Q3 2022 Infinera Corp Earnings Call

We're looking statements to reflect events or circumstances that may arise after the date of this call.

Today's conference call includes certain non-GAAP financial measures.

<unk> to 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 will allow for plenty of time for Q&A today that we ask that you limit yourselves to one question and one follow up please I'll now turn the call over to our Chief Executive Officer, David Here, David Thanks, Aman, Todd Good afternoon, and thanks for joining US today I'll begin with a review of our results for the quarter and then turn the call over to Nancy to cover the <unk>.

Sales of our financial performance.

Given everything that's going on in the world with the markets and the economy I'll try to be concise today overall, our message today is our overall Q3 non-GAAP financial results beat consensus estimates our outlook for Q4 is in line with consensus consensus expectations were delivering against.

Our product strategy to drive market share gains as evidenced by our 17% year over year product revenue growth.

And we've strengthened our balance sheet.

Financially in Q3, we delivered revenue and non-GAAP operating margin at the high end of our outlook range with non-GAAP gross margins near the midpoint of the range and up 170 basis points sequentially on a year over year basis, we expanded operating margin by 270 basis points grew product revenue 17%.

Sent which represented an acceleration from 11% growth that we posted last quarter and grew total revenue by 9%.

Furthermore, we generated free cash flow in the quarter and improved our balance sheet.

Demand in the quarter remained healthy with bookings continuing at a steady pace for most of the quarter, especially in the Americas and with Icp's. In fact, four of our top 10 customers based on bookings were Icp's we.

We did have a few large orders that slipped in the last week of the third quarter, given the September 24th quarter and into the first week of our fourth quarter, resulting in a very strong start to Q4, our backlog is healthy setting us up well for the fourth quarter and for the full year 2023 from a supply perspective, the environment was.

Then our expectations from 90 days ago, but our team effectively navigated the challenges in the quarter supply costs, including expedite fees and freight remained elevated and adversely impacted gross margins incrementally by over 100 basis points relative to our projections coming into the quarter. The total impact to gross margins.

For the quarter was approximately 400 basis points above normalized levels without which our gross margins would have been above 40% in the quarter. While we're seeing some broad based relief and overall supply chain, we expect supply conditions to remain challenging for some critical components through at least the first half of next year before easing.

In the back half of 2023 during.

During the quarter, we continued to ramp new products, winning deals with major ICP and tier one service provider customers our progress in the quarter spanned our entire portfolio reinforcing our confidence in our eight by four by one strategy specifically within our systems business group, we had two key developments first we ramp ice.

Six to over 30% of product revenue in the quarter and secured key design wins with several large customers, including a tier one global.

Cable operator with significant operations in the U S tier one ICP as we expanded into their long haul network and a major telecommunications service provider in Asia Pacific <unk> remains on track to ramp to 20% to 25% of total product revenue for the full year of 2022 in line.

With our prior commitments.

Second we had another strong quarter for our metro platforms with revenue for the flagship Gx 30 product line up in the double digit percentage range on a year over year basis, our metro footprint continues to diversify as we expand service provider with service provider customers, both domestically and internationally.

Within our sub systems group there were three notable accomplishments for the quarter.

First our 400 gig ZR plus <unk> is industry, leading and ahead of our expectations. We are starting to vertically integrate it into our own metro platforms, which should begin to positively impact gross margins as we exit 2023 during the quarter. We concluded a successful field trials with a large north American tier one.

Service provider in which we demonstrated industry, leading results and reach power and performance. All of this was accomplished in the industry's first 400 gig ZR plus software defined plausible.

We're pleased with the progress we're making on the development of our own 100 gig point to Multipoint coherent <unk> based on the open multi source specifications being developed in the open XR Forum. We believe these <unk> will revolutionize the networks and open up a new multibillion dollar addressable market for us.

Membership in the open XR form continues to expand and there is a growing pipeline of interested service providers and equipment manufacturers ready to sign up for the forum in fact during the quarter American Tower Telecom Italia mobile joined US members of the forum, along with additional network equipment manufacturers, including driving that spoofed.

Space and for our power electric third and finally, the development of our next generation 800 gig <unk>.

Is progressing well and we intend to lead the industry in this category as well.

