Q3 2021 Infinera Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to Infinera third quarter of fiscal year 2021 earnings call. All life's been placed on mute spent any background noise. After the speaker's remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again press Star one.
He tapped puppy he may be getting your conference.
Thank you Josh.
Everyone Welcome Simpson or third quarter High School 2021 conference call.
Hope you have today.
Available on the Investor Relations section of the website.
Additionally, this call is being recorded and it will be available for replay from our website.
Today's call will include projections and estimates that constitute forward looking statements.
Clearly, but not limited to stay.
Statements about our business plan, including a product roadmap sales growth market opportunities manufacturing operations products technology strategy statements regarding the impact of industrywide supply chain challenges in COVID-19 on a business plans and results of operation as well as statements regarding future financial performance.
Including a financial out the for the fourth quarter of fiscal year 2021.
These statements are subject to risks and uncertainties that could cause infinera results to differ materially from management current expectations.
Actual results may differ materially as a result of various risk factors, including those set forth in an annual report on Form 10-K for the year ended on December 26th 2020 as filed with the SEC on March 3rd 2021, and a quarterly report on 12 10-Q for the quarter ended on June 26 2021.
As filed with the SEC on August 3rd 2021, as well as subsequent reports filed with a furnished to the SEC from time to time.
Please be reminded that all statements are made as of today and Infinera undertakes no obligation to update our revised any forward looking statements to reflect events or circumstances that may arise. After the date of this call.
Today's conference call include certain non-GAAP financial measures.
Pursuant to regulation G, which provided a reconciliation of these non-GAAP financial measures to the modem directly comparable GAAP financial nature, and an earnings release, an investment slides for this quarter.
Which is available on the Investor Relations section of a web site.
And finally as a reminder, we will offer plenty of time for Kunai. Today. So we ask that you limit yourselves to one question and one follow up please with that I'd like to turn the call over to our Chief Executive Officer, David heard Thanks have a.
Good afternoon, and thanks for joining us today I will begin with a review of the third quarter results and then turn the call over to Nancy to cover the details of our Q3 performance and the outlook for the fourth quarter Q3 marked another quarter of strong performance with non-GAAP revenue above the midpoint of our outlook range and both non-GAAP gross margin that operating margin exceeding the.
Hi end of the outlook range revenue grew approximately 5% year over year.
Margins in Q3 benefited from the revenue ramp up by six higher services revenue and a shift in the timing of deployment of Lions systems due to supply constraints. These benefits were offset by approximately 200 basis points of extraordinary costs associated with the current supply chain environment on which I will elaborate shortly.
Bookings momentum reflective of market demand remained healthy and quarter with total bookings up double digit year over year and well ahead of the growth rate of the optical WGM systems market. We ended the quarter with the book to Bill ratio well above one.
And record backlog once again compared to the same quarter last year, our product backlog has grown over 50% are.
A record backlog provides greater revenue visibility in position to as well to deliver improved growth and profitability. In 2022, we delivered these results against a tough macroeconomic backdrop navigating both a global pandemic and challenging supply chain environment. So.
So far in 2021, we estimate that the supply chain dynamics of constrained our revenue growth by 400 to 500 basis points gross margin by 50, 150 to 200 basis points and operating margins by 300 to 350 basis points. These dynamics have reinforced the importance of our focus on.
Vertical integration and the associated control of our supply chain.
Our annual business plan is progressing well when measured against the goals, we laid out at the beginning of the year and towards our longer term target model for the full year of 2021, we remain on track to drive revenue growth above the market expand gross margins by 300 to 400 basis points and be profitable on a non-GAAP operating basis.
Further more.
<unk> the demand drivers fueling our business continued to be robust, including the unabated growth of traffic at 30% plus per year. The massive rollout of five G. In mobile edge compute the acceleration of architectures embracing open optical networks, along with competitive displacements, especially against squad way.
In international markets are eight by four by one strategy that we launched at our Investor day, combined with our software and service offerings physicians as well to drive growth and expand market share. As we have previously stated are eight by four by one strategy is focused and founded on three key network transition.
V a reflective of core networks moving to 800 gig.
Services and beyond the four reflective of Metro networks, expanding the 400 gig and the one reflective of coherent optics moving out to the edge of the network with the rollout of five G and mobile edge compute.
To seize the eight by four by one market opportunities. We recently organized our company into two business groups, one focused on optical systems. The other on coherent optical modules. In addition, we enhanced our leadership team by bringing an experienced industry veterans, Tom Burns, who previously led del net gel.
