Adtran Networks SE

XMUN:ADV

Earnings Call Transcript 2018-Q2

[Operator]

Dear ladies and gentlemen, welcome to the conference call of ADVA Optical Networking for the second quarter 2018 IFRS financial results. This call is being recorded. [Operator Instructions].I now hand you over to Mr. Stephan Rettenberger, ADVA Optical Networking's Senior Vice President, Marketing of Investor Relations. Please go ahead, sir.

[Stephan Rettenberger]

Yes, thank you, and a warm 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 call's 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 2017.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 as 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 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 Q2 2018 financials. And finally, we will have sufficient time for your questions, which we'll be happy to answer. Brian, please go ahead with the business update.

[Brian L. Protiva, Co]

Thank you, Stephan. As always, we will start with the business update and outlook on Page 4 of the presentation. Q2 revenues reached EUR 123.8 million, up from EUR 120.5 million in Q1 2018, but down from EUR 144.2 million in Q2 2017, where North America and the ICP space contributed higher revenues. This was within our guidance corridor provided on April 26, 2018, of between EUR 120 million and EUR 135 million. Our Q2 pro forma operating income was at EUR 6.1 million or 5% of revenues. It was at the upper end of guidance of between 1% and 6% of revenue. On a positive note, although we lost quite a bit of revenue from 1 strategic customer from last year, our total gross profit remained at a comparable level from Q2 2017 to Q2 2018. All in all, we quickly recovered from the dip in Q3 2017, on showing both slight growth in revenues and stronger gross margins, which will have a positive impact on our calendar year 2018 results. We were able to demonstrate good execution when it comes to our strategic investments, which are beginning to deliver returns. Our third consecutive quarter with growth and strong margins and good profitability is building the foundation for driving stronger shareholder returns. Optical market remains competitive, while both the packet edge and the synchronization solutions are delivering according to plan and helping us to secure solid gross margins and profitability. Prospects for Q3 2018, Page #5. We will continue to strengthen our balance sheet and return to normalized growth by tightly managing our costs and driving greater growth in some of our highly differentiated market solutions such as our packet edge solutions area and our edge NFV portfolio. For the first time in many quarters, we forecast both sequential growth and annual growth of between 10% and 20% off Q3 2017. Revenue growth on an annual basis in 2018 is still challenging. As already mentioned, we have to replace strong ICP revenue numbers from one of our largest ICP customers, who made large revenue contributions to the first half of 2017. However, strong order entry and early indications from major customers point to a strong second half of the year. And as presented last quarter, we now service 3 of the big 5 ICPs, and we are working diligently on the next-generation of DCI technology to upsell our existing customer base. Every revenue euro means more to us in 2018 than in 2017, due to our increasing gross margins. The optical market will remain very competitive until further consolidation occurs in the market, as some of the weaker players are selling purely on price to stay relevant. On the next 3 slides, I will outline my view on our position in our 3 technology segments. Page 6, in optical networking. Our focus will be to leverage the metro core upgrade cycle at our carrier customers to drive additional optical revenues by expanding the use cases at our existing customers. We're also aggressively pursuing DCI opportunities with open-line systems, and we are introducing a number of new products for this market segment later this year. In addition, we are going to win new footprint for flexible and programmable 5G infrastructure, where we can leverage all 3 core technologies and our software expertise. We believe, for the first time, there will be opportunity for networking equipment manufacturers other than the big 3 mobile network providers to win real share due to the virtualization of certain parts of the network and the differentiated technology needed for 5G. Investments are too big and the lock-in too great for carriers to solely rely on the big mobile network equipment vendors. In the meantime, our business is moderately positive, as we continue to win an ever greater number of CloudConnect customers. With the addition of our TeraFlex features, we'll be expanding both our CloudConnect product architecture while winning further customers. In the meantime, our MicroMux product is shipping with initial volumes. And finally, ADVA Optical Networking continues to invest in software-defined strategy in order to support our customers looking at flexible capacity in the network, in order to support cloud-like flexibility in a carrier network. Physical and virtual packet edge, moving to Page #7. With respect to our second technology segment, we have a number of opportunities to grow our ADVA packet edge market share throughout 2018. The first and primary goal is to protect our MRV customer base and drive cross-selling initiatives with our NFV solution or other ADVA products. Next, we plan on expanding the customer base for cloud access solutions by offering both physical and virtual packet edge solutions for complete flexibility and a secure access. They can choose to use our all-in-one hardware solutions, which lead with price performance or to use our software solutions over their cloud infrastructure on white boxes to build secure, high bandwidth and software-defined on-ramps to data centers or cloud infrastructure. Furthermore, we plan on accelerating revenue contribution for our Ensemble software solutions, as we see a lot of activity from the carrier landscape and our win rate is increasing. This is based on our comprehensive product strategy, ease of use, secure platform and some of our latest technology features such as zero-touch service delivery or provisioning for both carriers and enterprises. Our channel base for the Ensemble products continues to strengthen with one global integrator and one global manufacturer reselling our product platforms. The list of potential customers is growing rapidly and our reach is at a never-seen-before scale. We have positive revenue and margin growth in this area, and we've made a number of new customer announcements, such as our recent announcement with Colt based on our Ensemble software universal CPE solution. Synchronization, my final slide, Page #8. We are winning multiple footprints and growing rapidly with our synchronization strategy. So far, we are leveraging our large footprint in the carrier space, but there are a number of other customer segments which we will be successfully expand into over the next 2 to 3 years. We are utilizing our technology leadership in synchronization to further improve overall corporate gross margins and win new footprint, where we can cross-sell our other technologies.With the decision for 5G infrastructure builds being made now, we have all the pieces in order to offer a comprehensive portfolio with core, access, and even software-based assurance solutions, which far exceed our competitor's offerings. Our recently introduced new products the OSA 5430 and 5440 put us, once again, 18 to 24 months ahead of all competition. Accurate and scalable time and frequency synchronization will continue to give us a third leg to stand on and the ability to leverage optical, packet and timing technologies for next-gen networks. With ICPs and carriers as already existing large-scale market verticals, we'll be adding other customer segments throughout 2018 and 2019. And now for the financial overview with Uli as the next speaker. Thank you very much.

