Infinera Corporation Q1 2023 Earnings Call
Speaker 1: Good day. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the Infinite Air Force Quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise.
Speaker 1: After the speakers are marked, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again press the star one. Thank you. Amitabha Pasi, Head of Investor Relations, you may begin your conference.
Speaker 1: Thank you Rob and good afternoon. Welcome to Infineras first quarter of fiscal 2023 conference call. A copy of today's earnings and investor slides available on the investor relations section of the website. Additionally, this call is being recorded and will be available for replay from our website.
Speaker 1: Today's call will include projections and estimates that constitute forward looking statements, including but not limited to statements related to our future business plans, product development and growth opportunities, including progress against strategic priorities and milestones, trends, competition and customers.
Speaker 1: capacity growth, expectations regarding industry-wide supply chain challenges, and the macroeconomic environment, market adoption of coherent optical engines, expectations regarding the launch of our subsystems of business, and its impact on our financial results, expectations regarding obtaining government funding, projected urevia drives of demand, revenue growth margin, operating expenses, and operating
Speaker 1: Actual results met different materially as a result of various risk factors, including those set forth in an annual report on Form 10K for the year ended on December 31, 2022, as filed with the SEC on February 27, 2023, as well as subsequent reports.
Speaker 1: file the width or furnished to the FEC from time to time. Please be reminded that all statements are made as of today, an infinite amount of takes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call.
Speaker 1: Today's conference call includes references to non-GAAP financial measures, except for revenue, balance sheet items, and cash flow from operations, which are discussed on a gap basis. Pursuant to regulation G, we've 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'll allow for plenty of time for Q&A today that we ask that you limit yourselves to one question and one follow-up, please.
Speaker 2: and we're focused on delivering to the technology roadmap and timeline that we laid out for you during our investor day. Fifth, we're continuing to position ourselves for the Chips and Sciences Funding Act to augment our existing business plan. As a US-based optical semiconductor manufacturer, Infanera is well situated at a time with significant government funding, is on the table to reshore and secure critical supply chains. And finally, we're driving towards our full-year plan for revenue growth and margin expansion. As you've just heard, Q1 revenue was 16% and above our 8%
Speaker 2: the ICP segment which represents 25 to 30 percent of our revenue and less than 15 percent of the overall optical systems market, we've seen a bifurcation in customer behavior. While some of our ICP customers are digesting inventory and working down backlogs, we're winning and shipping to others who are gearing up for artificial intelligence.
Speaker 2: Despite this macroeconomic backdrop, we're continuing to land new design winds with our strong portfolio as customers look to diversify their vendor base. Furthermore, spending priorities across our customer base remain centered on fiber builds, higher speeds and feeds, lower cost and power efficiency.
Speaker 2: These are areas that firmly hit our sweet spot. Our overall sales funnel is solid and our p- our p- activity is quite healthy. As we stated during our investor day, and like the prior two years, we expect to grow ahead of the market in 2023 with bookings weighted towards the second half of the year.
Speaker 2: In the meantime, we're staying focused on our growth strategy, prioritizing investments in expanding our market reach and building our pluggables business while being judicious about all other expenses. At this point, our bottoms-up view supports our annual plan for 2023. As you've seen from our press release today at the midpoint of our outlook range for Q2 2023, we're looking at a low-level growth strategy that's been
Speaker 2: We would deliver 10% year-over-year revenue growth in the first half of 2023, which is above our annual target of 8% while continuing to expand margins. In closing, while there is some near-term uncertainty in the market, it's our expectation that much of what we're seeing today is short-term and timing related and not a reflection of any long-term, long-term underlying demand. We were executing to the six strategic milestones we out-learned outlined during our annual
Speaker 2: I would also like to thank our partners, customers and shareholders for their ongoing support.
Speaker 2: I will now turn the call over to Nancy to cover the financial details of the quarter and our outlook for second quarter. Nancy? Thanks, David. Good afternoon, everyone. I will begin by covering our first quarter results and then provide the outlook for the second quarter.
Speaker 3: For your reference on our Investor Relations website, we have posted slides with financial details, including our gap to non-gap reconciliation to assist with my commentary.
Speaker 3: As you heard from David, the first quarter was a solid quarter for us, in which we delivered double digit year-over-year revenue growth with keep financial metrics, revenue, margins, and EPS all coming in above the midpoint of our Outlook range.
