Infinera Corporation (NASDAQ:INFN) Q4 2023 Earnings Call Transcript
Infinera Corporation (NASDAQ:INFN) Q4 2023 Earnings Call Transcript March 6, 2024
Infinera Corporation misses on earnings expectations. Reported EPS is $0.02 EPS, expectations were $0.1. Infinera Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon. My name is Krista and I'll be your conference operator today. At this time, I would like to welcome everyone to the Infinera Corporation Fourth Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Amitabh Passi, Head of Investor Relations. You may begin your conference.
Amitabh Passi: Thank you, Krista. Good afternoon, everyone. Welcome to Infinera's fourth quarter of fiscal 2023 conference call. A copy of the press 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 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-K that the company issued today and our financial outlook for the first quarter of 2024. 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 an annual report on Form 10-K for the year ended on December 31, 2022, as filed with the SEC on February 27, 2023, and amended on February 29, 2024, and in our quarterly report on Form 10-Q for the quarter ended September 30th, 2023, as filed with the SEC on February 29th, 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 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 in our earnings release and investor slides. Sorry, there are no investor slides this quarter, each of which is available on the investor relations section of our website. And finally, as a reminder, we'll allow for plenty of time for Q&A today but we ask that you limit yourself to one question and one follow-up, please. I'll now turn the call over to Chief Executive Officer, David Heard.
David Heard: Thanks, Amitabh. Good afternoon and thanks for joining us today. I'll begin with the highlights for our preliminary fourth-quarter results and then turn the call over to Nancy to cover the preliminary financial details of our fourth-quarter performance and outlook for the first quarter. Overall, the fourth quarter was a strong quarter for us, in which the midpoint of our preliminary revenue, gross margin, and EPS ranges are all expected to come in above our outlook ranges. We delivered a book-to-bill of approximately one for the second quarter in a row, and we generated over $50 million in free cash flow. Furthermore, during the quarter, our GX Systems portfolio performed strongly, landing new Tier 1 design wins with global service providers and ICPs. It now represents almost 50% of our expected annual product revenue, and in Subsystems, we shipped our first 400 gig ICE-X coherent pluggables vertically integrated into our own GX Metro platform.
Combined, the third and fourth quarters of 2023 marked a strong finish to the calendar year. While capital markets and macroeconomic conditions were challenging throughout 2023, we kept our heads down and believe we've delivered on our commitments to you. For the full-year 2023, we expect to deliver our sixth consecutive year of revenue growth, expand gross margins to approximately 40%, expanded operating margins, and increased operating profit in the double-digit percentage range, and delivered EPS in the 20% to 25% range. Also consistent with what we committed to you in our investor day, and that EPS is up at least 70% year-over- year. From a portfolio and customer perspective, we continued to build on the momentum of the last few years as we landed new customers during the year and successfully expanded into new market segments and geographies.
Let me touch on a few of the 2023 highlights. First, we won new strategic deals with major service providers, including notable wins in the U.S., Europe, India, Australia, and several multinational subsea consortiums. Our win rate in the Metro remains strong with revenue in this segment growing to almost 50% of product revenue in 2023, an important part of our investment thesis and forward opportunity with the Huawei situation. Second, we had another banner year with U.S. hyperscalers and delivered our fourth consecutive year of 30-plus revenue growth in this segment. We've increased our market share with hyperscalers by approximately 1,000 basis points over the last four years, and our total exposure to them, including the indirect business that they drive through carrier service providers and subsea consortia, is approaching approximately 50% of our revenue.
Third, we exceeded $10 million in bookings for our Subsystem products and recognized our initial revenue in the year. This was an important milestone for the company and consistent with the goals we communicated at our March Investor Day. To date, we've received purchase orders from 26 customers that span our entire Subsystems portfolio. Additionally, membership in the XR Forum continued to expand in 2023, and the new list of members included Lumentum and Arista. And fourth, we announced the commercial availability of our 400 gig XR pluggables and also shipped our first Metro systems with our own vertically integrated pluggables in Q4. The use of pluggables in our Metro systems will be a key driver of margin expansion getting into the back half of 2024.
Our consistent performance over the past few years highlights that our strategy is working and that our portfolio is in the best shape it's ever been, as evidenced by our win rates. Our key growth and profitability financial metrics are trending up and to the right, and we feel great about the underlying long-term secular drivers in the business. However, in the near term, as we look at the first half of 2024, we're planning for a slow start to the year consistent with what our peers in the industry are seeing and communicating. In Q1 In particular, we're experiencing a temporary low point in revenue and margin driven by two factors. First, from a revenue standpoint, approximately $35 million of revenue has shifted out of the quarter, with roughly $10 million being recognized earlier in Q4 and $25 million of shippable backlog shifting from Q1 into future quarters.