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

Thank you, Brian, and hello, everybody. Let's move to Slide #10, quarterly IFRS revenue and pro forma profitability. As already stated, we ended Q2 2018 with revenues of EUR 123.8 million. This resided within our guidance range of EUR 120 million and EUR 135 million and represents an increase of 2.7%, compared to the EUR 120.5 million in Q1 2018. The change in customer and product mix combined with the successful cost reduction efforts led to a strong gross margin of 36.7%, compared to 32.4% in the year ago quarter. Despite the fact that our revenues decreased by 14.2% year-over-year, we managed to maintain almost similar levels of gross profit compared to Q2 2017.These effects are also reflected in the strong pro forma operating income, which was in Q2 2018 EUR 6.1 million or 5.0% of revenues at the upper end of our guidance of between 1% and 6% of revenues.Let's move to the next slide please. Quarterly IFRS profitability. In Q2 2018, IFRS operating income was at EUR 4.1 million or 3.3% of revenues, up from negative EUR 0.4 million or minus 0.4% in Q1 2018. This result was impacted by EUR 0.3 million restructuring expenses. The integration of MRV has been completed, and we expect no further restructuring expenses. A stronger U.S. dollar supported EUR 1.3 million of financial gains and combined with an effective tax rate of 7% resulted in a net income of EUR 4.6 million or 3.7% of revenues. As the number of weighted average shares outstanding has not changed significantly, diluted EPS developed in proportion with IFRS net income to EUR 0.09 per share. Next slide please, quarterly revenues per region. As already seen in Q4 2017 and Q1 '18, we benefit from the strong MRV presence in Asia-Pacific, reliably contributing now more than 10% of total revenues. Revenues in the Americas recovered nicely and increased by EUR 10.6 million compared to Q1 2018. EMEA continues to be our strongest region and contributed 46% of total revenues in Q2 2018. Slide 13, IFRS balance sheet. Overall net working capital of EUR 121.8 million remained at a similar level as at the end of Q1 2018. Inventory increased slightly to EUR 76.3 million from EUR 73.0 million at the end of Q1 2018. Due to a very backended-loaded quarter, both accounts receivables and payables increased significantly compared to the end of Q1 2018. In Q2, we repaid EUR 5.6 million of debt and increased our cash level slightly to almost EUR 60 million. Consequently, net liquidity improved by EUR 7.6 million to a negative EUR 36.6 million. Equity ratio is at 49% with total stockholder's equity of EUR 233.2 million. Next slide please, outlook for Q3 2018. We project Q3 2018 revenues of between EUR 123 million and EUR 133 million with a pro forma operating income range to range between 2% and 6% of revenues. We remain committed to a flexible cost and operating model that allows us to quickly adapt to changing market conditions. We will continue to perform detailed reviews of the expected business development in respect of all intangible assets, including capitalized development projects. In case of highly adverse business prospects, such a review may result in noncash impairment charges in Q3 2018 and beyond. The operating pro forma income guidance we have provided today excludes any such potential impairment charges.With that, I'd like to summarize today's call. Last and final slide, Slide 15. We have good execution and focus. Our strategic investments are delivering returns. Our acquisition of MRV, which we completed in August 2017 and have now fully integrated into our business, has delivered the anticipated revenue contributions and synergies. Coupling this with our continued financial discipline and strategic focus, we believe ADVA is on track towards increasing profitability and sustainable growth. Q2 2018 market -- marked the third conservative quarter of sequential growth with increasing profitability. The global growth drivers cloud and mobility and the preparation of the network infrastructure for 5G create new opportunities for us with multiple ways to win. Our open, programmable, optical transmission technology offers significant value in terms of capacity, flexibility and automation to network operators, large enterprises and Internet content providers. Traction with our cloud access solution is growing, and we are winning more and more designs. Our technical advantage in network synchronization is growing, and we are developing a strategic presence with Tier 1 network operators. Both technology pillars, cloud access and synchronization, are delivering increasing revenue contributions and opening new doors to new customers. Altogether, we expect continued positive business development in the second half of the year. Let me now thank you for your participation in today's call. And with that, I'd like to turn the call over to the operator to begin with the Q&A portion of the call.

