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spk08: My name is Savannah and I will be your conference operator for today. At this time, I would like to welcome everyone to the Antennair Corporation Q2 2022 earnings call. Today's call is being recorded. All lines have been placed on mute to prevent any background noise. And after the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, please press star one on your telephone keypad. If you'd like to withdraw your question, please press star one again. Thank you. And I would now like to turn the conference over to Amitabh Tasi. Please go ahead.
spk10: Thank you, operator, and good afternoon. Welcome to Infonera's second quarter of fiscal 2022 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, macroeconomic factors, and 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 and second half of 2022. 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 25, 2021, as filed with the SEC on February 23, 2022, and its quarterly report on Form 10-Q, the quarter ended March 26, 2022, as filed with the SEC on May 3, 2022, 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 earnings relief 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, so 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.
spk04: Well, thanks, Amitabh. Good afternoon, and thanks for joining us today. I will begin with a review of our financial results for the quarter, and then I'm going to turn the call over to Nancy to cover the financial details of her financial performance. The second quarter results were encouraging in a challenging environment, with revenue beating the midpoint of our outlook range, non-GAAP operating margin at the upper end of our range, and non-GAAP gross margin near the midpoint of our range due to higher supply chain costs. On a year-over-year basis, product revenue grew 11%, while services revenue declined 11% due to supply-related delays in customer deployments, resulting in total company revenue growth of 5.5%. The good news is this is only an issue of timing with the service revenue, and revenue associated with these delays should be recognized in the coming quarters. Global demand for our products remains strong in Q2, with bookings up in the double-digit percentage range year over year and a book-to-bill above 1%. Booking's growth was especially strong with the ICPs, where we grow both with existing customers and expanded with new ones. We set another record backlog, growing approximately 80% year over year, with product backlog growth over 100% again. Our remaining performance obligations, which are a measure of both our non-cancellable backlog and our deferred revenue, grew by $133 million sequentially. in quarter. We successfully delivered our Q2 results despite facing several supply chain challenges, including continued component shortages, decommits, COVID-related shutdowns in China, all of which resulted in higher costs for components and logistics. Taken together, these factors impacted our gross margin by approximately 350 basis points in quarter and temporarily skewed our shipping linearity, which had a much larger portion of shipments occurring in the last three weeks of the quarter. We believe the supply chain impact was at its worst in Q2. And while we expect the supply chain environment to remain difficult for some time, we do expect some relief in the second half of the year with additional improvements in 2023. Overall, the demand drivers fueling our business are healthy. Our booking strength and record backlog demonstrate the market traction of our open optical portfolio. Specifically, within the systems business, we added new I6 customers, secured new design wins in Q2, resulting in very solid bookings for the quarter. We believe I6 lead times are industry-leading, given our high degree of vertical integration, which we are leveraging to win new deals and drive future share games. We are certifying I6 with several leading U.S. and global Tier 1 service providers for deployment in the networks. which will drive future growth and margin accretion. Through the first half of the year, I6 has ramped to the high teens as a percentage of product revenue, and we are on track to grow I6 to 20% to 25% of product revenue in 2022. Next, our Metro solutions perform well as we grew bookings and revenue year over year for both the GX and XTM platforms. Our expanding customer footprint sets us up well for future revenue growth and margin expansions, once we vertically integrate our coherent pluggables into our metro platforms. To that effect, we have our first set of pluggable samples available now, and we are currently integrating them into our metro platforms for deployment starting in 2023. And finally, we saw continued growth in our open line systems with both bookings and revenue up in the double-digit percentage range year