Casa Systems, Inc.
Q2 2018 Earnings Call Transcript

Published: 15 Aug 2018

[Operator:]

Greetings, and welcome to the Casa Systems' Second Quarter 2018 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [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.

[Lindsay Savarese:]

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 close. 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 trend. And with that, I'd like to turn the call over to Jerry.

[Jerry Guo:]

Good afternoon, everyone and thanks for joining us today. My prepared comments today will review three 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 remained confident in the strategic direction of the company, as evidenced by $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 the gigabit services with DOCSIS 3.0 and DOCSIS 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-expand model, we believe these deployments will lead to high margin capacity expansions in the future. Some 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 undertaking as multi-year multi-phased 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 on and deployment of these projects. Customer concentration intensifies this lumpiness when 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 one period can slip into a 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 net 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 in currently in digestion phase, but are also approaching a new technology inflection point marked by the shift to DAA and to move certain core network functions to the outside plant closer to the end customers. 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. 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 their 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 health and it will continue to grow. There are three 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 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 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 the 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 four 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 B&G 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 new wireless, seven in fixed telco and 20 in table, for both our CCAP and Remote PHY products. While we're 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 the multi-year 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 multi-year experience in developing, virtualized and disaggregated solutions, for all broadband providers, as they meet the needs of delivering increased bandwidth. As network architectures across access technologies converge, we believe that our innovations and insights gained over the past decade, uniquely positioned 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 investors in the collaborative fashion. In the meantime, we are fortunate to have Shaun McCarthy, who has been our Vice President of Finance and the Corporate Controller for the past four years, assume the Interim CFO role while we search for our 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 detailed review of our financial performance and our revised outlook for 2018.

[Shaun McCarthy:]

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 continued 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 mix - 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 final 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 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 cost to support the growth of our business, the development and sales of our new products and increase in research and development spending to address our customers' rapid deployment timelines, as well as transaction cost 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 lock-up 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 of 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 would now turn the call back to the operator to open the call for questions. Thank you.

[Operator:]

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of James Kisner with Loop Capital Markets. Please proceed with your question.

[James Kisner:]

Thanks for the additional detail and background on the cut [ph]. I still want to dig into it little bit more. It sounds like it's primarily more customers that's driving these cuts. It's obviously pretty big in magnitude. Do you have any insight into what the delay is here? Is it inability to get labor or the final architecture being moved over here or just read about business disruptions, just any kind of initial idea and is this kind of one of your large customers in the midst of divesting some assets and wondering if that is having the impact on this quarter or the balance of for the year, thank you.

[Jerry Guo:]

Sure. So our Q2 pushouts were really related to a few customers. The delay in DAA is really an industry wide event that we're 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 be not 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 pushout from delayed DAA decision.

[James Kisner:]

Okay. And just to clarify also, just sort of couple of things about things that might happen or would happen or might happen in Q4. One thing you said was that you probably might get some capacity addition in Q4. I - to clarify something like that's not in your guidance right now. And also I mean you also said that, you probably were going to get some small solar recognized in calendar Q4, 2018. Is it all the $20 million or can you give us any idea that how much that might be? And it sounds like maybe the margin I assume that's going to be lower but talk about the margin in Q3, give us the margin for the year but just what do you anticipating in Q3 what's implied for that? Sorry for the barrage of question, just get a lot of detail. Thank you.

[Shaun McCarthy:]

I would note that for the second half of the year, we're 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.

[James Kisner:]

Okay. What about - it sounds good on the capacity additions, but what about small cells. I think you did say that you have that in Q4, and I mean is it all that $20 million some of it, any thoughts what you are assuming for mobile small cell Q4 that you mentioned you recognized.

[Shaun McCarthy:]

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

[Jerry Guo:]

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.

[James Kisner:]

Thank you, that helps. And just I'll pass it here and give someone else an opportunity. But just as sort of follow-up on my other questions, I think you said that the gross margin in the high-60s for the year and that's partially because of that low marketing 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 kind of to be closer to perhaps low-70s. What are you expecting for Q3 if you wouldn't mind sharing that?

[Shaun McCarthy:]

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

[James Kisner:]

All right. I'll pass it to someone else. Thank you.

[Shaun McCarthy:]

Sure.

[Operator:]

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

[Jason Ader:]

Yeah, thank you. I'm just trying to understand the delay. And is what's 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?

[Jerry Guo:]

We're not say it's just a one thing which caused a delay, there are multiple items which are pushed out that caused the topline to be less than what we expected. But on the other hand, when we look at the position we have in the marketplace we do not lose market share, as a fact - as a matter of fact, we gain 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 during a certain period of time when the spending was softer or pushed out, we went up with [ph] the results.

[Jason Ader:]

Okay. That wasn't what I was asking though. I wasn't asking about market share, I was asking about - 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?

[Jerry Guo:]

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 were projects and we actually - some of them were closed it's more for delivery, some of them we are still in the process of closing.

[Jason Ader:]

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

[Jerry Guo:]

Well, I know over 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 weigh the timing for their large scale rollout of the next network architecture, they are choosing to only procure capacity in a short-term basis. And they're not making very long-term upgrades of the chassis-based products in some cases.

[Jason Ader:]

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

[Jerry Guo:]

Both.

[Jason Ader:]

It's both. Okay.

[Jerry Guo:]

Well, we do see DAA 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.

[Jason Ader:]

Why would they do that? Why would they slowdown on the current capacity if they're evaluating DAA?

[Jerry Guo:]

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

[Jason Ader:]

And the long-term architecture decisions you are confident that they're going to make in what timeframe?

[Jerry Guo:]

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

[Jason Ader:]

First half or do you have a sense of that yet.

[Jerry Guo:]

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

[Jason Ader:]

Okay, I'll pass it to the next. Thank you.