[Operator]

[Operator Instructions] We've received the first question. It comes from Mirko Maier of LBBW.

[Mirko Maier, Investment Analyst]

A couple if I may, and mainly for Uli, is I guess, first on outlook. If I add to your outlook, you've mentioned in your report this high single-digit revenue growth in 2018, together with your outlook for Q3 that means from my point of view that in Q4 your planning assumptions are for negative revenue growth, is this right? And secondly, it seems that your visibility is somewhat higher because you came back with a range for guidance in the EUR 10 million range, is this also right? And third, it would be great if you could share with us the revenue numbers from Oscilloquartz in Q2 and progress in the last year. And the last question on those customers in United States. Could you give us an update how the discussions are going on with the special customer? Have you lost those -- customer? Or will he come back with some orders in the next couple of quarters?

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

Thank you, Mirko, for the question. I need to clarify one thing. So our 2017 revenues, the EUR 514.5 million, and we -- in our outlook, we say we will see moderate single-digit growth in 2018. So with our guidance that we provided now, we -- and I didn't really get what you were trying to say with the negative, but we will have a -- we will have to have a strong Q4, yes. If you take mid to our high point of guidance, we still have to step it up significantly in Q4 to get there. What makes us confident? Can we still reach it? Look, we had very strong order entry in Q2, like Brian mentioned during his part of the presentation, and we have some good signs from several larger customers and now it's about execution. There are, of course, several challenges. We have seen some of the challenges already in Q2 with some shortages on the component market for certain low-value components. But it's -- is it doable? Yes. It's going to be tough? Yes. In regards to Oscilloquartz revenues, we do not disclose these revenues as of now. But we're currently considering doing this going forward, so please allow us not to disclose these numbers.

[Brian L. Protiva, Co]

Two questions -- two comments from my side. The EUR 10 million range, Uli, yes. The answer is better visibility. And Oscilloquartz is profitable and growing quickly, but we're not going to disclose each piece at this point. So it's a nice business for us. And discussions around the special customer was reference, I believe, to our large ICP, where we lost revenues after the first half. They are still a buying customer. We, in fact, won another footprint with them just -- over the last 6 months, which is small volume, but it shows that we are an existing supplier, and we hope to become very strategic over the next 6 to 12 months with them with our latest generation of technology. And I think we're well positioned there.

