Infinera Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 14, 2024

There are 11 speakers on the call.

Operator

Thank you for standing by. My name is Christa, and I will be your conference operator today.

Operator

At this time, I would like to welcome everyone to the Infinera Corporation First Quarter Earnings Conference Call. 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. I will now turn the conference over to Amitad Passey, Head of Investor Relations.

Operator

You may begin your conference.

Speaker 1

Thank you, operator, and good afternoon. Welcome to the call where we'll discuss the preliminary financial results for Infinera's Q1 of fiscal 2024. A copy of the release issued by Infinera today is available on the Investor Relations section of the website. This call is being recorded and will be available for replay from our website. Today's call will include financial commentary and metrics based on our preliminary Q1 of fiscal 2024 results.

Speaker 1

Yesterday, we announced that we currently expect to file our quarterly report on Form 10 Q for the 1st fiscal quarter fiscal 2024 on or before May 21, 2024. As a result, and notwithstanding anything to the contrary said during the call, all financial results discussed today are preliminary, are subject to change and are based on management's current expectations as of the date of this conference call. Final results will be included in the Form 10 Q. In addition, today's call will include projections and estimates that constitute forward looking statements, including, but not limited to, statements related to the matters referenced in the press release and current report on Form 8 ks that the company issued today and our financial outlook for the Q2 of 2024. These statements are subject to risks and uncertainties that could cause Infinera's results to differ materially from management's current expectations.

Speaker 1

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 December 31, 2022, filed with the SEC on February 27, 2023, and amended February 29, 2024 and its quarterly report on Form 10 Q for the quarter ended September 30, 2023 filed with the SEC on February 29, 2024 as well as subsequent reports filed with or furnished to the SEC from time to time. Please be reminded that all statements are made as of today, and Infinera undertakes no obligation to update or revise any forward looking statements to reflect events or circumstances that may arise after the date of this call. Today's conference call includes references to non GAAP financial measures, except for revenue, balance sheet items and cash flow from operations, which are discussed on a GAAP basis. Pursuant to Regulation G, we've provided a reconciliation of these non GAAP financial measures to the most directly comparable GAAP financial measures in our preliminary earnings release, which is available on the Investor Relations section of our website. And finally, as a reminder, we'll allow for plenty of time for Q and A today, but we ask that you limit yourselves to one question and one follow-up, please.

Speaker 1

I'll now turn the call over to our Chief Executive Officer, David Heard. David?

Speaker 2

Thanks, Bob and Todd. Good afternoon and thanks for joining us today. I'll begin with the highlights for the Q1 results and then turn the call over to Nancy to cover the financial details of the Q1 and the outlook for the Q2. The Q1 was much like a tale of 2 cities for us. On one hand, bookings were strong and on plan and up year over year.

Speaker 2

Strategic deal momentum was unprecedented as we won new network decisions, potentially representing over $1,000,000,000 in cumulative multiyear value across some very strategic accounts for us. Margin and EPS were within our outlook range despite the large contribution from lower margin line systems, which are crucial for laying the groundwork for future high margin fill. Cash flow generation was healthy with free cash flow of $16,000,000 in the quarter, continuing the positive trend from the Q4 of 2023 where we generated $58,000,000 in free cash flow. We ended Q1 with $192,000,000 in cash and cash equivalents with no amount drawn against our $200,000,000 plus ABL. And we released our Q4 2023 and full year 2023 financial results.

Speaker 2

As you've hopefully seen by now, overall, our Q4 results came in towards the upper end of our prior outlook range. For the full year of 2023, we delivered our 6th consecutive year of revenue growth, gross margin of approximately 40% and earnings per share growth of 92% compared to 2022. With respect to our quarterly close process, we plan to get back on normal cadence after we file our Q1 Form 10 Q, which is expected to occur in the next week. Despite this progress, however, our quarterly revenue came in 4% below the low end of our outlook range and declined 22% on a year over year basis, compared to revenue declines already reported in the industry of 30% to 50% in Q1 by many of our optical peers. Our revenue shortfall in the quarter was due to a slower release of book ship orders to the tune of approximately $25,000,000 in addition to the push out of shipments from the first half of the year to the second half of the year.