over year. The continued strength in line systems growth over the past two years remains a good leading indicator of future high-margin transponder sales as we grow with existing customers and win precious new ones. Turning to our subsystems business group, we have the following highlights for the quarter. First, as I previously stated, we have samples available for our 400-gig XR pluggables, capable of supporting both point-to-point and industry-leading point-to-multipoint applications. These samples are on time and performing well against our technical specifications, and we're on track to see their financial impact beginning in the first half of 2023. Second, important to our systems business, we're integrating these 400 gig pluggable modules into our metro platforms. This is a high percentage of material content for our metro systems. This is the first time we've had the ability to produce our own vertically integrated metro solutions instead of buying components from the merchant market, which should result in future meaningful margin expansion and improved global competitiveness. Third, we're beginning to certify our 400 gig pluggables to work in external platforms as well, such as routers, switches, servers, and wireless RAM. This will open up a new multi-billion dollar addressable market for us, while giving us additional revenue growth and margin expansion opportunities. We partnered with leading equipment manufacturers to accelerate our go-to-market programs for our pluggables and are planning trials with Tier 1s in the second half of this year. Next, we're expanding our line of pluggable products as we develop both 100-gig and 800-gig coherent pluggable solutions. While we are in early days of development, we've received great feedback from our customers, and we're building out our customer pipeline. We plan to provide an update on our pluggables roadmap at an upcoming industry event. Lastly, membership in the OpenXR Forum, which was established to accelerate the market adoption of point-to-multipoint networks and architectures, continues to gain traction. During the quarter, several new service providers joined as members of the forum. More importantly, the pipeline of network equipment manufacturers who are major players in their respective market segments is growing. In a Q2, Dell Technology signed on as a forum member, which is a significant milestone. Our portfolio is in great shape, and we're seeing insertion opportunities from competitive displacements and the growing need for supply chain diversity from our global customers. These opportunities are balanced by the temporary supply chain impacts on our business, which we expect to attenuate over time. In 2022, we estimate the total supply chain impact on our gross margins to be over 300 basis points for the full year, almost twice the impact we saw in 2021. We expect the higher supply chain costs to start easing next year, potentially declining by 30% to 40% in 2023 and to dissipate in 2024. We're not sitting still, as we shared with you on our last earnings call. We're taking several steps to mitigate these higher costs over time. including adjusting our commercial terms, cost-reducing products, and substituting precious parts. Our investment thesis fundamentally remains intact, and we expect our financial performance to continue to improve in the back half of 2022 as we benefit from design wins, ramp the production of I6, and see the conversion of our backlog to revenue. We are planning for sequential revenue growth in both Q3 and Q4, with product revenue growth of 8% to 12% year-over-year. offsetting the timing of the service revenue recognition. We're also planning to exit the year with gross margins hitting 40% or higher in Q4. The size of our backlog, which is approaching a billion dollars, gives us greater confidence going into 2023. Nancy will provide additional details on our expectations for the rest of the year shortly. While there are several short-term factors at play, including a global pandemic, a war, a difficult supply chain environment, and macroeconomic uncertainty, The underlying market opportunity is healthy, and the Infinera team is executing the plan. We're winning new customers, expanding with existing ones, ramping I6 to 20% to 25% of product revenue in 2020, and launching our pluggable products at or ahead of schedule. I'd like to thank the Infinera team for their continued support and dedication to our customers and to one another. I'd also like to extend our thanks to our customers, partners, suppliers, and shareholders for your continued support. We intend to take full advantage of these market disruptions to create opportunities for Infinera and for our investors. I will now hand the call over to Nancy to cover the financial details of the quarter and the outlook for the third quarter. Nancy?
