Q1 2022 Infinera Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Infinera Corp, first quarter 2022 earnings call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time. Please press star followed by the number one on your telephone keypad if.
If you would like to withdraw your question again press Star one thank you.
Amitabh Coffey head of IR you may begin your conference.
Thank you operator, and good afternoon, welcome to <unk> first quarter of fiscal 2022 conference call.
Today's earnings and Investor slides are available on the Investor Relations section of the website.
Additionally, this call is being recorded and will be available for replay from our website.
Today's call will include projections and estimates that constitute forward looking statements, including but not limited to statements about our business plans, including our product roadmap sales growth market opportunities manufacturing.
Operations products technology and strategy statements regarding the impact of industry wide supply chain challenges and COVID-19 on our business plans and results of operation as well as statements regarding future financial performance, including our financial outlook for the second quarter of fiscal year 'twenty two.
These statements are subject to risks and uncertainties that could cause <unk> results to differ materially from management's current expectations. Actual results may differ materially as a result of various risk factors, including those set forth in our annual report on Form 10-K for the year ended on December 22021, as filed with the SEC on February 20.
Third 2022, as well as subsequent reports filed with or furnished to the SEC.
At this time.
Please be reminded that all statements are made as of today and Infinera undertakes no obligation to us.
Date or revise any forward looking statements to reflect events or circumstances.
They arise after the date of this call.
Today's conference call includes certain non-GAAP financial measures pursuant to Reg G regulation G. We have provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures in our earnings release and Investor slides for this quarter each of which is available on the Investor Relations section of our website.
And finally as a reminder, we will allow plenty of time for Q&A. Today. So we ask that you limit yourself to one question and one follow up please.
I'll now turn the call over to our Chief Executive Officer, Victor Thanks, Kevin.
Good afternoon, and thanks for joining us today I will begin with a review of the results for the quarter and provide some color on the broader market context, and then I'll turn the call over to Nancy to cover the details of our financial performance.
We continued to benefit from strong demand and deal momentum in the quarter, both of which were above our expectations, especially following a very strong Q4 2021. However, our Q1 financial results did not represent our full potential and we're at the low end of our outlook range due to uncontrollable and previously unforeseen supply chain.
Developments late in the quarter non-GAAP revenue was just below the outlook range, while both non-GAAP gross margin and operating margin were within the low end of the range from a bookings perspective, we had a big quarter, especially in the U S coming from both ICP and service providers overall bookings grew in the double D.
<unk> percentage range on a year over year basis, and we ended the quarter with a product book to Bill meaningfully above one this was our sixth consecutive quarter with book to Bill ratio above one not surprisingly our product backlog set another quarterly record and was up almost above 20% sequentially and over one.
100% on a year over year basis.
However from a revenue perspective, we faced two anticipated headwinds late in the quarter first a $5 million impact due to governmental trade sanctions and our decision to suspend operations in the Russian Federation in early March the right decision second a $20 million impact from two new <unk>.
Supply chain related developments.
Including first project delays due to customer dependencies, meaning we shipped the hardware, but our customers were delayed in commissioning their network to allow for revenue recognition due to challenges with their site readiness availability of customer resources and customer furnished installation material.
This timing impact was split roughly across product and services revenue.
We also experienced a relatively smaller impact from supplier D commenced and push outs, partially caused by the COVID-19 shutdowns in China in the last two weeks of the quarter at a time when we typically ship at a very high percentage of our quarterly revenue.
These new supply related impacts occurred against the backdrop of an already difficult semiconductor environment. The combined effect of the higher logistics component cost variations, particularly in the broker market and lower volumes impacted gross margin in the quarter by an incremental 150 to 200 basis points versus our earlier.
Our expectations are.
On the customer front, we continued to secure new large deals with well known brands at a faster pace than originally expected across long haul metro and subsea applications further validating that our eight by four by one strategy and refreshed portfolio are winning in the market. In addition to our <unk>.
<unk> wins in Q1 with customers like Seo Windstream PCC W. Amongst others. We had a few other notable brand name wins first we secured an IL six win with a significant tier one service provider in Western Europe , our momentum and performance leadership in subsea are starting to translate into meaningful.
Terrestrial network wins.
We signed a large metro deal for our Gx product with a major U S service provider one of the largest deals in our history. This is a multiyear deployment that we believe will benefit from improved margins as we integrate our own <unk> in the first half of next year and third we successfully on boarded a new.
Top ICP with our Gx family of products, we have very strong momentum in the ICP segment and for the first time in several years and ICP was our number one customer in the quarter.
Fixed revenue grew to the high teens as a percentage of product revenue in the quarter up from the low teens last quarter bookings have started out strong in Q2 and we're in the middle of several certifications of major ICP and tier one service providers, we remain on track to ramp by 6% to 20% to 25% of product revs.
In 2022 next the Gx Metro products had a record quarter with bookings up almost 200% year over year, driven by a combination of new wins and growth in existing accounts.
We are winning new metro deals at a much faster pace than our prior expectations. While these wins have a near term margin impact as we lay out common infrastructure. The expanded footprint lays the foundation for margin expansion in 2023, when we vertically integrate these platforms with our own products and finally, we saw continued growth in <unk>.
Open line systems, a good leading indicator of future high margin transponder sales for long haul and subsea.
