth targets we have put out there on the Packet piece.

On the 800-gig question, I'll come back to just reminding folks that WaveLogic 5 Extreme is actually an optical engine that addresses multiple applications, in a sense sort of a doubling of the performance in an optical network from what you would have been able to get in the past.

And in that context, it is going to be applicable to all the segments that we serve.

The 800-gig application specifically is addressing where you have high cross sections of bandwidth in the fairly constrained reach environment, a few hundred kilometers type of environment.

That's -- those types of deployments are dominated by the webscale or the Data Center Interconnect, but not 100% exclusively.

I'd also mention, Scott, you might have mentioned this, but we had very, very strong orders in the Packet segment in Q2.

So that's another reason why we're...

Yes.

We were pretty strong in Q2 and strong year-over-year for the first half as well.

If I can sneak in one more question.

You spoke about difficulties in the operations in India.

Can you expand on this?

This is a virtual call, Tal, as you know, and we're not able to look at each other and point at each other as we do in person.

As you know, India was shut down.

I mean the whole country was shut down.

And basically, people could leave their homes once a week or something to go get food.

And so there was -- other than the normal sort of engagement with the customer in terms of telephone and e-mail and the occasional Zoom call, we were not able to engage with their engineering staff and continue their plans to build out their networks.

As we said, we don't think this is a demand issue.

We believe that our big customers in India -- in fact all of our customers, but particularly our big ones, GEO and Barkey, are still intent on building out the entire subcontinent with a network, and we're in a good position to continue to win a lot of that business.

They had sort of paused last year, you'll recall, those 2 customers, because they had spent a ton of money, and they were in the digestive phase already.

And I think the COVID-19 shutdown only exacerbated that situation.

We think it will continue.

We are reengaging with them.

We got some orders in the quarter that were a little bit earlier than we thought we might get, and we think it will come back, but it's going to be a little slow.

Next question comes from Jim Suva with Citigroup Investment.

On the international, specifically Asia-Pac and India challenges concerning coronavirus, am I correct at concluding that it isn't share loss at all, it's just the logistical challenges of not being able to meet and get the new design-ins?

And so when it comes back, it should come back quite strongly?

It sounds like nothing about share loss, like incumbency or being not closer to them, it's just everybody can't get into the selling process.

Is that correct?

Yes.

I would -- that's a fair characterization, Jim.

It is definitely not share loss.

In fact, we've got a number of wins on the new business side that we're -- we have challenges ramping up that we were expecting to ramp-up in Europe.

We've had a number of wins there, people like Telia, et cetera, that would have been challenging on the ramp-up.

So it's absolutely not market share.

And in fact, as we fast forward for the year, Jim talked about the overall market probably being flat because of COVID.

We're talking about growing there.

So therefore, we are going to take and continue to take market share.

So I don't think there's any question about that.

It's just the -- and it's kind of to be expected.

It's just the logistics of velocity of being able to get to sites, have access, fly across borders, all those are just slowing down, and that's sort of weighing on the second half.

But as Jim said, relative to other people, we actually have good visibility into those kinds of dynamics.

And who knows how long this will last in terms of the COVID piece play out?

But we think it's still -- will weigh on it.

But the overall sort of secular demand is extremely robust in pretty much all geographies.

Yes.

The other dimension, Jim, of this velocity theme is not only on the logistics side that Gary talked about, but where we are.

The new (inaudible) in an account where we may have won the logo and are trying to get through the certification process.

Well, that requires people getting in labs.

And when the world is sort of working from home, that slows things down.

So there's a sort of a new product introduction pace into our customers' domains that probably hinders us more where we're trying to grow market share, like in APJ, than where we have incumbency.

Then my follow-up is, does incumbency of Ciena having such a good first-mover's advantage in 100 gig and 400 gig, does that help out even more so with 800 gig, when you then layer on the coronavirus additional challenges?

Or is it similar to the other technological rollouts as far as the competitive landscape of opening up for RFPs for rolling out for 800 gig?