<unk> technologies networking and solutions business was appointed as the general manager of the coherent optical modules group, while Ron Johnson, who served as the head of product management of Cisco's optical transport business unit.
Was appointed as the general manager of the optical systems Group. In addition in addition to Tom and Ron. We also brought on as Mina Sumani, formerly at La Mentum to head engineering for the coherent optical modules group and to drive the high volume production of Pluggables and Russ X marker formally at Nokia as head of strategy and core.
Development to drive our corporate growth agenda. This group of leaders possesses the experience and talent to execute our growth strategy now.
Now, let's turn to additional details from the quarter from a regional and customer segment perspective year over year revenue growth was strong across the board and EMEA, APAC and our ICP and cable customers global tier ones, though down on a year over year basis due to timing of certain projects and pull in of demand into the first.
Half of 2021 were largely stable quarter over quarter, we had a record revenue quarter with icp's driven from new applications footprint expansions and the onboarding of new customers from our bookings perspective, we delivered year over year growth in the Americas and EMEA, while APAC typically a smaller.
Region for US declined primarily due to the timing of certain projects, we had a record bookings quarter with our icp's spanning metro subsea and long haul applications and covering multiple generations of our products across the region's we benefited from our new ice six wins strengthened subsea.
Metro Rollouts and new competitive wins, we're seeing a growing pipeline of Huawei displacement opportunities, especially in EMEA in APAC and have started converting some of these to wins on a product basis revenue in bookings growth were robust across the open optical portfolio the gx compact modular.
Platform grew double digits year over year and continued to be broadly deployed across all applications Metro long haul and subsea after a very strong first half and bookings for our X T. M Metro platform. It continued to grow year over year as we had another good quarter with the Gx 600.
Product and added new customers, while scaling existing ones on the ice six front revenue is ramping our product pipeline and backlog are growing and we have now secured orders from 25 customers. We've recently announced customer wins with Ti Sparkle, <unk>, Saudi Telcom and Telstra and <unk>.
Tiered additional wins with several unannounced customers, we're deploying ice six globally with tyr ones Icp's and the enterprise customers across both terrestrial and subsea networks.
A recent wins and shipments reinforce our belief that ice six remains on track to represent 20% to 25% of our product revenue in 2022 line system bookings, which are a leading indicator of future high margin transponder sales remained healthy in quarter and we were up again.
On a year over year basis, while these lines systems carry lower margins in the short term they are critical to expanding our customer footprint and are a good predictor of the adoption of ice six technology on the revenue side line systems came in slightly below our expectations as some of our deployments pushed out into Q4.
This provided a benefit to our gross margins in the quarter by approximately 200 basis points, which was largely offset by higher supply chain costs.
Finally, the industry is increasing its adoption of coherent pluggables and we believe we are in a unique position to leverage our technical leadership and core competencies to deliver industry, leading point to point and point to multi point pluggables by leveraging our in house DSP design capabilities use based semiconductor fab integrate.
<unk> and packaging facilities, we are positioned to have greater control over our supply chain alleviating security and supply concerns while delivering best in class Pluggable solutions.
Interest in our XR up optics offering continues to accelerate enrollment in the open XR Forum is increasing we now have seven leading global service providers as members of the forum as well as interest from network equipment manufacturers globally trials and proof of concept activities are advancing proving.
The technology and business case, and setting us up well for revenue and margin accretion beginning in 2022 2023, we remain excited about the prospects of creating a billion dollars plus addressable market with point to point and point to multipoint capabilities of XR optics as well as the impact.
Has to our longer term business model as we close out 2021, we remained laser focused on delivering against the financial projections, we shared at the beginning of the year, we've refresh our portfolio laid the groundwork for our vertically integrated pluggables are ramping ice six and securing important global customer.
Wins looking ahead to Q4, we see another quarter of continued momentum and our business with healthy demand trends, while the industry wide supply chain challenges are likely to remain with us for a few more quarters, our queue for outlook reaffirms our prior expectations for 2021 to grow revenue above the market and.
Expand profitability Nancy will provide additional details on our queue for outlook inner commentary in conclusion.
I'd like to reiterate how excited I am about the market opportunities ahead of us the team we've assembled along with our technology innovations in recent operating results gives us confidence that we are on the right track to deliver the target business model, which reflects our expectations of 8% to 12% revenue growth gross margin in the mid forties.