spk01: Thanks, David. Good afternoon, everyone. I will begin by covering our Q2 results and then provide our outlook for Q3. My comments reflect our non-GAAP results and outlook. For your reference, on our investor relations website, we have posted slides with financial details, including our gap to non-gap reconciliation, to assist with my commentary. Overall, I am pleased with our financial results for Q2. As you heard from David, revenue beat the midpoint of our outlook range, non-gap operating margin was at the upper end of our outlook range, and the non-gap gross margin in the quarter was near the midpoint of the range, as we absorbed the highest supply chain impact to date. Demand remains strong in the quarter, with bookings up in the double-digit percentage range, a book-to-bill ratio above one, and record backlog. Our strategy is working well, and our refreshed portfolio is creating insertion opportunities, especially as our customers seek supplier diversity. Turning to the financial details of the quarter, on a year-over-year basis, Q2 revenue of $358 million was up 5.5%, with product revenue up 11% in the quarter and up 8% in the first half. Services revenue, which is still being impacted by the timing of customer project deployments, was down 11% on a quarter over, I'm sorry, on a year-over-year basis. We continue to view the dynamic within our services business as temporary and expect revenue to catch up through the rest of the year and into 2023. Geographically, we saw revenue growth across all regions on a year-over-year basis and derived 51% of our revenue from domestic customers, a level generally consistent with Q1. During the quarter, one customer contributed to greater than 10% of our revenue. Q2 gross margin of 36.1% was near the midpoint of our outlook range. We delivered this margin while absorbing approximately 350 basis points of impact from elevated supply chain costs. Operating profit in the quarter was $1.5 million, equating to an operating margin of 0.4% and at the high end of our outlook range. Operating expenses in the quarter of $127.6 million were below our outlook range of $132 to $136 million as we tightly managed spending while maintaining investments in our long-term projects. The resulting EPS in the quarter was a loss of $0.05 per share. Moving on to the balance sheet and cash flow items, we ended the quarter with $155 million in cash and restricted cash down from last quarter. The primary use of our cash in the quarter was for temporary changes in the working capital balance impacted by atypical linearity as a greater portion of shipments than is normal occurred late in the quarter. As a result, cash collections were lower than our expectations in Q2, but we expect to see improved collections in Q3 and Q4. In addition, we used cash opportunistically to increase our inventory by $18 million in the quarter, which we expect to convert to cash in the back half of the year as we ramp I-6 further and drive growth. Additionally, because of our improved financial position over the last couple of years, we were able to replace our prior ABL facility at the end of June with a new one at better terms and with expanded capacity. This new $200 million facility will be an efficient source of short-term capital, if required, to drive working capital for our growth while allowing us to navigate temporary supply challenges. Looking ahead to the third quarter of 22, we are encouraged by our bookings momentum, the ramp of I-6, and record backlog. At the same time, as we have discussed this afternoon, we expect the supply challenges to continue through the second half of 22 and into 23, albeit moderating some over this period. Taking these factors into account, we expect Q3 revenue to be in the range of $360 to $400 million, representing approximately 7% growth on a year-over-year basis at the midpoint of the range, with product revenue growth at or above 8% to 12%. while services revenue will still be down on a year-over-year basis in Q3. We expect Q3 gross margin to be in the range of 38% plus or minus 150 basis points, up on a quarter-over-quarter basis. The primary driver of improved gross margin sequentially is a higher percentage of vertical integration in our mix from the ongoing ramp of I6 in Q3. Embedded in our gross margin outlook is the assumption that we will continue to absorb approximately 300 basis points of supply chain impact from higher costs tied to components, materials, logistics, and freight. We are forecasting Q3 operating expenses to be in the range of $131 to $135 million as we continue to prioritize investments in both sales and R&D consistent with the comments we made at the beginning of the year. The resulting operating margin in Q3 is expected to be 3% plus or minus 300 basis points, generally in line with current consensus expectations and up on a year-over-year basis at the midpoint of the range. We plan to generate cash from operations in the quarter as working capital begins to normalize, even as we continue to invest in inventory. Below the operating income line, we assume $5 million for net interest expense and $5 million for taxes. Finally, we are anticipating a basic share count of approximately 218 million shares for Q3 and a fully diluted share count of 289 million shares. Looking further ahead, we are currently planning for revenue to have a normal seasonal uplift in Q4, up approximately in the mid-teens percentage range, sequentially from Q3 to Q4, and with Q4 gross margin at or above 40%. We expect the year-over-year growth rate for product revenue to be in the 8% to 12% range again in Q4 and on an annual basis in 22. Consistent with commentary on our last earnings call, we expect approximately $30 million of services revenue to push out from 22 to 23. Despite the ongoing challenges in 22 from numerous external developments, we remain committed to driving revenue growth and margin expansion in 2022 and beyond. We are pleased with our record demand, customer wins, and next-generation technology development. Through the first half of the year, we have grown bookings in the double-digit percentage range, and our remaining performance obligations, a proxy for backlog, are approaching $1 billion, up approximately $350 million from the year-ago quarter. Furthermore, we are driving toward product growth of 8% to 12% in 2022 and plan to exit the year with gross margin at 40% or higher. Based on what we see today, we expect to be generally in line with current consensus for operating margin in Q3 and Q4. I am proud of our team's operational execution as we are delivering these results while absorbing supply chain costs that are almost twice the level of what we experienced in 2021. In closing, I would like to echo David's thanks to the Infinera team who continue to work tirelessly through a very dynamic environment, and to our partners, customers, and shareholders for your continued support. Savannah, I'd now like to open up the line for questions.
