Infinera Corporation

Good afternoon and welcome to the Infinera Corporation fourth quarter 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Amitabh Pasi, Head of Investor Relations. Please go ahead.

Amitabh Pasi, Head of Investor Relations Thank you, Operator, and good afternoon. Welcome to Infonera's fourth quarter of fiscal 2020 conference call. A copy of today's earnings and investor slides are available on the Investor Relations section of the website. Additionally, this call is being recorded and will be available for replay from the website. Today's call will include projections and estimates that constitute forward-looking statements, including, but not limited to, statements about our business plans, including our product roadmap, sales, growth, market opportunities, manufacturing operations, products, technology, and strategy, statements regarding the impact of COVID-19 on our business plans and results of operation, as well as statements regarding future financial performance, including our financial outlook for the first quarter of our fiscal year 2021. These statements are subject to risks and uncertainties that could cause Infineris results to differ materially from management's current expectations. Actual results may differ materially as a result of various risk factors, including those set forth in our annual report on Form 10-K for the year ended on December 28, 2019, as filed with the SEC on March 4, 2020, and our quarterly report on Form 10-Q for the quarter of September 26, 2020, as filed with the SEC on November 5, 2020, as well as the earnings release and investor slides furnished with our Form 8-K filed today. Please be reminded that all statements are made as of today, and INFINERA undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call. Today's conference call includes certain non-GAAP financial measures. Pursuant to Regulation G, we have provided a reconciliation of these GAAP financial measures to the most directly comparable GAAP financial measures in our fourth quarter of fiscal year 2020 earnings release and investor slides, each of which is available on the investor relations section of our website. And finally, as a reminder, we will allow for plenty of time for Q&A today, but we ask that you limit yourselves to one question and one follow-up, please. I'll now turn the call over to our Chief Executive Officer, David Hurd. David?

Thanks, Amitabh. Good afternoon and thanks for joining us today. I will begin with a brief review of the fourth quarter and full year 2020 results before discussing our expectations for 2021. I will then turn the call over to Nancy to cover the details of our financial performance and outlook. But the fourth quarter was another strong performance quarter with solid execution across the board. Revenue came in line with our outlook with non-gap gross margin and operating margin above the guidance range. On a year-over-year and quarter-over-quarter basis, we expanded margins, drove profitability, and strengthened the balance sheet while investing in technologies that will drive our future growth. A notable achievement in the quarter was the generation of $40 million of free cash flow, which we believe is a key indicator of the progress we have made in improving the operational efficiency and financial health of Infinera. From a demand perspective, the quarter played out pretty well as we expected. While we did not see the typical year-end budget flush from our customers, we had a strong bookings quarter and ended the year with a book-to-bill ratio above 1%. Revenue from our ICP and other service provider customers was strong, including from EMEA and Asia Pacific regions, as was generally consistent with our expectations. Due to the diversified customer base we have, this strong demand helped offset demand softness in the industry experience among Tier 1 North American service providers. We won nine new customers across global ICPs, Tier 1s, and other service providers for our 600-gig compact modular Groove GX platform and made progress in advancing our open optical initiatives across the portfolio. We secured several 800-gig design wins and booked purchase orders from major ICP and a CSP customer in the quarter. We continued our efforts in qualifying and ramping the product, keeping to our timeline of a more meaningful financial impact from I6 in the second half of 2021. We saw strong contributions in the quarter from our services and software annuity business, as our expanded footprint and value added software drove healthy maintenance renewals. We remain focused on our investments in vertical integration, a scarce and highly differentiated capability in the industry. As we look back to the full year results for 2020, it's clear that the heavy lifting over the past two years to drive operational improvements is taking hold, as evidenced in our results. For the full year, we grew our non-GAAP revenue by more than 3% in a challenging environment, slightly faster than the growth in the overall optical systems market as reflected by industry analysts. We expanded our non-GAAP operating margin by nearly 600 basis points year over year, equating to $76 million in operating profit expansion, reduced inventory by $71 million, improved our cash flow from operations by $55 million, and ended the year with $315 million in cash and restricted cash. We did this while paying down accounts payable by nearly $100 million and investing close to $300 million in R&D and CapEx to fuel future growth. From a product perspective, we had several highlights in 2020. Revenue grew in our Compact Modular Groove GX platform by almost 40% over 2019, and we added 32 new 600 gig customers for the year, including notable global tier ones and ICPs. We ended the year with a number two position in the Compact Modular market, a $1.5 billion market that is expected to grow 20% over 2023, through 2023. We achieved record revenue for the XTM Metro platform, up 20% year over year, driven by 5G rollouts, working from home, and mobile X-haul. During the year, we added 28 new XTM customers. We created additional customer traction with XR Optics, as recently demonstrated with our technology trial with British Telecom, BT. who validated significant savings in an extensive study. XR Optics received the award for the most innovative product at the 2020 ECOC Industry Conference in December. It's early days for XR Optics, but we're optimistic that this innovative solution will open up a large market opportunity for Infonera and the industry for the future. We made continued progress with I6 as we secured design wins, received purchase orders, and delivered our first qualification units to a major customer prior to year end. We feel confident in our I6 performance differentiation. We set new industry performance records in CSP and ICP trials in the fourth quarter and are now focused on ramping production. As we have previously stated, we expect I6 revenue to begin its ramp in the second half of 2021 as we progress through the typical customer acceptance, certification, and revenue recognition cycle. Our pipeline is very strong, and we are building backlog with additional design wins and purchase orders this quarter. To date, our list of design wins and purchase orders includes well-recognized global tier ones, ICPs, and other service providers. I'm encouraged by the financial progress, operational improvements, and technology innovation delivered by the Infinera team in 2020. We ended the year in a stronger position to achieve our target business model and our strategic goals. Looking ahead to 2020, We will be prudent in our outlook, especially with the first half of the year. For the full year, we expect the optical systems market to grow around 2% to 3% year over year, with great growth weighted towards the second half of the year. In the near term, we are being cautious given the ongoing impact of COVID-19, newly developing semiconductor shortages that are not unique to our industry, and extended lead times for some components. Looking longer term, we see 2021 as a foundational year for us. We have a sound strategy and are well positioned to execute. This is a great time to be a differentiated supplier of optical technology, and there is growing recognition of the market of the value we provide. The dynamics we spoke of last quarter around bandwidth growth, accelerating a ship to open optical, and the need for vertical integration are increasing in their importance. In addition, the geopolitical dynamics that are constraining Huawei's ability to grow have opened up a longer-term, incremental $500 billion to $1 billion annual market opportunity for us to pursue. We see increasing RFP-RFQ activity, but it's early days, and we would expect a more meaningful financial impact from these competitive displacements as we begin in 2022. For the full year, we expect to grow revenue slightly faster than the overall market, with a stronger second half as we see the impact of new products, including I6, GX, and enhancements to our metro portfolio. We will continue to prioritize our portfolio investments in high-value, fast-growing subsegments of the optical market, including open optical, high-performance optical engines, and differentiated pluggables. Lastly, we will remain laser-focused on operational excellence, expanding margins, driving profitability, and generating cash flow for the full year. Over the next few months, we will give you greater visibility into the growth drivers for our business as we lay out the key elements of our strategy, the market opportunity ahead for us, and our path towards our long-term business model today. via a series of webcasts the first of these events beginning in march will be extremely important in understanding the customer value proposition and market opportunity with open optical we will culminate the series of events with the virtual investor day now being planned for later in q2 where we will share additional details of our technology and financial roadmap to drive shareholder value i will now turn the call over to nancy to provide additional details on the quarter and our first quarter outlook.