Q2 2021 Infinera Corp Earnings Call
This is 1 of the healthiest optical environments, we've seen in years.
Second we held our Investor day on May 19th where we communicated and reviewed our 8 by for by 1 strategy to drive growth and expand market share or $8 for by 1 strategy is focused and founded on the following network transitions first core networks moving to 800 gig next.
The Metro networks, expanding to 400 gig and lastly, coherent optics moving out close to the edge of the network with the rollout of 5 G and mobile edge compute which are expanding the reach of optical networks and driving tremendous future potential volumes. These.
These market transitions, along with the shift to open optical networks, and the Huawei share gain opportunity or creating specific insertion opportunities for us.
We are starting to see early signs of success across all of these fronts and our growing pipeline and bookings.
Third as evidenced in the robust market trends, we experienced very strong growth in bookings in the quarter a continuation of the trend we observed in the first quarter and Q2 product bookings grew double digit year over year and bookings for the first half of 2021 are also up double digits from last year.
Our quarterly book to Bill ratio was meaningfully above 1 and we ended the quarter with record backlog. Despite the temporary headwinds from the industry wide supply chain disruptions are Q2, and the first half operating results give us confidence that we are on track to achieve the target business model, we presented at.
Of our Investor day in May as a reminder, our target business model reflects our expectation of 8% to 12% revenue growth starting in 2022 gross margins in the mid Forty's and double digit operating margins by 2023.
Lastly, we made significant progress with the new products that support our buy for by 1 strategy.
For 800 gig and above we accelerated the ramp of <unk> in the quarter with the addition of new customers shipment of commercial product realization of first revenue and growth in our backlog we are tracking towards the I 6 growing to a 20% to 25% of product revenue in 2022 as we described in.
Our may analyst day to address the reader mentioning of the Metro networks to 400 gig, we announced the availability of our 400 gig ZR plus merchant plug of holes for our Metro product family. We also unveiled our intention to offer a suite of vertically integrated ice fix ex or <unk>.
Which includes ZR plus we expect this suite of plug of bowls to be key to expanding our margins and market share further in the metro in years ahead.
And with <unk> and mobile edge compute driving 100 gig coherent for the edge of the network. We are creating a new billion dollar plus the addressable market with the point to multipoint capabilities of ex our optics in June we officially launched the open XR Forum with initial members Verizon BT.
Lumen, Windstream and Liberty Global who all share our goal of driving standardization and acceleration.
In the industry of the adoption of XR optics within the first 45 days of launching the forum current membership in the Forum currently represents a significant share of global service provider of Capex and we are of a large number of global carriers and ecosystem partners interested in joining the forum.
Turning to the specifics of our financial results Q2 revenue was within our outlook range, while gross margin and operating margin exceeded the high end of our outlook range.
Revenue in the quarter grew 2% on the year over year basis, with our growth rate entirely constrained by supply.
These supply issues limited our cumulative revenue by a total of 35% of $40 million Q2 gross margin expanded by nearly 400 basis points year over year operating margin expanded by over 250 basis points year over year and cash flow from.
<unk> increased by approximately $60 million compared to Q2 of 2020.
Our quarterly results give us confidence that we are on track to achieve that target business model I disclosed earlier.
We believe the supply chain challenges, we are facing are temporary and not unique to us and are forecasted to continue in their intensity.
Nancy will provide additional details in her commentary interestingly the supply chain constraints of the open the doors to greater collaboration with our customers, providing us increased visibility into their for demand profile and underscoring the importance of our 8 but for by 1 strategy from a regional and cut.
<unk> segment perspective, we experienced solid growth both sequentially quarter over quarter and on a year over year basis in the Americas and amongst our ICP customers benefiting from regional subsea builds and the high speed Metro upgrades bookings in EMEA were up year over year in the quarter were <unk>.
<unk> in the core and our Metro portfolio are doing well in addition to an increase in our engagement in meaningful Huawei displacement opportunities, while seasonality and timing of the few major projects affected our Asia Pacific performance in the quarter. Our pipeline is healthy for the second half as we're rolling out of 6.
And driving additional success with our ex TM and Gx Metro products.
Overall, our tier 1 fared well in Q2 with broad based demand strength, while sales in the cable segment moderated after a good start in Q1 on.
On a product basis revenue and bookings growth were robust across our open optical portfolio. The gx platform grew double digit year over year and continued to be broadly deployed across all applications metro long haul and subsea.
At this year's OFC optical industry show of North of major North American tier 1 service provider highlighted that they have chosen infinera is open optical portfolio, including our 400 gig G ex metro solution for deployment across their network. Additionally, we operationalized another me.
<unk> web scale customer in quarter, 4 our 600 gig <unk> solution for their Metro network and this customer is actively testing our <unk> 800 gig solution.
These are important strategic customer wins as they demonstrate the strength of our broad and flexible portfolio.
<unk> system bookings, which are a leading indicator of future high margin transponder sales are trending 60% higher than our plan for the year and are up meaningfully both sequentially and on a year over year basis, while these line systems carrier.
Margins in the short term they are critical to expanding our customer footprint and are also a good leading indicator of the adoption of <unk>. It.
It's worth noting that in Q2 over 70% of the line systems that we booked were specifically related to ice 6.800 gig deployments.
Speaking of which on the 800 gig front, we have now secured purchase orders from 19 customers.
6 more than we reported in our Investor day on May 19, our initial customer success.
