Q2 2019 Earnings Call
Good afternoon.
I'm walking them through first quarter 2014 financial results conference call.
Oh warrants will be in listen only mode until the question and answer session.
Today's call is being recorded.
If anyone has any objections you may disconnect at this time.
I would now like to turn the call over to Ted Moreau.
Best Relations, Sir you may begin.
Thank you operator.
Welcome to <unk> second quarter of 2019 conference call a copy of today's earnings and CFO commentary are available on the Investor Relations section of our website.
Additionally, this call is being recorded and will be available for replay from the website.
Today's call will include projections and estimates that constitute forward looking statements, including but not limited to.
That's about our business plan sales opportunities manufacturing operations products technology and strategy statements about the current status of our integration plans its energy.
Well the statements regarding our third quarter outlook.
These statements are subject to risks and uncertainties that could cause infineras results to differ materially from management's current expectations.
Actual results may differ materially as a result of various risk factors.
I think what in our most recently filed 10-Q as well as the earnings release and CFO commentary furnished with our 8-K filed today.
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 certain non-GAAP financial measures.
Pursuant to regulation G. We have provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measure measures and our second quarter of 2019 earnings release and CFO commentary.
I will now turn the call over to our Chief Executive Officer, Tom Fallon.
Good afternoon, and thank you for joining us on our second quarter 2019 conference call.
Joining me today are CFO , Brad Feller and C O David heard.
After quickly reviewing our Q2 financial performance I will summarize how we see the market evolving and describe the opportunity created by our innovation roadmap.
I'll, then turn the call over to Brad will provide a more detailed review of our Q2 results and outlook for Q3 and the remainder of the year.
Well the past several months, we've made tremendous progress towards building, the new infinera and upscale optical networking innovator as envisioned when we acquired orienting the fall of 2018.
As we approach the one year anniversary of this acquisition, we are witnessing strong progress around the foundational pillars that support the thesis of our strategy.
First with significant order in pipeline and permit the largest consumers of optical technology, we are enhancing our scale a mandatory ingredient to be a leader in this industry.
Second as we near the end of our integration period solid execution continues to support our expectation of returning to non-GAAP profitability and cash flow in the quarter fourth quarter, just over one year from the closure of the acquisition.
We are on track to substantially finished our integration work in the fourth quarter of this year.
And finally, our investment differentiating innovation, which has remained robust through this integration period has positioned us well for the next generation optical spending.
Before elaborating further on these key pillars I want to mention several recent notable events and provide an integration update.
Last week, we announced that we hired Nancy Erba as our new CFO .
Nancy brings significant experience in running large scale operations in industry that the man execution efficiency and is a great addition to the team welcome aboard Nancy.
We've closed on a $100 million asset backed loan facility with wells Fargo to provide an additional cost effective source of liquidity as we execute on our business plan.
We believe this gives us the appropriate working capital flexibility needed to scale the tier one relationships we've been developing in the market.
We have fully transition manufacturing from our Berlin facility and are successfully ramping production with fabrinet in their variable low cost manufacturing center.
These steps drive out significant fixed cost from our business little positive impact on gross margins as we exit the year.
On the IP front, we have now completed the third and final systems implementation project on time and within scope.
But it's an area is now unified with one version of Sep One version of Salesforce in one instance of agile.
The unified systems will allow us to continue to bring down expenses and more efficiently run a significantly scaled business.
With these steps and many others. We have now implemented cost reduction activities that will deliver in excess of $100 million in non-GAAP opex savings and an excess of $160 million in combined non-GAAP Opex and cog savings in 2019.
And importantly on the innovation front, we taped out or ice six DSP, a critical deliverable required for us to lead in the next generation optical performance.
Well there is more work to be done our integration progress remains fully on track as it continued to exceed the milestones outlined when we close the transaction.
These significant accomplishments laid a foundation for achieving core fourth quarter, non-GAAP profitability and capitalizing on future market opportunities.
Moving onto our Q2 financial results, we are towards the upper end of our guidance range with non-GAAP revenue of 307 million non-GAAP gross margins of approximately 31% and non-GAAP operating expenses at 132 million.
Revenue benefited from healthy demand from our top customer the successful initial ramp of our new I.C.P. customer and solid demand from other global tier one relationships.
As we had anticipated during Q1 earnings call three months ago I'll highlight for the quarter was the strength of our bookings, which grew greater than 15% quarter on quarter.
We saw particular strength from tier ones globally significant growth in sub sea bookings and strong bookings from our new I.C.P. customer.
In fact, two of our top five bookings in the quarter came from customers that were new to the company.
The strength more than offset continued weakness from our North America cable customer and its created a significantly expanded pipeline for the second half of the year.
In part due to our success in adding new customers a significant portion of Q2 shipments were footprint expansion opportunities, which pushed our non guar modern down to 31% from 35% in Q1 in line with our expectations entering the quarter.
This footprint was about equally split between new customers and new opportunities with current customers.
We view this footprint expansion as a great investment one that creates the opportunity to earn higher margin transponder fill over time.
And then it was experienced periodic late through our history.
Following our third consecutive quarter of backlog growth bookings momentum and positive order trends, we are increasingly confident in our near and longer term visibility.
All be prudent in our guidance, we see healthy market demand and we believe were well positioned to capitalize on a number of industry and macro trends.
These include the continued shift to the cloud.
The migration to open end, just aggregated network architectures and the selection of trusted supplier. So that have a robust technology roadmap for continued differentiation.
One important architectural trend is the continued momentum to a disaggregated network model in a growing number of customer networks. This is reflected in the significant growth of this segment, which is predicted to be a multibillion dollar market over the next few years.
