Adtran Networks SE

XMUN:ADV

Earnings Call Transcript 2019-Q1

[Operator]

Dear ladies and gentlemen, welcome to the conference call of ADVA Optical Networking for the first quarter 2019 IFRS financial results. This call is being recorded. [Operator Instructions]I now hand over to Mr. Stephan Rettenberger, ADVA Optical Network's (sic) [ ADVA Optical Networking's ] Senior Vice President, Marketing and Investor Relations. Please go ahead.

[Stephan Rettenberger]

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.advaoptical.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 believes, anticipates and expects to describe expected revenues and earnings, anticipated demand for optical networking solutions, internal estimates and liquidity. These factors are discussed in greater detail in the Risk Report section of our annual report 2018.Please also be reminded that we provide 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 restructuring measures are also 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. And then Uli will talk us through our Q1 2019 financials. And finally, we will have sufficient time for your questions, which we will be happy to answer.So Brian, please go ahead with the business update.

[Brian L. Protiva, Co]

Thank you, Stephan. Moving to Page #4, Q1 2019 in review.Q1 revenues reached EUR 128.2 million, up nicely by 6.3% year-over-year from EUR 120.5 million in Q1 2018. This is around the midpoint of our guidance corridor provided on February 21, 2019 of between EUR 124 million and EUR 134 million. Our Q1 pro forma operating income was at EUR 2.7 million or 2.1% of revenues and also around the midpoint of our guidance of between 0% and 4% of revenue.So the new fiscal year started well. Both revenues and profitability developed according to plan. We continue to invest aggressively in innovation leadership. In addition, the revenue contribution of our FSP 3000 CloudConnect is growing in all major customer segments and geographies.Furthermore, all 3 of our core technological competencies are providing good revenue contributions. Geographically, we grew year-over-year in the EMEA and Americas region. We are winning tenders and new customers in our key areas of strength and presence. And most importantly, for our shareholders, our share price developed well in the first quarter of 2019.Since March 18, 2019, we are now a member of the SDAX index, which had been redefined in September 2018. This positive development shows that not only our customers are loyal to ADVA, but also the confidence of investors in our company and our technology has returned. We have positive momentum, and we will stay in a mode of profitable growth.Slide 5, industry macro environment is positive. Despite the turbulence in the global economy and the open questions with respect to Europe, we continue to have an optimistic outlook as there is no choice for our customers, but to invest in technology and more specifically, in networking. Digitization is changing networks and bringing the investment focus to us. We are technologically very well positioned. Our 3 core competencies are strategically relevant to the transformation of all networks. A transformation based on openness, virtualization, security and precision timing, this creates new growth opportunities and new market segments.More specifically, the investment focus is moving to the edge of the network. The edge is where you need to combine infrastructure knowledge with end customer application know-how. It is where ADVA performs best. As a company, we've aligned ourselves accordingly and invested exclusively in strategically important future technologies. Technologies that enable new digital business models. Optimal transition technology delivers the required bandwidth.Physical and virtual edge technologies bring the cloud and related services closer to the customer and enable instant service creation with a click of a mouse, whereby packet solutions within this framework allow for secure cloud access. And our synchronization technology guarantees the level of timing needed in a high-performance network. All of our technologies make the difference for the digital world. With our focus on the edge and on our innovation capacity, we are well positioned for winning new opportunities.Moving to Page 