Infinera Corporation

Thank you for standing by. My name is Krista and I will be your conference operator today. At this time, I would like to welcome everyone to the Infinera Corporation first quarter earnings conference 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 that time, simply press star followed by the number one on your telephone keypad. And if you would like to withdraw that question, again, press star one. Thank you. I will now turn the conference over to Amitad Pasi, head of investor relations. You may begin your conference.

Thank you, operator, and good afternoon. Welcome to the call where we'll discuss the preliminary financial results for Infonera's first quarter of fiscal 2024. A copy of the press release issued by Infonera 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 financial commentary and metrics based on our preliminary first quarter fiscal 2024 results. Yesterday we announced that we currently expect to file a quarterly report on Form 10-Q for the first fiscal quarter fiscal 2024 on or before May 21, 2024. As a result, and notwithstanding anything to the contrary said during the call, All financial results discussed today are preliminary, are subject to change, and are based on management's current expectations as of the date of this conference call. Final results will be included in the Form 10-Q. In addition, 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 on Form 8-K that the company issued today and our financial outlook for the second quarter of 2024. These statements are subject to risks and uncertainties that could cause infinite 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-K for the year ended December 31, 2022, filed with the SEC on February 27, 2023, and amended February 29, 2024. and its quarterly report on Form 10-Q for the quarter ended September 30, 2023, filed with the SEC on February 29, 2024, 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, except for revenue, balance sheet items, and cash flow from operations, which are discussed on a GAAP basis. Pursuant to Regulation G, we've provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures in our preliminary earnings release, 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 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, Bob and Tom. Good afternoon, and thanks for joining us today. I'll begin with the highlights for the first quarter results and then turn the call over to Nancy to cover the financial details of the first quarter and the outlook for the second quarter. The first quarter was much like a tale of two cities for us. On one hand, bookings were strong and on plan and up year over year. Strategic deal momentum was unprecedented as we won new network decisions, potentially representing over a billion dollars in cumulative multi-year value across some very strategic accounts for us. Margin and EPS were within our outlook range, despite the large contribution from lower margin line systems, which are crucial for laying the groundwork for future high margin fills. Cash flow generation was healthy, with free cash flow of $16 million in the quarter, continuing the positive trend from the fourth quarter of 2023, where we generated $58 million in free cash flow. We ended Q1 with $192 million in cash and cash equivalents, with no amount drawn against our $200 million plus ABL. And we released our Q4 2023 and full year 2023 financial results. As you've hopefully seen by now, overall, our Q4 results came in towards the upper end of our prior outlook range. For the full year of 2023, we delivered our sixth consecutive year of revenue growth, gross margin of approximately 40%, and earnings per share growth of 92% compared to 2022. With respect to our quarterly close process, we plan to get back on normal cadence after we file our first quarter Form 10Q, which is expected to occur in the next week. Despite this progress, however, our quarterly revenue came in 4% below the low end of our outlook range and declined 22% on a year-over-year basis, compared to revenue declines already reported in the industry of 30% to 50% in Q1 by many of our optical peers. Our revenue shortfall in the quarter was due to a slower release of book shift orders to the tune of approximately $25 million, in addition to the push out of shipment from the first half of the year to the second half of the year. We believe these market dynamics will continue through the second quarter before business conditions start to normalize in the back half of the year, enabling us to get back to year-over-year growth in the second half. The positive news I mentioned earlier is that we continue to win groundbreaking awards in the quarter with some notable customer logos that are expected to have a significant impact on the future trajectory of the company. Our open optical roadmap aligns well with our customers' needs for open and agile architectures that deliver the lowest cost per bit, the lowest power per bit, while improving operational efficiency. Our recent wins reinforce our ability to help customers keep pace with the accelerating traffic demand, support the build-out of deep fiber networks, and efficiently manage evolving data center capacity needs, especially with new applications like artificial intelligence. As a result, we remained laser-focused on our priorities, which are to grow and take market share in the $11 billion-plus systems market, ramp our business in the growing $5 billion market for coherent pluggables, and leverage our vertical integration capabilities to break into the high-volume, $2 billion intradata center segment driven from the optical payloads of AI. The addition of pluggables and intradata center products onto our systems portfolio allows the maximum leverage of our U.S.-based FAB as we drive significantly higher volumes through it. In fact, annual PIC volumes associated with embedded solutions that are sold as part of our optical systems business tend to be in the tens of thousands of units. Pluggable volumes are expected to scale to hundreds of thousands of units, and we expect intradata center volumes to scale into millions of units annually. We believe this dramatic increase in unit volume will drive a tremendous cost advantage across our portfolio in the future, a critical factor in the realization of our long-term business model. Our U.S.