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Ciena (NYSE:CIEN)
Q3 2018 Earnings Conference Call
Aug. 30, 2018 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Emily, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ciena fiscal Q3 2018 financial result call. [Operator Instructions] Thank you.

Gregg Lampf, vice president of investor relations, please go ahead.

Gregg Lampf -- Vice President, Investor Relations

Thank you, Emily. Good morning, and welcome to Ciena's 2018 fiscal third-quarter review. With me today is Gary Smith, president and CEO, and Jim Moylan, CFO. Scott McFeely, senior vice president, global products and services, will join us for the Q&A portion of the call.

This morning's press release is available on National Business Wire and ciena.com. We have also posted to the Investors section of ciena.com an accompanying investor presentation that includes certain highlighted items from the quarter. Our comments today include detail on our fiscal third quarter results, our views on the market environment and our outlook for the remainder of the year. We'll then open the call to questions from the sell-side analysts, taking one question per person with follow-ups as time allows.

Before turning the call over to Gary, I'll remind you that during this call, we will be making certain forward-looking statements. Such statements are based on current expectations, forecasts and assumptions regarding the company that include risks and uncertainties that could cause actual results to differ materially from the statements discussed today. These statements should be viewed in the context of the risk factors detailed in our most recent SEC filing. Our 10-Q is required to be filed with the SEC by September 6, and we expect to file by that date.

Ciena assumes no obligation to update the information discussed on this call, whether as a result of new information, future events or otherwise. Today's discussion includes certain adjusted or non-GAAP measures of Ciena's results of operations. A detailed reconciliation of these non-GAAP measures to our GAAP results is included in today's press release. This call is being recorded and will be available for replay from the Investors section of our website.

With that, I'll turn the call over to Gary.

Gary Smith -- President and Chief Executive Officer

Thanks, Gregg, and good morning, everyone. Let me start by saying that Q3 was a great quarter. But more importantly, the strong financial performance is a clear validation of our strategy and continued consistency of our execution. Our diversification, global scale and clear technology leadership enable us to take full advantage of robust demand across a broad spectrum of customers and applications.

As a result, our third-quarter revenue came in very strong, and we continued to deliver faster-than-market growth and take considerable market share. In fact, orders in the quarter were greater than revenue, and we achieved record backlog coming out of Q3. We also delivered a strong adjusted bottom line, with EPS of $0.48. And on that point, I'd like to mention that as we become more profitable and substantially improve our EPS, we are increasingly focused on EPS as a key performance metric in addition to top-line growth of our business.

This continued execution and consistent performance increasingly differentiates us from our competitors, many of whom are challenged with weakening financial positions and strategic distractions. I'll also point out that the distinction between the winners and losers is becoming even more pronounced. And we remain the only Western company in our space that is both growing and profitable. Fundamental to our strong performance is the continued diversification of our business, as illustrated in Q3, with 37% of revenue coming from non-telco customers.

This diversification is contributing to our growth, and importantly, it better enables us to navigate through industry dynamics that may temporarily adversely affect particular customers, verticals or geographies. Similar to last quarter, in Q3, we saw the benefits of this diversification, specifically with web-scale customers, international Tier 1 service providers and across the Asia Pacific region, in general. Let's start with web-scale. This customer set is clearly now a major influencer of network architecture demands.

And we are extremely well-positioned in this key segment. And we continue to capitalize on the increasing opportunities we see in this space. In fact, in Q3, three of our top 10 revenue accounts were web-scale customers, including one that exceeded 10% of total quarterly sales, which was a first for us. Overall, our direct web-scale business was up more than 150% year over year.

This represents a record 20% of quarterly revenue in Q3. And revenue for our DCI platform, Waveserver, which has seen rapid adoption by web-scale customers, is $252 million year to date. This compares with $110 million for all of fiscal 2017. Last quarter, we mentioned that we're working with several international Tier 1 service providers, many of whom are new to Ciena, to help them with their network transformation plans.

This dynamic continues to play out, and I'm very pleased to share with you that one of those customers, as an example, is Deutsche Telekom, specifically in support of its international wholesale business entity. The project includes a Europeanwide network deployment, leveraging our WaveLogic technology. Importantly, this new set of customers are coming to us because they view us as a financially stable partner with global reach and capabilities and an ability to sustain our innovation leadership over the long term. And we see this opportunity continuing.

And lastly, as you've seen in our results, Asia Pacific region generally continues to contribute meaningfully to our growth. With the region representing more than half of the world's digital population and estimated to have roughly 1.8 billion smartphone users by 2021, the network infrastructure demand is obviously booming to support this in the region. In Q3, once again, this region's performance was led by India, which grew 100% year over year, and Japan, which doubled in the same period. Australia was also a strong contributor to our quarterly results.

Overall, our consistent performance further reinforces our resiliency to the ebbs and flows of specific customers and market segments, and we are extremely well-positioned to take advantage of generally robust market demand. With that, I'll turn it over to Jim for some additional detail.

James Moylan -- Chief Financial Officer

Thanks, Gary, and good morning, everyone. Today, we delivered strong quarterly performance, with revenue of $819 million. Notably, we had three 10% customers this quarter. In order of contribution, these were Verizon, AT&T, and a major web-scale company.

In aggregate, these three customers comprised 33% of Q3 revenue. For the past few years, the composition of our top customer list has changed and evolved. We have intentionally and successfully diversified our business across customer segments, geographies, and products. Our quarterly and even annual performance is now less correlated to any one customer or region.

Also of note in the quarter, our top 10 revenue customers included three web-scalers. Our Q3 gross margin was 43.4%, mainly driven by a favorable product mix. We reported quarterly adjusted operating expense of $241 million. In addition, in Q3, our adjusted EBITDA was $132 million.

