Infinera Corporation

ladies and gentlemen thank you for standing by and welcome to infinera's third quarter fiscal year 2021 earnings call all lines have been placed on mute to prevent any background noise after the speaker's remarks there will be a question and answer session if you would like to ask a question during this time simply press star followed by the number one on your telephone keypad if you would like to withdraw your question again press star one amitabh posse you may begin your conference thank you josh

Good afternoon, everyone. Welcome to Infinera's third quarter 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 our product roadmap, sales, growth, market opportunities, manufacturing operations, products, technology and strategy, statements regarding the impact of industry-wide supply chain challenges and COVID-19 on our business plans and results of operation, as well as statements regarding future financial performance, including our financial outlook for the fourth 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 an annual report on Form 10-K for the year ended on December 26, 2020, as filed with the SEC on March 3, 2021, and a quarterly report on Form 10-Q for the quarter ended on June 26, 2021, as filed with the SEC on August 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 INFIDERA 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 the earnings 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 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. With that, I'd like to turn the call over to our Chief Executive Officer, David Hurd.

Thanks, Tom and Tom. Good afternoon, and thanks for joining us today. I will begin with a review of the third quarter results and then turn the call over to Nancy to cover the details of our Q3 performance and the outlook for the fourth quarter. Q3 marked another quarter of strong performance with non-GAAP revenue above the midpoint of our outlook range and both non-GAAP gross margin and operating margin exceeding the high end of the outlook range. Revenue grew approximately 5% year over year. Margins in Q3 benefited from the revenue ramp of I-6, higher services revenue, and a shift in the timing of deployment of line systems due to supply constraints. These benefits were offset by approximately 200 basis points of extraordinary costs associated with the current supply chain environment, on which I will elaborate shortly. Bookings momentum, reflective of market demand, remained healthy in quarter, with total bookings up double digit year over year and well ahead of the growth rate of the optical WDM systems market. We ended the quarter with the book-to-bill ratio well above one and record backlog once again. Compared to the same quarter last year, our product backlog has grown over 50%. Our record backlog provides us greater revenue visibility and positions as well to deliver improved growth and profitability in 2022. We deliver these results against a tough macroeconomic backdrop navigating both a global pandemic and challenging supply chain environment. So far in 2021, we estimate that the supply chain dynamics have constrained our revenue growth by 400 to 500 basis points, gross margin by 150 to 200 basis points, and operating margins by 300 to 350 basis points. These dynamics have reinforced the importance of our focus on vertical integration and the associated control of our supply chain. Our annual business plan is progressing well when measured against the goals we laid out at the beginning of the year and towards our longer-term target model. For the full year of 2021, we remain on track to drive revenue growth above the market, expand gross margins by 300 to 400 basis points, and be profitable on a non-GAAP operating basis. Furthermore, the demand drivers fueling our business continue to be robust. including the unabated growth of traffic at 30 plus per year the massive rollout of 5g and mobile edge compute the acceleration of architectures embracing open optical networks along with competitive displacements especially against huawei in international markets our eight by four by one strategy that we launched at our investor day combined with our software and service offerings positions as well to drive growth and expand market share As we have previously stated, our eight by four by one strategy is focused and founded on three key network transitions. The eight, reflective of core networks moving to 800 gig services and beyond. The four, reflective of metro networks expanding to 400 gig. And the one, reflective of coherent optics moving out to the edge of the network with the rollout of 5G and mobile edge compute. To seize the eight by four by one market opportunities, We recently organized our company into two business groups, one focused on optical systems, the other on coherent optical modules. In addition, we enhanced our leadership team by bringing on experienced industry veterans. Tom Burns, who previously led Dell Technologies networking and solutions business, was appointed as the general manager of the coherent optical modules group. While Ron Johnson, who served as the head of product management of Cisco's optical transport business unit, was appointed as the general manager of the optical systems group. In addition to Tom and Ron, we also brought on Asmina Somani, formerly at Lamentum, to head engineering for the coherent optical modules group and to drive the high volume production of pluggables. And Russ Eschmacher, formerly at Nokia, as