And double digit operating margins in 2023.
I'd like to thank our employees customers and partners for their resilience and support during a year that continued to pose formidable challenges in their personal and professional lives. These are certainly unprecedented times I will now turn the call over to Nancy to provide the additional financial details of the quarter, our fourth quarter outlook.
And the progress towards our target business model Nancy.
David Good afternoon, everyone I will begin by covering R. Q3 result, and then provide our outlet for Q4.
<unk> comments reflect our non-GAAP results for your reference we have posted sides with financial details, including our gap to non-GAAP reconciliation to our Investor Relations website to assist with my commentary.
Overall I am pleased with our performance in the third quarter of 2021 once again, the company performed well, while ramping new products and learning new customers and a tough business environment.
As David covered bookings were robust in the quarter.
Double digit year over year, continuing the strength, we saw in the first half of 2021, our primary challenge at least over the next couple of quarters will be navigating the industrywide supply shortages as we successfully did in Q3.
While staying on course to execute against our eight by four by one strategy and delivering on our target business model.
He is there any revenue was $357 million above the midpoint of our outlook range and up approximately 5% year over year.
Relative to our expectations coming into the corner, we estimate our revenue with constrained by approximately $20 million from the impact of supply chain shortages.
Three Q3 21, we believe the cumulative impacts our revenue from supply chain shortages has been at least $50 million constraining our revenue growth in 2021 by 400 to 500 basis points, while contributing to a record backlog.
Q3 gross margin of 38% was above the high end of our outlook range of 34% to 37% realm.
Relative to the midpoint of our outlook gross margin came in higher than the quarter, primarily due to the ramp up by sex.
The delay and deployment of certain lines systems from Q3, and Q4 and the benefit of increased services revenue par.
Partially offsetting these positive factors.
With the 200 basis points us supply chain related costs that we absorbed 50 to 100 basis points higher than our expectations coming into the quarter.
On a year over year basis gross margin extended by 280 basis points in Q3.
Operating profit in the quarter with eight $6 million, claiming to an operating margin of 2.4%, which was also above the high end of our outlook on a year over year basis operating margin was up 20 basis points with the higher gross margin in the quarter, largely offset by higher investments and art.
Handy and sales to drive growth to capitalize on market opportunities ahead of us.
The resulting EPS in Q3 was the loss of one per share.
Moving on to balance sheet and cash flow items, we ended the quarter with $216 million in cash and restricted cash during the quarter, we use $13 million of cash from operations as we increased inventory by approximately $15 million.
After capex and working capital investments free cash flow in the quarter was a negative $20 million and we ended the quarter with a zero balance on our credit facility.
Looking ahead to the fourth quarter of 2021, we are encouraged by the continuation of healthy demand and our record backlog to exiting Q3 at the same time, we are mindful of the ongoing industrywide supply challenges and expect supply related pressures to continue in their intensity in queue for.
Four Q4, therefore casting revenue to be in the range of $370 million to $400 million.
Representing approximately 9% growth on a year over year basis at the midpoint of the range.
Embedded in our revenue outlook is approximately $20 million, that's projected supply related impact comparable to the level, we experienced in Q3.
Customer demand remains strong and we are secure in key wins with our open optical portfolio setting us up well for 2022 and beyond.
We are forecasting gross margin to be in the range of 37% plus or minus 150 basis place the.
The primary drivers influencing our gross margin include and approximately 200 basis points hadn't been from the pushed out of low margin line system deployment from Q3 to queue for.
That continued impact of elevated supply chain related costs of around 200 basis points comparable to the level in Q3.
Actually offset by a greater contribution from higher margin ice six revenue.
Despite these near term pressures, we remain on track to extend gross margin by 300 to 400 basis points and physical 21 over the previous year.
We are planning for queue for operating expenses to be in the range of $129 million to $133 million as we planned for higher sales commissions on the back of record breaking put things here.
And invest in R&D to align with our four by one strategy.
Within R&D, our focus remains on high performance coherent optical engine.
Open optical platforms vertical integration and Pluggables.
We expect queue for operating margin to be 3% plus or minus 200 basis points.
During the quarter, we expect to utilize cash from operations to provision for inventory.
And working capital to support the rollout of our new products.
Below the operating income line, we assume about $5 million for net interest expense and another $5 million for taxes.
Finally, we are anticipating a basic share count of 212 million shares in queue for in the event that we are profitable on a non-GAAP basis in the quarter diluted share counts should be approximately 222 million shares.
