Q4 2022 Infinera Corp Earnings Call
Okay.
Good day, everyone and welcome to the Infinera Corporation Q4, 2022 earnings Conference call. After today's prepared remarks, we will take your questions. If you have a question. During this time. Please press star one on your telephone keypad. It has also started once you remove yourself from the queue at this time I would like.
The hand things over to Mr. Amitabh policy head of Investor Relations. Please go ahead Sir.
Thank you Lisa Thank you and good afternoon, everyone welcome to Infinera fourth quarter of fiscal 2022 conference call a copy of today's earnings and Investor slides are available on the Investor Relations section of the website. Additionally, this call is being recorded and will be available for replay from our website.
Today's call will include projections and estimates that constitute forward looking statements, including but not limited to statements related to our expectations regarding our business model and strategy market opportunities and trends competition customers capacity growth. The shifting open architecture market adoption of coherent <unk>.
Engine, our ability to ramp up six and increased vertical integration the potential for infinera as new sub systems products to drive market expansion increase <unk> profitability and improve infinera competitiveness in the future.
Expectation is also regarding industry wide supply chain challenges in the macroeconomic environment.
<unk> year over year drivers of demand revenue gross margin operating expenses and operating margin.
Investments in our direct sales force and our ability to sell higher margin products to existing customers applying systems and infinera as financial outlook for the fourth quarter and full year 2023.
These statements are subject to risks and uncertainties that could cause infinera as a result 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 25th 2020.
One as filed with the SEC on February 23, 2022, and its quarterly report on Form 10-Q for the quarter ended September 24, 2022 as filed with the SEC on November two 2022 as well as subsequent reports filed with or furnished to the SEC from time to time.
Please be reminded that all statements are made as of today and Infinera undertakes no obligation to update or revise any forward looking statements to reflect events or circumstances that may arise. After the date of this call. Today's conference call includes non-GAAP financial measures, except for revenue balance sheet items and.
Cash flow from operations, which are each discussed on a GAAP basis.
Pursuant to regulation G. We have provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures in our 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. So we ask you limit yourself to one question and one follow up please with that I'll turn the call over to our Chief Executive Officer, David Kerry.
Thanks, Tom.
Good afternoon, and thanks for joining us today I'll begin with a review of our results and then I'll turn the call over to Nancy to cover the details of our financial performance for the fourth quarter and for the full year, our fourth quarter performance was remarkably strong and enabling us to beat consensus expectations on revenue and operating profit.
And contributed to record performance on many fronts, specifically, we reported record revenue of 486 million up 21% on a year over year basis, we achieved product revenue of $399 million also a high for the company and up 26% on a year over year.
Year basis, we delivered gross margins of 38, 7% up 150 basis points year over year, and we expanded operating margins to 10, 5% up 620 basis points year over year.
Relative to our expectations coming into the quarter revenue and operating margin came in above the high end of our outlook range, while gross margin was within the outlook range.
<unk> in the quarter was healthy with a book to bill ratio above one.
The fourth quarter also marked a great finish to 2022, a year in which we grew company revenue by 10% can assist consistent with our stated objective of 8% to 12% with product revenue growth even higher at 15%.
We kept gross margin stable, while absorbing more than $60 million of supply chain cost that adversely impacted our annual gross margins by over 400 basis points.
We doubled operating margin to four 4% up 230 basis points year over year, we ramped up <unk>, 6% to 28% of product revenue for the full year ahead of our stated objective of 20% to 25%.
And we delivered samples of the industry's first software defined 400 gig ZR plus plausible on time with industry, leading reach power and performance as validated by tier one customers.
Im extremely pleased with our performance in 2022, especially considering the range of macroeconomic impacts we faced from a lingering pandemic and persistent supply chain challenges to rising inflation and a backdrop of a conflict in Europe . Despite these headwinds we outgrew the optical systems market gained share.
<unk> improved our balance sheet and continue to extend profitability for the third consecutive year.
As I think about the year there were two primary factors that presented us with some challenges throughout the year, one micro and one macro.
On the macro front as I mentioned earlier, our most profound challenge was navigating a difficult supply chain environment as we absorbed over $60 million of supply chain costs without these elevated costs. Our gross margins would have been 400 basis points higher for the full year and above 40% for the full year, we expect supply costs to remain.
