Infinera Corp (INFN) 2021 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Infinera's Third Quarter Fiscal Year 2021 Earnings Call. (Operator Instructions) Amitabh Passi, you may begin your conference.

Thank you, Josh. Good afternoon, everyone. Welcome to Infinera's Third Quarter Fiscal 2021 Conference Call. A copy of today's earnings and investor slides are available on the Investor Relations section of the website. Additionally, this call is being recorded and will be available for replay from our website.

Today's call will include projections and estimates that constitute forward-looking statements, including but not limited to, statements about our business plans, including our product road map, sales, growth, market opportunities, manufacturing operations, products, technology and strategy, statements regarding the impact of industry-wide supply chain challenges and COVID-19 on our business plans and results of operations as well as statements regarding future financial performance, including our financial outlook for the fourth quarter of our fiscal year 2021.

These statements are subject to risks and uncertainties that could cause Infinera's results to differ materially from management's current expectations. Actual results may differ materially as a result of various risk factors, including those set forth in our annual report on Form 10-K for the year ended on December 26, 2020, as filed with the SEC on March 3, 2021, and our quarterly report on Form 10-Q for the quarter ended on June 26, 2021, as filed with the SEC on August 3, 2021, 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 certain non-GAAP financial measures. 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 earnings release and investor slides for this quarter, each of which is available on the Investor Relations section of our website.

And finally, as a reminder, we will allow for plenty of time for Q&A today. (Operator Instructions)

With that, I'd like to turn the call over to our Chief Executive Officer, David Heard.

Thanks, Amitabh. Good afternoon, and thanks for joining us today.

I will begin with a review of the third quarter results and then turn the call over to Nancy to cover the details of our Q3 performance and the outlook for the fourth quarter. Q3 marked another quarter of strong performance with non-GAAP revenue above the midpoint of our outlook range and both non-GAAP gross margin and operating margin exceeding the high end of the outlook range.

Revenue grew approximately 5% year-over-year. Margins in Q3 benefited from the revenue ramp of ICE6, higher services revenue and a shift in the timing of deployment of line systems due to supply constraints. These benefits were offset by approximately 200 basis points of extraordinary costs associated with the current supply chain environment on which I will elaborate shortly.

Bookings momentum, reflective of market demand remained healthy in the quarter with total bookings up double digit year-over-year and well ahead of the growth rate of the optical WDM systems market. We ended the quarter with a book-to-bill ratio well above 1 and record backlog once again. Compared to the same quarter last year, our product backlog has grown over 50%.

Our record backlog provides us greater revenue visibility and positions us well to deliver improved growth and profitability in 2022. We delivered these results against a tough macroeconomic backdrop navigating both the global pandemic and challenging supply chain environment. So far in 2021, we estimate that the supply chain dynamics have constrained our revenue growth by 400 to 500 basis points, gross margin by 150 to 200 basis points and operating margins by 300 to 350 basis points. These dynamics have reinforced the importance of our focus on vertical integration and the associated control of our supply chain.

Our annual business plan is progressing well when measured against the goals we laid out at the beginning of the year and towards our longer-term target model. For the full year of 2021, we remain on track to drive revenue growth above the market, expand gross margins by 300 to 400 basis points and be profitable on a non-GAAP operating basis.

Furthermore, the demand drivers fueling our business continued to be robust, including the unabated growth of traffic at 30% plus per year, the massive rollout of 5G and mobile edge compute, the acceleration of architectures, embracing open optical networks, along with competitive displacements, especially against Huawei in international markets.

Our 8x4x1 strategy that we launched at our Investor Day, combined with our software and service offerings, positions us well to drive growth and expand market share. As we have previously stated, our 8x4x1 strategy is focused and founded on 3 key network transitions. The 8 reflective of core networks moving to 800-gig services and beyond. The 4 reflective of metro networks expanding to 400 gig, the 1 reflective of coherent optics moving out to the edge of the network with the rollout of 5G and mobile edge compute.

