Infinera Corporation

Good day and thank you for standing by. Welcome to the Infinera Core Q2 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Mr. Amitabh Bassey. Please go ahead.

Amitabh Bassey Good afternoon. Welcome to Infinera's second quarter of fiscal 2021 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 our 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 a product roadmap sales growth market opportunities manufacturing operations products technology and strategy, statements regarding the impact of industry-wide supplies and challenges in COVID-19 on our business plans and results of operation, as well as statements regarding future financial performance, including a financial outlook for the third quarter of our fiscal year 2021. These statements are subject to risks and uncertainties that could cause InfraNair's 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. The year ended on December 26, 2020, as filed with the SEC on March 3, 2021, as well as subsequent reports filed with or furnished to the SEC from time to time. 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've provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures in our earnings press release and investor slides for this quarter, each of which is available on the investor relations section of our website. And finally, as a reminder, we'll 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, I'm done.

Good afternoon and thanks for joining us today. I will begin with a review of the second quarter results and then turn the call over to Nancy to cover the details of our financial performance and the outlook for the third quarter. Overall, Q2 was a pivotal quarter for the following four reasons. First, the market environment continues to trend towards open optical networks, including an acceleration in the pace of Huawei replacement opportunities. Bandwidth requirements are growing unabated. The competitive environment is improving, and there is increasing recognition of the value we provide in optical networks. This is one of the healthiest optical environments we've seen in years. Second, we held our investor day on May 19th, where we communicated and reviewed our eight-by-four-by-one strategy to drive growth and expand market share. Our 8x4x1 strategy is focused and founded on the following network transitions. First, core networks moving to 800 gig. Next, the metro networks expanding to 400 gig. And lastly, coherent optics moving out close to the edge of the network with the rollout of 5G and mobile edge compute, which are expanding the reach of optical networks and driving tremendous future potential volumes. These market transitions, along with the shift to open optical networks and the Huawei share gain opportunity, are creating specific insertion opportunities for us. We are starting to see early signs of success across all these fronts and are growing pipeline and bookings. Third, as evidenced in the robust market trends, we experienced very strong growth in bookings in the quarter, a continuation of the trend we observed in the first quarter. In Q2, product bookings grew double-digit year over year, and bookings for the first half of 2021 are also up double digits from last year. Our quarterly book-to-bill ratio was meaningfully above 1, and we ended the quarter with record backlog. Despite the temporal headwinds from the industry-wide supply chain disruptions, our Q2 and first half operating results give us confidence that we are on track to achieve the target business model we presented at our investor day in May. As a reminder, our target business model reflects our expectation of 8% to 12% revenue growth starting in 2022, gross margins in the mid-40s, and double-digit operating margins by 2023. Lastly, we made significant progress with the new products that support our 8x4x1 strategy. For 800 gig and above, we accelerated the ramp of I6 in the quarter with the addition of new customers, Shipment of commercial products, realization of first revenue, and growth in our backlog. We are tracking towards I6 growing to a 20% to 25% of product revenue in 2022, as we described in our May Analyst Day. To address the redimensioning of the Metro networks to 400 gig, we announced the availability of our 400 gig ZR Plus merchant pluggables for our Metro product family. We also unveiled our intention to offer a suite of vertically integrated I6XR pluggables, which includes ZR Plus. We expect this suite of pluggables to be key to expanding our margins and market share further in the Metro in years ahead. And with 5G and mobile edge compute driving 100 gig coherent to the edge of the network, we're creating a new billion-dollar-plus addressable market with point-to-multipoint capabilities of XR optics. In June, we officially launched the OpenXR Forum with initial members Verizon, BT, Lumen, Windstream, and Liberty Global, who all share our goal of driving standardization and acceleration in the industry of the adoption of XR optics. Within the first 45 days of launching the forum, current membership in the forum currently represents a significant share of global service provider CapEx, and we have a large number of global carriers and ecosystem partners interested in joining the forum. Turning to the specifics of our financial results, Q2 revenue was within our outlook range, while gross margin and operating margin exceeded the high end of our outlook range. Revenue in the quarter grew 2% on a year-over-year basis, with our growth rate entirely constrained by supply. These supply issues limited our cumulative revenue by a total of $35 million to $40 million. Q2 gross margin expanded by nearly 400 basis points year-over-year, operating margins expanded by over 250 basis points year-over-year, and cash flow from operations increased by approximately $60 million compared to Q2 of 2020. Our quarterly results give us confidence that we are on track to achieve that target business model I disclosed earlier. We believe the supply chain challenges we are facing are temporary and not unique to us and are forecasted to continue in their intensity. Nancy will provide additional details in her commentary. Interestingly, these supply chain constraints have opened the doors to greater collaboration with our customers, providing us increased visibility into their forward demand profile and underscoring the importance of our 8x4x1 strategy. From a regional and customer segment perspective, we experience solid growth both sequentially, quarter over quarter, and on a year-over-year basis in the Americas and amongst our ICP customers, benefiting from regional subsea builds and high-speed metro upgrades. Bookings in EMEA were up year over year in the quarter, where I-6 in the core and our metro portfolio are doing well, in addition to an increase in our engagement in meaningful Huawei displacement opportunities. While seasonality and timing of a few major projects affected our Asia-Pacific performance in the quarter, our pipeline is healthy for the second half as we are rolling out I-6 and driving additional success with our XTM and GX Metro products. Overall, our Tier 1s fared well in Q2 with broad-based demand strength while sales in the cable segment moderated after a good start in Q1. On a product basis... Revenue and bookings growth were robust across our open optical portfolio. The GX platform grew double-digit year-over-year and continued to be broadly deployed across all applications, metro, long-haul, and subsea. At this year's OFC Optical Industry Show, a major North American Tier 1 service provider highlighted that they have chosen Infonera's open optical portfolio, including our 400-gig GX Metro solution for deployment across their network. Additionally, we operationalized another major web-scale customer in quarter for our 600-gig GX solution for their metro network, and this customer is actively testing our i6 800-gig solution. These are important strategic customer wins as they demonstrate the strength of our broad and flexible portfolio. Line system bookings, which are a leading indicator of future high-margin transponder sales, are trending 60% higher than our plan for the year and are up meaningfully both sequentially and on a year-over-year basis. While these line systems carry lower margins in the short term, they are critical to expanding our customer footprint and are also a good leading indicator of the adoption of I-6s. It's worth noting that in Q2, over 70% of the line systems that we booked were specifically related to ICE 6 800-gig deployments. Speaking of which, on the 800-gig front, we have now secured purchase orders from 19 customers, six more than we reported in our investor day on May 19th. Our initial customer success include those that we announced publicly, such as Telsius Cable's TPG Telcom, PCCW, UPnet, and Seaborn, as well as other unannounced customers. In Q2, we recognized initial revenue from I6, albeit at modest levels. Demand is growing, a trend that is continuing in Q3, and we're ramping production and deploying systems with Tier 1 and ICP customers globally across both terrestrial and subsea applications. As evidenced in our field deployments and customer qualifications, the performance of I6 remains industry leading and surpassing our original specifications. We remain of the view that 800 gig opportunity is a long multi-year cycle and are focused on growing I6 to represent 20 to 25% of our product revenue in 2022, which is reinforced by the increased demand for line systems that we are experiencing. And lastly, we are seeing strong growth in interest in XR optics. Customer trial activity for the quarter in the first half has been strong, and we've conducted over 30 XR optics customer technology trials and demos in the first half of 2021. And as I mentioned earlier, we're seeing tremendous interest in the open XR forum amongst our customers, suppliers, and ecosystem partners. Overall, I'm encouraged by the broad-based demand strength across geographies and customers for our open optical portfolio. While demand indicators are healthy across our customer base, the near-term supply challenges are real and are impacting the entire networking industry. This is a challenge in the near term, but the underlying demand strength bodes well for our future, including our path to our target business model. We are working closely with our supply chain partners and customers to address those short-term supply issues. In closing, with many regions around the world facing spikes in COVID-19 variants, we continue to put a priority on keeping our employees safe. We have an incredibly dedicated team, and I really can't thank them enough for their resilience as the pandemic continues to pose formidable challenges in their personal and professional lives. Their tireless commitment to serving our customers is reflected in our achievements this quarter and the progress we are making towards our target business model, and quite frankly, are humbling and inspiring to me personally. I will now hand the call over to Nancy to provide additional financial details on the quarter and our third quarter outlook and the progress towards our target business model.