Q4 2020 Infinera Corp Earnings Call

Good afternoon, and welcome to the Infinera Corporation fourth quarter 2020 earnings Conference call.

All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please.

Please note this event is being recorded.

I would now like to turn the conference over to Amie Top policy head of Investor Relations. Please go ahead.

Thank you operator, and good afternoon, welcome to Infinera as fourth quarter of fiscal 2020 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 the website.

Today's call will include projections and estimates that constitute forward looking statements, including but not limited to statements about our business plans, including our product road map sales growth market opportunities manufacturing operations products technology and strategy statements regarding the impact of COVID-19 on our business plans and results of operation.

As well as statements regarding future financial performance, including our financial outlook for the first quarter for fiscal year 2021 day.

Statements are subject to risks and uncertainties that could cause infinera <unk> results to differ materially from management's current expectations.

Actual results may differ materially as a result of various risk factors.

Moving those set forth in our annual report on form 10-K for the year ended on December 28, 2019 as filed with the SEC on March 4th 2020, and our quarterly report on form 10-Q for the quarterly September for the quarter September 26, 2020 as filed with the SEC on November five 2020, as well as the earnings release.

And investor slides furnished with our form 8-K filed today.

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 certain non-GAAP financial measures.

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 fourth quarter of fiscal year 2020 earnings release, and Investor slides each of which is available on the Investor Relations section of our website.

And finally as a reminder, we will allow for plenty of time for Q&A. Today. So we ask that you limit yourself to one question and one follow up please.

I'll now turn the call over to our Chief Executive Officer, David heard David Thanks, So much.

Good afternoon, and thanks for joining us today.

I'll begin with a brief review of the fourth quarter and full year 2020 results before discussing our expectations for 2021.

I will then turn the call over to Nancy to cover the details of our financial performance and outlook.

But the fourth quarter was another strong performance quarter with solid execution across the board revenue came in line with our outlook with non-GAAP gross margin and operating margin above the guidance range.

On a year over year and quarter over quarter basis, we expanded margins drove profitability and strengthen the balance sheet, while investing in technologies that will drive our future growth.

A notable achievement in the quarter was the generation of $40 million of free cash flow, which we believe is a key indicator of the progress we have made in improving the operational efficiency and financial health of Infinera.

From a demand perspective, the quarter played out pretty well as we expected while we did not see the typical year end budget flush from our customers. We had a strong bookings quarter and ended the year with a book to bill ratio above one revenue from our ICP and other service provider customers was strong including from EMEA.

And Asia Pacific regions.

As was generally consistent with our expectations due to the diversified customer base. We have this strong demand helped offset demand softness in the industry experienced among tier one north American service providers.

We won nine new customers of course, global Icp's tier ones and other service providers for our 600 gig compact modular group G X platform and made progress in advancing our open optical initiatives across the portfolio. We secured several 800 gig design wins.

And book per purchase orders from major ICP and a C. S. P customer in the quarter. We continued our efforts in qualifying and ramping the product keeping to our timeline of a more meaningful financial impact for my six in the second half of 'twenty 'twenty. One we saw strong contributions in the quarter from our <unk>.

Services and software annuity business as our expanded footprint and value added software drove healthy maintenance renewals, we remain focused on our investments in vertical integration are scarce and highly differentiated capability in the industry.

As we look back to the full year results for 2020, it's clear that the heavy lifting over the past two years to drive operational improvements is taking hold as evidenced in our results for the full year. We grew our non-GAAP revenue by more than 3% and a challenging environment slightly faster than the growth in the overall optical.

Systems' market as reflected by industry analysts, we expanded our non-GAAP operating margin by nearly 600 basis points year over year equating to $76 million in operating profit expansion.

<unk> inventory by $71 million improved our cash flow from operations by $55 million and ended the year with $315 million in cash and restricted cash. We did this while paying down accounts payable by nearly $100 million and investing close to 300 million.

In R&D and Capex to fuel future growth.

From a product perspective, we had several highlights from 2020 revenue grew and our compact modular groove gx platform by almost 40% over 2019, and we added 32, new 600 gig customers for the year, including notable global tier ones and I see piece.

We ended the year with the number two position in the compact modular market. A 1.5 billion dollar market that is expected to grow 20% over 2023 through 2023, we achieved record revenue for the ex T M Metro platform up 20% year over year driven by.

Five G rollouts working from home and mobile ex haul during the year, we added 28, new ex T M customers.

We created additional customer traction with XR optics as recently demonstrated with our technology trial with British Telecom B T who.

Who validated significant savings and an extensive study XR optics received the award for the most innovative product at the 'twenty 'twenty <unk> industry Conference in December it's early days for XR optics, but we're optimistic that this innovative solution will open up a large market opportunity for infant infinera.

And the industry for the future.

We made continued progress with ice six as we secured design wins received purchase orders and delivered our first qualification units to a major customer prior to year end, we feel confident in our eye six performance differentiation, we set new industry performance Records in C. S P and ICP trials in the fourth quarter.

And are now focused on ramping production as we have previously stated we expect ice six revenue to begin its ramp in the second half of 'twenty 'twenty, one as we progressed through the typical customer acceptance certification and revenue recognition cycle. Our pipeline is very strong and we are building backlog with additional.