As we have previously stated based on our year to date performance and our outlook for Q4, we remain confident and delivering our previously shared expectations.
For 2021, we continue to plan to grow our revenues slightly ahead of the projected market growth to expand gross margin by approximately 300 to 400 basis points compared to FY 20 and to be profitable on a non-GAAP operating income level for the full year.
We have made much progress putting in place the right team product portfolio and supporting processes to be able to deliver on our eight by four by one strategy and long term business model.
Despite the difficulties of navigating a global pandemic and to constrain supply chain.
I remain encouraged by the team's resilience and execution were to date. It has a great time to be a vertically integrated optical company.
Our progress in 2021 positions as well for increased growth in 2022 and should keep us on the path to achieving our target business model in 2023, I would like to Echo David's depreciation for our employees customers partners and shareholders for their continued support Josh I would like to know what's in the lineup for question.
At this time I would like to remind everyone. If you would like to ask a question. Please press Star then the number one on your telephone keypad and your first question comes from Rod Hull with Goldman Sachs. Your line is open.
Alright this is <unk>.
Hi, this is logging on behalf of fraud. Thanks for taking my question in my job onto the Salt. So I wanted to check how much 800 gig with Avenue did you seen the quarter and this and your common to eat sounds like ice <unk> faster than your expectations. So could you confirm if that's the case and talk about what's driving that.
No. Thanks I appreciate I appreciate the question so while we're not breaking particularly out the the ice six revenue, let's say, it's high single digit in terms of our product revenues going forward and that combined with the bookings give us great confidence for our.
Three discussed target next year of 20% to 25% of our product revenues being that 800 gig ice six revenue.
Okay, Let me get it and does that is that the little bit the head off your expectations for Q3.
Yeah, I think we're feeling good again, I think it's helping us build confidence not both on the shipment side on the revenue side as well as on the booking side of what we're seeing from an order intake.
Okay, and lastly, I wanted to check these supply constraints continue what is the risk that you're 22 revenue targets medium doctor. Thank you.
Well, we're kind of going quarter to quarter right now and as you have seen I think we've started out early in the year really quantifying.
Ed both the revenue line the gross margin line, what we thought those risks would be in Q1, and Q2 and Q3 and we're fighting away to deliver those.
We've imputed $20 million as Nancy said of that risk into.
Into Q4, so far this year, it's been 400 to 500 basis points that it's really at 10, you waited the the growth as well as 200 basis points of of gross margin and 300 to 350, it's probably too early to call the ball for next year.
So.
Will will continue to give you as much clarity as we have on a quarter by quarter basis.
Okay.
Your next question comes from the line of Alex Henderson with Needham and company. Your line is open.
Okay.
Hello, I just want to go back to the last comment about the 5% per second just to put that in context with the combo of 20 million so 5% of.
2020 revenues, so headwind would be around $68 million.
And you're saying, it's a headwind in the most recent quarter of $20 million. So are you then cumulatively be adding the headwinds need should the prior quarters <unk> added.
You got it it's things that we would have shipped for the full year. When we look at it on a full year basis.
So where does that business laws tours that going into back well no. That's that's part of we keep saying record backlog at and I know we're.
There's others in the industry growing record backlog, but we are seeing that backlog continue to grow based on real deployments in real plans that continue to be plan for rollout.
Within the constraints that you're experiencing is there any differential between the vertically integrated products that you were developing per se I six persons the supply constraints on what are more open source.
Products or broadly source products.
Yeah, we certainly see more of an impact.
In the merchants market for packet.
Four things chipsets that come to move slim packets around on the network and I think you're seeing that in the industry, certainly less where we have our own fab our own packaging capability or on semiconductor.
Indium phosphide fab so.
It is more more profound on the merchant field of things that are.
Are kind of in the bent metal the power sources the processors the.
That pull in our vertical integration.
So does that imply them as you move more and more of your palm at two O six which is more vertically integrated that the risks to your supply chain diminished.
Yeah, I wouldn't say diminished I think you'd becomes less because you are still putting things into at some point in time, a compaq modular chassis that has microprocessors.
Fans other things that we're seeing.
In shortage on the supply chain market.
Right, Okay, great. So.
If I could just to make sure that I understand the mechanics of what you are saying here in as we go into twenty-two you've talked about the growth rate in 23, but you haven't really address the growth rate in 22 and in your comments in microeconomics.