6, portfolio, technology tripod delivering returns. As stated, our technology tripod is developing accordingly with each like fulfilling an important role in the network transformation happening in every market segment. The much discussed introduction of 5G pushes the fiber deeper into the access area of the network. Corresponding technology advances such as IoT and edge computing also require new, innovative and scalable telecommunications infrastructure with more efficient optical transmission technology, new virtualized models for service provisioning and more accurate network synchronization.Our portfolio is precisely tailored to these trends, and we start with some successes that we've had in our cloud interconnect portfolio in the upper right-hand corner of the slide. Our FSP 3000 provides open, scalable and programmable optical transmission technology that further reduces the cost of a bit transport, while enhancing network flexibility and security, a market that we've been focused on for the better part of 20 years.In addition to being deployed in our carrier infrastructures, the platform is also widely used by large enterprises and Internet content providers, ICPs, for interconnecting large-scale data centers. The launch of our new TeraFlex terminal is proceeding according to plan, and we see good opportunities to gain market share, especially in the ICP area. Also, our supporting differentiated products and components such as the advanced line monitoring, ALM solution, often classified as an OTR, and our vertically integrated solutions such as our MicroMux and optical plug have very good market traction. In fact, they already delivered a few millions of revenue in Q1 2019 by adding many new customers as well as one of the largest routing companies as an OEM partner going forward.Going anticlockwise, our cloud access, the upper left-hand corner. Our FSP 150 family of packet edge solutions, together with our edge cloud software products, provide flexible and fast delivery of NFV-based services at the network edge. Our new aggregation solution with 10- and 100-gig interfaces and almost 1 terabit of switching capacity completes our end-to-end packet access offering and is gaining momentum in wholesale, MSO and mobile applications.For business services, we added several higher layer features and our universal customer premise software solution architecture, specifically addressing the universal CPE use case, is market leading. In the meantime, we have signed reseller contracts with 2 of the top 3 global IT solutions integrators. In fact, we are also partnering with a leading global hardware technology vendor in this space by positioning our solutions with their platforms approach. And in the world of 5G mobility, we introduced an innovative disaggregated cell site getaway called a DCSG, which is a full-blown router as part of the Facebook initiative Telecom Infra Project known as the TIP project. This open approach with our own home-grown Ensemble Activator Software has the potential to greatly simplify and radically reduce the cost of the commercial rollout of 5G networks.And the last but not least, and a fastest-growing leg, our Oscilloquartz portfolio. The bottom left-hand corner of the slide. We have received consistently positive feedback from network operators around the globe regarding our network synchronization solutions. The portfolio is technologically leading the industry and now formally part of the British Telecom 5G strategy.Furthermore, the new OSA 54xx generation of products just passed all tests by China Unicom and we won 2 new Tier 1 telco customers in medium-sized countries last month, in addition to signing 1 major wireless OEM agreement for synchronization, delivery and assurance for global distribution. From a cross-portfolio perspective, the emerging 5G architecture provides a positive backdrop for open disaggregated infrastructure solutions with software-based service creation and delivery. And specific features, which we support just as ITEMP, we are positioned to compete for a larger opportunity. In summary, we have a clear positioning in all major customer segments and geographies, and our portfolio is well aligned to current and emerging market trends.And with that, I hand it off to Uli to cover the financial segment of our presentation.