[Operator]

The next question is from Tim Savageaux, Northland.

[Timothy Paul Savageaux, MD & Senior Research Analyst]

Just wanted to follow-up on that conversation around 2018 growth potential and make sure I understand what you're trying to communicate here. So in the prepared comments, Brian, I thought you indicated that growth in '18 will be challenging, sounds like in this most recent conversation, that's challenging but doable. So I want to get a better sense of whether you're kind of maintaining that kind of low single-digit growth guidance for the year but pointing out some risks to it. And to the extent that you've got some funnel or order visibility into a potential, pretty strong ramp in Q4, I wonder if you could characterize what sort of opportunities are driving that? Whether it is cloud? You mentioned at least some uptick in [ others ]. You saw a strong increase in Americas' revenues in Q2. Or whether there are other areas that might be providing the sort of visibility that would lead you to say that it's still possible, although tough, if I'm hearing you right.

[Brian L. Protiva, Co]

Okay. So I mean, that's why we prepared, and I think taking on what Uli said is, we are all focused on getting that growth and we, as executive team and the entire ADVA is -- clearly our variable pay is based on getting that mid-single-digit growth. So we are very focused on it. It has become more challenging because our growth rates has been slight growth quarter for quarter. And I think we can continue that slight growth quarter for quarter. As Uli said, we had good bookings in Q2, but it's competitive optical market where pricing is still having too much influence on the market space. So we feel good about our position. We feel it's risky to commit and that's why we're saying to everybody right now, it's going to be a hard push because we're going to have a strong Q4 to make that original commitment come true. But based on some of the bookings and opportunities that we saw in Q2, it's still doable. Even if we do not achieve that, I think it's our goal to make sure the profitability is there, the cash flow is positive. We are evolving nicely as a company. The 3 segments, and I just want to repeat this, is optical is the most challenging over the last 6 to 9 months. Synchronization and timing coming along very nicely. And our packet edge, both from the physical network element equipment, but also with the Ensemble architect -- software architecture, we're doing nicely and growing that business. We do believe that our optical product architecture is getting more competitive by the week, month and quarter. And therefore, that'll allow us to attack the optical segment aggressively with right technology. I hope that answers your question, Tim.

[Timothy Paul Savageaux, MD & Senior Research Analyst]

It does. And I'd like to follow-up and see whether it's possible to put any more specific metrics around the extent of the booking strength in Q2, whether that's kind of a book-to-bill indication. Sounds like it should be solidly above 1. But to the extent, would you like to comment in more detail on the nature of the bookings strength, I'd be interested in hearing that.

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

Tim, we usually do not disclose booking numbers. I guess, as you said, if you talk about book to bill, we had a very good book-to-bill ratio. But I guess, that's all the details we can provide as of now. But we have definitely some strong bookings that are not only going into Q3, also going into Q4, and even into the first quarter of following year. So yes, we feel pretty good about this.

[Timothy Paul Savageaux, MD & Senior Research Analyst]

Okay. And then final question from me on the competitive situation. I think, if anything -- if you look across the space, the challenges have been maybe more on the margin side than the top line in terms of what some of your peers have been saying, kind of echoing some of your commentary around price pressure, but also seeing some pretty significant uptick in growth rates, at least in Ciena's case. So I wonder if you can talk to your impression of, kind of, ADVA's overall kind of market share development across your served markets on the optical side, and how you expect that to unfold throughout the year. There's been -- any major changes there?

[Brian L. Protiva, Co]