What you are absolutely correct in that so I think what we're going to continue to do is get our hands around the current supply chain environment of where we're at we've said that.
In our analysts day that we expected over the years to grow with that 8% to 12%.
As we get into 22 and 23, but we'll further quantify that as we report our queue for results and lay out what we see for the year book based on both backlog and the development of the supply chain environment.
Got it okay. Thank <unk> thank God.
Yeah next question comes from the line of Michael Genovese with West Park Capital. Please go ahead.
Okay. Thanks, Yeah.
Yeah, I could tell them I wanted to start with a question about our pets, you've given us the 131 number for the fourth quarter.
Should we when we think about next year and the average.
Opex per quarter.
Can we think about it being above that number I guess my question was is there any.
Cost cutting are pulling back on investment since you you know.
Invested in ice six or should we think of Opex sort.
Sort of scaling uhm.
Not with revenue but.
Moving in that same direction with revenue.
Yeah we're.
We are absolutely going to be continuing our investments and our key technologies right I mean that is.
Part of our strategy that we're going to be driving forward into 22.
Well, obviously give you more color on 22 is David said with our queue for results, but if you think about the compare 20 to 21, and then where we're going in 22 right.
We are in 21 able to.
Return to bonus merit salary increases this year and we're planning for that and have friends for that during this year against a compare and 20, where we had pulled that back right in the Covid environment. As we look forward you can expect us to continue to focus the R&D investments.
As we have an 21 will give you a little bit more color, but our expectation would be.
As Opex does increase year to year. It was not increase at the same rate as the revenue growth that we've ever done.
Okay, Great and I wanted to ask about the ICP vertical good results, there and an interesting commentary.
So I guess is that mostly all and North America or is that is that spread out and then you know you talked more.
You talked about that things over multiple generations of technology Uhm. So can you talk can you just give us more color on on what's going on.
Yeah, Great I think when you look at the largest web scale is out there were now covering virtually all of those web scale is in some way shape or form.
And we're covering with them both in the U S, but but Mike as well as internationally. When we look at some of their deployments, where there either carrying traffic or having others carry traffic on their behalf and they're part of the decision.
It's going there for subsea routes and long haul routes.
We are hitting both 600 gig, we're hitting traditional 200 gig technologies as well as 800 gig technologies that are going quite well with the icp's. So it is across the portfolio using the compact modular platform.
Very very strong revenues very very strong order intake and again, what gives us more confidence in the support of the new products being 20% to 25%.
For a six of the product revenue next year.
Great. Thanks very much.
Okay.
Your next question comes from the line of Simon Leopold with Raymond James Your line is open.
Thanks for taking the question I think maybe I want to follow up on this this ICP topics specifically.
I appreciate the vertical disclosure so thanks for that.
C. A jump this quarter to 20% and I imagine some of that might be revenue wreck.
On products, you shipped and some new product adoption coming off of kind of that low mid teens trend that you saw prior year in the first half of 2021, So I guess, what I'm trying to get a better understanding of is what's the normalised level and the outlook as we think about the setup in 2022 and.
Part of what I'm struggling with is we've got one particular hyperscaler, that's growing it's capital spending budget by 60%.
And it's just trying to figure out where all that money goes and so anybody that's growing in fact range.
Yeah, everybody to describe it that way we want a piece of that we want a piece of that pie. So [laughter].
I think the good news is we have more exposure if I look back two years ago to how many of these web scalar as we were relevant with at the time with the offering way more relevant now so we've got exposure to more of those web scaler and in particular the ones that are increasing their capex. The most I think we're well positioned.
With the new technology up in terms of a steady state in terms of what's the mix is going to be between ICP use and csp's.
To predict I will tell you we see a nice strong growth here in 2023 with the Icp's based on our refresh portfolio.
And just to clarify this quarter was this anomalous or is this sort of the the new run right level.
Well again.
Because of how they are Onboarding technologies. This was the fact that they continue to again the world continues to buy 200 400 600.
And fifth generation 800 gig technologies to service to market.
I think we saw both an uptick in revenue and and orders that we will see how it normalizes I think you guys often write up how lumpy. They are we know how lumpy they are but the trend line over a four quarter period next year I would expect to be overall up for us to be growing faster than than the market.
Than the market average and then all right. Thank you.
I appreciate it thanks for taking my question.
Thank you.
Your next question comes from the line of metal Marshalls with Morgan Stanley. Please go ahead.
