Good day and thank you for standing by. Welcome to the Ciena Fiscal Q3 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Operator instructions. I would now like to hand the conference over to your speaker today, Gregg Lampf. Thank you. Please go ahead.

Thank you, Stephanie. Good morning. And welcome to Ciena's 2021 Fiscal Third Quarter Results Conference Call. On the call today is Gary Smith, President and CEO, and James Moylan, CFO. Scott McFeely, our Senior Vice President of Global Products and Services, is also with us for Q&A. In addition to this call 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. A commentary speaks to our Fiscal Third Quarter performance, our view on market dynamics, as well as the discussion of our outlook for the fourth quarter. Today's discussion includes certain adjusted or non-GAAP measures of Ciena's results of operations. A detailed reconciliation of these non-GAAP measures to our GAAP results is included in today's press release. Before turning the call over to Gary, I'll remind you that during this call, we'll be making certain forward-looking statements. Such statements, including our quarterly and annual financial guidance, discussion of market opportunities and strategy, and commentary about the impact of COVID-19 and supply constraints are based on current expectations, forecasts, and assumptions regarding the Company and its markets, which include risks and uncertainties that could cause actual results to differ materially from the statements discussed today. These statements should be viewed in the context of the risk factors detailed in our most recent 10-K filing and in our upcoming 10-Q filing, which is required to be filed with the SEC by September 9th. We expect to file by that time. Ciena assumes no obligation to update the information discussed in this conference call, whether as a result of new information, future events, or otherwise. As always, we'll allow for as much Q&A as possible today, but we ask that you limit yourselves to one question and one follow-up, please. This call is being recorded and will be available for replay on the investor's page of our website shortly. With that, I'll now turn the call over to Gary.

