Infinera Corp (INFN) 2018 Q4 法說會逐字稿

Welcome to the fourth quarter year 2018 investment community conference call of Infinera Corporation.

(Operator Instructions) Today's call is being recorded.

If anyone has any objections, you may disconnect at this time.

I would now like to turn the call over to Mr. Jeff Hustis of Infinera, Investor Relations.

Jeff, you may begin.

Welcome to Infinera's fourth quarter and fiscal year 2018 conference call.

A copy of today's earnings and CFO commentary are available on the Investor Relations section of our website.

Additionally, this call is being recorded and will be available for replay from the website.

Today's call will include projections and estimates that constitute forward-looking statements, including, but not limited to, statements about our business, plans, products and strategy, statements about the acquisition of Coriant, integration plans and synergies, as well as statements regarding our first quarter outlook.

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, as included in our most recently filed 10-Q as well as the earnings release and CFO commentary furnished with our 8-K filed today.

Please be reminded that all statements are made as of today, and Infinera undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call.

Today's conference call includes certain non-GAAP financial measures pursuant to Regulation G. Infinera has provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures in its fourth quarter and fiscal year 2018 earnings release and CFO commentary.

I will now turn the call over to our Chief Executive Officer, Tom Fallon.

Good afternoon, and thank you for joining us on our fourth quarter 2018 conference call.

Joining me today are: CFO, Brad Feller; and COO, David Heard.

I'll start with our Q4 financial performance and then provide a status update on the integration of Coriant and the outlook for the new Infinera.

Overall, I was encouraged by our performance in Q4 as revenue exceeded our expected range and gross margin was at the high end.

Non-GAAP revenue of $337 million was driven by strength in bookings from the combined customer base.

I was particularly pleased that bookings from traditional Coriant customers rebounded significantly in Q4 after a noted pause in Q3 due to the announced acquisition.

With a fast start on integration execution, I believe our customers are now much more comfortable with our consolidated roadmap and are making network decisions based on the combined strengths of our broad portfolio.

Now I will reiterate the goals of our Coriant acquisition and why I feel confident with both the long-term merits of the deal and the significant progress to date.

When we announced the acquisition, we did so with the commitment to achieve 3 key objectives: First, achieve significant cost synergies from -- synergies to deliver a profitable business in the near term; second, increase scale from expanded customer traction with Tier 1s and ICPs that allows the investment needed to win in the market and grow the top line; and third, leverage the vertical integration of our differentiated optical engine over a broad end-to-end solutions portfolio as a cornerstone of a differentiated business model.

Starting with an update on realizing cost synergies.

In Q4, we made considerable progress in driving down cost of the combined companies.

Of note, with a focus on expense management, we have reduced non-GAAP operating expense of the company combined by 10% from the first half of 2018 to the second half.

This was a reduction of $30 million and demonstrates the speed and decisiveness with which we are making the necessary hard decisions.

As of the end of Q4, we had notified over 450 members of the workforce, or more than 10% of our population, that their jobs would be eliminated.

As a combined entity, reducing the cost of redundant positions is a necessary priority.

In January, we announced our decision to close our manufacturing site in Berlin sometime in late 2019.

We are executing plans to move this work to a variable cost model with a low-cost global contract manufacturing partner, further reducing our workforce significantly.

We have successfully completed specific supplier agreements that will positively impact our cost structure through the year.

And on the functional side, the management team is in place, the sales team is integrated, and we remain locked on track to have an integrated ERP in Q3 of this year.

With our current committed plans, we see overall savings exceeding the $100 million that we committed for 2019, and expect at least $250 million of total synergies by the end of 2021 as we leverage our vertical integration capability.

Brad will provide more details on the timing and magnitude of these savings and the bottom line progress over the coming quarters in his commentary.

On the second key objective of expanded customer traction, I will highlight some of the opportunities we are seeing with the combined portfolio.

Since the close of the acquisition, I have spent a significant amount of time meeting with customers, and my enthusiasm for the combination continues to grow.

With Tier 1 customers, I believe we are in a strong position to preserve and ultimately expand our business with Coriant's largest historic customers.

In Q4, our corporate bookings were up significantly from Q3, and orders from traditional Coriant products returned to expected levels.

There are 3 common themes that I hear from service provider customers around the world.

First, our end-to-end portfolio is impressive, from core optical innovation to leading automation and disaggregated packet solutions at the edge.

These customers are looking for an at-scale innovator that has a complete set of solutions today and the financial capacity necessary to continue to invest in the technologies that drive down their CapEx and OpEx.

Second, our new level of scale is important.

We are now viewed as large enough to play a meaningful role in their move forward network plans, and we were not before.

And third, the timing is ideal as bandwidth continues to grow and the competitive landscape, with increasing concerns on network security, creates a market opening for us to be a leading end-to-end solution provider.

While opportunities take time to develop and are expected to ramp throughout 2019, there are concrete examples of success to date that are worth mentioning.

