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Dear ladies and gentlemen, welcome to the conference call of ADVA Optical Networking for the First Quarter 2020 IFRS Financial Results. This call is being recorded. [Operator Instructions]May I now hand you over to Mr. Stephan Rettenberger, ADVA Optical Networking's Senior Vice President, Marketing and Investor Relations. Please go ahead, sir.
Thank you, and welcome from my side. This earnings call builds on a presentation, which is available for download in PDF format from our homepage under www.adva.com in the About Us/Investors section. Should you not have the presentation in front of you, you may want to access it on the conference calls page in the Financial Results section of the Investors section of our website. Before we will lead you through the presentation, as always, please be informed that this presentation contains forward-looking statements, with words such as beliefs, anticipates and expects, to describe expected revenues and earnings, anticipated demand for networking solutions, internal estimates and liquidity. These factors are discussed in greater detail in the Risk Report section of our annual report 2019.Please also be reminded that we provided consolidated pro forma financial results in this presentation solely as supplemental financial information to help the financial community make meaningful comparisons of our operating results from one financial period to another. This pro forma information is not prepared in accordance with IFRS and should not be considered a substitute for historical information presented in accordance with IFRS. Pro forma operating income or loss is calculated prior to noncash charges related to the stock compensation programs and amortization and impairment of goodwill and acquisition-related intangible assets. Nonrecurring expenses related to the restructuring measures are not included. Unless stated otherwise, all numbers are presented in euro. We will target to limit this conference call to 60 minutes. As usual, Brian will start and provide a business update and outlook, then Uli will talk us through our Q1 2020 financials. And finally, we will have sufficient time for your questions, which we'll be happy to answer. Now Brian, please go ahead with the business update.
Thank you, Stephan. Let's see, we will move to Page #4, Q1 2020 in review. After our strong finish in 2019, we started 2020 with good momentum and a healthy order backlog. As communicated in our last earnings call, the COVID-19 crisis, with its origins in Wuhan, was primarily a concern for the supply side of our business. But thanks to our agile and flexible supply chain model, we were able to largely mitigate the effects and serve most of our customers well. We only had a relatively small impact on the delivery side, resulting in a deferred revenue impact of about EUR 10 million. We had expected more earlier on. Our Q1 revenues reached EUR 132.7 million, up nicely by 3.5% year-over-year from EUR 128.2 million in Q1 2019.Our Q1 pro forma operating income was negative at minus 1.3% of revenues. Customer concentration on larger accounts with lower margins, lower revenues, costs to protect our supply chain and the usual Q1 seasonality were the main contributors to this result. We continue to see good demand from the larger communication service providers and Internet content providers, and the demand covers all of the 3 technology legs. While the demand for our solutions has been holding up, we continue to face pressures on our margins. The revenue delays, the costs for protecting our supply chain, the customer mix and especially the U.S. dollar strength, with related cost pressures, which it puts on our margins. Thus, we are further tightening our OpEx control. Our Q1 results and achievements underscore the resilience of our business in times of crisis and economic downturn.Page 5. How does the customer demand evolve in times of COVID-19? Let me start with a quick overview of the 3 main customer groups that are driving our business. Carriers or communication service providers are our largest customer group, representing an average approximately 65% of our revenues. They are in the business of building and operating large-scale networks that they used to offer communication services to end users or other CSPs. Their network is their product and all of our technologies are relevant to their network expansion. Internet content providers, ICPs, are companies whose principal business is the creation and dissemination of digital content. They operate data centers of enormous proportions and are often referred to as hyperscale or cloud-scale operators. The main asset of an ICP is its digital content and the associated services. They represent approximately 10% of our revenues. Over the past few weeks, providers of video conferencing solutions and cloud services have been reporting record usage. Remote working is practiced wherever possible, and school closures are leading to the rapid adoption of e-learning techniques. The consumption of digital content is increasing. And both providers of cloud services and telecommunications service providers confirm significant higher network utilization. Both customer groups are very important to us, and in the past quarter, orders from several major customers in the CSP and ICP space actually grew. We suspect, however, that this increase only partially reflects the actual growth in current demand with a significant part serving as a safety buffer to prevent delivery and production bottlenecks that may rise. From our large corporate customers, who use our technology to build private enterprise networks as part of their IT infrastructure, we have observed the first signs of more careful ordering behavior. Many corporations have been directly affected by the drastic economic effects of the crisis, experienced severe slumps in orders, had to temporarily shut down plant, implemented short-time work or even reduced the headcount of their workforce. On average, private