The sub systems business group achieved several significant milestones for the quarter.
First our 400 gig XR, DSP, which is ZR plus compatible and the industry's first point to point and point to Multipoint DSP was delivered from the fab and is performing well initial testing is ahead of schedule second we began early production of our T rozsa the optical <unk>.
And that represents almost 65% of the bill of materials and plugging holes as a reminder, the DSP and the two rossa are the two critical building blocks and applicable and we're off to a good start with both we are planning for our first plug a hole samples to be available in the beginning of the third quarter and to start ramping revenue in the first half of.
<unk> 2023, and then to drive hundreds of basis points of gross margin improvement in our metro products once we integrate them into our platforms.
And lastly membership in the open XR Forum continues to gain traction during the quarter, We announced the addition of five new service providers to the forum, including AT&T and Telefonica and the list of service provider members now collectively represents over 20% of the global Telecom Capex spend.
And <unk>.
Furthermore, the first set of equipment manufacturers of routers switches servers, and wireless ran including Juniper Sumitomo and <unk> have joined the forum, we have a healthy pipeline of familiar network equipment manufacturers interested in joining these proof points validate that we are on track to product is our pledge.
<unk> vertically integrate them into our platform and create what is potentially a new $1 billion plus addressable market.
Point to Multipoint plausible.
There is tremendous momentum in our business, we are winning new customers growing with existing one scaling our six 800 gig in metro solutions and introducing innovative products like our <unk> and software automation Street suite. The underlying demand drivers are healthy and as our customers cope with increasing bandwidth needs to accelerate the rollout of <unk>.
<unk> mobile edge compute and deep fiber architectures.
These dynamics are playing out while the industry's number one optical infrastructure vendor Huawei is excluded from many global markets.
Looking ahead to Q2, we anticipate continued healthy demand given our bookings momentum and the expectation of a strong capex cycle continuing.
At the same time, we believe the acute macroeconomic and supply chain pressures from Q1 will continue into Q2, and our Q2 outlook, which Nancy will cover in detail. Shortly we've incorporated the impact of suspending our operations in Russia as well as the projected temporal impact of further customer delays and <unk>.
Push outs due to constraints on the customers and this is a timing impact only despite these challenges we expect to grow revenue sequentially Q1 to Q2.
As we look out further into the year. We now believe 2022 will be a tale of two halves not too dissimilar to 2021, albeit for different reasons, we expect a lower first half of the year constrained entirely by supply followed by a meaningful uplift in our financial performance in the second half with year over year revenue growth.
In the second half at or above the high end of our 8% to 12% range and gross margins in the 40% range as we exit the year.
We anticipate the second half of the year will benefit from the continued ramp of our own production of IL six conversion of our backlog of revenue.
Partial benefit from first half push outs of those projects as I mentioned, we're timing only base.
And some supply chain relief given the actions we've taken over the last six quarters, we will continue to intensify.
Specific to the supply chain, we believe they're at least two developments that are unlikely to be long lasting and therefore temporary in nature.
We expect the impact of the Covid related shutdowns in China to persist through Q2, and we're assuming some relief from these shutdowns in the second half of the year second we don't believe the elevated pricing levels that we're seeing in the semiconductor broke it broker market are sustainable and that frankly, they're running out of supply which for us is more direct negotiations with suppliers.
<unk>, which is proving healthy for forward forecasting.
Taking these two factors into account we remain focused on the elements. We can control. The infinera team has been working diligently over the last six to eight quarters on the following five areas first we continue to qualify additional sources of supply, including the redesign of parts for substitution.
Second we have significantly increased purchase commitments to our contract manufacturers commensurate with the longer lead times and increasing demand.
Third we are investing more heavily in hardware cost reduction programs fourth we're significantly increasing production capacity of eight six.
Internally given the robust demand we are seeing and.
And lastly, we're adjusting selected commercial terms with suppliers and customers. These actions have the objective of mitigating some of the supply chain cost and revenue impacts, which I highlighted earlier and are enabling us to remain on the path to achieving our target business model as I close today I want to reiterate our confidence in Infinera strategy refresh.
Portfolio competitive position and customer omentum, we've made tremendous progress and our team continues to work through some unprecedented times and challenges I'd like to thank the infinera team for their continued focus intensity and dedication for servicing our customers. During these dynamic times, while taking care of one another the infinera cultures and <unk>.
We focused on doing the right thing and our thoughts and prayers go out to everyone who has been impacted by the crisis in Ukraine.
Finally, I would like to extend my thanks to our customers partners and shareholders for your continued support I will now hand, the call over to Nancy to cover the financial details of the quarter and our outlook for the second quarter.
Thanks, David Good afternoon, everyone I will begin by covering our Q1 results and then provide our outlook for Q2 2000 killed my comments reflect our non-GAAP results and outlook for your reference on our Investor Relations website, we have posted slides with financial details, including our GAAP to non-GAAP reconciliation to assist.
With my commentary.
As you heard from David demand in our fiscal first quarter remains strong coming in much better than our expectations, particularly after a very strong Q4 'twenty one.
We had another quarter with a very strong book to Bill ratio and set a new quarterly records for both product and services backlog. However, the industry wide supply impacts proved more challenging than our expectation, resulting in our financial metrics coming in below our plan.