First, our relationship with Verizon continues to expand strategically.

In 2018, Infinera was chosen to expand its embedded DTN Xpress network by filling in network gaps and enhancing network automation capabilities, ultimately enabling rapid end-to-end service activation.

Additionally, based on the SDN automation capabilities enabled by our Transcend software suite and long-term position in the network, Verizon selected Infinera to lead a major network migration project that will pave the way for greater efficiency and broader automation in Verizon's next-generation network.

In EMEA, our relationship with Vodafone continues to expand as we were selected for a subsea opportunity with ICE4.

For a long-term partner of both Coriant and Infinera, this is Vodafone's first deployment of our newest optical engine that delivers leading spectral efficiency to the market.

In addition to strengthening our position with current customers, the combined company is also creating a strong base of new customers around the world.

Some highlights include: In LatAm, as announced last week, we won and deployed in Q4 a significant mTera network with a national carrier in Mexico.

This was a nationwide 51-site network that was accomplished in just 10 weeks, demonstrating the ease of implementation of our solution over an existing competitor's WDM infrastructure and the capability of our global professional services team.

This is one of 13 new mTera customers in 2018.

In 2018, we added over 100 new customers, 19 that accounted for $1 million or more of revenue.

Plenty of these -- 3 of these customers were added in Q4 alone.

In 2018, driven by our new XT-3600 and DTN-X upgrade, we added 39 new ICE4 customers with 12 being added in Q4.

ICE4 continues to set the benchmark for spectral efficiency and is leading our resurgence in the subsea market.

In Q4, we were awarded our first consortium opportunity, and we also achieved our first MAREA cable win with a major ICP.

The group platform continues to be well received by the market, and now out from the -- under the cloud of private equity ownership, branding into a number of significant opportunities.

In 2018, 23 new customers selected the group, and platform revenue grew by 90% year-over-year.

On the ICP front, we've been invited to several new opportunities with the combined portfolio, in particular with the group, but also with ICE4 for subsea.

Our pipeline of opportunities is exceptional with significant decisions that will be made over the next couple of quarters.

While we continue to be in the early phase of the new combined company, I see the opportunity we envisioned beginning to materialize.

With our now complete end-to-end portfolio and differentiated instant network business model, our current customers want us to be successful and new customers are inviting us to bid on opportunities with deployments planned in the second half of the year.

With respect to our third key objective of the acquisition, vertical integration across the portfolio, we are on track and making progress.

Earlier this week, we announced an updated and expanded vision of the new Infinera, which we refer to as the Infinite Network.

The Infinite Network represents both the unification of our solutions and is an innovative end-to-end network architecture, designed to enable our customers to address the challenges of emerging new services like 5G, DAA and cloud-based business services.

This new architectural framework will guide our investment strategy going forward.

The expectation of the $300 million annual R&D investment will be to deliver differentiated value to our customers through optical performance network leadership and service delivery efficiency.

On the network scalability side, our 600-gig solution will enter the market by the end of this quarter.

At OFC, we'll be sharing some of the industry leading results we were seeing in customer networks.

We announced our specific plans for the release of our 800-gig ICE-based solution, and we'll have a live demonstration of the 800-gig PIC at OFC in March.

We remain on track to begin deploying our 800-gig ICE6 across our portfolio in 2020, a core element of our acquisition and synergy strategy.

On the service enablement front, we are also making significant progress.

This quarter, our disaggregated router solution, the DRX will be generally available.

This is a disruptive solution that is optimized to support 5G and DAA networks, and has aligned with the open networking business such as those promoted by companies like AT&T.

We continue advancements of our Transcend SDN-based networking automation solutions, currently deployed or in acceptance testing at 16 customers and being evaluated to address more than 20 additional customer opportunities.

We expect that these solutions will enable our customers to more easily launch new revenue-generating services.

In summary, our financial plan for FY '19 remains on track.

Looking into the first quarter, we see customer spending patterns as predicted, except for a significant North America customer that very recently shifted their buying plans from heavily weighted in the first half to more linear through the year.

Taking the purchase patterns, order activity and opportunities we are seeing in aggregate, we expect revenue and gross margin expansion throughout the year and continue to see $1.4 billion or greater in revenue for 2019.

We also expect expense reductions to continue as well, leading to non-GAAP profitability in Q4.

We ended 2018 with $269 million in cash.

We anticipate our cash balance will decline in 2019 as we progress, and we'll bottom out at approximately $175 million mid-year as our cash consumption rates decline significantly in Q1, and then slower rates in Q2 and Q3 before turning positive in Q4.

As we work through our integration plan, our confidence is growing that we will achieve our goals around customer growth, vertical integration, and financial results.

The demand environment appears healthy, and the competitive environment, whether due to growing network security concerns or general industry consolidation is favorable.

Longer-term, given our unique vertical approach and greatly enhanced scale, we accept -- expect to see a transformed company with a materially more promising set of opportunities ahead of us.