[Ulrich Dopfer, President, CFO & Member of Management Board]

Thank you, Brian. Let's move to Slide 8. As you probably know, the new IFRS 16 accounting rules came into force at the beginning of this year. The new standard aims to increase transparency on the financial liabilities of a company.Before we start with our Q1 2019 financial results, I would like to give you a brief overview of the impact. Impact on balance sheet. Assets increased by EUR 35.4 million due to the capitalization of lease assets. These right-of-use assets relate mainly to leased buildings and cars. The corresponding size of this entry was recorded in lease liabilities, which consequently increased the financial debt. Impact on P&L. There is a minor positive impact on pro forma operating income, which is partly offset by an increase in interest expense. Impact on cash flow. Due to the treatment of financial debt, leasing is now considered in the financing cash flow instead of the operating cash flow. This treatment does not have any effect on cash. Except of our leverage ratio, all 2019 financial numbers are reported in accordance with IFRS 16. 2018 numbers have not been adjusted.Let's move to the next slide, Slide 9, Q1 2019 key financials. Q1 was a good start to the new fiscal year. We achieved our guidance in terms of revenue and pro forma operating income. Q1 revenues reached EUR 128.2 million, up from EUR 120.5 million in Q1 2018. This result is within our guidance of between EUR 124 million and EUR 134 million.Gross profit contribution increased to EUR 45.1 million, up from EUR 44.3 million in the year ago quarter. Our pro forma operating income margin was 2.1% of revenues, up from 1.9%. This is at the midpoint of our guidance of between 0% and 4% of revenues. Net income was at EUR 1 million compared to a net loss of EUR 2.4 million in the year ago quarter. Consequently, earnings per share improved to positive EUR 0.02 from negative EUR 0.05. Based on the early explained first-time adoption of IFRS 16, net debt increased by EUR 29.5 million to EUR 73.7 million. Without considering IFRS 16, net debt improved to EUR 36.9 million compared to EUR 44.2 million in Q1 2018.Next slide, please, Slide 10, quarterly IFRS revenue and pro forma profitability. As already stated, our revenues were at EUR 128.2 million. The Q1 2019 gross margin was impacted by a less favorable customer and product mix as well as the strong U.S. dollar. This EUR 2.7 million or 2.1% of revenues, we were able to improve our pro forma operating income compared to the year-ago quarter, both in absolute and relative terms. Compared to the previous quarter, pro forma operating income is lower due to typical seasonality.Let's move on to the next slide, Slide 11, quarterly revenues per region. EMEA continues to be our strongest region and contributed 53% of total revenues, representing a 5.7% increase year-over-year. Revenues in the Americas increased by 16.9% compared to Q1 2018. The Americas region contributed 38% of total revenues. Asia Pacific had a revenue share of 9% and decreased by 20.8% versus the year-ago quarter. The region is dominated by project-based business leading to quarterly fluctuations.Next slide, please, Slide 12, healthy balance sheet ratios. Q1 2019 credit metrics remain solid with an equity ratio of 48.2% and a gross leverage of 1.3. The equity ratio decreased slightly due to the first-time adoption of IFRS 16. Financial debt of EUR 123 million consists of liabilities to banks of EUR 86.2 million, and IFRS 16 related lease liabilities of EUR 36.8 million. Compared to the year-ago quarter, our return on capital employed increased by 1.6 percentage points from negative 0.6% to positive 1%. This development is mainly due to the improved operating income in Q1 2019. Versus the year-ago period, the net working capital increased by EUR 10.5 million, while the working capital ratio only increased by 0.3 percentage points.Next slide, please, seasonality of operating cash flow. As already stated during the last earnings call, our operating cash flow is subject to a certain seasonality due to recurring events, in particular, employee-related costs in Q1 and Q3. We expect the operating cash flow to increase significantly again in Q2 2019.Next and final slide, please. We had a good start to the new fiscal year. Solid growth in EMEA and the Americas. We are winning tenders and new customers in our core markets. Digitization is changing the networks and bringing the investment focus to us. We are technologically very well positioned. Our 3 core competencies are highly relevant to the transformation of networks. We remain committed to the positive outlook for the current fiscal year and continue to invest all of our energy and creativity in innovative solutions for the benefit of our customers, shareholders and employees. Consequently, for Q2 2019, we project revenues of between EUR 130 million and EUR 140 million, with pro forma operating income margin of between 2% and 5% of revenues.Thank you. Operator, please open the Q&A.

[Operator]

[Operator Instructions]

[Robin Brass, Equity Analyst]

This is Robin from Hauck & Aufhäuser. My first question would be the profitability, at least when I look at your Q2 guide especially, you guide for, I think, around 5% to 13% top line growth, so very strong. But year-on-year, this profitability is rather coming down, so at midpoint would be 3.5%, that would be 150 basis points lower than last year's Q2. Why is profitability coming down?

[Brian L. Protiva, Co]

So profitability is coming down because of our [ bottom merger ] or gross margins are down a bit and relative to some of the reasons that Uli expressed, and that is a stronger dollar. Clearly, we purchase in dollars and sell a lot into other currencies. That's one of the reason. Some of the product mix is because we're winning a number of new accounts, which is good news for the mid to long term, but clearly, in the beginning, it's always a little bit more challenging to win those accounts with high margins contribution. And then just product mix, in general, specifically, also, customer related. So it's something we're very much focused on. We think that, that's -- it does turn around -- at least looking from a forecast perspective, in Q3 turns around, again, nicely, but that's where we're at right now for Q2. We hope to outperform. We hope to drive larger cost-reduction initiatives. So we have a lot of things ongoing in order to counter that, but that's how we feel we're positioned today.

[Ulrich Dopfer, President, CFO & Member of Management Board]

Maybe to add to this one. If you look into Q2 2018, there was also an extraordinary, relatively high other income based on an accrual that we had to release and whereas, we planned a very -- fairly conservative other income for Q2 2018. So if you want to compare apples with apples, then you need to take this into consideration.

