Infinera Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 9, 2023

There are 11 speakers on the call.

Operator

Afternoon. My name is David, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Infinera Corp. Q2 2023 Earnings Call. Today's conference is being recorded.

Operator

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. Amitad Pasi, Head of Investor Relations, you may begin your conference.

Speaker 1

Thank you, David, and good afternoon. Welcome to Infinera's Q2 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, Product development and growth opportunities, including progress against strategic priorities and milestones, trends, competition and customers, capacity growth, Excess 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 of demand revenue gross margin operating expenses and operating margin expectations regarding our future performance, revenue growth and margin expansion and our financial outlook for the Q3 of 2023.

Speaker 1

These statements are subject to risks and uncertainties that could cause Infinera's results to differ materially from management's current expectations. Actual results may differ materially as a result of various risk factors, including those set forth in our annual report on Form 10 ks for the year ended on December 31, 2022 as filed with the SEC on February 27, 2023 and in our quarterly report on Form 10Q for the quarter ended April 1, 2023, as filed with the SEC on May 4, 2023, as well as subsequent reports filed with or furnished to the SEC from time to time. Please be reminded that all statements are made as of today and Infiner 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've provided a reconciliation of these non GAAP financial measures to the most directly comparable GAAP financial measures Earnings release and investor slides for this quarter, each of which is available on the Investor Relations section of our website.

Speaker 1

And finally, as a reminder, we'll allow for plenty of time for Q and A today, but 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 Hurd.

Speaker 2

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 Nancy to cover the financial details of our Q2 and the outlook for Q3. Overall, the Q2 was another solid quarter for us.

Speaker 2

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 3 20 basis points and increased operating margins by 2 40 basis points, while continuing to invest in our strategic programs. In the first half of the year, we increased our top line by 10%, We improved gross margins by approximately 300 basis points to 39% and grew EBITDA by 137% compared The first half of twenty twenty two, bookings in Q2 improved sequentially with book to bill just below 1, 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, 1st, consistent with our efforts to expand our metro footprint, we won a new deployment with a major U.

Speaker 2

S. Service provider. This is a turnkey award, which will include our GX Metro platform, next generation line system software suite and professional services. The footprint we established with this customer We'll allow for future margin expansion as we integrate our own 400 gig ZRZR Plus pluggables in 2024, which we just made commercially available. 2nd, 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 subsea and terrestrial deployments in India for domestic service providers And U.

Speaker 2

S. Hyperscalers who are increasing their presence in the region. Finally, we continued our momentum in the hyperscale segment In the subsystems business, we're seeing the first signs of commercial progress. Our 400 gig ZRZR Plus pluggable is now commercially available We're excited about the margin expansion potential as we vertically integrate into the Metro portfolio. We're on schedule performing lowest power 800 gig pluggable that will leverage 3 nanometer technology and enable our customers to reach greater distances at unmatched economics.

Speaker 2

In addition to all of our intelligent pluggables have software that enables seamless integration and router switches, which allows simplified management, increased agility and dramatically lowers operating costs 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 pluggables and components from 100 gig to 800 gig. While these initial wins are relatively small in magnitude, they're encouraging and signs of the 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.

Speaker 2

We're excited to see the addition of 3 new members to the OpenXR Forum in the quarter, including Arista Networks. Total membership in the OpenXR Forum is now up to 34 members Our results in the first half of twenty twenty three continue to build on our momentum over the last 5 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 1,000 basis points, ramped ICE6 as 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 subsystems business, Business which we are investing close to $100,000,000 this year. As this business ramps, we expect to benefit from the higher margins in 2024 As we vertically integrate into our Metro portfolio and from the operating leverage once we ramp up the sale of external pluggables.

Speaker 2

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 reshore and secure critical supply chain, an issue of increasing importance to our customers. While long term demand will continue to be healthy with data rates growing from network payloads, they're getting amped from 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 3 to 4 quarter period of inventory digestion that's industry wide and are being cautious about spending in a recessionary environment.