So my view is pricing competitive environment, Ciena is growing, but it's not high growth. They're solid. Others are still open to see what's happening out there. And as indicated, our other 2 legs to stand on are stronger. So from an optical perspective, I believe that things -- bandwidth is growing like crazy. I think, things -- first of all, I do believe our industry is going to consolidate. There are rampant rumors out there of things happening. So you need to consolidate. That's going to help the optical space because the bandwidth growth should be driving much greater revenue growth. So even though we might as a whole industry be seeing slight revenue growth, it's nowhere even close to the bandwidth growth and it's due to very aggressive pricing from certain competitors. And so my view is keep our heads down and drive further build-outs and wins at existing customers. And we're doing that, cross-selling into other segments, et cetera, winning some key deals and we're doing that as well. And then we have to see exactly how price compression versus bandwidth growth is really doing. But I don't really want to commit to that right now. My sense is that it's -- the industry is growing in single-digit growth, and at best, in upper single-digit growth is my sense, just looking out there at the industry as a whole. We're not in an optical up cycle. There is some consolidation on to -- let's say, Ciena's numbers seem solid. So it's a competitive interesting market space and ADVA's technology differentiation and positioning is getting stronger by the month, and the reason is we made a massive transition to new architecture. And we were late with it back in that [ 2 17 ] range, and I think we're catching up there quickly. So we feel good about all 3 segments, but optical is the one to watch as far as growth goes.

[Operator]

The next question is from Robin Brass, Hauck & Aufhäuser.

[Robin Brass, Equity Analyst]

First one is looking at your 3 segments: Enterprise, Cloud and Communication. Is there any, like strong growth that you like to highlight here of where's the growth coming from in those 3 segments? And my second question would be especially, I guess, towards the communications space. So here at least you always heard a lot that the Chinese competitors in Europe were trying to get market share, is this continuing? Especially given that the U.S. is now even more shutting down to any Chinese entrants? Or how do you see this?

[Brian L. Protiva, Co]

So from a customer segment is what your first question was, enterprise, cloud and com space. And I think we're making progress in the enterprise space step by step. From a cloud perspective, we're still in the range of upper single digits and double-digit number, but not any kind of growth vehicle really for us as an organization today, but opportunity to grow that space with some things that we're working on presently. And then the com space, I'd say, is probably the strongest for us right now based on the wins and the sync and timing space/with our package edge story. So the communication providers is the one that's having the most, let's say, new footprint opportunities for us. And I'll let Uli do the details if you'd like to on any of the numbers in that segment. But that's more of kind of what's going on out there in the business. And the second one is, the Chinese have been in Europe for better part -- more than 10 years, and they're in many of the accounts already, being Huawei. ZTE has struggled except for some southern European countries. And now they're pushed back out completely, I think, just due to their challenges with the U.S. government, which means that they can't access certain technologies. And therefore, really it's not a discussion around the Chinese, it's a discussion around Huawei. And Huawei has most of the big carriers at this point, and I think that they're in a situation where they need to harvest some of the things they've done in the past. And therefore, I think it's very stable. I don't see them as changing market dynamics in any way or form because they are the leader already in Europe. And the leader doesn't usually do things that change their market position. So I think they're rock solid, good company, delivering what is needed, but they present us also opportunities because we are small and agile, focused on different opportunities to win new footprints, and we are often the challenger in a number of the accounts. So we share a lot of the Tier 1 accounts and Tier 2 accounts with them already. So we feel very comfortable that that's stable.Uli, I don't know if you want to add any color to the first one?

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

I mean, I can for sure. So if you look at the 3 segments: Carrier, Enterprise and ICP, you can -- definitely carrier space is up compared to the previous quarter or quarters and contributed almost 70% to the revenues. And then followed by the Enterprise with almost mid-20 -- mid-22%, 23% and the rest is ICP. ICP was actually surprisingly strong in Q2, but then was also up from previous quarters. But we don't expect this to be growing strongly going forward for the short term at least, but should be around that range.

[Robin Brass, Equity Analyst]

Okay. Maybe one follow-up. Brian, you also mentioned the new products you're currently rolling out. I think you also have one that is specifically linked to the ICP space. If I'm not wrong, is this correct? And what is your view here, especially maybe to win market share in the ICP space in the beginning of next year with this new product?