Speaker 2

We believe these market dynamics will continue through the Q2 before business conditions start to normalize in the back half of the year, enabling us to get back to year over year growth in the second half. The positive news I mentioned earlier is that we continued to win groundbreaking awards in the quarter with some notable customer logos that are expected to have a significant impact on the future trajectory of the company. Our open optical roadmap aligns well with our customers' need for open and agile architectures that deliver the lowest cost per bit, the lowest power per bit, while improving operational efficiencies. Our recent wins reinforce our ability to help customers keep pace with the accelerating traffic demand, support the build out of deep fiber networks and efficiently manage evolving data center capacity needs, especially with new applications like artificial intelligence. As a result, we remain laser focused on our priorities, which are to grow and take market share in the $11,000,000,000 plus systems market, ramp our business in the growing $5,000,000,000 market for coherent pluggables and leverage our vertical integration capabilities to break into the high volume $2,000,000,000 intra data center segment driven from the optical payloads of AI.

Speaker 2

The addition of pluggables and intra data center products onto our systems portfolio allows the maximum leverage of our U. S.-based fab as we drive significantly higher volumes through it. In fact, annual PIK volumes associated with embedded solutions that are sold as part of our optical systems business tend to be in the tens of thousands of units. Pluggable volumes are expected to scale to 100 of thousands of units and we expect intra data center volumes to scale into millions of units annually. We believe this dramatic increase in unit volume will drive a tremendous cost advantage across our portfolio in the future, a critical factor in the realization of our term business model.

Speaker 2

Our U. S. Base fab and advanced semiconductor packaging center also provides the added benefit of enhanced supply chain security and resiliency, which is increasingly important to our customers in the U. S. And abroad.

Speaker 2

Let me dive further into the specifics of the recent strategic wins and the progress to date in Q2, beginning first with the systems business. First, we continued the momentum with hyperscalers and our GX portfolio, including our next generation open line systems. During the quarter, we won a new GX i7 based subsea deal with a major hyperscaler potentially worth $100,000,000 to $200,000,000 over 3 years and we secured a major design win with our GX Open Line system potentially worth $200,000,000 to $300,000,000 over 3 years. In addition, we on boarded another hyperscaler with our i6 solution and secured a GX Metro and Open Line system win with a Tier 2 content provider. 2nd, influenced by the traffic demands of hyperscalers, we continue winning Managed Optical Fiber Networks or MOCAM deals in India, the Middle East, Africa and Asia with at least 3 new customers in Q1 supporting multiple hyperscalers.

Speaker 2

These land and expand opportunities start out small, but with the expected growth in these regions, we expect them to become a more significant portion of our revenue in the future. As a reminder, for the full year of 2023, we estimate that our direct and indirect exposure to hyperscalers approach 50% of our product revenue. And 3rd, we secured major wins with our GX systems portfolio with an international wholesale provider in Europe and a major service provider in the U. S. We continue to see bandwidth and connectivity needs increasing across our target markets, including increased marketing of 400 gig capacity services by carriers.

Speaker 2

We also anticipate initial orders from a design win at a major U. S. Service provider customer this quarter as they continue to upgrade their metro networks while pushing to capture higher bandwidth service revenues. These orders will begin shipping in the second half of the year into 2025. Shifting to our pluggable solutions, as you are aware by now, we landed a sizable 800 gig ZR, ZR plus win with a major hyperscaler in Q1.

Speaker 2

Since we are under strict NDA, we are limited to what can say about the specifics of this contract, but we estimate this opportunity to generate between $300,000,000 to $700,000,000 in revenue for us over 3 years beginning in the second half of twenty twenty five. I am also excited to announce that we received our first orders for our 400 gig pluggables from a major U. S. Cable MSO this quarter. While these initial orders are of a relatively small size, we are excited about the potential ramp of this customer to a $300,000,000 to $400,000,000 opportunity over 3 years as we address important use cases in the customer's network across both the consumer and enterprise service offerings.