We generated $88 million in cash from operations, and our free cash flow was $70 million. With respect to profitability measures in the third quarter, we delivered adjusted operating margin of 14%, adjusted net income of $74 million and, as Gary mentioned, adjusted EPS of $0.48. We ended the quarter with approximately $985 million in cash and investments. Moving to capital allocation.

During the third quarter, we repurchased approximately 1.4 million shares of common stock at an aggregate value of $36 million, which represented about half of our free cash flow in the quarter. In addition, we want to update you today on our plan with respect to our 2018 notes, which mature in October. Previously, we indicated our intent to settle in cash the $288 million face value of the new 2018 notes upon maturity. Given our current stock price, the market value of these notes will likely exceed their face value at maturity.

As a result, we've decided to settle in cash up to $112 million of the market value in excess of the face value of these notes upon maturity. This effectively represents an additional repurchase of shares in that amount. Taken together with our ongoing share repurchase activity, these steps are strong indicators of our confidence in the business and our continued commitment to managing dilution and returning capital to stockholders. I'll now share some additional highlights from the third quarter that illustrate the continued momentum across our business.

Key geographies performed well this quarter, and we have seen strong year-over-year growth in nearly every region. In particular, APAC was up nearly 50%, with India, once again, contributing greater than 10% of global revenue. I'll also highlight our continued traction in the subsea vertical, which remains a key contributor to our growth and diversification. This segment was up 23% year over year, largely driven by web-scale company demand.

We had several new significant wins in Q3 in the submarine business, including four new logos, and we were selected as the preferred vendor for two large consortium cables. Finally, with respect to our portfolio. We grew our networking platforms business more than 14% year over year. In fact, in optical, our WaveLogic coherent modem technology is clearly best in breed, as evidenced by our growing market share in the demanding web-scale market.

As we approach the one-year mark from WaveLogic Ai availability, there is still no significant innovation challenger on 400 gigs to date. Our packet networking business had a strong quarter, with 32% growth quarter over quarter, which reflects some early deployments with Verizon. In software, we continued to leverage our early leadership position in the network automation domain with Blue Planet. Blue Planet diversifies our customer base and our portfolio, and it also provides an opportunity to expand our gross margin as this business grows over time.

This is a nascent market, and we are still learning about customer needs in this space. And we are encouraged by the market's reception to our automation capability. We'll be increasing both our efforts and our investments in our software strategy over the next several months to accelerate the growth of Blue Planet. Looking ahead to fiscal fourth quarter 2018, we expect to deliver revenue in the range of $845 million to $875 million.

We expect to deliver gross margin in the low 40s. And we expect to report operating expense of approximately $255 million. We expect opex to be slightly higher in Q4, given the 53-week fiscal year as well as the addition of Packet Design. In closing, we delivered outstanding performance in Q3, due to solid execution and robust demand across a wide range of customers and applications.

We are increasing market share, and we are the market leader. We are confident in our business model and our ability to achieve our three-year financial targets. We'll look to provide additional commentary on our progress against those targets when we report the full fiscal year 2018 in December as well as any updates to our projections at that time. Thank you for your time today.

Emily, we will now take questions from the sell-side analysts.

Questions and Answers:

Operator

Of course. [Operator instructions] And our first question comes from the line of Paul Silverstein from Cowen and Company. Your line is open.

Paul Silverstein -- Cowen & Company -- Analyst

Thanks. Gary, I heard the comment about orders exceeding revenue. Can you give us a sense -- clearly, visibility is improving, but can you give us some more insight in terms of looking beyond the quarter and beyond as you are now -- and maybe compare it to 90 days ago and a year ago what you're seeing?

Gary Smith -- President and Chief Executive Officer

I think we see improving visibility, and it's improved steadily throughout the year. I'd describe it as very diverse, both geographically and with the customer set. We talked about Asia Pacific particularly being strong, but also we're seeing opportunities in Europe, with Tier 1s -- we're getting visibility to some of these now, these early wins. The backlog going out of Q3 was the largest that we've had.

And obviously, that's one dimension of visibility, and that's -- and revenue is clearly another one. But I think all dimensions of customer engagement, our forecasting, our pipeline points upwards.

Paul Silverstein -- Cowen & Company -- Analyst

If I may, just as a quick follow-up, we all know the history in terms of two steps forward, one step back and the one of visibility that characterizes optical in general. But it does sound like there has been meaningful improvement in that regard. And if I could exhume the questions to margins, the guide strikes me as conservative, but that's the question. How much -- to what extent are you all being conservative in the outlook on both revenue and margins? Not that there's something wrong with that.

Gary Smith -- President and Chief Executive Officer

Let me take the first one, Paul. I mean, I think what we've seen over the last few years in optical is very consistent demand. When you look at our top-line revenue performance over the last five to seven years -- and it has been very consistent -- the demand has been very consistent, and our performance has been consistent. I think this notion of optical being two forward and one back, I think is based on what happened in 2001.

And I honestly believe that. In all the analytics that we've done, this is a very broad-based demand characteristic that we're seeing.

James Moylan -- Chief Financial Officer

The margins -- on gross margins, Paul, as we've said many times, in the early stages of big deployments, we're going to enjoy slightly lower margins on average. And as we move through time and we get more mature in the life cycle of the project, we will get improvement in our gross margins. It so happens that because we're winning and we're getting great opportunities to win more, we are experiencing margins in the low 40s. We don't view this as a conservative guide.

In fact, I think we might be slightly down in Q4 as compared to Q3. But we're going to be in the range of where we've been this year. This is a good positive sign for the future of the business. It's a good news story.