[Brian L. Protiva, Co]

So yes, the TeraFlex is a really high capacity, low cost 100-gig engine, essentially. And that product is, in fact, in Q2 ahead of plan. So wonderful news. Remember though, that it's just an extension to our CloudConnect. The CloudConnect was a full new hardware architecture, full new software architecture. We don't have those challenges anymore. That product is solid, selling into many, many customers already. And now we're bringing out new features. The TeraFlex is -- can be considered a new feature. But it is a chassis, very scalable, very focused on that market opportunity. So that is coming to market and we feel good about our competitive position there. Combine that with what we call open optical systems and that is allowing our customers to build optical networks in very open, meaning that they can use multiple different suppliers for the transponders or for the optical modules. You can put the optical modules in a switch router. You can have standalone product. You can add it to other network equipment elements in the network. Our -- is an architecture where we're leader in. And so we have a couple of initiatives, and the third piece is all the software open, let's say, interface standards that we're coming to market. So we're not offering just one, we're offering very flexible, very focused on that customer segment and saying, we'll do whatever you need, essentially, very quickly and supporting that customer base with all those optical open-interfaces.

[Robin Brass, Equity Analyst]

And is it fair to assume that you use this new product first with some smaller clients before you offer it to the larger ones at his moment or...?

[Brian L. Protiva, Co]

I think we'll go to market at about similar times. So clearly, the larger ones have their cycles, depending if their cycles early or mid, will be determined whether they'll see that first or after some of the smaller players. Again they go through cycles of product evaluation. What we're trying to do is align all of our customers with our product introduction. So that they -- and at that point then, if that's all aligned from that base, clearly, we would be positioning with the largest customers first just because of the scale. But again there, that's an issue of alignment that we -- it's not at all our decision alone.

[Operator]

The next question is from [ Jan Eshuis ] [ Apus ] Capital.

[Unknown Analyst]

Maybe only follow-on question. Coming back to the CloudConnect where you said you have been a little bit late in the market. And now with TeraFlex, you have a head-on within the ICP market maybe you see good chances. Maybe what was the reason that CloudConnect was not at the first steps was as successful as you expect it was? Is it yet to be delayed? Or is this add-ons like TeraFlex may have not been available. And how -- you see your competitive maybe your position at the moment against the closest players in the space, that's the first question.

[Brian L. Protiva, Co]

So on that, we had indicated mid of last year that it was a software architecture and a supplier challenge. So our -- one of the engine in the solution was not done in a timely fashion. And then the software framework, being it was completely new and it's usually a 10-year software framework, we did make -- try to make big innovation steps and that was more challenging than we'd anticipated, but we're through those things. We've simplified and integrated and we're in normal process of now customer evolution. And the issue is long gone with the engine piece, and we're now moving to that -- to kind of that second-generation piece for the CloudConnect and that's working very well. So stable, nice position. Let's just make sure that we continue ahead of plan with go-to-market strategies on our TeraFlex. So I think that's all good. What was the second question? I do not write down, sorry.

[Unknown Analyst]

No, no, it was -- maybe the question was if -- how you now feel with, now you have solved the problems and make add-ons and the software is running, which is quite new solution. How you see your competitive positioning against maybe the closest competitors in the space with CloudConnect?

[Brian L. Protiva, Co]

So existing competitive position, I think we're in the ballpark. We're in the ballpark with our CloudConnect. We have some very nice differentiating features, but our competition have differentiating features. I think the TeraFlex really changes the ball game and makes us very efficient on the scalability/costing. So in a full picture, the CloudConnect continues to evolve. We continue to add features as we go forward, and that's what I indicated earlier. I think we're more competitive today than relative over the last 12 months, and we're getting better and better each quarter. So I think that's really important for us as we build holistic platform in that CloudConnect. The second piece is the issue in and around the scalability in 100-gig pricing and really hardcore infrastructure piece. And now with the TeraFlex, I think we will be market-leading. And I think we'll have a very nice competitive position to go attack the market, and we will.

[Unknown Analyst]

So if taking this and maybe also maybe Oscilloquartz maybe will pick up more in revenues next year because of some orders you will win now maybe it's more -- maybe picking up next year. And you mentioned also some market is not booming, but there are signs that maybe there is an up cycle ahead in the coming 2 years or so, LTE 5, for example, maybe the switch to 400 gig. Therefore -- could therefore maybe is a chance that the revenue could accelerate going forward with all the uncertainty you have today, but maybe the basic assess of the fundamental is made and the market is moving in the right direction or...?