Speaker 2

Finally, turning to the latest addition of our portfolio, we launched our IC inter data center solutions ahead of the OFC show in March. These solutions, which leverage our core competency in indium phosphide PICs and our U. S.-based optical semiconductor fab in California, have the potential to reduce power per bit by as much as 75% for AI centric applications. The elegance of our offering is that it is agnostic to data center architectures and will serve linear pluggable optics, 3 times and half timed optics. We have test chips available now, are deeply engaged with ecosystem partners and are working towards landing our leading customer in the second half of the year that could drive significant volume through our fab.

Speaker 2

As you can see, the momentum we have in our business sets us up well for 2025 and beyond. As evidenced by our OFC show, we are winning business, mindshare and trust from our customers, suppliers and partners. We also believe we remain well positioned for the CHIPS Act funding. In fact, I'm taking this call today from Washington DC. As most of the CHIPS Act awards for larger companies have been announced, we expect smaller companies to begin receiving awards in the 3rd Q4 of this year.

Speaker 2

While the long term prospects are encouraging, the short term macro and industry dynamics are more challenging than our expectations coming into the year. We continue to expect a slow first half with trends improving in the back half as we focus on getting to delivering year over year growth in the second half. As a result, for the full year, we now expect our revenues to be down 1% to 5% compared to 2023. Nancy will walk through the details shortly. As for the overall optical systems market, I expect the market to be significantly down in the first half and up in the second half of the year, resulting in an overall decline of 7% to 8% for the year.

Speaker 2

But as we head into 2025, I expect the overall market to normalize and start the next cycle of optical growth driven by fiber to the curve, massive data center build outs, AI and global growth in bandwidth demand. Against this backdrop, we will focus on taking our fair share of design wins and new deals, several of which ramp in the second half of the year and into 2025. Deploy what is expected to be a record number of generation line systems across new routes, which will drive future higher margin transponder sales continue our investment in R and D for systems and pluggables while increasing investments on I. C. Drive down discretionary spending to keep overall OpEx flat to down 3% for the year.

Speaker 2

Given the size and scale of our recent wins, the competitiveness of our portfolio and the strength of our long term secular drivers underpinning our business, we believe we can return to our target growth rate of 8% to 12% in 2025, depending on where we end up for 2024. This should result in our earnings per share getting back in the range of $0.40 to $0.50 next year. As I close today, I'd like to reiterate our recent strategic RFP wins and contracts along with the size and scale of our opportunity funnel gives me confidence in our ultimate recovery of the business as we head into 2025 and beyond. The near term environment is difficult, but I see no change in the long term drivers of the business and the increasing importance of scale and vertical integration in the industry. I'd like to thank the Infinera team for their unwavering commitment to innovation that matters, execution, our customers and to one another.

Speaker 2

I'd also like to thank our partners, customers and shareholders for their continued support. I couldn't feel better about our strategic position and I believe we remain well positioned for the long term. I'll now hand the call over to Nancy to cover the financial details of the quarter and our outlook. Nancy?

Speaker 3

Thanks, David. Good afternoon, everyone. I will begin by covering our Q1 results and then provide the outlook for the Q2. As you heard from David, business trends in the Q1 were a bit of a paradox for us. On the one hand, bookings were in line with our expectations, while design win momentum was unprecedented and the strongest the company has ever seen.

Speaker 3

On the other hand, quarterly revenue of $307,000,000 came in 4% below our outlook range and was down 22% on a year over year basis, compared to the 30% to 50% decline reported by many of our peers. As evident from these industry trends, it's been a tough start to the year in the in the customers due to the slower release of book ship orders and project push out and an overall cautious spending posture from our customers. Geographically, we derived approximately 54% of our Q1 revenue from domestic customers, a lower percentage than the trend of the past two quarters. Q1 gross margin of 36.6% was just below the midpoint of our outlook range and decreased 220 basis points year over year. Compared to the prior year, the primary driver of the lower gross margin in the quarter was the higher contribution of Line Systems to product mix and secondarily, the impact of fixed cost under absorption from lower revenue and volume.

Speaker 3

While overall company revenue declined in Q1, line system revenue was up approximately 20% compared to the year ago quarter, setting us up well for future transponder deployment. Operating loss in the quarter was $25,900,000 with an operating margin of negative 8.4 percent, which was at the lower end of our outlook range and impacted by lower revenue, lower gross margin and product mix. Operating expenses of $138,000,000 in Q1 were flat year over year and below our outlook range of $143,000,000 to $147,000,000 due to continued cost discipline while we managed our investments for growth. The resulting diluted EPS was a loss of $0.17 compared to earning $0.02 in the year ago quarter. Moving on to the balance sheet and cash flow items.