And second, from a margin standpoint, we expect gross margin to be approximately 400 basis points lower in Q1 due to a 300 basis point impact from the timing impact of higher line system shipments in Q1 associated with many of our global Tier 1 customer wins. This is ultimately a good news story in the back half of the year and for the longer term. And a 100 basis point impact from the combined effects of lower volume in Q1. The good news here is our commercial wins and strategic deployments give me confidence that we remain on path to deliver a full year of revenue growth and expanded margins in 2024 with gross margins expected to return to 40% plus starting in Q2. The even better news is both the pace and scale of our design wins across the portfolio are accelerating in this quarter, Q1.
This is especially true for hyperscalers, who we believe will continue to drive healthy levels of spending across the industry in the years ahead. Already in the first 60 days of 2024, we've achieved major hyperscale influence strategic wins with our Systems and Subsystems solutions, including the following developments. First, you've seen from our press release this morning, we've announced a new line system that puts our portfolio under the GX family. We've already landed wins with five service providers and hyperscalers that are expected to lead to significant revenue and margins with follow-on transponder sales, and we have a strong pipeline of additional customers. Second, we have won our first contract with a major hyperscaler for 800 gig three-nanometer ZR/ZR+ pluggables.
This win has the potential to be among the largest contracts for the company, scaling to hundreds of millions of dollars over a three-year period beginning in 2025. This is the first of multiple contracts in this key market segment that we expect to land in 2024. These pluggable wins will drive additional volume through our U.S.-based semiconductor manufacturing assets and be incrementally accretive to the financial model. Third, influenced by traffic demands of hyperscalers, we continue winning Managed Optical Fiber Networks or Mofin deals in India, the Middle East, and Asia, with at least three wins quarter to date in Q1 with three different hyperscalers. These private network builds are driven by hyperscalers and their preference for suppliers along with service providers across the globe.
Fourth, in addition to shipping our first Metro systems with our own 400 gig pluggables, we're also qualifying our 400 gig ICEX pluggables with a major Tier 1 service provider and a major U.S. cable MSO for applications that include single fiber Bi-Di, and business-to-business PON Overlay. And fifth, we've invested in producing the first test chips for inside the data center applications driven by AI that will drive down power and leverage our U.S.-based semiconductor assets. While these days are early and architectures are still evolving, we believe our unique vertical integration and indium phosphide capabilities are competitive differentiators inside the data center. We look forward to talking to you on the progress as this further develops.
Based on the stack-up of those strategic wins, my confidence in our strategy, portfolio, and execution is as high as it's ever been. Despite the short-term inventory digestion customers are going through and the timing of the mix impacts of laying down new routes, in the long term, demand for bandwidth continues to grow as hyperscalers accelerate the rollout of artificial intelligence, machine learning workloads, and service providers drive fiber deeper into networks. We believe we're uniquely positioned to gain with these customer segments. We look forward to diving deeper into our product and technology strategy at this year's Optical Fiber Communications Industry Show in San Diego, California on March 27th, and as I close today, I'd like to thank the Infinera team for another solid quarter of execution and results and their continued commitment to our customers and one another.
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 to deliver our seventh consecutive year of revenue growth, expand margins by approximately 200 basis points, and deliver EPS growth of at least 25% in 2024. I'll now turn the call over to Nancy to cover the preliminary financial results of the quarter and our Q1 outlook. Nancy?
Nancy Erba: Thanks, David. Good afternoon, everyone. I will begin by addressing our third-quarter filings and then cover our preliminary followed by our outlook for the first quarter of 2024. For your reference, we have included a GAAP to non-GAAP reconciliation of our preliminary financials and outlook in our press release to assist with my commentary. As a reminder, any financial commentary provided today for Q4 '23 or the full fiscal 2023 period are based on our preliminary non-GAAP results. As most of you are aware, we filed our Q3 '23 Form 10-Q on February 29th. This represented a tremendous effort by the Infinera team and our auditors over the past few months given the intensive and time-consuming nature of the matters under review.