spk08: Thank you. And as a reminder, that is star one if you would like to ask a question. We'll pause for a moment to compile the Q&A roster. And our first question will come from Rod Hall with Goldman Sachs. Please go ahead.
spk06: Hi there. Yeah, thank you for taking my question. And thanks for quantifying the backlog. I'm wondering where you expect this one billion backlog of total backlog to trend from here as we move throughout the year and into 2023 and then have a follow up.
spk04: Yeah, you know, I think the good news is. You know, one, backlog continues to grow. We're continuing to see strong demand, certainly as we see match supply begin to ease in the back half of this quarter and as the easing continues in 2023. Some of that will drain down, but consistent with our comments when we entered the year, consistent with our comments every quarter, we believe it will continue to support that 8% to 12% growth rate. It should be noted that, you know, double-digit product revenue growth you know, is double what we grew last year despite the supply chain environment. And so that puts us in a nice position because, as you know, when you get the revenue on the product side, the service and warranty is certain to follow that. Very, very high attach rates and future commitment rates.
spk06: Got it. Thank you for that. And then on I-6 mix of total product revenue, high teens this quarter, and I believe also high teens last quarter. And what gives you the confidence to end the year in the 20 to 25% range of total product?
spk04: Yeah, deployment facts. So backlog bookings and some of those deployments are indeed out shipped, being installed, going into revenue, going through certification to be clicked on. So just based on the facts of our business in front, we're very comfortable with the 20 to 25%. Got it. Thank you.
spk03: Thank you. Good questions.
spk02: Our next question will come from Alex Henderson with Neatown.
spk08: Please go ahead.
spk09: Thank you. I just wanted to clarify on the backlog comment. That $1 billion was total backlog. What was the backlog for just product, which is what would be comparable to what other people are reporting?
spk01: Yeah, we aren't giving that split out. And that billion dollars that we're referring to is actually the RPO. I just want to clarify that. which represents non-cancellable backlog and our deferred revenue. But our product backlog grew, as David said, over 100% on a year-over-year basis again. So we are seeing very good product backlog.
spk09: So if you could talk just about the transaction that slipped out of the first quarter into the second quarter. I think that you clarified during the May timeframe that you had won a 19-country sea deployment, which was apparently that project. Have we now got most of that into the revenue for the second quarter, or is that still the back half of the year? What's the slope of that fairly massive project, and do you expect to have terrestrial winds in the 19 countries that it has a terrestrial landfall in. Thanks.
spk04: Yeah, so good question, Alex. So we had removed that from second quarter, right, and said it was likely to push out to the back half of the year. We're confident it'll be done in the back half of the year between Q3 and Q4. And we are getting, you know, as the prior question asked, we are having new winds on I-6 that are making us confident that as we go through Shipments, deployments that will hit the 20% to 25% that we committed to for the year.
spk09: The other piece of that was the terrestrial opportunities off of it.
spk04: Yeah, look, I think we're seeing terrestrial opportunities based on the fact that our lead times for I-6 are quite low because of our vertical integration compared to maybe compared to others right now. At the same time, those same customers are looking for supply chain diversity. I think this whole last two years has taught everybody to try to better equalize the supply chain. And as a market taker in our position, as somebody that needs to take share, that's opening up opportunity for us. So we are starting to see those terrestrial wins. I'm not commenting in particular on that particular customer's attach rate. to the subsea, but that does remain, you know, opportunistic upside for us. And we continue to see our sales pipeline increase, which is super important right now because you're seeing very, very healthy backlog continue to grow. I mean, RPO is growing in quarter at $133 million. You know, it makes me feel much better about our growth trajectory going forward, much more confident about our year end as well as 2023. Thanks.
spk03: Thanks, Alex.
spk02: Our next question will come from Mike Genovese with Rosenblatt Securities.
spk08: Please go ahead.
spk13: Great. Thanks. Thanks very much. First question. It sounds like we're still with the 8% to 12% total revenue guidance for 23 and 24. And are we still looking at 300 basis points of gross margin and about 200 of of operating margin, or since we're starting with a little bit lower operating margin base, is there a reason operating margin could grow, say, in line with gross margins next year?