Jim, I would say is we have a very strong competitive advantage because we've got the largest market share, but really that's about relationships and trusted relationships that we have with most of the major Tier 1s around the world and all the content players, and we have that at scale.

And so not only do we have the best technology, but they've trusted us for a number of years, and they are very confident about our road map and the fact that we have the global scale to continue to innovate and support them.

So frankly, it's a situation where the strong get stronger, and we are the incumbent player in most of the major carriers around the world.

So whilst it's a challenge for us, as Scott said, in terms of getting new stuff out there like anybody else, we are much better positioned than any of the competition to be able to do that because of our incumbency and track record and deep integration into the back office of many of these carriers.

Yes.

The last point Gary made is an important one because we -- as you may have known, we've released the WaveLogic 5 technology on both our 6500 and our Waveserver platform.

And the fact that it's on those platforms that our existing customers know and love, just reduces the hill that they have to climb to integrate it into their operation, their back office, et cetera.

And as you know, there's -- those platforms are well distributed around the world.

Next question comes from John Marchetti with Stifel.

Gary, I'm curious if with some of the strength that you saw in the quarter with the webscale guys, particularly at 100 and 400 gig, if you think that pushes out, at all, the adoption of 800 by those customers.

Understanding they're seeing the same traffic growth demands, and in some cases even seeing that increase, but if they're sort of ordering what they need today and buying the 100 and 400 because that's what they already have qualified, do you think that this may be slows the -- at least the early stages, of adoption of 800 gig?

That's a good question, John.

I'll go then and Scott can probably provide more color to it.

But I don't think so.

And what we've seen to date with their reaction really to the COVID piece, they had pretty strong plans anyway for rollout this year on 100 and 400 gig anyway, particularly 400.

But we saw a -- they saw a step function in demand and reacted to it.

And obviously, right now, it's 400 gig.

But we are very encouraged by what we're seeing in terms of the engagement on 800 gig.

Scott, do you want to give a little more color on that?

Yes, I think I'd just reiterate that, Gary.

I mean we've shipped already to date and it hasn't been commercially available that -- for that long.

We're north of a dozen customers across multiple application sets.

Where it seems to have the most urgent and immediate demand is anybody that has significant bandwidth growth and has fiber constraints.

And that's where it proves out in whether they're going to run that in an 800-gig application or in some multiples of 100 gig.

That's where we're seeing the demand.

But it's across all the applications: submarine, terrestrial, metro and long-haul networks and in DCI networks.

So to be...

And then maybe just as a -- sorry, go ahead, Gary.

Yes.

We all -- what Scott said, we are talking about the content players.

Yes.

Yes.

And I think that's a good follow up.

I mean you talked about the expectations for sort of flat market growth.

Last quarter, we talked about 7% to 10% growth for this market.

Has that outlook changed for the year?

I'm assuming the more flattish outlook is more on the telco side.

I'm curious what your outlook is on the sort of the webscale side and if you've seen any change with all of this going on, really on the competitive front relative to ZR?

That's a very good question on market share growth.

I'll let Scott take the ZR piece, but I'll take the share piece.

We -- overall, for the optical space, excluding China, we think it's going to be pretty flat as an overall market.

Now within that, we think that GCN, I think the -- as you said, the expectation for the year was about 7% to 5% -- 7% to 10%, sorry.

I think the latest stuff that I saw from it is probably 5% to 10%.

We absolutely expect that space to grow within the overall context of the optical market.

So I do think you're going to see growth there.

And we are going to grow at least at that kind of rate, which is what's forecast in for our guidance for the year.

Scott, do you want to take the ZR piece?

Yes.

ZR, as you know, specifically, is an industry standard around interoperability that really targets an application space that's very short-reach transmission.

Let's call it 80 kilometers or less, single-span, with a very simple network in between it from a photonic perspective.

So that really talks to really campus or metro DCI.

And we've said, I think, consistently for the last little while that we expect, in the fullness of time, that market opportunity for that application set will be somewhere around the $500 million mark against the backdrop of the total optical market of -- depending on who you listen to, $13 billion or $14 billion.

What I do see -- so that hasn't changed our perspective of the overall market size opportunity, it hasn't changed.

