Q2 2023 Infinera Corporation Earnings Call
Good afternoon, My name is David and I'll be your conference operator today.
At this time I'd like to welcome everyone to the <unk> fear not corporate Q2 23 earnings call. Today's conference is being recorded all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press. These starkey followed by the number one on your telephone keypad.
He'd like to withdraw your question Press Star one once again.
You.
Omnipod Posse head of Investor Relations you May begin your conference.
Thank you David and good afternoon, welcome to Infinera as second quarter of fiscal 2023 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 future business plans and product development and growth opportunities, including progress against strategic priorities and milestones trends competition on customers.
Capacity growth.
Inventory held by customers beyond normalized levels expectations regarding industry wide supply chain dynamics, and the macroeconomic environment market adoption of coherent optical engines expectations regarding our subsystems business and its impact on our financial results expectations regarding obtaining government funding projected year over year drivers up dip.
Men revenue gross margin operating expenses and operating margin expectations regarding our future performance revenue growth and margin expansion and our financial outlook for the third quarter of 2023.
These statements are subject to risks and uncertainties that could cause <unk> results to differ materially from management's current expectations.
Risk factors, including those set forth in it.
We'll report on Form 10-K for the year ended on December 31, 2022 as filed with the SEC on February 27, 2023, and in our quarterly report on Form 10-Q for the quarter ended April one 2023 as filed with the SEC on May 4th 2023, as well as subsequent report.
<unk> 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 references to 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 Reg G. We have provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures.
The earnings release, and Investor slides for this quarter each of which is available on the Investor Relations section of our website.
And finally as a reminder, we will allow for plenty of time for Q&A. Today. So 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 heard yes. Thanks Thomas.
Good afternoon, and thanks for joining us today I'll begin with the highlights from our Q2 results and then turn the call over to Nancy to cover the financial details of our second quarter and the outlook for Q3 overall, the second quarter was another solid quarter for us we beat the midpoint of our outlook range across all key financial metrics revenue gross margin operating margin and EPS.
On a year over year basis, we grew revenue by 5% expanded gross margins by 320 basis points and increased operating margins by 240 basis points, while continuing to invest in our strategic programs in the first half of the year, we increased our top line by 10% improved gross margins by approximately 300.
Basis points to 39% and grew EBITDA by 137% compared to the first half of 2022.
Bookings in Q2 improved sequentially with book to Bill just below one which was in line with our expectations in our subsystems business. We continue to win new strategic deals in the areas we've been prioritizing.
For example, first consistent with our efforts to expand our metro footprint, we want a new deployment with a major U S service provider. This is a turnkey award which will include our Gx Metro platform next generation line system software suite and professional services footprint, we established with this customer will allow for future.
Margin expansion as we integrate our own 400 gig ZR ZR plus plausible in 2020 for which we just made commercially available.
Second our investments in go to market and geographic expansion resulted in new deals in India, a market, where we believe we have significant growth opportunity. These wins span, both <unk> and terrestrial deployments in India for domestic service providers and U S hyperscale or who are increasing their presence in the region. Finally, we.
Our momentum in the Hyperscale segment, where we landed a new subsea deal with a major hyperscale or a customer with whom we historically had less share positioning us well for future expansion in this account.
In the sub systems business, we're seeing the first signs of commercial progress our 400 gig ZR and ZR plus Gluggable is now commercially available and we're excited about the margin expansion potential as we vertically integrate into the metro portfolio. We're on schedule to make the first set of software enabled 100 gig plug a bulls commercially available.
In the second half of 'twenty four we will open a significant market opportunity at the edge of the network with.
With broadband access <unk> and cable networks.
And we are on track to deliver the highest performing lowest power 800 gig plausible that will leverage three nanometer technology and enable our customers to reach greater distances and unmatched economics. In addition to all of our intelligent plausible to have software that enables seamless integration and routers switches, which allows simplified manner.
Increased agility and dramatically lowers the operating cost for our customers.
These achievements have resulted in a solid pipeline and purchase orders from 15 network equipment manufacturers and service providers to date. The purchase orders are broad based and include our entire suite of plausible and components from 100 gig to 800 gig. While these initial wins are are relatively small in magnitude. They are encouraging and signs are there.
Return, we expect to get from our investment going forward.