Im encouraged by our business execution across the board, while being mindful of an uncertain macroeconomic environment. Our product portfolio is in great shape, and we're winning major deals in gaining market share. We are prioritizing our investments in sales and marketing in the most strategic R&D programs to capitalize on the insertion opportunities we see globally.

In addition, as an optical semiconductor manufacturer, we have been positioning ourselves over the past couple of years with all branches of the U S government, including the department of Commerce as an intended beneficiary of the government sponsored chips and Sciences Act.

Infinera is unique in our U S based capability in compound semiconductors with production and packaging facilities located in the United States. We intend to use any government funding that may be made available to us to accelerate R&D leadership in this critical technology invest in our core business capability and potentially expand into new.

Markets, while strengthening supply chain resiliency and national security interests.

Looking ahead into the fourth quarter, we're planning for another quarter of above market revenue growth, while fighting the remaining acute supply chain challenges to get towards non-GAAP gross margins of 40%. We expect the fourth quarter to benefit from the continued ramp of <unk> momentum in the metro business and additional operating leverage.

Our fourth quarter outlook also implies product revenue growth greater than 10% for the full year and significant operating income expansion in 2022 over 2021 results. This financial performance is remarkable, especially in an environment, where we expect to absorb more than $50 million in elevated <unk>.

<unk> costs for the year and further demonstrates the value of our vertical integration as you've heard today, we're extremely focused on executing against our strategy and meeting our commitments are.

Our eight by four by one strategy is working our products are winning in the market and supply chain disruptions are actually creating new opportunities for us.

And our customers as they look to mitigate their supply chain risks, we are relentlessly driving towards our target business model and $1 per share in annual earnings power. While there are several adverse macroeconomic factors at play the underlying demand drivers for our products and services are healthy I continue to be impressed with the.

Innovation execution and resilience of our Infinera team the high degree of engagement of our partners and suppliers.

And the collaboration of our customers.

As we look forward, we look forward to diving deeper into our company strategy and our product portfolio at our upcoming Investor day that we are planning for March seven 2023 at the OFC industry show in San Diego, California.

I will now turn the call over to Nancy to cover the financial details of the quarter and our outlook for the fourth quarter. Nancy. Thanks, David Good afternoon, everyone. I will begin by covering our Q3 results and then provide our outlook for Q4 my comments reflect 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.

I am very pleased with our performance in Q3, the Infinera team executed well to deliver revenue and operating margin at the upper end of our outlook range and revenue in the third quarter was $390 million up 9% on a year over year basis with product revenue growth of 17%.

This growth was largely due to the continued ramp of <unk> six to over 30% of product revenue in the quarter along with the continued momentum in our Metro business service revenue was stable sequentially, but still down on a year over year basis, as we continue to build our professional services backlog from the impact of delayed customer deployment.

Earlier in the year.

Geographically, we derived 57% of our revenue from domestic customers a level higher than normal.

Was five cents per share.

Moving onto the balance sheet and cash flow items, we ended the quarter with $210 million in cash and restricted cash up from last quarter, our cash balance benefited from cash flow from operations of approximately $20 million, which resulted in free cash flow of $9 million and we reinforced our balance sheet further.

As part of the refinancing of a substantial portion of our 2024 notes.

During the quarter, we paid off the $40 million outstanding on our ABL facility and in the quarter with a zero balance drawn.

As a reminder, we will continue to utilize our ABL facility strategically for short term working capital needs.

Despite the tough macroeconomic conditions in 2022, we continued to make meaningful progress toward our longterm target business model, while strengthening our financial position.

Through the first three quarters of 2022 and compared to the same period. In 2021, we grew up company revenue by six per cent and product revenue by 11% well ahead of the 4% growth rate for the optical market, netting and unexpected gain and market share.

We expanded operating margin, while observing higher supply chain costs throughout the year, and we successfully ramped I six consistent with our commitments.

Turning to the outlook for the fourth quarter, we are encouraged by the demand environment the ramp of I six and our strong backlog at.

At the same time, we are cognizant of the uncertain macroeconomic environment and expect supply challenges to persist through at least the first half of 2023, albeit with some moderation take.

Taking these factors into account, we expect to for revenue to be in the range of $435 million, plus or minus $15 million, representing approximately 8% growth are the year over year basis at the midpoint of the range. We are planning for your over your product revenue growth of greater than 10% in Q4 and a sequential.