Paul Silverstein -- Cowen & Company -- Analyst

Appreciate it.

James Moylan -- Chief Financial Officer

Thanks, Paul.

Operator

Our next question comes from the line of Meta Marshall from Morgan Stanley. Your line is open.

Meta Marshall -- Morgan Stanley -- Analyst

Great. Thanks. Maybe just following up on that. I think we had expected slightly lower gross margins in fiscal Q3.

So was there perhaps projects that hadn't started to the level that you expected? Or just maybe more detail on what led to the growth margin upside in fiscal Q3? And then second, you've mentioned the ability to diversify away from a lot of lumpiness from particular customers. But does -- as we had throughout the rest of the year, the cloud customers have been particularly strong through the first fiscal Q for -- through fiscal Q3, is there any expectation that they would potentially be weaker heading into the second half of the year? Thanks.

James Moylan -- Chief Financial Officer

In terms of the visibility and to build out with folks like the web-scale, I think, overall, we're very mindful of the need for diversification, both customer-wise, geographically and in applications. And I think we're -- we've built the business to be resilient to that as we've demonstrated this year. You will get ebbs and flows. But I believe and if you take the web-scale segment, specifically, I still think we're at the early stages of this.

I mean, they're trying to get more content out to more people, particularly internationally, which means more connectivity and more data centers. And it shows no signs of abating when you look at their strategy to basically get more eyeballs and particularly, outside of the U.S. So I mean, it's going to have ebbs and flows within certain customers for sure. We've got a broad base of customers now, both within the predominant web-scale players and also, the emerging players as well that are increasingly looking to connect their data centers.

So as a segment, I think we're very positive around the demand characteristics of this for certainly sort of the near to medium term.

Meta Marshall -- Morgan Stanley -- Analyst

Got it. Thank you, guys.

James Moylan -- Chief Financial Officer

Meta.

Operator

Our next question comes from the line of George Notter from Jefferies. Your line is open.

George Notter -- Jefferies -- Analyst

Hi, guys. Thanks very much. I was just looking at the year-on-year sales growth, 12%. Not that long ago, you guys were talking about growth rates of mid-single digits in 2018.

And as I think about that year-on-year growth rate, how much of that growth are you ascribing to market growth versus share capture? Is there any sense for what that might look like? And then also I noticed that you hired 200 people in the quarter. I think some of those may have come from Packet Design, but that's a really big hiring quarter. I guess I'm wondering where you're making incremental investments right now? Thanks.

Gary Smith -- President and Chief Executive Officer

George, let me take the first part of that. Yes, you're right. The 12% is considerably more when -- than we thought when we came into the year or on our sort of three to -- three-year projections as well. I think that's been driven by the growth areas that we've talked about.

Web-scale's come in stronger than we thought. Asia Pacific, stronger than we'd anticipated. And we're also beginning to see these Tier 1 wins as well come into the revenue. So I think the contribution of those three elements I think have taken us above.

Interestingly, the market data, I think many of the industry analysts have actually revised down their numbers for the year. And depending on which analyst you look at, they're in the very single digits. So this is share gain, and we anticipate by the end of the year to have gained something like 2% market share globally on the back of this performance.

James Moylan -- Chief Financial Officer

And on the people count, George, not quite half of that people gain was due to our acquisition of Packet Design. But we're right on plan, frankly, with our hiring for the year. And we're going to spend $400 million on R&D this year. That takes people to do that.

George Notter -- Jefferies -- Analyst

Thank you.

Gary Smith -- President and Chief Executive Officer

Thanks, George.

Operator

Our next question comes from the line of Jim Suva from Citi.

Jim Suva -- Citi -- Analyst

Thanks very much. The revenue bp this quarter was very material. And based upon your guidance, I think -- am I correct by assuming that there was like no major pull-in from revenues from your quarter out? And on that strong guidance -- or strong revenues that you just reported, can you help us understand? I think I heard in your prepared comments a little bit that it was web-scale and Tier 1 strength. Can you confirm if that was the case? And was it geographic-focused at all? Or more, say, land-based or undersea? Or just help us get some color on the clarity of the strength because it was quite impressive.

James Moylan -- Chief Financial Officer

Yes. As we said, it is mostly Tier 1s and GCNs. Remember, we've said over the past couple of quarters that we're seeing increasing opportunities with Tier 1s, we're winning those. And sometimes, they take a bit of time to get to revenue.

So that's something that's happening in this quarter. But the other side is WaveLogic Ai is a very attractive piece of technology, particularly to the web-scale customers who demand high performance. And we're winning in that space, and we're gaining market share. Those are the two big changes from what we expected as we came into the quarter.

Now we did say we had a strong quarter in subsea. We said that that grew 23% or sort of 50% market share in that business now. We had a strong quarter in packet networking. So really, across the company, across geographies and across products, we're winning.

Scott McFeely -- Senior Vice President, Global Products and Services

And Jim, it's Scott McFeely. The AI technology that our Jim spoke about is also very applicable to the submarine space and the very big part of the reason why we're continuing to win and continuing to show No. 1 market share there.

Jim Suva -- Citi -- Analyst

Great. And then as my follow-up, can you briefly mention or give us some insights about your market share gains, what's really driving that? Is it like execution? Is it world-class product? Is it ability to react in a very quick manner? There's lots of things that could lead to share gain, but could you help us understand what you think are the key factors that are driving your market share gains? Thank you.

Gary Smith -- President and Chief Executive Officer

Jim, I think at the highest level, it's this virtuous combination of absolute leading technology and the road map of that technology, and Scott can talk to that. And the combination of the fact that we've got the largest optical sales force in the world. And we've geared up for global scale very meaningfully over many years. And so the combination of those two things are we have best customer relationships in the world, we have more of those customer relationships than anybody else in reach.