spk01: So, based on what we see today, right, and we're still halfway through 22 and have just come off of a tough supply chain quarter, I'll leave it at that. But based on that, yeah, we're still expecting that 8% to 12% growth in 23. and the margin expansion, albeit off a lower base of 22 than we had originally anticipated. But our view today is that we'll still exit 23 at our target business model, which has margins in the 45% range at double-digit operating income.
spk03: Thanks.
spk13: And, you know, I understand that it was a back-end loaded quarter. Yeah. And that, you know, what happened with receivables and so forth. Yeah. Is that the reason that you took the revolver, $40 million more? And just talk to me about the cash flow and the balance sheet and make me a little bit more comfortable for the back half of the year and into next year about that situation.
spk04: No, that's great. It's a good question. I think, look, the reason we changed out the ABL is we're in much better financial shape, so we had better terms. both in terms of set of fees, both in terms of the interest rate, as well as the capacity. So this is an increased capacity as well as the ability to expand it over time. And, you know, we're looking at a big backlog and growth sitting in front of us and a big pipeline in front of us. So as we exited the quarter, we had the ability for, you know, really the first time in multiple quarters to add some inventory. Our team's been working really hard in putting those purchase commitments in, so we were actually able to add, be able to execute for the back half in the beginning of 2023. And at the same time, yeah, the linearity in the amount it shipped in the last month of the quarter was significant. And so we changed out because we were going to get better terms. The fact that we use an ABL for a low-cost and flexible working capital relief is there. And given we expect to create cash from operations in Q3 and Q4, we feel adequately positioned in the future and that that was a good thing to help us drive to these growth numbers into our target business model.
spk03: That's perfect. Very helpful. Thank you. Thanks, Mike.
spk02: Our next question will come from Simon Leopold with Raymond James.
spk08: Please go ahead.
spk12: Thank you for taking the question. I wanted to see if you could talk a little bit about how hard exchange rates are or are not affecting your business. Saw a little bit of sequential slowing from your EMEA region and slower growth in Asia Pacific. And we've had certainly big moves in the dollar to other currencies. How are you factoring that into your outlook and how did it affect you in the quarter? Thank you.
spk01: Hi, sure. Very minimal impact. Think less than $5 million, right, on an overall basis. Our exposure in Europe from contracts that are transacted in the euro are limited, and we have a natural hedge on some expenses in OPEX. So we did not have a meaningful exposure to FX this quarter.
spk12: And in the outlook, how are you thinking about the impact that Your goods are now more expensive for customers to pay in dollars when they budget in euros.
spk01: Yeah, I mean, we're planning accordingly based on, you know, we're watching the trends and the forecast as well. But we don't expect it to be a meaningful impact through the back half of the year.
spk04: A big portion of that is they're still drawn down on backlog. So the reason I mentioned we're watching the pipeline carefully is to pick up any nuances like that. But so far, we haven't seen any material shift. in that demand equation.
spk03: Thank you for taking the question. No, good question.
spk02: Our next question will come from Neda Marshall with Morgan Stanley.
spk08: Please go ahead. Hey, Neda. Great, thanks.
spk00: Hey, a couple questions for me. One, maybe just on kind of the confidence that you guys have about conditions improving in the second half and just A little bit of kind of maybe more background on kind of what's giving you or what part availability is kind of giving you some of that confidence. And then, you know, it seems as if most of the gross margin ramp into the second half is largely just from kind of the I-6 mix picking up. But I just want to make sure that none of that is also from kind of any supply chain overhang improving in the second half. Thanks.