Thanks, Gregg, and good morning, everyone. The strong third-quarter performance we reported this morning reflects a combination of our increasingly differentiated position in the marketplace and a robust demand environment. We delivered $988 million in revenue and a particularly strong gross margin that drove a 19.1% adjusted operating margin and a $0.92 adjusted earnings per share. Overall, COVID-related challenges remain dynamic around the globe. But most of what we saw in the last several quarters is ameliorating. Importantly, the things we needed to happen in the market and for our business as we move through 2021 are materializing largely as predicted. Specifically, industry and economic conditions have improved noticeably. Service provider spend globally continues to improve, and our customers' network investments and operations are normalizing. We had a strong order flow in Q3, and that outpaced revenue again. This allows us to continue growing our backlog and positions us to deliver the stronger-than-typical uptick in our second-half performance that we expected. Secular demand is very strong, and we are taking full advantage of our leading position to address the opportunities that are driving network investment, including capacity adds to address bandwidth demand, a shift to the cloud with new architectures and network builds, intense focus on edge applications, and the need for network automation, as well as Huawei replacement opportunities. Within the strong demand environment, however, there remain global and industry-wide supply chain constraints. And as we have consistently demonstrated, we have best-in-class ability to manage through this challenge and to deliver outcomes for our customers better than anyone else in our industry. However, as we've said before, we are not immune, particularly if supply challenges persist. And as has been widely reported, conditions have somewhat deteriorated and are posing headwinds for Ciena, including difficulty to fully address demand. We have also seen some extensions of our lead times and some increased costs. As we sit here today, we believe these challenges will likely persist through at least the middle of calendar 2022. Moving to highlights from the quarter, our competitive position remains strong and we continue to take market share. Concerning innovation, we are investing across three key sectors: optical, where we are the world leader in Optical Systems and its associated technologies, and we continue to drive our leadership, innovation, and market share; routing and switching, where we are leveraging our optical expertise to offer a new architectural approach to disrupt the market with next-gen Metro and Edge use cases; and in software, where we are executing on and accelerating our automation strategy to digitize both service delivery and networking layers. In optical, we're the undisputed 800 Gig leader, having been in the market for 18 months. We have secured the vast majority of opportunities globally and are now approaching 20,000 modems shipped. In the quarter, we added 11 customers for WaveLogic 5 Extreme, including a major North American service provider and Windstream, bringing our total count to 106 customers. In addition, WaveLogic 5 Nano, our 400ZR product, is generally available and currently with several key customers as part of our certification and adoption process. We're also excited about the opportunity for next-generation Metro and Edge, where we expect to significantly expand our total addressable market from about $13 billion currently to roughly $22 billion over the next several years. New use cases and technology disruption have created an important insertion point within this space for our architectural approach. We have all of the critical elements required to win, including IP routing, switching, optics, automation software, and professional services. As many of you know, we've been laying the groundwork for expansion in this area for quite some time, including significant investment in both product development and our go-to-market resources. As you probably saw this morning, we announced an agreement with AT&T to acquire its Vyatta virtual routing and switching technology. Vyatta's technology and software engineering team will bring additional resources to our routing and switching R&D team to address the growing market opportunity that we see with Metro and Edge use cases. This includes continued development of our adaptive IP capabilities, and that in part increases our exposure to certain 5G use cases. We also look forward to extending our strategic relationship with AT&T by directly supporting this key piece of their network in that transformation journey. Overall, as customers seek out new architectural approaches and alternatives to the status quo, we've secured several significant architectural wins around the world for switching and routing. In fact, in Q3, we had 10 new wins for our routing and switching portfolio. Finally, our Blue Planet software business continues to enjoy strong momentum with our Adaptive Network Vision, which is well-aligned to network operators' automation priorities. With increasing customer engagements, we continue to win new significant deals resulting in quarterly revenue growth of 47% year-over-year in Q3. We expect to deliver a strong fiscal 2021 for Blue Planet, likely towards the high end of the $65 to $75 million annual revenue range we previously provided. Shifting to overall diversification in our business across customers and regions, we had three ten-percent customers in Q3, including two Tier 1 service providers and the web-scale customer. Highlighting our diversification, our top ten customers in the quarter included full web-scale companies, three North American service providers, one international service provider, one MSO, and a wholesale company. Non-telco revenue in the quarter was strong at 42%. Web-scale revenue specifically grew 24% sequentially in Q3 with direct DCI business contributing 25% of total Q3 revenue. Regionally, strength in IMEA continued driven by web-scale, growing more than 16% year-over-year. IMEA represents our fastest-growing region in the quarter, and in fact, year-to-date as well. In India, we continue to navigate through COVID challenges and make progress with revenue up 48% year-over-year, and 26% year-to-date. Importantly, we are seeing investment by key customers for network upgrades in India, as well as replacement of Huawei equipment. As I mentioned earlier, we are investing to capture ongoing secular demand for optical, routing and switching, and network automation solutions, and to considerably expand our addressable market over time as the shift to the cloud continues driving additional traffic growth and a greater need for network transformation. As a result, we are confident in our strong market position and in our ability to continue to outperform the industry. With that, I will turn over to Jim.