[Robin Brass, Equity Analyst]

Okay. And just to follow up, the product mix that Brian mentioned. I mean, you generally also see strong demand for Oscilloquartz, right, so therefore, at least this one should also help on the margin? Or is that maybe something they forgot here?

[Brian L. Protiva, Co]

Definitely helps in the margin, but as -- of the 3 legs to stand on, that's still small, but it's growing quickly. So I think, we had mentioned there that in the 20% to 30% kind of growth per year right now compared to other stuff. So that's definitely going to contribute positively, but slowly, but surely that grows and has a bigger impact on us. But it's not a huge one for, let's say, Q2 of this quarter. Helping, but it's not huge.

[Robin Brass, Equity Analyst]

Okay. And my second question also maybe looking a little at least towards H2, and so do we see rising demand also from 5G rollouts? And how do you work currently with the carriers if they want to look into 5G developments?

[Brian L. Protiva, Co]

So I think, yes, there is a lot of initiatives out there and everybody is looking at it very closely. I mean, it's always that transformational change takes longer. I think, everybody expressed that from the industry perspective. Having said that, a number of initiatives. And we had mentioned, one of our products, our 10-, 100-gig aggregator up to 1 terabit of -- or not quite, but almost up to a 1 terabit of switching capacity. That's a product that's being looked at for all sorts of mobile applications. So there seems to be a lot of movement, a lot of initiatives. Some opportunities that are developing in revenues, but it is steady as it goes, and I foresee that as a real positive starting in -- on the second half of this year. But that's something that goes to the next couple of years after that and kind of a linear, nice uptick for ADVA.

[Operator]

And the next question is from the line of Simon Scholes with First Berlin.

[Simon Scholes]

I've just got a question on the leasing liabilities. I mean, you said they were -- you've booked them for the first time in this quarter in the accounts at EUR 36.8 million. And just looking at the notes from the 2018 annual report, initially they were EUR 28 million at the end of 2018 and EUR 22 million at the end of '17. Have there been some acquisition? Or was there an acquisition driving the growth in '17 and '18? And can you give us an idea of what we should model in terms of leasing liabilities for the end of this year?

[Ulrich Dopfer, President, CFO & Member of Management Board]

The leasing liabilities, you can -- they won't change during the year, may be slightly if there's any change. But actually, they will change a little bit due to the depreciation, but there is no -- it's just a regular treatment of IFRS 16. So what you do is essentially, instead of having the lease OpEx in your P&L, you exploit the liabilities and you put the depreciation into the P&L. That's the only thing you do, but it's almost the same value. The only difference is that over time you depreciated some, the lease liability.

[Simon Scholes]

But isn't it basically the present value of some of -- that it's a lease outgoings on cars and buildings.

[Ulrich Dopfer, President, CFO & Member of Management Board]

That is correct.

[Simon Scholes]

That's right. So at the end of '17, you had EUR 22 million and at the end of Q1 '19, you've got EUR 37 million. So I was just wondering why the present value is up 80% or so?

[Ulrich Dopfer, President, CFO & Member of Management Board]

So as you said, we -- so, of course, we have the IFRS 16 for the first time in this quarter. What -- are you looking at the notes of the report, I mean?

[Simon Scholes]

I'm looking at the notes that you put in the 2018 annual report?

[Ulrich Dopfer, President, CFO & Member of Management Board]

Yes. These are only the notes of the lease liabilities, yes, and they might have been lower because we did acquisitions in the previous years. If you recall, in 2016, we acquired Overture Networks, where we acquired also some lease liabilities as well as with the MRV acquisition last year, the year before 2017, we acquired certain lease liabilities, yes.

[Simon Scholes]

Yes. Yes, I mean, that's what I thought. I mean, as far as I can remember there weren't any -- there wasn't a big acquisition last year, at least not from EUR 22 million to EUR 28 million, and it's gone to EUR 37 million in Q1 this year. Are you leasing that many more buildings and cars?

[Ulrich Dopfer, President, CFO & Member of Management Board]

No.

[Simon Scholes]

Okay. So we should -- I mean, if I model something like EUR 37 million, EUR 38 million for the end of this year, I mean, that would be a good estimate?

[Ulrich Dopfer, President, CFO & Member of Management Board]

Maybe. But you -- we did not add any additional buildings last year, but if we -- whenever you extend a lease, it also increases your liability...