Speaker 3

We ended the quarter with $192,000,000 in cash and cash equivalents with no amount drawn on our $200,000,000 plus ABL. From a cash flow perspective, we generated $24,000,000 in cash flow from operations and $16,000,000 in free cash flow, continuing the positive trends from Q4 when we generated $58,000,000 in free cash flow. Let me now turn to the outlook for the Q2 of 2024 and our expectations for the rest of the year. As you have heard this afternoon, the near term operating environment remains very challenging across the industry as our customers continue to work down excess inventory and push out some projects. We expect business dynamics we experienced in Q1 to persist into Q2.

Speaker 3

And as a result, our contemplated outlook for the Q2 is revenue of $330,000,000 plus or minus $20,000,000 implying a year over year revenue decline of approximately 10% to 15%. Gross margin of 39.5 percent plus or minus 150 basis points, approximately flat on a year over year basis at the midpoint of the range operating expenses of $138,000,000 to 141,000,000 dollars modestly up on a year over year basis and operating loss of 3.5 percent, plus or minus 300 basis points, down on a year over year basis, primarily due to lower revenue. Below the operating income line, we assume $8,000,000 for net interest expense and $4,000,000 for taxes. Finally, we are anticipating a loss of $0.09 plus or minus $0.04 per share, assuming a basic share count of approximately 235,000,000 shares and a fully diluted share count, if profitable, of approximately 264,000,000 shares. We expect to utilize cash from operations in Q2, primarily for working capital and returns generating cash from operations over the second half of the year.

Speaker 3

I expect the Q1 to mark the low point for us in the year with a gradual improvement in our financials in Q2 and a more meaningful step up in the back half with revenue growth of about 8% to 10% compared to the second half of twenty twenty three. For the full year, we now expect revenue to be down between 1% 5% compared to 2023. While it is early to be talking about 2025, our longer term planning framework assumes that industry dynamics normalize in 2025 and that we get back to our objective of 8% to 12% revenue growth depending on where we end 2024. This growth rate in 2025 would serve as the foundation to get us back to the $0.40 to $0.50 EPS range next year, which obviously implies roughly a year shift out in the realization of our dollar per share EPS objective. Despite these near term considerations, our refreshed portfolio, customer momentum, design wins, contracts signed, RFP activity and the size and quality of our opportunity funnel

Operator

gives me

Speaker 3

a lot more confidence in the long term trajectory of the business. I would like to thank the Infinera team as well for their continued commitment to innovation and execution excellence and our partners, customers and shareholders for your continued cooperation and support. Operator, I'd now like to open the line for questions.

Operator

Thank you. We will now begin the question and answer session. Your first question comes from the line of Samik Chatterjee with JPMorgan. Please go ahead.

Speaker 4

Hey,

Speaker 5

Samik. Hi. Thanks for taking my question. So maybe for the first one, I know you talked about the strong design activity that you had in 1Q. But in terms of those translating into orders, can you give us a bit more sense about what are you seeing in terms of order trends in the quarter relative to either the carriers or telco service providers versus the cloud customers?

Speaker 5

Can you give us a bit more sense Thank you. And I have a follow-up.

Speaker 2

Yes, it's okay. As we've mentioned in kind of past earnings calls, the ICPs tend to shop in bulk, bulk quantities. We had about $25,000,000 of book ship orders that normally would have come. The overall booking profile was about to what we expected in terms of dollar value and was indeed above 1, which isn't bragging given the revenue base. But there was about $25,000,000 mostly ICP that pushed out into the back half of the year, as well as we had some implementation of projects at some CSPs that also pushed into the back half of the year.

Speaker 2

We think this will continue into Q2, but based on the design wins and orders we're pulling in, we expect that pattern to reverse a bit in the back half and it's given us more credibility and confidence in our plan for 2025. Did that answer your question?