Design wins in purchase orders this quarter to date, our list of design wins and purchase orders includes well recognized global tier ones I see PS and other service providers.

I'm encouraged by the financial progress operational improvements and technology innovation delivered by the Infinera team in 2020, we ended the year in a stronger position to achieve our target business model and our strategic goals looking ahead to 2020.

We will be prudent in our outlook, especially with the first half of the year for the full year, we expect the optical systems market to grow around 2% to 3% year over year with great growth weighted towards the second half of the year.

In the near term, we are being cautious given the ongoing impact of COVID-19, newly developing semiconductor shortages that are not unique to our industry and extended lead times for some components looking longer term, we see 'twenty 'twenty, one as a foundational year for us we have a sao.

<unk> strategy and are well positioned to execute this is a great time to be a differentiated supplier of optical technology and there is growing recognition of the market of the value we provide.

The dynamics, we spoke of last quarter around bandwidth growth accelerating a shift to open optical and the need for vertical integration are increasing and their importance.

In addition, the geopolitical dynamics that are constraining hallways ability to grow have opened up a longer term incremental 500 billion to $1 billion annual market opportunity for us to pursue.

We see increasing RFP or a few activity, but it's early days and we would expect a more meaningful financial impact from these competitive displacements as we begin in 2022 for the full year, we expect to grow revenue slightly faster than the overall market with a stronger second half as we see the impact of.

New products, including ice six gx and enhancements to our Metro portfolio, we will continue to prioritize our portfolio investments in high value fast growing sub segments of the optical market, including opening open optical high performance optical engines and differentiated plug a bulls lasts.

We will remain laser focused on operational excellence, expanding margins driving profitability and generating cash flow for the full year.

Over the next few months, we will give you greater visibility into the growth drivers for our business as we lay out the key elements of our strategy the market opportunity ahead for us and our path towards our long term business model via a series of Webcasts. The first of these events beginning in March will be extremely important in understanding the customer value.

Proposition and market opportunity with open optical we will culminate the series of events with the virtual Investor Day now being planned for later in Q2, where we will share additional details of our technology and financial roadmap to drive shareholder value.

I will now turn the call over to Nancy to provide additional details on the quarter and our first quarter outlook.

Good afternoon, everyone.

I will begin by covering our Q4 results and then provide our outlook for Q1 my comments reflect our non-GAAP results for your reference we have posted slides for financial details, including our GAAP to non-GAAP reconciliation to our Investor Relations website to assist with my commentary.

We expect that our form 10-K will be filed with the SEC during the first half of next week.

They delivered another strong quarter with revenue in line with our outlook and both gross margin and operating margin exceeding the high end of our guidance range significant highlights in the quarter were a positive non-GAAP EPS and free cash flow generation, both of which were outstanding achievements to close the year in which we drove.

Operational and financial improvements.

In 2020, we achieved revenue growth slightly above the market meaningfully expand expanded operating margin improved our cash flow and strengthened our balance sheet all in the face of a global pandemic the.

The efforts, we have undertaken to drive operational improvements are showing progress as demonstrated by the leverage in our business model and non-GAAP operating profitability in the second half of 2020.

Q4 revenue was $354 million near the midpoint of our guidance range of $340 million to $370 million and up 4% sequentially and a challenging macroeconomic environment.

36 per cent of our revenue came from the from the United States during a relatively weak quarter characterized by industry wide softness in tier one carrier spending in the U S or internationally, we saw strong growth in EMEA and Asia Pacific.

Gross margin was strong at 37, 6% and above the guidance range of 34 to 37 per cent.

Several factors that led to the strong gross margin performance, including better execution on cost reductions gross or 600 gig product strength in services and modest improvement in the per cent a vertically integrated product.

Partially offsetting these positives were ongoing supply chain and logistics challenges, especially late in the quarter.

Operating profit in the quarter was $23 million for $6, 6% operating margin, which was above our guidance range.

Our operating margin in the quarter expanded by over 400 basis points, both sequentially and year over year accomplished with stronger gross margin lower operating expenses and productivity improvements, while continuing to invest in our key innovation programs.

Operating expenses of $110 million were lower compared to our $115 million to $117 million outlook range. While our continued focus on cost and expense management helped in the quarter approximately $2 million to $3 million of costs related to R&D shifted from Q4 to Q1 <unk>.

And we had them forecasted benefit of $2 million.

The resulting EPS in Q4 with 13, driven by strong operating margin as well as certain items below the operating income line, primarily a $9 $7 million foreign exchange impact from shifts in the euro and various Latin American currencies.

Excluding the foreign exchange impact adjusted non-GAAP EPS in the quarter would have been eight cents a share.

Moving on to balance sheet and cash flow items, we ended the quarter with $315 million in cash and restricted cash of $100 million sequentially.

Cash flow from operations of $52 million and free cash flow was $40 million a significant improvement from the $192 million and free cash flow. We utilized in the first three quarters of fiscal year 2020.

The primary drivers of improved free cash flow in the quarter were higher profitability and working capital efficiencies.

We exited the quarter with $77 million drawn on our $150 million ABL. During Q4, we raised $62 million through our ATM offering for a total of $93 million in net proceeds raised in fiscal year 2020, and now consider the offering concluded.

