Infinera Corporation

Good day, everyone, and welcome to the Infinera Corporation Q4 2022 Earnings Conference Call. After today's prepared remarks, we will take your questions. If you have a question during this time, please press star 1 on your telephone keypad. It is also star 1 to remove yourself from the queue. At this time, I would like to hand things over to Mr. Amitabh Pasi, Head of Investor Relations. Please go ahead, sir.

Thank you, Lisa. Thank you, and good afternoon, everyone. Welcome to Infinera's fourth 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 related to our expectations regarding a business model and strategy, market opportunities and trends, competition, customers, capacity growth, the shift to open architecture, market adoption of coherent optical engines, our ability to ramp I6 and increase vertical integration, the potential for Infineura's new subsystems products to drive market expansion, increase Infineura's profitability, and improve Infineura's competitiveness in the future. Expectations also regarding industry-wide supply chain challenges and the macroeconomic environment, projected year-over-year drivers of demand, revenue, gross margin, operating expenses and operating margin, future investments in our direct sales force, our ability to sell higher margin products to existing customers of line systems, and Infinera's financial outlook for the first quarter and full year of 2023. These statements are subject to risks and uncertainties that could cause Infinera'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 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 for the quarter ended September 24, 2022, as filed with the SEC on November 2, 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 non-GAAP financial measures, except for revenue, balance sheet items, and cash flow from operations, which are each discussed on a GAAP basis. Pursuant to Regulation G, we have provided a 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, so we ask you to limit yourself to one question and one follow-up, please. With that, I'll turn the call over to our Chief Executive Officer, David Hearn.