And so you combine the two, and you just get the virtuous velocity of leadership, and that's why we're taking market share so dramatically over the last few years because the business is completely designed to go and do that, the combination of the two.

Scott McFeely -- Senior Vice President, Global Products and Services

Yes. And I think from a portfolio perspective and differentiation, I think the breadth of our portfolio right from access through to core and being able to deliver, I'll just say, our road map for the lowest cost per bid in the industry for the applications that matter, where the growth are, combined with the other dimensions of our adaptive network strategy around the programmable infrastructure and the automation software that goes with it, is a story that's resonating with a number of customers. And I've been at this for a long time, and I'd say, every time you have an engagement with a significant Tier 1 and even the web-scale folks, which surprises some people, they're not only buying into what's on the shelf, they're buying into your ability to continue to drive that story and drive that innovation. And now more than ever, people are starting to question the ability of some folks in the industry to follow through on that.

And the financial strength that we have and be able to continue to invest in that innovation is actually starting to become a major differentiator.

Jim Suva -- Citi -- Analyst

Thanks. Congratulations to you and your team.

Scott McFeely -- Senior Vice President, Global Products and Services

Thanks, Jim.

Operator

Our next question comes from the line of Simon Leopold from Raymond James. Your line is open.

Simon Leopold -- Raymond James -- Analyst

Great. Thanks. I just wanted to see if, reflecting on this quarter and the strong bp, if you could just identify what were the biggest elements that surprised you versus your expectations when you offer the guidance? And then in terms of trending, you haven't talked that much today about the packet networking segment, which looks like a good grower in the long-term outlook. I'm assuming that that particular business is not driven by web-scale.

It's more around maybe cable TV and wireless. Maybe if you could offer a little bit of color on how you see that particular product group trending? Thank you.

Gary Smith -- President and Chief Executive Officer

Simon, let me take the first part of that. I think there's always a lot of moving parts into the quarter. I think the thing that did better than we anticipated, if you want to keep it simple as that, I think web-scale demand was stronger than we'd thought. You've got the Tier 1s, it came in a little bit stronger than we'd thought.

Some of these initial new wins that we've got. And then thirdly, just Asia Pacific as a general region. Japan was stronger than we'd thought. So there was no one big thing really that blew it out.

It was really a combination, which, I think, talks to the diversity of the dynamics that we have in our business. Scott, you want to talk about packet?

Scott McFeely -- Senior Vice President, Global Products and Services

Yes. The packet, I reckon, our strength historically has been on access and aggregation, focused on ethernet business services and wireless backhaul. We've worked very diligently over the last couple of seasons to diversify that geographically and to also marry it, I'll say, with our optical portfolio so that we can provide a more holistic end-to-end solution. And we're benefiting, I think, from the efforts to diversify geographically.

And we're starting to see the benefits of that sort of whole portfolio piece. The other thing that, from just a market-dynamic perspective, you are quite right, by the way, the dominant deployment scenarios are folks that have access networks. So they're the MSO or cable folks or they're the service providers typically with a wireless property. Both of those segments are looking at enhancing their end user experience.

And for us, that means fiber densification, and that means more opportunities for packet access. We're benefiting from that as well.

Simon Leopold -- Raymond James -- Analyst

Great. One quick clarification, Gary, you mentioned Japan. This is something you've talked about in the past. Has that market inflected for you? Or is this still to come?

Gary Smith -- President and Chief Executive Officer

I think we've got more in front of us here. I really do. I think there has been a significant change in the last sort of 12 months or so in terms of the need really to get a vendor that has got global scale for them that they're comfortable can sustain the innovation that Scott talked about. And I think we're beginning to see the momentum of that now.

We've had a number of wins of big Tier 1 players that have not been customers before and that are now beginning to ramp up.

Simon Leopold -- Raymond James -- Analyst

Great. Thank you.

Scott McFeely -- Senior Vice President, Global Products and Services

Thank you, Simon.

Gary Smith -- President and Chief Executive Officer

Simon.

Operator

Our next question comes from the line of Rod Hall from Goldman Sachs. Your line is open.

Rod Hall -- Goldman Sachs -- Analyst

Hi, guys. Thanks for the question. I guess I wanted to ask a little bit about the 400 gig competition and just see whether -- right now, you're saying that you're well ahead in the field, and you guys have kind of leapfrogged the competition with WaveLogic Ai. I wonder what you see on the competitive front there as you look forward.

And I'm kind of curious on DCI whether you've learned as you've gained more footprint that there's more to it than just the chip. I mean, obviously, you're gaining a lot of transaction on the chip. But are there other things about your platform that you think are resonating with customers and that might give you more stickiness there either -- if competition comes? And then I've got a follow-up question as well.

Scott McFeely -- Senior Vice President, Global Products and Services

Yes. So, Rod, it's Scott. From a 400-gig perspective, I still believe we're the only commercially deployed with the 400-gig solution in the marketplace now. And I think that's going to continue for a little bit.

No question there will be competition that comes, but we're not going to make a product announcement on this call. But you -- rest assured, with the $400 million of R&D we're spending, we've got some more things coming on the pipe as well. In terms of your second question, yes, actually, it's a very good point. I think people focus on the optics, line-side optics, and sort of the cost per bid.

But one of the attributes of the web-scale folks is they run a relatively lean operation and really depend on, I'll say, an IT kind of approach to operating the network, which comes with a lot of automation. Though the programmability of the network, supporting the right application programming interfaces and having the software infrastructure to go around that, certainly has the stickiness. And as you get ingrained in that, I think it starts to become a bit of a barrier to entry.