Regarding our capital structure, we are focused on building sustained cash flow generation through operational profitability, while maintaining access to ample liquidity to drive growth.

As I reflect on the full year of 2020, I am pleased with our financial improvement we made in the business. We ended 2020 with revenue of $1.36 billion up 333% year over year gross margin of 33 eight per cent progressively increasing through the year and operating margin.

Close to breakeven at nearly 600 basis points year over year.

As mentioned previously we exited the year with $315 million in cash and restricted cash we generated free cash flow in Q4 and have our one time cash outflows from integration largely behind us. Furthermore, we reduced inventory by $71 million.

This reduced both our past due accounts receivable and accounts payable and completed a variety of process automation initiatives.

Turning to prioritize R&D investments and our strategic technology programs.

Looking ahead to the first quarter of 2021, we are planning for normal seasonality in our business with revenue in the range of $320 million to $340 million.

Incorporated into our revenue outlook is approximately $10 million.

Supply chain risk from Covid, 19, and the industry wide semiconductor shortages and lead times that David highlighted earlier.

We have however, been taking preventative measures to minimize its risk going forward. It is important to note that against this backdrop of challenging supply chain dynamics, we are experiencing healthy demand in the current quarter.

Despite normal seasonality, we expect gross margin to be in the range of 34% to 37% up over 700 basis points year over year at the midpoint.

We expect Q1 operating expenses to be between 121 and $125 million up sequentially as we increased spend on D. S piece optical engines and plausible to complement the strong momentum in long haul and subsea with ice and in Metro with grew Gx and ex T M.

These investments are highly differentiate these investments are in highly differentiated and value technologies for us. Additionally, we will see normal seasonal increases in Q1 employee expenses, a step up as we restore bonus accruals and salaries for certain employees that were reduced last year.

We expect Q1 operating margin to be between a loss of 4% and breakeven and improvement of over 700 basis points year over year at the midpoint below the operating income line interest expense will be approximately $5 million and taxes are estimated at $3 million for.

Finally, we expect to utilize $10 million to $20 million in cash from operations in the first quarter a market improvement from the same quarter in the prior year, when we utilized more than $90 million and we're in the midst of heavy cash integration costs.

Our operating improvement creates a solid foundation for us to take advantage of customer insertion opportunities drive market growth market share growth and expand margins as we become more vertically integrated.

For the full year of 2021, we are planning for revenue growth slightly above anticipated market growth gross margin expansion of 300 to 400 basis points positive operating margin and to generate positive cash flow from operation our.

Patients remain tempered on the first half with revenue expected to be flat to slightly up as compared with the first half of 2020, we expect second half revenue growth coming from both market improvement and the ramp up of revenue from our new product.

As we have shared on prior calls we plan to expand our gross margins to our targeted mid 40% range as we exit 2022.

I would like to close by thanking the Infinera team, our customers and partners for their tremendous effort in these difficult times and our shareholders for their continued support Gary I'd like to now open up the call for questions.

We will now begin the question and answer session.

To ask a question you May press Star then one on your telephone keypad. If you were using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two our first question comes from Sami strategy with J P. Morgan. Please go ahead.

Hi, guys, Hey, just to make it as how are you.

Hi, This is actually Joe Cardoso on for Sonic Thanks for the question here.

Yes. My first question just has to do with.

You guys have seen good momentum over the past couple of quarters around your Metro platform. Your modular platform in your 600 gig solution and if we could bifurcate those for a second how do you feel about your sustainability around the momentum you've seen in those product lines.

Particularly heading into 2021, and what is driving your confidence or visibility in to that momentum.

Yeah, it's customer wins and insertion opportunities. So I think the metro is continuing to grow we continue to invest in those products.

Going forward and we continue to see a nice sales pipeline and backlog to be able to fulfill so.

Obviously, we think it's a healthy demand environment from a bandwidth perspective.

And and we've put the right investments in place to have the right products to serve the demand.

Yeah.

Got it and then if I could just switch gears here, obviously, you know it doesn't necessarily come not too surprised that north American tier one service provider customers were weak this quarter.

Can you kind of just dive into your visibility you know what are you hearing from customers. There as we kind of look into 'twenty and 'twenty one like what are they communicating to you in terms of the investment priorities.

I mean part of their died there in terms of the second half recovery or a second half market growth is particularly right around then kind of returning to investment, but just curious to hear where you know what your visibility into it and what you're hearing from your customers specifically thanks.

Yeah, It's a good question.

Certainly the market analysts are predicting what the Capex games will be this year that certainly was a decline year over year in Q4 again, one of the advantages we have from our diversified customer bases is that really didn't impact us greatly in Q4 as it did to some of our competitors.

As we look forward look I think traffic continues to grow and in the core of their network and the backbone data center infrastructures continue to.

To get moved for Hyperscale application loads people continue to buy new iphones that not only our download a healthy video that is close to 50 per cent of the traffic on the on the mobile network, but are now starting to upload a new dynamic are now starting to upload all of their content to the cloud to back it up.

And so look I I believe that you know there's always a pause at the beginning of the year as people lay out their capital budgets with those large service providers.

They're they've got to continue to keep up with that bandwidth expansion as I think you've seen from some of the public information coming from some of those large tier ones.

Thank you got it pretty convincingly inside.