spk04: Yeah, Matt, let's talk about that because I want to be crystal clear. You know, I don't think the supply chain environment is anywhere near over. I just think, and when you talk to the supply chain all the way through CMs, all the way through the folks that are in the semiconductor field, I think everybody saw Q2 as kind of the triple witching between costs, transportation costs, the China pandemic shutdown. It was just more material than anybody had expected. And therefore, you know, whether you call it a peak or a bottom, You know, I think a lot of us see that as going to be the top impact that supply chain has to us. We are seeing parts free up. You're hearing some banter in the world that, you know, whether it's cell phones or consumer electronics are freeing up due to the economy. That doesn't have a lot of crosshatch with the products we build, but it does have some shared components in terms of resistors, capacitors, some of the raw materials. Overall, I just think the planning effect that we've put in place over the last two years, again, you haven't seen us with the ability to pre-bring in $18 million inventory before. That should be a telling sign and a good telling sign because we tend to turn the inventory pretty damn quick once we get it in. You know, obviously, it has to be a match set. So, we are seeing that lighten up, but, Meta, to that point, 350 basis points of gross margin was the impact in Q2. It'll be about 300 basis points in Q3. It might be a little bit lighter than that in Q4, but that's still a pretty big margin impact. To put it in perspective, roughly in 21, we had our results improve, yet we absorbed $25 million roughly of supply chain, extra supply chain costs. This year, that number will be closer to 50, yet will improve on every financial metric. Next year, I expect that to attenuate back down. Not all the way to zero, but as we said, 30 to 40% down. In 24, I expect it to be zero. I think that's prudent planning right now.
spk03: Okay, perfect. Thanks for all the context.
spk02: And as a reminder, that is star one if you would like to ask a question.
spk08: And our next question will come from I'm Jim Suva with Citigroup. Please go ahead.
spk07: Thank you. Your comments around the back-end loaded corridor, I get it, but I'm just kind of curious, with such a big backlog and arguably more visibility than kind of ever, why was it so back-end loaded? Was that just you didn't get the parts into the warehouses or The shipment in time. Okay. That's what it was.
spk04: Okay. So look, Shanghai was shut down for half the quarter. CMs were having a hard time getting digestion in. And so our production lines were smoking around the clock, uh, both at our CMs and then our own internals to be able to get things, uh, you know, rack stacked and finished to get out to the customer. And a lot of that shipped deployed and had to turn on in the last period. Unlike we've seen before. So that's why it's abnormal linearity. Great.
spk07: And then in the quarter outlook for the revenue growth, is it then back to normal cadence of linearity or actually better since the spigot was so tight given the lockdowns in the June quarter that just kind of started to release towards the end?
spk04: Hey, Jim, nothing's normal in this period, but it's beginning to normalize, I would tell you. And so we don't expect that kind of dramatic linearity. We do expect it to normalize and thus the working capital balance to rebalance between Q3 and Q4 based on payment terms, collection cycles, you know, just math.
spk01: But I would also add to that that if we have the opportunity to bring in inventory, we're doing it. So the faster we can get it in and turned, the better for us in the back half.
spk07: Great. Thanks so much for the details and clarifications.
spk03: No, thanks, Jim.
spk02: Our next question will come from George Nodder with Jefferies.
spk08: Please go ahead.
spk11: Hi, guys. Thanks very much. I guess I know there was some talk at one point about pricing increases. Was that something that you guys did in Q2? And is there a possibility of raising price going forward as well?
spk04: Yeah, I think I've mentioned this on probably three or four earnings calls. Obviously, we work with our customers on their commercial terms as well as cost reductions and part substitutions, but I don't make public our competitive price actions. Got it.
spk11: Okay. So can we say – is it fair to say that the RPOs or backlog were not affected by any type of price increase? Is that – I guess I just want to know that the improvements were organic.
spk04: Yeah. It's fair to say a portion of that might not be impacted by that, but all of it's impacted by our ability to continue to drive the cost reductions and part substitutions we're going through.
spk11: Okay. Okay. Got it. And then, Nancy, could you just remind me the share count? I missed the fully diluted number.
spk01: Yeah, 289 for Q3, because that includes the convertibles with the new accounting standard.
spk03: Gotcha. Okay. Okay. Great. Thank you guys very much. Hey, thanks, George.
spk02: And we do have a follow-up from Alex Henderson with Needham.
spk08: Please go ahead.
spk09: Great. I was hoping you could just clarify the commentary around... the absorption on the supply chain. Obviously, $50 million this year is a pretty good net, and attenuation of that over the two years would be a large number. But are you saying $50 million, or are you saying the post-75, the 25 from last year, and the 50 this year? And how would the parts price inflation that is part of standard cost accounting going forward as the parts prices increase by the OEMs feather against that?