Speaker 2

We believe we're roughly halfway through this projected 4 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 we'll grow revenue in the low single digit percentage range and deliver our 6th consecutive year of top line growth. We'll expand operating profit and EBITDA by double digit percentages on a year over year basis 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 6 strategic milestones we outlined during our March Investor Day and we're focused on gaining additional market share, expanding margins, ramping the pluggables business and delivering at least $1 in earnings per share in the 2025, 2026 timeframe. Overall, our investment thesis Remains unchanged.

Speaker 2

We continue to expand EPS. As I close today, I'd like to reiterate The fact that I'm confident in our strategy and our ability to execute through this adjustment period. Over the past few years, We delivered consistent commercial and financial progress while navigating a pandemic, supply chain disruptions, a 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 subsystems 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.

Speaker 2

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 outlook. Nancy?

Speaker 3

Thanks, David. Good afternoon, everyone. I will begin by covering our Q2 results and then provide the outlook for the Q3. For your reference on our Investor Relations website, we have posted slides with financial details including our GAAP to non GAAP reconciliation to assist with my commentary. As you heard from David, the 2nd quarter was another strong quarter for us.

Speaker 3

Revenue was $376,000,000 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 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 percent was above the midpoint of our outlook range and increased 320 basis points year over year.

Speaker 3

Compared to the prior quarter, gross margin in the quarter benefited from higher vertical integration, including ICE6 And some relief in supply costs, partially offset by lower services margin 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 our external pluggables revenue. Operating profit in the quarter was $10,700,000 with an operating margin of 2.8%, which was at the higher end of our outlook range. On a year over year basis, we expanded our operating margin by 2 40 basis points. Operating expenses of 137,000,000 In Q2, we're below our outlook range of $140,000,000 to $144,000,000 as we tightly managed quarterly spending, while continuing to make The resulting diluted EPS was at the high end of our outlook range at breakeven and compared to a loss of $0.05 in the year ago quarter.

Speaker 3

Moving on to the balance sheet and cash flow items, we ended the quarter with $167,000,000 in cash And cash equivalents with no amount drawn on the ABL. From a cash flow perspective, we generated $1,400,000 in cash flow from operations, while free cash flow was an outflow of $9,400,000 Let me now turn to the outlook for the Q3 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 have 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 3.50 basis points And increasing EBITDA by 137% compared to the first half of twenty twenty two.

Speaker 3

We believe we are about halfway through this temporary industry wide 4 quarter customer adjustment period. As a result, we now expect our outlook for the 3rd quarter To be revenue of $376,000,000 plus or minus $15,000,000 gross margin of 39 percent plus or minus 150 basis points Operating expenses of $141,000,000 plus or minus $2,000,000 and operating margin of 1.5 percent plus or minus 2.50 basis points. Below the operating income line, we assume $7,000,000 for net interest expense and $4,000,000 for taxes. Finally, we are anticipating a loss of $0.02 plus or minus $0.04 per share, assuming a basic share count of approximately 228,000,000 shares and a fully diluted share count, if profitable, of approximately 260,000,000 shares. We expect to utilize cash from operations in Q3, primarily for working capital and return to generating cash from operations in Q4.

Speaker 3

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 digit percentage range and delivering at least 25% growth in earnings per share compared to 2022, remaining on the path to delivering $1 of EPS in $0.25 to $0.26 We expect bookings to continue to improve sequentially in Q3 and then again in Q4 and to exit the year with our remaining performance obligations or RPOs of approximately $800,000,000 which should set us up well for 2024 when we believe demand should start to normalize. As I At 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 are 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 6th consecutive year of revenue growth and 5th consecutive year of operating profit expansion.

Speaker 3

We expect to improve our earnings per share by at least 25% in 2023, while investing close to $100,000,000 in our subsystems business this year, and we remain on the path to delivering at least $1 in earnings per share in 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.