Thank you for that I appreciate it.

The next question is from Rod Hall with Goldman Sachs. Please go ahead.

Hey, Rod Yeah, Hi, Thanks for the question I wanted to.

Come back to the supply constraint and ask you guys, what you've factored into your 'twenty, one revenue guidance for supply constrained or have you have.

Have you factored that in.

And is there any potential for that supply constraint to be lifted and then secondly, I wonder if you could talk David a little bit you said the second half of the year or you think it will accelerate.

What kind of growth do you expect in.

In the second half I guess, you would expect kind of mid single digits and do you. What do you think the drivers of that growth are in the second half of the year.

Sure Rod I'll take the first part and then David can go to the second in our outlook of $340 million to $370 million in Q1, we have a $10 million built into that for them I'll call. It risk to the supply chain and all of that said we are actively working every.

Singles day to mitigate that risk and teams are working really hard to do that so we've got it built into our outlook and we're doing our best to mitigate it.

Yeah. So my second part to clarify that.

Yes, I just wanted to make sure I got that so youre, saying $10 million for the full year is what you are factoring in or was that just Q1.

Yes, Q1, Okay, and I was asking about the full year.

So we are giving full year guide at this point you know we are.

Are going to be working through these constraints and we started to see them at the end of Q4 and you know are in the midst of it right now we're going to do our best to mitigate them in the in the first half Yeah. You can think in the first half when you look at the supply chain.

Rod when you look at the first half at the supply chain shortages. It's typically that number of 10 represents a pretty good number in terms of risk of what we see for the front half of the year and we will continue to work to try to mitigate anything for the back half of the year, but that's kind of all contemplated in our internal plans.

As we go forward and we'll be more thorough in our Q2.

View as we go into Investor day, with the remainder of the year.

To your second question just as we look at the rollout of new technologies.

And our new technologies that are loaded into our portfolio about 600 gig 800 gig in our metro product that will really be driven into the back half of the year based on again customer trial.

Certification and the revenue recognition process, we see big drivers for growth in the second half being this moved to compact modular systems with open line systems, allowing us new insertion opportunities on a on a global basis.

So <unk> continuing to rollout bandwidth continuing to grow and again.

The nature of that bandwidth, both uplink and downlink is going to be a big driver for the next couple of years.

Okay. Thanks, a lot dude excellent. Thank you.

Right.

The next question is from John Marchetti with Stifel. Please go ahead.

Thanks, very much day I was wondering if you could spend a minute just talking about some of the strength that you saw at least sequentially in the European and Asian markets, you'll understand the weakness in North American tier one, but those markets were a little bit stronger on a sequential basis I'm curious if you're seeing the release maybe of some pent up demand and stuff was done.

Wade through the bulk of 2020 are now some of that easing up or what if it's the result of new footprint range or something along those lines.

Yeah, I think in Asia, we had some new footprint wins and some opportunities obviously given both.

The pent up demand in the front half and a better competitive environment for us in Asia. So we had some nice wins there again more along the lines on Metro met our metro portfolio and in the Europe market traffic continued to diverse across continents, and so we continued to be very well.

Positioned in that market to be able to drive that growth as well and obviously on a weighted average basis against the weakness in the overall North American market.

You know that was a good thing for us in the quarter.

Got it and then maybe for you if I can just ask a quick question on the services side. We've had a couple of good quarters of growth. You mentioned you had some renewals I mean do we expect that to trend sort of with revenue as we go forward here or is there more sort of catch up to be done on the services side. Because that's obviously been you know part of the margin expansion story as well. Thank you.

Sure. Good question, Yeah, Q4 is typically the quarter when we start we see these renewals. So it was good for Q4 for US and we will expect and do expect to see services continue to grow with the revenue base. So we're really pleased with the business. The work. The team has been doing in a very challenging environment right now.

To get out and work with our customers that's the value of growing the embedded base and having the appropriate software to drive those.

Renewal opportunities and create those software annuities for us.

Yeah.

Anything else John.

No that was it that was my follow up I didn't want to get greedy.

Okay. Thanks, John.

Next question is from Alex Henderson with Needham <unk> Company. Please go ahead.

Thank you very much first just a clarification you just gave the book to Bill was that the book to Bill for the fourth quarter or was that book to bill above one for the full year or both.

So given we don't that we don't provide quarterly book to Bill we had a strong bookings quarter in Q4.

But that was book to bill guidance for the year.

For the year great.

What I really wanted to ask is the commentary around the geographies.

You had some pretty clear our strength in Europe and APAC are those.

Interest installations that are ongoing and therefore, we should expect that to continue and similarly.

If there was a singular point.

Point of pressure at a tier one in the U S. A is that something that we should anticipate will continue.

As we move forward because of the change in their spending patterns or was that particular downdraft in the U S simply a function of timing of programs.

Thanks, It's a good question Alex Yeah, no what from your U S question, It's it's 100% timing.

We're continuing to to position well with the U S service providers and tier ones.

To your question of international we've been working really hard to expand our footprint and so again you know we're gonna have we've been laying out some good line systems over the last two quarters and expect that to continue over the next two quarters and we're seeing the growth from those and we talked about some new wins.