Elevated for the first half of 2023.
On the micro front as we grew our business with customers into new locations and new geographies, we experienced a higher than anticipated demand for our line systems and non vertically integrated metro products. These products do come at lower margin initially, but the expanded footprint sets us up well for future margin expansion as we add <unk>.
<unk> ponders with our own vertical integration.
Let me now turn to some of our portfolio and commercial highlights for 2022, specifically within the system business group, we had three major accomplishments in the year first as I mentioned earlier, we successfully ramped up 6% to 28% of product revenue in 2022, resulting in nearly 30% revenue growth in the <unk>.
Find long haul and subsea market segments, we exited the year with over 76 customers and secured design wins with major service providers, including a U S. Tier one service provider with plans to ramp revenue in 2023 and beyond second revenue in the Metro segment from the <unk>.
30, and X T M products grew by a double digit percentage in 2022, continuing the strong momentum in this segment over the last three years.
Lastly, we continue to advance our suite of automation software, which makes our products easier to use and faster to onboard and open networks over competitors line systems. We also believe software on our <unk> is a game changing and differentiator in the industry.
Helping customers lower operating costs and gain higher levels of visibility and security while maximizing their agility.
Similarly in the sub systems group, we also had several notable accomplishments.
First we turned up the first units of our 400 gig ZR plus software defined plausible in live traffic environments in North America with the tier one service provider delivering industry, leading results in reach power and performance at.
At the upcoming OFC industry shall we look forward to sharing additional details on the recent momentum we've had in our <unk> business.
Second we received commercial validation of these gluggable as for the first set of purchase orders of our 400 gig ZR plus point to point and our 400 gig X our point to Multipoint plausible as we exited the year, we remain on track for product availability in the first quarter of 2023.
Third we advanced the development of our 100 gig XR point to multi point coherent plausible based on the open multi source specifications being developed in the open XR Forum. We believe this plausible will be a game changer in the <unk> mobile edge compute and a new access architect.
<unk> membership and the XR Orem expanded further with seven new members joining the forum in the quarter, including momentum in a tier one north American cable operator.
Forum now includes a total of 28 members, including service providers, representing about 25% of the global Capex spend in this category and several network equipment manufacturers, demonstrating our commitment to open networks in the industry and finally during the year. We also launched the.
<unk>, our next generation 800 gig high performance <unk>, which we will believe we believe will lead the industry in power performance and Manageability.
Looking ahead to 2023, we remain encouraged by the secular drivers of our business our competitive position our plan portfolio and record backlog the insatiable appetite for bandwidth coupled with the significant investments being made in fiber infrastructure are long term positive drivers for infinera and quite frankly the industry.
With that being said, we are mindful of an uncertain economic macroeconomic backdrop, which may result in some near term variability in the timing of demand and capital spending.
Customers manage their business in a recessionary climate, we see no reason to get ahead of our skis at this time and we'll take a prudent approach to 2023, while Nancy will cover the specific details of our financial outlook I'd like to provide some high level color on our planning assumptions for the year first we expect to outgrow the optical system.
<unk> market again in 2023, resulting in further market share gains and.
Industry analysts appear to be coalescing around a growth rate of 4% to 5% for the systems market in 2023, and we believe we will grow high single digits similar.
Similar to last year, we expect our growth to be weighted more towards the second half of the year second we plan to expand our operating margins and gross margins again in 2023, as we continue to ship more vertically integrated products like <unk>, six and as the supply chain costs attenuate in the back half of the year.
In addition, we will exit the year with the next level of margin expansion with our own vertically integrated plug a bulls beginning to fire in our financials.
Finally.
Given the strength of our refresh portfolio and the market opportunity in front of US. We believe it's an appropriate an opportune time to increase investments in our go to market efforts to accelerate top line growth and drive additional market share gains in pursuit of a dollar of earnings per share as our targets overall, we believe.
During steady and solid improvement across our financials portfolio customer service and employee engagement has served us well over the last three years, despite some significant externalities.
Our primary objectives remain unchanged to grow faster than the market drive margin expansion and officially entered the plausible to market.
A multibillion dollar opportunity or eight by four by one strategy is winning as evidenced by our customer and portfolio traction and the demand for our products and services remains healthy we look forward to driving deeper into our strategy growth plans and announcing some exciting additions to our robust portfolio of CIS.