Finally, as a company we've been a proponent of open architectures and open networks. We're excited to see the addition of three new members to the open XR Forum in the quarter, including Arista networks total membership in the open XR Forum is now up to 34 members and represents a significant portion of the overall network spend.
Our results in the first half of 2023 continue to build on our momentum over the last five years that validate our strategy is working from 2018 to 2022, we've grown company revenue at an average of 14% annually expanded operating margins by over 1000 basis points ramp the I six as it.
One of the fastest technologies in our history to ramp refreshed, our entire hardware and software portfolio and added a significant number of new customers gained share, especially in the metro segment with our refreshed Gx portfolio. We're now in a position to expand our market opportunity further with a newly launched sub systems.
This business, which we are investing close to $100 million. This year at this as this business ramps, we expect to benefit from the higher margins in 2024, as we vertically integrate into our metro portfolio.
From the operating leverage once we ramp.
The sale of external plausible. Furthermore, we've continued to position ourselves to benefit from the chips and Sciences Act to augment our existing business plan as a U S. Based optical semiconductor manufacturer Infinera is well situated at a time when significant government funding is on the table to reassure and secure critical supply chain.
<unk>, an issue of increasing importance to our customers.
While long term demand will continue to be healthy with data rates growing from network payloads Theyre getting asked from our artificial intelligence and machine learning. We believe the second half of the year is going to be lighter than our original expectations as our customers are going through a three to four quarter period of inventory digestion.
It's industry wide and are being cautious about spending in a recessionary environment. We believe we're roughly halfway through this projected four quarter digestion period and are taking this into account in our outlook for the back half of the year. However for the full year, we expect will grow revenue in the low single digit percentage range and deliver our sixth consecutive year.
<unk> top line growth will expand operating profit and EBITDA by double digit percentages on a year over year basis.
And we will drive at least at least 25% growth in EPS compared to 2022, our first fifth consecutive year of EPS expansion.
Nancy will provide the specifics of our third quarter outlook and expectations for the rest of the calendar year. Shortly despite the near term and temporary industry wide digestion mentioned earlier the longer term secular drivers of our business and target business model remain intact, we're executing to the six strategic milestones we outlook outlined during our <unk>.
<unk> Investor day, and we're focused on gaining additional market share expanding margins ramping the <unk> business and delivering at least a dollar in earnings per share in the 2025 2026 timeframe.
Overall, our investment thesis remains unchanged, we continue to expand Etfs as I close today I would like to reiterate the fact that I am confident in our strategy and our ability to execute through this adjustment period over the past few years, we've delivered consistent commercial and.
Progress, while navigating a pandemic supply chain disruptions of war rising interest rates.
As evidenced by our progress over the last few years, our systems portfolio is in the best shape, it's ever been and I'm equally excited about the outlook of the new sub systems business I would like to take this opportunity to thank the infinera team for their unwavering commitment to our customers and one another and delivering on innovation that matters. In addition, I'd like to thank our partners customers.
And shareholders for their ongoing support.
I'm now going to hand, the call over to Nancy to cover the financial details of the quarter and the outlet Nancy Thanks, David and good afternoon, everyone. I will begin by covering our second quarter results and then provide the outlook for the third quarter for your reference on our Investor Relations website, we have posted slides with financial details, including our GAAP to non-GAAP .
To assist with my commentary as you heard from David The second quarter was another strong quarter for US revenue was $376 million up 5% on a year over year basis, and just above the midpoint of our outlook range. This performance was primarily driven by strength in the Americas Asia Asia Pacific and with ICP customers.
Geographically, we derived 58% of our Q2 revenue from domestic customers a level generally consistent with Q1, there was one customer who accounted for over 10% of our revenue in the quarter, which was an ICP customer.
Q2 gross margin of 39, 3% was above the midpoint of our outlook range and increased 320 basis points year over year compared to the prior quarter gross margin in the quarter benefited from higher vertical integration, including IL six and some relief in supply cost, partially offset by lower services.
As we continue to work through our lower margin professional services backlog overall I'm encouraged by the gross margin trend in the first half of the year as it supports my confidence in our ability to show continued gross margin improvement in 2024 and beyond as we vertically integrate our metro portfolio and ramp up.
External plug a bull's wrap them now.
Operating profit in the quarter was $10 $7 million with an operating margin of two 8%, which was at the higher end of our outlook range on a year over year basis, we expanded operating margin by 240 basis points operating expenses of 137 million.