Shall improvement in services revenue.

We expect gross margins to be in the range of 40% plus or minus 150 basis points up 220 basis points at the mid point of the range on a quarter over quarter basis. The.

The primary driver of projected sequential margin improvement is a higher percentage of vertical integration and are mixed from the ongoing ramp of ice six.

Embedded in the gross margin outlook is our assumption that we will continue to absorb approximately 300 basis points of supply chain impact from elevated costs tied to components materials and fries.

We are forecasting queue for operating expenses to be in the range of 142 144 million up sequentially as we pay annual commissions and continue to Prioritise investments and both sales and marketing and R&D, the resulting operating margin in queue for it is expected to be seven per cent plus or minus two.

200 basis points in line with consensus at the mid point of the outlook range and up 270 basis points on a year over year basis.

Below the operating income line, we assume $7 million for net interest expense and $4 million for taxes.

Finally, we are anticipating a basic share count of approximately 221 million shares for Q4, and a fully diluted share count of 260 million shares.

Is that close today I want to reiterate how proud I am of the Infinera team's accomplishments over the last couple of years as we have ramps new products, one new customers accelerated growth and expanded margin. The team has delivered the solid operational results, while navigating through a tough external environment.

We remain confident in our eight by four by one strategy as we drive toward our long term business model and focus on generating a dollar per share and earnings power.

Finally, I'd like to extend my thanks to our partners customers and shareholders for your continued support and cooperation Josh I'd like to turn the call over for questions.

At this time, if you would like to ask a question. Please press star followed by the number one on your telephone keypad.

Your first question comes from the line of Catherine <unk> with M. K I'm partners. Your line is open.

Oh, Thank you for taking my question [laughter]. Thank you and the first time I'm actually on the call with you guys. So what my one question as you and it looks like Europe is down 9% quarter over quarter can you talk to some of the issues going on there is still pretty much.

Yeah.

Yeah, just explain what's taken place in Europe Mmm why that sounds thanks, yeah not good question. Thank you.

Good good good to have your online.

Two three typically seasonally.

A bit of a down quarter in Europe .

With the pandemic not as much travel this year I think we saw a bit more trouble plus we had quite a concentration here in the U S and with Icp's and the way, we count something about revenue of Globalised CPT, if it falls in the U S bucket, but nothing out of the ordinary nothing so stomach, we still see strong demand and good prospects in Europe going.

<unk>.

Yeah, I wanted to <unk>, she's always been a strong area of upgrades for 800 gay again could you pretty much pinpoint where you are against some of the competitive landscape with that opportunity.

Yeah, I think we're winning we're winning lots of routes and then with when we look at the technology there aren't many with 800 gig technology out there so that business for us has been growing year over year not only in revenue bookings, but also pipeline opportunity. So it's gonna be an extra.

Lots of new cables going in to.

To take advantage of interconnecting these data centers in handling the growth on a global basis.

Alright, thank you.

Section.

Your next question comes from the line of Dave <unk> would be Riley. Your line is open.

It is.

Alright. Thank you. Good afternoon. My first question is Oh that'll be if you disclose R. P. O just how much was it and how much of that is really for for your immediate treatment say less than three months.

So we did this closely <unk> in the detail schedule as in the queue that was filed today.

<unk>, we're up $300 million a year over year at $909 million. It was down 45 million versus last quarter, but I can say that in the first week of Q4, we've more than offset that in some bookings that literally just pushed over into the first week of two four.

So is it <unk> the <unk> I actually I wanted my next question is orders of words slipped through fourth quarter or sounds like it's about maybe $90 million to $100 million is it about right I'm.

I'm not gonna give you the amount, but it's more than 45 I'll leave it up [laughter] yeah, all the equipment we are.

Third quarter closed on September 24th just the way the days, so sometimes getting customers and folks to realize it's not October 1st.

Ellen So yeah, those orders Hall, K amendments Q1, well over the 45 million.

One number.

And my first question that actually was about how much of it at our appeal is four four immediate shipments.

Her immediate shipments.

Yeah, you expect this quarter almost like a.

How much can you it should be if you have yeah, we don't.

The opponents yeah. The remaining of the 909 million the remaining to go in 2022 is $426 million.