To seize the 8x4x1 market opportunities, we recently organized our company into 2 business groups, one focused on optical systems, the other on coherent optical modules. In addition, we enhanced our leadership team by bringing on experienced industry veterans. Tom Burns, who previously led Dell Technologies networking and solutions business was appointed as the General Manager of the Coherent Optical Modules Group. While Ron Johnson, who served as the Head of Product Management of Cisco's Optical Transport business unit, was appointed as the General Manager of the Optical Systems Group. In addition to Tom and Ron, we also brought on Azmina Somani, formerly at Lumentum to head engineering for the coherent optical modules Group and to drive the high-volume production of pluggables and Russ Esmacher, formerly at Nokia as Head of Strategy and Corporate Development to drive our corporate growth agenda. This group of leaders possesses the experience and talent to execute our growth strategy.

Now let's turn to additional details from the quarter. From a regional and customer segment perspective, year-over-year revenue growth was strong across the board in EMEA, APAC and our ICP and cable customers. Global Tier 1s, though down on a year-over-year basis due to timing of certain projects and pull-in of demand into the first half of 2021, were largely stable quarter-over-quarter.

We had a record revenue quarter with ICPs driven from new applications, footprint expansions and the onboarding of new customers. From a bookings perspective, we delivered year-over-year growth in the Americas and EMEA, while APAC, typically a smaller region for us, declined primarily due to the timing of certain projects. We had a record bookings quarter with our ICPs, spanning Metro, subsea and long-haul applications and covering multiple generations of our products.

Across the regions, we benefited from our new ICE6 wins, strength in subsea, metro rollouts, [competitive] wins. We are seeing a growing pipeline of Huawei displacement opportunities, especially in EMEA and APAC and have started converting some of these to wins. On a product basis, revenue and bookings growth were robust across the open optical portfolio. The GX compact modular platform grew double digits year-over-year and continued to be broadly deployed across all applications, metro, long haul and subsea. After a very strong first half in bookings for our XTM metro platform, it continued to grow year-over-year as we had another good quarter with the GX 600 product and added new customers while scaling existing ones.

On the ICE6 front, revenue is ramping. Our product pipeline and backlog are growing, and we have now secured orders from 25 customers. We've recently announced customer wins with TI Sparkle, GÉANT, Saudi Telecom and Telstra and have secured additional wins with several unannounced customers. We're deploying ICE6 globally with Tier 1s, ICPs and enterprise customers across both terrestrial and subsea networks. Our recent wins and shipments reinforce our belief that ICE6 remains on track to represent 20% to 25% of our product revenue in 2022.

Line system bookings, which are a leading indicator of future high-margin transponder sales, remained healthy in the quarter and we were up again on a year-over-year basis. While these line systems carry lower margins in the short term, they are critical to expanding our customer footprint and are a good predictor of the adoption of ICE6 technology.

On the revenue side, line systems came in slightly below our expectations as some of our deployments pushed out into Q4. This provided a benefit to our gross margins in the quarter by approximately 200 basis points, which was largely offset by higher supply chain costs.

Finally, the industry is increasing its adoption of coherent pluggables, and we believe we are in a unique position to leverage our technical leadership and core competencies to deliver industry-leading point-to-point and point-to-multipoint pluggables. By leveraging our in-house DSP design capabilities, U.S.-based semiconductor fab, integration and packaging facilities, we are positioned to have greater control over our supply chain, alleviating security and supply concerns while delivering best-in-class pluggables [solution].

Interest in our XR optics offering continues to accelerate. Enrollment in the Open XR Forum is increasing. We now have 7 leading global service providers as members of the forum as well as interest from network equipment manufacturers globally. Trials and proof-of-concept activities are advancing proving out the technology and business case and setting us up well for revenue and margin accretion beginning in 2022 -- 2023.

We remain excited about the prospects of creating a $1 billion-plus addressable market with point-to-point and point-to-multipoint capabilities of XR optics as well as the impact it has to our longer-term business model.

As we close out 2021, we remain laser-focused on delivering against the financial projections we shared at the beginning of the year. We've refreshed our portfolio, laid the groundwork for our vertically integrated pluggables, are ramping ICE6 and securing important global customer wins.