In Q2 were below our outlook range of $140 million to $144 million as we tightly manage quarterly spending while continuing to make substantial investments in our subsystems business. The resulting diluted EPS was at the high end of our outlook range at breakeven and compared to a loss of five cents in the.
Year ago quarter.
Moving onto the balance sheet and cash flow items, we ended the quarter with $167 million in cash and cash equivalents with no amounts drawn on the ABL from a cash flow perspective, we generated $1 4 million in cash flow from operations, while free cash flow was an outflow of $9 4 million.
Let me now turn to the outlook for the third quarter of 2023, and our expectations for the rest of the year as you heard from David the near term operating environment has become more challenging than our original expectations as customers in our industry has slowed the pace of bookings, while continuing to work down their inventory.
However, even against this backdrop, we achieved our plan in the first half of the year growing revenue by 10% expanding operating margin by 350 basis points and increasing EBITDA by 137% compared to the first half of 'twenty 'twenty. Two we believe we are about halfway through this time.
Larry industry wide for quarter customer adjustment period as a result, we now expect our outlook for the third quarter to be revenue of 376 million plus or minus $15 million gross margin of 39% plus or minus 150 basis points operating expenses of $141 million plus or minus.
2 million and operating margin of one, 5% plus or minus 250 basis points.
So the operating income line, we assume $7 million for net interest expense and $4 million for taxes. Finally, we are anticipating a loss of <unk> plus or minus four cents per share assuming a basic share count of approximately 228 million shares and our fully diluted share count as profitable of them.
Proximately 260 million shares we expect to utilize cash from operations in Q3, primarily for working capital and returned to generating cash from operations. In Q4, we are continuing to target generating cash from operations for the full year.
Despite the near term considerations our investment thesis is sound and we are still planning on delivering year over year improvement in our financials. In 2023. This will include growing revenue in the low single digit percentage range driving gross margins to 40% expanding operating profit in the double digits.
<unk> range and delivering at least 25% growth in earnings per share compared to 2022 remaining on the path to delivering a dollar of EPS in 'twenty five 'twenty six we expect bookings to continue to improve sequentially in Q3, and then again in Q4 and to exit the year with our remaining performance.
Locations are rps of approximately $800 million, which should set us up well for 2024, when we believe demand should start to normalize.
As I close today I would like to reiterate that I'm pleased with our second quarter and first half performance, especially considering the industry wide slowdown that we're experiencing in the near term we are tempering our expectations for the back half of the year, but believe our strategic initiatives are on track and we are on pace toward our sixth consecutive.
Year of revenue growth and fifth consecutive year of operating profit expansion, we expect to improve our earnings per share by at least 25% in 2023, while investing close to $100 million in our subsystems business. This year and we remain on the path to delivering at least a dollar and earnings per.
Sure and the 'twenty five 'twenty six time frame.
I would like to thank the Infinera team as well as their continued commitment to innovation and execution excellence and our partners customers and shareholders for your continued cooperation and support.
David We can now open the line for questions.
Thank you at this time I'd like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad will take our first question from Simon Leopold with Raymond James Your line is open.
Thanks, Thanks for taking the question.
I wanted to see if you could maybe unpack what's going on in terms of your verticals.
Whether they are all behaving similarly in terms of its kind of inventory absorption and slowing or whether there is an aspect that stands out either because of customer concentration or other reasons and then I've got a quick follow up.
No. It's a good question Simon good to hear from you.
So look I think on the from an ICT front. They are lumpy orders in each one of those is behaving differently I would say that maybe 50% of the icp's are burning through a significant portion of inventory and.
Still have nice capex forecast for 2024, and I expect as we exit the year again.
As I mentioned, we used to be with one ICP at a time, we're now doing some form of business with the top seven so that bodes well for the future a couple of them are going and still quite strong.
Because of their immediate.
Immediate exposure to machine learning and AI.
In the CSP domain, the largest CSP in the World I think that's where you see a large portion of that inventory, what we used to call kind of the inner exchange carriers.
Have been less affected by that I think the larger conglomerates that offer multi service access wireless others had been burning through inventory.
That's been a bigger challenge for them so.
So it's spotty in the ICT, but identified on the applications, they're using and in the CSP.
It's based on.
Again, there overall.
Supply chain buying that they did last year, meaning that the pack down inventory to cover themselves in supply chain and they're going to burn that down.