[laughter].

Thinking about <unk>.

Okay. Thank.

Thank you.

Your next question comes from the line of Alex Henderson with Needham Your line is open.

Mmm, so looking at the same basic.

Two more appeal.

But what I could do.

<unk> tobacco <unk> 40.

45 million quarters and knowledge.

Been fully refreshed if I were to look at the basketball.

How do we think about.

Please go into the first half of next year, and she's particularly relative to the first quarter.

Because normally you would have a seasonality in the first quarter again.

The drops quite significantly I know you don't want to give guidance. That's her all good is there.

Enough of that backlog at at this point.

Have a.

Different than normal seasonality and maybe lawsuit decline product shields sequentially.

We've had in the past.

It's possible, but we're not going to call it yet.

That <unk> number and backlog number just to remind everybody. It's supply limited and has been for the last.

Months so.

At this point in time, we're kind of.

Continuing to believe we will have the typical seasonal falloff from Q4, two Q1 too early to call that ball.

Given the how dynamic the supply environment is as I mentioned earlier, well things have gotten easier for some broader parts, there's still probably an acute eight to 12 parts.

And suppliers with with kind of.

Each a handful of parks that are really holding up the industry very familiar names that many ceos like myself had been muttering.

Okay.

Okay.

Is.

$245 million and see what the.

Normal September quarter, and it sounds like you have around 90 $91 million or appeal.

For the fourth quarter and then two 2023 is it reasonable to think about is is a scraped backlog and therefore, you've already got in hand.

Well over 50.

60% of C Y twenty-three product sales and and hand or as a large portion of that polluted the service.

A portion of that is related to service I would say we feel.

Good about are expected backlog building into twenty-three and that it gives us.

Although we're not giving full guidance for 2003 at this point, we do expect to grow ahead of the market and twenty-three and our backlog gives us that comfort.

Alright. Thank you also you before.

Okay I just wanted to clarify for those because I want to make sure Alex we get to your question on the on the backlog NR Prp's. So again, we ended the quarter September 24th.

There were a couple of orders that flipped over into the following week, which ended before October October 1st.

That were in excess of $45 million. So the RPM number I think reported that Nancy just went through was without those bookings included so that number would have been the 909 would've been up by over $45 million well over $45 million.

Alright, so what are you <unk> some explosives 910.

That you would have on the.

The trip coming into the quarter.

If you make that one week adjustment.

Correct correct.

Thanks, Alex.

Your next question comes from the lineup, Mike Genovese was Rosenblatt Securities. Your line is open.

I'm great. Thank you very much.

Yes, I want to understand I think I heard you say you had giving twenty-three guidance right now and I don't.

<unk>.

Does that mean, we're not talking about it to 12 anymore for next year.

No. It doesn't mean anything it's just right now we're focused on queue for executing Q4, and we're not gonna make any update to 23 at this point.

No updates to what we've said prior Mike So we're not back on off anything we just want to get through this quarter and make sure we see where there where the stability in the markets and stuff.

Okay.

I'm looking at the presentation for bookings continued at a steady pace.

Prior quarters. This year they were up I I think double digits year over year is that does that continue in the third quarter of this study mean sort of flat year over year.

Yeah. So I think what we're seeing is the forecast that we have for the back half of the year is holding strong with steady growth the timing of that week of ending the 24th October 1st was the only change that we saw Mike.

So we still see that kind of growth rate as we look at the back half of the year and part of the book to Bill or book to Bill just to be clear was just under one and if you take that week into was was definitely over one and consistent with what our thoughts were as we entered the back half of the year.

Okay. So a couple of more questions. If you don't mind first of all I'm on the Icp's.

Really good quarter Pricey P. As it sounds like you have 110 per cent customer.

Where their strengths from other customers not as well or was it primarily driven by one.

No there isn't those as I mentioned in my last call, where we used to only engage one ICP or two at a time, where now kind of position with.

The top seven.

Going forward and some of those are ramping.

You heard in my comments, where we are ramping different applications with each of those ICP. So while there was 110% ICP. There were a couple of very large contributors to the quarter as well.

Alright, and then I'm gonna ask us to it once and that'll be that'll be it for me [laughter].

Uhm.

The supply and we will supply chain.

Like a lot of people have said is.