Speaker 3: Revenue in the quarter was $392 million, up 16% on a year-over-year basis, with product revenue up 18% year-over-year. This performance was driven primarily by strength in the Americas and with ICP customers, and was across both our GX portfolio and line systems. Geographically, we derived 60% of our Q1 revenue from domestic customers.
Speaker 3: a level consistent with Q4 as we saw continued strength across our customer base in the U.S.
Speaker 3: Q1 gross margin of 38.8% was above the midpoint of our outlook range and increased 260 basis points year over year.
Speaker 3: Compared to the year ago quarter, Gross Margin benefited from higher I-6 revenue and some relief and supply costs, partially offset by higher line systems revenue and services as we continue to work through our lower margin professional services backlog.
Speaker 3: As we have discussed in prior calls, line systems revenue comes at a lower gross margin, but the expanded customer footprint boasts well for the future attachment of higher margin transponder sales. Operating profit in the quarter was 13.6 million with an operating margin of 3.5 percent.
Speaker 3: compared to an operating loss of 3.5 million in Q1 of 2022. On a year-over-year basis, we expanded our operating margin by 450 basis points, benefiting from higher revenue, higher gross margin, and improved operating leverage. Operating expenses of 138.6 million in Q1 were slightly below our outlook range of 139 to 143 million, as we tightly managed quarterly spending.
Speaker 3: The resulting deluded EPS was 2 cents per share at the high end of our outlook range, which compared to a loss of 7 cents in the year ago quarter.
Speaker 3: Moving on to the balance sheet and cash flow items, we ended the quarter with 170 million in cash and restricted cash, with no amount drawn on our ABL.
Speaker 3: The primary use of cash in the quarter was working capital as we continued to strategically build inventory while reducing our payables. Consequently, cash flow from operations reflected a modest use of 1.8 million in cash in the quarter and 18.6 million in outflow and free cash flow.
Speaker 3: Let me turn now to the outlook for the second quarter of 2023.
Speaker 3: While we remain encouraged by the long-term drivers of our business, our design lens, our above industry growth, and healthy backlog, we are cognizant of the environment we are operating in as our customers take a little bit more time to determine their spending priorities for the year. However, we don't expect this transitory effect to reflect a material shift in the longer term drivers of our business.
Speaker 3: first half of 2023 over the first half of 2022.
Speaker 3: Partially impacting our Q2 Outlook is the pushout of an approximately $20 million government project that we now expect to materialize in the second half of the year.
Speaker 3: Overall, we believe our revenue trajectory in 2023 will mirror the trend of the last two years with sequential growth in both Q3 and Q4 and a stronger second half compared to the first half.
Speaker 3: We expect Q2 margins to be in the range of 38.5%, plus or minus 150 basis points, up 240 basis points year-over-year at the midpoint of the range.
Speaker 3: The primary driver of the year-over-year increase in growth margin is the projected greater contribution of I-6 in our revenue mix and a continued abatement of supply costs, partially offset by a more acute impact from lower margin line systems and metroproducts that are currently non-vertically integrated.
Speaker 3: We are forecasting Q2 operating expenses to be in the range of 140 to 144 million, modestly up sequentially as we continue to prioritize investments in global sales and business development to take advantage of the growing market opportunity and as we continue to invest in our product roadmap.
Speaker 3: up 20 basis points on a year over your basis at the midpoint.
Speaker 3: Below the operating income line, we assume $7 million for net interest expense and $4 million for taxes.
Speaker 3: Finally, we anticipate a loss of 3 cents per share, plus or minus 5 cents, assuming a basic share count of approximately 226 million shares and a fully diluted share count of approximately 267 million shares.
Speaker 3: The midpoint of this Q2 Outlook range would represent your over-year improvement across all Outlook metrics, revenue, growth margin, operating income, and EPS.
Speaker 3: As we look ahead, at this point we are leaving our full year 2023 outlook unchanged. Consistent with the messaging during our investor day in March, we expect our revenue growth to be approximately 8% for the year and our annual EPS to be above 20 cents for 2023.
Speaker 3: As I wrap up today, I want to thank those of you who attended our investor day in March, and I enjoyed seeing you in person. We had record attendance at our OFC booth. Our portfolio and technology roadmap are clearly resonating with our customers, and we believe the investment thesis is compelling.
Speaker 3: We are focused on executing our strategy, delivering on the six milestones, and driving at least a dollar EPS by 2526.
Speaker 3: I would like to thank the Infinero team for their continued commitment to innovation and execution excellence, and our partners, customers, and shareholders for their continued cooperation and support. Operator, I'd like to open it now for questions.