The employees and leadership team of the New Infinera are committed to capitalizing in this opportunity, and we look forward to sharing our in-depth plans at an Analyst Day to be scheduled in Q2.

With that, I'll now turn the call over to Brad to go over the financial results.

Thanks, Tom.

And good afternoon, everyone.

Today, I will discuss Q4 highlights for the New Infinera, provide our outlook for Q1, and share some updated color on our outlook for 2019.

The detailed recap of our Q4 result is available on the CFO commentary on our Investor Relations website.

In Q4, non-GAAP revenue was $337 million, above the high-end of our guidance range, driven by overall strong momentum, including a customer requested acceleration of a large new opportunity into the fourth quarter from Q1.

Our first quarter for the New Infinera was solid as several large Coriant customers resumed spending, and we closed on new business opportunities from both sides of the portfolio.

Regarding margins, non-GAAP gross margin in Q4 was 31.9%, at the high-end of our guidance range of 28% to 32%.

This result was achieved due to a favorable mix of business in the quarter, including improved margins in the former Coriant business, along with higher levels of Instant Bandwidth licenses late in the quarter.

As we knew at the time of the deal and discussed during the last earnings call, the inclusion of the Coriant business cost structure had a significant negative initial impact on our margin levels.

During the fourth quarter, we took several actions, which will benefit our gross margin levels and put us ahead of our committed COGS reduction targets included in the integration synergy plan.

First, we began renegotiations and closed on new agreements with key suppliers based on our stronger relationships and increased scale.

This process will take multiple quarters to complete.

We are seeing 20% to 35% cost reductions from our suppliers in certain cases.

Additionally, we took actions to lower our fixed cost infrastructure via headcount reductions, and initiated structural changes which will allow us to move to a more variable cost model going forward.

Finally, we combined the pricing approval processes into one controlled global process, enabling us to drive pricing consistency across all accounts, reevaluating previously entered-into low margin deals, and scrutinizing new investment deals.

This discipline will enable a balanced approach of maximizing margin on deals while also allowing us to be aggressive on the right opportunities.

With these actions and combined with our overall integration plan, we remain confident in our ability to improve gross margin throughout the year.

With the synergy path we are on and the expectations of vertical integration in 2020, we believe we can achieve mid-40s gross margin in 2021.

Turning to OpEx, non-GAAP operating expenses were $141.7 million in Q4, slightly above the midpoint of our guidance.

This result reflected a significant reduction from the pre-acquisition levels.

During the quarter, we took actions to further drive down the run rate of expenses, including implementing certain headcount reductions late in the quarter, which will benefit us more in the first quarter of 2019 and beyond, initiating a detailed plan to complete rationalization of our global real estate footprint and drive out cost of our business that will begin to flow through during Q2.

And pooling together and eliminating duplication of spend across the company, allowing us to drive efficiencies with our new scale.

In Q4, on a non-GAAP basis, we had a net operating loss of 10.2% and a net loss of $0.25 per share.

Both metrics were better than our guidance despite the negative impacts on the bottom line due to significant FX movements related to the Coriant side of the business.

Looking ahead, we are making good progress in driving the initiatives which I believe will lead to a significantly differentiated financial profile for the new Infinera.

These improvements will continue to provide incrementally positive benefits throughout the year.

And combined with the growing top line, will enable us to exit the year with a profitable Q4.

In Q1, our industry tends to be seasonally down as customers take much of the quarter to finalize their capital budgets.

For us, we had the large deal which shifted into Q1 from the first quarter of 2019, and recently had one of our largest customers tell us they intend to change their order pattern from being predominately first half-focused to being more evenly spread throughout the year.

While we don't expect this to have an impact for the full year, we do see an impact to our Q1 outlook.

While we see a strong upward trend in orders and opportunities, we currently expect revenue in the first quarter of 2019 to be $310 million plus or minus $10 million.

This represents a decrease of 8% sequentially versus a more typical 15% seasonal decline in our industry in Q1.

Furthermore, the pipeline remains strong into Q2 and beyond, and we have continued confidence in our full year 2019 outlook.

To put this all into perspective, on the October earnings call, we stated that we expected $325 million in revenue in Q4 2018, and expected Q1 2019 to be at least flat, implying combined total revenue for the 2 quarters of $650 million.

Based on our Q4 2018 actual revenue of $337 million and our guide of $310 million for Q1 2019, we are in line with our previous expectations, even without factoring in the impact of the linearization of orders from the large customer mentioned before.

This is actually a very solid result.

During Q1 of 2019, we expect gross margin to be approximately 31%, down slightly sequentially.

While the underlying cost structure of our business is improving as a result of actions to eliminate fixed cost infrastructure and renegotiate supplier contracts, this is offset by approximately $2 million of additional headcounts in the new year due to the reset of bonus, payroll taxes and other benefits, as well as a $5 million-plus impact of having to absorb fixed cost across lower revenue in the quarter.