Rod Hall -- Goldman Sachs -- Analyst

OK. And then -- thanks for that. I wanted to follow-up on this. I know the margin question has been asked over and over again.

But I wanted to follow-up on this and just kind of ask, I think historically, you guys had said that DCI and India, things like that are kind of at corporate average margins that they're neither some of the things that are driving this mix surprise and the better margin. So I'm curious whether that still holds or are you seeing better margins in some of these specific deal or product categories than maybe we would have anticipated you would be seeing over time?

James Moylan -- Chief Financial Officer

Well, the biggest contributor to the slightly higher gross margins that we had this quarter was packet, which has slightly higher margins than our optical business. But if you look across our business, there's really not a lot of difference in the gross margins that we get across customer segments or geographies. So what really matters, other than products, is where we are in the life cycle of deployment. And as we've said, early stage deployments are going to be costly.

We might -- we're going to have start-up costs. We might give credits, whatever. And then we move through time, and we get better in gross margin as we move to upselling and improving the mix with individual customers. So that's just a natural recurring phenomenon that happens over time.

In any given quarter, the mix of early life cycle deployments as compared to later life cycle projects is going to be a driver of our gross margin. And although some of that is visible, we get surprises. Things don't happen as we expected. But on balance, things are happening more positively for us than we expected.

Rod Hall -- Goldman Sachs -- Analyst

All right. That's great. Appreciate it, guys.

Operator

Our next question comes from the line of Michael Genovese from MKM Partners. Your line is open.

Michael Genovese -- MKM Partners -- Analyst

Thanks a lot, and congratulations on the great execution. You've talked about a lot of positive things on here. One thing I may have missed that I didn't hear a lot of talk about was the expectation of return in gross margins back to the mid-40s and the timing of that. So could you give us an update on that, please?

James Moylan -- Chief Financial Officer

Yes. If I'm not mistaken, Mike, it sounds as though you're looking for some guidance on gross margins beyond fourth quarter. We're not going to provide that. I will say that we've got -- we're seeing lots of opportunity to win.

And we'll update you on our gross margin progression at the end of fourth quarter.

Michael Genovese -- MKM Partners -- Analyst

OK. But when you talk about your three- to five-year targets, can you just remind us what the gross margins are in the three- to five-year targets? Or sorry, the three-year targets?

James Moylan -- Chief Financial Officer

Yes. I actually don't know that we provided guidance on gross margin. What we said was we expected to achieve a 15% operating margin by 2020. That's what we said.

Yes, what we said was our revenue growth rate was going to be 5% to 7%. You know that if we hit our guidance in fourth quarter, we'll be above that range for this year. And so we're going to have to look at our three-year targets and talk about that again when we talk in December. The other thing that's going to be updated is our view on EPS.

Michael Genovese -- MKM Partners -- Analyst

OK. Actually, that -- my follow-up is related to that. And to clarify on the three-year targets, if the three-year targets are for two more years, if you are rolling them forward to be the next three years of -- if the five to seven was three more years? Or basically, for two more years at this point?

James Moylan -- Chief Financial Officer

We gave three-year guidance at the beginning of this year. So we talked about the three-year period, '18, '19, and '20. And we'll look at all of those things as we come to the end of this year. And we'll consider giving new three-year guidance.

I don't know that we will. I'm just saying that we will certainly talk about our progress against our targets that we set. We'll update any that we feel need to be updated.

Michael Genovese -- MKM Partners -- Analyst

All right. Thank you.

James Moylan -- Chief Financial Officer

Thanks, Mike.

Operator

Our next question comes from the line of Tejas Venkatesh from UBS. Your line is open.

Tejas Venkatesh -- UBS -- Analyst

Thank you. I was hoping you could comment on how far away we are from an inflection in the Blue Planet business. You talked about it a little bit in the prepared remarks, but I think you had a very strong bookings quarter in the prior quarters. So just curious how that's going? And how far away we are from the inflection?

Gary Smith -- President and Chief Executive Officer

Yes. Now that's -- you saw the acquisition of Packet Design, and the context of that is, as you know, we were early entrants into this with Blue Planet. We've done a lot of learning over the last two to three years, still a nascent space. What we've tested this year is really some of those learnings.

And we are very encouraged by what we're seeing. We've got good momentum. As you said, the bookings were very encouraging. And we should be able to come into the year -- next year with a backlog for 2019.

But importantly, I think we've identified the road map that we want to put together for those capabilities. And as we come out of the year, we'll talk a little more about that, that road map. We're putting the pieces together predominately, organically. But there has probably been some -- that has been inorganic, and I wouldn't rule out a little inorganic acquisitions going forward to fill out the road map that we've identified.

We've got a very clear direction on where we want to go with Blue Planet now, and that's going to be a key part of our automation story going forward. And probably, as we turn the year, we'll give a little more visibility into our thinking here.

Tejas Venkatesh -- UBS -- Analyst

Thank you. And as a follow-up, how are you thinking about revenue from AT&T and Verizon through the rest of the calendar year?

James Moylan -- Chief Financial Officer

Yes. As we've always said, those are important customers, and we expect that they're going to remain big customers for the long term. We've also said consistently that the combination of those two customers over time will decline as a percentage of our revenue because we are growing in a lot of other spaces. It's really hard to comment on what's going to happen with any individual customer in any given quarter.

But I would say, we do expect a stronger performance from AT&T in Q4.

Gary Smith -- President and Chief Executive Officer

Thank you, Teja.

Operator

Our next question comes from the line of James Kisner from Loop Capital Markets. Your line is open.