Like when we look at the inventory levels that we perceive are out there in the industry. This isn't our inventory. It's total inventory in the industry. They are about I think you know halfway through the inventory burn down.
So so that sets up my my follow up nicely in that.
It sounds like you're expecting a couple of quarters of this remain but if I combine the midpoint of your <unk> guidance with the prediction for low single digit growth in 2023 that would imply at least mid teens sequential growth in your fourth quarter, so somewhat of a.
Have a nice rebound in the fourth quarter, yes, I want to make sure I'm interpreting that correctly and what you see fueling that imply fourth quarter strike.
Yeah, so backlog right. So both our backlog and the order intake that we have in our order forecast that we have with our client base.
So I think again, despite a bit of a softer back half as we see service providers again digesting the inventory.
We're still continuing to have.
System design wins out there with carriers, they're just slower to pull the trigger on ultimately getting the orders in and even once they've got the orders in on getting them schedule. We think that begins to rebound as we exit the year and we get a more normalized 24 now.
Now despite that Simon look we pull our levers in times like this you drive efficiency and then Nancy and my comments for the fifth year in a row will expand EPS in this year you can do the math, if you contemplate that will grow by at least 25%.
That says it's kind of 15 to 20 cents EPS, which when you go back to our analyst day.
That's kind of the view the upper end of that view is kind of where we said we needed to be and when we look at the consensus view for next year.
That doesn't scare us at all Nancy also said that.
We're spending $100 million on a sub system business.
Over 30, if you if you added up and that is.
That hasnt, yet begun to payback the payback will start next year, when we start putting the vertical integration in the Metro platforms, and then will further drive operating leverage as we as we exit 'twenty four when you start to see true impact from the external applaudable sales in any kind of large scale fashion.
Great sorry long answer Simon but did that help you very.
Very much so appreciate the detail.
Thanks.
Okay next we'll go to a meta Marshall with Morgan Stanley . Your line is open.
Okay. Thanks.
Just kind of wanted to reconcile some of your commentary about the book to Bill was largely as expected.
With kind of some of the lower order commentary along the way and I know you were kind of alluded to the fact that you.
We're going to need to see orders improve throughout the year to kind of make expectations. So I guess I'm just trying to see is this just you didn't see that improvement or the environment kind of further deteriorated.
It's good good question. So we certainly did see improvement from Q1 to Q2, we expect to see improvement in Q3, and certainly the whole back half of the year, including Q4.
To improve I think overall the industry had a much softer Q1 than anybody anticipated and if you look at our competitors and where their book to bills have been where they reported we think we're doing a good job of maximizing our bookings and are in a pretty sparse first half environment, and we think that will pick up in the back.
Half, but I don't think Youll talk to anybody in the industry that doesn't think the first half was lighter we all expected lower bookings, but the first half was lighter than anybody had anticipated.
Got it and then maybe just as a follow up on the new you are on the major U S service provider.
When metro win that you noted this quarter is that a new customer.
400, ZR piece of that you know is it going to be a multi vendor just any kind of commentary on that one yet.
<unk>, new customer for us using the whole gx platform.
Starting out using.
Call It merchant <unk> and we will be we are we are already integrating our plug those into our platform. So that in 2024, we can leverage our own <unk> and that was part of that deal. So.
So we will see the margin that's a great example of how the margin will expand with our most important customer of our plug. It was our first most important customer as Ron Johnson, who runs our systems business, where our most important first customer.
Great. Thank you.
Next we'll go to Alex Henderson with Needham Your line is now open.
Great. Thanks.
I was hoping you could.
Give us some clarity on the linearity of orders over the course of the quarter, whether there was any push outs in the period.
As you have given guidance of improving orders.
And both <unk> and <unk> do you anticipate exiting the year with a book to Bill for the year that is somewhat above one.
Hi, Alex.
Yeah. The linearity has been challenging for us and I think for the industry as a whole in terms of first half versus second half and you can see that in terms of some of the working capital usage that we're planning for Q3 as things start to work through there, but for the second half and certainly as we're exiting the year, we believe book to Bill should be.
About and potentially a little over one just as we had said at the beginning of the year, So definitely a second half growth in bookings.
And we'll see how things shake out in Q4, but I'm expecting some good growth there yeah, just to clarify Alex so for the second half absolutely. We expect the book to bill to be above one for the year to be seen.