Operator

Thank you. We'll take our first question from Simon Leopold with Raymond James. Your line is open.

Speaker 4

Great. 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're all behaving similarly in terms of this kind of inventory absorption and slowing or whether there's an aspect that stands out either because of customer concentration or other reasons? And then I've got a quick follow-up.

Speaker 2

That's a good question, Simon. Good to hear from you. Yes, so look, I think on the from an ICP front, they are lumpy orders And each one of those is behaving differently. I'd say that maybe 50% of the ICPs 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, we're As I mentioned, we used to be with 1 ICT at a time.

Speaker 2

We're now doing some form of business with the top 7. So that bodes well for the future. A couple of them are going in Still quite strong because of their immediate exposure to machine learning and AI. In the CSP domain, the largest CSPs in the world, I think that's where you see a large portion of that inventory. What we used to call kind of the inter exchange carriers have been less affected by that.

Speaker 2

I think the larger conglomerates that offer Multi service, access, wireless, others have been burning through inventory. Let's say that's been a bigger challenge for them. So it's spotty in the ICPs, but identified on the applications they're using. And in the CSPs, it's based on, Again, their overall supply chain buying that they did last year, meaning they packed down inventory to cover themselves in supply chain And they're going to burn that down. Feels 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're about, I think, halfway through the inventory burn down.

Speaker 4

So that sets up 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 3Q guidance with the prediction for low single digit growth in 2023, That would imply at least mid teens sequential growth in your 4th quarter. So somewhat of a nice rebound in the 4th quarter. Yes. I want to make sure I'm interpreting that correctly and what you see fueling that implied 4th quarter strength?

Speaker 4

Thanks.

Speaker 2

Yes. So backlog, right? So both our backlog and the order intake that we have and our order forecasts 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 scheduled.

Speaker 2

We think that begins to rebound as we Exit the year and we get a more normalized 2024. Now despite that, Simon, look, we pull our levers in times like this. You drive efficiency and then both Nancy and my comments for the 5th year in a row we'll expand EPS and this year You can do the math. If you contemplate that we'll grow by at least 25%, that says it's kind of $0.15 to $0.20 of EPS, which when you go back to our Analyst Day, that's kind of the view the upper end of that view was 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.

Speaker 2

Nancy also said that We're spending $100,000,000 on the subsystem business. That's over $0.30 if you add it up. And that is That hasn't yet begun to pay back. The pay back will start next year when we start putting the vertical integration in the metro platforms and then we'll further Drive operating leverage as we exit 2024 when you start to see true impact from the external pluggable sales in any kind of large scale fashion. Sorry, long answer, Simon, but did that help you?

Speaker 4

Very much so. Appreciate the details.

Speaker 2

Thanks.

Operator

Okay. Next we'll go to Meta Marshall with Morgan Stanley. Your line is open.

Speaker 5

Thanks. I just kind of wanted to reconcile some of your commentary that the book to bill was largely as expected With kind of some of the lower order commentary along the way. And I know you had kind of alluded to the fact that You were going to need to see orders improve throughout the year to kind of make expectations. So I guess just trying to see, Is this just you didn't see that improvement or the environment kind of further deteriorated?

Speaker 2

Yes, it's good question, Minh. 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 Competitors and where their book to bills have been, where they reported.

Speaker 2

We think we're doing a good job of maximizing our bookings in a pretty sparse 1st half environment and we think that will pick up in the back half, but I don't think you'll 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.

Speaker 5

Got it. And then maybe just as a follow-up, On the major U. S. Sewer risk provider win, metro win that you noted this quarter, is that A new customer on the 400 ZR piece of that, is it going to be multi vendor? Just any kind of commentary on that win?