enterprise demand contributed about 25% of our sales. We expect this customer group to be more reluctant to make future-oriented investments in the coming weeks and months. In general, our global endeavor customer rates provides some resiliency as communication infrastructure remains vitally important in times of travel restrictions and lockdown, but new projects and new customer wins will take longer to materialize than planned.Page 6. Our supply chain update in times of COVID-19. While demand developed surprisingly well in the first quarter, our main focus is currently on maintaining our ability to deliver. In our last earnings call, we provided additional insights to our supply chain, detailing the work we do with our global EMS partners and the setup of our main distribution centers, which can be seen on the right-hand side of the slide. We were one of the first companies to point out that Wuhan is a center of optoelectronic component and that supply bottlenecks were to be expected due to the curfews and plant closures. Since then, Wuhan and the rest of China are on the way back to normal, and we're quickly restoring production and supply chains. However, we have not yet passed the pandemic peak in other regions of the world and uncertainty has shifted to Europe and Southeast Asia. Every curfew, lockdown or closure of borders in the countries exposed to our supply chain, bears the risk of bottlenecks in component procurement, production, goods logistics as well as any ability to install and maintain our products at customer site.Given the work restrictions and even if demand remains healthy, uncertainties will increase as to whether technicians will be able to implement new installations and system expansions in a timely manner. ADVA has developed a very agile and flexible supply chain, and we are fortunate that our development and distribution centers have so far largely avoided the crisis. Our production and supply chains are very intact. However, as already mentioned above, this can change suddenly. This is why we have developed a strategy that allows us to compensate for production and delivery bottlenecks due to possible location closures. We are working closely with our customers and have asked them to place orders early to help us mitigate supply chain challenges. We will continue to do everything we can to take advantage of our distributed and agile structures and reliably supply them while we continue to act responsibly and protect the health of our employees and partners. Then on to my final slide, Page #7, innovation in times of COVID-19. As a telecommunications supplier, our technologies and services are supporting some of the world's most critical network infrastructures, from emergency, communication to e-learning, from remote work to mobile communications, from media streaming to online gaming. Our technology plays an important role. Securing the digital connection in times of social distancing, and working from home is currently a high priority. ADVA took very early preventive measures to ensure the company remains fully operational in these extremely challenging times. And we did this, while at the same time, making the safety and health of our employees, partners and customers a top priority. We continue to innovate and are aligned with what our customers need most. With our cloud access solution, upper left, we enable CSPs to deliver software-defined, differentiated and performance-assured wholesale, mobile backhaul and business services. We continue to see good demand for physical access and aggregation solution and the acceptance of our new generation 100-gig aggregated devices has been positive. As expected, with labs being shut down, the testing and onboarding of innovative virtual solutions has slowed down. With our network synchronization solutions, we provide accurate and scalable time and frequency synchronization for mobile network infrastructure, utilities, media distribution networks, financial services, distributed databases and meteorology. The demand from the CSP community for precise timing to achieve better spectrum utilization in mobile networks continues. Due to the shutdown of trade shows and conferences, our plans to expand into new market verticals have to wait a bit longer. We need to be a little patient. Last but not least, a few words about our biggest revenue generator, our cloud interconnect solutions to the right. This optical networking portfolio delivers a scalable bandwidth for access, metro and long-haul networks. We provide high levels of open internet interworking, programmability and ease-of-use. From my earlier comments, we've seen increasing demand from some of our larger CSP and ICP customers, scaling their network & cloud capacities. The number of TeraFlex customers keeps growing. In March, we introduced our innovative spectrum-as-a-service capabilities, creating a new level of openness in our FSP 3000 line system. We also launched a new G.metro product, providing cost-competitive bandwidth out of the edge of the network, supporting growth applications, such as front haul and network slicing for 5G.Every crisis accelerates change and creates new opportunities. Perhaps the current emergency will soon result in noticeable improvements, such as more environmentally friendly lifestyle, more solidarity, appreciation for social profession and the health care system, and the better use of digital tools. But first of all, many people have great concerns about the health of their family, their income, their professional existence or their company. Saving lives and securing basic needs for peaceful coexistence must remain a top priority. Our industry is an essential pillar for maintaining communication and economic processes, both in the crisis and in the aftermath. We will make our contribution to overcoming this crisis and continue to invest all our energy and creativity in innovative solutions for the benefit of our customers, shareholders and employees. And with that, I'd like to hand off to Uli. Thank you.