We will be close to one for.
For the year, if you were to ask our current predictions.
The question on linearity was for the second quarter, specifically was there any change in the linearity during the quarter in terms of.
Perceptions of when you're going to close deals.
Follow up question I had for you was.
Really on the <unk> side.
Piece out.
Recently talking about 39 vendors have a four.
400 gig CR obviously.
Not all of them have chips.
To integrate from themselves, but that's that's a lot of players and it does strike me as risky pricing.
Considering this is supposed to be an open standard product. So how do you view the you know.
The market for these struggles relative to the pricing and ability to generate decent profits on them.
As a standalone business.
Yes, it will have to talk off line.
Haven't seen what we see are the competitors, we're bidding against today and active bids and then the awards that we're getting I think.
And you're right, probably not all of them there might be a rebranding or something but I certainly don't seek theyre not I C. III I see three or four in any particular bid and not all of them have their own DSP and their own optics in fact.
We tend to be the only company that has all of the vertical integration and also has the software enablement and I think as you start to scale. These out in networks, especially on the CSP side of things.
And it proved to be more important and that same software platform will carry on into our 800 gig product and certainly our 100 gig products. So we'll have to talk to you offline I have no no way shape or form that we seen 39, when we look at the competitive field, it's more lives.
<unk> that came out of <unk>.
Yes.
Saying that there was 39 companies competing in this space.
Yeah.
Telling you what I see competing for a deal so.
Sure Yes.
It looked like or do you think pricing is going to hold it and do you think it's going to roll any sense of pricing.
Yeah, So I think so far.
Theres pricing, depending on the form factor if it is going into an ICP. It tends to be differently and are in the DB form factor versus the CFP two going into a metro network, which tends to be.
It's stronger because of the value that's bringing in the overall network.
Certainly be typical price pressure on an annualized basis, but I think we're well positioned again with the vertical integration.
To hit that down and they're starting to spend even more time on the whole power and reach.
Some of the ZR technologies in terms of them trying to get the reach and punch through <unk>.
They're looking for a bit more of that performance and that's what we're going after today understood. Thanks.
Thanks, Alex.
39 didn't excellent. Okay next we'll go to Mike Genovesi with Rosenblatt Securities. Your line is open.
Oh, great. Thanks, a lot.
Hi, David.
Could you talk about just in 'twenty four.
Which products in particular, Youre excited about and and you know for those of those out there who would say maybe.
Not having a one six terabyte product in 'twenty four.
It could potentially be a disadvantage although that seems.
Early to me.
To make that anyway.
What would you say to those people.
So basically you have the products that you're excited about and why short sort of 25 is a good point to intersect the $1 six market.
Yeah. So good it's a good question look overall.
<unk> refreshed our entire product line since the Korean acquisition right. So we have a whole new line of hardware the gx platform of holding the line a software a whole new O S.
State of the art that takes multi generational sled. So it'll take a six it will take a seven it'll take eight.
And our plug are alive.
So I'm pretty excited about having a product in the metro where I don't have to go buy plugs from somebody else should take margins that are destructive now.
Now we've been growing the EPS of this company for the last five years, while we've been investing in this in the systems line and I feel good that we've got a very competitive systems line, that's winning with less competitors and Huawei exiting the market.
So I just I know everybody is going to come out and say well I got a one six in this timeframe, it's all going to be about closing wave sizes at 400 gig in the Metro and then closing them in the long haul. It you know how many 800 gig links and how far can you carry them and continuing to push the economics. So as we model it we feel pretty good about that.
And where we sit in the competition against the competition, we're just probably a little surprise right now, especially given where we're trading that we just continue to drive EPS expansion no matter, what the market throws at us and we're investing the systems portfolio has never been in good shape and we're putting 100.
To work to make sure the second act and the subsystems piece.
It drives long.
Long term shareholder growth.
So more than you asked for Mike, but hopefully that was helpful.
Very helpful.
Our final question.
Just on AI, how it might impact you in the future.
Any early thoughts on either.
Higher growth rates for the Dci market or probably maybe more likely your technology and coherent technology moving into the data center and basically do you think that you know a year or two down the line.
And AI story like some of these optical component stocks. Thank you well I promise I'm not going to rebrand as an AI story on this call given the recent trading environment that isn't a trick.
But what I will tell you is look our order book.