<unk> high end embedded engines and plug a hole products and technologies at our upcoming Investor Day on March seven 2023 at OFC, the optical fiber communications industry show in San Diego, California.
As I close today I would like to thank the Infinera team for delivering on our solid 2022 and their continued commitment to care to our customers and one another I would also like to thank our partners customers and shareholders for their continued support.
I will now hand, the call over to Nancy to cover the financial details of the quarter and the outlook for the first quarter and year.
Thanks, David and good afternoon, everyone I will begin by covering our fourth quarter and full year results and then provide the outlook for the first quarter and full year of 2023.
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.
The fourth quarter wasn't all around great quarter for US we delivered record revenue above to bill ratio greater than one higher gross margin double digit operating margin and GAAP profitability.
Revenue in the quarter with $486 million, a new high for the company and up 21% on a year over year basis with product revenue up 26%.
This year over year growth was driven primarily by the strength in the Americas and with ICP customers. The continued ramp of <unk> six and ongoing momentum in our metro business.
Revenue in the quarter also benefited from the early completion and acceptance of approximately $30 million of projects that were originally slated for acceptance in the first quarter of 2023.
Performance in the services business improved further with revenue up 19% sequentially and 3% on a year over year basis, as we continued to recover from the supply related impact earlier in the year.
Geographically, we derived 61% of our revenue from domestic customers a level higher than normal due to the strength at several service providers and ICP is in the U S.
During the quarter, one ICP customer contributed to greater than 10% of our revenue.
Q4 gross margin of 38, 7% was within our outlook range and up 150 basis points on a year over year basis, and 90 basis points sequentially.
Relative to our expectations from about 100 days ago. When we provided our outlook gross margin came in about 200 to 300 basis points, lower, especially when considering the high performance of revenue compared to our outlook range.
Approximately two thirds of that shortfall was due to the impact of product mix, including higher revenue from lower margin Metro and line system products, while approximately one third was from higher supply chain costs.
Operating profit in the quarter was $51 million up to approximately 200% on a year over year basis with an operating margin of 10, 5% compared to four 3% in Q4 of 'twenty one.
This margin performance in the quarter clearly highlights the operating leverage potential in our business model, which we believe will only get better as we drive a higher percentage of vertical integration and our product mix and with the benefit from the attenuation of supply chain cost in the second half.
Operating expenses of $137 million in the quarter were slightly below our outlook range of $140 million to $144 million as we tightly manage spending in the quarter.
The resulting diluted EPS in the quarter was 16 cents per share up from three <unk> in the year ago quarter.
Moving onto the balance sheet and cash flow items, we ended the quarter with $189 million in cash and restricted cash slightly down from last quarter. The primary use of cash in the quarter was working capital to fund our growth as we strategically built inventory and invested in securing our supply chain, while the use of.
Cash by accounts receivable is typical of the fourth quarter seasonality in our business.
Consequently cash flow from operations was approximately flat in the quarter and free cash flow was an outflow of $9 million.
As I reflect on our performance for all of 2022 I am proud of the progress we made with our business model portfolio and customers. Despite operating in a very difficult macroeconomic environment as you heard from David for the full year of 'twenty two.
We delivered record revenue of 1.5 dollars $7 billion up 10% on a year over year basis, and within our stated range of 8% to 12% growth.
We ramped up 6% to 28% of product revenue above our stated range of 20% to 25%, we set a record for bookings and backlog and exited the year with remaining performance obligations of $983 million up $220 million year over year.
And we more than doubled operating margin to four 4% up 230 basis points year over year and within our stated range of 200 to 300 basis points of operating margin expansion.
Furthermore, we strengthened our balance sheet by refinancing a portion of our debt and therefore, reducing our 2024 convertible debt to approximately $100 million down from over 400 million. Previously we also put in place a new ABL facility in the year with expanded capacity and better terms.
Let me now turn to our outlook for the first quarter of 2023, we remain encouraged by the long term drivers of our business customer momentum and record backlog at the same time, we are mindful of the uncertain macroeconomic environment, we are operating in and the potential for some near term impact to customer capex.
Budgets, we expect supply chain cost to carry over from 22 into 2023 with their impact being more pronounced in the first half of the year.
Taking these factors into account, we expect Q1 revenue to be in the range of $380 million, plus or minus $15 million, representing approximately 12% growth on a year over year basis at the midpoint of the range.