Our group platform is meaningfully contributing to this trend as bookings grew 75% quarter on quarter and 80% year over year.
This platform not only opened up opportunity at the previously mentioned Nike Pea that was also the cornerstone of the new tier one win in Asia that began shipping in Q2.
The promise of this aggregation is also moving beyond the optical domain with significant customer interest at the IP edge.
Not only will this spring customers or reduction in Capex. The real advantage is allowing them to deploy services faster by breaking the chokehold that proprietary and closed devices have had on this market.
Our direct deals are dealt with our field proven hardware and software carrier class IP stacks has now successfully completed lab trials with a leading tier one customer and is slated for first office application in the second half of this year.
While this market is still developing the opportunity we see in Fiveg and D.A. networks for this solution is validated by a significant pipeline of trials and some of the largest tier ones and cable operators around the world.
In both of these use cases, we believe our timing is ideal for bringing this revolutionary architecture to the market.
It is also clear that some larger customers are becoming uncomfortable with our over reliance on certain suppliers opening up opportunities for the new infinera.
Whatever reasons of network security continuity of supply global politics, and customer pressure or general over exposure. These customers are evaluating alternatives to their current solution.
Well generally we don't believe telcos will decommission working networks, we do see a growing interest by them to expand their networks with other vendor alternatives.
During Q2 for example, we were awarded our first wildly replacement deal with a tier one in Asia, and we anticipate more of these opportunities arising over the course of time.
And finally, I see technology differentiation, becoming significantly more important in vendor selection.
Our customers participate in a highly competitive markets and their own competitiveness is closely tied to the underlying technology that enables the delivery of their services.
As we are invited to new opportunities, we see a shift in the customer buying criteria from primary primarily evaluating what is available today.
Two evaluating what we reliably we'll be able to deliver over the next couple of technology generations.
In this regard we are uniquely positioned to market with both ice for and our 600 gig solutions, probably be providing cost and performance leadership today, our ice six while the schedule for delivering 800 gig and 2020 and <unk> seven on the drawing board.
Today, we remain one of the only two suppliers that have committed 800 gig over the next year.
As the optical supply chain continues to consolidate our position in the market as a differentiated optical technology provider continues to be enhanced by our successful integration of putting it.
On that note our integration plan has never been just about capturing cost efficiencies.
As I noted earlier, we have maintained our R&D leadership in optical performance and now with the most significant integration risk behind us we can focus even more on our resources, our technology development and privatisation.
As we communicated during our July 17th Technology roadmap webcast. Our focus is in three distinct care categories optical leadership optical in IP disaggregated platforms and automation that delivers network solutions.
And optical leadership, we have recently introduced our 600 gig solution with our group platform.
In the first half of the year, we successfully completed 14 customer trials and had 18 additional trial scheduled for the second half.
To date five customers have verbally awarded us wins with one of them extending its appeal.
This customer is also a new groove win for us and our technology roadmap was a critical decision criteria.
A significant number of other group wins have been based on our road map of offering both 600 gig and 800 gig technology, even if initial deployments are with lower speed solutions.
Based on these wins, we expect initial 600 gig revenue in the second half of 2019 with a significant volume increase in the first part of 2020.
At the heart of our portfolio is our vertical integration strategy of developing and manufacturing optical engines.
As wavelengths speeds continue to advance we believe that vertical integration becomes a mandatory ingredient and the ability to fundamentally deliver the technology and to control the cost structure that makes it economically attractive.
We view recent industry consolidation as a continuing endorsement of the vertically integrated strategy installed at our inception, nearly 20 years ago.
We have recently achieved an important vertical integration milestone with the tape out of our Isix DSP, putting us on track for first Silicon This fall and 800 gig product delivery in the second half of 2020.
As communicated during our recent road that webcast I, six will deliver better spectral efficiency and lower cost per bit not only at 800 gig, but through a range of transmission rates from 200 gig 200, 8800 gig opening up a tremendous market opportunity.
Our customers will be able to use the same technology for applications spanning from short reach datacenter interconnect transoceanic links improving their operating costs and simplify their network architectures.
Well remain only one of two vendors with published 800 gig solutions come into the market in the near term. We are the only one promising 1.6 terabytes of capacity in a single device.
This level of integration in the DSP and corresponding optics is the core of Infinera as differentiation.
Well our heritage has been focused on high capacity optical integration, we continue to expand our tool box the optical intellectual property.
At ECOC in September we intend to lay out our plans for using this IP to bring a new architecture to the aggregation market the uniques Pluggable strategy.
In summary, the combination of significant order momentum pipeline improvement in customer wins has driven improved confidence and momentum in our business.
We expect to grow our backlog in Q3 and are reiterating our 2019 revenue target of 1.3 billion and the expectation of turning cash flow positive in Q4.
The benefits of the Korean acquisition on a tree realizing in the Finalization of integration is now what insights to the new Infinera.
We have enhanced customer engagement with larger customers driving opportunities, we are demonstrating success and driving scale.
We are close to completing our integration work, you'll be a company positioned to create profitability and positive cash flow and most importantly, we have continued to invest for the future, bringing innovation to the market that should create customer and shareholder value.
I want to thank our employees for their hard work and creating the positive momentum in our business I'd also like to thank our customers who share our vision and are creating the optical networks of tomorrow now I'd like to hand, the call over to Brad for a more thorough review of the financials.
Thanks, Tom and good afternoon, everyone today, I will discuss our Q2 highlights and provide our outlook for Q3 and the remainder of fiscal 2019.