Thank you, Brian, and welcome, everyone. Let's move to Slide 9. As Brian stated in the beginning of this call, revenues in Q1 2020 amounted to EUR 132.7 million and were up by 3.5% from EUR 128.2 million in Q1 2019. Given the presence of COVID-19 and the resulting supply chain constraints in Q1, this is a remarkable result. COVID-19 adjusted revenues would have been at EUR 142.8 million. Pro forma gross profit contribution decreased to EUR 42.3 million, down from EUR 45.1 million in the year ago quarter. We had a strong revenue concentration of a few major customers with comparatively low margins and incurred additional efforts for securing our global supply chain. As already anticipated and communicated back in February, our pro forma operating income margin was at negative 1.3% of revenues, down from positive 2.1% in Q1 2019. Without COVID-19, we estimate we would have been a positive 1.2%. I will expand on that later in the presentation. Net loss for the quarter was EUR 7.2 million. The loss included restructuring expenses, adverse exchange rate effects as well as a higher than usual tax rate. Consequently, earnings per share decreased from positive EUR 0.02 to negative EUR 0.14. Net debt decreased from EUR 73.7 million in Q1 2019 to EUR 67.7 million. Next slide, please. Q1 revenues per region. Looking at our revenues geographically, EMEA revenues decreased by 4.4% year-over-year, now representing 49.2% of total revenues. The slight decline was primarily due to delays in production and supply chain. Sales volume in the Americas increased by 14.9%, primarily driven by a few major customers. The Americas are now contributing 41.8% to global revenues. Asia Pacific revenues increased by 3.1%. The region is still dominated by project-based business, and there were no material country-specific or customer-specific special effects. Slide #11, please. Quarterly revenue and pro forma profitability. Demand developed well in the first quarter, and revenues reached EUR 132.7 million, up 3.5% compared to the year ago quarter, but down from EUR 151.1 million compared to Q4 2019. Revenues in Q1 2020 shifted towards the carrier segment, especially in North America. Due to the aforementioned supply constraints, we also decided to prioritize shipments in favor of critical infrastructure projects. However, this coupled with increased supply chain cost led to lower gross margins of 31.9% in Q1 2020 compared to the 35.2% in the year ago quarter or 36.1% as seen in Q4 2019. With negative EUR 1.7 million or minus 1.3% of revenues, our pro forma operating income was down from EUR 2.7 million or 2.1% of revenues in Q1 2019, and also down when compared to the EUR 10.3 million or 6.8% in Q4 2019.Now let's discuss the impact of COVID-19 on our numbers. Slide 12, please. During the early phase of the COVID-19 outbreak, we were one of the first companies to point out that Wuhan lockdown will lead to bottlenecks in the supply chain and will likely impact our performance for Q1. Supply constraints ultimately led to a shift of revenues of around EUR 10 million. Due to our agile and flexible supply chain, the shift is at the lower end of the initial expected range of EUR 10 million to EUR 20 million. Without COVID-19, our revenues would have been at EUR 142.8 million. This reduction in revenues consequently resulted in low gross profits. The COVID-19 adjusted pro forma EBIT would have been at a positive EUR 1.7 million or 1.2% of revenues, respectively. Turning to the balance sheet. Slide 13. Q1 2020 credit metrics remained strong with an equity ratio of 48.4%. Gross leverage was at 1.4%, indicating a solid investment-grade profile. Liabilities to banks were EUR 87.9 million and IFRS 16 lease liabilities were EUR 32.5 million that make up our total financial debt of EUR 120.4 million. Year-to-date ROCE came in negative at 4.3%, which was mainly due to the operating loss of EUR 4 million. Nevertheless, our cash and cash equivalents were only slightly below the level of Q4 2019 and even EUR 3.4 million above the year ago quarter. Of course, we are reviewing governmental assistance programs globally, and we will use every sensible measure to protect the company against all existing risks and to maintain a healthy balance sheet. Next slide, please. Cash flow. As mentioned in the past, our operating cash flow is subject to a certain seasonality due to recurring events, in particular, employee-related costs in Q1 and Q3. Despite the loss of EUR 7 million and the difficult situation in Q1, we were able to almost double our operating cash flow year-over-year. Next and final slide, please. Guidance for the fiscal year 2020. While demand in Q1 2020 developed positively and our order backlog is encouraging, business risks significantly increased since our last guidance issued back in February. As discussed, there are risks in maintaining our ability to supply and the recession-related decline in demand can also have a negative impact on the business performance of ADVA. Due to the current uncertainties about the further course of the crisis and its effects on ADVA's business, it is not possible to reliably predict further implications for the company. Therefore, we decided to withdraw the guidance for 2020 financial year until further notice. Originally, we had anticipated increasing revenues of more than EUR 580 million, with pro forma operating income to exceed 5% of revenues. And finally, our strong order backlog makes us confident that we will be able to show sequential growth in Q2. With that, I'd like to hand over to the operator to open the Q&A session.