[Brian L. Protiva, Co]

So my idea would be that we can grow Enterprise. We can grow Carrier, but we all know that the carrier market space is competitive, remains competitive and there's consolidation there. So -- and I think that will -- can evolve. So Enterprise evolves. Carrier space evolves, and I think the ICP space is the one where we could get a strong growth, if we perform well, but we're not promising that. And therefore, my statements have been is that we're evolving the business. We're managing the business well. Gross margin is expanding. Profitability is expanding. But right now, I cannot make a call on the industry as a whole, specifically the optical space to see do we go back into double-digit growth next year. That will be our intent. I will be pushing the company aggressively in order to make that happen, but I can't sit here today and say that's definitive. What I feel comfortable with is an evolving story growth, strong margins, good profitability, continue to invest and having 3 legs to stand on in order to win business, cross-sell, build the business. And then we'll have to get back on our next calls, 1 or 2 calls to really see how the optical space is expanding into next year, probably early next year.

[Unknown Analyst]

Okay. Maybe only follow-on if -- maybe ICP is really moving back to strong growth. Would this time be not a negative impact on the profitability like we have seen in the last strong growth rate of the ICP business because you have another product which has better margins? Or should we expect because it is a very competitive space that growth's moving up, but margin maybe we see some negative impact?

[Brian L. Protiva, Co]

So you are right. If we go into a rapid growth phase coming from ICPs, that will dilute our gross margins, but we'll still drive profitability. But I think what we have stronger this time around is we have 3 legs to stand on. We have a nice growth business in synchronization and timing with good margins. The packet edge story, that's why we mentioned a couple of times in the presentation today, is a nice story evolving and the margins are getting stronger there as we win more and more software deals. We truly have the leading product on the globe and that's against all other players for a number of different use cases. So if we can grab that and drive sales growth there, that's very good margin development. And that's that packet edge story. So we have very good products, good margin future, and right now things look strong there. And so the third segment is really in and around that optical space. So if we get that ICP engine going, yes, we will grow faster, margins -- gross margins will be diluted, but our profitability will grow nicely and strong. We understand the ramp and the opportunity is a little bit better than last time. I think we'll do a good job of managing those things and continue to try to stabilize on 3 legs to grow or just stand up.

[Operator]

The next question is from [ Timmy Genesis ], William Blair Company.

[Unknown Analyst]

I have three questions I wanted to pose to you. And I appreciate your candid answer. On the TeraFlex, I'm sort of following up on prior questions here. You launched -- you announced the product in March of '17. I think you launched it in the fall. So it's been out there in the open, right? So people are trialing it. I'm curious to see how many design wins you have on this product. And this was going to be your grand sort of product for ICP market, right, and you were going to maybe win that -- back that large ICP that you had on the prior-generation products and maybe add a couple of more to it. So this is obviously a key product to your success in preserving margins and driving future growth in this segment. So can you give us a little bit more visibility, color of how many design wins you have so far? Is it close to prime time? Is it not yet there? I mean what are some of the steps you're doing to kind of get TeraFlex qualified into major...

[Brian L. Protiva, Co]

What we have said is that our lab demos Q3, customer demos Q4, ramping sales beginning of 2019. We are dependent on the DSP partners that we have selected. And the technology is coming to market. One's slower than anticipated in, let's say, the first half of 2017, but they are coming to market and all indications are very good at this point. So we're not in a position to say now we have specific design wins. We're not a position to recognize any revenue, but all indications that it's a rock-solid architecture, all the pieces are there. We can show the product et cetera. So things are moving around nicely. So this is all based on the 600 gig per wavelength. Our last generation was 200 gig per wavelength. And the state of the art right now, are people either at 200 gig or [ Sam ] has announced the 400-gig platform and are going to market with that solution as, kind of, as we speak now. So we feel that we have a competitive edge against other players, but we need to go get our roadmap and then start to realize revenues, revenue recs in beginning of next year. That's the plan at this point.

[Unknown Analyst]

All right, I appreciate that. Second question on the, kind of, the price competition that you mentioned in the optical market. Any specificity, I mean, Huawei has always been kind of a big price disruptor. So maybe take them out for a second, but focusing on sort of more disciplined players out there, the Nokias and Cienas and Infineras of the world, are you seeing more price aggression coming out of these players? Or is it something else like Coriant? I mean, can you give us a little bit of color what's driving all this price disruption or aggressiveness out there?