Despite these transitory challenges we feel good about our strategy deal momentum new product milestones and MTI ramp.
They are committed to delivering our target business model.
Turning to the financial details of the quarter Q1 revenue of $339 million grew 2% year over year with product revenue up over 5% while services revenue was down 8% on a year over year basis.
Compared to the first quarter of last year product revenue benefited from higher Isaacs Gx natural and line systems revenue, but was attenuated by severe supply constraints and the suspension of our operations in Russia.
Services revenue declined year over year, primarily from the recent dynamic where some customer projects are being shifted out due to their own site readiness and resource constraints, coupled with the impact of our operations in Russia.
And at <unk>.
Services bookings, however were strong in Q1, and we are entering Q2 with record backlog.
Geographically, we derived 50% of our revenue from domestic customers in the latest quarter compared to 48% in the year ago quarter, and 42% in Q4 of 'twenty, one and no customer contributed greater than 10% of our revenue in the quarter.
Q1 gross margin of $36, 2% came in below the midpoint of our outlook range, primarily due to an incremental 150 to 200 basis points as supply chain impact from higher component costs and lower volume.
And secondarily from a higher contribution of line system and Metro common infrastructure.
Partially offsetting these factors was a positive contribution to gross margin from <unk>. Once you ramp to the high teens as a percentage of product revenue in Q1.
Operating loss for the quarter was $3 $5 million equating to an operating margin of negative, 1%, which was below the midpoint of our outlook range operating margin in the quarter was impacted by lower revenue and gross margin, partially offset by focused expense control operating expenses in the quarter of 126 million.
We're below our outlook range of $130 million to $134 million as we tightly manage spending while maintaining investments to keep our innovative programs on schedule. The resulting EPS in Q1 was a loss of seven cents per share.
Moving on to the balance sheet and cash flow items, we ended the quarter with $204 million in cash and restricted cash up slightly quarter over quarter. During the quarter, we generated $16 million of cash from operations and free cash flow was approximately breakeven we ended the quarter with zero balance on our credit facility.
Looking ahead to the second quarter of 2022, we are encouraged by our customer wins booking momentum and record backlog at the same time as David outlined in his comments, we expect the supply challenges to continue in Q2 before seeing some relief in certain areas in the second half of the year, taking these factors into account.
We expect Q2 revenue to be in the range of the $350 million plus or minus $20 million, representing approximately 3% growth on a year over year basis at the midpoint of the range. However product revenue is expected to grow faster at approximately 8% year over year.
Given the increasingly uncertain supply chain environment, we have widened our revenue range for Q2 and have incorporated the following impacts in our quarterly outlook first the removal of $5 million.
Revenue related to our prior expectations gives us suspension of operations in Russia, and second approximately $25 million of revenue attenuation from customer delays and project push outs, including large global <unk> steel that is shipping in Q2, but will generate revenue in the second half.
For the year.
These delays and push outs, we will continue to pressure our services revenue, especially professional services tied to new project installation.
We are forecasting Q2 gross margin to be in the range of 36, 5% plus or minus 150 basis points up slightly on a quarter over quarter basis.
Compared to the year ago quarter. The primary factors influencing our gross margin outlook include a higher mix of <unk> revenue, which is accretive to the company's gross margin, but it's being offset by the impact from a combination of higher supply chain costs as we continue to bear the burden of higher component materials.
<unk> and freight costs lower services revenue and margin compared to the second quarter of 2021, and new footprint wins from large household names, which bode well for future quarters.
Our planning to recover much of this margin impact as we exit the year.
We are forecasting Q2 operating expenses to be in the range of $132 million to $136 million as we continue to prioritize investments in both sales and R&D consistent with the comments we made at the beginning of the year within R&D. Our priorities are centered on plausible metro platform and software areas.
Critical to driving topline growth and margin expansion. Additionally, Q2 was also the quarter when our annual Merit, but merit increase takes effect.
We expect Q2 operating margin to be a loss of 2% plus or minus.
At this point with operating margins down on a year over year basis at the midpoint of the range, primarily due to lower gross margin compared to the year ago quarter.
In Q2, we expect to use cash from operate some cash from operations as we make selected investments in inventory and manage through the impacts of the supply constrained environment.
Below the operating income line, we assume $5 million for net interest expense and $7 million for taxes. Finally, we are anticipating a basic share count of approximately 215 million shares for Q2.
Given the recent external events, including the challenging supply chain environment and the impact to our services revenue in the year from customer project push outs based on what we see today, we now expect our full year revenue growth to be at the low end of our 8% to 12% goal and for gross margin to expand by 100 to 100.
50 basis points in 2022 versus our prior 300 to 400 basis points goal.
Our updated outlook for the year also implies a meaningful improvement in our financial performance in the second half of the year with revenue growth measure for the second half at or above the high end of an 8% to 12% range and gross margin of 40% plus exiting the year.
Our second half financial performance is expected to benefit from product growth the ramp of <unk> the deployment of new customer wins secured in the first half the timing of certain large project deployments completions and our supply chain mitigation efforts.
Fight the slight setback in 2022 from several uncontrollable external developments, we are extremely pleased with our record demand new customer wins and next generation technology development, we remain confident and committed to working towards the realization of our target business model.