The include those that we announced publicly such as Telsey of cables TPG Dell Com PCC W you'd be net and seaborne as well as other unannounced customers in Q2, we recognized the initial revenue from <unk> 6, albeit at modest levels. The.
<unk> is growing a trend that is continuing in Q3, and we are ramping production and deploying systems with tier 1 and ICP customers globally across both terrestrial and subsea applications.
As evidenced in our field deployments and customer qualifications the performance of ice fixed remains industry, leading and surpassing our original.
Specifications.
We remain of the view that 800 gig opportunity as a long multiyear cycle and are focused on growing <unk> to represent 20% to 25% of our product revenue in 2022, which is reinforced by the increased demand for line systems that we are experiencing.
And lastly, we are seeing strong growth in interest and XR optics.
The customer trial activity for the quarter and the first half has been strong and we've conducted over 30, XR optics customer technology trials and demos in the first half of 2021 and as I mentioned earlier, we're seeing tremendous interest in the open XR forum amongst our customers suppliers and ecosystem partners.
Overall, I am encouraged by the broad based demand strength across geographies and customers for our open optical portfolio, while the demand indicators are healthy across our customer base. The near term supply challenges of real and are impacting the entire networking industry. This is a challenge in the near term, but the underlying demand strength bodes well for.
Our future, including our path to our target business model, we are working closely with our supply chain partners and customers to address those short term supply issues in closing with many regions around the world facing spikes in COVID-19 variance, we continue to put a priority on keeping our employees safe.
We have an incredibly dedicated team and I really can't think of them enough for the resilience as the pandemic continues to pose formidable challenges in their personal and professional lives.
Their tireless commitment to serving our customers as reflected in our achievements this quarter and the progress we are making towards our target business model and quite frankly, our humbling and inspiring for me personally I will now hand, the call over to Nancy to provide additional financial details on the quarter and our third.
Our outlook and the progress towards our target business model.
Thanks, David Good afternoon, everyone.
I will begin by covering our Q2 results and then provide our outlook for Q3.
Commentary on non-GAAP results for your reference we have posted slides of financial detail, including our GAAP to non-GAAP reconciliation for our Investor Relations website to assist with my commentary.
Overall I am pleased with our performance in the second quarter of 2021, the company performed well against the backdrop of the challenging supply environment, while ramping new product and winning new customers as David covered bookings were robust in the quarter continuing the strength, we saw in Q1 with <unk>.
Q2 product bookings up double digit year over year.
We ended the quarter with the book to Bill ratio meaningfully above 1 and with record backlog.
Our primary challenge right now is navigating the impact of the industry wide component shortages and extended lead times and elevated costs, while staying on course for our 8 by for our pipeline strategy.
Q2 revenue was $339 million within our outlook range for gross margin of 37, 7% and operating margin of 8% came in above the high end of our outlook range.
Coming into the quarter, our outlook contemplated a potential quarterly revenue impact of $20 million to $25 million from the industry wide supply chain shortages and we now believe that the actual impact was about $10 million.
Taking that into accounts, we now believe that the cumulative impact for our total revenue in the first half is in the range of $30 million to $35 million.
Q2 gross margin of 37, 7% was above the high end of our outlook range of 34% to 37%.
Relative to the midpoint of our outlook gross margin came in higher in the quarter in the quarter, primarily due to the 2 factors for.
The more favorable product mix as the deployment of some line system shifted out into Q3 and second higher services margin keep in mind. This was while absorbing approximately 100 basis points of unexpected temporary supply chain related costs in the quarter.
On a year over year basis gross margin expanded by approximately 400 basis points as we benefited from improvements in our cost structure with for reflected in higher product and services.
The margin.
Operating profit in the quarter with $2.6 million.
8% operating margin, which was also above the high end of our outlook with operating margin at over 250 basis points year over year the.
Of the year over year improvement and better than anticipated profitability on the quarter, which is the higher gross margin and operating expenses of $125 million.
Moving in towards the lower end of our outlook range, even as we continued to prioritize R&D spend on our vertically integrated ACI for pipeline and portfolio.
The resulting EPS in Q2 was of lots of <unk> per share representing a 5 per share improvement year over year.
Moving on to the balance sheet on cash flow items, we ended the quarter with $233 million in cash and restricted cash.
Our ending cash position benefited from $21 million of cash flow from operations and after Capex resulted in the $7 million of positive free cash flow.
During the quarter, we completed the transfer of inventory with 1 of our contract manufacturers as we continued to drive a more variable and efficient business model at the end of the quarter, we had zero drawn against our $150 million credit facility.
As I reflect on the first half of 2021 I am pleased with the progress we have made over the last year against the tough macroeconomic backdrop, while navigating a global pandemic and the industry wide supply chain challenges.
Comparing our financial results for the first half of 2021. So the first half of 2020 bookings grew in the double digit percentage range, while we grew revenue by 1% constrained entirely by supply.
Furthermore, we expanded gross margin and operating margin by 650 basis points, and 620 basis points, respectively, and improved our operating cash flow by almost $170 million generating approximately $40 million of operating cash flow in the first half of 2020 of them.
1 of the momentum in our business.
Along with our focus on execution sets us up well to achieve our target business model in 2023.
Looking ahead for the third quarter of 2021, we are encouraged by the continuation of healthy demand and a record backlog exiting Q2 at the same time, we are mindful of the ongoing industry wide supply challenges and the.