Thank you, Gary. Good morning, everyone. We generated strong Q3 revenue with $988 million. Adjusted gross margin in the quarter was once again very good at 48.5% reflecting a favorable customer and product mix, as well as a high concentration of capacity adds versus new builds. More specifically, we're not yet monetizing the new design wins to the extent we originally expected for this time frame. Overall, we've been very pleased with the gross margins we have produced this year. They reflect the benefits of our scale and vertical integration, as well as a lot of hard work in lowering unit costs of both our products and our services. Adjusted operating expense in the quarter was $290 million. Concerning profitability measures, we demonstrated extraordinary operating leverage in Q3, including an adjusted operating margin of 19.1%, adjusted net income of $145 million, and adjusted EPS of $0.92. In addition, in the quarter, cash from operations was $69 million, free cash flow was $54 million, and adjusted EBITDA was $214 million. We ended the quarter with approximately $1.5 billion in cash and investments. Also in Q3, we repurchased approximately 483,000 shares for $26.2 million. Turning now to guidance, as Gary stated, the demand environment is very strong. This was reflected not just in our Q3 revenue that was well above the high end of our guidance, but also in our strong order flow in Q3 and an increased backlog. At the same time, global supply chain conditions have deteriorated. And we've always said that we would not be immune if those challenges persist or especially if they worsen. Taking these factors into consideration, we expect to deliver revenue in a range of $1.00 billion to $1.04 billion in Q4. At the midpoint of this guidance range, our revenue growth from the first half to the second half of fiscal '21 would be approximately 26%. This will be a very strong second-half performance, in line with the stronger-than-typical second-half uptick that we forecast since the beginning of the year. Also, at the guide midpoint, we will deliver revenue growth for the year at just under 2% above the midpoint of our revenue guide. For adjusted gross margin in Q4, we expect a range of 45% to 47%. This reflects our expectations for more monetization of new wins, as well as some impact of supply chain constraints. Finally, in Q4, we expect adjusted operating expense to be in the range of $295 to $305 million, slightly higher than expected. Our order flow is well above our plan, as is our operating income, and this will result in higher variable compensation levels in Q4. As always, we expect to provide detail about the next fiscal year when we report our Q4 results in December. What I will say is that we are confident in a strong performance in fiscal year '22, even when factoring in supply constraints. As we have over a long period, we believe that we will outperform our competitors in both market share and financial results. Our technology leadership position, our expectations for a continued strong demand environment, and a very solid backlog going into next year will enable us to continue the momentum we have developed. Before we move to Q&A, I'm going to hand it back over to Gary for some closing remarks. Gary.

Thanks, Jim. I'd just like to give a brief update on a new CSR program recently underway with our partner, Digital Promise. With the return to school in many parts of the world, we're excited to launch the Ciena Solutions Challenge, which invites middle and high school students around the world to design solutions that can address sustainable development goals within their local communities. This program focused on computational thinking and digital skills is one of several programs within our digital inclusion commitment. To learn more about our programs like this and what Ciena is doing to help create a more sustainable and connected future, I'd encourage our shareholders and others interested to check our recently published sustainability report on our website. With that, Operator, we'll now turn questions over to these sell-side analysts. Thank you.

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

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

Thanks, Tal. From a vertical point of view, we're seeing solid demand across most verticals. It's a combination of a confluence of catch-up on capacity as operational caution over the last 12 months eases, and carriers are catching up on capacity. Also, modernization of networks and architectures, particularly around Metro Edge facilitating 5G and similar initiatives, are now moving forward and customers are investing and delivering operationally. Coupled with this, the increase in demand due to accelerated adoption of the cloud over the last 12 months is driving traffic. So you've got those three dynamics in play, and the overall application is to drive greater capacity to the Edge of the network for all of the cloud applications that are well understood.

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

If you define visibility as order backlog, which is a key part of that, I think the answer is absolutely yes. When we went into this year, there was a considerable amount of uncertainty. There was a great deal of caution from the carriers, both operationally and fiscally. I think we have seen that ameliorate as we thought it would. As Jim said, that's resulted in a pretty significant uptick in our second half, 26% growth at the midpoint of our guide here. I think that bodes well for 2022; we'll have a strong 2022. Obviously, it's a little early to talk about that and we'll talk about that next quarter. But I think we've got better visibility now than we had when we started the year, and the overall dynamics of demand are very positive going forward.

Thank you.

Your next question comes from the line of Simon Leopold with Raymond James.

Thanks for taking the question. I wanted to see if we could discuss a little bit about how you see your gross margin trending. I'm not asking specifically about the October quarter, but when you consider your order trends. I'm struggling with this: it sounds like you've been pushed out of this new footprint expansion, which should be dilutive to gross margin. But I also suspect you've got a good order book on the routing and switching segment, which I imagine is accretive to gross margin. Help us understand the puts and takes, please.