Normalizing for the $30 million of higher revenue in Q4 from the early acceptance of certain customer projects. Our Q1 outlook is consistent with the typical seasonality we experienced in our business. We believe our revenue trajectory in 2023 will mirror the trend of the last two years with a stronger second half.
Half compared to the first half.
We expect Q1 gross margin to be in the range of 38, 5% plus or minus 150 basis point up 230 basis points year over year at the midpoint of the range. The primary driver of the year over year increase in gross margin is the higher percentage of vertical integration and our mix also embedded in the gross margin.
Outlook is our assumption that we will continue to absorb significant supply chain impact in Q1 from elevated costs and expedite fees.
We are forecasting Q1 operating expenses to be in the range of $139 million to $143 million up sequentially as we accelerate investments and global sales and business development to take advantage of the growing market opportunity, while continuing to invest in our R&D roadmap.
The resulting operating margin in Q1 is expected to be approximately one 5% plus or minus 250 basis points up approximately 250 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 earnings per share in the range of a loss of two plus or minus four cents per share assuming a basic share count of approximately 222 million shares and our fully diluted share count of 262 million shares.
Okay.
Looking further out to the full year of 2023, we remain focused on making continued progress in our financial performance as we March towards a dollar and earnings per share over the next few years.
Our outlook for the full year of 2023 contemplates. The following first revenue growth of approximately 8% considering the approximately $30 million of additional revenue in Q4, the uncertain macroeconomic environment and our record backlog. We believe it is prudent to set our outlook toward the lower end of <unk>.
Lower end of our long term, 8% to 12% growth rate range for now I want to reinstate that we remain committed to our long term growth rate of 8% to 12% higher than the growth rate of the market.
Second gross margin of 40% plus for the full year up approximately 300 basis points of year over year. The two key drivers of gross margin expansion in the year will be the continued ramp of <unk> and our expectation of some relief of supply chain costs of approximately $30 million with most of the benefit expected to flow through the second.
Half of the year.
Finally, we are planning for continued operating margin expansion with operating margin up 125 to 200 basis points year over year as we accelerate investments in our go to market engine.
As I close today I want to reiterate my confidence in our eight by four by one strategy, our long term business model and our commitment to a dollar per share and earnings over the next few years I would also like to extend my thanks to the Infinera team, whose unwavering commitment to innovation execution excellence and to one <unk>.
Other is remarkable in addition, I would like to thank our partners customers and shareholders for your continued cooperation and support we look forward to seeing many of you at our upcoming Investor day at the OFC industry show in San Diego on March 7th.
Lisa I'd now like to open the line for questions.
Thank you and just a reminder, everyone that is star one on your telephone keypad, if he would like to ask a question.
We will take our first question from Alex Henderson Needham.
Great. Thank you very much.
So I was hoping you could talk a little bit about.
The mechanics around your backlog and book to Bill number in the fourth quarter and how we should think about.
Backlog slash.
Working down over time.
Can you give us some sense of what your expectations are in terms of what you might have in terms of excess.
Orders on the book as you're exiting the year or do you still anticipate that just some color around that would be helpful. Thanks.
Yes sure.
Remaining performance obligations, which is our kind of proxy for backlog was up $220 million year over year at 983, which was a record for us.
So even though we did see some earlier acceptances in Q4 than we originally expected.
You know, we're looking at Q1 and the first half seeing our customers.
Start to work through some of their own backlog and we would expect to do the same however in the back half of the year as that demand first half second half.
Plays out again, we would expect that we will once again.
In a position where we're building that backlog in the second half.
So for the total year book to Bill at this point in time is forecasted to be above one.
So you're sure you're expecting 2023 book to bill to be above one that's helpful. Thank you.
Youre welcome.
Yeah.
Our next question is Mike Genovese Rosenblatt Securities.
Hey, Mike.
This is Andrew King on for Mike.
Just a quick question around demand in the U S, particularly around the tier one and the other service providers can you give us any idea.
Demand trends around there changed a lot of what we've heard is that advanced ordering has slowed can you just talk to us about what those customer conversations sounds like now versus a couple of quarters ago Yeah.
Yes.
That's accurate and Alex's question kind of perks.
Precludes that.