Speaker 1: At this time I would like to remind everyone in order to ask a question press star then the number one on your telephone keypad And your first question comes from a line of Mike Genovese from Rosenblatt Securities. Your line is open Hey Mike. Hi David, thanks for the question. I guess you know David when you're talking about cloud
Speaker 1: And whether you think the markets, which one feels relatively stronger or relatively weaker in the second quarter? And do you think that that same kind of trend will continue in the second half or do you have different expectations?
Speaker 2: No, it's good question. What I was actually saying is exactly what you repeated back, which is this bifurcated, there's some, you know, and they publicly announced their numbers, right? So some of their web services slowed down from some really fantastic growth rates, I mean, some above 40%, right?
Speaker 2: there's still some high double digit growth rate. So I think, you know, we've all expected them to digest some inventory and burn down some backlog. And so I think that's a couple of quarter issue. Well, there's a second set of them when you look at their CapEx, I think there were three or four that are driving these machine learning and AI workloads, which are, you know,
Speaker 2: Everybody told us they were going to be 10 times and you don't believe it until you see it in the forecast and then ultimately in the order book. So I think as I said at analysts today they're going to continue to be lumpy but I think the demand will be there. I think even the ones that have slowed down to burn off the backlog work loads are still going to when they're growing double digits.
Speaker 2: happens in times like this when you hear the R word recession, a lot of them are sweating their assets and running a little hotter and burning down backlog. That being said, you know, service providers typically when they cut their budgets, you know, some of them that are spending 18 billion, they don't cut them to nine, right? They cut them by a couple billion dollars. And it's really the priority of the spend.
Speaker 2: So I think that's what they're going through is their priority is spend and Where orders are going to be I think the good news for the long term and the medium term is actually that Fiber is a big priority. We've got some design wins and many of those big CSPs
Speaker 2: I'll remind you, I would like more customer concentration in those tier one top 50 CSPs. So, you know, the slowdown in terms of their order deployment versus their backlog drawdown isn't quite as painful when you're not as concentrated.
Speaker 2: but we are going to continue to drive to be more concentrated on the CSPs. Mike, did I answer your question?
Speaker 1: Yes, that was great. Thanks. I guess just looking at last year, there was a pretty steep ramp in the second half of the year compared to the first half of the year. And by saying 8% is achievable this year, it seems like it could be even.
Speaker 2: You know, slightly steeper this year. Is that, you know, where does that confidence come from in the second half? Where are you getting that confidence? So a couple things. I think you're right. Actually, for the last couple of years, we've had a much more dramatic back half than front half, slower start. I think what you saw is our Q1 performance was quite a bit stronger than our last two years.
Speaker 2: be at that 8% market rate, which is again below the 10% in the front half. We'd be crazy in this market might to get more frothy than that. We think we're being really mindful and we're managing with the micro up. We're looking at our sales funnel, we're looking at our deployments, we're looking at having conversations with the people making these deployments.
Speaker 2: And could it get hotter? Hey, look, I think that would be speculation. We're kind of at this point, we stick with what we said in March and continue to use our micro tools quarter to quarter like we did through the supply chain mess, like we did through the pandemic. We're keeping our same forecast methodology and our same executional focus.
Speaker 2: The street believes that you guys have a pretty good sized backlog of product that you'll be shipping in 2023. And that should give you some pretty good visibility as supply chain improves. The debate on a lot of these companies that are in the systems market with
Speaker 2: large backlog seems to be focused more on what happens after the backlog comes down. And I was hoping you could talk a little bit about the mix of the backlog and what it might imply. Specifically, it's my understanding in talking to Sienna, and I think you guys have a similar situation,
Speaker 2: that the optical line systems are a pretty significant piece of your backlog. But it's also my understanding that the transceivers needed to light those optical line systems are not. And so I guess the question is, if it's 40% of the backlog is OLS and
Speaker 4: you ship that out how long before the orders come in to light those line systems up. Is that a second round of orders that should give visibility to a longer-term trajectory of growth?
Speaker 3: Yeah, I'll start and David you can jump in. Sure. But, you know, the backlog, we're not going to get into the specifics of what's in our backlog, but, you know, one of the comments that I did make is we are seeing, I'll say some of the supply loosen up and you're seeing more line systems getting deployed. One of the, you know, the statements that I made about the Q2 margin and keeping that range where we did.
Speaker 3: It really depends on the customer and the deployment. Certain customers are going to buy the transponders at the same time they're deploying the line systems and fill at different rates. Others, it will be more staged and take multiple quarters. But it really is going to depend on the customer, the deployment, and the timing of what they need in order to get their network up and running. But to your point, Alex, I think there's a good portion.