We expect our cost initiatives and flow-through impact at higher revenue levels to provide a step function increase in gross margin for Q2 and for the remainder of the year.

On operating expenses, the benefit of the restructuring actions we took in the fourth quarter, and our ongoing focus on cost control, will allow us to absorb $9 million of incremental expenses related to the reset of bonus, payroll taxes and other benefits.

Even with this increase, we anticipate non-GAAP operating expenses in the first quarter to decline to approximately $138 million, plus or minus $3 million.

Putting it altogether, we currently project a non-GAAP operating loss of approximately 13.5% for the first quarter.

Below the line, we currently expect interest and other expense to be approximately $2 million.

With respect to tax, we expect tax expense for the near term to be approximately $3 million to $4 million per quarter.

In Q1, we currently projected non-GAAP net loss of $0.27 per share, plus or minus $0.02, with the GAAP results significantly lower, due primarily to the amortization of intangibles, stock-based compensation and integration costs.

On October 1, we closed the acquisition of Coriant, paying $154 million in cash and issuing 21 million shares valued at $130 million, for an adjusted purchase price of $284 million.

This is lower than the previously announced $430 million purchase price due to cash deductions from the purchase price and decreases in the stock value in between sign and close.

After paying the cash to close the deal on the first day of the fourth quarter, we had $342 million of cash on the balance sheet.

After making significant investments during the fourth quarter to drive synergies, pay-for-deal cost and pay down some past due payables inherited from Coriant, we exited the year with $269 million of cash and investments on the balance sheet.

In Q1, we expect to continue to invest in the business and integration, which will cause us to utilize some additional cash, though expect cash consumption in Q1 to be lower than Q4 by about 50%, and expect the rate to continue to decline over the course of the year such that we'll begin generating cash in Q4.

We have begun the process of driving down our DSOs to allow us to turn our cash quicker, and also have developed plans which will allow us to decrease our inventory levels by 10% over the course of the year.

While we remain confident that we have sufficient cash to make the right investments to transform the business as we move forward, we have work streams in process to increase our liquidity cushion, which we intend to announce in future quarters.

For 2019, we continue to be excited about the opportunity of the combined company.

In relation to revenue, this stems from positive ongoing conversations with customers and their view about what the new Infinera brings to the table as a hungry innovator with an end-to-end portfolio.

I expect us to continue the momentum of new wins we experienced in the fourth quarter across multiple end markets and geographies.

My expectation for 2019 continues to be that we will achieve revenue of $1.4 billion or greater, which based on the implied Q4 run rate, provides ample scale for a profitable business going forward, with a further material step up in profitability expected in 2020.

For gross margin, we will continue to make changes to drive an efficient cost structure and continue to partner with our key suppliers to enable them to support us in approaching bigger opportunities in a more profitable way.

In addition, as we have always stated, Infinera's margin improves as customers add capacity via line cards and Instant Bandwidth licenses.

As we have deployed a significant amount of IB-enabled hardware over the last several years, this will provide a substantial opportunity for margin expansion over time.

As we move through the year, we expect 100 to 200 basis points of improvements each quarter, allowing us to exit the year with gross margins in the mid-30s.

Although this is still well below what we think is ultimately achievable going forward, we see this as the start of a significant transformation in year 1.

In relation to operating expenses, as we took our first significant headcount reduction actions in Q4 of 2018, we are seeing the benefit in Q1.

We expect to continue the execution -- to execute on our integration and restructuring plan over the course of the year, which will allow us to continually -- continue to gradually take down the expense levels, exiting the year on an approximately $130 million per quarter run rate.

We continue to anticipate that over the course of 2019, as we drive the synergies and gain traction in the market, the result should steadily improve, allowing us to achieve non-GAAP profitability and cash generation in the fourth quarter of this year.

In summary, during our first full quarter as a combined company, we made significant progress, which demonstrates that we are on track with the integrations and the transformation of the company.

We look forward to continuing to update you on our further progress as the year goes on.

With that, let's start the question-and-answer portion of the call.

(Operator Instructions) And our first question will come from Rod Hall of Goldman Sachs.

This is Balaji on behalf of Rod.

Maybe I'll start with the large customer that you've called out in terms of the linearization of their orders.

If you could give us some more detail on whether this large customer came from your legacy business, or is this a Coriant customer?

And then maybe also size.

What the magnitude of that impact of Q1 would have been?

And then just in terms of what gives you confidence that the business is going to come back through the rest of the year?

Any commentary there will be helpful.

Yes.

So certainly.

In regard to the customer, it was a traditional Infinera customer.

It was a large North America cable customer.

And I am -- feel very confident that it was not a change of their yearly plan, but it was an articulated plan that they decided to distribute their capital purchases from the front half of the year very significantly to more linear through the year.

I have every belief that their overall purchase plan within this year is identical to what it was.

They continue to expand networks, so we continue to be in a very good spot with them.