As we look at the first half of the year. This year I think a lot of people are coming out of the box a little bit slower in terms of their capital planning trying to eat any of that excess inventory is we do see the actual supply chain beginning to alleviate those costs again are still carrying over into the first half of this year. So I think youre going to see a little bit of a slow.
Down in those orders in the first half yet picked up in the back half because the csp's.
They may hold or cut some capex the priority of their capex is still on the rollout of fiber in terms of spending both fiber access and then obviously driving the speeds to bring that back into the metro and long haul network on the web scale or <unk>, we continue to see their cloud services.
<unk> continued to grow despite people talking about layoffs in certain segments of their of their area.
And again, we now have exposure to all seven of the top.
So.
Again, we think people are going to moderate and hold less.
Order less sooner.
But I will tell you the positive element of that as we've seen better planning coming out of the CSP and Icp's, which is why Nancy and I are able to look better at a long term or a full year view now versus a year ago today.
Great color, there and then inject.
Sure.
Yeah.
Next is George Notter Jefferies LLC.
Hey, guys. Thanks, Hey, George I'm, just I'm, just curious about the mix of IL six in Q4 as a percentage of product sales.
The comment for the full year I'm, just curious about Q4.
Yeah, it approached 40% getting in that range.
Okay and then.
As I think about your gross margin guidance for next year I think he said, 40% for the full year.
What kind of mix of ice six does that contemplate.
Yeah, I said, 40% plus I'm, giving myself, a little room, there, but 35%.
But as it from gross margin.
Yeah, Yeah yeah.
And for <unk>, we're thinking 35% to 40% for the full year.
Of product revenue.
Got it Okay. And then is that is that a lower mix than you were thinking previously.
It feels like the gross margin assumptions for next year are down a little light.
This is quite apples to apples, but I think you guys were kind of talking about a mid forty's exiting the year this year.
Now, it's 40% for the year.
Is the gross margin perspective, a little bit lower is there something driving that is it mix is it something else we're missing here.
Really good question a piece of that George is certainly.
We've talked pretty consistently about the supply chain costs, so that $30 million that we talked about roughly having from last year that'll be very weighted in the front half of the year, we already know based on backlog and purchase commitments out there and the in the PPV we've laid out.
That is more likely to hit a large portion of that in the front half of the year. The second piece is were continuing to lay out.
The mix of blind systems and metro prior to the vertical integration coming in.
Got it okay, alright, thanks, very much I appreciate it.
No worries.
Our next question is Simon Leopold Raymond James.
Thanks for taking the question.
First thing I wanted to ask you about was recently there have been a series of press releases from us.
Other optical systems players regarding newer generations.
I know Youre, just starting to hit your stride on I six so it seems early to be asking you about seven or whatever you'd like to be calling it but given that the series of headlines in the timeline.
And what kind of assurance can you can you offer us in terms of your roadmap towards our Nexgen platform and then I've got a quick follow up.
It's a good question and this always happens about this time of the year right as we get into as we get into OFC. It always conveniently around our earnings call.
So Simon it's the best I've felt.
We will lay out our roadmap for <unk>, which will be very in line with an eight by four by one strategy in terms of our plausible strategy that you've heard us talk about an 800 gig or 400 gig and 100 gig.
And remember that's attacking about 60% of the market in terms of Metro.
And getting out to access on the long haul side.
Because of our block technology, and us being fully vertically integrated.
We are actually working on two generations of technology that we will announce at OFC and we feel very very strong about our competitive position. We all know that these product cycles take lots of time <unk> will be a very 800 gig will be a very long product cycle.
But again I think we feel very good we've got a 7% nice eight.
On that.
Great and then just as a follow up I wanted to see if maybe you could unpack.
What youre seeing from the cable TV vertical, particularly given charter specifically has laid out a plan and Comcast has been investing in.
In the past that those have been good businesses for you and just wanted to see how youre thinking about the trend in cable TV over the next year or two thank you.
My sales team isn't listening to this call because I would say I don't believe they have been great segments for us.
That is one of the areas, we are growing and putting more investment in.
Because as they move to these next generation architectures, I mean, youre hearing not only about two gig to the home, but now youre starting to hear about five gig and 10 gig for the home.
Those architectures are going to be very very reliant on our <unk> by four by one strategy. So.
Look what I'm seeing is investment Youre right.