And expect supply related pressures to continue in their intensity in Q3.
For Q3, we are forecasting revenue to the end of the range of $340 million to $370 million.
This wider range is not demand related but entirely due to the current supply chain environment. It is important to reiterate the customer demand remains robust, especially for our <unk> 800 gig product and sets us up well for the 8% to 12% growth we expect in 2022.
As we mentioned earlier bookings momentum is strong across our portfolio, including for our line system and we expect these bookings to drive increased revenue in Q3, we had initially planned for modest impact the gross margin in Q3 frontline system deployment, but now given the increased demand and the timing of these.
Deployment, we estimate the impact of the 100 to 200 basis points on gross margin.
In addition, we expect to see of 102 of 150 basis points of gross margin pressure in Q3 from higher than normal supply chain related cost associated with free expedite fees and component costs required to mitigate longer lead time and constrained capacity.
Taking these factors into account we are anticipating Q3 gross margin for the 34% to 37%.
We are planning for Q3 operating expenses to be in the range of $126 million for $130 million as we invest in R&D to align with our 8 by for pipeline strategy focused on high performance coherent optical engine open optical platform vertical integration and our entry into.
Upon the vote.
We expect Q3 operating margin to the negative, 1% plus or -200 basis points. During the quarter, we expect to prudently use of cash from operations provisioning for inventory and working capital to support the rollout of our new product.
Finally, please the FINMA basic share count of 210 million shares for Q3 in the event that we are profitable on a non-GAAP basis in the quarter diluted share count should be approximately 224 million shares.
As we look ahead to the full year of 2021 based on the market environment, our growing backlog and demand profile. It gives us further confidence in our previously shared expectation.
To grow our revenue slightly ahead of the projected market growth of 2% to 3%.
To expand gross margin by approximately 300.400 basis points compared to fiscal year, 'twenty and to be profitable on a non-GAAP operating income level for the full year of.
Our progress in 2021 should position us well for increased growth in 2022 and put us on the path to achieving our target business model of the 8% to 12% revenue growth mid <unk> gross margin and double digit operating margin in 2023.
Before turning the call over to Q&A I want to Echo David's sincere appreciation for our employees customers and partners as we collectively navigate these challenging but all of our opportunistic time and also to our shareholders for their continued support and I'd now like to open the lines for questions.
As a reminder to ask the question you will need the press star 1 on your telephone.
On your question first the balance sheet.
Your first question comes from the line of John Marchetti of.
Stifel.
Hey, John Thanks for how are you.
Well, thanks very much.
I wanted to just do a quick question on the guidance for <unk> of the $3.40 to $3.70 range net.
You mentioned that being wider given some of the constraints out there just trying to reconcile that with the <unk>.
25% to $35 million.
Is there more still to come there does that incorporate any of that guidance just trying to get a sense of of how to level set that guidance relative to the shortfall that you saw on <unk>.
Yes, it's been certainly in the unusual of time with the supply shortages. So I wanted to try and clarify what we're seeing and how we're thinking about it. So the parts that are sort of right now think of it as about 2% of the parks that were purchasing are causing the impact.
And on a margin basis that represents about 100 basis points in Q2, and we said of 100 to 150 basis points in Q3, that's short term impact from from the situation that we're in if we think about it on the revenue basis, we've been trying to give that quarterly view.
For the first half.
The $30 million to $35 million. So you can think about it like $15 million of quarter that were not achieving in revenue right now because of the supply. So if I look at Q3 and I would think it similar about another $15 million of quarter that puts the revenue that we havent achieved or wouldn't achieved on the first 3 quarter.
In that $45 million to $50 million range that is all covered by backlog of really strong bookings growth.
Well I know the next question. So this is kind of waterfall and the future quarters as the supply loosens up and we're thinking about that in Q4, and then Q1 Q2 really into the the first half of 2022 as we start to see the supply come back online.
Great. That's helpful. Maybe just a quick follow up then just given that comment about Q4 net into Q1 and Q2 are you expecting on that Q3 of sort of the worst for the supply constraints.
As you get late this year and then certainly into the first half of 'twenty 2.
Yes based on what we see today, yes, but I'm going to hold on.
All of that because it's absolutely been a been a little bit longer than we probably anticipated coming into the year.
Great. Thanks very much.
Thanks Ian.
Next question comes from the line of Simon on the helpful.
Of Raymond James.
Great. Thanks Thomas.
Okay.
I wanted to check in on the the outlook for the 800 gig product gaining gaining traction I know.
It seems to have split out.
Later into this year, but we're now getting closer to that point.
On an update of when you think you'll start recognizing material revenue.
On the prior earnings call, we left with the impression you expected hyper scaler beginning deployment in the fourth quarter this year and becoming more meaningful in 2022 I just wanted to see if we could update that.
Sure. Let me, let me kind of clarify what we had talked about I think what we mentioned was we were shipping commercial product.
On our last quarter and so we have had first revenues kind of in the second quarter. We do expect more material revenues in in Q3, and Q4 building, 220% to 25% of our product revenues in in 2022 pretty consistent with our comments, we made on our analyst day.
Day on May 19th.
We've added 6 additional customers.
On the positive side, we've laid out 60% more in line systems and we bargain for in the year. So the demand for the product. This foundation really very strong and has grown since we last talked.
So we do expect those rollouts and are on path for that 20% to 25% of product revenue.
Youre going to ask me is it ICP, yes at CSP, yes, it's across the the.