Speaker 5

Yes. No, and maybe if I can move to gross margins. Nancy, curious, I mean, you still you have a strong gross margin expansion here from 1Q to 2Q. And are we still sort of thinking if you can just walk us through that and are we still thinking sort of mid-40s exiting the year? Maybe if you can clarify that.

Speaker 5

Thank you.

Speaker 3

Yes. So gross margin certainly in Q1 was impacted by the number of line systems that we deployed. We talked a little bit about this on our last call, but you can think about that as almost 200 basis point impact in gross margin from line systems and then about another $100,000,000 from just the lower volume in terms of absorption of fixed costs. As far as exiting the year, if we're down 1% to 5%, I would expect that margins are likely going to be still flat to slightly up with fiscal year 2023 and it will take us a little bit of time to get back into that mid 40s which is still our target business model.

Speaker 5

Okay. Thank you. Thanks for taking my questions.

Operator

Your next question comes from the line of Simon Leopold with Raymond James. Please go ahead.

Speaker 6

Great. Thanks for taking the question here. It sounds to me just looking at the full year guidance that you expect your September, December results to be very similar to what you had talked about in March and previously. And I just wanted to sort of see what are the key drivers given the softness you saw this quarter and in your guide, what's sort of informing your confidence? And is my arithmetic correct in thinking that you're really expecting the same second half of the year that you anticipated before?

Speaker 5

Amitabh?

Speaker 1

Yes. Simon, I think you're right. The second half is contemplated to be very similar to the first half sorry, to our prior expectations. And I think David will cover this in more detail, but we did talk about projects being pushed out from the first half to the second half. David talked about slow release of book ship in the order of $25,000,000 We also mentioned that in last quarter's call.

Speaker 1

So part of I think what you're seeing in the back half is an expectation that these projects that have been pushed out due to timing come through fruition. But David, please go ahead and add.

Speaker 2

Yes. I think Simon, what we are doing is just given the slower book ship, which is in our industry the hardest thing to predict. We're just not expecting those push projects to add to what we already had in the back half. So we're kind of tuning that into our back half plan. And so it's both the project push outs, the RFP wins, any line systems we're laying out, that's what we've put into our bottoms up view for the second half.

Speaker 6

And for my follow-up, I'm wondering if you could maybe give us a little bit more color on customer concentration. Were there any 10% customers in the quarter? And really more of more interest, I think, is what are your expectations for customer concentration for the full year 2024? What are you baking in?

Speaker 2

Yes. So let's let Amitav and Nancy hit that one. Yes.

Speaker 3

So for customer concentration, there was not a 10% customer in the quarter for Q1. There were a couple that bumped up close to that. But we are still seeing a lot of strength in terms of ICPs in our top 10.

Speaker 1

Thank you very much.

Operator

Your next question comes from the line of Christian Schwab with Craig Hallum Capital Group. Please go ahead.

Speaker 7

Great. Thanks for taking my question. I had a few difficulties, so I didn't get every design win that you had. Can you just give us the total of the design wins over a 3 year basis for all the ones that you kind of walk through that you anticipate starting in 'twenty five and going through 'twenty eight, what that total number was?

Speaker 2

Yes. I think maybe just to recall it, we can go through the ones for systems and for pluggables so that it's quite clear because I think it's an important point. Ron, do you want to walk through those?

Speaker 8

Yes, sure. Thanks, David. We had a in the hyperscaler domain, we had a number of wins. One of them was on ICE 7 for a subsea based win that we see worth $100,000,000 to $200,000,000 over 3 years. We had a GX open line system for terrestrial applications that over 3 years is worth $200,000,000 to $300,000,000

Speaker 2

Also with the major hyperscaler.

Speaker 8

Yes, all of these are the hyperscalers. A third one with hyperscalers was an ICE6 solution as well as GX Metro. We didn't talk about a specific number on this, but this is likely in a similar range between $100,000,000 to $200,000,000 We also and then outside the hyperscaler space, but motivated by hyperscalers, we had a number of Mofin wins, right, the managed optical fiber networks. So these are in places where the hyperscalers don't operate networks. They leverage service providers to do so, typically in the Middle East, in Africa and in Asia.