Looking ahead to Q4, we see another quarter of continued momentum in our business with healthy demand trends. While the industry-wide supply chain challenges are likely to remain with us for a few more quarters, our Q4 outlook reaffirms our prior expectations for 2021 to grow revenue above the market and expand profitability.

Nancy will provide additional details on our Q4 outlook in her commentary. In conclusion, I'd like to reiterate how excited I am about the market opportunities ahead of us. The team we've assembled, along with our technology innovations and recent operating results, gives us confidence that we are on the right track to deliver the target business model, which reflects our expectations of 8% to 12% revenue growth, gross margin in the mid-40s and double-digit operating margins in 2023.

I'd like to thank our employees, customers and partners for their resilience and support during a year that continued to pose formidable challenges in their personal and professional lives. These are certainly unprecedented times.

I will now turn the call over to Nancy to provide the additional financial details of the quarter, our fourth quarter outlook and the progress towards our target business model. Nancy?

Thanks, David. Good afternoon, everyone. I will begin by covering our Q3 results and then provide our outlook for Q4. My comments reflect our non-GAAP results. For your reference, we have posted slides with financial details, including our GAAP to non-GAAP reconciliation to our Investor Relations website to assist with my commentary.

Overall, I am pleased with our performance in the third quarter of 2021. Once again, the company performed well while ramping new products and winning new customers in a tough business environment. As David covered, bookings were robust in the quarter, up double-digit year-over-year, continuing the strength we saw in the first half of 2021. Our primary challenge at least over the next couple of quarters, will be navigating the industry-wide supply shortages as we successfully did in Q3, while staying on course to execute against our 8x4x1 strategy and delivering on our target business model.

Q3 revenue was $357 million, above the midpoint of our outlook range and up approximately 5% year-over-year. Relative to our expectations coming into the quarter, we estimate our revenue was constrained by approximately $20 million from the impact of supply chain shortages. Through Q3 '21, we believe the cumulative impact to our revenue from supply chain shortages has been at least $50 million, constraining our revenue growth in 2021 by 400 to 500 basis points, while contributing to our record backlog.

Q3 gross margin of 38% was above the high end of our outlook range of 34% to 37%. Relative to the midpoint of our outlook, gross margin came in higher in the quarter, primarily due to the ramp of ICE6, the delay in deployment of certain line systems from Q3 to Q4 and the benefit of increased services revenue, partially offsetting these positive factors, with the 200 basis points of supply chain-related costs that we absorbed, 50 to 100 basis points higher than our expectations coming into the quarter.

On a year-over-year basis, gross margin expanded by 280 basis points in Q3. Operating profit in the quarter was $8.6 million, equating to an operating margin of 2.4% which was also above the high end of our outlook. On a year-over-year basis, operating margin was up 20 basis points, with the higher gross margin in the quarter, largely offset by higher investments in R&D and sales to drive growth to capitalize on market opportunities ahead of us. The resulting EPS in Q3 was a loss of $0.01 per share.

Moving on to balance sheet and cash flow items. We ended the quarter with $216 million in cash and restricted cash. During the quarter, we used $13 million of cash from operations as we increased inventory by approximately $15 million. After CapEx and working capital investments, free cash flow in the quarter was a negative $20 million, and we ended the quarter with a 0 balance on our credit facility.

Looking ahead to the fourth quarter of 2021, we are encouraged by the continuation of healthy demand and our record backlog exiting Q3. At the same time, we are mindful of the ongoing industry-wide supply challenges and expect supply-related pressures to continue in their intensity in Q4.

For Q4, we are forecasting revenue to be in the range of $370 million to $400 million, representing approximately 9% growth on a year-over-year basis at the midpoint of the range. Embedded in our revenue outlook is approximately $20 million of projected supply-related impact comparable to the level we experienced in Q3.

Customer demand remains strong, and we are securing key wins with our open optical portfolio, setting us up well for 2022 and beyond. We are forecasting gross margin to be in the range of 37%, plus or minus 150 basis points. The primary drivers influencing our gross margins include an approximate 200 basis points headwind from the push out of low-margin line system deployments from Q3 to Q4. The continued impact of elevated supply chain-related costs of around 200 basis points, comparable to the level in Q3 partially offset by a greater contribution from higher-margin ICE6 revenue.