Speaker 2

Yes, new customer for us using the whole GX platform, starting out using, call it merchant pluggables. And we will be we are already integrating our pluggables into our platform so that in 2024, We can leverage our own pluggables and that was part of that deal. So we'll see the margin. That's a great example of how the margin will expand With our most important customer of our pluggables, our first most important customer is Ron Johnson, who runs our systems business. We're our most important first customer.

Speaker 5

Great. Thank you.

Operator

Next, we'll go to Alex Henderson with Needham. Your line is now open.

Speaker 6

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. And as you have given guidance of improving orders in both 3Q and 4Q, do you anticipate

Speaker 3

Hi, Alex. Yes, 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 1, 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 Expecting some good growth there.

Speaker 2

Yes. Just to clarify, Alex. So for the second half, absolutely, we expect the book to bill to be above 1. For the year, To be seen, I think we'll be close to 1 for the year if you were to ask our current prediction.

Speaker 6

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? The follow-up question I had for you was really on the pluggable side. There was an industry piece out Recently talking about 39 vendors of 400 gig ZR. Obviously, not all of them have chips To integrate from themselves, but that's a lot of players and it does strike me as risky on pricing Considering this is supposed to be an open standard product, so how do you view the market for These pluggables relative to pricing and ability to generate decent profits on them as a standalone business.

Speaker 2

Yes. We'll have to talk offline, Alex. We haven't seen what we see are the competitors we're bidding against today in active bids and then the awards that we're getting. I think, again, you're right, probably not all of them. They might be rebranding or something, but I certainly don't see 39, I see 3 or 4 in any particular bid.

Speaker 2

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 that's going to prove to be more important and that same software We'll carry on into our 800 gig product and certainly our 100 gig product. So I'll have to talk to you offline. I have no way, Jay perform as we've seen 39 when we look at the competitive field that's more or less GAAP.

Speaker 6

FYI, I have a report that came out Specifically saying that there is 39 companies competing in the space.

Speaker 2

Yes. I'm just telling you what I see competing for a deal. So Yes, but what pricing is

Speaker 6

going to look like? Do you think pricing is going to hold in? Do you think it's going to roll? Any sense of pricing?

Speaker 2

Yes. So I think so far there's pricing depending on the form factor. If it's going into an ICP, it tends to be differently in In the DB form factor versus the CFP2 going into a metro network, which tends to be a bit stronger because of the value that's bringing in the overall network. There'll 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 because some of the ZR Technologies, in terms of them trying to get the reach and punch through ROADMs, they're looking for a bit more of that Okay. Next

Operator

we'll go to Mike Genovitsi with Rosenblatt Securities. Your line is open.

Speaker 7

Great. Thanks a lot. David, Could you talk about just in 'twenty four, which products in particular you're excited about? And for those out there who would say maybe not having a 1.6 terabit product in 20 24 Could potentially be a disadvantage, although that seems early to me to make that. Anyway, but what would you say to those people?

Speaker 7

So basically, yes, the products that you're excited about and why Sort of 25% is a good point to intersect the 1.6% market?

Speaker 2

Yes. So it's a good question. Look, overall, We've refreshed our entire product line since the Coriant acquisition, right? So we have a whole new line of hardware, the GX platform, a whole new line of software, a whole new OS, State of the art that takes multi generational sleds. So it'll take ICE6, it'll take ICE7, it'll take ICE8 and our pluggable line.

Speaker 2

So I'm pretty excited about, a, having a product in the metro where I don't have to go buy plugs from somebody else and take Margins that are disruptive. Now we've been growing the EPS of this company for the last 5 years, While we've been investing in the systems line and I feel good that we've got a very competitive systems line Winning with less competitors and Huawei exiting the market. So I just I know everybody's going to come out and say, well, I got a 1.6 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 at how many 800 gig lengths 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 against the competition.

Speaker 2

We're just probably a little surprised 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 The systems portfolio has never been in as good a shape and we're putting $100,000,000 to work to make sure The second act in the subsystems piece drives long term shareholder growth. So more than you asked for, Mike, but hopefully that was helpful.