Closing I would like to Echo David's thanks to the Infinera team, who continue to work tirelessly through a very dynamic environment and to our partners customers and shareholders for your continued support.
Josh we can now open the line for questions.
At this time I would like to remind everyone in order to ask a question. Please press star followed by the number one on your telephone keypad.
The first question comes from the line of Michael Genovese with Rosenblatt Securities. Your line is open.
Okay. Thanks, a lot.
A couple of questions here.
First if.
If I look at the guide for <unk>, It's about 30 million below consensus and I think youre seeing $5 million is Russia. So.
That leaves us with 25 million for the supply chain and what I'm, having trouble understanding from your language is.
How much of that is you guys, having trouble getting parts versus your customers, having trouble getting other products and delay network builds.
Yes, so the Delta it's a good question Mike.
The question is a majority of that is actually project acceptance from our customers ability to not just get parts, but have sites available have labor available.
To be able to have site preparation. Good news is we have good visibility now into that happening in a piece of that is a very large <unk> customer that's.
Deploying in multiple countries and just based on.
These delays that we've seen through China, and the supply chain the acceptance for that will now spread that revenue in the back half of the year.
Okay. So it's it's a majority of it is the majority of that 25%.
A couple of follow ups on that I mean, so it sounds like you're saying that.
Stuff that you can control on the supply chain getting parts for yourself.
It sounded like.
You wouldn't have missed based on that Youre doing a good job there and then secondly, if you could comment on that but also talk about.
Six products with how much or other.
Vendors parts or contract manufacturing services necessary.
For I suppose products or you're doing a whole lot of that yourself.
Yes, it's a good another good question. So again just to try to put this into perspective.
If you think about the <unk>.
Miss to the midpoint of guidance for Q1 5 million of Russia 15 million of project acceptance all based on customer site availability. However, typically Mike we have enough wiggle room with the supply chain and what we've been doing over the last eight quarters to be able to hit the high end of that range.
Obviously the.
Late in quarter supplier Decommit did not allow us to cover that.
$20 million impact of Russia, and the supply chain so.
I appreciate we've been we've been hanging in there quite well for the last eight quarters and the team is working around the clock, but was not able to pull in enough supply to mitigate that 'twenty.
Based on our carry forward of the Russia in typical markets given our.
Mike we're now sitting on $822 million of Rps.
That grew $58 million over the quarter I expect that the top 100 million for the for the first half of the year in terms of growth of the ERP OS.
So there is plenty of opportunity to go to go get but based on the fact that supply chain.
Lead times are no longer 12 weeks, it's hard for us to flip the Russia turn off into.
Another opportunity without having that supply.
Great.
Question, Yes, sorry go ahead.
It was about the <unk> how much yet.
Working to yourselves.
So look well we.
Way more control over <unk> six we always these supply chain challenges are across you can have a transistor fair right.
Small device, that's coming through your contract manufacturer and you've seen the reports from the primary contract manufacturers that went that way.
Went through they also had some challenges in the supply chain in the quarter, but.
I six much more in our control not completely.
You can always be again impacted by some small device, but a lot more in our control the remainder of what we see and what our customers see our things like power supplies and.
Things that they need and building out there.
Their local networks.
Thanks, Michael.
I can ask a lot more questions but.
Perhaps my time, but maybe I'll just get one more and then that would be my last one which is the space.
You know you're comparing this next this year to last year with the back half.
But we didn't see the kind of I think ramp you're implying in the third quarter of 15% plus sequential revenues in the third quarter. We didn't have that last year, we had a strong fourth quarter sequentially, but not as strong as the third quarter.
Talk more about your confidence that not a lot of companies are saying things are going to get better before the end of the year.
So the confidence in the third quarter, please talk about that some more.
Yes, I'd say the confidence in the back half isn't that the supply chain environment gets better.
Yes.
It's that.
The projects that we already have out to go to revenue again, remembering those $822 million of Rps.
We will convert and we have visibility to that the second thing is there is a very large degree of that that is on the production of our own <unk> six.
For Q3 and Q4.
Given our visibility to that supply chain environment and the fact that we in Q2 grew our production capacity by six by 30% and are continuing to increase that on a quarterly basis, we feel good about the flow through of our own and the service conversion in the back half of the year, we're kind of holding that.
Supply chain environment, the only improvements, we expect to see Mike or because we ordered a bunch of parts for a very hefty demand and above even the demand we were seeing last year to be able to cover and we're starting to see that visibility of supply in the back half, albeit it wasn't in the first quarter.
Okay. Thanks, Mike.
We need to move on thanks, Operator next question. Please.
Your next question comes from the line of Matt dessert with Needham Your line is open.
Hey, Matt I think that.
That's all right.
This is Alex it is Alex I thought maybe maybe you were putting somebody else in there how are you doing Alex.
I'm fine thanks.
Thanks to Mike Nick.
Call here.
<unk>.
I just wanted to clarify a couple of the numbers.
The Russian number was $5 billion in first quarter Youre seeing additional $5 million in the June quarter does it track through the year then.
Yeah, its 20 for the year, but given the again strong RP O position and lead time will be able to convert the back half and cover that with other existing demand.
Just trying to get the numbers right that's all.
Second question is.