head of strategy and corporate development. to drive our corporate growth agenda. This group of leaders possesses the experience and talent to execute our growth strategy. Now let's turn to additional details from the quarter. From a regional and customer segment perspective, year-over-year revenue growth was strong across the board in EMEA, APAC, and our ICP and cable customers. Global Tier 1s Though down on a year-over-year basis due to timing of certain projects and pull-in of demand into the first half of 2021, we're largely stable quarter-over-quarter. We had a record revenue quarter with ICPs driven from new applications, footprint expansions, and the onboarding of new customers. From a bookings perspective, we delivered year-over-year growth in the Americas and EMEA while APAC, typically a smaller region for us, declined primarily due to the timing of certain projects. We had a record bookings quarter with our ICPs spanning metro, subsea, and long-haul applications and covering multiple generations of our products. Across the regions, we benefited from our new I-6 winds, strengthened subsea, metro rollouts, and new competitive winds. We are seeing a growing pipeline of Huawei displacement opportunities, especially in EMEA and APAC, and have started converting some of these to WINS. On a product basis, revenue and bookings growth were robust across the open optical portfolio. The GX Compact Modular platform grew double digits year over year and continued to be broadly deployed across all applications, metro, long haul, and subsea. After a very strong first half in bookings for our XTM Metro platform, it continued to grow year over year as we had another good quarter with the GX600 product and added new customers while scaling existing ones. On the i6 front, revenue is ramping, our product pipeline and backlog are growing, and we have now secured orders from 25 customers. We've recently announced customer wins with TI Sparkle, Giant, Saudi Telcom, and Telstra, and have secured additional wins with several unannounced customers. We're deploying I6 globally with Tier 1s, ICPs, and enterprise customers across both terrestrial and subsea networks. Our recent wins and shipments reinforce our belief that I6 remains on track to represent 20 to 25% of our product revenue in 2022. Line system bookings, which are a leading indicator of future high-margin transponder sales, remained healthy in quarter, and we were up again 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 a good predictor of the adoption of ICE 6 technology. On the revenue side, line systems came in slightly below our expectations as some of our deployments pushed out into Q4. This provided a benefit to our gross margins in the quarter by approximately 200 basis points, which was largely offset by higher supply chain costs. Finally, the industry is increasing its adoption of coherent pluggables, and we believe we're in a unique position to leverage our technical leadership and core competencies to deliver industry-leading point-to-point and point-to-multipoint pluggables. By leveraging our in-house DSP design capabilities, US-based semiconductor fab, integration and packaging facilities, we are positioned to have greater control over our supply chain, alleviating security and supply concerns while delivering best in-class pluggable solutions. Interest in our XR optics offering continues to accelerate. Enrollment in the OpenXR forum is increasing. We now have seven leading global service providers as members of the forum, as well as interest from network equipment manufacturers globally. Trials and proof of concept activities are advancing, proving out the technology and business case, and setting us up well for revenue and margin accretion beginning in 2023. We remain excited about the prospects of creating a billion-dollar-plus addressable market with point-to-point and point-to-multipoint capabilities of XR Optics, as well as the impact it has to our longer-term business model. As we close out 2021, we remain laser-focused on delivering against the financial projections we shared at the beginning of the year. We've refreshed our portfolio, laid the groundwork for our vertically integrated pluggables, are ramping I6 and securing important global customer wins. Looking ahead to Q4, we see another quarter of continued momentum in our business with healthy demand trends. While the industry-wide supply chain challenges are likely to remain with us for a few more quarters, our Q4 outlook reaffirms our prior expectations for 2021 to grow revenue above the market and expand profitability. Nancy will provide additional details on our Q4 outlook in her commentary. In conclusion, I'd like to reiterate how excited I am about the market opportunities ahead of us. The team we've assembled, along with our technology innovations and recent operating results, gives us confidence that we are on the right track to deliver the target business model, which reflects our expectations of 8% to 12% revenue growth, gross margin in the mid 40s, and double digit operating margins in 2023. I'd like to thank our employees, customers, and partners for their resilience and support during a year that continued to pose formidable challenges in their personal and professional lives. These are certainly unprecedented times. I will now turn the call over to Nancy to provide the additional financial details of the quarter, our fourth quarter outlook, and the progress towards our target business model. Nancy?