Great. Thanks, I wanted to dive into your commentary around the hallway displacements a little bit.
And just kind of get a sense of where the differentiation is there you know is [noise].
Just trying to get a sense of are they adopting open mind systems and Mcsame transponders online systems, just trying to get a sense of where you're finding the most success and if it really is maxine transponders and it was that accelerating and some other timelines of displacement. Thanks.
No. Thank you. It's good question you know you should think about the Huawei replacement as.
50% plus of that market is in the metro as people tried to remove that.
Close to the customer as that is and so a big piece of that it takes a long period of time to go do no doubt open lines systems and a shift to 400 gig is helping people accelerate because it's kind of two dynamics at once once they want to get rid of Huawei too they want to re dimension their networks for 400 gig in the metro and so that is hell.
Full to us that that that trend is there and the trend to open makes it easier for them to do certainly on.
Long haul routes and subsea routes with open lines systems. It does make it easier. We're just seeing a lot more opportunity in the pipeline than we've seen it continues to accelerate and we are seeing people will begin to award that business and that business be planned out for deployment in 2022.
And that's pretty consistent with I think what we said at the beginning of the year, which is we didn't want to get too ahead of our skis, we were seeing it in the pipeline, we expected wins towards the back half of the year and here we are.
Beginning to see those wins and we have that baked as we said in our may analysts stay into our growth pattern for 2022.
Was that helpful mattered or was there something yeah now that that's helpful. I appreciate that thanks.
Your next question comes from the line of George <unk> with Jeffries. Please go ahead.
Hi, guys. Thanks, very much I guess I wanted to clarify I think you guys had earlier on the call.
Hi single digits in terms of ice six was that as a percentage of product sales was that for Q3 or is that prospective you know exiting the year, what exactly was that number.
Yeah, Sorry, let me, let me give you a little color around that so tight.
High single digit for Q3 product revenue.
And that will grow in our queue for guidance, we've got to add imputed to.
To continue to grow.
And as many have asked if you're going to have 20% to 25% of your product revenues that exit right will grow well ahead of single digit into the double digits in queue for and.
And will continue to accelerate in 2022 for that average of 20% to 25% and our bookings intake in Q3 and so far are.
Forecasts in the queue for are very supportive of that.
Great. Okay, and then just as a follow up on that.
Do you have a mix of vertically integrated product sales. This quarter I think you said last quarter's around 40% of product sales what would that be now and.
I guess I'm, just trying to understand the sort of <unk>.
Okay.
It's about to mid forties.
44 45, yeah.
Okay.
Great and then when you talk to.
You know year and 2022 being at mid Forties gross margins would you know mix of vertically integrated product does that imply out of curiosity.
The mid forties gross margin is for 2023.
Full year, yeah for the full year.
And that is in the 60% range far vertically integrated product.
Got it okay, okay, great to see the progress there thanks guys.
Thanks George.
Your next question comes from the line of Jim Sofa with Citibank. Your line is open.
Thank you so much given the supply chain issues in your company, that's doing more and more hurdle vertical integration can you shift shift your fabs up to be just running more shifts four days to pump out more product and then convince customers Hey, why not.
Get ice six now as opposed to waiting for all the supply chain issues or are you already running 24, seven you simply can't keep up it just seems like if if you crank stuff up you could convince and compel some people to move from ice you know five or four to six faster and they.
We'd be happy with delivery or maybe that's just not how it works.
Yeah.
When you look Jim at the overall supply chain there's.
There's a number of semiconductors shortages that again, it's not just on a transponder that you build but you put it into a compact modular chassis.
Align system and you deploy it out over a network there are metro boxes that require packet processing that go in that are dependent on merchant platforms. The good news for US is the transponders, we build and the products, we build art that piece of it is within our control, but it's kind of like a car is if it's only.
Three tires, you're not going to be able to drive it around so.
We do have less of that than if we were fully merchant, but but it isn't simply that if you had just had a bunch of ice six transponders by themselves that you could run a full network from the Metro edge all the way through the subsea core.
No no I understand thank you so much for the details and clarification.
Thanks, Jim.
Your next question comes from the line of semi chatter sheet with J P. Morgan Your line is open.
Hi, Thanks for taking my question I actually I have two quick ones.
The 400 500 basis points.
On this huge because it's like I'm streets. Just wondering if you think you can recoup some of that is spent on.
Mixed you are given a whole life situations involving the best gives us to start limiting some of the headlines as you get into Q1 Q.