[Operator Instructions]The first question received is from Simon Scholes of First Berlin Equity Research.
Yes. So you very helpfully provided numbers, which show what Q1 pro forma EBIT margin would have been like without COVID-19 impact. And I mean you're showing 1.2% margin. When it was last year, the pro forma EBIT margin was 2.1%. So am I correct in thinking the main difference between the 2 numbers is the impact of the dollar, i.e., the strength of the dollar over the last 12 months?
Hey, Simon. Brian, I'll take this question. So there's a few things. A, yes, the dollar is definitely some sort of an impact, but if you look into Q1 of 2019, we had a much higher income from capitalized R&D expenses as well as a higher other income. So if you take this out, then actually our pro forma EBIT in Q1 '20 is way above the comparable 2019 number.
The next question we received is from Stephan Klepp of Commerzbank.
First one is the delta between operating profit and pro forma operating profit. So the delta is EUR 2.4 million. In none of the documents that you provided today, you explained that delta. So can you tell me what it is? Is that restructuring costs I would presume? Or what is it?
So it's the usual compensation expenses as well as the amortization of intangible assets from acquisitions, which is usually in the EUR 1.6 million range, and then there's an additional EUR 750,000 of restructuring expenses.
Okay. And then talking about the what would have been without COVID, the EUR 10 million higher sales that you talk about, so where is the EUR 10 million coming from? Is it just orders that you couldn't deliver because we didn't have the products in place that you could ship? Or can you tell me where this EUR 10.1 million comes from?
So the EUR 10.1 million does come -- it's a supply chain challenge as we had indicated. We thought it would be greater. We just could not ship them. Remember, we had said that our book-to-bill in Q4 was very high. We named that to you last quarter. And therefore, it was coming off of backlog and good bookings in Q1. So that was the EUR 10 million we just couldn't deliver. And therefore, we've stated in our notes that that EUR 10 million, we believe, we can deliver into Q2. Why? Because Wuhan is pretty much at 100% already and Shenzhen has been working at 100% for some time already. So things are being caught up. And therefore, we believe we can catch back up some in Q2. Having said that, there's still a whole lot of work to be done in Q2. We need running orders to stay healthy throughout the whole quarter to always get our numbers, but we've got a good buffer to start.
Okay. Maybe to complete Brian's comment, we did not experience any cancellations from any customers at this point.
Well, that was one of my question. Good. And then secondly, if you don't have any cancellations, can you tell me what's happening with your private enterprises. As you pointed out, they are very hesitant. So when you say hesitant, that could mean anything from: "Oh, they are basically placing no orders; to, they are placing reduced number of orders." What are you seeing in that area at the moment?
So let's talk about the market as a whole here. I think the people that are going out of business and really disappearing as customers are small-to-medium size. When we talk about our 25% enterprise business, mostly large enterprises, much more resilient than the small to medium-sized enterprise area, and we get hit by the small- and medium-sized enterprise a little bit more through our carrier service provider customers. But so from a large enterprise business, it's tailing down, certain of them are very exposed to, let's say, consumer-based business that's tailing off quickly, and they then push out potential projects or budgets. So we're starting to feel that. But everything we see, read and what we understand from some of our customers, clearly, certain of our verticals will be impacted. Now we're trying to push back against that. How are we doing that? We have direct sales in place out there, teams and going after large enterprise and healthy verticals. We have some very interesting business in government. And so there are some areas that are still strong, and we're pursuing those. But in general, that 25% of our business will tail off in Q2 and most likely Q3, and then we hope to recover very quickly when things stabilize.
Great. Very helpful. And then last one. If you look at the order book that you're having and you said you have healthy bookings, can you talk about the margin quality of those orders that are coming in there? Are they like the same level that we have pre-crisis of the ICPs and CSPs? Or are these kind of more aggressive these days?
So I think the issue, clearly, there's a lot of movement in the market, but the biggest issue is the exchange rate weakness, the pound hurts us, as an example, when it weakens through this type of a situation. And therefore, I think at the beginning of the year, point one, usually our results aren't as good; point two, we're getting more of the business coming out of the telecommunication service providers where there is lower gross margins at large customers; and then clearly, the currency stuff adds to that margin. But as Uli has said, internally and as we look at our forecasting, it looks to be the low point of our gross margin Q1 and then we will be able to increase that into Q2, Q3. So I don't like to compare it to pre-COVID-19 because there's too many moving factors. But in general, again, it's more exposure to telco, currency change, et cetera. And we should make gains moving into the further quarters.