The detailed recap of our Q2 results is available in the CFO commentary on our Investor Relations website.
Q2, non-GAAP revenue of 307 million represents a 4% sequential increase coming in towards the upper end of our 290 to 310 million guidance range.
Revenue improved during the quarter due to strength within the actually p. vertical as well as with global tier ones.
Oh, I see people vertical exceeded expectations, driven by a new customer I could be customer deploying our group Dcs platform.
This new I.C.P. relationship, which came as a benefit of the corn acquisition contributed to the sizable footprint expansion, we experienced during the quarter.
Our tier one strength was fairly broad, but was particularly good with our largest north American customer and our largest APAC customer.
During Q2, we won both several new customers and new opportunities with existing customers and each contributed to strong backlog growth.
We saw solid demand from a number of customers in North America, including from our largest customer which represented 13% of total revenue in the quarter as they continue building new routes with us.
In addition, our revenue within Latam doubled in the quarter as we saw some recovery in spend across this region.
As additional color on Tom's comment or Terry about our expanded tier one relationships.
Eight of our top 10 customers in the quarter would be considered tier one scale customers. We believe that these relationships along with the new ones. We're now creating as a combined company provides a solid foundation for future growth opportunities.
As we commented on during our last earnings call. We saw a robust pipeline of opportunities in Q2 that we expect it will drive growth in the second half.
The good news is that we were able to convert those opportunities into a strong bookings quarter in Q2 contributing to significant backlog growth entering Q3.
Also of note following the Korean acquisition, we have a more diversified customer base.
Our top 10 customers represented 43% of revenue in the second quarter of 2019 as compared to 67% in the year ago quarter.
This more diverse customer base. This allows us to offset continued soft spending within our cable vertical.
non-GAAP gross margin of 30.7% was slightly above the midpoint of our 28% to 32% guidance range.
As we expected going into the quarter, we experienced significant footprint expansion with both existing and new customers.
As we've stated throughout Infineras history. This initial footprint often requires an upfront investment that carries lower gross margins.
However, given the size and scale of many of these customers. These investments typically generate a very strong return once customers expand capacity within these networks, resulting in a significant margin expansion opportunity in the future.
Moving now to operating expenses, we continue to make solid progress with our Opex synergies as Q2, non-GAAP Opex came in at $132 million compared with our $135 million guidance midpoint.
And well below the pro forma levels of the combined companies from a year ago.
Well, we take actions to reduce our overall opex spend we're focusing our R&D dollars in areas, where we can differentiate and where we see the best opportunity for the company.
Our ability to differentiate with our solutions has always been a key principle of infinera.
Taking it all together, we had a non-GAAP operating loss of 12% and a non-GAAP net loss of 24 cents per share.
Both metrics better than our guidance range, although both significantly below our longer term expectations.
As we continue to take the key actions necessary to transform the company and benefit from an increased scale. We expect financial results, we will continue to improve.
Turning to the balance sheet total cash and investments finished the quarter at 140 million.
The ending cash balance was slightly below our expectations as we made a decision to invest in working capital to support second half revenue growth and accelerated some integration spending.
These impacts were only partially offset by operational outperformance in the quarter.
These investments in working capital represent the building of a strong asset base, which we expect to benefit our cash position as we work it off over the second half of this year.
In order to provide us the flexibility to absorb working capital fluctuations such as those described above.
As we continue to transform the company and pursue large new customer opportunities last week, we closed a $100 million credit facility with Wells Fargo.
We believe this facility satisfies our near term capital needs. Although we do have the ability to upsize the facility by 50 million in the future if certain conditions are met and the need arises.
Turning to the third quarter, we have some important integration milestones, which we are closely managing.
First off we are tracking ahead of our financial synergies and are on track to complete the integration by the end of the year with future synergies to come with vertical integration.
Second we have now transitioned our Berlin manufacturing up or is it operations to Fabrinet in Thailand.
This program is six months in the making and we have a high degree of confidence in fabrinets ability to wrap up our products in line with the plan.
We will continue to closely manage this transition and expect a smooth ramp.
Third in early August we went live with the new combined ERP system.
As of today, there have been no major issues and we expect a smooth transition they'll complete validation has not yet been accomplished.
This is an important step in finalizing the integration driving synergies and having full financial and operational visibility across the organization.
Now to our guidance for the third quarter of fiscal 2019.
As mentioned earlier, our Q2 bookings increased materially in the quarter, representing the third consecutive quarter of backlog growth.
As we continue to see a strong pipeline, we expect another solid quarter of bookings in Q3.
Which would allow us the opportunity to once again built further backlog.
For Q3, we currently anticipate non-GAAP revenue of 330 million plus or minus $10 million.
This would represent a 7.5% sequential quarterly increase in revenue.
Looking at the second half, we expect a continued solid pipeline of opportunities and strong backlog will allow us to reach our 1.3 billion revenue target for the year.
On gross margin, we anticipate Q3 to be another quarter of strong footprint deployment with both new and existing customers.
Well, we have been pleased with the opportunities we're winning many of these networks take advantage of our unique ability to pre deploy bandwidth.
Allowing our customers to react quickly to their customers demand with our instant bandwidth capability.
In this case the initial deployment of a very small percentage of bandwidth activated.
As a result of these upfront investments the anticipated gross margin expansion is projected to shift out by a quarter.
On the positive side, we have now officially completed the transition of our Berlin manufacturing to Fabrinet, which significantly improves our cost profile and reduce its fixed cost.
We expect this transition to have a positive impact to margins as 2019 progresses, and we begin to sell the lower cost inventory.