Sure. I'll take you back to pre-COVID days just to remind you of what we said. We believed that our run rate for gross margin was in the mid-40s, and that included a reasonable amount of new builds. We also said as we started COVID that for the next several quarters we would enjoy a higher-than-mid-40s gross margin because we would not have the level of new builds in our revenue stack. That's exactly how this has played out. We are experiencing a good level of capacity adds which are accretive. We've done pretty well on software and we're doing pretty well on routing and switching. So all of those things are impacting our gross margin as we have come through COVID. I would not say anything different about what I think our gross margin is going to be once we get to expected levels of new builds in our revenue stack, which we see in our order book and that will start to hit revenue as we move into next year. Now, we also have the supply chain which has impacted our fourth quarter. In fact, our fourth quarter guide, which is 45% to 47%, does have a fair amount of expected premium costs in getting material for hitting our revenue expectations. So that's what I'd say: we think 45% to 47% for Q4. As we enter next year, it depends upon how much of the new wins are in our revenue stack and what the costs of the supply chain generate, but that's the expectation as we sit here today. We've been pleased with our gross margin performance; we've taken costs out of both products and services, we have scale and vertical integration, and all of those things have helped this year.

Thanks for that, Jim. And just as a follow-up, I'd appreciate an update on the opportunities for Huawei swaps. I know you've counseled the investment community to be patient, but I want to reflect on what's different versus your prior earnings call. Have you seen some evidence? You did mention some India traction, but appreciate an update on that Huawei opportunity. Thank you.

I don't think anything fundamental has changed. We've seen this dynamic for a while and it is clearly a multi-year tailwind in infrastructure. These things take time; those decisions take time, and then to execute on them. Either traffic grows or carriers migrate traffic operationally—it's a big undertaking by the carriers, but it's underway. To your point about India, generally the two areas are Europe and India, with a few other countries in Asia. India in the last six months, I would say, has accelerated that move and they are actively replacing Huawei networks in India and we've certainly been the beneficiary. We have good order flow and good new wins in India, some of which are on the back of that. Obviously, it will take a little while to deploy over multiple years, but India acceleration and IMEA are on track.

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

Hi, guys. Thanks very much. I want to revisit the gross margin discussion. You printed significant upside relative to your guidance for two quarters in a row now, and I'm curious why we expected much more significant new-build activity across these two quarters and actually not seen that new-build activity as the quarter progressed. Why has that business shifted out so much?

As we come into any quarter, we have expectations of what our mix is going to be and things move around. I wouldn't read anything ominous into the fact that it's been a little slower to develop than we thought. COVID has had some effect. We have started to see in our order book the effect of some of these wins and we're definitely going to see those things come into our revenue next year. So I wouldn't read anything into it other than it's an ebb-and-flow in our business. The good news is we're doing well with our core customers and we've had a high preponderance of capacity adds.

Just to add: I think generally capacity adds and catch-up have been prioritized over new business rollouts. Those rollouts are absolutely going to happen; we've won a number of new deals in the last quarter indicating network modernization. But I think carriers have prioritized capacity a little bit more than we thought, and that has resulted in better margins for us in Q3.

Got it. Okay. And then I also wanted to ask about the Vyatta transaction. I believe that asset came over from Brocade some years ago and we haven't heard much about it at AT&T. Can you talk about why you're buying that asset and what it really gives you going forward? Thanks a lot.

Hi, George. Scott here. The Vyatta software has been used by AT&T to further their network transformation in a couple of different use cases around the Edge and virtualizing capabilities such as cell-site routers for 4G and 5G backhaul and enterprise business services for SMBs. Those use cases are very much in the sweet spot for what we're trying to accomplish in our next-generation Metro and Edge campaign. The assets we're picking up have a capability set to enhance our routing and switching portfolio as we address the increased market size of next-generation Metro and Edge. It deepens our relationship with an important customer, AT&T, and we pick up an engineering resource in a location where we had no presence before in the UK. Those are the three dimensions of value for us.

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

There is, but it's not material to our business. We'll reflect that in our 2022 plan when we get to that.

Thanks, George.

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

Hey guys, thanks for the question. Good morning. I wanted to start off with the revenue guide, and Jim maybe just ask you if you can estimate how much impact of that guide there was from supply constraints or if you can give us any color on how much of an impact on revenue the supply situation is in the guidance.

I'll start by saying we performed well in Q3. When you take everything into account, we're probably low tens of millions below what we could have done if not for the supply chain constraints.

And that's reflected in the guidance?

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

For the fiscal year, but also low tens in the fiscal Q4 guidance, is that the way we should think about it?