Okay. Then let me phrase it differently. Is that pressure on pricing?
We live in a world of pressurized pricing. We don't see it greater right now in the COVID crisis than we did pre-COVID prices, but it's an ongoing balance. And clearly, environment is such that if there are wounded animals out there and they're trying to win business because they're wounded, it could get more aggressive, but it's almost more relevant around the competitive landscape than it is, customers really coming out and trying to abuse suppliers at this point. I think they understand that as well that that's not an intelligent long-term strategy. So I don't think there's a united front on the customer side of things to put pressure on equipment suppliers. I think it's more just competitive environment. And if people are hurting, they're out there may be getting more aggressive than they normally would. And in general, we -- it's not a huge factor. And again, the lower gross margin in Q1 is necessarily driven from that.
The next question we received is from [ Alex Anderson ].
I was hoping we could talk a little bit about how the conditions have changed on the demand side as we progress through the quarter and into April. It seems pretty clear that there's been a very rapid shift in traffic patterns as a result from work-from-home phenomenon. And service providers have seen, according to Akamai or Cloudflare or some of the service providers directly, as much as 30% to 50% month-to-month increase in traffic. And certainly, the cloud companies have seen similar spikes in traffic. So has there been any push for incremental capacity, particularly around the DCI space, but by service providers, in general, for more capacity to respond to that?
So I think we look at -- yes, we've had good book-to-bill in Q4. We had good book-to-bill in Q1. Part of it, we had said it in the notes, where basically that we feel some of it is preordering because of securing the supply chains and stuff. Bandwidth is moving, especially for certain ICPs, I think, more than others. And therefore, it's a combination of a number of different pieces. I don't think there's radical shift over the last 4 weeks or 5 weeks or 6 weeks in that perspective. I do believe that there are some carriers that are making sure that they're securing their supply chains. I think there are some customers out there that truly have to invest more short-term clearly, but that's not a huge number out there. And then there's the issue of new projects are being slowed down. So there's a number of factors, and they're all complex. So it's not easy to answer that question where you're trying to get boiled down to, "Hey, there's this big uptick in demand, and therefore, they're investing like crazy in infrastructure?" I think we're not believers that that's a massive change. There are -- there is more bandwidth. There is more bandwidth within certain areas, maybe some core network nodes need to be built out in general, but there's not a fundamental shift in demand.
Great. And if I could add a second question. To what extent are you seeing a real acceleration in transition from the 400-gig Ciena-type products that were out in the DCI space over the last couple of years to the 600-gig oriented DCI modules that are now able to be shipped. Are we seeing a big change in share between the 400-gig and the 600-gig market? Or is it more reluctant to transition for whatever reason, perhaps waiting for 800-gig coherent products to come down the pike.
I think it's evolutionary. It's not revolutionary. And I think bottom line is, it's still 100-gig clients, right? And 400-gig is still kind of -- it's out there, but just slow to take off, waiting on some of the inherent changes that are -- and structures that are going to come into the network with the 400-gig ZR. So I'd say it's evolutionary. Our product is very good, very competitive, price competitive, has better bandwidth. I mean, clearly, maybe a couple of the big boys are still trying to figure out, do they move to the 600-gig solution sets, do they wait for the 800-gig technology that's been promised, which is also shifting as we are shifting out there. So my message will be evolutionary, good positioning. We win more and more TeraFlex customers day by day, week by week, month by month. And I think that will continue over the next quarters.
If I could just close the loop on that last question. Has there been any evidence of delays in availability of the 800-gig products which your competitor said was going to be available here in the first quarter. It doesn't seem like that product is delivering as expected. Have you seen anything change in that?
You just hear rumors out there in different places. Definitely, that's -- nothing is really shipping in high-volume in that space or 800-gig. Does it work like it should work? It's always the case when you develop and introduce a new product and maybe not everything is working. For some use cases, it works really well. For other use cases, it doesn't work yet as well as advertised. I think it's a very complex question, but we don't see a mass movement to new technologies in any way or form, point one. Point two, we believe our TeraFlex is very competitive today with anything that's been promised, from a price performance and from a capability. It has some really nice capability that we've talked about a number of times. And therefore, we -- it's a mute topic. It's really -- again, it's optimizing 100-gig, it's optimizing 400-gig as a next gen, and what is going to be the architecture that does that. How much of it's going to be a case of 600-gig solution set or an 800-gig from one of the others or 400-gig ZR. There's a bunch of stuff coming. But I'd like to reiterate, I think we've got a great next-gen solution set. We've got a whole bunch of stuff that we're coming to market on with new stuff now. So we're moving to the next generation as we speak. And it's an arms race, and will stay that way. What clear is, there will not be the difference between the 200-gig and the Ciena 400-gig generation where they really beat up a global market and had fundamentally different cost structures, that's not happening anymore. So there's not huge technology differentiation out there, not for us. Moving with the TeraFlex and not for the next-gen 800 gig, there's more incremental upgrades, and there's a hell of a lot of other things that are important, like ease-of-use, like how your software-defined networking you're able to use it in certain environments, how far can you transport 400-gig over certain fiber infrastructure, and 100 other things that are more important in this arms race, 600, 800, et cetera. And from a cost perspective, they're all very similar going forward.