James Kisner -- Loop Capital Markets -- Analyst

Hey. Thanks so much for taking my question. I'm just going to follow up on that, that last question, a little bit more and clarify your comments. So you here -- like you've said in the past that for Verizon and AT&T, that they'd be down, the flat is going to be down for the year.

I just want to clarify, has that expectation changed or not?

James Moylan -- Chief Financial Officer

No. It hasn't changed at all.

James Kisner -- Loop Capital Markets -- Analyst

OK. And then just a follow-up. On packet networking, I think if my math is right here, if you guys are going to hit your kind of 68% growth rate target for that business, you'd have to generate I think $150 million in this coming quarter, is that your expectation or might you be in the low side, be below the low end of what you expect for a long-term growth with packet networking? Thank you.

James Moylan -- Chief Financial Officer

Now the target, James, actually that you quoted, actually, just to remind you is the three-year target. So this business, as we said, we're working to diversify it from a customer-and-geography perspective. We see -- we think we'll see ebbs and flows as we go through the three-year target. But we're very comfortable in terms of achieving that three-year target.

James Kisner -- Loop Capital Markets -- Analyst

Thank you.

James Moylan -- Chief Financial Officer

Thanks, James.

Operator

Our next question comes from the line of Vijay Bhagavath from Deutsche Bank. Your line is open.

Vijay Bhagavath -- Deutsche Bank -- Analyst

Yeah. Hi, good morning, Gary, Jim. Two questions, if I may. The first is on web-scale.

I mean, great to hear 20% of revenues. My question is, how do you see competition both on pricing and also on speeds and feeds as we head into next year with this 400-gig product cycle coming up in the cloud with switching and routing? And then the second part of the question is on fiber deep, fiber densification, how is Ciena positioned in that opportunity? Thanks.

Scott McFeely -- Senior Vice President, Global Products and Services

Yes. Vijay, it's Scott. Let me take a crack at the two of them. On the web-scale piece, I guess, the competition -- it's been an attractive market space for everybody in our segment.

So the competition has been there forever. And we don't -- we will continue to see it going forward. I think the important attributes of what will decide who will win market share here is who's going to drive the best coherent optics road map and who actually has the programmable infrastructure that they are looking for. And I'm not saying we're alone in the field in terms of the competition, but I like our hand that we have.

And I think we've demonstrated in the past to be able to drive both of those dimensions pretty well. And you can expect there's lots of focus in terms of continuing to lead in both of those dimensions. On fiber deep piece, for where we play in the network on fiber deep, which is sort of from the fiber node into the network, if you like, it's a great opportunity, more fiber, more bandwidth plays to what we do. If I look at the technology combination that's there, it's packet capabilities and it's optical transport, both of which we have a good set of capabilities there.

We have won some of the early deployments of some of the first movers on that. But much of that field out is still quite in front of us. It's probably more of a 2020 event than it is a '19 event.

Vijay Bhagavath -- Deutsche Bank -- Analyst

OK. Thank you.

Scott McFeely -- Senior Vice President, Global Products and Services

Thank you.

Operator

Our next question comes from the line of Dmitry Netis from William Blair. Your line is open.

Dmitry Netis -- William Blair & Company -- Analyst

Thanks, guys. Nice results. Nice guidance. A couple of questions.

As you look at your 3% -- 10% customers, you have three of them coming in at 33%, I think, is what you said. Are those your usual suspects, AT&T, Verizon, India customer? And then are there any customers close to that 10% mark, maybe Japan or ICT?

Gary Smith -- President and Chief Executive Officer

That's a good question. You've got -- of those two, I think Verizon was the, interestingly, the largest this quarter, then the other two were AT&T and a web-scale player. That's the first time we've had a web-scale player get into that 10% bracket, particularly considering the growth the company has been on. So the makeup of the sort of 10% players, you've got a number of other customers, including you mentioned one of the Indian players, very close.

There are other customers that are just under that percentage. In fact, we've got more and more of those customers in the high single digits pushing into the 10% range.

Dmitry Netis -- William Blair & Company -- Analyst

Perfect. And what was -- is Japan something -- one of the Japanese operators is something coming close to that?

Gary Smith -- President and Chief Executive Officer

Not yet. It isn't yet. But I wouldn't be shocked to see that over the course of the next 18 months.

Dmitry Netis -- William Blair & Company -- Analyst

Excellent. OK. And then Jim, you also mentioned that you would expect AT&T to be up in the fourth quarter, and that's probably after a quite sluggish first half as evidenced by their guidance -- by AT&T's capex numbers as we progress through the year. On Verizon, in their earnings call, they emphasized fiber projects accelerating for small cell densification ahead of their 5G deployment.

So does that mean that you would see acceleration as well at Verizon as we head into fourth quarter based on that commentary?

James Moylan -- Chief Financial Officer

Again, it's difficult to say how these customers progress because they're in different stages of their projects. Verizon will be strong for us in Q4. I don't know if it's going to be higher or lower in Q4, but it will be strong.

Dmitry Netis -- William Blair & Company -- Analyst

Do you think 5G is driving that yet?

Gary Smith -- President and Chief Executive Officer

I think we are seeing some of that in the converged metro deployments that they're rolling out in the packet. We're just beginning on the packet side with them. Though, we feel pretty bullish around Verizon for the next certainly couple of years. I think we've got reasonable visibility to that.

And I think this converged metro deployments is -- the consideration of it is around their 5G. So it's difficult to see whether it's -- exactly how much of that is 5G, but it's definitely in their capacity consideration when they're thinking of these rollouts.

Dmitry Netis -- William Blair & Company -- Analyst

Great. Last question on the software side, if I may. It came in a little bit light on a year-over-year basis. You said you're increasing investment in Blue Planet.

Can you walk us what you plan on doing there specifically? And how could this ramp up from here?