Spectrum, both for long haul Metro core.
In subsea applications and the performance of the product continues to.
To climb way ahead of spec of what we original spec, which is good news commercially for our customers and for our shareholders as we scale of the technology.
Thanks for the detail just a quick follow up.
You've talked in the past about the need for the investment community patient regarding Huawei.
Swap type opportunities.
Just like to see if you could update your thinking and the progress in terms of deals 1 that you would consider.
At Huawei as expense thank you.
Yes, no I think even on May 19th we I don't think we ever demanded the investment community to be patient I would never expect such sorry, bad humor, but.
I think what I'm trying to do is have realistic expectations of how long. It takes to do an RFP and then go ahead and engineer install furnish and then revenue recognize a lot of these projects because again rip out.
Or replacements or overlays are all long term and I think youll hear that even from our industry competitors.
We're seeing even since may 19th and increase in these opportunities and locations all around the world.
So we have seen both an increase in RFP.
We have been awarded contracts.
And I think what I said, even in Q4 of last year Q1, as well as in our analyst day is we would expect to see those rfps and wins and to be able to see material contribution in 2022 and beyond contributing to the 8% to 12% growth rate that we gave and that $5.19.
So as Nancy said prior the.
45 million to $50 million <unk> contemplated of <unk>.
Supply chain constraints that we have covered in bookings plus the Huawei orders give us even more confidence in that 8% to 12% growth rate as we go into 2022.
Thank you for that detail.
Thank you.
Next question is from Alex Henderson of Needham.
Hello, I was hoping you could talk a little bit about when you talk about 20%, 25% of revenues come from product revenues coming from the.
The new product.
The 22.
On the average for the full year. So should we be then thinking that that would ramp for a 10% in the first half going to 30% in the back half to average 20 to 25 is that the right way to think about the net debt.
It's a good it's a good question and I won't give you a specific answer other than the trend is about right meaning.
Typically as you're deploying a lot of these elements youre going to get.
You're waiting in the back half just by nature of we're onboarding more and more customers, winning more and more contracts and filling up those lines systems that I mentioned, where 60% ahead of our original plans. So I would expect on.
On a weighted average basis that 20% to 25% with more opportunity.
As the market continues to unfold, but it has to be heavier weighted in the second half.
Within the context or.
Are the parts that are being.
Difficult to achieve all of those predominantly going into the line system elements of the disc.
Slowdown on the line system deployment.
The gating factor to realization of the.
The NIM is that the primary area in the.
That's the case.
So all of that ramps up.
And then there is a direct relation to the line cards, which would seem to be more 800 gig related is that the right way to think about just the mechanics.
Yes, good point.
Depict it.
Nothing is left the load meeting a microcontroller and the fan Trey.
Can be on shortage right now on that 2% and can hold up shipments, but you hit the nail on the head we've seen.
Shortages online systems, which delayed our deployments from Q2 to Q3, which had a good guy on margin on Q2, as Nancy mentioned, but puts more pressure on the margins along with the increase in volume that we've seen.
For Q3 and.
And Youre right less so with 800 gig transponders with our own vertical integration.
So again the line system deployment gives you that Q2 of the Q3 shift in margin, but for the long term both the increase in those line systems as well as the timing of them give us.
Again more confidence towards that original question of the years that $20 to 25% product revenue of <unk> 800 gig.
If I could just clarify 1 last thing for a the floor share net you said, 20% to 25 million.
As you expected.
<unk>.
Substantially more than that I think you said 30 day okay.
The $35 million.
In the quarter and then of 1 point you said it was $15 million per quarter. So.
It's the cumulative impact great.
Perfect.
<unk>, maybe that $15 million of <unk> would potentially shift into Q. It didn't the airport the net impacted.
Of $30 million to $35 million in into Q the sliding sequentially.
So, let's think about the 30% to 35 of the cumulative for the first half we.
We were.
Looking originally we had set of 10 it ended up being closer to <unk> 15 in Q1 that sides of the Q2.
So I think the simplest way to look at the that's about $15 million per quarter.
Right now on for going into Q3.
I think.
About that $15 million into the Q3 guide and if you look at that for the year of this 2% part shortage, causing the hundreds of 150 basis points of gross margin temporal impact is having what 400 basis points of suppression on growth in revenue that ultimately we will get rolled in.
Waterfalls as we get into 2022.
Just to be clear when you say $15 million in Q3 than it would be the cumulative impact of the 30 million plus another 15 exiting 2 of them.
You got it you got it exactly perfect. That's great everybody will be on the same page. Thank you.
Thank you.
The next question comes from the line of Mike of Genesis of.
West Park capital.
2 questions for me.
So to pick from.
On the order sort of demand basis going into 2022.
We're sort of.
Right, where we should be.
We feel good about the 8% to 12%.
<unk>.
Right.
Given the because of the supply constraints for <unk>.
Rowing in the low single digits right now.
Sue me 2 months, but they're going to be gone next year and that we won't be talking about the same level of supply constraints.
The next year as we are right now or something similar.
So maybe just kind of go away next year, but let us take the country.
Well so.
I think 2 elements to look at it.
Is 1.
When a lead time goes from 15 weeks to 50 weeks.
When we were in December of January dealing with this it does put quite a whole when you do the math of the delta between those it puts the whole into Q Q1, Q2 Q3 for orders that you get in.
And thus even a bit in Q4, we have provision.