Speaker 2: typically unless it's a true subsea where they're going to fill the whole spectrum rate away, you're absolutely right. Typically people aren't going to buy line systems and then not fill them, right? And deploy them. And we certainly don't want that to happen. So we kind of track where we've got line systems out.
Speaker 4: The line system orders generally do not
Speaker 4: include at the same time that the order was put in the transceivers to meaningfully light them up. There is a lag from the OLS going out to when the transceiver order comes in and therefore that does suggest a
Speaker 4: Another round of ordering front. That thesis is correct, yes?
Speaker 2: Partially, there are people that when they're doing their initial order might order the line systems and a portion of the initial deployment, but a majority of the dollar value of that potential deal is future versus current. Right, and just to be clear, did you work down your backlog during the period or is it...
Speaker 4: I mean normally this is seasonally week quarter per orders. We did. Yes.
Speaker 2: Yes, yeah, we had mentioned that in the analyst day. We thought that in the first half that would definitely be the case. Yeah, RPOs went from 983 to 903. Thank you so much.
Speaker 2: Yes, we had mentioned that in the analyst day. We thought that in the first half that would definitely be the case. Yeah. RPOs went from nine eighty three to nine oh three. Thank you so much. Thanks.
Speaker 1: Your next question comes from a line of Simon Leopold from Raymond J. Your line is open. Thanks for taking the question. In the prepared remarks, David, you mentioned this comment about inventory absorption. And I want to make sure I understand because I get some a little bit confused in that, like, imagine.
Speaker 2: that your customers had inventory of your gear. Now, I didn't know whether you were sort of referring to the broad sense of things like 5G radios being absorbed or you were specifically talking about your own products. And if it's your own product, you're not going to be able
Speaker 2: I'm puzzled how they got that inventory. Hey, Simon, I would like to make a very clear statement here. So thank you for the clarifying question. Yeah, in the prepared comments, it was industry wide, and not just specific to optical, and not R-Gear, right? You know, I think that during the supply chain, a lot of CSPs and customers loaded up, and in many cases loaded up to be given where the lead times are. As those are coming down, they have the ability to burn down. And you know.
Speaker 2: economic pressures, you know, necessity drives that innovative spirit to drive what's in the warehouse and try to get that out and what's deployed. So what I meant is they're burning down backlog and they're burning down the inventory that they have rather than ordering lots of new gear in the front half of the year. And we mentioned that in the analyst's day that we thought that that would happen.
Speaker 2: And then people would kind of reload and recharge as we go out throughout the year.
Speaker 2: And then as a follow up, just what are you thinking in terms of the you know, ebbs and flows in your customer mix and that second quarter guidance? So you know, it implies that at least one of your verticals is not following seasonality and your comments on the call make me think it's the ICPs.
Speaker 5: And not the traditional telcos, but I just want to make sure that I'm thinking about this correctly.
Speaker 2: Yeah, I'd say two things. One, we did have a government deal of a reasonable size that Nancy mentioned, a $20 million deal that was supposed to be in the first half. And, you know, in these times and governments typically run at their own productivity timelines, you know, that's going to move from the first half into the second half of the year. And you've seen that happen.
Speaker 2: you're continuing to see we had a very strong Americas, you know, for the quarter. Europe , you know, continued to be a little bit weaker. I think that's overall a more of a cautious environment, although we see a very large number of RFPs out there. That one's just going to be timing.
Speaker 2: So I think it is a little bit of ICP lumpiness, a government project that has spit out, and then just the ramp rate of CSPs that are traditionally pretty darn strong in Q2 that are just taking a lot longer, again, as they try to burn down their backlog.
Speaker 5: Appreciate the clarification and just as a quick verification, I'm assuming the government shows up with your other service provider segment.
Speaker 5: That's correct, Simon. Great, thank you very much.
Speaker 5: So great, thank you very much. Thanks Simon.
Speaker 1: Your next question comes from a line of Madam Marshall from Morgan Stanley . Your line is open.
Speaker 6: Great, thanks. Maybe on your commentary about the 10 customers looking at the external pluggables. Just wanted to get a sense of what early feedback you were getting, what kind of scale of projects these could be as we had to 24 and 25.
Speaker 6: And then maybe a second comment or second question is just on.
