Ruben Roy: I appreciate the detail both of you. And for a quick follow-up, I think Samik asked about the pluggables earlier. And I was just wondering again, you know as you get closer to cloud customers, are they starting to ask you about you know optics inside of datacenter, I’m asking that you know at the European Optical Conference, there was a lot of discussion around coherent light, and just wondering you know kind of how you’re thinking about potential opportunities inside as you go forward.
James Moylan: No, I think as we’ve — as we’ve sort of talked, we were very bullish around the opportunity to intercept. As you think about what’s going on in the datacenter, particularly with AI and the rest of it, traffic growth is going up dramatic — inside the datacenter, where we have no exposure to that right now. And I think the timing for that is probably you know as we get to ’25, something like that. But I think there is, you know, an inflection point there from all of the conversations we’re having with them were coherent, coherent light as you described, really should bed into the perfect application for them. And you know, clearly we’re the world’s leader in coherent technology. And we do see an intercept into there, and we’re investing in that as Jim has said.
We are doing a variant of WaveLogic 6 that will absolutely be focused on the inside the data center applications. Now again if we model that into our, you know, given it’s sort of a ’25 opportunity, we’ve not really taken a lot of consideration of that right now into you know the three year guide. But that clearly is a massive opportunity for us you know further out.
Ruben Roy: Thank you.
James Moylan: Thanks, Ruben.
Operator: The next question comes from Alex Henderson with Needham. Please go ahead.
Alex Henderson: Thanks. I wanted to go back to Tal’s question, but with a very different spin on it. It strikes me that the decision to move to Ericsson and downplay Nokia was a function of the absolute horrific performance of the 5G core which isn’t working properly in almost any location. And as a result the inability therefore to drive out the improved functionality that the 5G core would deliver such as network slicing and other elements that are really driving revenue differential for the largest the Tier 1s. And in turn that’s created a situation where they can’t monetize 5G the way they had expected. And as a result of that are cutting back CapEx on 5G because they can’t get it to work properly. Now the question I’ve got for you is, does that result in an aggregate reduction in CapEx across the board or do they say, yeah, I need to fix 5G core, and that in turn means I need to take some time to do that, and let’s shift spending away from 5G into other areas that are necessities like optical.
Or does it mean that they cut optical spending as well as they are under pressure given the lack of monetization?
James Moylan: I believe, Alex, that they have spoken about the fact that their spend on RAN is coming down. Now I don’t know what’s driving that in terms of the performance of the 5G core. I just don’t know. But what everything we’ve seen publicly and everything that we have heard from our customers is that they’re spending, other than RAN is going to be sort of flattish as we move into ’24 and that their spend with us is going to be flat to maybe a little bit up. So that’s what we know from what we see in the industry and what we see from our customers. You know it’s hard to know how they’re going to allocate all that, but we don’t see a big effect for any of their decisions on RAN today.
Alex Henderson: Second question is on the inventory side. A number of companies have been forced to take some inventory write-downs as a result of the very large build of inventory that’s happened over the last couple of years. I didn’t hear any mention of that with you guys. Have you actually absorbed some inventory write-downs, that are based — built into the numbers and offset them with improved pricing or is just improved pricing? Could you give us some sense of what the magnitude of the reduction in prices is in the quarter. And how you think that plays out as we go forward, you know in time, and you get to your supply chain back into normal conditions?
James Moylan: The first thing I’d say is, we don’t see any material risks to a big inventory write-off. We do a very careful look at our inventory down to the component level compared to demand in each of our products and to the components that are built into those products. And so, we don’t feel that there is a material risk of a big inventory charge. We do every quarter — we have what we call excess and obsolete charges in the range of $4 million to $6 million. And we think that will continue. As far as the margin situation, the margin situation is really driven by our mix and a bit of component cost reduction because of the fact that we’re no longer buying as much from the broker market as we did last year and earlier this year.
By the way, we do expect an improvement in that as we go into next year, which is why we’re confident in guiding to the mid-40s gross margin range. And we think that’s going to be you know less than 100 basis points in terms of our cost next year.
Alex Henderson: Great. Thank you so much and great execution. You guys really did a superb job. Thanks.
Gary Smith: Thank you. Appreciate it.
Operator: The next question comes from George Notter with Jefferies. Please go ahead.
George Notter: Hi. Thanks a lot guys. And maybe just to continue on the gross margin question. I was pretty impressed by this quarter’s gross margins given the much higher mix of cloud provider revenue and then also the big spike up in services revenue and installation revenue. Can you talk about what was going on this quarter on gross margins, is there something there kind of underneath? I know you said favorable product mix. I think Jim also but more context there would be great.
James Moylan: You know, it’s interesting, George, when you think about the gross margins across our customer base, although they’re in — you know, if you look at the web-scale versus the service providers, they’re in very different businesses, but they are very big companies, and they have choices, and we have to compete for the business. Now, we are fortunate and blessed that we have the best optical gear in the world and that helps in the competition. So when you think about that across our customer base, the gross margins are not all that dissimilar. Yes, in particular applications or particular products there are differences, but across the customer base, they’re not all that different. The big difference in our gross margin is really mix.
And with — and that is particularly with respect to in the optical business line systems versus capacity adds. In line systems, just by the nature of the way the business works, our lower gross margin, capacity adds are higher. We, as you remember, we came into this year expecting a very high mix of line systems. We sort of got to that mix, maybe not quite as high line systems mix as we thought. And that’s why our gross margin was impacted in addition to the couple of 100 basis points at the component cost us. As we move into next year, I think we’ll have both probably a little improved mix again, and a lower amount of component costs.
Gary Smith: So we do expect an improvement in our gross margins next year.
George Notter: Got it. Great. And then just as a quick follow-up, could you give us an update on delivery of the WaveLogic 6 product. I know — I think you guys had said GA in the first half of next year, but can you just confirm that that’s on track. And when do you expect customers to start testing the products? Thanks.