What I do see is probably the timing of that moving a little bit to the right.

I think it's going to be a 2021 event, maybe a little bit later in 2021 than people even anticipate it.

We will have, as you know, we're going to have product off of our WaveLogic 5 nano development activity.

We'll have a product that addresses the ZR application space at the end of this calendar year.

Next question comes from Samik Chatterjee with JPMorgan.

I just wanted to start off by asking in terms of the North American telcos and your outlook there.

Multiple times on the call, you mentioned that the challenges are more kind of international here.

In the meantime, you've kind of seen large customers like Verizon kind of raise their CapEx even during the COVID, kind of, pandemic happening.

Is some of that dedicated to bandwidth expansion?

And what's your kind of now, current expectation for growth with the large North American telos?

If you can help us with that.

Yes...

Yes.

I would say that...

Go ahead, Gary.

Jim, do you want to go?

I'll be brief and then you can follow-up, Gary.

Generally speaking, we are the most incumbent in the North America.

And we have old and established relationships and very, very solid market share.

And yes, they will probably be spending more over the coming quarters.

Orders from them were particularly strong in the first half of this year.

And our expectation, frankly, is that for the North American telecoms, that they will be somewhat better than we expected for this full year.

The weakness, as we've said a couple of times, is on the international side.

Gary?

Yes.

I would just add that you've obviously got the normal suspects there, the large carriers.

But I would also emphasize, again, very strong performance on the cable side we expect for the year.

Obviously, we've had new wins at places like CenturyLink that we're ramping up, Charter, et cetera.

So we expect to have a very strong year in North America.

Okay.

And if I can just follow-up more in terms of OpEx, but in terms of OpEx planning.

Obviously, some of the change here in OpEx in the quarter was more temporary and travel-related.

But when you're kind of thinking about next year and kind of the -- all the different factors about increasing bandwidth needs and kind of market share gains, how are you thinking about OpEx, particularly going into next year?

Are you looking to kind of keep some structural reduction on your OpEx?

Or are you more looking to kind of increase headcount and kind of gear up for kind of higher demand?

That's -- rather than talk about next year in particular, I'll say this, Samik: it is our goal every year as we go into our planning process to reduce OpEx as a percent of revenue and, therefore, add to our profitability.

We've done it every year, frankly, for the last 10.

And I think we'll continue to do that going forward.

We're going to continue to invest, though.

And that's really critical for us to maintain our lead across the functions, whether that's R&D, or sales or the support functions.

So that's what I'd say.

Operator, we'll take one last question.

And just so everyone knows, we will try to get the transcript up on the website as soon as possible.

Again, we apologize for any of the problems on the webcast.

And we have a question from Meta Marshall with Morgan Stanley.

Great.

Just drilling down one last time on kind of 800 gig.

And just whether -- you've mentioned, clearly, most of the restrictions are international.

But are you seeing kind of labs to do the 800-gig testing by your customers, you know, still open and progressing?

Or were they kind of far enough through the testing process, that the trajectory of 800 gig doesn't change?

And then maybe just second question.

I know you mentioned the OpEx savings from travel.

But if you could just call out kind of what is a quarterly travel budget traditionally for you guys?

Meta, it's Scott.

I'll take the 800 gig one, and then I'll let Jim talk to the second piece on the travel.

On the 800 gig, we have engagements with customers across the globe that are at various stages of maturity on their optical technology.

Some have been testing this technology for quite some time.

Some of them, they're -- were bidding in new commercial RFPs and everything in between.

I'll say this, if I take a summary of it: our plans and forecast for 800 gig for the year haven't really changed from what they were 3 or 4 months ago.

And on the T&E, in a typical quarter, our T&E -- our OpEx T&E is $10 million to $12 million, and we're running at less than half that now.

Again, thank you, everyone, for joining.

We apologize we couldn't get to everybody's questions.

We look forward to catching up with everyone over the next -- following couple of days.

Thanks for joining.

Thanks for the interest.

Stay well.

And this concludes today's conference call.

You may now disconnect.