We've got the right port portfolio at the right time, but we've got to make sure. We've got the right go to market relationships and channels to be able to get there.
But my expectations are raising for that my expectations are raising for that segment.
You've been you've historically, you've been strong with a couple of those guys in <unk>.
Let's say some share loss in the last year or two.
So I'm just wondering if you're sort of making a comeback.
Yes, yes, so youre, referring to one major one msos here and one in Europe , I think we feel very good about our position without revealing any particulars about the customer summit and just as a reminder, we also mentioned a new six wounded with a cable operator last quarter so disciplined.
Great I forgot about that so thank you.
No worries.
We will now hear from semi chatter J J P. Morgan.
Hey, Thanks for the question. This is Joe Cardoso on for <unk>. My first question on the sequential improvement in Europe .
The new level, there is still kind of in the sub 100 revenue run rate can you just provide an update on what youre seeing in that region and whether demand trend. There. So overall positive and then more specifically touch on the Hawaii displacement opportunity whether there has been any.
Encouraging developments on that front, and whether youre seeing any share gains or whether you'd rather taking any share gains into your guidance for 2020 through relative to that and then I have a quick follow up.
Okay, well good all good questions I think the subsea segment is reasonably lumpy, but as we stated in our prepared remarks that the long haul and subsea segment overall was up 30% on a revenue basis year over year. So we feel really good about our position there not just now but as I mentioned.
Over the long term with our roadmap did you have something yeah, Hey, Joe just to clarify was your question on Europe or subsidies.
The question was on Europe .
So on Europe , Yeah look I think on Europe , we did see a bit of softness in the European region. I think based on a couple of factors one of which is FX, which we don't disclose by region, but obviously, that's the one that gets impacted the most for us.
The second is look I think service providers, they are digesting a bit as well as looking at their their budgets on operating cost.
As we've noticed especially from the conflict between Russia, and the Ukraine power costs have gone up as I talked to the Ceos and <unk> in that area, they're power budgets have gone up.
Two to four fold over the last two years.
So I still think that we're going to see nice robust growth there, but the third element of that is where we are continuing to add sales and marketing resources for both Europe and the middle East, we think that can be a that's going to.
To be a very robust and high growth area for us.
And then just any progress in terms of the Hawaii.
Placement opportunity in that region and is any of that baked into your guide for next year.
Yes, so look let's let's talk about the growth rate, so our growth rate, meaning the revenue that Nancy and I projected a 100 days ago. When we were contemplating next year has not changed the absolute number hasnt changed we happened to have a bit of business come in in terms of acceptances and supply chain relief in the fourth quarter that we assumed.
Would be in Q1, so the absolute number for 2023 has not changed where we talked about having an 8% growth rate in 2022, and maybe 10% next year. It flipped just because of that.
The Huawei opportunities, they are becoming harder and harder to decipher because they're just not being invited to new tenders and so we are seeing a bigger inflow of future tenders. In fact, we have some very big ones in house for that particular region, where it is just they are not included in that so I do think that we do see opportunity there.
But given everything else I just didn't don't think it pays for us to get ahead of our skis in terms of the growth rate for next year of contemplating anything bigger than that I think those are some significant tailwind for our business for the long term for sure.
Now don't forget all the.
Sorry, I don't forget that there are 12% roughly of if you think of their overall market share outside of China, It's about 12.
12%.
<unk> continues to be up for grabs for again the best.
The best solution provider over the next couple of years.
Got it I appreciate the color guys. Thanks.
Yes.
So hard to John with capital is up next.
Great. Thank you for taking my question.
As if you already addressed this but if I look at your <unk> guide.
Oh bit more below typical seasonality and.
One correct me, if I'm mistaken, but you had maybe 14 weeks in the quarter.
In the fourth quarter is that correct.
Can you just help us understand what's driving the above seasonality weakness.
Yes. So in Q4, we saw about $30 million of revenue that if.
If you look at the exceeding of the outlook range that we had originally anticipated what hit us in Q1 that we're actually able to close down in Q4. So if you if you take.
Take that into consideration the seasonality is about normal about 9%, so thats why youre seeing that.
That higher number just if you look Q4 to Q1 directly I also wouldn't call it 12% year over year growth in the Q1 contemplated guidance weakness.
We're splitting hairs there.
And then for the year as David was saying if you look at the full year growth.