Been delivered cause I need to go ahead I'm just trying to think is there some upside of supply comes back or the best gift you just Delaware.
[noise] belong to model based on just trying to limit headwinds as we get into next year and I'm for look yet.
Good question, where as I mentioned earlier were taken this one quarter at a time on the supply chain and then again trying to provide as much transparency as we can to you. The good news is with that backlog. It does make us more confident in what we had mentioned about the 8% to 12% as we get into two.
2022, but until we see the another couple of months of the supply chain situation will give you again that that detail in in our queue for earnings results as well as the view for the full year for 2022 good news.
Kind of a starting position that is much stronger.
Based on backlog and deferred revenue it certainly again builds our confidence what we've got to do is make sure that as we go through the next couple of quarters of supply chain, we see that abatement and that attenuation of the supply chain circumstances.
And.
Follow up Uhm, I'm going back to ICP acute and I think this is more of similar to what question. Simon had is I think one of the things that we often get asked my investors as we see the strong capex growth numbers from the ICP.
But clearly that's a big boon interesting insight that he doesn't do it outside it as well, but in your experience when you looked at them and the boss like.
It does it hypothetically a 30% increase in Capex strong straight into there's a similar investment in the.
Systems or in the D. C I knew it or is it a different number just because of certain architecture decisions.
Well, there's there's two points, they're one of the total optical system spend ICP user typically teens percentage compared to the CSP use the.
Communication service providers, who are about in the seventies, 74%, but they are growing faster.
When you see those big Capex numbers, here's the good news, we are positioned with now more of those icp's and the major web scales, which controls.
A huge portion of that spend.
And when they're growing inside the data center and they are growing all that capability in traffic is growing they have to connect those data centers and I think we're seeing that in our order forecast for next year, we're seeing that in the order book rates that we had in Q3 and in what we've contemplated in our queue for guidance.
Okay. So we have great exposure now more customers and more opportunity given a refresh portfolio.
Okay.
Your next question comes from the line of Fahad thought shot with MK I'm partners. Your line is open.
Oh, Thank you for taking my question I have two questions first.
The pricing and discounting iguana, but can you walk us through what you seek out the in the marketplace.
Probably a favorable pricing environment.
Related to that do you have any plans to pass on would you increase the.
Costs to your customers.
Yeah, I think that's a question I'm not going to really address.
I don't want to go through pricing strategy on a on a public hearings call. What I will tell you is that.
The more vertical integration, we have in our products more flexibility it gives us to price performance for our customers.
Treating customers poorly in times like this I know because I have suppliers. Some that are being excellent partners. In this period. Some that maybe are passing on some extraordinary costs.
I'll have long memories, and so our job is to continue to deliver a long term business model as well as short term quarterly results and to accommodate for those things and trade off the fact that I want a customer three years from now to look at the Infinera logo and think highly of us.
As it pertains to the pricing environment.
No no change in our competitive pricing environment over the last quarter since our last during each call.
I appreciate it a bed I wanted to revisit your ICP where to go I think you mentioned that some of your.
ICP customers that bike monkey definitely some solution.
Solution from Ya.
To what extent are you see some of your customer who had developed white box solutions.
Kind of feeling the brunt of the component shortages and heavy.
What was supposed to be forced to go back to bedroom for like yourselves in order to offset bill or.
Component shortages are you beginning to see that.
Like books, correct, you know opportunity break open for Ya.
Look we do this for a living so God help anybody that's new to developing this kind of infrastructure and trying to manage in the supply environment I don't want to speak on behalf of any one of our customers that is a very dangerous path to go down but.
To say out of the major web scales.
Again, we're in a much better position across the.
That entire.
Entire gamut of spenders and again, they are buying multiple generations of technology. So they must be having some issues as well as.
Great Great portion of the services are still connecting at 200 400 600.
<unk> services.
I appreciate you answered thank you.
Sean.
Your next question comes from Alex Henderson with feed him accompany your line is open.
Thanks.
She thought we'd get the question little lost Polaroid with them.
Can you talk a little bit about the occasional 1.2 terrible product announcements and how you see that.
How you view 800 gig cycle versus 601.2 and.
Is that <unk>.
A real threat to 800 gig cycle does it change your the curve you're thinking about on the 800 gig or do you think it's.
Less well positioned obviously, it's it's well out into the future as well. So could you just talk about that because there was a.