Speaker 8

We had 3 new wins here. These aren't massive wins, but these are what we refer to as land and expands. So there are opportunities to get into these service providers and expand into other applications within the service providers. On the system side in the service providers, we had a GX systems portfolio win with a wholesaler in Europe and a major service provider in the U. S.

Speaker 8

Again, over multiple years in that same time period, this would be worth $200,000,000 to $300,000,000 And then if we look at the pluggable wins, this is also a hyperscaler. We had a sizable win in ZR and ZR plus for 800 gig. This is the one that David referred to as under strict NDA. So we can't say a lot about it, but it is worth anywhere between $300,000,000 to $700,000,000 over a 3 year period. And then on the subsystem side, we had a 4 100 gig, our first 400 gig, not just when but booking with a major U.

Speaker 8

S. Cable provider. And that cable provider has the potential just in a split decision for that network to spend $300,000,000 to $400,000,000 over the next 3 years, leveraging both applications that use our subcarrier technology with our 400 gig as well as point to point applications with our 400 gig, Really, really desirable win in the 400 gig space there.

Speaker 2

Thanks, Ron. So those are all based on again those either design wins, RFPs or actual contracts and again on the forecast that were being provided from the customer set. Did that help?

Speaker 7

That's tremendous. And then my follow-up question is, is there a number of other customers that you're working for? Would you expect more substantial orders on top of that to occur throughout calendar 2024?

Speaker 2

Sure. Yes. I mean, I think last time when we updated, we had talked about the 800 gig design win as an example. The initial sampling order that we got from the major U. S.

Speaker 2

MSO that Ron talked about that happened in Q2 here. And then we also have And, And we believe that we'll be receiving the first orders this quarter that would then be up for scaling as we get into the back half of the year into 2025. So obviously that's kind of why we're riding out this kind of short term

Speaker 5

bottoming of the optical curve

Speaker 2

as people finally burn out the inventory. But This helps us fill out kind of the capacity curve, This helps us fill out kind of the capacity curve to substantiate the growth for 2025.

Speaker 7

Fantastic. Thanks for the clarity. No other questions. Thank you.

Speaker 4

Thank you.

Speaker 1

Thanks, Christian.

Operator

Your next question comes from the line of Michael Genovese with Rosenblatt Securities. Please go ahead.

Speaker 2

Hey, Mike. Hi, Dave.

Speaker 1

How are you? The second half outlook that you have, I mean, it's really strong and it seems to be based on like an unprecedented number of design wins that you can list off like we've never heard this before, like something new is going on here. And I wanted to gauge you on the like is this how much of the second half is the industry and how much is specific to you guys, I don't know, taking share and having these get through these design?

Speaker 2

Ups? It's really a good question. I mean, look, the industry is tough to gauge, right? When you looked at where we were coming into the year, everybody kind of had optical growing at low single digits 1% to 3%. When we look at who's announced so far, right, it appears that most folks that have announced have been now with us announcing between 22% 50% year over year declines in Q1.

Speaker 2

Now we think that will improve for everybody based on everybody's imputed guidance in Q2. And based on what we see for the industry, there will be year over year growth in the back half. I mean, I hate to say it, but a really lousy compare when you're at the bottom of the curve for the front half. Now that being said, I've been at the company 6 years and I just haven't seen us in a position with our portfolio where we're able to get these kind of design wins. But don't forget, we still have to get orders for that, deliver the orders and execute.

Speaker 2

So what we're trying to do for everybody is give you our best view. I think we are taking more than our fair share. If you look at our book to bill over the last 2 years compared to competitors. But again, getting that rolled out and seeing the recovery start in Q3 is an important aspect. A lot of the schedules for these products for the back half and especially into 2025 are supported by a lot of the traffic growth that we see in between data centers and for new technology insertion.

Speaker 1

Yes. Great. And particularly in the ICP hyperscale market, but I think also in metro, it feels like you've gained a lot of share in the in the last year, I'd say. But have you seen any numbers come out to kind of quantify whether that feeling is right and is that gain share in Metro DCI?