[Simon Scholes]

Oh, I see. Okay, so it's extending the leases.

[Ulrich Dopfer, President, CFO & Member of Management Board]

As you probably saw, so, no, we did not lease any additional buildings last year, but we extended for 2 of our larger facilities the contracts for a few more years.

[Operator]

And our next question is from the line of Tim Savageaux with Northland Capital Markets.

[Timothy Paul Savageaux, MD & Senior Research Analyst]

Couple of questions. First, I want to start off with the focus on the TeraFlex product line. You mentioned that was kind of developing according to plan. Can you sort of remind us what that sort of plan is, whether you are shipping or have been planning to ship that product for revenue or kind of material commercial revenue? And whether that's a factor in your Q2 guidance? And I guess, competitively, how you see the TeraFlex platform shaping up versus some of the newer technologies bring -- brought to market by competitors, 800-gig technologies that Ciena, maybe Infinera? And what kind of advantage do you think TeraFlex will have in the marketplace relative to those? And I will follow-up.

[Brian L. Protiva, Co]

So on TeraFlex, I think, everything is moving forward. I think, we had initially said we're showing customers in the Q4 around demos at the customers in Q1. Shipping small, initial numbers this quarter and then recognizing figures in the second half was what we had said. And I think, it's all exactly on plan, no change of approach, huge amount of interest, far too many demos and PoCs that we have to pursue. We're not getting to them fast enough, so there's a lot of interest in the product. And I think, we have a very interesting product that has some inherent advantages beyond just bandwidth, speeds and feeds, but the -- how you operationally use the product and then also the issue of being able to modulate different modulation schemes and bit rates to maximize distance and scalability, efficiency and optical connectivity in over any distance, any mix of the modulation scheme and the bit rate is also a very big advantage and the customers love it. I'm not sure that anybody else is going to have that actually feature set setup anytime soon. So that's something that's long term, highly differentiated. Second is we really have 1,200-gig per chip ASIC from a density, power requirement. It's excellent and it seems to be best-of-breed. Next piece is, yes, some of the other people are bringing out 800-gig, but it's at higher BoD rate. So when you look at efficiency of the systems, it's not better. So I think people have to go apples-to-apples, not apples-to-oranges. The tendency is in marketing format to say 200-gig, 400-gig, 600-gig, 800-gig, but that's only part of the equation because it's all about efficiency and how you communicate over a fiber and cost management to thermal management. I think we're rocking there and I don't see anything that's been announced that we're worried about in the next couple of years. So that's -- there is arguments going out there that 800-gig is better for -- oh, you can map 2 400 gigs in that. I mean, you might know from our solution, we can map 3x 400 gigs in our -- in the chipset that we're using. That's one aspect. And second aspect, going -- using 800-gig speeds, you don't go over a couple of hundred kilometers. It's not about the people are mixing, let's say, positioning up a long distance, it's better for long distance, well, 800-gig doesn't go long distance. So I think we really got to be careful about the concept of what's the best solution architecture and we've never felt more comfortable that we can compete very effectively with the TeraFlex. The feedback from the customer is excellent.

[Timothy Paul Savageaux, MD & Senior Research Analyst]

Okay. Great. I appreciate that. And I don't know whether this is related or not, but you mentioned [ therapute ] is new tender activity. I don't know, if it's sort of centered around cloud and the TeraFlex solution and whether you're seeing other drivers for this tender activity? And also whether relatively strong -- well, this also may or may not be related, you saw some good year-over-year growth in the U.S., I wondered if you can give us more color on what's driving that from a product or end-market perspective?

[Brian L. Protiva, Co]

So let's start with the U.S. because a lot of the first question I missed, but we'll get back to that. So from a U.S. perspective, I think it's -- a lot of it is actually company related. I think we've invested and built an outstanding team, number one. Number two, I think the product spectrum is really nicely positioned right now, and there are many use cases where we're best-in-breed, price efficiency for use cases that make a difference. And so with change coming, transformational change coming, lots of investments going on in the United States because there is a need for state-of-the-art networks and digitization of society. That's all going in the right direction and ADVA is able to go out there and win customers and footprint effectively. So essentially, I do believe we're doing quite well in the United States and the pipeline has never looked stronger. Let's just knock on wood and keep moving down that path. But I think, it's a combination of competitive products, strong team, focused approach, doing well in the market. The first question, though was tender activity, okay.