Gary Smith -- President and Chief Executive Officer

Yes. I think this quarter was just -- in terms of the revenue, it was slightly down. I think that's just the normal sort of ebbs and flows. Orders have been strong.

Engagement is very strong, and the pipeline is increasing. So I think we're getting increasingly confident around the methodology of our engagement with the market and also the -- refining our offering around that. Packet Design was a key element around fulfilling some of that road map. There are other elements that we're working on.

And I think probably as we turn the year, Dmitry, we'd give a little more visibility into those. They're not quite at the degree of maturity yet. But I think as we get into '19, we'll talk a little more around our plans for Blue Planet and a road map, both in terms of capabilities and what we think that might mean from a financial point of view.

Dmitry Netis -- William Blair & Company -- Analyst

I appreciate it. Thank you, Gary.

Gary Smith -- President and Chief Executive Officer

Thank you, Dmitry.

Operator

Our next question comes from the line of Catharine Trebnick from Dougherty. Your line is open.

Catharine Trebnick -- Dougherty & Company -- Analyst

Hi, thank you. Great quarter, guys. Can you explain -- obviously, in the last year, you've been doing very well in Japan. Can you describe some of the dynamics in that market? Where you've been able to break into that market? Thank you.

James Moylan -- Chief Financial Officer

The biggest single thing is that the domestic Japanese market has been served by Japanese companies. And several of those companies, just like several companies in the West, are -- have lost market share, are having trouble investing in the -- in order to keep their innovation at world-class. And I think operators in Japan have noted that. They want to make sure that they get the best available technology.

That's the big driver, and that's why we're doing well in Japan.

Catharine Trebnick -- Dougherty & Company -- Analyst

All right. Thanks.

James Moylan -- Chief Financial Officer

Thanks, Catherine.

Operator

Our next question comes from the line of Samik Chatterjee from JPMorgan. Your line is open.

Joe Cardoso -- J.P.Morgan -- Analyst

Hi. This is Joe Cardoso on behalf of Samik. Just one question from me, and I just wanted to dive into the subsea business. You guys are seeing great growth there.

And I'm just curious -- some of the other industry participants in the subsea business has highlighted project delays, and I'm just curious why you guys haven't seen those. And then just a second part on that, like how sustainable do you think that business is? Because it's well known for being very cyclical, so I just want to see if this cycle is any different from prior cycles. That's it.

Gary Smith -- President and Chief Executive Officer

I think the difference, Joe, is really, that we're positioned with both the upgrade cycle, and we also got the newbuilds as well. So we see very diverse sources of demand. I think we -- it is going through a newbuild cycle. The upgrade cycle we basically have elongated because our technology was able to take old cables into -- changed the economic dynamics of them from a capacity point of view.

But you are seeing actually now new cables going in. I would also say that -- and Jim talked about it, we won two consortium cables just last quarter alone. We're also seeing increasingly -- this is driven by web-scale. They're putting in their own cables.

They're also key drivers of capacity on other cables. So I think the overall demand for capacity is not particularly cyclical. It's up into the right as you'd expect. So I think we're well-placed in both the upgrade market and in terms of the newbuilds.

And we basically -- we think we've come over the 50% market share threshold this year in submarine.

Scott McFeely -- Senior Vice President, Global Products and Services

Yes. I think a couple of items I'd point out. If you look back in the rearview mirror, say, five years ago, the bandwidth on those cables was dominated actually by voice traffic. And today, it's actually exposed, and the biggest dominant driver of the bandwidth is actually the web-scale folks.

And we're talking a significant increase in bandwidth demand. And that's going to, I think, continue for the future. What is happening, as has Gary said, is there has been a shift from the upgrade market to the new cable market and being led by the web-scale folks. The other thing I'd say just relative to your comment of some people seeing delays, that may happen on an individual-project basis.

And if you're a company serving a relatively limited number of cables, you may be susceptible to those delays. But we're on pretty much every major cable on the globe. And we have -- back to the diversification of the business, we're less susceptible in any individual quarter to one project delay.

Joe Cardoso -- J.P.Morgan -- Analyst

All right. Thanks, guys.

James Moylan -- Chief Financial Officer

Thanks, Joe.

Operator

Our next question comes from the line of Alex Henderson from Needham. Your line is open.

Alex Henderson -- Needham & Company -- Analyst

Great. Thank you very much. As it seems to me that the current environment is probably the most dynamically changing environment we've seen in a long time with the acquisition of Coriant by Infinera, knocking out what is clearly the price leader in the marketplace, the most aggressive pricer. Plus, obviously, a radical change in Japan where Fujitsu has been pushed out of the U.S.

gradually and now has lost position in the kingpin in Japan, i.e. NTT. It seems pretty clear that there's a major shift going on here in terms of market share as a result of these things. When you look at those dynamics, can you talk a little bit about the rate of change in that? Obviously, getting into Japan, you start off with the smaller projects and then gradually, will raise its position.

And how fast do you think the roll-off of Fujitsu and Hitachi and other Japanese players? What's the slope of that over time? It seems pretty clear that that's a huge positive dynamic for you.

Gary Smith -- President and Chief Executive Officer

I think -- generally, I think we feel very positive around the structure of the industry improving considerably, I think, over the last few years. I think the key elements for success for us are around global scale and being present in all of these markets and picking the right markets as well at the right time and putting infrastructure and investment in there. These are long-term bets that we've placed. We've been in Japan over 25 years, and we have a lot of resources on the ground, built a lot of relationships over that time.

Similarly, places like India, the reason we're doing well, we placed that bet very early on. We've been there over 15 years. We have close to 1,500 people on the ground in India. So it's about the combination of technology and leadership, which we clearly have, and the largest global sales force in optical.