In regard to my confidence in regard to the year-end bookings, first of all, Q4 bookings were quite good, both from current customers from the Infinera side, the Coriant side, and also new customers.

We grew backlog fairly significantly in Q4.

We also will grow backlog in Q1.

A number of the orders that we received in Q4 were actually for newbuilds.

That's good news and bad news.

In the long-term, it's great news, but it takes a while to roll out some of those newbuilds.

Those newbuilds will fill, but we don't get to have revenue right away.

So when I look at the backlog we grew in Q4, the number of new customers we won, the number of significant new opportunities that we have won or in contract with, the growing backlog in Q1, and our pipeline of opportunities, it's really quite significant.

I'm very comfortable with that picture.

And I will make one more point, and it's in Brad's script.

We had a significant customer pull in from Q1.

When we talked back in Q4, we looked across the horizon of Q4 and Q1, and said, "This is what our business profile looks like." The business profile versus what we saw in October comes out exactly the same when you add them up, and it doesn't include the fact that we had a significant slip out from one of our cable customers.

So if anything, I'm more optimistic on the pipeline today than when I made the comment in Q4.

And Balaji, just to address the second part of your question, the impact of that change that Tom talked about is somewhere in the neighborhood of about $20 million in Q1.

Got it.

And could I just clarify, is that significant pull in that you talked about for Q4, is that the same customer?

No.

No, it's not.

That was an international customer that had the pull in.

We had it scheduled for Q1.

They made a request to pull it into December.

And we did, of course.

Of course.

And maybe just one more longer-term question on the 800G announcement.

It seems like the Ciena 800G product will be available in the second half of this year.

But is -- what's your take on that?

How do you feel about your competitive position?

I'm going to start talking about our position.

Our position, I am very comfortable that we're going to bring 800-gig to market.

We're going to show the PIC at OFC, our PIC-transmitting lasers.

We're going to have, as we announced, our DSP available in Q3 and our fundamental DCO working by the end of this year.

That says we will bring product to market sometime in the middle of next year.

I believe our ICE architecture will perform a step function in capability of performance similar to what ICE4 did to the industry.

ICE4 today continues to be the leading DSP when it comes to spectral efficiency and optical performance.

We're well on our way to, I think, changing the game.

The fact that we are roughly lining up as a leader in 800-gig, I think, is superb testament to the cadence we've said we are changing regarding bringing technology to market.

In regard to what Ciena announced, I have no comment on what their plans are.

I will encourage you to go and poke very hard at us and hope -- poke hard at them at OFC and to see what's really going to come to market.

I feel comfortable.

We think we are roughly going to be one of the first to market with 800-gig.

Our next question comes from Meta Marshall of Morgan Stanley.

I just wanted to -- I think in the past you've kind of talked about between Coriant and you guys, there were -- of the delayed purchases from the Coriant side, around 70% were from customers where there was no overlap with Infinera, and then 30% was where there was overlap.

And just as you circle up with those customers, is there any change in the discussion between ones where they were Infinera customers versus ones where they weren't and maybe be getting comfortable with you?

And then maybe just on the second question, as far as figuring out what the go-forward portfolio will look like, has -- have all of those decisions been made?

Or is that something that is still TBD?

I will answer the first part, and then ask David Heard to answer the second one.

On the first part, the slowdown was vastly from traditional Coriant customers.

When somebody is buying your supplier and you are making decisions that you expect to have in your network for a very, very long time, they want to feel comfortable that you're actually committed to those platforms.

As I said, I have spent an inordinate amount of time on the road talking to customers.

We are -- we saw a huge resurgence from the customers who had paused, coming back in a significant way in Q4.

The Coriant bookings, in particular, were exceptionally strong, getting back to the anticipated levels for Q4.

I do believe that pause was created by the fact that we announced this in July, and we couldn't close -- didn't close until October 1, and that created a period of uncertainty.

That uncertainty period is over.

David, can you comment on the road map?

Yes.

I think it's related.

So I think you see that resurgence based on a clear road map.

I think just to reiterate, when we announced the transaction, the product overlap was very, very small given the thesis of vertical integration.

It was 15%.

But I think once they saw our forward road map going forward, saw what little impact it had on their existing embedded base, we saw those purchase orders released.

There was not a differentiation between existing customers from one side or from Coriant legacy from one side to the other.

I will tell you, it was nice to see the Tier 1 customers at the table, and not only releasing purchase orders for their current products but planning their long-term road map with us.

Got it.

Maybe just circling back on the first one, have you seen a resurgence in orders for customers where there was kind of an overlap, not product overlap but just where both you and Coriant were previously competing?

I think again, what we've seen is because we've made the portfolio clear, we're involved in a number of our RFPs, RFQs, RFIs and pipeline where we're bringing together the power of both portfolios.

Meta, are you asking if there's revenue dis-synergies because we are a customer of both -- or a supplier to both?

Yes, that is -- yes.

Yes, okay.

You should just ask it that way.

It got me confused.

We are just not seeing much impact from dis-synergies, Meta.