As we went through this year and as we look into next year as being impacted by.
By AI and ml.
You hit it on the head there's some <unk> that are going to have to run eight to 10 times the payload and that just means more dci boxes to be able to do that and the software to be able to manage it and as they move closer and closer to the metro other solutions get more payload.
I think thats, absolutely going to happen and yeah look longer term, yes, we have obviously had discussions with folks about how you can use our indium phosphide capability in our fab to have optical do what copper is doing inside the data center against.
A chipset, that's driving AI, but that's long long term then we want to hear about that now they want to hear that we're going to continue to keep our heads the ground put a mouthpiece then and continue to drive EPS expansion.
Okay fantastic. Thank you.
Okay.
And next we'll go to Christian Schwab with Craig Hallum. Your line is open.
Great. Thanks for taking my question.
David you've talked to even at your analyst day, and I know you hired some people.
Who help form the legislation on the on the chips Act and you keep mentioning that but you know recently Bloomberg just said that there's over 460 people asking for money right, Germany gave big chunks to until like 11 billion TSM $5 5 billion.
It isn't going to take too much time to run out of the grant money in the chipset. So.
I guess I'm just wondering what makes you so confident that you think that.
There'll be something left for Infinera.
So first of all none of our expectations and even when we were talking at analyst day assume anything from the chips Act.
All were saying and have said and we still believe is that with our U S based semiconductor manufacturing optical semiconductor and California in advanced packaging in Pennsylvania, we check a lot of the boxes that we've been told they're looking for and.
We're going to pursue as we can but none of that is incorporated into our outlook or into that dollar of EPS or into the cash generation that we've put forward in terms of.
Our long term business model.
Great and then my second question. This is as we exit this inventory digestion.
Halfway through.
You know on the back side of that is.
Is that when you guys would expect to kind of return to the type of growth rates on the top line that you outlined at the analyst day is that kind of what we should be thinking.
Yeah look a couple of years ago at our analyst day, we said, 8% to 12% everybody kind of question as we've been growing again.
Again, a six year view or a five year view, we've been we've been clicking along at that above that rate.
Look it's too early to talk about 'twenty four.
But our long term view on our long term business plans.
And that is 8% to 11% to 12% growth rate in them and had.
A little bit of buffer room for EPS expansion.
Meaning to continue EPS expansion, even if we have little blips and <unk>, which we've had and guess what we've continued to expand EPS and in this trading environment I can't even explain and hopefully somebody came to me, but I would tell you that the one thing I do know is if you continue to grow EPS ultimately it will be valued.
And take care.
Yeah perfect great no other questions. Thank you.
Yes.
Okay next we'll go to our Cemig chatter G with J P. Morgan Your line is now open.
Oh, hi, Thanks for taking my questions I had a couple and maybe if I can start with the updated revenue guide for the Euro I mean.
If I look at your full year guide, you're taking your revenue expectations down by about 100 million or so I'm. Just wondering can you sort of.
Quantify that a bit more in terms of how much of that is going to be service providers versus ICB relative to your prior expectations or even by geography like how should we think about that being split between the Americas, EMEA and APAC and as to where you're seeing that sort of reduction coming from just to get a bit more sort of color.
No.
Yeah, I'd say its pretty broad based I mean, 25% of our revenues are coming from ICP, it's probably in that nature of 25% to 30%.
From that sector. The rest is broad based across service providers and again remember some of these folks have scheduled projects and they're just saying, hey, let's let's delay them out a quarter or two.
It's honestly a lot of those customers are moving off and have new management in place and I'm, just trying to kind of make it through the period as they digest inventory. So it's kind of two things going at once so we can make pieces of that back to the margin and through operational efficiency and that's why.
Nancy and myself are confident that the 25%.
EP plus EPS expansion this year and when we look at what you all have contemplated in EPS for next year.
Again remember, we're investing over 30 a year in the.
In our subsystems business that is.
It's an investment at this point, that's not yet paying back and starts to payback in 'twenty. Four so is that license in 'twenty four and licensed in 25, you see that path to a buck let's not forget in 2019, we were losing $1 60, EPS. When we started this journey.
Got it.
And then maybe just for my follow up I mean, given the.
Push out of projects being the primary driver of.
Sort of the uncertainty that you're seeing.
What drives the confidence for the 400 million plus revenue number in <unk> that you are implying and also when you talk about the fourth quarter digestion how.