-based FAB, an Advanced Semiconductor Packaging Center, also provides the added benefit of enhanced supply chain security and resiliency, which is increasingly important to our customers in the U.S., and abroad. Let me dive further into the specifics of the recent strategic wins and the progress to date in Q2, beginning first with the systems business. First, we continued the momentum with hyperscalers and our GX portfolio, including our next generation open line systems. During the quarter, we won a new GXI7-based subsidy deal with a major hyperscaler, potentially worth 100 to 200 million over three years. and we secured a major design win with our GX open line system, potentially worth $200 million to $300 million over three years. In addition, we onboarded another hyperscaler with our I6 solution and secured a GX metro and open line system win with a Tier 2 content provider. Second, influenced by the traffic demands of hyperscalers, we continue winning managed optical fiber networks, or MOHIN, deals in India, the Middle East, Africa, and Asia, with at least three new customers in Q1 supporting multiple hyperscalers. These land and expand opportunities start out small, but with the expected growth in these regions, we expect them to become a more significant portion of our revenue in the future. As a reminder, for the full year of 2023, we estimate that our direct and indirect exposure to hyperscalers approach 50% of our product revenue. And third, We secured major wins with our GX systems portfolio with an international wholesale provider in Europe and a major service provider in the U.S. We continue to see bandwidth and connectivity needs increasing across our target markets, including increased marketing of 400 gig capacity services by carriers. We also anticipate initial orders from a design win at a major U.S. service provider customer this quarter. as they continue to upgrade their metro networks while pushing to capture higher bandwidth service revenues. These orders would begin shipping in the second half of the year into 2025. Shifting to our pluggable solutions, as you are aware by now, we landed a sizable 800-gig ZR-ZR-Flux win with a major hyperscaler in Q1. Since we are under strict NDA, we are limited to what we can say about the specifics of this contract, but we estimate this opportunity which generates between $300 to $700 million in revenue for us over three years, beginning in the second half of 2025. I am also excited to announce that we received our first orders for our 400-gig pluggables from a major US cable MSO this quarter. While these initial orders are of a relatively small size, we are excited about the potential ramp with this customer to a $300 to $400 million opportunity over three years as we address important use cases in the customer's network across both the consumer and enterprise service offerings. Finally, turning to the latest addition of our portfolio, we launched our IC Intradata Center solutions ahead of the OFC show in March. These solutions, which leverage our core competency in indium phosphide PICs and our US-based optical semiconductor FAB in California, have the potential to reduce power per bit by as much as 75%. for AI-centric applications. The elegance of our offering is that it is agnostic to data center architectures and will serve linear pluggable optics, retimed and halftimed optics. We have test chips available now, are deeply engaged with ecosystem partners, and are working towards landing our leading customer in the second half of the year that could drive significant volume through our FAB. As you can see, the momentum we have in our business sets us up well for 2025 and beyond. As evidenced by our OSC show, we are winning business, mindshare, and trust from our customers, suppliers, and partners. We also believe we remain well-positioned for the CHIPS Act funding. In fact, I'm taking this call today from Washington, D.C. As most of the CHIPS Act awards for larger companies have been announced, we expect smaller companies to begin receiving awards in the third and fourth quarter of this year. While the long-term prospects are encouraging, the short-term macro and industry dynamics are more challenging than our expectations coming into the year. We continue to expect a slow first half with trends improving in the back half as we focus on getting to delivering year-over-year growth in the second half. As a result, for the full year, we now expect our revenues to be down 1% to 5% compared to 2023. Nancy will walk through the details shortly. As for the overall optical systems market, I expect the market to be significantly down in the first half and up in the second half of the year, resulting in an overall decline of 7% to 8% for the year. But as we head into 2025, I expect the overall market to normalize and start the next cycle of optical growth driven by fiber to the curve, massive data center build-outs, AI, and global growth in bandwidth demand. Against this backdrop, We will focus on taking our fair share of design wins and new deals, several of which ramp in the second half of the year and into 2025. Deploy what is expected to be a record number of next generation line systems across new routes, which will drive future higher margin transponder sales. Continue our investment in R&D for systems and pluggables while increasing investments on IC. drive down discretionary spending to keep overall op-ec flat to down 3% for the year. Given the size and scale of our recent wins, the competitiveness of our portfolio, and the strength of our long-term secular drivers underpinning our business, we believe we can return to our target growth rate of 8% to 12% in 2025, depending on where we end up for 2024. This should result in our earnings per share getting back in the range of $0.40 to $0.50 next year. As I close today, I'd like to reiterate our recent strategic RFP wins and contracts, along with the size and scale of our opportunity funnel, give me confidence in our ultimate recovery of the business as we head into 2025 and beyond. The near-term environment is difficult, but I see no change in the long-term drivers of the business and the increasing importance of scale and vertical integration in the industry. I'd like to thank the Infonera team for their unwavering commitment to innovation that matters execution, our customers, and to 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 for the long term. I'll now hand the call over to Nancy to cover the financial details of the quarter and our outlook. Nancy.