Yeah. I think you should.

Okay. And then the other thing I wanted to just check was the gross margin guidance. I know you kept the high end of the range unchanged and you dropped the bottom. I was curious what that corresponds to. Is 45% if expediting costs go up or continue to go up, and 47 assuming a hold where they are? Or can you give us some color around either end of that margin guidance—what it takes to get to 47 and what happens if you end up printing 45?

There's always variation in our gross margin because we start the quarter with an expectation of what's going to roll through and things change. I think the difference between 45% and 47% is mostly going to be mix. We've already set up our supply chain for the quarter, so I don't expect more costs out of buying parts. It's the mix that's going to drive the ends of the range.

Is it fair to say that mix will be driven by deployments—for example the big North American deployments in particular—what might change in the fourth quarter?

It could be the deployment of the new wins, but remember we have many different customers, products, a software mix—many things can impact our margin. Generally speaking, it's going to be the mix of all those things and 45% to 47% is where we think we'll come out.

Thanks, Rod.

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

Your next question comes from the line of Meta Marshall with Morgan Stanley. Hi team. This is Eric from Meta. Thanks for taking our question. Congrats on the quarter. Given some of the order flow you were seeing and presumably that being gated by supply chain converting into revenue, does that have any impact in smoothing some of the normal seasonality you would typically see into the first half? I understand it's early to comment on 2022, but if anything you can tell us there?

I would say it's too early to tell. We're just finishing this year. I do think the supply chain issue will likely continue into the first part of next year, and when we give FY '22 guidance we'll take that into account. We're well-placed and navigate through supply chain constraints better than others in the industry, but we're not immune. Our scale, vertical integration, and sophisticated supply chain enable us to mitigate many customer delivery issues, but challenges remain.

Got it. That's helpful. Thank you. And if I could squeeze one more in on hyperscale: as you're seeing strength there and it looks like EMEA continuing, is that continuation of scaling build-out that hyperscalers are doing in that region? You mentioned 400ZR products starting to test—could you update us on expectations for timing and share as 800 Gig starts to ramp even more?

I'll take the first part and then Scott can comment on 800 Gig adoption. Our engagement with the web-scale folks is multifaceted: connected datacenters, long-haul global networks, and submarine. We have intimate relationships across many applications. They're continuing to roll out traditional data centers and increase connectivity within datacenters both in North America and internationally. So we're seeing healthy demand dynamics across the board.

Just to add, another part of the relationship with web-scale customers is they do a lot of business in regions like EMEA through managed service providers, and our relationships with service providers benefit our engagements with web-scale customers. On the 800 Gig comment, our 800 Gig product is represented by WaveLogic 5 Extreme, which has been in the marketplace for almost a year-and-a-half. We're approaching 20,000 units shipped—well beyond trials and into mainstream deployment. The product you may have been referring to is WaveLogic 5 Nano, our 400ZR product, which recently went generally available and is going through trials now. That product is derivative of the same technology and is progressing through customer certifications.

Thank you very much.

Your next question comes from the line of Paul Silverstein with Cowen and Company.

Sorry, I had a mute issue. Relative to the lighter revenue guidance: first, are you seeing any demand weakness, or is that all assumption supply chain? Second, Jim, you've talked about restraining OpEx growth to low single-digits, which with decent revenue growth should result in strong operating leverage. But after OpEx declined for four straight quarters, you grew OpEx 15% year-over-year in Q3 and almost 8% in Q2. The guidance works out to over 6% in Q4. Has something changed in your OpEx growth plans or is this transitory? Finally, are you seeing any impacts relative to concerns about 400G or 400ZR in particular? Are you seeing any impact from market monitoring there?

On the revenue guide, I wouldn't describe it as light—a 26% uptick in the second half is pretty solid and is in the higher end of our original guide at the start of the year when we had very little visibility. The guide is largely driven by supply chain constraints. We could have had greater revenues in Q4, probably by low tens of millions, if not for the supply chain. We overachieved by more than that in Q3, so it's all about the supply chain. These challenges will likely continue into the first half of next year, but demand dynamics are incredibly strong.