And so we're able to take advantage of those dynamics. In terms of Japan specifically, listen, I'm very bullish on Japan, but things always take longer than you think. And I think that we've got a good long runway there, and we're incredibly well-positioned with them. I'm very positive about it.

But I think it will take time. It's just one of the bets on the table.

James Moylan -- Chief Financial Officer

Yes, Alex, in addition to industry structure by consolidation of companies, market shares are consolidating. And the winners are getting bigger and the smaller companies are losing shares. So you're really moving in a good direction with respect to consolidation of the industry. As Gary said, all of this takes time, but we feel great.

We think that the dynamics of the industry are moving toward us.

Alex Henderson -- Needham & Company -- Analyst

If I could just follow up with one more question. The company has a history -- or the industry has a history of large players doing large programs, and then digesting for a couple of quarters. Typically, the January, February -- actually, the January quarter is a very seasonally soft quarter. You've had a couple of major builds here.

In fact, a number of them whether it's India or in the U.S. or around Metro. Should we be careful with our thinking about the lumpiness that that implies? And the possibility that there could be a little bit of more softness on the other side of that?

Gary Smith -- President and Chief Executive Officer

I would say generally on the industry, I think this perception around big cycles is actually incorrect. There has been very consistent robust demand for optical capacity over many years now, and I think that will continue. What you're, I think, talking to is really the seasonality element, and you're talking about sort of Q1. Obviously, I'm not going to get into -- we haven't finished this year yet before we start talking about next year.

But I would say, generally speaking, always, Q1 is our lower quarter because you've got the end of the fiscal year, beginning of the next. I think -- I don't see any reason for that to change. But I think the context of this is consistent robust demand.

James Moylan -- Chief Financial Officer

You are right, Alex. This is a project-driven business. But the key to showing the kind of consistent execution that we've shown is diversification. And that's across geographies, it's across customer segments, it's across products.

And we have demonstrated that, so we expect to continue to deliver consistent performance.

Alex Henderson -- Needham & Company -- Analyst

Thank you.

James Moylan -- Chief Financial Officer

Thanks. Emily, let's take one more.

Operator

Our last question comes from the line of Tim Savageaux from Northland Securities. Your line is open.

Tim Savageaux -- Northland Securities -- Analyst

Good morning, and congrats on a strong quarter. I have a question focused on, I guess, APAC in general and India in particular. And really, kind of similar in nature to some of the other questions on the cloud and other markets to the extent you've seen some very strong growth here. I think your India revenue this year, by the time it all wraps up, might have, I don't know, tripled over the past couple of years.

So as you look forward there, I wonder if you have any commentary on continued growth, sustainability, market share in the India region and what your expectations are. We've heard about that market either driving growth or being a potential opportunity for a range of players kind of large and small. I wonder if you can comment on your thoughts and your overall position in India and to what degree that position is concentrated with various carriers.

Gary Smith -- President and Chief Executive Officer

Yes. India has got a lot of attention recently. I'd say a couple of things specific to us than mostly sort of generic around the market. We've been there for a long time.

So we've been on the ground there for over 15 years in a very big way. Let me say I think the dynamics at the highest level are that you've -- it's the fastest-growing Internet usage in the world. You've got broadband penetrations still less than 30%. So we've got all this in front of us.

I think just the demographics and the population gravity of India, I think, will sustain demand for certainly the next few years as these build-outs go. Now I think they're going to have ebbs and flows. There's no doubt about that. But I think what we've tried to do is position ourselves.

We're in all of the major players in India. We're also with the government in various manifestations and the DoD. We're also into some regional carriers. We're also in all of the web-scale players in India as well, and they clearly view that as a strategic market.

There's no question about that. So I think we're -- we've done everything to diversify our customer base in India. We're very bullish about the sustainability of demand. But we know that there's going to be some ebbs and flows in that.

And that's how we've structured our investment there and our anticipation over the next two years. We've got a lot of other areas in Asia Pacific as well. Japan is only one we've just talked about that will offset any potential ebbs and flows. But we don't see any curtailing of this dynamic in the short term.

Tim Savageaux -- Northland Securities -- Analyst

Thanks very much, and congrats once again.

Operator

And there are no further questions at this time. I will turn the call back over to Gregg Lampf for final remarks.

Gregg Lampf -- Vice President, Investor Relations

Thanks, Emily. Thanks, everyone, for your time today. We'll be on the road for the next few weeks and look forward to seeing everybody out on the road. Have a good day.

Operator

[Operator signoff]

Duration: 62 minutes

Call Participants:

Gregg Lampf -- Vice President, Investor Relations

Gary Smith -- President and Chief Executive Officer

James Moylan -- Chief Financial Officer

Paul Silverstein -- Cowen & Company -- Analyst

Meta Marshall -- Morgan Stanley -- Analyst

George Notter -- Jefferies -- Analyst

Jim Suva -- Citi -- Analyst

Scott McFeely -- Senior Vice President, Global Products and Services

Simon Leopold -- Raymond James -- Analyst

Rod Hall -- Goldman Sachs -- Analyst

Michael Genovese -- MKM Partners -- Analyst

Tejas Venkatesh -- UBS -- Analyst

James Kisner -- Loop Capital Markets -- Analyst

Vijay Bhagavath -- Deutsche Bank -- Analyst

Dmitry Netis -- William Blair & Company -- Analyst

Catharine Trebnick -- Dougherty & Company -- Analyst

Joe Cardoso -- J.P.Morgan -- Analyst

Alex Henderson -- Needham & Company -- Analyst

Tim Savageaux -- Northland Securities -- Analyst

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