If you look at this over two years right. The CAGR on that is is over 9% for the two years. So it's a matter of just timing on when that revenue hit us.
Got it.
To ask a little bit about the supply chain dynamics, one of your contract manufacturers talked about.
Some incremental new challenges for 400 gig and higher speed.
System I guess.
A new component shortage anything can you.
I don't know us about what youre seeing in terms of supply chain that you still continue to see the same level of <unk> is it getting more challenging.
Yes, I wouldn't say, it's getting more challenging I would say, it's the same star six to eight suppliers in a handful of components underneath that are driving huge portion of expedite and cost.
But I do believe that we are seeing relief along the way. So in the first half we're going to see some pretty significant costs continue.
Then in our plans they dissipate in the back half of the year in general the supply chain is much healthier than it was at the beginning of last year. So I'm a lot more optimistic.
I appreciate the answer thank you.
Paul.
Our next question is meta Marshall from Morgan Stanley .
Great. Thanks.
Maybe just a second on the product mix on the gross margins I just wanted to get a sense of that.
New implementations and just kind of initial dip.
Deployments that are kind of causing that product mix down or is there a more fundamental kind of metro gross margin kind of.
Headwind that we should be thinking of and then just second on the go to market efforts during kind of the investment there I mean, I think you somewhat alluded to it with cable kind of.
Being.
Meaningful target market for that better just where should we consider kind of the the bulk of those investments being made thanks.
Sure on the yeah on the Metro I mean, it's new wins right. So we've talked about this now for a couple of quarters and we look at the growth rate, we're seeing there.
The challenges that the metro today isn't vertically integrated yet, but it will be with our own plausible and when that happens we see that margin expansion, but we are seeing new wins, whether that be in metro or in line systems.
It's not anything that I would say is is new in terms of the metro margin. It's just a matter of that we're winning more business there.
Yes, I would say the other thing just to add for everybody to be aware of is I think amitabh. This is like for the second and third year in a row or align systems, we've under forecasted when their impact which is.
That for the short term good for the long well I'd say, it's good because those are wins.
But it's dilutive to the gross margins in the short term and contemplated into Nancy's first half second half is.
In the supply chain there were some components that were really holding up everybody's line systems and so we are seeing those now come to revenue in the first half of this year.
Coming out of backlog and those are dilutive. So while <unk> is going to continue to grow in our operating efficiency is going to continue to get better what will fight as the layout of those licenses, which is great because it means we're winning new routes and new opportunities.
That'll be again dilutive in the first half as well as metro 40% to 50% of that bill of materials is that plug a hole and we will we have our own plausible now that will be available commercially this quarter.
But as we go to implement that we won't really see a significant financial benefit until kind of as we exit the year.
So those are that's the margin dynamic so meta on your sales.
And go to market question I would tell you that without giving away strategy here certainly the cable area the middle East.
Europe in those Huawei replacement opportunity markets, and then Theres a lot of jurisdictions that we're not in so we're investing pretty hard in the channel because where we are missing opportunities.
The number one root cause when we do a loss analysis is we werent there.
We didn't know the deal was really going down and we didn't have the relationship. There. So we feel good enough about our portfolio of the market and the position that it's time for us to lay that.
Sales and marketing and go to market resource down.
Did that answer your question Yeah, no that answered. Thank you so much.
Thanks, Matt.
We'll go to Dave Kang with B Riley.
Hi. Thank you. Good afternoon first question is regarding hi regarding XR.
Hear you correctly that you guys got purchase orders and how should we think about revenue projection for the next couple of years.
Yes, so I think what we've said.
In our in our prior remarks, and as we did our last analyst day.
We will start to see those external sales as we see today I get very excited when I see other network equipment manufacturers on boarding that because the reason we've tried we've stayed in our API four by one strategy is an optical player and not making switching and routing.
Alex is we don't want to compete with those that we're supplying.
So I think externally youll youll start to see that ramp this year.
It's not going to be a huge number this year, but you will see.
We will see design wins that will relate to <unk>.
More marketable revenue in 2024, we will also begin to again as we exit the year were qualifying and our own metro platform, but by the time that rolls through the revenue recognition cycle and the income statement.
That will really be the big story in 2024 in terms of continuing this margin accretion that we've been on and I would say at our analyst day, we plan to kind of walk through.