Despite these near-term pressures, we remain on track to expand gross margins by 300 to 400 basis points in fiscal '21 over the previous year. We are planning for Q4 operating expenses to be in the range of $129 million to $133 million as we plan for higher sales commissions on the back of record-breaking bookings year and invest in R&D to align with our 8x4x1 strategy.

Within R&D, our focus remains on high-performance coherent optical engines, open optical platforms, vertical integration and pluggables. We expect Q4 operating margin to be 3%, plus or minus 200 basis points. During the quarter, we expect to utilize cash from operations to provision for inventory, and working capital to support the rollout of our new products.

Below the operating income line, we assume about $5 million for net interest expense and another $5 million for taxes.

Finally, we are anticipating a basic share count of 212 million shares in Q4. In the event that we are profitable on a non-GAAP basis in the quarter, diluted share count should be approximately 222 million shares.

As we have previously stated, based on our year-to-date performance and our outlook for Q4, we remain confident in delivering our previously shared expectations. For 2021, we continue to plan to grow our revenues slightly ahead of the projected market growth to expand gross margin by approximately 300 to 400 basis points compared to FY '20 and to be profitable on a non-GAAP operating income level for the full year. We have made much progress putting in place the right team, product portfolio and supporting processes to be able to deliver on our 8x4x1 strategy and long-term business model.

Despite the difficulties of navigating a global pandemic and a constrained supply chain, I remain encouraged by the team's resilience and execution year-to-date. It is a great time to be a vertically integrated optical company. Our progress in 2021 positions us well for increased growth in 2022 and should keep us on a path to achieving our target business model in 2023.

I would like to echo David's appreciation for our employees, customers, partners and shareholders for their continued support. Josh, I'd like to now open the line up for questions.

(Operator Instructions) And your first question comes from Rod Hall with Goldman Sachs.

This is (inaudible) on behalf of Rod. Nice job on the results. So I wanted to check how much 800-gig revenue did you see in the quarter? And based on your commentary, it sounds like ICE6 is ramping faster than your expectations. So could you confirm if that's the case and talk about what's driving that?

No, thanks. Appreciate the question. So while we're not breaking particularly out the ICE6 revenue, let's say it's high single digit in terms of our product revenues going forward. And that, combined with the bookings give us great confidence for our pre-discussed target next year of 20% to 25% of our product revenues being that 800-gig ICE6 revenue.

Okay. Appreciate it. And is that a little bit ahead of your expectation for Q3?

I think we're feeling good. Again, I think it's helping us build confidence, [not both] on the shipment side, on the revenue side as well as on the bookings side of what we're seeing from an order intake.

Okay. And lastly, I wanted to check, as these supply constraints continue, what is the risk '22 revenue targets may be impacted?

Well, we're kind of going quarter-to-quarter right now. And as you've seen, I think we started out early in the year, really quantifying at both the revenue line and the gross margin line what we thought those risks would be in Q1 and Q2 and Q3, and we're finding a way to deliver those.

We've imputed $20 million, as Nancy said, of that risk into Q4. So far this year, it's been 400 to 500 basis points that has really attenuated the growth as well as 200 basis points of gross margin, and 300 to 350. It's probably too early to call the ball for next year. So we'll continue to give you as much clarity as we have on a quarter-by-quarter basis.

Your next question comes from the line of Alex Henderson with Needham & Company.

Yes. So I just wanted to get back to that last comment about the 5% for a second. Just to put that into context with the comment of $20 million. So 5% of 2020 revenue's headwind would be around $68 million. And you're saying it's a headwind in the most recent quarter of $20 million. So are you then cumulatively adding the headwinds from each of the prior quarters assuming that it's...

You got it. It's things that we would have shipped for the full year when we look at it on a full year basis.

So were those -- is that business lost? Or is that going into backlog?

No, That's part of we keep saying record backlog, and I know we're -- there's others in the industry growing record backlog, but we are seeing that backlog continue to grow based on real deployments and real plans that continue to be planned for rollout.