Even when we had -- there's a very small number of customer overlaps.

Even when we had customer overlaps, they were typically in different parts of the network.

So we are just not seeing much -- some dis-synergies from these customers.

Of significant customers, I think we announced at the transaction time, there were 4 that we had any significant overlap.

And factually from those 4, we're not seeing any dis-synergy.

Our next question comes from Alex Henderson of Needham.

It seems pretty clear that the overall optical telecom space is in very good shape.

But could you run through some of the segments and talk about what you're seeing in terms of broad industry demand getting away from the company-specific stuff a little bit to sort of metro core of U.S., Europe?

What you're seeing in subs, what you're seeing in [DCI]?

Any color around your penetration of those with the Coriant/integrated Infinera platform?

And by the way, just before I get hand off to that -- to answer that question, congratulations on getting that ICE5 out ahead of schedule.

So it's really hard to pull off.

Alex, thanks for the comments.

I'll give you some color on what I see in the market, and then if Dave or Brad want to add in.

We are seeing, as you said, a healthy environment in general.

Now I'll talk about a couple of the areas that we are particularly seeing opportunity in.

In APAC, we had a very strong Q4, winning not only a lot of dollars but a couple of very substantive new franchise wins that I think will bring a substantive business to us.

One was on the classic Coriant side.

One was on the classic Infinera side.

So we're seeing good traction in APAC.

I think that there's a ton more opportunity in APAC to go and attack.

We are attacking that, and I'm hoping that we can make more announcements this year.

It's an important segment.

In EMEA, our new position is we're of substantive size in EMEA now.

It's almost $0.5 billion this year.

It's -- we're well positioned.

We continue to win a significant number of metro opportunities.

As I mentioned, we cracked more into Vodafone.

We continue to be very, very well positioned with Telefónica, both for the legacy technologies but also moving forward as they prepare for more of the 5G types of rollouts.

So I think our new disaggregated IP solutions are wonderful.

I'm really pumped up about our approach to that.

You know, we're entering into this market without something to protect.

The world wants to move to a disaggregated IP type of approach and we're not protecting anything.

So we can play offense in that space, and they want somebody to play offense in that space.

I think they view us as a thought leader.

We see a lot of opportunity down in LatAm, both in Mexico and the rest of LatAm.

One of the strongest areas we see is in subsea.

Our ICE4 continues to win.

We won a couple of very substantive deals in Q4, both MAREA as a benchmark of performance.

That's going to, I think, open up other doors with ICPs and other people putting capacity on MAREA.

We won our first consortium deal, which is a big deal for us because not only did we win the consortium, but we now have an in to all those consortium members to go and talk about our leadership in technology.

So I think that there's a lot of commentary on data center.

I think data center interconnect continued to be a strong market.

We've done well there.

We continue to have a lot of opportunities.

I see a lot of opportunities, quite frankly, for our 600-gig Groove in the ICP space.

We're in a number of RFQs right now.

And I think that it's too early to say if we're going to win or not, but we were certainly hunting.

They liked the Groove.

They like the Groove particularly now that it's owned by a non-private equity enterprise.

So I do see some very good opportunities across the landscape, Alex, to be candid.

If you could just quantify that a little bit, do you think that '19 optical globally is going to be at the same rates of '18, stronger than '18, slightly weaker than '18?

What was your...

It's hard to say, Alex.

I think we look at all the forecasts.

The predictions are anywhere from 2% to 6%.

I think certainly, it's going to be 2% to 6%, whether it's bigger than that or not.

But partly, my take is that how big is the market is growing with our new position, we're going to go take market share.

That's what we're going to go and do.

And I think with our new technology and our new portfolio, we are well positioned to do that.

So I think the -- in a growing environment, it's easier to grow.

We plan on growing with the market but also taking on market share opportunities.

Alex, if it's helpful, I'm going to add just 2 comments to that because along with the size of the market and the fact that subsea is kind of the proving ground for optical performance, and we're making lots of traction there, and we see very strong growth this year.

I'd say even stronger than last year in subsea.

In long haul, we continue to see growth in the marketplace.

Now there are new insertion opportunities, though, that help us, and new insertion strategies, one of which is that you start to see this open environment with open ICE.

We're able to insert our technologies into these.

Now with the global footprint so expanded, it provides us new opportunities in those core markets.

On the edge, we really never had the scale to leverage embedded base there.

The scale of, for example, the 8600 that's providing mobile front-haul capability for 3G, 4G and 5G capable given the latency requirement and sync requirements on the network, we have 300,000 embedded locations there to be able to grow from and a new product portfolio that brings that all together.

So I don't think it's just the market growth that we feel good about but the proof point behind what's your ability to now take share.

Boy, embedded base is certainly something I've learned in this industry over my career is an important element to make that happen.

Our next question comes from Christian Schwab of Craig-Hallum Capital Group.

As we look to 2019 and the guidance for the year, can you talk about how much is under contract and backlog and the pipeline of opportunities?