It sounds like you're suggesting that there was $15 million in project and <unk> and it's going to be an additional $20 million or so in <unk> is that correct.
So theres 35 in the first half.
Sorry, it's 'twenty than it was 20 in Q1, and it's going to be 25 in Q2 and.
And that's because of a large multi country project as Nancy mentioned for ice six.
Okay. So that.
That revenue that's $45 million in revenue will show up in the back half of the year.
And that's contributing to the upside to the back half growth rates.
Yes, some piece of that and so what we're saying is that that will time shift out in the waterfall of those that revenue recognition will happen in the back half of the year, we will see some push out from the back half of the year, but we think the impact of that Nancy will be about about $30 million on the services line.
Yes.
Make up on the product that some of the services will take longer to deploy it.
Think about $30 million impact on the year in terms of services revenue.
Okay, so shifting $30 million out of 'twenty two into 'twenty three as a result, correct yeah.
That does not go away and.
In the backend.
Growth rate in product as you can see.
It was good in Q1 at 5% expecting 7% to 8%, 8% ish on Q2, and then it will be higher revenue growth in Q3, and Q4 as we end up with product revenue in the back half of the year at or above the high end of the 8% to 12% range.
Alright, if I'm doing my math correctly.
The Russian impact is one 4% and the.
Impact of the 30 million sliding out.
Another two 5% so that's.
Secondly, four percentage points.
Okay.
Because of those two factors and that's what's bringing the full year down.
Yes, and we are.
We're going to obviously do what we can to offset that in the back half, but it's still very early in the year. So I think you have it captured correctly.
Great.
So if the products are shipping now but recognized in the back half of the year.
Then I would assume that there's a significant improvement in gross margins in the back half, but it sounds like youre talking 40% ish gross margins in the back half I think we were already there before this so am I talking about gross margins benefiting in addition to that.
That shift.
No I think I think we exited the year at or slightly above 40%.
We've still got the.
Hangover effect on the costs on supply right, even though we're able to manage through on the product revenue and product growth.
<unk> costs are still very real.
Continuing and will offset as many of those as we can in the back half and then you'll also have the impact of a lower percentage of services revenue.
Okay got it okay.
My final question, if I could just one one of them.
And the point to multi point products.
Very good news that you're pulling that forward can you quantify the magnitude of the pull forward or is it like one quarter.
What's the thought process in terms of the timing of getting that product to market.
Yeah, well I think first and most importantly, the DSP that we got back is point to point and point to Multipoint. So it fulfills the ZR plus a portion of our market, which allows us to put that plug a hole in our own metro platforms to improve our margin in the first half of the year and the fact that that DSP is back.
The fab.
A schedule and testing well.
Just puts us a high degree of confidence a higher degree of confidence in our ability to go ahead and hit that margin improvement in the first half of next year and the fact that we're going to have samples out.
Bodes well for all the customers looking to deploy both point to point and kind of the industry's first point to multi point.
It's a big Big Big deal Big.
Big confidence boost for us.
Thank you Alex.
Operator, we'll go to next question please.
Your next question comes from the line of meta Marshall with Morgan Stanley . Your line is open.
Hey, Matt.
A couple of questions for me.
I mean, I guess just in terms of you guys are seeming to indicate that.
This large project.
You guys aren't kind of controlling the timing of his is pushed out and that you can basically pull some other orders and.
Just fill that with kind of the other order activity that you guys are seeing.
I guess just in terms of.
If those timing if the timing of this kind of a project that's been pushed out like what kind of gives you confidence of of when that timing will take place that some of that is moving into kind of 'twenty three or what gives you confidence in kind of that that timing that is there and do you think that kind of all of these other.
Orders can be pulled in.
And then the second question that I have is just you mentioned.
Kind of taking some of the negotiations direct and avoiding maybe some of the gray market and that actually being helpful. I. Just wanted to see if you could give more detail as far as just kind of what youre seeing as far as improvements there yes.
Yes.
Excellent question. So look let me restate for Q1, so for Q1 from a shipment perspective, we shipped the amount of hardware that we would've expected to cover to the midpoint of our range. The fact that it didn't revenue recognized due to kind of customer requirements.
That was a unexpected dynamic that developed in the last month of the quarter and was not expected given the supply chain impacts that typically we have more supply chain to cover that what gives us confidence in this large project that we're talking about that has an impact to Q2 is.
Are intimately involved with deploying the product and this one.
Under lots of things that will be under our purview as we implement this and we've implemented a first phase of this may.
Maybe two years ago Nancy.
Two years ago.
That had a negative impact to the first quarter of 2020.
And this is a six global.
Big revenue and a big margin impact that we feel comfortable will spread between Q3 and Q4 based on the contract details that we have and we're being I think good and conservative given what we learned in Q1.
To your to your second question look I think if you listen to some of our.
Suppliers like fabric and others and they are in their commentary, they're seeing the same thing where the broker market, which has been ridiculous where we saw.
200% Markups go to 600%, we'd even seen them up to a 1000%.
It is beginning to dry up.
And some of the suppliers are monitoring that broker market to see when parts go to is trying to punish is probably the wrong word but.
Really control antibody, that's dumping and taking profit by moving their parts to the broker market and so buying that we're having more direct discussions directly with the manual.
Manufacturers of the suppliers themselves.