And gotten a lot closer to our customers, which has been a positive of this in terms of getting their lead times extended for things. They are looking for and therefore casting.
So again, we're expecting that at least by math in terms of forecasting we have been able to cover a lot of that.
Demand that by the time, we hit Q1 and Q2.
We will be able to hit in terms of lead time, although as new orders come in we will see what the capacity of yield once things roll off of Automotives and get back online and even keel across the industry. Most people are expecting some moderation in Q1 and Q2 with the second half being.
Relatively clear it's too soon to tell but thats what were estimating in our business outlook, which is hey, there'll be some impact in Q4, but we keep fighting through it and that in Q1 and Q2 of the next year, we've moderated the big piece of that through our forward planning elements and putting additional inventory.
Lead time, and and commitments with our contract manufacturers.
Great perfect.
The second question is yes.
We've been hearing and I think you've been talking about.
I think having some really good 800 gig performance.
The long haul ultra long haul of subsea type distances and I guess my question is on.
What's the perspective on how much in those markets or customers actually deploying 800 gig wavelengths.
I started.
Where were the real inflection.
Pure native sort of 800 G wavelength demand for long haul and subsea of we've already seen it in subsea or is it coming on long haul.
Just your comments for.
Yes, let me clarify the comment we make on the performance. It's not just the performance at 800 Gee, It's the performance of our <unk> portfolio so that means.
How many bps.
How many how many bits per dollar can we carry over distance. So when you look at of subsea network what capacity can we carryover of that same fiber when we look at how long can we carry.
600 gig signal or of 700 gig signal or a 500 gig signal. So we've seen double digit performance benefits head to head as we've been out there and our performance has been well ahead of the specification we put out.
Which which again yields to better economics for the for the client base. So it's not just at 800 gig.
Okay and then on.
On the question on just the timing of the 800 gig market for perhaps for the deployment of the interpretive wavelengths.
Yes.
Again.
It's net all of that people are deploying youre, asking who at what distance of what percentage as we get into 2022, we'll try to give you some more relevant statistics that base.
Based on our deployments to date with.
Again, the number of purchase orders, we just announced its probably not.
Not materially relevant but as we go forward what percent of operators are operating at 800 gig 700 gig 600 gig 6 we'll try to give you a better profile I just don't have that for you now.
Alright, Thanks, a lot of and I appreciate it.
Thank you good questions.
Next question comes from the line of Rod Hall of Goldman Sachs.
Hi, Thanks for taking my question. This is <unk> on for Rod.
Hi, guys.
And then the question.
So of the Actelion.
The $2 million revenue shortfall that youre talking about.
Could you maybe give us some color on how much of it was.
On a related to isn't that great.
Zero, yes.
Zero.
Got you makes sense and.
And on the same lines.
So how do we think about this 800 gig contribution I understand the system.
The response to it and then there could be.
On a few large products projects rather for that good.
Fluctuate the revenue contribution, but do you at least have some milestones on how youre thinking about cash.
800 gig revenue contribution by the end of the year.
Okay.
Well by the <unk>.
For 2020.
Net of 20% to 25% of our product revenue will come from the IL 6 product so.
Shifting we recognized our first revenue in Q2, as we've been saying that we will begin the ramp in the back half of the share and represent 20% to 25% of product revenue next year for the full year.
And as Alex asked earlier.
Is that.
On average, 20% to 25% of every quarter no. It will be up for the total year, which means probably of gradually growing from Q1 for Q2. The Q3. The Q4 as you go through deployment revenue recognition cycles across icp's across regions across Csp's.
And on interchange carriers.
Does that answer your question.
It does but I have a quick clarification.
So could you.
Yes.
This has been asked earlier, but.
Could you maybe give us some color on what percentage do you think.
The 800 gig revenue contribution could finish the year.
Ed.
This this year.
Okay.
In fact, even the next year could also be helpful.
Yes, So let me try this again next year by the end of the year, we expect as we mentioned in our May 19th Analyst day and today for the full year 2022.
<unk> 800 gig product would be 20% to 25% of our product revenue.
For the year on average total year.
I'm, sorry, maybe I didn't clarify it enough, but I mean in Q4 of the like maybe the ending up the type of center just wanted to just volume.
Yes, yes.
Yes, we.
Haven't provided that level of granularity yet.
So again as we get closer to that we'll try to give you more of the ramp we think that it should give you a good indication of 20% to 25% will be.
It will be of pretty good ramp going from Q1 through Q4, it will be a positive slope.
Can't tell you what that is just yet sorry about depending on holidays.
A quick follow up if I can on visibility so you talked about increased visibility.
Is that mostly towards the through the end of the sea.
We do have some larger customers the kind of giving you some confidence on the equipments even to say maybe even next year.
Yes, yes, so when we're laying out that strategy of API for by 1 of these architectural changes so in the core of the network and subsea networks Youre dealing with these people that are going with the fifth generation <unk> 800 gig technology.
Which obviously takes multi quarters to go plan.
When Youre re dimensioning the metro to 400 gig again, those are multi quarter plans when youre doing.
Huawei replacement deals those are multi quarter plans. So all the way into next year and we've gone through our supply chain and are placing demand and then as you go to look at the impact of our own 400 gig ZR plus plausible.
As well as the ability for XR point to Multipoint.
These are again multiyear architectural shifts that are going on.
So look it's just it necessity has said for stuff all together in the industry to get a lot tighter in on.