And the next question received is from Tim Savageaux of Northland.
Just kind of following up on some of Alex's questions. I mean, it sounds like, at the very least, you're describing a pull forward in demand from carriers in response to this increased traffic, if not, an overall organic increase in demand to some extent. And I would like to try and get to the magnitude of that to some degree. And maybe the best way to start is, as you came into Q1, I mean, were you anticipating--and to the extent you're talking about positive book-to-bill overall, I imagine the carrier portion must have been quite positive. Were you anticipating that coming in? Or to the extent you're looking at positive booking trends in the March quarter, was that unexpected? And should we basically be looking at the degree of positive book-to-bill, whether it's 1.1 or more, obviously, it was higher in Q4. As that -- as representative of that unexpected upside and have those trends continued into April? And I will follow up.
So we don't give book-to-bill, Tim. And it's just one more data thing that once we start that, we will have to do it every quarter. So we don't go through that process. I mean, I think what Uli and I said is, we just -- we had good -- better than one. We had good book-to-bill. Yes, it was probably stronger than we expected. Clearly, hard for us to judge exactly how much has been brought forward. Some of our customer, carrier customers, especially North America, were more aggressive. And I think it was to make sure that they have enough pipeline and secure supply chains through any kind of difficult period of time. And clearly, also demand was out there for shifting flows, gaming and video conferencing, shifting flows in the network and having to upgrade certain nodes and upgrade their networks in certain areas. So I don't -- it's not such a clear cut. You're asking kind of like a little formula; I don't think it's out there. And I think that's why we were -- we talked about this and said we want to be very clear. Everybody's -- because some people out there all uses and the answer is now, it's -- this is really good. It's bringing back. There's so much more bandwidth and whatever else. And I think our thinking is that you guys, let's not get carried away. Let's -- yes, I think the industry, as a whole, did get some nice orders out there. Clearly, when we interviewed our customers, many of them said, this is bringing stuff forward. They're not increasing their budgets, their CapEx for the year. And therefore, I think we all have to be a little bit wary of the -- what happens when people over-order in the components side of things, guys, because there seems to be a competitive environment for capacitors. What happens to take that business up like crazy and then everybody pays the price 3 quarters later, right? So I think we don't -- let's not get ahead of ourselves, but we do -- we're not in a short workweek. We're running our business. We are -- we think we're okay. We're okay compared to 75% of the companies out there. And we hope that the orders keep running in May, June and July. But it could turn very quickly as demand changes, look at AT&T guys. Comments were CapEx down and it could go down again. So I think we're all -- it's not -- your job is not easy, and I can't help you with that job. Because I can't give you a formula out there, except for the fact, our information is some of those orders are coming in advance.
Right. Well, continuing on the theme of not helping us, let me follow up. I know you -- and certainly, I appreciate the reason or the value of conservatism in this environment in general. Having said that, as you look into your second quarter, it appears you have a tailwind to the tune of as much as EUR 10 million. In terms of catch-up shipments and then maybe a similar-sized tailwind in terms of positive order trends on the carrier side throughout the quarter offset most likely by weakness on the enterprise side. Looking at that, it seems like a fair assumption to assume you might see some growth in Q2. And then maybe to open a new kind of line of questioning, it would certainly stand a reason that, to the extent you're focused on incremental capacity adds system fill line cards, that actually could be a positive margin dynamic. Of course, you have a higher-margin enterprise business being weak offsetting that. I wonder if you could talk about that interplay and whether my very high-level setup of your outlook heading into Q2 is something that makes sense to you?