Speaker 2

Have not yet seen anything come out. And I think that's because the industry still again, when I mentioned those decline numbers for Q1 for a market that was going to grow 1% to 3 percent. I just think you're seeing a bottoming of a curve in the front half as people work through the final inventory and reload for 400 gig networks in the metro, the 800 gig networks and the high capacity networks for the next lift up of the pluggable to hit. As well as subsea, they're laying record number of cables out across the world. So typically, you don't get analysts that then very quickly calculate overall optical looks like maybe a decline 7% or 8% this year.

Speaker 2

That's our calculation based on what we see today. I'm sure the analysts will come down out with the market share, but it's usually a looking back figure.

Speaker 1

Yes. Great. I appreciate it. Thanks very much. All right.

Speaker 1

Thanks.

Operator

Your next question comes from the line of Meta Marshall with Morgan Stanley. Please go ahead.

Speaker 9

Hi. This is Karan Jupakar on for Meta. Hey. The first question is just more of a clarification question. I think you mentioned that the $25,000,000 of the bookshelf push outs were mostly on the ICP side.

Speaker 9

Did I hear that correctly? And if so, was that a surprise to you guys? I guess any detail on sort of how or what is sort of ICP?

Speaker 2

Yes. Well, yes, no. Obviously, our contemplated midpoint of the range was higher than what we got. And that's not our job as leaders of the company and executives and stewards of the shareholders to give the best view of what we see. So obviously that shifting out was a bit surprising, and we continue to see that happening in Q2.

Speaker 2

Again, some of that is actual book ship business and some are projects that are just being delayed as people try to kind of clean up things on their own financials in the front half. And then we see things being scheduled in the second half. But yes, primarily on the ICP front, if you look at our ICP numbers year over year, quarter over quarter, that's why you see a little bit more of a decline there. And yes, that wasn't something we had planned.

Speaker 9

Okay. That's helpful. And then second question for me. I guess traction on the PUGGLES win that you had last quarter, any details around there? And was this one of the push ups that you saw in the quarter?

Speaker 9

And if so, does that impact the gross margins just given it's a more vertically integrated product? I appreciate that you have an NDA, so you may not be able to disclose much, but

Speaker 2

Yes. Just to be yes, I want to be crystal clear. So the 800 gig wouldn't start until as we talked about on our last call until we're in the mid of 2025. So that had no impact on our business in Q1 and Q2. Although those that number that we gave is again based on as we engage on the contract and look at the forecasts that we've contemplated to be able to drive the right capacity through our fabs, That 300 to 700 is something we hadn't talked about prior.

Speaker 2

The new win in the or the design win in with the MSO in North America is something new here in Q2, meaning the first order we have. The ability to then scale that to the numbers Ron talked about, again, would begin to happen as we get into the back half of the year. So that was also not contemplated. That's not an excuse code for the front half dip that both the industry is experiencing and we're experiencing.

Speaker 5

Okay. That's helpful. Thank you.

Operator

Your next question comes from the line of George Notter with Jefferies. Please go ahead.

Speaker 1

Hi, thanks a lot guys. I just wanted

Speaker 10

to come back on the roster of content provider wins you mentioned. Just to be clear, are these all incremental to the existing run rates of business you're doing with these customers?

Speaker 2

Yes. I think for the most part, the i7 subsea win is incremental. The hyperscaler OLS win for a new line system that we just announced in Q1 is indeed incremental on the system side of things. And certainly the 800 gig win. So those are the 3 largest that we talked about.

Speaker 2

The moving somebody over to i6 is actually an existing customer that we have that's moving on to the i6 platform.

Speaker 1

Got it. Okay. And then

Speaker 10

for these wins, I assume then these are all contracted with the dollar values you guys have outlined specified or at least unit volumes that translate into those kinds of dollars specified? Or I guess I just want to make sure that these are current pieces of business that are in backlog now. And guess I would have expected the bookings to be up more also given the strength here. I'm just trying to put it all together and think about the second half of the year and that ramp. Thanks.

Speaker 2

No, George. It's a good question. And I think we were pretty specific in our language here. These design wins are RFP wins. When you win them, it's great.

Speaker 2

And when you in many cases, you sign a contract, but then the volumes are based on the forecast that they then roll out. So what we've given you is, as we've negotiated these RFPs, these design wins and price them as well as the pluggable contract that we talked about. We get volumes kind of low range, medium range, high range or it's actually a low and high from the customers. These are not hard program volume to roll out in quarter X, Y and Z. That would be great because it would be much easier to do the quarterly predictions going forward.