How much of that is just sort of thinking that the comps get easy enough and you start to sort of.
From there or do you really expect sort of inventory can be completely normalize how do you get visibility into that sort of specific fourth quarter. In addition.
And so I mean, the the digestion that we're seeing is based on discussion with customers right and the growth that we expect in Q4.
As again based off backlog that we have today and pipeline and order opportunity that we're working through now in Q3, and that's what gives us that confidence in Q4, so we should start to see.
Inventory start to work through our own inventory one comment there as we've already seen and not something that you guys see quarterly but you see annually.
Is the commitments at our CMS in terms of the N CNR on hand, and on order that has already started dropping and has dropped more than the inventory increase you saw in our balance sheet. This quarter. So we're starting to see those signs I know theyre not all quite as visible to you.
In terms of you know the day to day, but that's what gives us the confidence in exiting the year.
In Q4 strong and then what we see in terms of backlog and pipeline.
Man's normalizing into 'twenty four.
Okay. Thank you thanks for taking my questions. Thank you.
Okay next we'll go to George Notter with Jefferies. Your line is now open.
Hi, guys. Thanks, very much I guess I wanted to ask about the mix of vertically integrated products for Q2 do you have a number for <unk> and then a number for overall.
Yeah for overall, it's about 55% and for ice six.
30% for the first half and so on track to the 35% plus for the year.
Got it Okay, and then I think you guys also had a like a 55% to 60%.
For the full year for overall vertically integrated product does that is that still on the cards or maybe.
Yes, yes.
Okay.
And then how do you think about.
No the Gx family.
Correlating plugging holes into the into that product, which is great and certainly very helpful for margins, but.
Certainly theres going to be a testing period I think for customers.
Before they can start deploying that commercially like how how long do you think that test phase will take how long before you have been doing.
Yes, it's good.
Yes, it can be material yep.
Yes, we started doing that if you recall in kind of the July August time period. So just early July as soon as we started the quarter.
And what we had mentioned on in both the analyst day and in prior calls is we expect that to be kind of complete by the end of the year and.
Our teams are out selling today, but deployment, we said would be in 2010. The foreign given we have qualified I can't even tell you hopefully over a dozen different merchant optics in our own platforms.
Aware of what needs to happen there so yes that will happen.
This year through the end of the year and we'll be deploying those solutions and 24.
And so you will see the impact and then all mining income statement and balance sheet.
Okay, and then I guess same question for the X T M. I assume that now has plug a hole.
And that as well.
Yeah, Yeah. So we're in in parallel going through the <unk> Gx.
Great. Okay. Thank you very much on most of the volume going forward Youll see in the Gx platform obviously.
Okay, great. Thanks.
Okay.
Okay, I am showing no further questions at this time I'll now turn the call back over to CEO , David heard for any additional or closing remarks.
Thank you David well Q2 was another solid quarter for US look we beat the consensus view across the board, while making the strategic progress in the six milestones we talked about just a few short months ago in March we're continuing to win new accounts, we're growing in new geographies and particularly in the metro where that is.
Over half the market in optical we're on track as I just mentioned the George to integrate our own 400 gig Didi and <unk> ZR ZR plus modules, we will start to see those in the margins in 'twenty four we are increasing the vertical integration in the mix as we've said.
We believe there'll be growth in both embedded engines and plausible and that's why we're investing in both and let's not forget we're investing $100 million a year in the <unk> that we're not yet seeing.
Seeing the return from but we expect to start seeing it in something we control on our own products in 2024.
Again, the technology and innovation to do what we do is getting harder to do.
And doing it in the U S is proving to be an advantage both from a security standpoint and from a supply chain standpoint.
So I'm feeling really good about where we're at in terms of the systems portfolio.
And I'm really excited about the new subsystems business now that being said the industry is going through a period of digestion I've been seeing we've been seeing this from the competitive field in the industry over the last over the last couple of quarters and in particular over the last 30 days, but our commitment is to continue likely have been over the last five years to continue to bust out.
EPS in difficult times like this because we think it ultimately will be valued and again there is less people that are able to do what we can do so I do appreciate your support your patience. Your good questions, we're going to put our heads down put her mouth pieces in and go back to work driving EPS expansion.
Thank you and have a great night great day.
This concludes today's conference call you may now disconnect.
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