Still still bad and even a little worse than we thought, but but but you still manage to come in with what I called in line gross margins in line gross margin guide does that mean that the mix shifts the ice sixes even.

Even more powerful than.

Then you caught and then and then secondly unrelated what's the driver of the shower count dropping in four to you from three Q. Thank you yeah. The bird first question, Yeah, 400 basis points was not what we expected on the supply chain drag that is going to eclipse, a 50 million dollar extra costs for us this year.

The positive piece of our margin performance as we said in the script was.

<unk> was was over 30% of product revenue for the quarter so that powerful.

Powerful mix and margin of that product line and vertical integration did.

It did help us mitigate some of that supply chain question will continue to in Q4, and then to 2023 and that same vertical integration in our plausible as we as we move into the metro with our own portables will help us in the future yeah.

Yeah, and on and on the share count it.

It's a somewhat of an unusual quarter because of the new 28 <unk>.

Convert switch or an instrument C, meaning we intend to pay those back in cash. So they are not included in the fully diluted share count we actually have a bridge for you and the material. That's on the website that walk you through the share count calculation.

But I can go into more detail later, if you want but that bridge is actually out there, but it's one of the one of the attribute of an instrument see you would not include those shares in the fully diluted account.

Thanks, Yeah.

Thankfully.

Your next question comes from the line of Simon Leopold with Raymond James Your line is open.

Hey, thanks for it.

Thanks for taking the question.

David I feel like I I heard you say something or suggest something that I wanted to make sure that my imagination running away from it.

It sounds like you suggested.

You're taking some extra share and doing a little bit better in part because competitors are having issues, perhaps with supply chain.

And so part of your your ability to grow fast your market is coming from your supply chain execution relative to others. If you could maybe elaborate on what you were talking about.

No you actually I wasn't intimating that is a fact so.

You got that right that.

A good translation, we are seeing in a number of markets, where maybe people had been waiting or had orders placed.

And they're hitting traffic limits, where they need to bring in an alternative with open lines systems and open transponders or lead times.

On those transponders, given we had planned for a big ramp and wanted to have extra ability to take sure number one.

And number two the vertical integration puts more of that.

Supply chain in our own hands and so that is provided us in many cases, where we can deliver transponders and 12 weeks or 16 weeks compared to somebody else that might've been waiting for a couple of quarters or a year.

And I guess the follow on to that is how sticky is that does that reverse at some point when supply chain needs is for everybody or does it give you some advantage.

Yeah. The way I think about it is when I talked to our customers anytime you experienced a shock like this whether it's Y two K or any of the initiatives that have gone across across corporations and into boardrooms.

Supply chain has been a huge discussion and everybody's boardroom.

And so I think people have just looked at the concentration on where they have their spend in each category, including optical and somebody who has a share taker.

Provides us for more opportunity, where maybe some of the customers have been more concentrated.

Not just temporarily but permanently.

Permanently.

Thank you and then just just a quick clarification I think in the past.

Target for ice six to be 20% to 25% of revenue I believe for the full year.

Yes, the 30 per cent you achieved in this quarter and your outlook for the fourth quarter do you have a revision for the full year target will keep still about 20 to 25 per se nah, It's still 20 to 25 and somebody had the question of full year guidance. That's why on this call. We also mentioned, we're having our Investor day March 7th it OFC. So.

We will try to give you all those metrics like we did I think for this year, we did a nice job, saying, hey, here's what we're going to ramp up six two here's what's going to happen with plausible tears, what's going to happen with operating margins Here's what we believe the supply chain drag will be we will give.

The same kind of detail March 7th in San Diego.

Great I'll be there. Thank you alright, well look forward to essentials.

Your next question comes from the line of meta Marshall with Morgan Stanley .

Line is open.

Great. Thanks, maybe just.

Hearing it on the supply chain that for a minute you know just what form the kind of a more complicated supply chain take this quarter, just trying to get a sense of worth of products that became.

Different products that became unavailable during the quarter or whether just hire broker fees than expected just a little bit of context about kind of what happened versus what you were expecting and then second.

You know the international business is obviously, a little bit weaker either I understand that there's you know lumpiness in project face up there, but you did better backrow and their script. So just wondering what kind of a strengthening dollar had any impact with kind of a European customer base. That's it for me. Thanks.