Rolling up the various components. We currently anticipate Q3, non-GAAP gross margin of 32% plus or minus 200 basis points.
Based on the further benefits from the Berlin manufacturing transition in Q4, and as our product mix begins to level out in the period. We continue to expect non-GAAP gross margin in the mid Thirtys range for the fourth quarter of this year.
Keep in mind that our non-GAAP gross margin in the first quarter of fiscal 2019 was 35.3% that was representative of a more normalized product mix.
Since then we have taken multiple actions to lower our cost structure, providing us confidence in our ability to achieve these gross margin levels as we exit the year.
With regards to operating expenses, we have made tremendous progress, we're driving down our operating expense levels.
As mentioned, we have now completed the migration onto one global ERP system, allowing us to further drive efficiencies in the business.
As we still need to stabilize on the new system, we expect only a minor benefit to operating expenses in Q3.
Leading us to anticipate non-GAAP operating expenses of 130 million plus or minus 3 million for the quarter.
As we progress into Q4, we expect to be able to drive further expense reductions, allowing us to finish the year in the mid 120 million range for non-GAAP operating expenses.
Putting it altogether, we expect the Q3 non-GAAP operating loss of approximately 7% and a bottom line non-GAAP loss.
Of 17 cents per share plus or minus a couple of cents.
In relation to cash levels in the third quarter of fiscal 2019.
As we articulated on our last call, we expect to significantly smaller cash reduction driven by improved operating results and working capital benefits as we utilize the inventory build to support the fence the factory transition.
As we move into the fourth quarter, we continue to believe that our improved financial results fueled by our strong backlog position and diligence on working capital will lead us to both non-GAAP profitability and cash generation.
This being my last earnings call here.
This will be my last earnings call here, However, I want to reiterate that I continue to be very optimistic about the future of infinera.
I'm appreciative of the great experience and the committed people I've had the opportunity to work with on this journey and I believe infinera is well positioned to complete the transformation that we began with this acquisition.
I'm excited to hand, the CFO reigns to Nancy Zeglin. She is the right person to take the company forward as he brings a strong financial and strategic background, along with the hunger and dedication to drive change in the business.
Thank you for your support over the years.
With that I will turn the call over the operator for the Q and a portion of the call.
Thank you we will now begin the question and answer session.
To ask a question you remember press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
So it's all your question. Please press Star then too.
Today's first question comes from Rod Hall of Goldman Sachs. Please go ahead.
Thanks, This is bothering on behalf of fraud.
Congrats on the stabilization in the quarter and Brad.
Best wishes for the for your next move as well.
I think my question really is on focused on the recent announcement on Acacia has acquisition by Cisco, maybe if you want to comment on the state of the merchant solutions and.
If you think that there's other suppliers available for future needs.
And if you want to comment on your own potential to be a merchant supplier. Thank you.
Yes, good question and we're certainly seeing a lot of interest there are a couple of things one I personally believe this is good for us and it's good for the industry I know Roger I know bill very well.
I am a 100% confident they're going to continue to provide us how the technology that we need in the platforms today and they're going to make available technology. If we choose to in the future. We have been clear, we will make our own dsps and optical technology and we will also buy where it makes commercial sense to do that and I fully believe that that technology will be available to us too I do think it makes our own strategy around vertical integration quite frankly more valuable there are fewer choices everyday on the market and I think that this DSP technology and soon to be the optical technology the value of being able to control that value chain are going to become more appreciated and I think it underscores some of the basic value and opportunity of Infinera in regard to will we make our technology potentially available in the merchant.
Two quick points, we have been approached in regard to our IDE six by some people who I think.
Maybe incurred in conjunction with this Acacia Cisco announcement are now interested in diversifying and looking other suppliers I also see that the point that is resonating with the market that we are one of two choices in 800 gig and lots of people need 800 gig beside the two people that are making it. So people are approaching us to discuss opportunities in DCIO I don't know if anything will materialize, but clearly it's something directionally that we were going to spend time when I was very clear on my script that at ECOC, We will discuss where we're heading with our Pluggable strategy you should pay attention to see how we're planning on commercializing parts of optics and DSP.
That makes sense, if I could ask just one more question.
The it was good to see the increase spend with your tier one customer in Mexico do you see the lifetime revenue levels in the quarter sustainable going forward or.
I recognize it's pretty small so it can be lumpy, but just trying to get your comment on that.
Yes, I think as a combined company, we have a pretty diverse customer base and Latam.
And I think there's lots of opportunity there so I see continue to see going forward.
The opportunity to continue to grow those revenues.
The large.
Customer that I referenced historically has been a quite a large customer into can you just see them start to come back.
We'll spend would be another nice phenomena, we're also winning new customers in Latin and their substantial investment happening there and I think we're well positioned.
Great. Thank you.
Yes. Thanks.
Next question comes from Josh.
Oh no more instinet. Please go ahead.
Yes, thanks very much.
I guess could we begin.
By talking about what looks beyond the integration little bit it sounds like you're making great progress on putting everything together ahead of schedule.
Where what kind of improvements can we think about for the margin structure once we get get beyond the fourth quarter and.
Is it possible for us to be talking about a low or even mid fortys number at some point in the future.
Yes, great question. So obviously as we continue to take out the fixed cost and exit the year on that is a great accomplishment for the future cost structure and we're going to continue to work down operating leverage as we put out and we've had a very successful.
Quarter as Tom mentioned with the group platform, which is a compact modular platform.
Going forward substantial year over year growth, 8%.
That is a slide based architecture modular platforms will continue to be let base.
As we start to put our own vertically integrated optical technologies those products themselves increase in there.