Speaker 7

Very helpful. My second 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. Basically, do you think that a year or 2 down the line, you'll have an AI story like some of these optical component stocks? Thank you.

Speaker 2

Well, I promise I'm not going to rebrand this as an AI story on this call given the recent trading environment. That isn't a trick we're going to play. But what I will tell you is look our order book as we went through this year and as we look into next year is being impacted by AI and ML. You hit it on the head. There's some ICPs that are going to have to run 8 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.

Speaker 2

And as they move closer and closer to the metro, other solutions get more payload. So I think that's absolutely going to happen. And yes, 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. Nobody wants to hear about that.

Speaker 2

Now they want to hear that we're going to continue to keep our heads to the ground, put a And continue to drive EPS expansion.

Operator

Okay. Fantastic. Thank you. Okay. Next we'll go to Christian Schwab with Craig Hallum.

Operator

Your line is open.

Speaker 8

Great. Thanks for taking my question. I just said, David, you've talked to even at your Analyst Day and I know you hired some people who helped form the legislation on the CHIPS Act and you keep mentioning that. But Recently, Bloomberg just said that there's over 460 people asking for money, right? Germany gave big chunks to Intel Like $11,000,000,000 TSM, dollars 5,500,000,000 It is going to take too much time to run out of the grant money and the Chips Act.

Speaker 8

So I guess I'm just wondering what makes you so confident that you think that there'll be something left for Infinera?

Speaker 3

So first of all, none of our expectations and even when we were talking at Analyst Day assume anything from the CHIPS Act. All we're saying and have said and we still believe is that with our U. S.-based semiconductor manufacturing optical semiconductor in California 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 the dollar of EPS or into the cash generation that we've put forward in terms of our long term business model.

Speaker 8

Great. And then my second question, just as we exit this inventory digestion kind of halfway through, On the backside of that, 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?

Speaker 2

Yes. Look, a couple of years ago in our Analyst Day, we said 8% to 12 Everybody kind of question us. We've been growing. If you take again a 6 year view or a 5 year view, we've been clicking along at that above that rate. Look, it's too early to talk about 2024, but our long term view and our long term business plans Have that 8% to 12% growth rate in them and had a little bit of buffer room for EPS expansion And meaning to continue EPS expansion even if we have little blurbs and blurbles, which we've had.

Speaker 2

And guess what, we've continued to expand EPS. And in this trading environment, I can't even explain it. Hopefully, somebody can to me. But I would tell you that one thing I do know is if you continue to grow EPS, ultimately it will be valued and take care.

Speaker 8

Yes, perfect. Great. No other questions. Thank you.

Speaker 2

Okay. Thanks.

Operator

Okay. Next, we'll go to Samik Chatterjee with JPMorgan. Your line is now open.

Speaker 9

Hi, thanks for taking my questions. I had a couple and maybe if I can start with the updated revenue guide for the year. I mean simplistically, if I look at your Your guide, you're taking your revenue expectations down by about $100,000,000 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 provider versus ICP relative to your prior expectations or even by geography like How should we think about that being split between Americas, India and APAC and as to where you're seeing that reduction coming from just to get a bit more

Speaker 2

Yes, I'd say it's 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 are just saying, hey, let's delay them out a quarter or 2. And honestly, a lot of those customers have laid off And have new management in place and I'm just trying to kind of make it through the period as they digest inventory.

Speaker 2

So it's kind of 2 things going at once. So we can make pieces of that back to margin and through operational efficiency. And that's why Nancy and myself Confident at the 25% plus EPS expansion this year. And when we look at what You all have contemplated an EPS for next year. Again, remember, we're investing over $0.30 a year in the In our subsystems business that is it's an investment at this point.

Speaker 2

It's not yet paying back and starts to pay back in 2024. So that license in 20 24 and license in 20 25, you see that path to a buck. Let's not forget in 2019, we were losing over $0.60 to EPS when we started this journey.