[Lindsay Savarese:]

Hey guys, 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 even in period of technology upgrade, there is very significant growth in our business and there is periods of digestion, where our customers are buying incremental 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're 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 are doing fillings of capacity. So if they were running their networks up to a 65% or 70% and 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 suggest 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 the 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 towards the backend 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 expected 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 best estimate right now that the remainder of that revised guidance is coming is 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.

[Operator:]

Our next question comes from the line of Meta Marshall, with Morgan Stanley. Please proceed with your question.

[Meta Marshall:]

Great, thanks. 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?

[Jerry Guo:]

So that 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 are seeing that there is a mix of strategies in deploying DAA. There are operators which will start the deploying, which may start deploying GM 1 node [ph] and while others looking at FDX deployment as the true volume and deployment.

[Meta Marshall:]

Got it. And then I mean just a sense of are you starting - I would expect that DAA would be kind of rolled out, they would do trial cities and then do four stage deployment later, and so is that you're expecting kind of trial for 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 deployment in 2019?

[Jerry Guo:]

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

[Meta Marshall:]

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

[Jerry Guo:]

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

[Meta Marshall:]

Okay, thank you.

[Operator:]

[Operator Instructions] Our next question comes from the line of Simon Leopold with Raymond James. Please proceed with your question.

[Simon Leopold:]

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

[Shaun McCarthy:]

Sure, we had two. One of them was the same as a quarter ago that was Charter and then the second one was a tier 1 European customer that chose to upgrade their network to DOCSIS 3.1.

[Simon Leopold:]

And then combined, how big was the combination? Are your looking?

[Shaun McCarthy:]

48%.

[Simon Leopold:]

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

[Jerry Guo:]

Well. 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. But - and we expected the 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.

[Simon Leopold:]

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.

[Jerry Guo:]

We have the same understanding in terms of quarterly revenue.

[Simon Leopold:]

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-to-head. Thank you.

[Jerry Guo:]

We just based on our understanding of our customers' 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 like a preference for that. And in terms of delays in rolling out this thing in production, there are many factors. Especially this requires a big change in outside plant and it's much bigger system level job than upgrading a chassis in the hub.

[Simon Leopold:]

Thank you for taking my questions.

[Operator:]

Our next question comes from the line of Sarah Hindlian with Macquarie Group. Please proceed with your question.

[Sarah Hindlian:]

Okay. Thank you very much. When we last spoke in, I think it was reasonably early June, there was apparently high degree of confidence expressed in the fiscal year outlook. And with 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 onboarding of wireless, some revenues there in Q4, although less of a $20 million given the timing of 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?

[Shaun McCarthy:]

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 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 one year to two year outlook period versus any specific quarter. We're 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. We do think 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 will make these decisions. And then what will happen is, the smaller scale customers will wait to see what the larger customers were going to do and then they are going to make their decisions and it will kind of follow on from there. But for us, it is very difficult from quarter-to-quarter to look out three months and project. But on the whole when we look out one year or two years we're very confident about where we're going to be, and it's just very difficult from quarter-to-quarter.

[Sarah Hindlian:]

Okay. I wanted to follow up again get to that. I want 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 sign point for us on whether or not you are seeing any pivot in competitive landscape, a pick-up from - particular in the core from somebody like Cisco or anybody of that nature will be very helpful if you could kind of elaborate on what you're seeing there?

[Jerry Guo:]

While we - based on what we are seeing, from a cable perspective, we actually gained the geographies, gained new customers. So from a competitive point of view, we believe we are net gainer for the first half of the year and also when you look at the cable products in several categories, on the chassis-based 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 two different cores. One is appliance based CCAP core and we also have a virtualized CCAP core. Our virtualize CCAP core is a very feature complete CCAP core, which has our accumulated knowledge over the last dozen years. We believe we are in very good position, in that product categories in the cable space.

[Sarah Hindlian:]

Okay and just one more out of me then I'll cede the floor. I am 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 our 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?

[Shaun McCarthy:]

I am not sure that I have that level of detail. Hardware, I can give you a little bit of color on that. There's really two things…

[Sarah Hindlian:]

That would be helpful, thank you.

[Shaun McCarthy:]

Sure, yes. We see 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 sometime see that whether they 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 what where we are for the year and how we're thinking about it as we look out towards the future as well.

[Jerry Guo:]

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

[Sarah Hindlian:]

Okay, thank you.

[Operator:]

Our next question comes from the line of Tim Savageaux with Northland. Please proceed with your question.

[Tim Savageaux:]

Hi, couple of questions. First, from a customer standpoint in the quarter. I mean you looks like you have one of your major European customer 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 anyway 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're seeing changes amongst in the traditional group, the ARES' [ph] and CISCO with your focus on the CCAP market and where there any new players coming to the market or changing that competitive dynamic making it more challenging whether its Nokias or Harmonics or what have you either on a virtualized or distributed access basis? Thanks.

[Jerry Guo:]

Well, we cannot comment on a particular customers' purchases and we - as we mentioned earlier, 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 - I know we are very confident about our capability in executing on both the access side than node side and for 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 how much traditional competitive capabilities in those space is. But we believe that we're in a great position to gain market share.

[Tim Savageaux:]

If I may follow-up on that quickly, you 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 kind of discuss the dynamics around that sort of in the context to both of these architectural changes both DAA and virtualized and also some of the changing competitive dynamics we were just discussing.

[Jerry Guo:]

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

[Tim Savageaux:]

Okay, thank you.

[Jerry Guo:]

Sure.

[Operator:]

Ladies and gentlemen this does conclude our question and answer session. And now I'd like to turn the call back over to Jerry Guo, for closing remarks. [Ends abruptly]