Last year that we want in the Asia Pacific marketplace, and those are beginning to bear fruit, which is a which is a nice thing. So I would expect to see that continue, albeit these things ebb and flow on a quarterly basis.

It puts a follow up question if I could.

No mention of Huawei are in anything that's been said so far I assume that youre seeing significant change in the status of Huawei and a lot of your customers from potential customers can you give us some context and some sense of what kind of momentum there might be and winning.

New customers, new footprint from either a 800 gig or from the Huawei.

Replacement opportunity.

Yeah. Thanks, Alex Yeah, I think we're just trying to be cautious not to get ahead of our skis and in pounding. This one too hard.

We are seeing a tremendous uptick in RFP or a SKU activity. We are bidding deals we are getting design wins and as you know by the time, we get the gear ordered deployed out there and score of as revenue. We just expect that to be a growth dynamic as we get into 2022, but it is.

Is accelerating.

But as you've probably heard from others in the industry. It is a multiyear game of which we expect to see the first appreciable uptick as we exit 2020 into 2022 excuse me 2021 into 2022.

Great I appreciate the answers thank you.

No thanks, Alex for the.

The next question is from Simon Leopold with Raymond James. Please go ahead.

Great. Thanks for taking the question first thing I wanted to just maybe unpack the gross margin forecast a little bit in I'm trying to understand the sequential decline you're guiding to.

Volume is not down all that much and I'm just wondering how much of the.

Sequential decline is because you had a very favorable customer mix in your fourth quarter or if there are other issues in the supply chain, but maybe if you can help build the bridge between Q4 and the Q1 guide gross margin and then I've got a problem.

Sure well Q1, you know that you'd normally a seasonally down quarter right. So there was an impact on our margin from that but as we look at the next we're expecting for next quarter in terms of the product mix and that's going to have an impact and we're going to continue to try.

And and driving and.

Focus on the same things, we've been focusing on which is insertion opportunities, which is driving cost reductions and which is providing excellent service to our customers and as we look forward. We have planned for the year to expand gross margins 300 to 400 basis points. So that full year expansion is.

Similar to what we have been saying them for the last year or so we ourselves and we continue to see our ability and our confident in our ability to achieve that margin expansion for the full year, Yeah, I would say, there's a bit of mix in terms of line system deployment that we intend to see but lets not forget and I know last year Q1 is a terrible compare.

Because were up 700 basis points to the midpoint, but we are feeling more confident in and again last year, we talked about our margin expansion of 200 to 400 basis points. After we got off our Q1 call and that was delivered in 2020, we expect and are confident in that 300 to 400 basis points.

In 2021.

Great. Thank you for that and then as a follow up I wanted to dig in a little bit deeper on the longer term Huawei opportunity I appreciate the timing issues that I get yeah.

I'm trying to gain is is really a better understanding of your competitiveness. If we consider the fact that trans mode with a European asset.

You have the roots that Nokia Siemens networks also our European domicile. That's it you clearly have relationships in Europe.

With that kind of as a backdrop, how do you see your ability to take some of that Huawei share versus your closest competitors in that market.

Yeah, I think as we continue to invest in innovative technologies and the right feature sets to get there I think we're uniquely positioned and as you mentioned.

You know Huawei, certainly, there's an opportunity there and maybe some of the other suppliers that could step up to that are going through their own.

Vulnerabilities at this stage, so I think we're very well positioned to go through it.

We've got resources all over this and are treating this as a as a very focused go to market activity for our company. We just again don't want to get ahead of our skis here in terms of expectations.

Thank you.

Thanks Simon.

The next question is from meta Marshall with Morgan Stanley. Please go ahead.

Great.

Hey, just a couple of quick questions. Just in terms of you know as 800 gig gets rolled out over the next year just are there still ICP or major customers of cloud xpress that still need to be moved to grew before it.

We can kind of assume shorter upgrade cycles from group for 800 gig versus you know the bigger lift that might need to be from cloud xpress to kind of the group platform in general.

And then maybe second question just is there still a gross margin drag from kind of the ICP customer on 200 gig versus 600 gig or is that a headwind gone away at this point. Thanks.

No both both excellent questions. So on the first one on these compact modular platforms, it's a lot easier to in <unk>.

<unk> into that environment, because quite frankly, you can have coexistence or rip and replace just like servers.

You know are in data centers.

So when when it comes to the the opportunity don't forget we're still selling a lot of 100 gig 200 gig and were still selling the cloud Express Platte.

Platform ex D platform as we go so that is not one that disappears those tend to have very long cycles that we believe 800 gig will be a very long cycle. We think this is a four to six year cycle product.

As we get it out into the marketplace on your second question Yeah, absolutely is in some of the product categories, where we're not vertically integrated.

And yet you know that can have a drag and still has a small drag on the company and I would expect that to continue through 2021 and as we get into 2022 for that based on product cycles to really begin falling off.

But just in terms of.

That there was an ICP customer who had started their transition that 600 gig and away from 200 gig, which was particularly kind of detrimental day gross margins just any progress there of you know on that specific customer being a.

Definitive headwind.

Yeah. So as we mentioned our 600 gig sales did go up in AR in Q4 and in particular with with an icy piece of that was contributory to the mark to the margin increase that we experienced in Q4 as we predicted earlier in the year.

Great. Thanks.