Both both.

Both excellent questions to go through I think on the macro basis.

<unk> to demand.

Now so far we haven't seen anything significant.

Service providers in general maybe I'll make a comment about spend I think icp's are continuing to grow in their in their data Center. I think you saw that his capex numbers are we expect data center growth to continue in the subsea cables to continue we have very good insight into that as we've been partnering with our client base because those are long.

Projects, when you're planning cables under the sea, we get to see though so that gives us a little bit more confidence that our capex will be prioritised. When you think of the csp's.

And prepared remarks from the largest csp's. Most of them are said look they're going to continue to spend capex, primarily focused on fiber on the implementation of fiber and five G.

<unk> tends to be a very radio heavy first implementation and so that means the intensity of the spend we're seeing is really on that fiber implementation.

Seem Corning announced to they are very conservative company, they announced to factories, one in Arizona, one in Warsaw to actually make fiber, which means this is going to be continued trend b, a little bumpy with the economy, but.

The investment thesis is strong there from a supply chain perspective, I'll tell you. This.

The supply chain costs went up in terms of expedite fees and transportation fees Big time broker fees. Obviously, we grew product revenue, 17% year over year. So in order to do that we have to make our supply available. The good news was it was also a large portion of our ice six which is a lot more under our own.

Vertical integration, so a little bit of our own control. We continued to see again. This eight to 12 parts for eight to 12 vendors that are still ramping up their fab capacity.

An older geometries, an analog technologies.

Those still are biting on the industry and we expect those to he's in the back half of next year.

On the on the FX impact.

On both a quarter over quarter in a year over year I would say modest on the revenue.

Certainly quarter over quarter.

Call It <unk>.

5 million S. But we have a natural hedge in terms of our expenses there subnet and that it was almost neutral to a million bucks impact so not not anything that window will not change.

Great. Thank you.

Okay.

Your next question comes from the line of <unk> with Luke Capital. Your line is open.

Hey, Thank you for taking my question.

Qualifications for David If if you guys are taking sure.

Then why are you. So why are you still.

Taking your ice fix it that'd be contribution can be 20% to 25% is it that the most of the Shogun R. M I six legacy product.

No I mean, I think if you do the weighted average math I mean again you follow this stuff probably even closer that when I look at the competition most of the competition on a year over year basis is down in terms of revenue and significantly down in terms of.

There are gross profit.

Gross profit percentages. So all I know is we're up in revenue by 9% up and product by 17% and I don't believe the competition is there so when the <unk> and others report their market share gains.

The major competitors are down and we're up.

I think we'll be gaining share and that's by the way both on our long haul <unk> as well as in the Metro and we haven't even unleashed our own pluggables yet.

Got it if I take a step back up.

The real quiet.

If I look at your R&D Sunday.

<unk> sequentially.

Worsening inflation.

And you mentioned that you plan on taking.

Taking a leadership role is 800 gigs yard development, so you've got a number of.

Ahead of you you already started coming down with a fever.

<unk> <unk> <unk> <unk> <unk> <unk> ahead of competition.

Yeah, we are a vertically integrated we develop our own fantastically integrated circuits those same.

Integrated circuits can do big transponders like six 800, Giga one <unk> two by 800 gig, which is what our product is as.

As well as that's how we build the.

Transmit receive optical assembly or the <unk> Rosso, which is the largest portion of a plausible.

So that kind of platform development allows us to be efficient in our development now the other side of that we have had some relief because we do some of our development for some of our system software and others in in F X.

Jurisdictions, but not a not a tremendous amount next year again, we've said we will continue to invest in R&D in those critical areas and we've taken our product portfolio that much more simplified set as.

As well as working to expand our go to market.

Investments Y again, if you're gonna gain sure it's not just about having the product, but it's about being there to be able to have the relationships in sales channel with the customer.

I realize you're gonna give you for your outlook for 23.

But.

Does the question do you think that the.

<unk>.

Spending on already and feel good marketing is likely to increase as you look at all these new projects.

And your ambitious.

So if any leadership role.

Yeah, I think overall, you're going to see an increase it by the way there is some inflation going on to as well. So yeah. Both in terms of where we invest.