And that's giving us more visibility to the capacity that we're adding and analog technologies and fabs and in digital technologies and Fabs and to win things begin to come online and when we can view the commits theyre, giving to us for our.
Forward needs.
More confidence when there'll be met.
So that transparency.
<unk> is a good thing right now.
Got it thanks, the brokers the brokers or a bad thing.
Thank you.
Okay.
Operator next question.
Your next question comes from the line of Simon Leopold with Raymond James Your line is open.
Thanks for taking the question I guess, if somebody needs to ask.
I will volunteer.
You opted not to pre announce.
The quarter and given the degree of the Miss and the factors I just.
A little bit of insight into the thought process as to why you opted not to pre announced this quarter and then I've got a follow up regarding one of the projects you are discussing.
Sure.
So the outlook range for revenue of 345% to $3 75, and where we landed was about 2% a little less than 2% below that bottom end of the range in our gross margin in our out our operating margin within the outlook range.
We have some.
Challenges with supply supply chain is very well known in terms of an industry dynamic.
The impact of Russia in terms of the suspension of activity. There also vary.
Well known and well publicized event globally.
So we felt.
That we didn't need to make a pre announcements and made that comp.
Okay and regarding the Gx Metro deal that you talked about your.
Can you characterize it David is the largest in your history.
I think I know, what youre talking about but I'd like to maybe get a little bit more color to confirm.
This.
Is this something related to an open road and type of Volta architecture and now.
Maybe give us a little bit more color on the nature of the either deployed.
Deployment that makes it special.
Yes nationwide metro footprint on our Gx platform, starting with merchant integration and will ultimately fetter in our own vertical integration via our own <unk>. We are also engaged with that other opportunity with the tier one in the Metro we are winning.
Large.
Initial design wins and initial footprint in the Metro as I mentioned at a much faster pace. So we are involved in that other opportunity I think you're alluding to but this is a nationwide U S.
Carrier that we don't define as a tier one.
Very large footprint of somebody who's laying out fiber to try to get.
Lots of bandwidth out to two gig out to everybody's home.
Great. That's helpful. I appreciate that insight. Thank you. Thank.
Thank you. Thank you.
Your next question comes from the line of Rod Hall with Goldman Sachs. Your line is open.
Hey, Rod Hi, guys. Thanks for the question.
So I wanted to.
I wanted to ask you on the product just to clarify what you're saying.
You're expecting product revenue on a full year basis to more or less catch up in the second half so.
No change there is that services revenue will be impacted because of the fact that it takes longer to recover or is that what you're saying.
Correct, so basically product catches up services.
Timing delay of $30 million impacting the quarter Thats how I'd.
Right Yeah, Okay. That's what we understood and then the other thing I wanted to just following up on that.
Russian impact and maybe this may come back to kind of a 96 question ultimately but.
Youre dropping 20 million out of the model for Russia, I guess, a lot of that product.
Going to end up kind of flat on the products for the full year, what fills that in and is that just better <unk> six performance than you expected or can you give us a little bit of more color on kind of what's doing better than you anticipated to come back in and fill that revenue well just real quick just want to make sure we're not misstating.
On the front half of this year as Nancy said, we grew 5% in product in the first quarter.
And we expect that to be 7% to 8% as she said in Q2 and in the back half.
It's a it's <unk>.
Much higher than that right. So it will product will be growing across the board. It will be growing certainly highly driven by a six deployment, but also the thing that's quite surprising is the gx platform.
As a metro platform is just winning much more than anticipated our line systems, winning much more than anticipated and these are.
Across the board between.
Certainly in the Metro.
It's csp's, but we're also seeing even more opportunity with ICP.
And David as you guys think that.
So you've got this 20% to 25% fixed mix target for the full year do you.
You end up above that now given what you know or do you think is most of the extra.
Over on the <unk>.
Hey, Rod given the unknowns that we saw I think in Q1 that.
We didn't predict Russia, the Russian conflict.
The China shutdown of the pandemic. So given that look I think are giving the color of outlook that we have it. We're just trying to give you assurance that again when you are sitting on 822, <unk> and you know the contracts you know the design wins, you have and youre expecting that to grow again.
You know.
Again commensurate with the first half growing another $100 million in RP OS.
That's what gives us confidence I don't want to get a little too.
Too far ahead of our skis here on on the fixed rates.
Okay, alright, well, thanks, a lot I appreciate the color anyway. Thank you.
Thanks Rod.
Your next question comes from the line of George Notter with Jeffries. Your line is open.
Hi, guys. Thanks, Hi, Jordan I guess I wanted to ask about.
Hi, I wanted to ask about vertically integrated products I think last quarter, you told us that.
<unk> 44, 45% of sales came from vertically integrated products I'm, just curious what that is right now.
Yes.
The same right now George.
We have as.
As David said, we're seeing that the impact of the metro wins that are starting to offset some of that.
<unk> not changing our objective, though to get that into the into the 16% range.
Next year, but for this quarter it was about flat with last quarter.
Got it Okay and then so as I think about the gross margin discussion for the full year, you took the expectation down a bit it sounds like the.
The issue there is really about.
Component cost. So I think you mentioned services mix, but the issue is not the mix of vertically integrated products is that correct.
That's correct.