How that transpires over the next several years and show the impact that it can have on our overall business model.
I think in the past.
But that's our Sam to be about $1 billion to $2 billion.
Maybe you'll go over that during the analyst day, but what do you think your.
Your market share will be.
Yes, so thats not something let's talk more at the analyst day I will tell you if Europe lovable player in the industry.
Having the vertical integration the SaaS capabilities to advanced packaging capabilities all.
All the assets. We have you can you it's not a small youre not a small player. There are no niche players in that market. So it's kind of an oligopoly and so the numbers numbers of market share tender fall within that structure and we'll talk more about that in the analyst day. It's a good question that Dave.
Got it thank you.
Okay.
As a reminder, it is star one if you have a question we'll go to Jim Suva Citi.
Thank you David Nancy I think both of you mentioned dollar of earnings per share I, just wanted to calibrate and make sure you werent referencing.
Referencing for 2023, I'm quite certain of that but do you have a timeframe of when that is.
No I was not referencing twenty-three, but rather you can think about that in the 25% 26 timeframe and we'll walk through what has to happen during analyst day to whether it falls on the 25 line or the 26 line.
Great. That's exciting and then when you mentioned in Q4, you had some early customer acceptances does that mean that in 2023 that these are potential customers that they're going to be doing future rollouts and purchases faster than expected is that how we should kind of think about those growing customer acceptances.
That you referenced.
Some of them, yes, I mean, some of them. It was a matter of whether it fell in December January and when we thought it was going to hit but certainly they were new wins and so we're pleased that we have them as customers and would expect them to grow.
And then the second is on the line systems, where we have line systems coming in in December that allows us to start that process in that timeframe in order to fill those line system.
Earlier, which is good.
Okay and then my final question, probably for Nancy CFO , how should we be thinking about kind of cash flow for 2023 seasonality or variability as we progressed through the year for cash flow.
Yeah, certainly our plan would have us generating cash from operations in the care and modest free cash flow.
Again, we are going to be absorbing about $30 million in terms of additional supply chain costs and my contemplation there.
But are we saw in Q4, the additional supply chain the ability to bring on additional inventory, which we took advantage of and want to get that turned out to our clients and so I'm pleased that.
We were able to do that.
One of the things I did not mentioned is we have not we don't have anything drawn on our ABL at this time, either so that still remains available to us if we needed to for working capital for 23 for the year generating free cash flow and modest I'm, sorry, generating cash flow from operations and modest free cash flow.
Great. Thank you, David and Nancy for the details.
Chip.
And everyone. At this time there are no further questions I'll hand, the call back to management for any additional or closing remarks.
Yeah, No I appreciate it and all very good questions look overall 2022 was a very solid year. We grew the top line, 10% ahead of the market gained share and more than doubled our operating profit in the year.
That's the third consecutive year of improving our financial progress, we think that steady consistent approach is going to be great for executing rate by four by one strategy.
That strategy is working and is winning with.
We delivered this performance, while we really address some really tough macros, I mean absorbing over $60 million of supply chain costs and continuing to improve the margin level.
At the rate we did well.
Executed our product portfolio to the timing.
Our expectations in the performance ahead of our expectations in terms of the products I wanted to remind you all that having the right elements of vertical integration has never been more important.
So as people talk about increasing the speeds of baud rates and wave sizes.
Having our own components baked into photonics integrated circuits, our own U S based fab our own U S. Based advance packaging allows us to have our own low low noise high output lasers, our own modulators photo detectors advanced RF packet.
Packaging the facility facilitate higher baud rates. That's why we're so comfortable that these block technologies are allowing us to move faster through our development cycle at greater R&D efficiency for both our subsystems business that we intend to be a leader in and.
A systems business that we intend to continue to gain share now this year.
I think what we're seeing is people going through their budgets and I believe we're going to see again that dynamic of eating into backlog for the first half.
And gaining overall book to Bill in the second half of the year and for the year. So demand continues to look strong.
We'll give you lots more guidance as we as we lay this out at OFC, we look forward to seeing you there.
And again look forward to your continued engagement. Thank you all for your continued support have a wonderful day or evening.
Thanks, Kevin.
Once again, everyone that does conclude today's conference. Thank you all for your participation you may now disconnect.
Please wait the conference will begin shortly.
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Okay.
Yes.