Within the constraints that you're experiencing, is there any differential between the vertically integrated products that you were developing for say, ICE6 versus the supply constraints on what are more open sourced products or broadly sourced products?

Yes, we certainly see more of an impact in the merchants market for packet for things -- chipsets that come to move -- swing packets around in the network, and I think you're seeing that in the industry certainly less where we have our own fab, our own packaging capability, our own semiconductor, indium phosphide fab. So it is more profound on the merchant field of things that are kind of in the bent metal, the power sources, the processors that pull in our vertical integration.

So does that imply then as you move more and more of your product to ICE6, which is more vertically integrated, that the risk to your supply chain has diminished?

Yes. I wouldn't say diminished. I think it becomes less because you're still putting things into at some point in time, a compact modular chassis that has microprocessors, fans and other things that we're seeing out in shortage on the supply chain market.

Right. Okay. Great. So if I could -- just to make sure that I understand the mechanics of what you're saying here and as we go into '22, you've talked about the growth rate in '23, but you haven't really addressed the growth rate in '22 in your comments. Am I correct in that?

You are absolutely correct in that. I think what we're going to continue to do is get our hands around the current supply chain environment of where we're at. We've said that in our Analyst Day that we expected over the years to grow at that 8% to 12% as we get into '22 and '23, but we'll further quantify that as we report our Q4 results and lay out what we see for the year, but based on both backlog and the development of the supply chain environment.

Your next question comes from the line of Michael Genovese with WestPark Capital.

Yes. I want to start with a question about OpEx. You've given us the $131 million number for the fourth quarter. Should we -- when we think about the next year and the average OpEx per quarter. Is it -- should we think about it being above that number? I guess my question is, is there any cost cutting or pulling back on investment since you've invested in ICE6? Or should we think of OpEx sort of scaling not with revenue, but moving in that same direction with revenue?

Yes. I mean we are absolutely going to be continuing our investments in our key technologies, right? I mean that is -- was part of our strategy that we're going to be driving forward into '22. We'll obviously give you more color on '22, as David said, with our Q4 results. But if you think about the compare '20 to '21 and then where we're going in '22, right, we are in '21 able to return to bonus, merit, salary increases this year, and we're planning for that and have plans for that during this year against the compare in '20, where we had pulled that back, right, in the COVID environment.

As we look forward, you can expect us to continue to focus the R&D investments as we have in '21. We'll give you a little bit more color. But our expectation would be as OpEx does increase year-to-year, it would not increase at the same rate as the revenue growth that we would expect.

Okay. Great. And then I want to ask about the ICP vertical, good results there and interesting commentary. So I guess, is that mostly all in North America? Or is that spread out? And then you talked more -- you talked about that being over multiple generations of technology. So can you talk -- can you just give us more color on what's going on over there?

Yes, it's great. I think when you look at the largest web scalers out there, we're now covering virtually all of those web scalers in some way, shape or form. And we're covering with them both in the U.S., but, Mike, as well as internationally when we look at some of their deployments where they're either carrying traffic or having others carry traffic on their behalf and they're part of the decision that's going there for subsea routes and long-haul routes.

We are hitting both 600 gig. We're hitting traditional 200-gig technologies as well as 800-gig technologies that are going quite well with the ICPs. So it is across the portfolio using the compact modular platform. Again, very, very strong revenues. Very, very strong order intake. And again, what gives us more confidence in the support of the new products being 20% to 25% for ICE6 of the product revenue next year.

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

I think maybe I want to follow up on this ICP topic. Specifically, I appreciate the vertical disclosures. So thanks for that. We see a jump this quarter to 20%. And I imagine some of that might be revenue rec on products you've shipped and some new product adoption coming off of kind of that low mid-teens trend that you saw prior year in the first half of 2021. So I guess what I'm trying to get a better understanding of is what's the normalized level and the outlook as we think about the setup in 2022. And part of what I'm struggling with is we've got one particular hyperscaler that's growing its capital spending budget by 60% and it's just trying to figure out where all that money goes. And so...