Ex matter.

Your next question is from Jessica <unk> with Wolfe Research. Please go ahead.

Oh, yes, thanks for that.

Sure.

Good afternoon, everyone.

I'm, hoping maybe to broaden the competitive landscape competition.

A question a bit.

You mentioned vulnerabilities from some of your rivals impeding their ability to take share from Huawei. It sounds as though maybe there are some opportunities for next year from from other folks other than Huawei that would be very very helpful. Thank you.

Yeah.

Yeah, I, just I think when we look at the overall optical market right. It's a very large market with many players in it but when we look at it the number one player is Huawei and obviously, there's a vulnerability there.

Number three player. There is is Nokia and certainly theyre going to go through it publicly.

Knowledge, they're going through their own portfolio rationalization and their prioritization of their resources, which I would imagine are very weighted on five G.

And when we look at the technology cycles of where work, but they are invested they have not invested in in that 800 gig cycle as well so.

Look we've what a difference a year makes.

For us.

We are now in the financial position the operational position and then technology positioned to play a little bit of offense and now we're not we're really being mindful, but we think that there's opportunity for us to grow our share in the future. This is a foundational year for us to really set a solid our feed on solid ground.

And in the back half of the year to to really begin with that share gain and with the Huawei opportunity as we get into 2022.

Did that help yes, yeah, that's where I was hoping you would go so thank you.

My my follow up is a similar question just on the DSP side now that we've got pretty good visibility on.

The Acacia deal closing I'm wondering if you have further comments on how.

Accuse you of being part of Cisco may change the competitive dynamics in the space.

Look I think since the company was founded.

Tom and David talked about the importance of vertical integration. It's one of the things that that recruited me here to the company because it is such a valuable.

Valuable asset as bandwidth continues to grow and as these systems go at higher higher speeds and bigger and bigger waves. So look I think it's essential for companies to have scale and vertical integration, which is why we are investing a significant portion of our R&D dollars in that portion of the.

Market and it just so happens that we're doing that at a time when people can open up line systems to let the best transponder win and as you know our aim is always to build the best product to drive that price performance dollar per bit spectrum efficiency on a go forward basis. So look we were.

To take every competitor very seriously I think that a Cisco Acacia is now will be positioned as a vertically integrated scaled competitor and we look forward to meeting them in the market as they complete the transaction.

So pretty profitable week for Acacia for that one week that they broke up huh.

Yeah, Yeah, it was not bad okay value vertical very much.

Thank you, Jeff Alright, Thanks, Jeff.

The next question is from Jim Suva with Citi. Please go ahead.

Thank you very much I know you'd mentioned that you expect the market to grow next year and for you to outgrow that.

Can you talk a little bit about seasonality for this year for the quarters.

You mentioned kind of seasonal for the March quarter, but I'm wondering about beyond that and not really comparing it to last year because last year was COVID-19, but any comments from seasonality on revenues or costs that we should be mindful of like are there additional merit increases coming on or seasonality something that we should be mindful of versus your historical excluding COVID-19. Thank you.

Yeah. Good question Jim.

As I mentioned in the prepared remarks, where we're expecting the first half of the year.

<unk> to be flat to slightly ahead of the market and ahead of what we did last year with growth really coming in the second half of the year in the first half than in the first quarter in particular, you're right. We do have increased employee costs, which are normal for the first quarter of the arris taxes and other payroll impacts take effect and then.

For us explicitly in 2020, as we were really focused on.

Driving profitability in a COVID-19 environment, we did take salary reductions for certain employees and reduced bonus. So those will be added back in the air as well, but really the year in total growing slightly ahead of the market really important we are driving profitability, we plan to free cash flow from operations positive generating cash.

Expanding our margins 300 to 400 basis points.

Okay and then my last question is your commentary have you know growing slightly more than the market. It people different parts of the country view slightly differently is that kind of one to 200 basis points is that kind of you know Q3.

Three to 500, I'm, just kind of curious of what's the general view of how you define slightly if if possible or at least help us bracket. It. So we don't over exaggerate or get too ahead of ourselves.

I would say, 1% to 2% I mean low single digit right. That's up about thank you. So much yeah, yeah about them. Okay. That's above the market. Thank you so much for your details and quality quantification just greatly appreciate it.

Thanks, Jim.

The next excuse me. The next question is from George Notter with Jefferies. Please go ahead.

Oh, hi, guys. Thanks, very much I guess I wanted to ask about the ice six contribution in the years. So as you look at that your topline growth you expect for the year is is eight six a big contributor. There is it is it five points of revenue in the year 10, I mean.

Any any kind of ZIP code you can give us around that would be great.

Yeah, you know we planned for the back half financial ramp that again, we continue to mentioned, we'll start based on the revenue recognition cycles.

We're not expecting that to be based on port shipments. When you look at total port shipments were not expecting that to be a double digit contributor a large double digit contributor in 2021, we're expecting the orders and backlog that we get throughout the year to set up for a nice.

Our back half exit to the year and a really healthy ramp in 2022.

Got it and then just to clarify when do you expect initial Rev. Rec on IL. Six is that is that Q1, then or is it Q2.

As we said the ramp of anything meaningful that we think do you want to pay attention to or be in the second half.

Got it.

