Infinera Corporation

Welcome to today's conference call and thank you for standing by. My name is Brent and I'll be your conference operator today. At this time, I would like to welcome everyone to the Infinera Corporation Q4 2021 earnings conference 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'd like to ask a question at that time, simply press star and the number one on your telephone keypad. If you'd like to withdraw your question, again, press star one. Thank you. I would like to now turn the call over to Amitabh Pasi, Vice President of Investor Relations. Sir, please go ahead.

Thank you, Operator, and good afternoon. Welcome to Infonera's fourth 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 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 first quarter of our fiscal year 2022. These statements are subject to risks and uncertainties that could cause Infinero'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 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 September 25, 2021, as filed with the SEC on November 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 reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures in our 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'll allow for plenty of time for Q&A today, though we ask that you limit yourselves to one question and one follow-up, please. With that, I'll turn the call over to our Chief Executive Officer, David Hurt. Thanks, Amitabh.

Good afternoon, and thanks for joining us today. I will begin with a review of the results for the quarter and the full year, and then turn the call over to Nancy to cover the details of our financial performance. Q4 was another strong quarter for us. Non-GAAP revenue of $401 million exceeded the high end of our outlook range, while both non-GAAP gross margins and operating margins were above the midpoint of our outlook. On a year-over-year basis, revenue grew 13%, and the second half grew 9%, driven primarily by the adoption of I6 and strong demand from our products, from customers from the Americas and EMEA regions. Gross margins in the quarter benefited from a higher mix of ICE 6, partially offset by elevated supply chain costs, higher line system sales, and slightly lower services margin due to a high mix of professional services to install new networks. Nancy will provide additional details of these dynamics in her commentary. Bookings momentum continued in the quarter. On a year-over-year basis, bookings were up profoundly and set a company record and were nicely balanced across customer verticals and major geographies. Our product backlog was up 100% year over year. Our record backlog provides us greater demand visibility as we enter the new year and positions as well to execute our growth and profitability objectives for 2022. Our strong Q4 performance was a great way to wrap up 2021, a year in which we were able to navigate an ongoing global pandemic and the increased impact of supply chain disruptions. Despite these headwinds, we executed our planned financial and strategic goals in 2021, including five key accomplishments that I'd now like to highlight. First, we delivered against our major financial milestones. We grew revenue faster than the market, despite absorbing four to five percentage points of supply chain impacts. We expanded gross margins by 380 basis points at the high end of our 300 to 400 basis point goal, despite absorbing 150 to 200 basis points of increased supply chain costs. And we generated positive and improved operating margins and cash flow from operations. Second, we drove commercial success across the customer footprint as we secured new Tier 1 design wins and won new Huawei displacement business. During the year, we announced awards with a very diverse set of global customers, including Virgin Media, Telstra, Telefonica Telcius, Telecom Italia Sparkle, Hatif Libya, and Globe Telecom, amongst many other awards. Our customer successes in 2021 included a 400-gig Metro win at a major North American service provider, commercialization of 600-gig at another Tier 1 ICP, and 800 gig growth at major ICPs and CSPs worldwide. Overall, we had a record bookings and revenue year with ICPs and have grown our ICP revenue at a 30% CAGR since 2019. And in subsea, a market characterized by stringent capacity and reach requirements, we grew overall bookings by over 50% in 2021. Third, we expanded our product portfolio, securing design wins and gaining market share with our compact modular platforms, line systems, and metro products. We grew revenue from our 800-gig ICE 6 GX product to the low teens as a percentage of product revenue in Q4, up from high single digits in Q3. We exited the year with over 30 ICE 6 customers, a healthy pipeline, and are on track to ramp ICE 6 revenue to 20%. to 25% of product revenue in 2022. In addition, line system bookings, a leading indicator of the future high margin transponder sales, grew by 100%. This was primarily driven by I-6 deployments. And bookings from our Metro portfolio, including the XTM 7100 and GX platforms, grew by 25% in year. We unveiled our suite of vertically integrated coherent pluggables to expand our addressable market by over a billion and enable an increase in margins from higher levels of vertical integration in our metro portfolio. In June, we launched the OpenXR Forum with initial members Verizon, BT, Lumen, Windstream, and Liberty Global. Over the next couple of weeks and ahead of OFC, we plan to announce other major carriers as new members in the forum. This impressive list of members collectively represents 20% of the global telecom CapEx spend. This is a great start, especially given we only announced the forum in June, and we have a strong pipeline of additional partners interested in joining the forum. Fifth and lastly, to execute our eight by four by one strategy that we laid out at our investor day last May, we organized the company into two business groups, one focused on optical systems and the other on coherent optical modules with both groups supported by our services organization. We also both bolstered the executive leadership team by bringing in industry veterans from Cisco, Dell, Lumentum, and Nokia to accelerate the execution of our growth and scale strategy. Looking ahead to 2022, our goal is to build on the foundation we established in 2021. The industry trends fueling our business remain robust. However, as we begin 2022, the supply chain environment remains challenging, and we expect these supply challenges to persist throughout the year with some relief anticipated in the second half of the year. These supply chain dynamics have reinforced the importance of our strategic focus on vertical integration, enabling us to have greater control over our supply chain. On the demand side, we see four drivers continuing to play out in 2022. First, healthy global service provider CapEx environment will be driven by bandwidth demands, 5G, and the proliferation of deep fiber architectures. Second, a robust 800 gig cycle. Based on the industry analyst forecast, 800 gig is expected to be a long multi-year cycle growing to almost 4 billion by 2025. A recent survey conducted by ACG Research found that 85% of service providers plan to deploy 800-gig solutions by the end of 2023, further substantiating the tremendous demand for 800-gig. Third, new insertion opportunities in the metro and access networks as service providers transition to 400-gig services and drive 100-gig coherent to the edge of the network. And fourth and lastly, an increased level of competitive opportunities to displace Huawei infrastructure. These demand drivers, coupled with the size of our backlog, Tier 1 wins, and growing pipeline, give us confidence that we're on the right track to grow and achieve our target business model in 2023. This model assumes revenue growth of 8% to 12% in 2022 and 2023, gross margin expansion of 300 to 400 basis points per year, and double-digit operating margins in 2023. I'm excited about our competitive position and our market opportunities ahead of us. We've strengthened our portfolio, bolstered our management team, and are investing to win. In fact, we have a set of portfolio announcements planned for this year's OFC in San Diego from March 6th to 10th, where you'll hear more about near-term performance enhancements to our 1.6-terabit I6 embedded optical engine, faster ways to integrate and manage open transponders in multi-vendor networks with our open automation suite, the introduction of our own high-performance vertically integrated pluggables. Today, we also announced that Rup Lakharaju will be joining our board of directors. I look forward to his contributions as he will work with us every day to drive value for our shareholders. Welcome, Rup. Separately, I would like to thank board members Kambiz Hujman and Tom Fallon, who have resigned from the board, effective today, for their service to Infinera over the years. I know they will continue to be friends of mine and for the company for years to come. Following these changes, our board will be smaller, more diverse, and reflect a lower average director tenure. As I close today, I want to reiterate how proud I am of the Infinera team's resilience in navigating a tough macroeconomic environment while delivering industry-leading products, record-breaking revenue and bookings, improved margins and cash flow, and winning new customers. The team's unwavering commitment, drive, and support have been personally humbling. I would also like to extend my thanks to our customers, partners, and shareholders for their continued support during a challenging year. I will now hand the call over to Nancy to cover the financial details of the quarter, our first quarter outlook, and the progress towards our target business model. Nancy.