I know you discussed a significant uptick in opportunities in Tier 1 and ICP, so let me ask the direct question, if you can quantify that opportunity.

And how much success do you need in that pipeline to drive $1.4 billion plus in revenue?

Or is that potentially upside to that expectation?

Yes.

So the good news is the first 2 buckets being backlogged going into 2019 is stronger than it's ever been.

Opportunities where we have already won deals that are in the contract phase where we may not have POs yet but we've been awarded business, is very strong.

We mentioned the win rate in Q4 being very good.

And we see further opportunities on both sides of the business to win incremental opportunities.

So the good news is with things that we already have in backlog or are working on contracts on, it's a substantial portion of the $1.4 billion number.

And we see opportunities throughout the year that may actually close this year or could provide benefit going forward as well.

Our next question comes from Samik Chatterjee of JPMorgan.

I just wanted to kind of ask you to elaborate on what you're seeing more from a geographical perspective in EMEA given that it's now quite a sizable portion of your business.

In North America, you kind of highlighted the opportunities.

But what do you think looking at in terms of opportunities in 2019 in EMEA and what your growth outlook there would be?

Yes.

We are -- I think there's a number of opportunities, partly coming from -- as David said, from an installed base of relationships that we inherited from Coriant.

We always -- Infinera always had very, very strong presence in the wholesale market.

We continue to have those do well.

We're using actually open ICE in EMEA.

In EMEA in particular, there's a growing anxiety over the network security issues that are being raised.

And one of the real opportunities we have is to take our transponder and put that on top of other people's infrastructure, whether it's from a Chinese supplier or a supplier that they feel like they are too dependent upon.

And we're seeing a number of opportunities, with some wins but also a number of trials.

I think the real opportunity for us in EMEA is going to come from the cracking into the Tier 1 relationships that Coriant brought to the table in new applications.

And the second one is old applications like transmission where Coriant wasn't winning its fair share of raw transport.

The combination of our edge solutions that we're getting from Coriant, the combination of the well-received Transcend SDN suite and combine that with the overall portfolio and solutions we're bringing to the 5G market, I see a lot of opportunity with the traditional Tier 1s.

Also, the large order that we got accelerated from Q4 -- into Q4, it actually was a large EMEA customer.

And it was one that was worried about national security issues.

So they were picking somebody that was a trusted partner.

So I think there's lots of opportunity in EMEA.

Got it.

And if I can quickly follow up with Brad on the gross margin comment about kind of mid-30s for 4Q exiting the year.

Brad, you're talking about component pricing or repricing, taking a couple of quarters.

Is that 35% kind of predicated on kind of the full run rate of getting those savings through the component pricing?

Yes.

It's a combination of things, actually.

Part of it is realizing the benefits of the lower component pricing.

It is further suppliers being involved in that process.

It's also taking out a significant amount of our fixed cost infrastructure to allow us to go forward as a much leaner, agile organization that's going to drive the benefits over the course of the year.

And as I mentioned in my prepared remarks as well, we've deployed over the last few years a lot of latent capacity in the gear that we've sold.

As customers add capacity to those networks, that's going to be a nice thing for margin enhancement as well.

Our next question comes from Jim Suva of Citi.

This is Tiffany on behalf of Jim.

You mentioned expecting cash consumption to be lower in Q1 than Q4 and eventually generating cash in Q4.

Can you give us some color around how we should think about projections for operating cash flow, working capital and free cash flow for the quarters through 2019?

Yes.

So what I said in my prepared remarks is that it would be roughly 50% of the overall cash consumption that we had in Q4.

Obviously, Q4, the first quarter after the deal, there was a lot of deal costs, a lot of true-up of some historic payables that we inherited from the Coriant side of things.

So in Q1, we should be somewhere in the $35 million to $40 million burn rate for Q1.

And then as you go over the course of the year, you'll continue to see that decline to where we're burning a small amount of cash in Q3 and actually generating in the fourth quarter.

(Operator Instructions) And our next question will come from Simon Leopold of Raymond James.

This is Mauricio in for Simon.

Brad, a quick housekeeping item.

Did you disclose your free cash flow metric for 4Q?

No.

It's about a $70 million burn.

So CapEx, we've been keeping really tight.

It's a lot of onetime expenses though, Mauricio, so don't expect that to be the model going forward.

We're driving a lot of cost out of the business, and unfortunately, it takes cash to do that initially.

But we look at the return of that investment as being very, very strong.

And the way that we should think about these for 1Q, as you mentioned before, it should be close to 50% of the expenditure in 4Q '18.

Is that a good way to think about that?

Yes, yes.

So about half the size and still driven by a lot of onetime expenses, right?

The underlying business is getting a much better cost structure, and that's why we are confident, as we get through the year and we get the onetime expenses behind us, that we'll actually start generating cash again.

Okay.

And then for Tom, do you guys continue to make a good traction with your ICE4 base portfolio?