On OpEx, we are committed to growing OpEx at a lower rate than revenue, and we've done that consistently over the past decade. The COVID years were a brief exception because revenue was affected and our plans for OpEx were to continue investing. Overall, we're right on plan. At the beginning of the year, we said we thought we'd average about $280 million a quarter. We were low in Q1 and planned to be a little higher for the last three quarters. We are a little higher this quarter. We are seeing some FX impacts from a weaker dollar, and for Q4, it's primarily that we're outperforming on orders and operating income, so incentive compensation will reflect that overperformance. We remain on plan with respect to our OpEx for this year.

On 400G/400ZR, the short answer is no—we're not seeing any negative impact on our business right now. The opportunity set remains as we expected. We see the total addressable market for coherent 400ZR approaching several hundred million per year as it matures; 2022 is the first year where you start to see meaningful revenue opportunities. WaveLogic 5 Nano recently went GA; we believe it is a best-performing pluggable in terms of optical performance and power, and we're excited about the opportunity. It represents upside for us because we don't largely participate in some of those applications today.

Thanks, Scott.

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

I'm Alex. Jim, just a quick one: you mentioned 24% quarter-to-quarter growth in web-scale revenue. Can you say what that was on a year-over-year basis? Second, on supply chain and mix—did supply chain impact capacity differently than new footprint builds? Is there any variance in how parts availability affected those segments?

On web-scale, if I recall correctly, direct DCI was about flat year-over-year as we closed out Q3—around 1% growth year-over-year—because COVID impacted the first part of the year. That explains the sequential strength.

As for supply chain, the well-known semiconductor challenges are multi-industry and don't have a concentrated impact; they are widespread across the portfolio. I wouldn't draw a conclusion that one part of the portfolio was more hit than another.

Follow-up: on Vyatta, you said it wasn't material revenue but you're bringing in assets and costs. I assume that's predominantly in the R&D line—is that accurate and what's the scale of the costs?

Not a material number. We'll address revenue, OpEx, and other details once we close and when we talk about next year.

To confirm, the costs are largely, if not almost entirely, in the R&D line.

Okay, great. Thank you very much.

Your next question is from Samik Chatterjee with J.P. Morgan.

Hi. Good morning and thanks. With the strong backlog and supply constraints, should we think of pent-up demand carrying into next year and potentially boosting revenue growth above historical levels? Investors often benchmark your long-term growth at 6% to 8%; how should we think about the degree to which the backlog and supply easing could lift growth?

Thanks, Samik. It's too early to talk about 2022—we haven't finished this year yet and we won't provide guidance now. We have strong secular demand, a lot of new business wins, and supply chain constraints to balance that. Also, COVID caused us to run with lower backlogs than normal, so we're replenishing backlog going into 2022. We expect decent market growth next year and we expect to outperform the market and continue to take share.

If I can follow up: you mentioned new award pushouts are ebb-and-flow. How is this different from last year during COVID, and what gives you visibility that it won't be a similar prolonged delay?

The new wins are showing up in our order book now, so it's a matter of time before they hit revenue. COVID drove customers to add capacity rather than new builds, which caused the dynamic we've seen, but the new business will show up in our revenue stack.

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

Good morning. I had a clarification if you have not already provided the breakdown of the three 10% customers—how much do those customers represent?

It's around 38%.

Correct—about 38%.

I want to follow up on the industry growth comment—do you still view the industry returning to low to mid-single-digit growth?

If you look at the last decade, growth has been in the mid-single digits and we've consistently outgrown the market. COVID was disruptive; I expect the industry to return to a more normalized mid-single-digit pace. Secular demand—5G, FTTP, IoT, cloud—remains strong globally. I expect the industry to normalize and we will likely continue to outgrow it.

Gary, on the Metro/Edge TAM expansion you mentioned: is that reflected in overall industry growth or does it elevate industry growth meaningfully because coherent optics gets pushed deeper into the network?

Good question. My earlier comment focused on Optical Systems. The Metro/Edge convergence is an expanding market for us, and some segments of that market may grow faster than the mid-single-digits. Core routing demand is different and, in some cases, declining; we're not targeting core routing. The convergence space is where we have unique assets and can disrupt incumbents over time, and that will provide us a better long-term growth opportunity.