Okay, Great and then there's also I think there was some development going on on a D. T X version of ice six it's more oriented around our carrier customers is that is that still under development and when when might that be coming to market.

Again, we've got a whole host of of ice six developments coming to the market are our first product coming out are both for the ICP as well as the CSD customers, but over the next you know 18.

18 to 24 months, we will continue to have those performance enhancements as well as additional products coming into the market, but that first.

Product on the Gx platform is honed both for the ICP as well as the CSP market in terms of features and functionality and we have already received purchase orders from both Icp's and large C. S piece for them.

Got it okay, all right very good thanks, a lot I appreciate it.

Thank you.

The next question is from Ryan Koontz with Rosenblatt Securities. Please go ahead.

Hi, Thanks for the question circling back to the ICP topic.

Pretty good quarter there.

How would you characterize your business there or is it mostly long haul or or more metro D. C. I and how would you characterize the threat from C are to that business. Thanks.

Yeah, no. It's a good question the threat from Z or everybody continues to you know this has been an ongoing discussion for a couple of years and I think as a ZR comes in folks using the optic for ZR and ZR plus in the Metro I think has been size by net hub 'twenty 'twenty four to be.

About an 800 and 900 million dollar market out of the 12 billion ish market opportunity.

You know, we do have a good mix of business with the IC piece.

It is both and metro Dci long haul and subsea.

And that those are areas and ultra long haul and subsea where you will not see they are based on reach and you will not see ZR plus based on spectral efficiency or reach performance. So we continue to use E. R and Z are plus when it when it gets here has a nice cost reduction for a true opportunities.

And again you know the the forecasts continue to come in when those products will be available. We're very active in that since we have the compact modular platforms that can use those as well.

And again, it's not a huge impact.

So the overall market again, I think Youre showing me now it's closer to 400 to 600 by 2024.

Of the total okay. That's.

Super helpful and just a quick clarification on the $10 million supply chain impact is that in.

And the Guy that's at risk or is that above the guide that is pushed out.

So the guide that excludes the 10 million that we wouldn't have been able to get.

Yes, perfect for those conditions did not exist.

Perfect. Thanks, so much.

Thanks, Ryan for that.

Next question is from Tim Savvy show with Northland Capital markets. Please go ahead.

Hey, good afternoon, Hey, Tim.

Oh, Hey, there I'm trying not to ramble here, hopefully you see where I'm headed and.

Then the question about the dynamics from Q4.

I thought you guys were pretty sanguine about the tier one issue you know on the last call.

Kind of looking forward.

And and obviously you saw some pretty significant declines.

I assume you didn't have any 10% customers in the quarter, maybe not even for the year, but could be close I don't know if you addressed that in that sort of parenthetically.

But.

Given the degree of weakness with your historically largest customer.

Did that come as somewhat of a surprise and were you able to them to then proactively offset.

With with opportunities in Europe, and Asia. It seems like you did have receivables extend and you know and some of that dynamic could have been there I'm just interested in your thoughts on that.

Thanks, Tim So so certainly our number one customer was an 11% customer for the year for the year.

And look at those large customers EBIT flow. So the likes of the verizons the at&t's companies like that ebb and flow I think we saw the North American service provider Capex on the top was down year over year, 22% or so and I think that was experienced by a lot of the competition in terms of their guidance. We just have a more.

Diversified customer base, we are winning insertion opportunities in those tier ones, which as you know take time to be able to scale and growth.

We do believe again those tier ones are expected to grow their capex and we're expecting that to really take more of the effect in the second half of the year, which I think is consistent with other companies and in our infrastructure space in terms of what they're saying and on your comment on the DSO.

Remember that in Q for them, we have the renewals for the services piece of that tends to bump up DSL in Q4.

Got it and if I could follow up briefly I mean, I think what we saw there with that customer was it pretty broad based shutdown that impacted a lot of different people. So.

You know that's more kind of along the lines of program timing, although as we head forward you know to what extent does competition share shifts.

That customer or other large north American customers.

Impact your first half for your annual guide.

Relative to some of the supply issues and other factors that you mentioned capex.

No I appreciate that again based on our customer makes them more to gain than to lose there. So.

It's been factored in our current outlook factors in a lighter spending.

From tier ones in the in the front half and a heavier in the back half and again, we've got them as Nancy said, a pretty strong start.

For the quarter were just not going to get ahead of our skis, we have a nice pipeline are <unk>.

Product portfolio is feeling good and it's time for us to execute but again, we're trying to be very mindful of the front half of the year given the market conditions.

Okay. Thanks.

Thanks for the next question is from Fahad <unk> with MK and partners. Please go ahead.

Thank you for taking my question.

Questions. If I may one kind of focused on the near term on.

If I look at the 800 gig.

Opportunity.

Thanks.

I want to compare.

To your leading competitor I think Dave mentioned, they have 5000 or.

Modern ship to almost 70 customers by my math that suggests that.

Obviously, the two ex ramp in their 800 gig.

Shipment versus any previous upgrade cycle can you share with us how many design wins you've had.

And can you quantify what kind of a ramp.

Or magnitude of ramp you'll see with 800 gig design win.

And then I have a longer term.

Yeah no. That's good so Bob good question I think for in the first piece the pipeline and demand in front of US is strong and continuing to grow up so it's surprisingly strong given past.