Pretty good wobble or your stock when location announced it.
Yeah, we all tend to keep each other on our on our toes with product announcements I think we remember when 400 G. R. A Z R plus was announced to hit market and we look in where it as where it is and where it really hit compared to the announcement.
I would remind folks that are DSP on 800 gig is a two by 800 gig. So we have a 1.6 terabits solution that site, if I use a little marketing ploy here and by the way that's a lot of bandwidth per DSP out with our customer base. So we always believe this is going to be a long cycle that one to tear bit announcement was.
Anticipated it was later than we expected.
We actually expected that to be out in June and there was an earlier caller that asked about R&D is our job is spending R&D. We don't just roll everybody off after I six we've rolled a lot of R&D into the metro into Pluggables for point to point and point to me.
LT point to help with our vertical integration into the next generation, which would be more like at $3 to tear of it to wave or a 1.6 turbit one with so.
So we think the cycles just to just to summarize we have a 1.6 Tara 800 gig solution today.
And we think that's going to be a very long cycle based on our design engagements with.
The csp's of that or 74% of the market spent and we're on boarding as you can see from the results with the Icp's as well.
Did that when we get into that.
Yeah go ahead.
Got the point, so I wanted to go into the the 200 basis points hit the.
Supply chain issues.
Clearly there are two different categories of costs associated with these pressures there's the the price inflation associated with individual parts, but there's also expedite and shipping costs and logistics caused delays and timing and things of that sort that.
Also play into it.
Given the holiday season really amplifies that significantly is we're in the third and fourth quarters.
But as we go into the seasonally soft quarter is there some opportunity for that portion of the.
Cost impact to to ameliorate more quickly than say.
The semiconductors metal and other things that are harder capacity.
That could could you kind of parse between which how much is parts and how much is logistics yeah, well first you didn't cover all the categories of of what they can to consider parts expedite fees I've I've heard all kinds of.
You already service fees and [laughter]. So it looks 75% of the costs are those parts increases.
Expedite fees broker fees tax title and dealer prep that people are charging to get your hands on the few parts that exists for a lot of the geometries that are out there to do believe it or not some of the simpler networking stuff to carry the more complex waves across the network.
Certainly by the number of cargo containers that are still stacked up in L. A.
Too hard to predict when those costs go down, but it's about 25% of the overall costs that we see when you take that 200 basis points into effect.
Will I think again since the start of the year, we've been really trying to quantify this stuff out as granular as possible and so when we go through the queue for results will update our view of what do we see going into 2022 on both those categories. It's an excellent point.
So.
Does this secondary question it rolls off the pill, which is historically you've had a very steep decline into the March quarter, and I know you don't want to do too much of the 22, but I think that was the thought that the first quarter would actually maybe even be sequentially flat based off of the.
Ramp up the 800, good product, which you describe as quite steep quarter to quarter to quarter and less driven by those those issues. So I guess my question is given the Bath long.
Given the implied lacomb seasonality and that backlog.
Should we be expecting one two dads may be enough to.
<unk>.
So this is the Q3 results call on the queue for a call.
Oh, Alex I can't do it.
In this supply chain environment too early to dive into Q1, where certainly encouraged by the backlog the demand and the engagement with the client base, but now can't do it just too early.
Alright at least ideologically it would be a good job.
Better than normal right [laughter].
Again bigger backlog, but you have to have supply of those back to the you can't drive a car with three tires.
Okay, well that's a good choice. Thanks, Yeah. It was [laughter]. Thanks. Thanks.
There are currently no further questions at this time I'll turn the call back to David hurt for any closing remarks.
Yeah I do appreciate the thoughtful questions. It's an unusual environment. We're in we're trying to give as much transparency as we can to guide you through this period and to keep our heads down and focused on what we laid out at the beginning of the year. We delivered Q3 ahead of the midpoint of our guidance right.
<unk>, we have guided queue for generally in line with consensus we expect 2021 to meet the targets that we laid out when we entered the year. We said we grow faster than the market. We said that we would expand margins by 300 to 400 basis points. Despite.
Despite the impacts of this global supply and global pandemic environment.
We could not do that without the just unbelievable round the clock work of our employees, the dedication and teamwork with our customers and suppliers and the loyalty of our shareholders and those on the phone that help communicate to them. So really do appreciate it these are unprecedented.
<unk>.
Again for the thoughtful questions. Please take care of yourselves and.
Stay safe.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Please wait the conference will begin shortly.
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