Our planning and I actually think that part of it is healthy so talk about making lemonade from lemons.
In the supply chain situation, that's what we're doing given us the short term impact.
Great. Thank you very much I appreciate on that system.
Okay.
Next question comes from the line of Fahad Nat Gen of MTN partners.
Hi.
Taking my questions.
So I want to understand the component.
For this dynamic of a bit more.
Get the 38.35 billion cumulative revenue hit that you're experiencing.
And on at 20 basis points.
On the gross margin in Q2.
First of all what is the 1 or 2 components.
Yes.
The small portion of the bill of materials is it more than 1 component.
And what are the lead times for the <unk>.
The Q.
Having a hard time getting holdup.
Yes. It is.
A really good question and I don't mean to be tried in the answer because we of daily meetings on this as well as the rest of the industry does but as Nancy said earlier, the best way to the picked it is it's only 2% of our overall components.
That we are having the supply chain issues with but as you know if you go buy a car if theres no tires, you can't drive the car off the lot.
And it's the same in terms of recognizing revenue so 2% of the components is attenuating revenue end of the bookings are coming in in fact coming in ahead of the revenue.
What could be the revenue growth and its attenuating, 2% of parks is attenuating revenue of 400 basis points of growth.
That as Nancy said will be pushed.
As we will determine whether how much of that can fall into Q4, if any or whether it's whether it's going to be in the front half of of 2022, which is our expectation.
So the good news is bookings are coming in well ahead of that.
Not a huge portion of the parts of the lead times on those parts as I said earlier many of them used to be 8 weeks for 12 weeks in of turned into 30 week for 2 weeks in many cases.
If you have something where you get an order for something that has moved.
By a net of 20% to 40 weeks, it's going to move revenue out of 2 to 3 quarters.
And Thats what were dealing with so so far again, it's been $15 million of quarter in actual revenue to our results in Q3 towards the midpoint of the guidance. We provided on what normally based on bookings and demand we would have put in the range. So each quarter of Q1 Q2 Q3, you put.
<unk> added $15 million too.
Got it.
It helps the.
So the 30 million cumulative debt you have missed in.
In the first half most likely everything for review.
For Q4, you probably would have the Q4.
The debt that debt.
Yes.
Everything resumed in Q4, which I do not expect everything to open up all at once because we do this as I mentioned on a daily basis and just to correct. Your prior point.
If you look at Q2 Q2 results.
For the midpoint of guidance it was less than a percent.
Impact versus again, a $15 million number of so youre talking about maybe $5 million versus 15 that we would have expected to be in Q2. If you look at the midpoint of our guidance, we're providing for Q3 again that would have been up by $15 million.
Without the spillover effect coming in.
Makes sense.
No no not at the mine.
The question.
Are you are you.
And the increased cost.
Obviously, the revenue impact but.
The other cost going up for your components across the board even those that you can easily get access to.
Are you paying more for them and if you are on of those components out who is the.
The lead time is extended to 30 weeks.
Wouldn't it be fair to assume that your gross margin in the when you recognize that revenue shipping debt.
From an <unk>.
<unk> network.
Can you sort of experiencing that headwind. So I'm just trying to understand like how how long.
Gross margin impact.
The flow through into your outlook.
Even in 2020, assuming things begin to normalize by the second half of this year, but im assuming youre still.
Picking on orders that were coming in 30 minutes late in the York now shipping in first half of next year for example.
Yes, very good question.
So if you think about Q2 within the 37, 7% of gross margin that we reported we had about 100 basis points of impact from the weather at the expedite fees or increased cost on component freight and all of the all of the actions that are on supply chain.
Team is really literally driving funding for hours a day I look at Q Q3, we estimate it to be about 100 of 150 basis point as we start to see the.
The shortages of abate I would expect that to go back to what would be more normal range, but again as Keith said, just kind of on Q4, but that's the level of impact of the athene in Q2 of them.
And ex Tac in Q3.
Alright, and last question do you intend to pass on increased cost of your customers.
You don't have the demand side problem.
Sure.
Are you planning to Jackup price of compensate for the higher credit charges et cetera.
And I look at this point again.
Our strategy with our clients is to provide value for what we do.
And on an earnings call, we're probably not going to talk about our pricing strategy competitively, but I understand your point.
We remember suppliers, who treat us.
The right way in these environments and the ones the treatise the wrong way and then we engineer our designs in the future remembering that partnership is a long term thing.
I appreciate the ice for them.
Next question comes from the line of Sandy chatter of J P. Morgan.
Hi, good afternoon, Thanks for taking my question.
I just wanted to start with.
The question on inventory levels, if I'm not wrong.
That was the statement.
Modestly quarter over quarter, but.
Any.
Talks around how comfortable you on with those inventory levels are as we will now think about the supply demand situation would you rather increase from these levels of sort of ex street.
Inventory you have and does that mean.
By components of higher prices that may be increased on all of the headwinds for next year on margins.
And of its a really good.
No. It's a really good question, while we provision than we've put out.
Lots of additional demand both because our demand itself was increase whether it's at the 60% line system increase or the demand we're seeing for 6 to 800 gig or our metro products or the Huawei insertion.
Look any inventory that comes in the.
On the operations team would turnaround the net.
Assembled to be able to ship out to meet customer demand Asap. So.
So we think that'll turn relatively quickly and again, given we have better demand us to your point of course as I said, yes, and Nancy said it was 100 basis points, we didn't expect.
