Infinera Corporation

Amita Pasi, Head of Investor Relations. You may begin your conference.

Amita Pasi Thank you, Krista. Good afternoon, everyone. Welcome to Infinera's fourth 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. 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 the matters referenced in the press release and current report in Form 8K that the company issued today and our financial outlook for the first quarter of 2024. 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 10K, for the year ended on December 31, 2022, as filed with the SEC on February 27, 2023, and amended on February 29, 2024, and in a quarterly report on Form 10-Q for the quarter ended September 30, 2023, as filed with the SEC on February 29, 2024, as well as subsequent reports filed with or furnished through 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, except for revenue, balance sheet items, and cash flow from operations, which are each discussed on a GAAP basis. Pursuant to Reg G, provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures in our earnings release and investor slides. Sorry, there are no investor slides 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, but we ask that you limit yourself to one question and one follow-up, please. And I'll turn the call over to our Chief Executive Officer, David Hurd.

Thanks, Amitabh. Good afternoon and thanks for joining us today. I'll begin with the highlights for our preliminary fourth quarter results and then turn the call over to Nancy to cover the preliminary financial details of our fourth quarter performance and outlook for the first quarter. Overall, the fourth quarter was a strong quarter for us in which the midpoint of our preliminary revenue, gross margin, and EPS ranges are all expected to come in above our outlook ranges. We delivered a book-to-bill of approximately one for the second quarter in a row. And we generated over $50 million in free cash flow. Furthermore, during the quarter, our GX systems portfolio performed strongly, landing new tier one design wins with global service providers and ICPs. It now represents almost 50% of our expected annual product revenue. And in subsystems, we shipped our first 400 gig ISEX coherent pluggables vertically integrated into our own GX Metro platform. Combined, the third and fourth quarters of 2023 marked a strong finish to the calendar year. While capital markets and macroeconomic conditions were challenging throughout 2023, we kept our heads down and believe we've delivered on our commitments to you. For the full year 2023, we expect to deliver our sixth consecutive year of revenue growth, expand gross margins to approximately 40%, expanded operating margins and increased operating profit in the double-digit percentage range, and delivered EPS in the 20% to 25% range, also consistent with what we committed to you in our investor day. And that EPS is up at least 70% year over year. From a portfolio and customer perspective, we continue to build on the momentum of the last few years as we landed new customers during the year and successfully expanded into new market segments and geographies. Let me touch on a few of the 2023 highlights. First, we won new strategic deals with major service providers, including notable wins in the US, Europe, India, Australia, and several multinational subsea consortium. Our win rate in the metro remains strong with revenue in this segment growing to almost 50% of product revenue in 2023, an important part of our investment thesis and forward opportunity with the Huawei situation. Second, we had another banner year with U.S. hyperscalers and delivered our fourth consecutive year of 30-plus revenue growth in this segment. We've increased our market share with hyperscalers by approximately 1,000 basis points over the last four years, and our total exposure to them, including the indirect business that they drive through carrier service providers and subsea consortia, is approaching approximately 50% of our revenue. Third, we exceeded $10 million in bookings for our subsystem products and recognized initial revenue in the year. This was an important milestone for the company and consistent with the goals we communicated at our March Investor Day. To date, we've received purchase orders from 26 customers that span our entire subsystems portfolio. Additionally, membership in the XR Forum continued to expand in 2023, and the new list of members included Lumentum and Arista. And fourth, we announced the commercial availability of our 400-gig XR plugables and also shipped our first Metro systems with our own vertically integrated plugables in Q4. The use of plugables in our Metro systems will be a key driver of margin expansion getting into the back half of 2024. Our consistent performance over the past few years highlights that our strategy is working and that our portfolio is in the best shape it's ever been. as evidenced by our win rates. Our key growth and profitability financial metrics are trending up and to the right, and we feel great about the underlying long-term secular drivers in the business. However, in the near term, as we look at the first half of 2024, we're planning for a slow start to the year, consistent with what our peers in the industry are seeing and communicating. In Q1 in particular, we're experiencing a temporary low point in revenue and margin driven by two factors. First, from a revenue standpoint, approximately 35 million of revenue is shifted out of the quarter with roughly 10 million being recognized earlier in Q4 and 25 million of shippable backlog shifting from Q1 into future quarters. And second, from a margin standpoint, we expect gross margin to be approximately 400 basis points lower in Q1 due to a 300 basis point impact from the timing impact of Higher line system shipments in Q1 associated with many of our global tier one customer wins. This is ultimately a good news story in the back half of the year and for the longer term. And 100 basis point impact from the combined effects of lower volume in Q1. The good news here is our commercial wins and strategic deployments give me confidence that we remain on path to deliver a full year of revenue growth and expanded margins in 2024 with gross margins expected to return to 40% plus starting in Q2. The even better news is both the pace and scale of our design wins across the portfolio are accelerating in this quarter, Q1. This is especially true for hyperscalers, who we believe will continue to drive healthy levels of spending across the industry in the years ahead. Already in the first 60 days of 2024, we've achieved major hyperscale influence strategic wins with our systems and subsystems solutions, including the following developments. First, you've seen from our press release this morning, we've announced a new line system that puts our portfolio under the GX family. We've already landed wins with five service providers and hyperscalers that are expected to lead to significant revenue and margins with follow-on transponder sales, and we have a strong pipeline of additional customers. we have won our first contract with a major hyperscaler for 800-gig, 3-nanometer ZRZR Plus pluggables. This win has the potential to be among the largest contracts for the company, scaling to hundreds of millions of dollars over a three-year period beginning in 2025. This is the first of multiple contracts in this key market segment that we expect to land in 2024. These pluggable wins will drive additional volume through our U.S.-based semiconductor manufacturing assets and be incrementally accretive to the financial model. Third, influenced by traffic demands of hyperscalers, we continue winning managed optical fiber networks, or MOFIN, deals in India, the Middle East, and Asia with at least three wins ordered to date in Q1 with three different hyperscalers. These private network builds are driven by hyperscalers and their preference for suppliers, along with service providers across the globe. Fourth, in addition to shipping our first metro systems with our own 400-gig pluggables, we're also qualifying our 400-gig ICEx pluggables with a major Tier 1 service provider and a major U.S. cable MSO for applications that include single-fiber buy-die and business-to-business PON overlay. And fifth, we've invested in producing the first test chips for inside the data center applications driven by AI that will drive down power and leverage our US-based semiconductor assets. While these days are early and architectures are still evolving, we believe our unique vertical integration and indium phosphide capabilities are competitive differentiators inside the data center. We look forward to talking to you on the progress as this further develops. Based on the stack-up of those strategic wins, my confidence in our strategy portfolio and execution is as high as it's ever been. Despite the short-term inventory digestion customers are going through and the timing of the mixed impacts of laying down new routes, in the long-term, demand for bandwidth continues to grow as hyperscalers accelerate the rollout of artificial intelligence, machine learning workloads, and service providers drive fiber deeper into networks. We believe we're uniquely positioned to gain with these customer segments. We look forward to diving deeper into our product and technology strategy at this year's Optical Fiber Communications Industry Show in San Diego, California on March 27th. And as I close today, I'd like to thank the Infinera team for another solid quarter of execution and results and their continued commitment to our customers and one another. I'd also like to thank our partners, customers, and shareholders for their continued support. I couldn't feel better about our strategic position, and I believe we remain well-positioned to deliver our seventh consecutive year of revenue growth, expand margins by approximately 200 basis points, and deliver EPS growth of at least 25 percent in 2024. I'll now turn the call over to Nancy to cover the preliminary financial results of the quarter and our Q1 outlook. Nancy?