As well as the inflationary impact good news being operating leverage good news being Nancy mentioned earlier that we intend to grow faster than the market. Good news is you'll probably see margin accretion on the gross level and the bottom line level and that's what we've been doing for the last three years and that's what we intend to do we're just not ready in this market to.

Nailed down the specific numbers, but we feel good about our position growing faster than the market.

Thanks for <unk>. Thank you.

Your next question comes from the line of Jim Super with Citigroup. Your line is open.

Thank you and you're prepared comments, you talked about supply chain have they actually gotten worse than or better and I'm just trying to get.

Get a better understanding or would you just like different things.

Final Park.

Yeah, both the costs went up into three more than we expected by 100 basis points and that was just an order Dino again late breakers that we needed to expedite pay expedite fees to get through to make sure. We meet the big demand that 17% product revenue growth.

We did see some lightning of the overall supply chain environment like general components are beginning to free up as the consumer demand lightened incentives people work through what was their backlogs with a a more robust economy, we still see where there where there was expansionary requirements again.

Very focused number an acute number of components for Lions systems and other things with older geometries that are in the process of building out that capacity and we expect that capacity to be in place an effective for us so that call at three quarters from now in the back half of next year.

We don't see the same dynamic.

Okay. Then my follow up designed more for Nancy probably interest expense going forward. This current run rate that you have this quarter good number or the set of course increased rates by 75 basis points should we remodeling interest expense no upward as we continue on.

No in fact, we're really glad we got the refinance done at the 24 converts when we did so those interest rates you should keep.

<unk> as they are the only ebb and flow would be there as if we utilize the ABL, but that would be on a temporary basis for.

Working capital needs, but as of today and as of the end of the quarter. We don't have anything drawn on that area.

Great. Thanks, so much for these qualifications.

Thank you.

Your next question comes from the line of George and order with Jeffries. Your line is open.

Hi, Thanks, a lot guys I wanted to ask about the mix of vertically integrated products. I think you said the I six was greater than 30%, but do you have an overall number for the mix of vertically integrated products.

Yeah. It was close to 50.

Okay great.

Great and then.

I also.

I wanted to ask also about you guys kept referencing the September 24th quarter and.

Are you, suggesting it was a 12 week quarter or was it within India to 13 quarter or what what's unique about that.

Was just the timing it was a 13 week quarter, we are going into a 14 week. This quarter. So this quarter will end December 31st.

Got it okay Subaru thanks, very much I appreciate it.

Extra with you next.

Your next question comes from the line of SME Chatterji with J P. Morgan Your line is open.

Hi, This is angela to add on for Sonic Caturday.

I just have one question just thinking I had to go that far.

<unk> 20th 23 could you maybe rank order, how you expect revenue grocery trend our customer medical.

That that one is going to be probably pretty tough to do I'll tell ya icp's are going to continue to be very strong for us.

I do believe that you'll continue to see.

Not just in queue for but next year tier one service provider U S.

Beginning to scale up as we have a number of certifications underway, but.

Nothing out of the ordinary for Q4 Q1.

A lot of that has to do with revenue recognition wind projects get complete.

And we've contemplated that kind of normalized mix into nancy's guidance for the quarter.

Okay. Thank you.

Thanks.

As a reminder, if you would like to ask a question at this time. Please press star followed by the number one on your telephone keypad.

Your next question comes from the line of Alex Henderson with meter your line is open.

Great. Thank you. So I wanted to go back to the economy comment about $50 million worth of absorbed supply chain.

Cost increases over normal.

Uhm.

Certainly get the.

The mouthful.

For this year, but I also understand that prices are going up so as you look out into.

The next three or four five quarters.

C.

When the supply chain improves.

400 basis points pulse through to to the gross margins or are there price increases that you're anticipating that would cause the effective normalized.

Cost to go up and.

And offset some of that benefit.

Yeah. It's good it's good question when that happens our job is to offset it.

In our plans I think we've mentioned this in prior calls we've added in 30 million contemplated excess supply chain costs for next year. So remember we said we thought it would be go from 50% to 55 this year too.

Thirtyish next year, but Alex Yeah, you're absolutely right. Some suppliers are going to go ahead and up a chip price here or there are job is to continue to drive that down and we do have annual cost reduction initiatives with our suppliers that I do expect us to supply chain begins to turn we can go get those back we've also made.