[Timothy Paul Savageaux, MD & Senior Research Analyst]

Yes, it's tender activity and what was the drivers there, yes.

[Brian L. Protiva, Co]

Well, I just think people maximizing cost in the transport space, it's really cost per bit. Technology is here in some really interesting features in and around the 600-gig architecture per wavelength, but again, with all the advantages that we offer there. So that's one driving piece. Second is 5G. So lots of tender activity around next-generation network synchronization, and that is just perfect timing for us because all of those decisions are being made this year, may be still into the beginning of next year, but pretty much everybody would have made decisions. Started about 12 months ago. Again, we're in the middle of that one. And then the whole thing with 5G and aggregation and ITEMP and outside plans, WDM, aggregation and bandwidth to the building and having restrictions within the building, fiber restrictions and how do you maximize that infrastructure. So all these things are happening, which means, that drives needs for use cases and then the tender activity seems to be quite active. And couple that, well, sometimes we actually create the tender, because we got some cool technology walking to customers that really, really have to go, but they have to go through a tender process, and -- but we're in the driver seat because we're influencing the RFP and the requirements. But again, lots of activity.

[Operator]

[Operator Instructions] And our next question is from the line of Robert Sanders with Deutsche Bank.

[Robert Duncan Cobban Sanders, Director]

I was just wondering if you could just update on your different segments, the percentage of sales and level of profitability by whatever WDM you can access synchronization NFV? Just so I can just relevel set on what you're thinking between '19. And I have a follow-up.

[Brian L. Protiva, Co]

So we show in the slides, the breakout of the revenues. We don't give you full P&Ls per group. We don't do segment reporting on those 3 areas. As indicated, the fastest growth is in sync and timing, the highest margins is the sync and timing. In general, packet is second highest margins, actually grew very nicely in 2018. All 3 segments are growing this year. We have said high single-digits growth. We are maintaining that forecast there. And again, it's across all segments. I'd say, WDM and the packet are, in general, most similar. They're probably in the 5% to whatever 10% range again and the sync and timing is at a faster clip. Anything else that we give a lot is that, we don't do a full P&L. I think that's as much as we can answer right now to that question set.

[Robert Duncan Cobban Sanders, Director]

Okay. Great. And just a follow-up would just be on your expected ICP mix, both in the current quarter and by the year-end?

[Brian L. Protiva, Co]

So I think, we said we were all high single digits, sometimes maybe double digits over the last many quarters and our intent is to grow that. And I think that's the real upside. If we can win some nice new footprints with our new architecture, then we're in the fold, we're in the mix. Let's see how we're successful in doing that, but that's kind of the breakout opportunity for us. It's not what we're basically betting on through our growth and opportunity. We're just in the same framework that we've been in the last months with doing -- we've won nice -- 4 of them, we've won at different opportunities; 1, a little bit more scales; another, in the sync and time, very nice business; another one, that we're in the infrastructure, but not strategic right now; and another one, we're selling some of our OTR technology, too. So it's a mix, nice position, but what we really need to do is break in more aggressively into the optical layer. I think, everybody saw the amount spend in that optical layer is huge. And again, we're being taken seriously for that kind of next-gen opportunity. So we're very focused on that. But I can't answer because it's a hit and miss, but it's also not part of our planning.

[Robert Duncan Cobban Sanders, Director]

I was just coming back to the first question, sorry, about the segment, one of the thing I'm interested in is what are your market shares at the moment in these different product areas? And is there a level of market share that you think is a minimum to make sustainable money? So are there businesses that are may be operating below a sufficient level of market share to actually generate a return? And would you consider exiting those in order to get your margin up to 10%, your operating margin?