spk04: Yeah, it's a good question, Alex. We keep pretty, you know, like forward orders that we track, we track everything that we view as extraordinary so we can drive it the heck out of our business as soon as possible. So the 25 from 21 was 25 of extraordinary costs not planned at the beginning of the year as part of our standard basis. The $50 million was $50 million of extraordinary costs beyond our standard cost basis. And that is typically captured in TPV, extra transportation costs that you can track in OCOGs, a great portion of it. So when you put that all together, Alex, when we go into next year, we expect those costs to go down, again, by 30% to 40%. I think that's a good conservative assumption we're making. And we always track what is going to be the reoccurring cost of Part A, B, and C. That's in our standard cost basis, and that's in our standard margin. Did that make sense?
spk09: Right. It does. I just wanted to be clear. 30% to 40% is on the $75 million. No, 30% to 40% is off of the $50. Off of the $50.
spk04: This year is a peak. Yeah, so it went from $25 and $21 of extra above standard cost 50, extra above standard cost in 2022.
spk09: So a net increase of 25.
spk04: Correct. A net increase year over year at 25, where we didn't expect it to net increase. And next year, we expect a net decrease off of the 50, conservatively 30 to 40%. Okay.
spk09: So the fundamental element of that question, which was underpinning it, was I assume that yes, you've had a whole bunch of increases in costs, but that are abnormal by standard accounting. But on the other side of the coin, that the price increases of components, you must be hearing from your suppliers that they plan to increase their standard pricing, and therefore you've got to add that back into your cost structure going forward, which would then be an offset component to the benefits that you're talking about because, I mean, obviously it's a slightly different bucket, but it does go against it, and it's similar. The cost that you're absorbing now for expediting parts at higher prices, it'll turn into a price increase in future periods of standard pricing.
spk04: No, see, that's why we tried to put it where we did, Alex. If we have a price increase of a product, it goes into our standard cost. And that's normal course of business. I mean, don't get me wrong. Some people took advantage of this period of time, and we always will remember that. But our job is to offset that with normal cost reduction and the Moore's Law of Optics. So those things, we all track at normal standard cost. So if a chip goes up 10%, well, we do that, and then we go try to negotiate that, just like we negotiate with our suppliers to get costs down on an annual basis and through volume. So those 25, 50, and then the whatever it's going to be next year, meaning the 30 to 40% below, those are extraordinary on top of standard cost.
spk09: I'll take it off.
spk03: Thanks. Okay. Thanks, Alex.
spk02: And again, that is star one if you would like to ask a question.
spk08: And with no further questions, I'll turn the call back over to David Hurd for closing remarks.
spk04: Now, I do appreciate the questions and the engagement. You know, overall, I look at a tough macroeconomic backdrop, but growing, you know, our current view of the year is we will grow product revenue 8% to 12%, and that will be double what we did last year in a tough supply chain environment. We are on track for the promises that we made to our shareholders. and our employees and our customers to have I6 scaling to 20 to 25% of revenue. Metro wins are ahead of schedule. The pluggables have gone from PowerPoint to products to qualification and are building a pipeline to open up a new billion-dollar opportunity. We have new 400-gig pluggable samples out there today. We will be talking further about our 100-gig and 800-gig coherent pluggables. We have solid wins across the board with ICPs and CSPs. We've built that strong backlog up to a billion with RPO that Nancy talked about. You know, margins will be up for the year despite us absorbing these huge 350 basis points of supply chain. They would have been up further if you'd taken the operating leverage effect of the attenuated revenue. So overall, we feel good about our business going forward. We've got opportunities that are further enhanced by both competitive displacements of Huawei, as well as an opportunity where our customers are really saying, we've got to balance the scale here in terms of supply chain and bring on new vendors in an open architecture environment that puts us in great shape. We really do appreciate been really good developments of partnership with our customers for planning. I think it'll be something that'll change us all forever. Our supplier partnerships that we've had the patience of our shareholders, and certainly the dedication of our employees. So thank you very much. And that's all we got. Have a great day.
spk03: Thank you, everyone. Thanks, operator.
spk08: And that will conclude today's conference. Thank you for your participation, and you may now disconnect.
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