Infinera Corporation

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.

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.

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?