Gross margins by 20 to 25 points over what we're seeing today, so where you're seeing a bit of muted margin footprint. That's out there today, it's great for us because we're winning new tier ones as Tom said that are looking for somebody that provides the existing technology today, that's unique in their ability to provide 600 gig, which we get a bit of better margin structure and as we get to 800 gig we will have the industry leading cost structure. So I agree with that being said Nancy is just getting on board will take over as CFO officially the first part or end of August we will plan on having an analyst day, we will update officially kind of our outlook of the business model on before the end of the year, we need to give her a chance to get smarter the topic.
Okay.
Thank you all and Brad. Thank you for all your help over the years.
Thank you.
Our next question today comes from Alex Henderson of Needham. Please go ahead.
Thank you very much.
I was hoping you could talk a little bit about the 800 gig chipsets.
You've obviously now announce the finished taping down the isix.
Does that increase your expected probability of getting them back.
Without any issues.
It had been estimating around 85% probability that when it came back that would be running well can you talk about some of that.
Reasons, why your success should be better than the problems that both NGL and Nokia appeared to have run into on their 600 gig deep dsps.
Yeah, I can't speak to the specific challenges they might have had but I can only tell you that.
We are on schedule to our original schedule with our basic it is a non trivial accomplishment to tape out.
Our history of paying out and having first silicon.
Is we've never had to completely re spin and basics. So I have high confidence, we have never put as much resource or diligence or tools on validating the design as we have this time, we made sure to work with World Class partners in every aspect of the technology going into this.
We saw that we need to minimize any unnecessary risk wherever we could so we spent the appropriate money, making sure that we were as bullet proof as possible. So I have high confidence second of all a lot of the technology that Ian Isix is actually not the first time, we're bringing that technology to market. We've been doing some carriers for a long time, we have been doing probabilistic shaping we had been doing SD FEC gain sharing the values that enhance the outperformance of optical we're taking them to next generation. This isn't first generation for us and I think that that will be.
Ah ha and advantage moving forward, but Alex having said that until it comes back in October and it works. It doesn't work so I'm going to keep my fingers crossed I have high expectations.
And do you guys heard or talk to anybody that is familiar with the.
Whether CNS tape down yet or whether you know where they are 800 gig chip is because we haven't been able to find anybody suggested theyve already seen this product in the field in any form or fashion.
I'm a little concerned that.
They're suggesting that its available so soon when I can't find evidence of it.
Evidence of that being in the field now were not outward we're extremely focused on our own execution, there and I'd add to Tom's comments, it's not only on the DSP, but last year at ECOC with our pick our Isix, which is our sixth generation of doing this and it gets harder to marry that photonic integration with the DSP every generation, we demonstrated over a terabit per wafer capacity at over 100 gigabyte at 64, Qualm. So we've actually provided to the industry almost a year ago, our operating results and open transparency. The Pic is ready ready to go the DST is safe that that's what we're focused on getting the market. So.
You know everybody else is very focused on.
The rates between us and Sienna all I know is this is our sixth time at bat and the market of two is much better than a market of seven or eight so.
Great. Thanks.
Our next question today comes from George Notter of Jefferies. Please go ahead.
Hi, Thanks, a lot guys, Brad best of luck I guess.
I do have some as balance sheet driven questions. Here can you help us just understand kind of where we are in the restructuring effort. Just in terms of the costs I think if I go back to.
The announcement of the Korean deal or maybe soon thereafter, you guys talked about a 75 to 80 million dollar total cost on a cash restructuring.
How much of that is behind you at this point how much of it is still in front of us.
And then yes, George we still have.
So we still have a another quarter in Q3 of <unk>.
Higher levels of spend around integration.
As we get into Q4, it drops down pretty significantly.
And then as David mentioned.
Expect a ramp.
The initial or ramp down and complete the initial integration. So basically you got one more quarter.
Left of heightened spend and then it drops off pretty significantly in the fourth quarter.
Yes.
George are roughly what we had said so in that same ballpark and as Brad said they ramp off dramatically. In Q4 Q3 is about the same as Q2 was from an integration cost perspective.
Got it.
Okay.
Fair enough and then if I just look at the cash quarter on quarter to 140 million. This quarter. It feels like Theres quite a few moving parts in that number I'm, hoping you can kind of walk me through some of those so for example, there was.
I think an issue with the customer outage that that may have affected cash I think there was a legal settlement you referenced in the CFO commentary I know in prior quarters, there's been some factoring but can you walk us through the moving parts and kind of give me a sense for how much cash was burnt I guess organically in a sense you know Q on Q. Thanks.
Yeah, So George overall.
The majority of the bonuses the cash from from operations.
But as we said we will continue to drop off will get lower in Q3, and then flip to positive in Q4.
The increase in in Q2 was really a strategic decision we made to.
Pay ahead, some pretty page through some of our contract manufacturers build some inventory to make sure. We can meet the demand for the second half so working capital hurt us to the tune of about $20 million.
We also increase the integration costs.
So that we can accelerate it and get the benefits and the piano faster.
Those are the biggest moving parts.
Okay. Thank you very much.
Yes, yes, I would just add that the delta versus expectations was the decision we made to increase working capital associated with the.
Integration and with the stronger second half booking and trends.
Transformation work that we're doing as we move to Berlin facility to give our customers smooth delivery of those higher bookings one of the things that might not be well understood. The certain optical components are quite frankly on allocation and it's a challenge to make sure you have sufficient supply. So as you have a ramping environment, it's pretty important for us to make sure we have the supply covered.
And our next question today comes from Christian Schwab of Craig Hallum Capital Group. Please go ahead.