I want to emphasize that despite the delayed review process, there were no adjustments to prior period financials. Our results for Q3 were revenue of $392 million, gross margin of 41.9%, operating income of $30.3 million, and diluted EPS of $0.08, all of which exceeded the midpoint of our original outlook range. Since our efforts over the past few months have been directed toward completing the work necessary to file our Q3 '23 results and other related SEC filings, our final results for Q4 '23 and fiscal year '23 have been delayed. As a result, we are sharing preliminary unaudited ranges today. We currently expect to have our year-end audits completed and file our fiscal year '23 10-K in the next five to seven weeks or about mid-April, and plan to be back on our normal cadence in Q1.
Turning to our performance in the fourth quarter, I am pleased with the strong finish we had to the year. The midpoint of our preliminary range of $435 million to $452 million is expected to be at or above our outlook range. This quarterly performance was primarily driven by strength in the Americas and with ICPs or hyperscalers. Geographically, we derived over 65% of our Q4 revenue from domestic customers, a level higher than normal given the strength at U.S. hyperscalers and service provider customers. We had one ICP customer that accounted for over 10% of our revenue in the quarter. Turning to gross margin, we expect the midpoint of our Q4 preliminary gross margin range of 39% to 41% to be above that in our outlook range and up on a year-over-year basis.
Compared to the prior year, gross margin in the quarter benefited from higher vertical integration, continued relief in supply costs, and ongoing cost improvements. Overall, I am encouraged by the trend in 2023, with gross margin expected to approach 40% for the year and be up approximately 300 basis points for the year. Preliminary operating margin of 5.7% to 8.3% is expected to be within our outlook range, while operating expenses of $145 million to $147 million are expected to be slightly above our outlook range. Our Q4 operating expenses included approximately $3 million of incremental spend as a result of the extended financial review I referred to earlier. We expect this level of incremental spend to continue through Q1 and partially into Q2.
In Q4 we also executed on a tax structuring initiative that allowed us to true up a $7 million tax benefit for current year and prior years. The resulting preliminary diluted EPS is expected to be $0.07 to $0.13 with the midpoint representing above our outlook range. Moving on to the balance sheet and cash flow items, we ended the quarter with approximately $174 million in cash and cash equivalents. We generated over $50 million of free cash flow in the quarter, and we benefited from higher net income, the partial work down of our inventory, and an improvement in shipment linearity. Let me now turn to the outlook for the first quarter of 2024. As David mentioned, like the rest of the industry, we are expecting a slow start to the year as our customers continue to work down their excess inventory and manage CapEx prudently in the short term.
Therefore, specific to Q1, we expect revenue to be in the range of $320 million to $350 million, including the impact of approximately $35 million of revenue that shifted out in the quarter. Gross margin to be in the range of 36% to 38%. This lower margin includes a 400 basis point margin impact, primarily from higher line system shipments with fill expected in the following quarters and from lower volumes in Q1. Operating expenses to be in the range of $143 million to $147 million, including approximately $3 million of incremental expenses related to support our fiscal '23 audit and an operating margin loss of 8.5%. Below the operating loss line we assume approximately $8 million for net interest expense and approximately $4 million for taxes.
Finally, we are anticipating a net loss per share of $0.18 to $0.10 assuming a basic share count of approximately 232 million shares. As you heard from us this afternoon, overall, we feel great about our strategy and the strength of our portfolio, as evidenced by the pace and scale of recent design wins across both our Systems and Subsystems portfolios. In the first 60 days of the quarter, I am encouraged by our win rate deployment of line systems, setting us up for future margin expansion. I'm encouraged by the growth of our sales funnel and the margins on our bookings, which I believe puts us on a path to drive revenue growth of 2% to 3% for the full year and deliver on our seventh consecutive year of revenue growth. Expand gross margin by approximately 200 basis points for the year and earnings per share expansion with EPS growth of at least 25% in 2024.
As I close today, I would like to reiterate that I'm pleased with our '23 performance for the full year. We hit several important milestones in the year with gross margin approaching 40%, bookings exceeding $10 million for our Subsystems products, vertical integration in the mid-50th percentile for the company, and we proactively strengthened our balance sheet. Looking ahead, we remain laser-focused on continuing to accelerate revenue growth, drive earnings per share expansion, and generate cash flow in the quarters and years ahead. We plan to file our fiscal year 10-K in the next five to seven weeks, as I said earlier, and we are back on track to file our Q1 10-Q on our normal cadence. In closing, I would like to take the time to thank the Infinera team, especially my finance team, for their continued commitment to innovation and execution, as well as to our partners, customers, and shareholders for your continued patience, cooperation, and support.
Krista, I'd now like to open the line up for questions.
See also 12 Most Undervalued REIT Stocks To Buy According To Analysts and 25 Best Places to Travel in the World in 2024.
To continue reading the Q&A session, please click here.