In Q2.
On 2% of the parts that we have so again.
We as we went into Q3, we see that now and we've identified that to 100.100 to 150 basis points. Our goal is going to be the continue to secure supply to meet our customer commitments out in the marketplace and as we get closer to Q4, if there's any impact.
Like we have been I think we've been letting you know both the cumulative impact and the incremental impact on revenue on margins pretty transparently on a quarter by quarter basis as best as we can see it.
Got it.
Just following up on the bookings can you give me some color on how it's.
On the geographic basis, if you kind of split it by customer and the geography, because the reason I ask because when I look at the quarterly revenue of at least it looks like most of the growth that you had you really came from the unite you with all of the medical services.
In the back where you're doing more kind of flat or down year over year.
So just curious how of that book is that showing up consistent with the bookings or is it a different picture on the bookings.
Yes.
I think there is a different type of a bit of a different picture in the bookings other Americas are up in.
In bookings year over year quarter over quarter for both subsea and Metro as he mentioned Asia Pacific is really about timing and so we expect both the bookings and the revenue.
To be able to hop up in the U S. The bookings we've gotten have been good about life line systems and wallet share of the existing tier ones, where we just haven't had a ton of wallet share of customer concentration. It's 1 of our goals that we outlined in our may 19th analyst day.
Again EMEA.
Again, while revenue was down the bookings were up quite solidly on a quarter over quarter and year over year basis as well.
Again.
By segments.
We saw the tier 1 ICP is up quarter over quarter and year over year on both revenue and bookings.
In the tier ones again, we're very much in line other system.
The service providers, a lot of inter exchange carriers connecting.
A lot of other carriers are up quarter over quarter.
Yeah.
Some of line system bookings on a 6 bookings as we look at it.
Got it great. Thank you.
On the.
Next question is from George Notter of Jeff.
Jeffrey.
Hey, George Hi, guys. Thanks, a lot for squeezing me in here.
I hate to belabor this with you, but I guess I had another question on bookings.
If we go through earnings season, I think it's pretty clear that the companies are benefiting from customers placing orders.
The data purchase orders given the supply chain concerns that are out there.
What I'm trying to do with you guys as kind of parse your commentary.
You said meaningfully better book to Bill.
Double digit orders is there any way to parse that for.
The sort of organic demand, if you will versus customers simply placing orders with you earlier than they have in the past.
Yes, I guess, what I would tell you is things like line systems, we typically don't.
Net orders for well in advance.
<unk> people are planning to lay out the line systems with the budgets they have.
And so the way we look at it is we know that our customer base at the beginning of the year George had a particular capex that they were looking for and budgets that they've communicated to our sales teams and we're trending meaningfully above our plans.
For Q1, and Q2 of meeting our results are meaningfully above and that continues in Q3.
And so far our forecast say that.
For the year, they will be meaningfully above what they expected to be within their budgets for Q the full year.
So I don't have a pay this.
Many points of the double digit is people, bringing things forward versus.
Versus normal demand what I do know is within the budget envelope of the year, we're trending in bookings higher than we expected to be when we started the year and I think another example of there. It's just the fact that.
As I characterize the revenue of $45 million to $50 million from Q1 to Q3.
Those are orders placed that we would have shipped and recognized revenue for those were orders that were won by our customers in that time period. So the.
I think you just need to make sure that you keep that in perspective in terms of the higher bookings numbers going out into the future as well got.
George we arent, saying, if we have inherent strength.
We aren't seeing people with a horse race on things, we don't see many people where we believe they are placing 2 orders to see who comes in with.
With the order first it's tougher as you know in optical systems.
For that to be for people to on on board that technology and to insert that technology.
Got it so said differently I guess, what you are telling us is that the weighted average delivery dates in your bookings isn't changing significantly.
Is that does that is that accurate.
Weighted average I think the lever on the lead times I think of gone up in the industry and our customers are giving us more.
More lead time, which would say our first half finished heavier in terms of bookings. So I then looked at the year forecast, which we have been pretty good at when I look back over the last 2 years from a bookings basis.
Say, if I see a dip in the second half of the year given budgets are finite.
Do I believe that I, just pulled like last year, we saw a little bit of this in bookings with the first half being heavy heavier than the second half. The good news for US is for the total year, we still think see things tracking above.
That rate.
Got it okay very good. Thank you guys very much I appreciate it.
Thanks George.
Next question comes from the line of Jim Suva of CPE.
Thank you for.
Question for my first question is I noticed you increased the guidance range for revenues, which makes sense given the uncertainty, but we are already like well past 1 month into the quarter. So theres less than 60 days left by the shortages of the 2% of cards. Just so unclear you don't even know for sure.
Sure if youre going to get the right parts of them in the next 50 days.
So we know where the where the shortages are as we've mentioned.
Instead of 2% of the parts what happens Jim.
In this world is that some somebody's commitment date, that's 30 days out that we expect 30 days out may not ship at that time.
And that's not a unique to infinera dynamic youll find that thats happening across the industry, where supply is just not as dependable in terms of timing and so that's why we're on it every day of $24.7 and that can happen in the last week of the quarter that can happen in the last day of the quarter that can happen. The first day of the quarter and so were just be.
Mindful that a wider range, but then execution and the achievement.
To execute in the above our midpoint of guidance on the bottom line and gross margin as well as continuing to collect those bookings really really important to executing that $8 for by 1 strategy on 8% to 12% growth.