Great. Thanks for taking my question Brad Good luck on whatever is next in your journey.
Well My question has to do with Hum you were kind of first a few quarters ago to kind of mention traveling across in particular Europe at the time.
That there was tremendous interest and people seeking alternatives to walk away, which should lead to future business, but you know and all telecom Oh narratives, usually move a little bit slow now that you've kind of seen your first walk away replacement Asia.
Can you give us an update on kind of a multiyear outlook and possibly give us any idea.
Of the magnitude of the opportunity you may have.
Well as you pointed out the telcos move at a.
Fairly methodical cadence I believe that the trend is set and there is going to be increasing decisions made to minimize the risk. There's a number of factors I said in my script.
Some of its political sort of its continuity supply some of its national security some of that quite frankly comes from customer pressure.
There's a number of customers some of the ICBPS, who will not allow their traffic to be carried across Chinese gear. So if that becomes more of a mainstay there are fewer fewer.
Telephone companies there are so many companies.
People carry internet product, we are going to be to using the Chinese gear I think all of these things play and all of them are actually causing people to second guess the presence of that level of investment they have in their network and I think that we've won the first one I think that we will win more over time, but it's going to be I think relatively slow I do see quite frankly, why wait countering pretty hard in regard to making billion dollar investments in a number of countries to balance. This out. So this is in no way shape or form done, but I do believe that the direction forward is more pressure will be applied to people, who are delivering the gear from China and its an opportunity for us.
Great and then my last question has to do with.
You guys being approached by customers for your Isix technology. It can you can you quantify should any of those customers are actually lead to design wins or use of your product is there any way for you to give us an idea of the revenue opportunity that could be there overtime.
Yes, so it's probably early inning for us to be talking about that we certainly have the capability as Tom mentioned the.
The Cisco acquisition of Acacia.
Yes kind of shows the valuation that we have for our.
Vertical integration given we build similar DC goes for our product line that are a substantial portion of the shipping volume of wood Acacia shifts, but it's a little early for us to talk about and as we said as Nancy gets on board and we look at our long term model with the second phase of vertical integration in this as a potential will be able to reveal a little bit more.
Great no other questions. Thank you.
Thank you. Our next question comes from Tim Savageaux of Muslims Capital markets. Please go ahead.
Hi, good afternoon.
Couple of questions first one would be on the cable front you did see what looks to be a pretty steep sequential decline in Q2.
However, if you kind of look at what the operators are saying and doing with regard to their second half capital budgets as well as some.
Equipment suppliers with similar exposure to some of your major customers.
That does seem to be turning a bit in the second half I wonder if you have any visibility.
Two I guess cable as a vertical bottoming in Q2, and whether you see any.
Rays of light.
In terms of resumption in spending in the second half Niagara Falls in regard to cable bottling, a bottoming out or rely quite frankly on what the industry talks about as we look at Capex numbers et cetera, and I I think that could be happening. We know that we have a range of cable customers. Some of them are investing more in some of their investing less the one I think you're probably referring to is the one that I came down for us significantly candidly, we are not putting anything really in Q3, and a very very muted amount in the rest of the year and we're going to wait for recovery, it's very dangerous to take broad general things and apply them to a specific scenario everybody will have a different scenario of how much inventory do they have in their warehouses et cetera. So I would encourage caution on taking an industry dynamic and applying it to any specific customers scenario.
Very good and bad and your.
As just stated not really building any of that in too.
So Q3 or the SEC.
We're taking a conservative approach and we're we're hoping to be pleasantly surprised.
And one question if I could on back on the Y way replacement.
Situation I Wonder if you can kind of describe the specifics of that not in terms of the customer of course, but in terms of the sales cycle whether that was.
Right in the wake of the ban just something where the overall political pressure there's been mounting over the last year or kind of describe how long it took to to go from initial inquiry to to close.
Yes. This is.
It's a PTT in Asia. So it's a significant potential customer is a customer that the client side of the house had actually been working on for a couple of years. So this is not like all of a sudden this new pressure came out may be an RF Q. This is a relationship that's been being worked for a long time I think that the opportunity to have an alternative to wawa presented as an opportunity to expand as an initial new vendor and what I get excited about is these pts never pick somebody for one deal we have our first deal with them. It's a non trivial deal, but it's a it's not going to change the companys landscape, but the opportunity to become a significant supplier over time is real and I think that this is a meaningful direction and it's a meaningful opportunity and I don't want you to think that this new political pressure caused into some that are acutely responded its been a relationship in development for a couple of years, yeah, just to add a little bit.
Jumped onto the hallway piece as we look at these tier ones and as Brad mentioned, we lay out that footprint expansion with tier one.
I think part of the strategic logic of the Korean acquisition was our expansion globally and to diversify the network and as Brad mentioned moving from 67% top 10 to 43 further Diversifies us.
But the Ptcs and tier ones do take time.
We have been pleasantly surprised that we've closed seven tier ones and new PE opportunities since the beginning of this.
This year in 2019, so it doesn't happen quickly. So we are not pounding our chest here, but it does give us ample opportunity to be able to scale.
Those those opportunities for both.
Revenue as well as very important growth margin growth.
Great. Thanks, very much and all the best to Brett.
Thanks.
Our next question today comes from Michael Genovese MKM partners. Please go ahead.
Hi, Thanks, guys two questions first.
On 600 G.
Just where were we in the quarter or was it mostly orders and.
Kind of what level of orders or were there any revenues that offer 600, Jake and what do you expect the second has to look like for for that technology.
Yes, there were orders one physical order five commits.