[Brian L. Protiva, Co]

So I think the most aggressive are and I've indicated in my presentation is, more the wounded animals that are doing crazy pricing. And then some of the more established players, including us doing strategic pricing at certain accounts. But that can get very aggressive. And I think that's the situation right now is it can come from anywhere, and not particularly the Chinese to tell you the truth because, again, they're well established. They're not able to attack the American market where, I think, they'd go crazy if they had that opportunity, but they don't. They're established in the other markets. And therefore, they're not really the leading price-aggressive player, but they can be at any given time naturally. But it is more the wounded animals in the first layer and then selective accounts in all the more established players based on strategic direction.

[Unknown Analyst]

Okay, that's helpful color. More established being the Cienas, Nokias, Infineras I would imagine is what you're referring to. Okay, and last one, if I may, more of a architectural shift that's going on. You'd open -- open-line systems. There's a lot of kind of buzz around that. And today, it seems to be coming out of the DCI world. Are you seeing any of the telcos, the Tier 1 telcos kind of talking about it and moving in that direction as well? And if so, how would the margins sort of fair in that architecture? It isn't any more kind of a razor-razorblade approach, I'd imagine, because you're either selling a transponder or you're selling an open line system or both. And so you would have to take the margin upfront as opposed to kind of piecemeal, razor-razorblade, right? Correct me if I'm wrong about that, but then just curious if the telcos are considering that as well? And if so, when that really becomes reality?

[Brian L. Protiva, Co]

So correct with your -- the situation of selling the infrastructure really, really cheap, all the line systems really, really cheap and then later making the money with the transponders. If it's an open system that might not work the same way. And therefore, people need to make sure on the line systems or even if you have individual network elements that are managed independently. And having said that, carriers tend to -- they want to go through this process. And yes, we are engaged with carriers, as we speak. They want to then qualify and certify the platforms, but in the end they want one throat to choke. They don't want to be dealing with 6 players for optical. So it goes through a process of optical and most likely, the 2 internals maybe, depending on the size of the company, maybe 3 players will then compete for that -- those, that optical transponder business, essentially. So I think carriers will go down this path line. It will be a very managed process. There will be more competition so that in the third and fourth year, it's not just captive. We have to continue to innovate and drive innovation, but I don't think it's going to have fundamental gross margin change within the optical space at all. And I think it -- but it will make us drive innovation and continue to innovate rapidly on the transponder side. So in general, ADVA here is a leader. We think we can go win new footprint because of our position and our willingness to go open, and we are seeing carriers just starting the process.

[Unknown Analyst]

Do you have a number of design wins you're involved in the open line networking deals or something you can...

[Brian L. Protiva, Co]

So I do -- yes, we have design wins. But we haven't started to process that or to make that information public. But yes, we have design wins.

[Operator]

We have received a follow-up question from Tim Savageaux, Northland.

[Timothy Paul Savageaux, MD & Senior Research Analyst]

I've got a quick follow-up for Uli and really that's focused on the operating expense front and kind of what your expectations might be looking forward there. It looked like you saw a pretty solid down-tick in OpEx in Q2 as part of the kind of high end of the range operating margin, despite a lower end of the range revenue result in sort of I guess, in line gross margin, which at least with regard to my expectations. It looks like from a guidance perspective, you kind of expect that to bounce back up towards Q1 levels. Just trying to get a sense of what the OpEx baseline might end up being on a quarterly basis. You mentioned you're kind of through the MRV restructuring. Any color around that would be appreciated.

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

Yes. I would probably assume, Tim, that our OpEx basis will bounce back to similar levels we have seen in Q1. We had some special effects in Q2 that helped us to get way below Q1. So -- but I guess, Q1 is a good basis for you to do your math going forward.

[Operator]

We have no further questions for the moment. [Operator Instructions] There are no further questions. I would like to hand back to you.

[Stephan Rettenberger]

Yes, and thank you, everybody, for joining today's call for the interactive Q&A. As always, we will publish the recording of the call and the transcript within the next few days. And we hope to have you back on October 25 for our Q3 earnings call. Thank you and bye-bye.

[Brian L. Protiva, Co]

Thank you, everyone.

[Operator]

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