Commercial arrangements ie pricing adjustments and things like that in the marketplace that we're not going to go into.

In detail on this call that should be able to mitigate and we will contemplate all of that into our guidance for for next year. When we go through it March 7th.

Okay. So conceptually.

Hypothetically we were to see.

Juruti of that 400 basis points hit to gross margins in three Q.

Fallout say three quarters of the fallout.

In the third quarter of next year.

The expected strategy be too.

To take that to the bottom line or would you take some of that in reinvested into.

R&D sales and marketing and other expenses.

Yeah. That's a good question that will go through I mean, conceptually, what we sound like forecast no no. It's okay conceptually what we said we are increasing our R&D because we've got this <unk>.

Vertically integrated U S based.

Again asset that we view this vertical integration for 800 gig Pluggables 100 gig plausible and 400 gig pluggables is going to be pretty powerful. So you will see us continue to invest their as well as transponders for.

Subsequent long haul as well as you are going to see a step up in sales and marketing.

And we've never had the confidence to go do that.

Because honestly the product line has never been a better shape in the industry dynamics of open and the needs for supply chain diversity has never been there so.

Contemplation is that yes, we will continue to grow sales and marketing and R&D, while we do that and we have to continue year after year to expand margin, while we do it and some of that will come from operating leverage but some of that is going to come from more products vertically integrated and then in 2024. So let's see then I <unk>.

Give any twenty-three, but I will talk about 24.

As the Pluggables become more.

More of our metro platform of our own system products, you're going to see the next kick point margin there as well as well as continued operating leverage but we do have to continue that investment in sales and marketing as well as R&D, I'd say sales and marketing with more intensity than R&D, though.

It just just one clarification on the R&D comment.

While I guess, it's down sequentially and actually down year over year.

Have a lot of prototype costs and things of that sort of thing.

Cause pop some big declines when they fall out is.

Look at the December quarter, it looks like the spin will go up quite a bit sequentially.

And I assume that good chunk of that's in R&D.

Which would put you at a meaningful increase in R&D for the year is that the right way to think about <unk>.

For the fourth quarter.

It is it generally trends as you get we said were <unk>, we were spitting samples out in the back half of the year and beginning to go through certification. So you nailed it on the head that happens in queue for it's not a stark of increases everybody probably expected again, we've got a little bit of the benefit from.

FX, but.

Will continue to increase as we get into next year, albeit.

Still while we while we increase.

Our operating income and increase our gross margins for next year in queue for also with commissions with the plans bookings for Q4 Uhm, you'll also see that step up as well.

The commission during the sales and marketing line Alright. They are correct. When you were talking about total.

Yeah, Okay I understand.

Thanks, Alex.

There are no further questions I'd like to turn the call back to C. E O David heard for closing remarks.

No I appreciate it really good good solid questions I know, it's a it's a difficult market out there a lot going on so we're trying to keep things relatively concise overall, we headquarter the beat expectations and delivered 17% product revenue growth.

Which is which is tremendous given the supply chain environment in our queue for guidance.

The midpoint of prior expectations, so our heads down and get ready to execute two that we've delivered three strong quarters for the first three quarters of the year in a tough match macro backdrop total revenue growth, while the services drag.

Was there was 6% still in that environment with total product revenue growing at 11%. We've expanded our operating margins like you saw this last quarter over double year over year, while we do that so we're really trying to drive that efficiency, while we do that and drive things to the bottom line. So our strategy is working.

We are laser focused no pun intended on driving towards that dollar per share of earnings power and that makes lots of things go well.

And I really want to thank the infinera team for their dedication I mean, we've gone through pandemic, we've gone through wars, we've gone through we.

We are now in a in a recession that we're going through but the great News is there is demand for what we do the capex seems to be very focused on cyber.

And fiber Buildout, that's our specialty we have vertical integration that matters, there and we've got an environment, where we're always stepping away. There is an open architecture for us to insert too so you're going to see our heads down call. It helmets on mouthpieces in and heads down to.

To execute and look we look forward to diving deeper into the strategy in answering all the detail questions you're going to have an R. Investor day on March 7th So we hope to see you there at OFC in San Diego, Thanks take care of yourselves and your families. We appreciate your support.

This concludes today's conference call you may now disconnect.

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