Everybody is growing at that rate. Everybody is growing at that rate, we want a piece of that pie. So I think the good news is we have more exposure, if I look back 2 years ago to how many of these web scalers we were relevant with at the time with the offering, we're way more relevant now. So we're -- we've got exposure to more of those web scalers. And in particular, the ones that are increasing their CapEx the most, I think we're well positioned with the new technology on. In terms of a steady state in terms of what's the mix going to be between ICPs and CSPs are harder to predict. I will tell you, we see a nice strong growth year in 2023 with the ICPs based on our refreshed portfolio.

And just to clarify, this quarter, was this anomalous? Or is this sort of the new run rate level?

Well, again, because of how they're onboarding technologies, this was the fact that they continue to -- again, the world continues to buy 200, 400, 600 and fifth-generation 800-gig technologies to service the market. I think we saw both an uptick in revenue and in orders, that we'll see how it normalizes. I think you guys often write up how lumpy they are. We know how lumpy they are. But the trend line over a 4-quarter period next year, I would expect to be overall up for us to be growing faster than the market average and than [RF].

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

I wanted to dive into your commentary around the Huawei displacement a little bit. And just kind of get a sense of where the differentiation is there? Is -- just trying to get a sense of are they adopting open line systems and mixing transponders and line systems? Just trying to get a sense of where you're finding the most success? And if it really is mixing transponders and was that accelerating some of the time lines of displacement?

Thank you. It's a good question. You should think about the Huawei replacement as 50% plus in that market is in the metro as people try to remove that as close to the customer as that is. And so a big piece of that takes a long period of time to go do. No doubt, open line systems and a shift to 400 gig is helping people accelerate because it's kind of 2 dynamics at once. One, they want to get rid of Huawei. Two, they want to re-dimension their networks for 400 gig in the metro. And so that is helpful to us that, that trend is there and the trend to open makes it easier for them to do.

Certainly, on long-haul routes and subsea routes, with open line systems, it does make it easier. We're just seeing a lot more opportunity in the pipeline than we've seen. It continues to accelerate. And we are seeing people begin to award that business and that business be planned out for deployment in 2022. And that's pretty consistent with, I think, what we said at the beginning of the year, which is we didn't want to get too ahead of our skis. We were seeing it in the pipeline. We expected wins towards the back half of the year. And here we are beginning to see those wins. And we have that baked as we said in our May Analyst Day into our growth pattern for 2022.

Was that helpful, Meta? Or was there something...

Yes. No, that's helpful. I appreciate that.

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

I guess I wanted to clarify, I think you guys said earlier on the call, high single digits in terms of ICE6. Was that as a percentage of product sales? Was that for Q3? Or is that prospective exiting the year? What exactly was that number?

Yes. Sorry, let me give you a little color around that. So it's high single digits for Q3 product revenue, and that will grow in our Q4 guidance. We've got that imputed to continue to grow. And as many have asked, if you're going to have 20% to 25% of your product revenues, that exit rate will grow well ahead of single digit into the double digits in Q4. And we'll continue to accelerate in 2022 for that average of 20% to 25%. And our bookings intake in Q3 and so far our forecast into Q4 are very supportive of that.

Great. Okay. And then just as a follow-up on that, do you have the mix of vertically integrated product sales this quarter? I think you said last quarter is around 40% of product sales. What would that be now? And I guess I'm just trying to understand the sort of trajectory...

It's about mid-40s. 44%, 45%. Yes.

Okay. Great. And then when you talk to year-end 2022 being at mid-40s gross margins, what mix of vertically integrated product does that imply out of curiosity?

Mid-40s gross margin is for 2023.

Full year, yes.

For the full year. And that is in the 60% range for vertically integrated products. .

Got it, okay. Great to see the progress there.

Your next question comes from the line of Jim Suva with Citibank.

Thank you so much given the supply chain issues and you're a company that's doing more and more vertical integration, can you shift your fabs up to be just running more shifts or days to pump out more product and then convince customers hey, why not get ICE6 now as opposed to waiting for all these supply chain issues? Or are you already running 24/7 and you simply can't keep up? It just seems like if you crank stuff up, you could convince and compel some people to move from ICE5 or 4 to 6 faster, and they would be happy with delivery or maybe that's just not how it works.