And then as you guys work to vertically integrate more of your products I guess I'm wondering what the milestones are I think you mentioned <unk> for the first half but are there other details and that sort of.
Transition that you can share with us.
Yeah, So first and foremost we tried to give the I six measure of that grow into the 20% to 25% and no we're not going to top that off right now.
As we mentioned a rod on the second piece.
A huge chunk of this 45% of the bill of materials of the Metro deployment for US is the optical engine.
And that is the DSP and the T. Rowe space. So the fact that we're already producing the tea Roses and we got our DSP back gives me more confidence that as we exit the year, we will feel very good about our margin accretion planned for the plug a hole in the metro.
In 2023, which has always been part of our margin story. This year was about a six.
Getting the wins and scaling and next year was about getting additional margin accretion with the plausible those are the biggest pieces of our vertical integration.
Got it okay, and the fact that the Gx platform, yes, sorry, the fact that the Gx platform is up 200% says that footprint is beginning to.
There is demand for the footprint, which is good.
Okay, Great and then so you said the plausible would ship in the first half of the year next year is that does that early in the first half is that mid younger.
Yes, no no early so sorry.
Samples come out in Q3.
This year and will be gone through qualification and qualification in our even our own platforms, which is a lot more under our control.
So we're ready to go as fast as possible as we enter.
As we enter 2023, but we wouldn't expect the revenue impact given the capital conversion cycles do you think about revenue recognition to happen until full.
Full half kind of second quarter, we will probably see the biggest.
So the first step.
Okay. Okay. Thank you very much.
Yes. Thank you.
Your next question comes from the line of Jim Suva with Citigroup. Your line is open.
Thank you.
For Nancy Nancy.
Nancy I see that you upgraded your gross margin guidance, which I think as you know.
Copenhagen prudent at this stage.
Correct and it's folded in.
The impact of higher.
Asps.
Components coming in higher expediting costs, but also these new orders that Dave talked about coming in.
Some of those new orders alright pricing.
He was subdued before this recent environment. We're in now and so that also has been fully folded folded into your gross margin outlook or how should you think about that.
Yes, I mean that would all be rolled into the full year outlook in terms of now being at 100 to 150 basis points up versus the 300 to $400. So I think you've captured the components there.
Okay great.
Dave.
Yes.
I noticed your optimism about the second half of the year for the recovery of the components availability.
Can you give us any insights about your conviction behind that because I think that there maybe some of US who may just be a little more uncertain about all of that kind of becoming closer towards equilibrium.
Hey, Jim if I'm coming off as Super confident about component availability in the second half let me let me, let me clarify I think I'm not expecting the component availability to get better.
And I am not expecting for any massive erosion, what we experienced in the first quarter was we had enough at least to ship it was tighter than normal meaning we didn't have enough to cover this.
We ship the parts, but our customer couldn't get it.
I couldnt get the parts, nor the people to be able to deploy.
In the back half, we're just assuming that stuff comes through.
The other projects, we have in deferred and then <unk> begin to come through because we've provisioned for the parts, we see them in our supply chain right now and we're not seeing right now additional risk that doesn't mean I'm super fired up about the supply chain environment. We're in it's been a tough.
Tough slog, we've been going at this for six to eight quarters, now and holding ourselves reasonably well.
But I will tell you that there is a bit of this that's under our control which is the production of IL six so as long as the supply chain holds we've increased the production output capability of <unk>, six and our own capacity to be able to keep up with a consistent supply chain environment too.
What it is today.
Is that helpful.
That was very useful and helpful. In clarifying is all of it for me. Thank you so much.
Thanks, Jim.
Your next question comes from the line of <unk> with loop capital. Your line is open.
Thank you for taking my question I wanted to double click more on the.
Component shortages.
All of the component shortages that you're seeing.
Yeah.
Universal products that you know.
Go across all your product lines are all day.
The products more skewed towards the vertically integrated products.
No I'd say actually that a lot of them go to older geometries that things like line systems.
Other things in the Metro I would say, it's skewed less towards our vertical integration and newer geometries. However, there are some parts power supplies.
As an example.
All kinds of chipsets and fair rates and other things that look they're just it.
It's.
Again, they go across the portfolio certainly much more line system in metro, but but there is an impact even when you have your own vertical integration because youre going to have some element you need from an outside supplier and what we're doing now is not only managing our direct supply, but even if we get it from a supplier.
In many cases from a cm or from a supply we're going to the second and tertiary source to make sure that that full chain. This through because some of our <unk>.
The secondary or tertiary impact of that.
That happens primarily when you see things like China happen unexpectedly.
Got it so.
If the parts like the power supplies and power strips.
In short we're supply why wouldn't you optimize six.
Six maybe.
<unk> shipments or any other.
Our portfolio of product.
Was it.
Better margin just trying to understand why arent you maybe allocating more of your limited.
Supply two six.
That's six.
More strongly.
That's what they are.
Yeah, I mean look we first optimize to what our customers demand is and what our requirements and our expectations are from our customer.
But then certainly we look at the mix, but even <unk> six when put into it needs to be put into our line system in.
Things have power supplies.
Again racks and other things that that again the industry has been pinched on so we do we've been doing our best to try to optimize our shipping volumes.
And hitting customer service, but also our shareholder expectations and for the last.