Generations of technology. So that's good as we mentioned we closed several purchase orders and design wins in Q4, those continued to build in Q1 and as we get into our Q1 results.

And into our our Q2 Investor day, we'll be able to kind of start plotting that course, but it is I agree with you. It is going to be a steeper and longer curve than than previous technology generations in our opinion based on the facts that we see in front of US you had a second question.

<unk>.

Yeah.

So on your comment about.

Component shortages in your book to Bill I, just wanted to make sure I understand that your book to Bill comment.

A factor in any kind of push outs.

Revenue that you may have booked this quarter.

That was impacted for.

For the case, if you see any revenue impact this quarter.

From component shortages and as the book to Bill kind of being driven.

But any kind of over ordering by your customers who are concerned about component shortages throughout the year.

Yeah. It's a good it's a good question and Nancy will jump in here, but I think.

No I mean bookings our book to Bill ratio that we look at was to give you a color that our bookings in Q4 was strong and that we ended the year with more bookings than revenue. So we're carrying backlog.

The suggestion on the supply chain, we did start to see this in Q4 and it's not just the.

The semiconductor shortages, but also COVID-19 and I think Nancy that was about $5 million of impact ish.

Two our quarter.

Again.

Always.

Impacts even more heightened as you end the year and as we go forward as we said that for $10 million impact in Q1, given some of the lead time associated with with some of the semis that are coming out some had been quoted it you know moving from 16 weeks or 14 week.

To 30 weeks or 52 weeks now we saw this early and so our supply chain began to reactive because we're in the right working capital position.

That were in thank you Nancy and team we were in a much better position to us to respond in our supply chain team is doing a nice job there.

Got it thanks for your service.

Thanks for this next question next question is from John Roy with Water Tower Research. Please go ahead.

Great and I wanted to take a step back a little bit I know, we're getting near the end here I wanted to talk about.

How much are being held back by Covid do you feel that if things get better in the next nine months or whatever in the vaccines go through et cetera that you really could see an acceleration of things or are you pretty much going as fast as you can what's really curious as to how much you feel like you're being held back by the Lockdowns.

Yeah, I mean, it's hard to quantify everything is harder than COVID-19 servicing equipment rolling new technologies out.

Everything across the board is certainly harder in a COVID-19 environment, but look the team buckled down and if you look at the results as we are in Q1, now and where we were last year.

I think we accomplished a heck of a lot in that environment now customer spend and our ability to get new technologies implemented cross borders and implemented I think you've heard that across but but at this point in time, we're not going to put out what would the annual number in the uptick be if it went away.

Because we're just not thinking that way, we are thinking hey, we build a solid foundation. We're in an entirely different spot now than we were last year and we're trying to again as I mentioned move from that defense to offense, because we think there's a real market opportunity in front of us regardless of whether there's COVID-19 supply chain shortages, our job is to execute.

With any market condition, that's thrown at us.

Alright, that's great and also maybe in the future as distinct progress any obviously any kind of hints as to things changing on the Covid front from your suppliers and your demand would be greatly appreciated. So we can know at least what you're seeing.

That's it for me Yeah, we're trying to do that it's a good it's a good point, we're trying to do that by incorporating is giving you the color on what impact we kind of saw in Q4, what impact we're seeing in Q1 trying to be mindful and give you that data. So you can you can kind of digest it.

Great. Thank you.

Alright. Thank you operator, we'll take one last question.

And that question is from Jon Lopez with vertical group. Please go ahead.

Hey, Thanks, very much I just had a clarification and then one question Nancy the differed in Q4.

It was pretty strong it looks kind of upper end of seasonal perhaps a bit better.

Is that all just the services renewal or was there any product contribution in there can you just maybe talk about what drove that.

Sure. It's it's both so services certainly drive the deferred revenue you see in Q4, but you know as we've talked about we're seeing good demand and we did see increase in both product as well as services and Q4.

Yeah.

Okay, Great and then I just wanted to come back to the tier one side for a quick second if.

If we kind of take that one big customer out your tier one business for the year for the quarter and for the year. It was actually quite strong I mean, it looks like a true kind of double digits for the year.

And what wasn't a terrific environment I guess I'm. Just wondering can you just talk a bit about what drove that portion of the business specifically kind of tier one ex the big customer was there anything one time he COVID-19 related in 2020 and is that sort of a sustainable base that you think you can build from in 'twenty, one and beyond.

Sustainable basis, especially when you compare it to the competition and a lot of these tier ones as I mentioned, we have a.

We have more opportunity in front of us.

Then risk.

Very good alright, thanks for the help build all of their infrastructure builds more opportunity than risk.

This concludes our question and answer session I would like to turn the conference back over to David heard for any closing remarks.

Yeah, No I appreciate everybody's thoughtful questions.

What a year what a difference a year makes for US 2020 was a solid year for Infinera I would like to thank our customers suppliers partners and our shareholders and.

And especially our employees, who braved the global pandemic to do some really heroic things on behalf of our customers and the overall ICT community.

To keep the world coming in to keep this going across.

And keep the keep the world connected.

We're really excited for the opportunities that we face in 2021 and I will tell you our focus our laser focus is on execution.

So thank you all and be well.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Okay.

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