Thanks, Gary.

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

Thank you. A couple of questions. First: what can you tell us about your inventory balances? Many networking companies expanded inventory or purchase commitments—what have you been able to do and what might you do in the future to improve visibility on your ability to meet demand?

Jeff, we are increasing commitments with our supply chain both in terms of volume and duration. That will impact inventory on the balance sheet. You'll see higher-than-normal inventory levels and lower turns for the foreseeable future.

Okay. Second, services had a strong quarter—can you deconstruct that a bit and let us know how much of it is ongoing versus one-time?

The services business breaks into three buckets: maintenance of existing installed base (steady and predictable); installation projects tied to new builds and will ebb and flow with projects; and professional services helping customers transform networks from legacy to next-gen. The latter is smaller today but growing and contributed to the strong services mix this quarter. We believe professional services around network transformation is an ongoing opportunity.

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

Good morning. Could you talk about the gross margin impact from supply chain headwinds in the October quarter—how much of an impact should we expect? And will supply chain headwinds continue to get worse into the first half of the next fiscal year?

We didn't have much supply chain impact in Q3; Q4 will impact us. For next year, we know the supply chain will continue in a constrained state, but it's too early to quantify how much it will affect gross margin.

Blue Planet growth has accelerated two quarters in a row—what drove that growth? Were there a couple of big projects ramping up, and how durable is the growth?

Full disclosure: Blue Planet is from a relatively small base, so percentages look large. We're seeing adoption by significant tier 1s for digitizing the service layer—replacing legacy back-office systems. This year we've seen a step-function of activity, with strong orders and revenue relative to plan. We expect to be towards the high end of the $65 to $75 million guide for the year and we've secured significant footprints that could result in multiyear rollouts for inventory management, service provisioning, and similar capabilities. It's encouraging and we'll discuss it further when we talk about 2022.

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

Two quick questions. Gary, can you double-click on the Metro/Edge TAM and how you plan to attack that additional TAM? Is the Vyatta asset part of it, or is it leveraging installed base? Also, can you touch on India given macro issues and also on subsea performance? Thank you.

Metro/Edge has been a multi-year journey for us. We've invested in packet assets, routing, switching, and software to build an architectural vision around Adaptive IP—a simpler, highly automated architecture. We're a challenger in the space, and we've been securing wins over the last 18 months. This is a two- to five-year expansion of our opportunity. We're challenging strong incumbents, but we have a differentiated value proposition with the assets we have. We're scaling investments in product, go-to-market, support, and engineering capabilities. The Vyatta acquisition adds specialist engineering talent to accelerate that effort.

On India and subsea: India has moved aggressively to exclude Huawei from builds and there are opportunities for us. We've taken advantage with several new wins. This year we expected India to show up more strongly in our revenue stack, and it has—India revenue is up nicely year-to-date, up 26% quarter-over-quarter. It's not yet 5% of revenue, but it's a growing and important market for us. On submarine, submarine revenue is up a lot this year—up 27% in the quarter though about flat year-to-date. We've done extremely well in submarine; it plays to our strengths since submarine requires long reach at high capacity and we are a leading supplier there. We expect to continue to win in submarine.

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

When we think about the supply chain issues, have you materially changed your pricing for things like expedited shipping? Have those fully folded into your gross margins or are they still being calibrated? Second, on bookings and orders, is there any concern about customers double ordering or ordering ahead knowing they have supply issues, or is that not a concern in your space?

Jim, on costs: we are certainly seeing the costs of procuring components and logistics have an impact on margin, and that's fully baked into our gross margin guidance for Q4.

On the second question: given the nature of our industry and the intimacy we have with customers on system purchases, double ordering is extremely unlikely. On the supply side, our supplier relationships are long-standing and intimate, which mitigates that risk.

Thank you so much.

Thanks, Jim.

Thanks to everyone for joining us today. We appreciate it. We are looking forward to catching up with folks afterwards today and over the next several days. Thanks and stay safe.

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