I still believe 600 gig is going to be a very significant technology adopted into the market.
And it's got to be differentiated around how many did you sell versus how many are making a decision on your platform based on your technology roadmap 200 gig today 600 gig today 800 gig tomorrow, we have a number of groove wins that are rolling out 200 gig today with an expected upgrade path to go to 600 gig at the beginning of next year, that's why they pick the group.
So I actually believe that we will absolutely get revenue this year, but the revenue ramp will be next year, but the decisions are being made based upon the roadmap of 600 gig and 800 gig availability. It 600 gig in a simple yes offers lower dollar per bit then alternatives on the market today, and that's what customers want but they have a long certification cycle, they're going to go do it when their network.
Planning cycle is appropriate and we see I see most of the people we're talking to planning for the first half of next year for Big installs. The nice piece of that group platform and the compact modular space, which were number two now.
In the market with the aspiration to be number one is again the group is in a real growth here in terms of its ability to offer the 200 gig 600 gig and then that platform architecture moving forward to 800 gig at the lowest cost per bit. So it's been a real vehicle to get insertion opportunities into these tier ones into these ICBPS that when they scale.
They go they go fast and hard.
Okay, Great and second question I guess Brad.
Yes, we are I guess, you're shifting out the gms by quarter when they got to go back.
Mid thirties.
I guess, what's the chance of them.
Shifting out again and it seems like they can shift out again for either good or bad reasons right. It could be that we get.
How many new orders that they're gonna stay down here for yet another quarter.
But you know how confident are you in these fourth quarter fourth quarter mid Fortys, which I started mid thirtys would seem important to get to breakeven or above.
What's your level.
Shut that again.
Yes, So Mike you are right that the reason they declined in Q2 was a very good reason.
That's a great opportunity for us and for our shareholders.
If you look at the different components to the increase in margin over the second half of the year and especially in the Q4, one is a mix shift which we.
Full benefits of all the fixed costs, we're taking out.
And the reason I gave the metric around Q1 is.
Q1, before we did all these cost reductions we hit those same mid Thirtys gross margin so.
Things happened in the market, but I'm confident.
We have a great opportunity to go meet those numbers.
Great Brad we're we're going to Miss you.
Thanks.
And our next question today comes from meta Marshall of Morgan Stanley . Please go ahead.
Great. Thanks, guys.
I Wonder if you could just kind of describe that relationship that took place with the new HCP. You mentioned it was a new growth group customer, but that that relationship may have come through Korea, just kind of background on that new customer win and then just what you're seeing as far as kind of timelines, maybe pass cloud express customers and how long it's taking them you know in the testing process as they look at group.
That's all for me thanks.
So a couple of things.
One the group was brought to us with Coriant as interesting is that when we announced the acquisition. They actually took the groove product out of their lab and.
Said, we're going to wait until we feel comfortable with this acquisition before we go and recertify. It. After we got the acquisition accomplished they put it back into their lab and retest that it and certified it so.
It's been actually really great validation that they are comfortable with both the technology and the combined entity that the group is a platform that we are going to continue to invest in.
The made the decision.
Probably the beginning of Q2, we started shipping in Q2 in fairly significant volumes that we see a very very nice pipeline of opportunities for this platform right now doing datacenter interconnect, but also now talking to us about other opportunities.
And other platforms.
I'm excited about that overall platform and I think that they will probably one of the customers that upgrade to 600 gig in the first half of next year and the second question, how long will it take for CX customers to migrate Youre presuming. It all the CX customers are going to migrate some of them will some of them well, we still offer the CX to we still offer the XT 3300, and we offer the groove today and each is.
Quite frankly.
Preferred by some customers clearly the growth of the company is moving to the group.
And our next question.
I'm sorry, I was is our next question today comes from Simon Leopold of Raymond James. Please go ahead.
Great. Thank you for taking the question a couple of things I wanted to check on you did indicate that you expect to generate cash from operations in the fourth quarter, which would of course imply that you expect to burn cash in the third quarter.
If we just sort of think about the midpoint of your your guidance.
Can you give us some sense of how much cash you anticipated burning whether there's any kind of onetime items in there or is there something we should be conscious of.
Yes, the expectation for Q3 assignment was 20 to 30 million.
Overall cash reduction in the quarter.
Great that's very helpful and.
You had I guess, a GAAP non-GAAP difference in revenue.
It sounds like you had a credit you provided too.
A customer from something last year, I don't quite understand that could could you explain what happened there.
Yes so.
The we had a discussion with the customer this quarter.
They had to compensate some of their end customers.
We agreed to reimburse them for those.
Warranty costs.
That will be given to them.
In the form of credits overtime.
Great I appreciate that and Brad I, just just want to thank you for your help and I wish you best of luck. Thanks, a lot. Thanks.
Thanks.
Our next question today comes from Joel Musante of Stifel. Please go ahead.
Thanks, very much last quarter, Tom you talked about an Asian customer who delayed some of those orders that you kind of took it out of the book because you weren't sure how that look we're just curious where that stands now if that was behind some of the APAC strength.
And in this current quarter and if it's in there for the second half of the year and then secondarily last quarter, there seem to be a lot of excitement or or enthusiasm around the subsea market didnt hear much of that.
During your comments today I was just curious if you could characterize what you're seeing in that market as we look out in the second half of the year.
Yes, so two things in regard to the Asia customer that we pulled out of Q1, and then did not put in Q2. We are also not contemplating in our Q3 guidance or Q4 guidance. We still think it's an opportunity my bet.
Is it does come in.
But there are some issues around it that would make us too uncomfortable to commit to it at this point so.