So I'm going to repeat what Uli said, confident we can grow into Q2. We don't know where we're going to be exactly. Let's not get ahead of ourselves. I think we're in an unprecedented territory. And I want to repeat that you guys going out there because the stock market works in 3, 6 or 9 months in advance, right? So going out there and saying that, "Hey, this is all bandwidth and people are going to -- ultimately, because what the question is, really, are people going to spend more CapEx in 2020 than planned?" That's the real question from a market perspective. So I'm going to say, reiterate, we're confident we can grow into Q2. Don't know more than that. We've got an area that in our enterprise that is going to get hit. We know that. Are certain people going to spend -- given if you're that exposed, are they going to outspend that weakness? Questionable. The next point is infill to you guys. I mean if people are doing infills and if they are higher gross margin, I mean I think that's more for the companies that are losing customers. They might have short-term positive infills, do we then have -- we're not losing any customers, we're -- if anything, winning a couple of new platforms and footprints, but I don't see a major shift to infill build-out. I think that's more of a question of companies that are at a challenge that are going to be a larger portion of their business coming from infills that actually helps them to increase gross margins for a short period of time before they really go down. So I'm going to summarize, confident we can grow into Q2. I'm confident when we come out of this COVID, whatever it is, with some kind of vaccine or some kind of a longer-term solution that our market area will recover very nicely and bandwidth is growing and things will be good. But for the next 1, 2 and 3 quarters, interesting times, and I don't think we should get ahead of ourselves in any way or form, as an industry or as an individual company.
[Operator Instructions] And the next question is from Robert Sanders of Deutsche Bank.
So what I'm hearing is 25% of your revenue is in enterprise, which is at considerable risk and that's your highest margin business. You've drawn down on your committed facilities completely. So I guess, from here, when you think about your scenario 1, 2, 3 that you've laid out and the scenario 3 if the crisis continues until after summer and triggers a global economic recession that lasts for several quarters, what could you do? You've talked about short-time work to reduce costs. Are there covenants on the debt that we should be aware of? Are there easy things you can do to reduce expenses? And what's your minimum cash balance that you would actually like to keep in a case of scenario 3? Because you're already quite levered as it is, and you don't generate any cash flow prior to COVID-19. So presumably, it's going to get worse from here. So what are you actually thinking in that scenario 3 in terms of how to kind of stay alive?
So let me take this, at least a part of this -- of your questions. So essentially, if things get really worse -- well, let's put it this way: what are we doing already? So we are already looking globally what most countries offer governmental support. In China, you get -- they waive benefit payments; in other countries, in the U.K., there is VAT payments can be delayed into next year; in the U.S., corporate income tax payments can be delayed. So we're looking in all of these things. We, of course, also explore short workweeks. However, we don't have a reason to go into a short workweek because I almost think it's almost unethical to do that right now since we have a full order book, right? So this is one thing. Then the next one is, we, of course, look into government loans to have an extra cushion of liquidity if things get worse. And we already have it essentially approved by some of our banks, and we already applied for it. If we will draw it, it depends on how things develop. As of now, we have no reason. And then again, we have currently no reason to go into a short workweek. That's the thing. And yes, we -- our cash flows weren't that great in the previous quarters or years. However, our goal is to be cash flow positive, free cash flow positive in Q2, also positive net income, and I guess this is our strategy going forward. We want to be -- we want to generate cash. We want to be -- no matter what the revenues are, we will do everything to generate cash and to have a positive net income.
Maybe to expand on that, guys, is we committed to flat OpEx 2019 to 2020. You can see our OpEx in Q1, we said though it takes time to restructure. So we're at kind of the end of that, guys. So what you're going to see is actually our OpEx go down. It's going to get better. And now in addition to that, a bunch of discretionary spending is going away. Travel, big number for us, gets ramped way down as an example. Things like whatever, this summer parties within our organization, off sites, there's all sorts of things, open positions gets pushed off. So there's a bunch of stuff that from a cost perspective, we've got it under control. We're looking at it very closely. We just came out of a restructuring where we've lowered our whole cost base, and now we're going to go under 2019. And in fact, starting for the first time in years at ADVA, we're going to go down year-on-year OpEx down quarter-on-quarter. you know what I'm saying quarter 2 quarter of last year, quarter 2 quarter of last year. We feel -- that gives us also some room depending on demand cycle, that might just be fine to do exactly what Uli just said. It's just this we're focused on free cash. We're focused on good rock-solid balance sheet. And so we're already starting in a lot better shape than we at any point in time in 2019. Add on top of that, discretionary spending that's being lowered; add on top of that these things that Uli rolled out, short workweek, government loans, whatever else. I think that we are in a really good situation from a balance sheet metrics and to manage this business because we're not in an industry that's going to collapse by 70% or 50% or even 30%. We're talking that it could move down. But who knows? Maybe things churn pretty quickly and people start investing because bandwidth is growing, and it is going to continue to grow over the next years.