You already unveiled ICE5 and just recently announced ICE6.

So I guess, my question is that given the large benefits of capturing cost efficiencies by sort of spreading your initially developed -- internally developed IP over an end-to-end portfolio and an expanded customer base, do you guys -- are you guys still planning on tapping on third-party providers of DSP for some point-to-point applications of -- against high turnover customers?

Is that something that you're still contemplating?

Yes.

We're committed to the value proposition of vertical integration.

We believe that we can differentiate around performance, around cost, around quality and a whole lot of other capabilities.

And we see that as a core differentiator in the market.

Having said that, we don't have the resources, and also, there's not always a payoff.

If something's going to be in the market for a period time that doesn't allow the payoff, we think that there's an opportunity to complement our vertical integration strategy with an external strategy of using technologies that help us bring excellent technology solutions to market but are more cost-effective because of the life cycle to use with third party.

So we're going to do both.

Okay.

And then on the hybrid model, you're still committed to bring your total road map to half or I guess 2 years rather than the 4 years that you guys did before.

I guess the reason why I'm asking, I'm trying to understand the dynamics of relying on third-party DSPs for some applications, some verticals.

And I understand the importance of being early to market.

But I also understand that, that could be a sort of headwind to gross margins, while at the same time, you continue to incur high -- the high operating costs associated with speeding the turnaround of your next-generation portfolio for, I guess, your larger, more cyclical customers.

So I guess if you can sort of talk me through that.

How should we be thinking about it?

Well, you should think about it that we're going to bring technologies to market that allow us, one, to differentiate; and two, allow our customers to continue to bring down network cost.

At the end of the day, customers have a need to bring down their dollar per bit about 15% to 20% a year every year.

We do that in a magnificent function with our PIC and DSP vertical integration.

Having said that, we are not going to have the ability, either because of a desire, headcount or cost, to bring every generation of technology to market on our own.

So you'll see us complement our own capabilities by bringing in third-party technologies to solve that problem that customers experience.

We're only going to develop technologies ourselves where we not only can differentiate but also earn a fair return.

The cadence of ones we will do ourselves, you should probably hold as a TBD.

Right now, we are bringing 600-gig to market this quarter.

We're bringing 800-gig to market in about 1.5 years from now, a little less than 1.5 years from now.

So you're going to see us have a technology cadence.

As you're probably aware on the 600 that we're bringing to market with the Groove, that's actually not based upon Infinera vertical technology.

That's through commercial technologies.

We believe it will be a performance leader in the industry, and I think that we're going to earn a good return on that as a company.

Yes.

And Mauricio, to touch on the financial side of your question, I would tell you to think about it from an operating margin perspective because for some of the cycles that are very short, the investment in R&D that you make, it's just really hard to recover that.

And so for shorter loop products, we may pay a little bit more from a gross margin perspective, but we avoid the R&D related to it.

On things that have a much longer life cycle, we can actually amortize that R&D over time and enjoy the overall benefits.

So both of them allow the best operating margin based on the market for those products.

That's pretty helpful.

And I have one last question.

And I think Tom referred to this in his previous commentary.

But we have seen the announcements by large European and APAC customers talking about, I guess -- or stating that they are not planning to have Huawei as a 5G provider.

I mean, we believe the 5G is more than RAN.

So I was wondering if this topic has come up in recent conversations with your large Tier 1 customers or Coriant's large Tier 1 customers in EMEA.

And what could it mean for Infinera?

Yes, that conversation certainly has come up.

And you're right, all the press is around 5G.

But the concern in 5G -- people talk about 5G, but the concern that is articulated around 5G is cascading through the rest of the network.

For the first time, as I converse with European customers, they are clear that there is being pressure put upon them internally and externally about making sure that they are having a secure network, and they are fundamentally looking to evaluate what they need to do.

So it's much bigger than a 5G question.

I think it's a transport question.

It's probably a router question.

It is a significant question that they are acknowledging is real.

And they are acknowledging that they are going to have to make decisions for 2 reasons: one, government pressure in regard to network security; customer pressure about them now being asked, "If I have a contract with you, will you carry my traffic across Chinese manufactured gear?" So there's economic forces outside of government forces that are making this very sticky for them.

And I think the third issue is regardless of the network security, a typical comment when I talk to customers is, yes, we've got this national security thing that's creating some challenge for us, but it's also adding to our own concern that we are too dependent upon one supplier.

So I think when you add all of those things together, I do think it's creating a market opportunity for insertion from a non-Chinese manufacturer into these opportunities.

Having said that, none of these people will move overnight.

This is a directional shift that, I think, will take time.

I think it's very real, and I think it's very important.

How the politics of it plays out, I don't know.

This concludes our question-and-answer session.

I would like to turn the conference back over to Tom Fallon for any closing remarks.

I'd just like to thank you for your time today, and I look very forward to keeping you updated on our integration and the opportunity we have ahead.

Have a great day.

The conference has now concluded.

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