Speaker 6: you know, lab trials that you were seeing in general, are you seeing any kind of slowdown in their activity and evaluations, or is this really just kind of slowdown of orders? Thanks. Yeah, thanks, Madam. Good question. I do want to clarify this one as well to be very specific. Yeah, the 10 aren't looking.
Speaker 2: What I mentioned is they're ordering. So we actually have firm hard orders in for either qualification initial deployment or sampling. So that's really good news. I'm encouraged by that. I think for those of you who are at OFC, you did see a large degree of interest as 400 gig goes into the Metro.
Speaker 2: for CSPs as well as our 400-GIG, ZR Plus and ZR module. A couple things are happening. The performance of it has been quite strong. And as people go look to deploy the 400-GIG ZR spec, in some cases they would like a little bit more reach. And our 400-GIG, our ISEX plug-able,
Speaker 2: software has been a big hit. Networks are complicated even in ICP networks. People looking to segment, alarm, track and be secure. And I'd say the third point is let's not forget our pluggables are manufactured in the United States with our own fab here in Sunnyvale, California and our
Speaker 3: And don't forget, right, that these pluggables are what's going to allow us as we exit this year and go into 24 to vertically integrate our own metro platform. And that's the margin expansion that we shared with you at Investor Day that really starts to kick in in 24. Now, that's a new business meta, and that's 10 orders for, again, sampling.
Speaker 2: initially and some initial deployments, that takes a while to scale. And that's why at Analyst Day we talked about our goal being tens of millions of orders by the time we exit the year and then the scale happening there. But I'm quite encouraged by so far what we see. We need to translate that to the almighty income statement and balance sheet. Great. Thanks so much.
Speaker 1: And your next question comes from a line of George Nottar from Jeffries. Your line is open.
Speaker 1: Hi guys, thanks very much. I've got a few questions here. I guess maybe to start, I thought I'd ask about pricing. I know you guys raised price about 5% back in May of last year. I'm kind of guessing that that would start flowing through the model here in Q1. Can you give us a sense of how much of the growth you are getting coming from pricing, or maybe that benefit is still in front of us.
I'd love to get a sense for that. And then secondly, I'm just curious about the mix of i6 and mix of vertically integrated products in the quarter. I'm kind of wondering what the update is on that mix of product sales. Thanks. Yeah, Amitabh, why don't you hit the i6 and vertical integration, and then Nancy can hit the...
Yeah, the piece. Yeah, so George I6, we said, well, we didn't say it's just north of 30% in the quarter of product revenue. And VI was north of 50%. 5.0. Yeah, and I think, you know, we, first of all, never announced a price increase. So we have, as we've said, look at our pricing, look at our customer mix, look at the products that they're buying and make assessments on it.
quarter-by-quarter basis. But the mix of the the margin that you're seeing now, you know, as we go above the 38.5 and and continue on our trek to get 40% for the year is going to be made up of a compilation of a number of things, right? But primarily the mix of I6.
helps us as we grow our margin there. And we're going to continue to look at our own pricing relative to the market, relative to where we see opportunity and also where we wanna grow, right? And where we wanna expand the market in front of us. So I won't.
comment further about any other increases or any decreases. Got it. Okay, thanks very much
And there are no further questions at this time. Mr. David Hurd, I turn the call back over to you for some final closing remarks.
No, I appreciate it. Like Nancy said, it was great to see everybody at Investor Day. So I know we're short today because hopefully we reviewed kind of the plans of where we go. As we mentioned there, we have those six milestones that we went through that we laid out at Investor Day. I think the good news is in times like this concentrating on ensuring.
We are closing off on those with credible measures. I think happened in Q1. We had quite a strong Q1, and I'm proud of what the team did. You know, 16% year-over-year growth, 260 points of gross margin, and 450 of operating margin expansion. Nice job to the team.
Our Q2, you know, guidance supplies 10% revenue growth for the first half, which is again ahead of what we see. We're certainly mindful of the macro. We read the news. We listened to other earnings calls. We understand what's going on. However, we're operating our business off the micro tools and processes. We'll see you soon.
and close discussions with our clients that have proved to be effective as we manage through a pandemic, supply chain crisis, wars, you name it. So that's what we're going to continue to do. Our job with you is to always give you a great view of what we see. We are encouraged by what we see in the subsystems business. That's quite exciting. We know it takes time.
But again, those six key milestones are what we are focused on. So we really appreciate everybody's continued interest, the thoughtful questions today, and we look forward to speaking to you at our next earnings call. If not sooner, everybody have a great day. Thank you. This concludes today's conference call. Thank you for your participation.
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