And I guess there's one question open, Rob, is the minimum cash balance. I guess, I can give you a range, EUR 25 million to EUR 35 million is probably the minimum cash balance that we have in our internal calculations.
Got it. Yes. And no covenants presumably because that was the other part of that question?
No. No, this is all already aligned with the banks. It's all -- we are good.
Okay. And just -- a follow-up question would just be, on the telcos, that's your biggest -- I think it's your biggest customer class group. Is it kind of a consensus that fixed data usage is going up and mobile, that will be going up a little bit. But most people are cutting their estimates for CapEx, and it seems like they're focusing on just priorities. But as you say, new projects are being deferred. If it ain't broke, don't fix, that kind of attitude, and there are obviously worries about the macro and what it means, so -- and in parallel with that, it does seem like things like in California, you can't -- there are just no AT&T trucks driving around at all, for example. So presumably, there are a lot of logistical problems getting around. I know that you don't intend to install equipment indoors rather than outdoors. But I mean, can you just talk through the practical challenges from lockdown in terms of your business with telcos? Is it really unaffected? Or you think there could be impacts down the line?
I think we mentioned again in our -- other than that it's one of the things that we track very closely. It hasn't impacted as much really yet. We are seeing this critical infrastructure. We went through it also in our presentation is that we are the backbone for government, emergency services, national communication, military, all sorts of different applications out there. And therefore, we more than most industries are in a position to get the ability -- we have -- of our 1,800, 1,900 people, we have probably 1,300 working at home, but we still have a few hundred working in different sites in different places around the globe because of that critical infrastructure support necessary, to continue to deliver products, continue service products and even to continue to supply and install products. So I think we're in better shape than most from that perspective. I think you're absolutely right, though, it's a high-risk area. I mean, if things double whammy, second wave comes and things really get shut down, could that impact us? For sure. Right now, that's not high in our list of issues and challenges. Again, ours is our supply chain itself and also getting some of our suppliers in that critical. We have to help some of our suppliers actually position themselves as critical infrastructure suppliers. So supply chain issue is higher on our list and the demand piece are higher on our list right now than, let's say, the services' equation of installation and bringing equipment online. Next point and I'd like to push is that ADVA is a fairly small company to be so well exposed to the large carriers. So we supply pretty much every Tier 1 in Europe in some way or form and we're having some nice Tier 1 business in North America, et cetera. And those tend to have better balance sheets, and clearly, critical infrastructure, and therefore, things keep running. We're not waiting on a big project right now to Tier 1 where we were betting 20% of our revenues on that. That wasn't the case. We were not betting on a big ICP win. Remember, I've always said, our planning was -- had nothing to do with us being able to win one of the big ICPs in some way or fashion, let's say, in the optical side of things. And so I think we have a little bit less risk than maybe some of the others in that space. I think Ciena is very well exposed to the Tier 1s. We are always very well exposed to Tier 1s. And remember that it goes down from there. And I think ADVA is in that second-tier of exposure of the strong balance sheets relative to the number of customers, or I should say, relative to the revenues we have. So I think those are critical aspects to that. So good question. But I think for right now, we're not thinking that collapses on us, but we did have it in our notes. We said absolutely a risk area. We're trying to be very open with you guys. There's plenty of risk out here. And clearly, we understand what that means.
Rob, let me clarify the statement I made to the covenants. Of course, we have covenants in place for our existing loans. It's -- the covenant is debt EBITDA gross leverage. As you know, our current gross leverage is 1.4. Our internal policy's gross leverage is 2.5. You can assume that this is below the official banking covenant. However, in case you would, for example, draw a government loan or so, we would get a covenant holiday for a certain period of time. So there's no issue regarding breaking a covenant here.
There are no further questions at the moment. [Operator Instructions]
So I guess, I'd like to thank everybody for joining us. Lots of good interesting questions. I say summarizing that is that we're in at least one of the better areas, not a great area but one of the better areas. There's fundamental growth in bandwidth in our industry, good news. I think a number of the systems, equipment vendors, exposed to the right carriers, into the right ICPs and the right customer base are doing well compared to other companies. I still think there's a lot of risk out there that we all have to manage together. And there's no free lunch. So even if there's ordering in advance, et cetera, I think it will all have to come clean, if that's the case, in further quarters out. So I think we need balance understanding the industry, understanding if CapEx truly is being increased. As was mentioned in this call, there's more of a tendency to decreasing CapEx spending even in the telco space than increasing. So I don't think we should get caught up in our own short-term views, and we should stay very balanced and move through it. And I think whatever it is, 6 months, 9 months, 12 months or 18 months from now, this industry will be solid. Thank you.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.