Speaker 9

And then maybe just 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 $400,000,000 plus to revenue number in 4Q that you're implying. And also when you talk about a 4 quarter digestion, How much of that is just sort of overall thinking that the comps get easy enough and you start to sort of improve from there? Or do you really expect sort of inventory to be

Speaker 3

So I mean 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, 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 is we've already seen and not something that you guys see quarterly, but you see annually is the commitments at our in terms of the NCNR on hand and on order, that has already started dropping and has dropped more than, the inventory increase you saw on our balance sheet So we're starting to see those signs. I know they're not all quite as visible to you, in terms of the day to day, but That's what gives us the confidence in exiting the gear, in Q4 strong and then what we see in terms of backlog and pipeline Demand normalizing into 2024.

Speaker 6

Okay. Thank you. Thanks for taking my questions.

Speaker 2

Thank you.

Operator

Okay. Next we'll go to George Notter with Jefferies. Your line is now open.

Speaker 10

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 ICE6 and then a number for overall?

Speaker 3

Yes. For overall, it's about 55%. And for ICE6, it's in the Less to 30%. For the first half. And so on track to the 35% plus for the year.

Speaker 10

Got it. Okay. And then I think you guys also had Like a 55% to 60% target for the full year for overall vertically integrated product. Is that still

Speaker 2

in the

Speaker 10

cards or maybe?

Speaker 3

Yes.

Speaker 2

Yes.

Speaker 4

Okay. And then how do

Speaker 10

you think about the GX family, You're incorporating pluggables into that product, which is great and certainly very helpful for margins. But

Speaker 4

certainly there's going

Speaker 10

to be a testing period I think for customers Before they can start deploying that commercially, like how long do you think that test phase will take? How long before you We've

Speaker 2

been doing

Speaker 10

Yes. It can be material.

Speaker 2

Yes. We started doing that, if you recall, in kind of the July, August Time period, so early July, soon as we started the quarter. And what we had mentioned in both the Analyst Day And in prior calls, we expect that to be kind of complete by the end of the year. And our teams are outselling today, But deployment we said would be in 2024. And given we have qualified, I can't even tell you, we have over a dozen Different merchant optics in our own platforms, we're pretty aware of what needs to happen there.

Speaker 2

So yes, that will happen this year through the end of the year and we'll be deploying those solutions in 2024 and Nancy will see the impact in the All my income statement and balance sheet.

Operator

Got it.

Speaker 10

Okay. And then I guess same question for the XTM, I assume that now has pluggable solutions in that as well?

Speaker 2

Yes. So we're in parallel going through the XTM and the GX.

Speaker 4

Great. Okay.

Speaker 10

Thank you very much.

Speaker 2

Most of the volume going forward, you'll see In the GX platform, obviously.

Operator

Okay,

Speaker 10

great. Thanks.

Speaker 4

I'm showing no further questions at

Operator

this time. I'll now turn the call back over to CEO, David Hurd, for any additional or closing remarks.

Speaker 2

Well, 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 6 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.

Speaker 2

We're on track as I just mentioned to George to integrate our own 100 gig DD and CFP2 as the RZR plus modules, we'll start to see those in the margins in 2024. We are increasing the vertical integration in the mix as we've said. We believe there'll be growth in both embedded engines and pluggables and that's why we're investing in both. And let's not forget, we're investing $100,000,000 a year in the pluggables that we're not yet seeing the return from, but we expect To start seeing it in something we control in 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.

Speaker 2

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 couple of quarters and in particular the last 30 days.

Speaker 2

But our commitment is to continue like We have been over the last 5 years to continue to bust out EPS in difficult times like this as we think it ultimately will be valued. And again, there's 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 our mouthpieces in and go back to work Driving EPS expansion. Thank you and have a great night, great day.

Operator

Okay. This concludes today's conference call. You may now disconnect.

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Earnings Conference Call
Infinera Q2 2023
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