Infinera Corporation

Ladies and gentlemen, thank you for standing by and welcome to the Infinera Corp third quarter 2022 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, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. Amitabh Pasi, Head of Investor Relations, you may begin your conference.

Thank you, operator, and good afternoon. Welcome to Infonera's third quarter 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 related to our expectations regarding a business plan, model and strategy, including product roadmap and products, sales, growth, market opportunities and trends, manufacturing operations, technology, the shift to open architectures, market adoption of coherent optical engines, competition, customers, expectations regarding industry-wide supply challenges, the macroeconomic environment, and ongoing COVID-19 pandemic impacts, and statements regarding our future financial performance including our financial outlook for the fourth quarter of 2022. These statements are subject to risks and uncertainties that could cause unfinanced 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 in Form 10-Q for the quarter ended June 25th, 2022, as filed with the SEC on July 28th, 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. An infineur 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 reconsideration 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. I'll now turn the call over to our Chief Executive Officer, David Hurd. David?

Thanks Amitabh. Good afternoon and thanks for joining us today. I'll begin with a review of our results for the quarter and then turn the call over to Nancy to cover the details of our financial performance. Given everything that's going on in the world with the markets and the economy, I'll try to be concise today. Overall, our message today is Our overall Q3 non-gap financial results beat consensus estimates. Our outlook for Q4 is in line with consensus expectations. We're delivering against our product strategy to drive market share gains, as evidenced by our 17% year-over-year product revenue growth, and we've strengthened our balance sheet. Financially in Q3, we delivered revenue and non-GAAP operating margin at the high end of our outlook range, with non-GAAP gross margins near the midpoint of the range and up 170 basis points sequentially. On a year-over-year basis, we expanded operating margin by 270 basis points, grew product revenue 17%, which represented an acceleration from 11% growth that we posted last quarter, and grew total revenue by 9%. Furthermore, we generated free cash flow in the quarter and approved our balance sheet. Demand in the quarter remained healthy with bookings continuing at a steady pace for most of the quarter, especially in the Americas and with ICPs. In fact, four of our top 10 customers based on bookings were ICPs. We did have a few large orders that slipped from the last week of the third quarter, given a September 24th quarter end, into the first week of our fourth quarter, resulting in a very strong start to Q4. Our backlog is healthy, setting us up well for the fourth quarter and for the full year 2023. From a supply perspective, the environment was tougher than our expectations from 90 days ago, but our team effectively navigated the challenges in the quarter. Supply costs, including expedite fees and freight, remained elevated and adversely impacted gross margins incrementally by over 100 basis points relative to our projections coming into the quarter. The total impact of gross margins for the quarter was approximately 400 basis points above normalized levels, without which our gross margins would have been above 40% in the quarter. While we're seeing some broad-based relief in overall supply chain, we expect supply conditions to remain challenging for some critical components through at least the first half of next year before easing in the back half of 2023. During the quarter, we continued to ramp new products, win deals with major ICPs and Tier 1 service provider customers. Our progress in the quarter spanned our entire portfolio, reinforcing our confidence in our 8x4x1 strategy. Specifically, within our systems business group, we had two key developments. First, we ramped I6 to over 30% of product revenue in the quarter and secured key design wins with several large customers, including a Tier 1 global... cable operator with significant operations in the U.S., a Tier 1 ICP as we expanded into their long-haul network, and a major telecommunications service provider in Asia Pacific. I-6 remains on track to ramp to 20 to 25 percent of total product revenue for the full year of 2022, in line with our prior commitments. Second, we had another strong quarter for our metro platforms, with revenue for the flagship GX30 product line up in the double-digit percentage range on a year-over-year basis. Our metro footprint continues to diversify as we expand with service provider customers both domestically and internationally. Within our subsystems group, there were three notable accomplishments for the quarter. Our 400 gig VR plus pluggable is industry leading and ahead of our expectations. We are starting to vertically integrate it into our own metro platforms, which should begin to positively impact gross margins as we exit 2023. During the quarter, we concluded a successful field trial with a large North American tier one service provider in which we demonstrated industry leading results in reach, power, and performance. All of this was accomplished in the industry's first 400-gig ZR Plus software-defined pluggable. Second, we're pleased with the progress we're making on the development of our own 100-gig point-to-multipoint coherent pluggables based on the open multi-source specifications being developed in the OpenXR forum. We believe these pluggables will revolutionize networks and open up a new multi-billion dollar addressable market for us. Membership in the OpenXR forum continues to expand, and there's a growing pipeline of interested service providers and equipment manufacturers ready to sign up for the forum. In fact, during the quarter, American Tower, Telcom Italia Mobile joined as members of the forum, along with additional network equipment manufacturers, including DriveNets, Oopie Space, and Furukawa Electric. Third and finally, the development of our next generation 800 gig pluggables is progressing well and we intend to lead the industry in this category as well. I'm encouraged by our business execution across the board while being mindful of an uncertain macroeconomic environment. Our product portfolio is in great shape and we're winning major deals and gaining market share. We are prioritizing our investments in sales and marketing and the most strategic R&D programs to capitalize on the insertion opportunities we see globally. In addition, as an optical semiconductor manufacturer, we have been positioning ourselves over the past couple years with all branches of the U.S. government, including the Department of Commerce, as an intended beneficiary of the government-sponsored CHIPS and Sciences Act. Infinera is unique in our U.S.-based capability in compound semiconductors with production and packaging facilities located in the United States. We intend to use any government funding that may be made available to us to accelerate R&D leadership in this critical technology, invest in our core business capability, and potentially expand into new markets while strengthening supply chain resiliency and national security interests. Looking ahead into the fourth quarter, we're planning for another quarter of above-market revenue growth while fighting the remaining acute supply chain challenges to get towards non-GAAP gross margins of 40 percent. We expect the fourth quarter to benefit from the continued ramp of I-6, momentum in the metro business, and additional operating leverage. Our fourth quarter outlook also implies product revenue growth greater than 10% for the full year and significant operating income expansion in 2022 over 2021 results. This financial performance is remarkable, especially in an environment where we expect to absorb more than $50 million in elevated supply chain costs for the year and further demonstrates the value of our vertical integration. As you've heard today, we're extremely focused on executing against our strategy and meeting our commitments. Our eight by four by one strategy is working, our products are winning in the market, and supply chain disruptions are actually creating new opportunities for us and our customers as they look to mitigate their supply chain risks. We are relentlessly driving towards our target business model and a dollar per share in annual earnings power. While there are several adverse macroeconomic factors at play, the underlying demand drivers for our products and services are healthy. I continue to be impressed with the innovation, execution, and resilience of our Infinera team, the high degree of engagement of our partners and suppliers, and the collaboration of our customers. As we look forward to diving deeper into our company strategy and our product portfolio at our upcoming Investor Day that we are planning for March 7th, 2023 at the OFC Industry Show in San Diego, California. I will now turn the call over to Nancy to cover the financial details of the quarter and our outlook for the fourth quarter. Nancy?