Okay. Then my follow up and this is a bit of more not for 1 quarter of a multi quarter do you feel the infinera is in line with your peers for placing all of your component quarters into the supply chain or a little bit ahead, or a little bit below because.
The reason why I ask is I know for 1 quarter, it's not a horse race as you'd mentioned and people can't double order and switch between the 2 easily.
Multi quarters, they kind of can so thats kind of what I'm wondering about how you feel your position with the supply chain.
Relative to your competitors.
That's the good question don't forget the people are making decisions based on that 8 by for by 1 strategy based on Who's got the technology.
So I guess the good news is there are less participants in the field with qualifying technology that delivers the price of performance.
How are the handful of competitors are leveraging the supply chain and their balance sheet I can't be certain.
What I can tell you is we've placed orders out through.
2022, and are looking at our capacities and working this on a daily basis.
Great. Thank you share with details of the clarification on such difficult times. Thank you.
No no worries thank you.
Next question is from GAAP, Jeff.
Of <unk> research.
Well. Thank you all very much my question is I guess.
The things get significantly worse in the supply over the course of the quarter because.
The mood.
The thought that the midpoint of guidance would have been your target zone, there and it came up a little shy of that for this quarter. So just if you could talk us through that that would be super.
And then on a go forward.
Yes, I think the.
The supply challenges as I said have been.
The continued to the intense.
We are driving that execution every single day, our supply chain team to close in on on.
The increases we can get on making sure that we're providing.
Outlook for our vendors as part of it as possible as far as of Q2.
<unk> come in and they still within the range, but the lot of the guide on wheat.
Talked about certain.
On certain lines of systems that are shifting into Q3. We also are really focused on execution right. Now internally you saw margins come in above the range of 37.7 out of.
We generated operating margin as well above the range, we're trying to manage the tightly.
I am constantly as we can and the.
The great news, though is that the <unk>.
<unk> continues to be really robust double digit growth in bookings and that continues even as I sit here today.
Yes.
Zero for centuries.
Awesome.
Guidance for the led the way.
Okay.
If I can add just 1 thing I mean, I guess the way I'd look at it is again that the.
The $45 million to $50 million total that Nancy mentioned of <unk> Q1, Q2, Q3 and in the results look our view is absolutely we should of been able to do an additional $15 million in quarter plus for us that opportunity to pull in from the <unk> 50, we're just very realistic and weed.
Look at those we know what the lead times are and we know what's available and what's not available which is why the wider range. So I think it has intensified in Q2 and Q3 by math when 10 weeks of comes to 40 or 10 goes to 50.
We expect Q3 to be the cash.
On the bottom, but we're cognizant that we're living in the very dynamic world right. Now so we do expect it to get better, but we will keep you guys with these numbers of what's incremental and what's the cumulative and we do expect this to rollover into next year on to Georges earlier question. We are mindful that some portion.
Of our bookings are people free ordering for Q3 and Q4, because they try to keep within the year, but overall for the year. We feel good that our bookings are well ahead of the industry growth rates well ahead of the industry growth rate.
Okay.
My follow up which is should we be thinking for next year about.
12% growth rate.
Plus the 45 of 50 million debt is pushed out from 2021 or inclusive of.
The $47 million.
It should be inclusive, but it's giving us a lot more confidence on that 8% to 12%.
It's a little early but as you think about the roll off of that $45 million.
Do I expect that into 2022, yes, we do but as we get closer to giving our results.
In Q3 and for Q4, we'll try to give you a bit more color based on what we see from the supply chain. It does give us great much more confidence.
Thank you.
Let's take the operator, let's take 1 last question yes.
Yes, it's from meta Marshall of Morgan Stanley.
Hey, Matt.
Hi, This is Jay for cargo for meta Marshall. Thanks for the question on My first question was are you seeing any sort of pause wireless customers wireless carrier customers focused on the advance spectrum implementations.
1 other.
No.
Now to your first question.
Thanks.
On the.
Sorry for the second question.
What's your 10% of customer average slipped below 10% during the quarter would you expect to have a 10% customer.
The second half.
Potentially but I think we don't usually predict that.
I have to see how the year plays out I think for the first half of the year, we had 110% customer when you look at the first 6 months of the year.
But we do need we are I mean, we're planning the seeds with line systems and new wins and that's what open optical is about it's about grabbing more wallet share and actually having some of our customer concentration, which I've never asked for it.
In running the company.
Okay.
Okay.
Thank you, David we'll hand, it back to you for any of us when it comes.
Yes, no I appreciate it look.
We are entering a robust ethical cycle.
That I think we haven't seen for for many many years.
Our strategy and business model are clear.
Bye for by 1 and we have the business model that were committed to achieving and feel more comfortable based on the results for the first half of the year and even in Q2 of our product portfolio and results give us that comp.
That confidence as we as we fight for the short term battles our global team is locked in on the execution to deal with these temporal issues.
From a supply chain as well as again the impacts of different variance of Covid and they do they just humbled me every day my team members around the world that are working together through unbelievable challenges in today's environment. So I. Thank you for your patience and your questions and your ongoing confidence of <unk>.
Support and so it would be well and be safe.
Okay. Thank you Alfred.
There are no further questions at this time I would now like to turn the call back to David.
Please go ahead Sir.
This.
<unk> concludes today's conference call. Thank you for your participating you may now disconnect.
Okay.
Yes.
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