Eight quarters, that's been going pretty good this new dynamic of Russia and shipping the actual goods that we thought would hit revenue, but did not on behalf of our customers and ability to get power supplies and other things into their network that was in it so we're making an adjustment.
And again, that's that $30 million of services that we've kind of pushed out timing only.
For the year.
Now we will continue to stay Super Super diligent and we've got an awesome team that's on it but and are working with our supply chain partners as well to make sure that we shore up.
More that's in our control tells you how important vertical integration is and the more we can put in our control.
Better.
Thanks, Ron.
I have another question on pricing.
Peers have now started talking about a second of all the price increases.
Can you remind us where you are in the.
I guess.
You haven't really talked much about price increases that much one when should we expect your.
Price increases go into effect, you'll also talking about the second half of the price increases.
Yes, it's a good question and I have been pretty consistent on this.
I don't.
This isn't the forum that we talk about our commercial strategy as we have made some adjustments to.
To contractual terms.
With our supply chain as well as customer network, but.
I think were enjoying.
Winning some new footprint and are focused on products that drive the lowest cost per bit outside that we will work our commercial terms in a more private forum.
Your next question comes from the line of Alex Henderson with Needham Your line is open.
Thanks, Tom a couple a couple of things I wanted to go back to the.
First one.
Was there was a comment in your questions about the <unk>.
Product being or the Russian business being more product it seems.
Stable at $5 million a quarter it sounds like it's more servicer.
Or as opposed to product can you talk about what the mixes between service and product within that $20 million.
Yes, so I would tell you that the out of that $5 billion a quarter maybe.
Yes, 1 million half of service the rest product.
That's great. Thanks, and then second you made a comment.
Jim.
<unk> talked a little bit about it but I didn't think fee.
We address the right issue, which is.
You didn't like that.
<unk> was going to come down.
Volumes of parts have gotten tighter.
So that seems a conviction.
Conviction in terms to me.
Okay, and economics to higher yeah.
Not the other way.
I'm a little confused by that.
Why are you would you think prices would come down supply has gotten tighter.
So I think what I'm, saying is the broker market itself when you buy a part from a broker versus directly from a broadcom Intel whoever.
You are paying more implicitly.
And again, we've seen crazy pricing there.
Multiples of the product taken a 90.
<unk> $90 part and charging for a grant for it but they are running out of parts and so that's forcing you to go directly to the direct man it make sure that with the direct manufacturer the direct manufacturer doesn't like that either and so my point is that this quarter thats going to go down next quarter, but ultimately this will not be something that will be.
Permanent in the market.
The broker market at these levels, we do not believe that that will continue.
So didn't mean to state that that goes away this quarter or next quarter. When we say temporal we mean, it's not we're not permanently baking those costs of something thats, a $90 part paying thousands of dollars for it is permanent.
And we're tracking that.
Let's see and then you had made a comment about purchase commitments.
Yes, one of the common set of a risk they took their purchase commitments up by over 50% clearly that's giving them a.
A chip to play with their customers, saying, Hey, we're looking looking out for you can you quantify the degree to which you've tariff purchase commitments up.
Sure gives us gives the second Nancy will.
Nancy will pick that up but yes. So it's a very good point. So if you think of <unk>.
Starting or ending the year at what $764 million of RP O and adding $58 million and I said in the first half will add.
My expectation is we will add $100 million, we have significantly increased our RP or our purchase commitments with our CMS and our suppliers Nancy you'll pull that in a second and we'll we'll read it off before Q&A ends.
Okay. One last quick question.
Comment around service sliding out does that pressure your service gross margins.
To add.
At or below the the recent levels.
Yes.
Partial pressure, but I think we will offset because on some of those projects youre using variable labor so you're using contract labor for pieces of that and that stuff that we're obviously not committing to in the same timeframe. So we can kind of follow the matching principle.
Okay.
Hey, Alex on the purchase commitments.
Got it to you we typically disclose in our 10-K and the number I can give it to your call. It was up quite meaningfully in 2020 and 21.
And it continued to go up in Q1.
Right.
Thank you Sir.
Yeah.
Thanks, Alex.
Okay.
Thanks, a lot.
Yes.
Yeah.
Sorry, there are no further questions I'll turn the call back to CEO , David <unk> for closing remarks.
Thank you.
So I appreciate everybody patient questions. We look forward to getting back to you in one on ones, we are expanding our customer reach the demand strength in customer wins.
Ed are ahead of our of our company and expectation.
The execution of our new products with <unk> six momentum the initial production of our <unk> elements are in line with what we told you on our eight by four by one strategy and the business model impacts that that brings the global supply chain impact on our customer rollouts and the cost of expediting parts to fulfill the demand has pushed out due to the <unk>.
<unk>.
And that's impacted the timing of revenue and margin as we talked about that has a service impact of $30 million.
We know we're not alone and we fared well in the supply chain up to this point over the last six quarters. We did have some late breaking impacts between the supply chain in Russia in Q2.
We do have remediation actions in place and we are addressing these developments accordingly.
Really do appreciate the partnership with our supply chain partners.
With our customers.
The continued tenacity of our employees and patients look forward to catching up with you more in <unk>.
And one on ones and next quarter be safe be well.
This concludes today's conference call.
Thank you for joining you may now disconnect.
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