Infinera Corporation

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 during this time, simply press star, then the number one on your telephone keypad. To withdraw your question, please press star one again. Thank you. I'm Atab Passi, Head of Investor Relations. You may begin.

Thank you, Chris, and good afternoon, everyone. Welcome to Infinera's third quarter of fiscal 2023 conference call. A copy of the press release issued by Infinera today is available on the investor relations section of the website. Additionally, this call has been 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 the accounting and financial matters referenced in the press release current form 108K, and notification of late filing that will file today. Our business plans, product development and growth opportunities, including progress against strategic priorities, including with respect to vertical integrations and its anticipated benefits, trends, competition, and customers. Furthermore, expectations regarding the macroeconomic environment, expectations regarding our inventory levels and industry-wide capex dynamics, expectations regarding our subsystems group and its impact on our financial results, expectations regarding potential governmental funding, projected year-over-year drivers of our key financial performance metrics, expectations regarding our future performance, revenue growth, margin expansion, generation of cash flow from operations and EPS expansion, and preliminary financial outlook for the fourth quarter 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 an annual report in Form 10-10-K for the year ended on December 31st, 2022, as filed with the SEC on February 27th, 2023, and in a quarterly report on Form 10-Q for the quarter ended July 1st, 2023, as filed with the SEC on August 9th, 2023, 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 references to non-GAAP financial measures. Pursuant to Regulation G, we've provided a recon of these non-GAAP financial measures to the most directly comparable GAAP financial measures in our earnings press release for this quarter, 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 Hurt.

David Hurt Hey, thanks, Amitabh. Good afternoon and thanks for joining us today. I'll begin with the highlights from our preliminary third quarter results and then turn the call over to Nancy to cover the preliminary financial details of our third quarter performance and the outlook for the fourth quarter and the items referenced in the press release in Form 8-K we filed earlier this afternoon. Before I jump into the details of the quarter, I want to pause, take a step back, and focus on our quarterly accomplishments at a high level. Overall, the third quarter was another solid quarter for us in which all preliminary financial metrics, revenue gross margin, operating margin, and EPS are expected to exceed the midpoint of our outlook range. We delivered strong bookings with a book-to-bill ratio above one. We continue to land new Tier 1 design wins for our systems business. We want additional orders for our subsystems business and are shipping our first vertically integrated metro systems this quarter, all while we expanded profitability on a year-over-year basis. Furthermore, as we look ahead to Q4, we're forecasting growth to be generally in line with the consensus view. While capital markets and macroeconomic conditions have been challenging, we've been keeping our heads down and remaining focused on executing our plan. For the full year of 2023, we currently project that we're still on track to grow revenue and deliver our sixth consecutive year of revenue growth, expand operating profit and EBITDA, and drive greater than a 25% improvement in earnings per share, which would represent our fourth consecutive year of significant EPS expansion. These accomplishments directly reflect the strong execution against the strategy we laid out in our past two analyst days and add to our track record of doing what we say we're going to do. Getting into some of the specifics of the quarter, Q3 marked the 14th quarter out of the last 15, which we believe we have met or exceeded our outlook range. Bookings in the quarter were up sequentially and on a year-over-year basis, with most of the sequential growth driven by customers in EMEA and the Americas. On a year-to-date basis through Q3 and compared to the same period last year, we expect to report growth in revenue, expanded gross margin, increased operating margin, and improved EBITDA. Traction across our portfolio remains strong in the quarter, and I'd like to touch on some of the highlights, starting with our systems group. First, we won new strategic deals globally, including wins with two Tier 1 service providers in Europe, several sub-seed consortiums, and an award to modernize and expand a nationwide network for a Tier 1 operator in Asia Pacific. The wins in Europe and Subsea are especially noteworthy as these are new customer logos where we have no incumbency. Second, we continued our momentum with U.S. hyperscalers with year-over-year growth in both revenue and bookings. The strength in this customer segment was broad-based spanning multiple customers, applications, and Infinera products. And finally, we booked our first set of orders and recognized revenue from the Metro win we referenced during last quarter's earnings call. As a reminder, this is a turnkey award with a major U.S. service provider, which includes our GX Metro platform, along with our software suite and support services. In our subsystems group, a few noticeable accomplishments were, first, both the CFP-2 and QSFP-DD versions of our 400-gig ISEX plugables are now commercially available. These two form factors give us flexibility of integrating our plugables in our own metro platforms, as well as in third-party hosts like routers and switches. In Q3, we received our first set of vertically integrated orders for our ISEX plugables, and are in the process of shipping our first metro systems with our own pluggables this quarter. This is a significant milestone and accomplishment for us and is consistent with the expectations we laid out in our investor day. We expect margin benefits from our own vertically integrated metro platform to begin in 2024. Second, we remain on track to deliver the highest performing and lowest power 800 gig pluggable that will leverage three nanometer technology and enable our customers to reach greater distances and unmatched performance and economics, which also has landed us our first set of 800 gig component orders. And lastly, we're excited to see four new members of the open XR forum in the quarter. We built a solid pipeline for both pluggables and components and received additional purchase orders spanning the entire portfolio. As our subsystems business expands, we expect to benefit from higher margins from both the vertical integration of our metro portfolio, as I described earlier, and from the incremental operating leverage as we ramp the sales of external pluggables. In addition, we are continuing to pursue government funding available at both the state and federal levels via programs like the CHIPS Act to continue to supply the US-made optical semiconductors to secure critical supply chains. These issues are of increasing importance to our customers, and as a company with US-based optical semiconductor fabrication and advanced test and packaging, we believe we are well positioned for this opportunity. In closing, my confidence in our strategy portfolio and execution remains high as evidenced by our market share gains and financial progress over the past few years. In the short term, our customers are still going through a period of inventory digestion and remain cautious about spending in a recessionary environment. Our job in this environment is to focus on the highest priority spend areas which are broad fiber deployment, data center buildouts, and new applications inside the data center, while taking more than our fair share of orders and managing spending tightly. In the long term, demand for bandwidth continues to grow as hyperscalers accelerate the rollout of artificial intelligence and machine learning workloads, and service providers drive fiber deeper into networks, pushing 100 gig to the edge, 400 gig in the metro, and 800 gig in the core. It's apparent that the growth inside the data center over the next few years is creating new opportunities for our business. Clearly, coherent optical technologies and vertical integration are becoming more important than ever. Our guiding principles for the company remain unchanged and centered on continuing to expand market share in our systems business across long-haul subsea and metro, vertically integrating our metro portfolio with our own pluggables, which will expand margins, ramping up external sales of our pluggables, driving operating leverage in our business model, and meaningfully expanding earnings per share. I'd like to thank the Infinera team and their dedication and unwavering commitment to our customers and one another, and for continuing to deliver on innovation that matters. I'd also like to extend my thanks to our partners, customers, and shareholders for their ongoing support. Finally, my thoughts and prayers go out to the people of the Ukraine and Middle East who are suffering through these very unthinkable times. I'd now like to hand the call over to Nancy to cover the preliminary financial details of the quarter and our outlook. Nancy?