Yes. When you look, Jim, at the overall supply chain, there's a number of semiconductor shortages that again, it's not just on a transponder that you build, you put it into a compact modular chassis, a line system and you deploy it out over a network. There are metro boxes that require packet processing that go in that are dependent on merchant platforms. The good news for us is the transponders we build and the products we build are -- that piece of it is within our control, but it's kind of like a car is if it's only 3 tires, you're not going to be able to drive it around. So we do have less of that than if we were fully merchant. But it isn't simply that if you just had a bunch of ICE6 transponders by themselves that you could run a full network from the metro edge all the way through the subsea core.

Your next question comes from the line of Samik Chatterjee with JPMorgan.

I actually have just 2 quick ones. You refer to the 400, 500 basis points headwind on growth this year because of the supply constraints. Just wondering if you think you can recoup some of that as rental demand next year? Or given how the supply situation is evolving the best case is to start limiting some of the headwinds as you get into Q1, Q2, and then try and deliver to that 8% to 12%. I'm just trying to think, is there some upside as supply comes back or the best case here is you just deliver to the long-term model based on just trying to limit headwinds as we get into next year? And I have a follow-up.

Yes. It's a good question. We're -- as I mentioned earlier, we're taking this 1 quarter at a time on the supply chain and then again, trying to provide as much transparency as we can to you. The good news is with that backlog, it does make us more confident in what we had mentioned about the 8% to 12% as we get into 2022. But until we see the -- another couple of months of the supply chain situation, we'll give you again that detail in our

(technical difficulty)

on the pricing and discounting environment, can you walk us through what you're seeing out there in the marketplace? I assume you have probably a favorable pricing environment. And related to that, do you have any plans to pass on your increased cost to your customers?

Yes. I think that's a question I'm not going to really address. I don't want to go through pricing strategy on a public earnings call. What I will tell you is that the more vertical integration we have in our products, the more flexibility it gives us to price performance for our customers, treating customers poorly in times like this. I know because I have suppliers, some that are being excellent partners in this period, some that maybe are passing on some extraordinary costs. We all have long memories. And so our job is to continue to deliver a long-term business model as well as short-term quarterly results and to accommodate for those things and trade off the fact that I want a customer 3 years from now to look at the Infinera logo and think highly of us. As it pertains to the pricing environment, I've seen no change in our competitive pricing environment over the last quarter since our last earnings call.

Appreciate it. And then I wanted to revisit your ICP vertical. I think you mentioned that some of your ICP customers are buying multi-generation solutions from you. To what extent are you seeing some of your customers who have developed Whitebox solutions kind of feeling the brunt of the component shortages and having -- or essentially being forced to go back to vendors like yourselves in order to offset their own component shortages. Are you beginning to see that Whitebox opportunity being open for you?

Look, we do this for a living, so God help anybody that's new to developing this kind of infrastructure and trying to manage in this supply environment. I don't want to speak on behalf of any 1 of our customers. That is a very (technical difficulty) to go down. But to say out of the major web scalers, again, we're in a much better position across that entire gamut of spenders. And again, they are buying multiple generations of technology. So they must be having some issues as well as their -- the great portion of the services are still connecting at 200, 400, 600-gig services.

Your next question comes from Alex Henderson with Needham & Company.

I actually thought we'd get the question on this from the last caller, but could you talk a little bit about the Acacia 1.2 terabit product announcement and how you see that? How you view 800-gig cycle versus 600 and 1.2? And is that a real threat to 800-gig cycle? Does it change your -- the curve you're thinking about on the 800 gig? Or do you think it's less well positioned. Obviously, it's well out into the future as well. So could you just talk about that because there was some pretty good wobble in your stock when Acacia announced it.