[Brian L. Protiva, Co]

So in -- let's go one after the other. WDM, you really have different markets within even the WDM segment. We've really focused on access and metro more than the other areas. And we are a top 5, 6, depending on whose information you read and which regions. We're, a, a very strong competitor in that space. When you move into the long-haul subsea [ zero ] we don't do business in that piece. So we're not really competing for the EUR 15 billion to EUR 20 billion market opportunity out there. You said we're subscale against the very big boys, but we're only competing them in certain use cases and I think we do extremely well there. And we share some of the biggest Tier 1 accounts in the world with them, because we are differentiated. So focused there in that space, but again, we need to grow over time and get a bigger part of the market share. If you look over the last 20 years, we've done that. Over the 20 years, we've taken an ever bigger part of the transport investment dollars, and we hope to do that over the next 10 years. Next piece is Ethernet. If you look at Carrier Ethernet, we're 1 of 2 global leaders. It's really us and Ciena. There we're very strong and you could say we're 25% -- 20%, 25%, 30% depending on whose numbers you listen to, market share. Having said that, we're moving into the virtualization piece, which is a new market. We're the market leader. We have almost 10 customers now. We won big players. We're in the middle of that. We're by far the leadership position. As that industry takes off, I think we're the global leader. But the third aspect of that is we're going up the stack. So we're adding Layer 3 capabilities. And they are, clearly, we're a nobody. But the fact is, we're leveraging our Carrier Ethernet space and our universal CPE strengths to go win pieces there and move into different use cases within the customers that we already have. And that's going nicely actually. So that's the market that we'll start to attack, which is a EUR 3 billion, EUR 4 billion, EUR 5 billion market, depending on how you categorize that and whose numbers you listen to and which use cases you include. So in Ethernet, very good, very strong global leader. And then think, we're a clear distant #2. The #1 is multiple bigger than us. Having said that, the #1 has gone through multiple different acquisitions, not focused on the right applications in this space. It is probably 3 years behind us in product architecture. We've done everything new, invest like crazy and we're winning deal after deal even though the other large player has amazing legacy install base and strong channels. So we are growing very quickly there. I don't think there's anything at this point, there's anything anybody can do to stop that besides us not being successful. In other words, it's about execution, pricing to perfection, quality service, organization, supporting things because our architecture is fundamentally better on technology, cost and everything else. So we're not big there, but we are actually the big kid on the block when it comes to the technology platform, so we can continue to win and scale that nicely and grow, grow, grow for a decade very aggressively and with very nice margin contribution. So that's the way I'd associate it. Clearly, so strong things, strong Ethernet, very focused WDM approach. And over time, we would love to build our WDM, let's say, end-to-end portfolio, but we've said that. We're focused today. We're building our balance sheet. We can grow organically. We can win lots of deals, but with the right opportunity, we do believe further consolidation is needed in the industry. We hope to lead that. Maybe we're not the leaders and someone else will be the leader, but we believe through that strategy that we will have a bigger influence in that end-to-end WDM architecture mid to long term.

[Robert Duncan Cobban Sanders, Director]

Got it. That's very helpful. Just to confirm, you wouldn't consider doing a portfolio examination and saying, look, we haven't really made a sufficient return, we haven't covered our cost of capital and we look to retrench in certain areas as part of a kind of, let's say, more aggressively priced disciplined approach to getting to a double-digit margin?

[Brian L. Protiva, Co]

So, I mean, clearly, we could sell one part of our business like the WDM piece, but it's -- that's not our intent focused strategy or something we're pursuing now. So the answer is absolutely, not. We see ourselves incredibly strong at the edge of the network. I think all areas are profitable, WDM is a profitable business for us. We feel like we're gaining strength. We moved to a new product architecture. We were a little bit late couple of years ago, and actually we feel that we're getting really nice momentum right now. And at the, again, edge of the network in the metro field that we're very well positioned, getting stronger. We're still not though ready for the regional long-haul and subsea markets, and no, because if we gave up WDM, that's giving up our -- lot of our strengths that we're seeing being realized by the move to the edge that helps to differentiate ADVA. So it's fundamental, it's an important part of our tripod strategy of optical packet and sync. And therefore, we see no need for that. And nevertheless, we believe that we can grow strongly and get better margins and profitability over the coming years.

[Operator]

So we have no further questions. I hand back to our host for closing comments.

[Stephan Rettenberger]

Okay, well, with that, ladies and gentlemen, thank you very much for attending today's call and for the interesting Q&A session. We thank you for the attention, and we will report our Q2 numbers on July 25. Thank you for joining, and have a good rest of your day. Bye for now.

[Brian L. Protiva, Co]

Thank you very much.

[Ulrich Dopfer, President, CFO & Member of Management Board]

Bye-bye.

[Operator]

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.