Thanks, Avita. Good afternoon and thanks for joining us today. I'll begin with a review of our results and then I'll turn the call over to Nancy to cover the details of our financial performance for the fourth quarter and for the full year. Our fourth quarter performance was remarkably strong, enabling us to beat consensus expectations on revenue and operating profit and contributed to record performance on many fronts. Specifically, we reported record revenue of $486 million up 21% on a year-over-year basis. We achieved product revenue of $399 million, also a high for the company, and up 26% on a year-over-year basis. We delivered gross margins of 38.7%, up 150 basis points year-over-year, and we expanded operating margins to 10.5%, up 620 basis points year-over-year. Relative to our expectations coming into the quarter, revenue and operating margin came in above the high end of our outlook range, while gross margin was within the outlook range. Demand in the quarter was healthy, with a book-to-bill ratio above one. The fourth quarter also marked a great finish to 2022, a year in which we grew company revenue by 10%, consistent with our stated objective of 8% to 12%. with product revenue growth even higher at 15%. We kept gross margin stable while absorbing more than $60 million of supply chain costs that adversely impacted our annual gross margins by over 400 basis points. We doubled operating margin to 4.4%, up 230 basis points year over year. We ramped I6 to 28% of product revenue for the full year, ahead of our stated objective of 20% to 25%. And we delivered samples of the industry's first software-defined 400-gig ZR Plus pluggables on time with industry-leading reach, power, and performance as validated by Tier 1 customers. I'm extremely pleased with our performance in 2022, especially considering the range of macroeconomic impacts we faced from a lingering pandemic and persistent supply chain challenges to rising inflation and a backdrop of a conflict in Europe. Despite these headwinds, we outgrew the optical systems market, gained share, improved our balance sheet, and continue to extend profitability for the third consecutive year. As I think about the year, there were two primary factors that presented us with some challenges throughout the year. One micro and one macro. On the macro front, as I mentioned earlier, our most profound challenge was navigating a difficult supply chain environment as we absorbed over 60 million of supply chain costs. Without these elevated costs, our gross margins would have been 400 basis points higher for the full year and above 40% for the full year. We expect supply costs to remain elevated for the first half of 2023. On the micro front, as we grew our business with customers into new locations and new geographies, we experienced a higher than anticipated demand for our line systems and non-vertically integrated metro products. These products do come at lower margin initially, but the expanded footprint sets us up well for future margin expansion as we add transponders with our own vertical integration. Let me now turn to some of our portfolio and commercial highlights for 2022. Specifically, within the system business group, we had three major accomplishments in the year. First, as I mentioned earlier, we successfully ramped I6 to 28% of product revenue in 2022, resulting in nearly 30% revenue growth in the combined long haul and subsea market segments. We exited the year with over 70 I6 customers and secured design wins with major service providers including a U.S. Tier 1 service provider with plans to ramp revenue in 2023 and beyond. Second, revenue in the metro segment from the GX30 and XTM products grew by a double-digit percentage in 2022, continuing the strong momentum in this segment over the last three years. Lastly, we continue to advance our suite of automation software, which makes our products easier to use and faster to onboard and open networks over competitors line systems. We also believe software on our pluggables is a game changing and differentiator in the industry, helping customers lower operating costs and gain higher levels of visibility and security while maximizing their agility. Similarly, in the subsystems group, we also had several notable accomplishments. First, We turned up the first units of our 400 gig Sierra Plus software-defined pluggables in live traffic environments in North America with the Tier 1 service provider, delivering industry-leading results in reach, power, and performance. At the upcoming OFC Industry Show, we look forward to sharing additional details on the recent momentum we've had in our pluggables business. Second, we've received commercial validation of these pluggables for the first set of purchase orders of our 400-gig ZR Plus point-to-point and our 400-gig XR point-to-multipoint pluggables as we exit the year. We remain on track for product availability in the first quarter of 2023. Third, we advanced the development of our 100-gig XR point-to-multipoint coherent pluggables based on the open multi-source specifications being developed in the open XR forum. We believe this pluggable will be a game changer in the 5G mobile edge compute and the new access architectures. Membership in the XR forum expanded further with seven new members joining the forum in the quarter, including Lumentum and the tier one North American cable operator. The forum now includes a total of 28 members, including service providers representing about 25% of the global CapEx spend in this category. and several network equipment manufacturers, demonstrating our commitment to open networks in the industry. And finally, during the year, we also launched the development of our next generation 800-gig high-performance pluggables, which we believe will lead the industry in power performance and manageability. Looking ahead to 2023, we remain encouraged by the secular drivers of our business, our competitive position, our planned portfolio, and record backlog. The insatiable appetite for bandwidth, coupled with the significant investments being made in fiber infrastructure, are long-term positive drivers for Infinera and, quite frankly, the industry. With that being said, we are mindful of an uncertain macroeconomic backdrop, which may result in some near-term variability in the timing of demand and capital spending as our customers manage their business in a recessionary climate. We see no reason to get ahead of our skis at this time, and will take a prudent approach to 2023. While Nancy will cover the specific details of our financial outlook, I'd like to provide some high-level color on our planning assumptions for the year. First, we expect to outgrow the optical systems market again in 2023, resulting in further market share gains. Industry analysts appear to be coalescing around a growth rate of 4 to 5 percent for the systems market in 2023, and we believe we will grow high single digits Similar to last year, we expect our growth to be weighted more towards the second half of the year. Second, we plan to expand our operating margins and gross margins again in 2023 as we continue to ship more vertically integrated products like I6 and as the supply chain costs attenuate in the back half of the year. In addition, we will exit the year with the next level of margin expansion with our own vertically integrated pluggables beginning to fire in our financials. Finally, given the strength of our refreshed portfolio and the market opportunity in front of us, we believe it's an appropriate and opportune time to increase investments in our go-to-market efforts to accelerate top-line growth and drive additional market share gains in pursuit of a dollar of earnings per share as our target. We believe delivering steady and solid improvement across our financials, portfolio, customer service, and employee engagement has served us well over the last three years, despite some significant externalities. Our primary objectives remain unchanged, to grow faster than the market, drive margin expansion, and officially enter the pluggables market, a multi-billion dollar opportunity. Our eight-by-four-by-one strategy is winning, as evidenced by our customer and portfolio traction, and the demand for our products and services remains healthy. We look forward to driving deeper into our strategy, growth plans, and announcing some exciting additions to our robust portfolio systems, high-end embedded engines, and pluggable products and technologies at our upcoming Investor Day on March 7, 2023, at OFC, the Optical Fiber Communications Industry Show in San Diego, California. As I close today, I would like to thank the Infinera team for delivering on a solid 2022 and their continued commitment to care to our customers and one another. I would also like to thank our partners, customers, and shareholders for their continued support. I will now hand the call over to Nancy to cover the financial details of the quarter and the outlook for the first quarter and year.