Speaker 2

So these are, as we said, that should be worth these ranges, right? And that's based on the forecast we've gotten from the client that we've landed those deals at.

Speaker 8

Got it.

Speaker 10

And is that a big element of the second half ramp? I assume it is given the conversation.

Speaker 2

Yes. It's a reasonable portion of the second half ramp, many of them on the line system, the Mofin side and then the push outs of the ICP from Q1 and Q2. I mean that's material to the second half. And when you look at the pluggable, the OLS win and the i7 win, that's more primary to 2025.

Speaker 1

Okay. Thank you. Thanks, George.

Operator

Your next question comes from the line of David Kang with B. Riley. Please go ahead.

Speaker 4

Thank you. Good afternoon. My first question is regarding the inventory situation. Just exactly how much excess inventories are out there? And are we pretty close?

Speaker 4

Are we still got maybe a few more quarters to go?

Speaker 2

Well, certainly there was enough to prevent $25,000,000 of book shipped in the quarter and call it an equal number for Q2 as well as continued project push outs. But we do think that things are beginning to thin down. And based on the RFP activity and the engagement we're having on both the ICP and the CSP side, we believe things are narrowing down to where the second half there should be again that year over year growth, not just first half over second half growth, because this is I think a trough that you'll see in the industry that will begin to pick up in Q3 and Q4.

Speaker 4

Got it. And then regarding all these multiple design wins you talked about ranging from $100,000,000 to $300,000,000 Are these, just for clarification, hard contracts where there is like a minimum amount or is it just forecast from these customers?

Speaker 2

No, these are I mean, look, these are all wins that then purchase orders are issued against, right? Either contracts or RFP wins or design wins where you then have quantities off against that. Now part of that process we go through what volume over what period of time. And that's why there's such a wide range of we try to put a low and a high. And that's just to better educate folks on why we feel good about 2025 moving forward.

Speaker 4

And when would they start to hit your like backlog then?

Speaker 2

Yes. So I mean as you start to get out towards the end of this year, I think you would start to see that hit the backlog. That's kind of what would be normalized in a view of the growth rates we have in for Q3 and Q4 and for 2025.

Speaker 4

Got it. Thank you.

Operator

That concludes our question and answer session. I will now turn the call back over to David Heard for closing remarks.

Speaker 2

Yes. So certainly, as we mentioned, the start to the year was slower than expected as carriers and ICPs kind of held on to their orders and ran their networks a bit hotter than I think we all expected and you'll see that going across the industry. But they are planning on expanding those 400 gig services and 800 gig services for high capacity routes. As I said, we're not the overall market analyst, but as we calculate that probably says that there's a market decline in the front half. It's kind of temporary in nature, call it digestion finalization of 20% followed by growth in the back half, albeit still we're not pushing anything we're not pushing everything that was missed in the front half to the second half.

Speaker 2

For an overall decline in the optical market, that's 7% to 8%. But the traffic generation in 400 gig subsea high capacity routes and then ultimately inside the data center are going to drive I think the optical world to go back to that normalized next cycle on AI as we get into 2025. So certainly these RFP wins and fair questions guys on the it's not hard coded contract value, but in the company's history we just have not seen this kind of potential value of lining brand new line system into ICPs, I7 wins already that are significant in nature as well as on the pluggable side, which is I think going to drive a huge cost benefit for us for our long term model. So we all know optical is becoming more important to the network outside and inside the data center. And I think our strategy for VI is well positioned for the next optical cycle.

Speaker 2

So I know the news on the Q1 and the Q2 outlook, well in line with the optical industry or a little bit better is not great. The prospects on that second half growth and even more importantly into 2025 is very, very strong. So we'll continue to keep our heads down and focusing on execution and taking more than our fair share, driving operating efficiencies and keeping transparent with what we see in the market as it develops. So appreciate the thoughtful questions and engagement and we'll be talking to you soon. Thanks, everybody.

Speaker 2

Have a great night.

Operator

This concludes today's conference call. Thank you

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Earnings Conference Call
Infinera Q1 2024
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