I'm going to wait and watch and work to continue to have the opportunity if they do build the network.
AIDS hours I'm sure.
But it's become a big enough question, Mark that I am not going to contemplate outlook, but I. My view is a reasonable likelihood that it would occur sometime this year in regard to sub sea. Okay kind of my error on really not talking about Brad talked about it a bit in his script, we had a very strong bookings quarter in Q2 in.
Particularly with ice for Icefour continues to lead the industry in spectral efficiency, it's quite frankly with a lot of sub sea decisions are made around.
We got our consortium IPO in Q2, which was a substitute.
When both from a technology when from a.
Deployment across a number of routes that will happen over the next three quarters, it's one of the.
Challenges within the US scale as a size is between the time, we get the PEO and ship it and then recognize revenue and that's part of the gap.
That between revenue recognition to cause a little bit of a challenge for us, but that and why we have to make an investment in inventory because that inventory is hours until they allow us to invoice it and they don't allow us to in license until they have it up and running but it's a huge win because of the consortium has a number of tier ones that we want to do business with and we had them. All here a few weeks ago, and we're going to use that as an opportunity to go in a calling card. We continue to win sub sea and I CP and we'll continue to see the IACP space and be a hotbed for subsea activity. So overall I am still very.
I am excited about sub sea and I'll tell you when I talk about people looking at technology generations are the people who look at sub sea are the ones, who probably poke at technology generation is the artist because what they're looking for is constantly improving dollar per bit watt per bit and the reach that a bit can go and they are really pushing it hard and that's where I think our ice six.
Was it positions us very well selling what we have today, but also selling the promise of our capabilities as we go deep dive into what our performance of Isix is with them.
Thank you Tom.
Yes.
Our next question comes from Samik Chatterjee Jpmorgan. Please go ahead.
Hi, Thanks for taking the question I just wanted to start off with the PCB revenues.
If I could.
Alright, you saw a sequential improvement in revenues from Q1 to Q2, I think 20 million to 29 roughly.
Can you help us with how much of that was attributable to the new I see that you started to ship to and also how you're thinking about kind of the ramp.
Revenues with ice speeds for the remainder of the year, particularly are you continue to expect a ramp with the new custom little bit youre not shipping too.
Yes, yes, so it sounds like that the majority of the growth in the quarter was that new customer.
And.
That was their initial.
Ramp we expect them to continue to ramp as the year goes on.
They would actually like to us to have shipped more in the quarter.
So we actually built some backlog with that customer so expect them to continue to grow.
Not only through the course of the year, but as Tom mentioned and I think the opportunity with that customer.
Significant one is we.
Transitioned to 600 gig as we have subsea opportunities.
It's a very big opportunity for us.
You'll also see the CP grow from a revenue perspective in Q3 and not just from that customer yes.
Also if I can just ask you on the strength, you're seeing with the North American tier ones and if you can kind of go into a bit more detail there what's driving the strength I know you mentioned fiveg.
And you also mentioned subsea kind of what you're seeing on the metro side as well in terms of investments where do we expect most of the fighting investments to come in.
Yes, we should delineate between.
Again, the third three quarters of building out backlog in that continuing for the remainder of the year is different than the strength. We're talking about in these new tier one wins in many cases when these tier ones that play there deploying new design win so some of them are getting new design wins on the open compact modular platform that we're talking about the group going forward based on our optical leadership and some of these both north American tier ones and we talked about global Ptcs that are that are considered tier ones are also.
Completing it or beginning their architectures for Fiveg and D.A. access architectures, and that's where we're starting to see those initial design wins, what you first get with a tier one is a design win is a trial period.
In some cases paid for in some cases unpaid and then they begin rollouts I would like to reinforce that in the.
Getting back to growing bookings and backlog that happens as they scale those opportunities, which is a multi quarter multi year for fiveg and da.
And a very large opportunity so again design wins on the edge of the network with our distributed router platform as well as our front haul backhaul platform and.
In the compact modular.
Business with the group, we're also Brad talked about North American tier one strength that came from our classic product building long haul product and winning new routes. So one of the things that we've been.
Really delighted with is the amount of new routes we are winning.
With two of our North America tier ones in the classic long haul space and that makes me also believe that they are not building. These routes to not sell need built fill them over time and I do believe that even though we are paying a little bit of a margin pressure on this in the near term. The fact that we are winning substantive new routes with these two tier ones that have been long term partners is a good sign.
Got it thank you.
And our next question comes from Jim Suva of Citi. Please go ahead.
Thank you very much and thanks for your questions in the details to once again very good I appreciate it and I had one thing that maybe like hearings, often I'm getting too old or maybe I got it wrong maybe can qualify.
Brad one of your prepared comments did you mentioned that there was like a gross margin push outs and if so can you help us better understand why we're maybe just completely a whole backlog can you give us some details around what again I apologize if I heard it wrong. Thank you.
Yeah, So Jim when we looked at the second half of the year earlier, we expected a bit more of a ramp of the gross margin in Q3, and then a further ramp into Q4. So although we are increasing the margin from Q2 to Q3 and still believe the opportunity in Q4 is strong the amount of new footprint. We're building in Q3.
He is going to push that growth of the Q3 increase in margin into the fourth quarter, that's what I was coming to.
Thank you. This concludes our question and answer session I'm going to turn the conference back over to internal management for his final remarks.
I'd like to thank all of you for your time today and I look forward to updating you on our continued progress the forefront up I would like to thank Brad for his partnership and his friendship. He has been truly committed to infinera and I wish him. The very best have a great day.
Thank you Sir todays conference has now concluded and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.