Yes. We all tend to keep each other on our toes with product announcements. I think we remember when 400ZR and ZR+ was announced to hit market and we look at where it -- where it is and where it really hit compared to the announcement. I'd remind folks that our DSP on 800 gig is a 2 x 800 gig. So we have a 1.6 terabit solution that if I use a little marketing ploy here. And by the way, that's a lot of bandwidth per DSP out with our customer base.

So we always believe this is going to be a long cycle. That 1.2 terabit announcement was anticipated. It was later than we expected. And we actually expected that to be out in June. And there was an earlier caller that asked about R&D. Our job is spending R&D. We don't just roll everybody off after ICE6, we've rolled a lot of R&D into the metro, into pluggables for point-to-point and point-to-multipoint to help with our vertical integration and then to the next generation, which would be more like a 3.2 terabit 2 wave or a 1.6-terabit 1 wave.

So we think the cycle just to summarize, we have a 1.6 tera 800-gig solution today. And we think that's going to be a very long cycle based on our design engagements with the CSPs that are 74% of the market spend, and we're onboarding, as you can see from the results with the ICPs as well.

Did that get to the -- yes, go ahead...

Yes. I got the point. So I wanted to go into the 200 basis point hit from supply chain issues. Clearly, there are 2 different categories of costs associated with these pressures, there's the price inflation associated with individual parts, but there's also expedite and shipping costs and logistics costs and delays in timing and things of that sort that also play into it. Given the holiday season really amplifies that significantly as we're in the third and fourth quarters. But as we go into the seasonally soft quarter, is there some opportunity for that portion of the cost impact to ameliorate more quickly than, say, the semiconductors and bent metal and other things that are harder capacity adds that can you kind of parse between which -- how much is parts and how much is logistics?

Yes. Well, first, you didn't cover all the categories of what they consider parts expedite fees. I've heard all kinds of priority service fees and -- so look, 75% of the costs are those parts increases, expedite fees, broker fees, tax title and dealer prep that people are charging to get your hands on the few parts that exist for a lot of the geometries that are out there to do, believe it or not, some of the simpler networking stuff to carry the more complex waves across the network.

Certainly, by the number of cargo containers that are still stacked up in L.A., too hard to predict when those costs go down. But it's about 25% of the overall cost that we see when you take that 200 basis points into effect. We'll -- I think we've -- again, since the start of the year, we've been really trying to quantify this stuff out as granular as possible. And so when we go through the Q4 results, we'll update our view of what we see going into 2022 on both those categories. It's an excellent point.

So the secondary question that rolls off of that, which is historically, you've had a very steep decline into the March quarter. And I know you don't want to go too much into '22. But I think there was a thought that the first quarter would actually maybe even be sequentially flat based off of the ramp of the 800-gig product, which you described as quite steep quarter-to-quarter-to-quarter and less driven by those issues. So my question is given the backlog and given the implied lack of seasonality in that backlog, should we be expecting 1Q to actually be an up quarter?

So this is the Q3 results call and Q4 earnings call, Alex. I can't do it. In this supply chain environment, too early to dive into Q1. We're certainly encouraged by the backlog, the demand and the engagement with the client base. But no, I can't do it. It's just too early.

All right. At least logically it's better than normal, right?

Again, bigger backlog, but you have to have supply of those back to the you can't drive a car with 3 tires.

There are currently no further questions at this time. I'll turn the call back to David Heard for any closing remarks.

I do appreciate the thoughtful questions. It's an unusual environment we're in. We are trying to give as much transparency as we can to guide you through this period and to keep our heads down and focused on what we laid out at the beginning of the year. We delivered Q3 ahead of the midpoint of our guidance range. We've guided Q4 generally in line with consensus. We expect 2021 to meet the targets that we laid out when we entered the year. We said we'd grow faster than the market. We said that we would expand margins by 300 to 400 basis points, despite the impacts of this global supply and global pandemic environment.

We could not do that without the just unbelievable round-the-clock work of our employees, the dedication and teamwork with our customers and suppliers, and the loyalty of our shareholders and those on the phone that help communicate to them. So really do appreciate it. These are unprecedented times. Thanks again for the thoughtful questions. Please take care of yourselves, and stay safe.

This concludes today's conference call. Thank you for your participation. You may now disconnect.