Infinera Corp (INFN) 2021 Q2 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Infinera Corp Q2 2021 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Mr. Amitabh Passi. Please go ahead.

Thank you, Jen. Good afternoon. Welcome to Infinera's Second Quarter of 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 operation as well as statements regarding future financial performance, including our financial outlook for the third 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 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 press 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 but we ask that you limit yourself to one question and one follow-up, please.

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

Thanks, Amitabh. Good afternoon, and thanks for joining us today. I will begin with a review of the second quarter results and then turn the call over to Nancy to cover the details of our financial performance and outlook for the third quarter.

Overall, Q2 was a pivotal quarter for the following 4 reasons. First, the market environment continues to trend towards the open optical networks, including an acceleration in the pace of Huawei replacement opportunities. Bandwidth requirements are growing unabated, the competitive environment is improving, and there is increasing recognition of the value we provide in optical networks. This is one of the healthiest optical environments we've seen in years.

Second, we held our Investor Day on May 19 where we communicated and reviewed our 8 by 4 by 1 strategy to drive growth and expand market share. Our 8 by 4 by 1 strategy is focused and founded on the following network transitions. First, core networks moving to 800 gig. Next, the metro networks expanding 400 gig and lastly, coherent optics moving out close to the edge of the network with the rollout of 5G and mobile edge compute, which are expanding the reach of optical networks and driving tremendous future potential volumes. These market transitions along with the shift to open optical networks and the Huawei share gain opportunity are creating specific insertion opportunities for us. We are starting to see early signs of success across all these fronts in our growing pipeline and bookings.

Third, as evidenced in the robust market trends, we experienced very strong growth in bookings in the quarter, a continuation of the trend we observed in the first quarter. In Q2, product bookings grew double-digit year-over-year and bookings for the first half of 2021 are also up double digits from last year. Our quarterly book-to-bill ratio was meaningfully above 1 and we ended the quarter with record backlog.

Despite the temporal headwinds from the industry-wide supply chain disruptions, our Q2 and first half operating results give us confidence that we are on track to achieve the target business model we presented at our Investor Day in May. As a reminder, our target business model reflects our expectation of 8% to 12% revenue growth starting in 2022, gross margins in the mid-40s and double-digit operating margins by 2023.

Lastly, we made significant progress with the new products that support our 8 by 4 by 1 strategy. For 800 gig and above, we accelerated the ramp of ICE6 in the quarter with the addition of new customers, shipment of commercial products, realization of first revenue, and growth in our backlog, we are tracking towards ICE6 growing to a 20% to 25% of product revenue in 2022 as we described in our May Analyst Day. To address the re-dimensioning of the metro networks to 400 gig, we announced the availability of our 400 gig ZR+ merchant pluggable for our metro product family. We also unveiled our intention to offer a suite of vertically integrated ICE6-XR pluggables, which includes ZR+. We expect this suite of pluggables to be key to expanding our margins and market share further in the metro in years ahead.

And with 5G and mobile edge compute driving a 100 gig coherent to the edge of the network, we're creating a new billion-dollar-plus addressable market with point-to-multipoint capabilities of XR optics. In June, we officially launched the open XR forum with initial members Verizon, BT, Lumen, Windstream and Liberty Global who all share our goal of driving standardization and acceleration in the industry of the adoption of XR optics. Within the first 45 days of launching the forum, current membership in the forum currently represents a significant share of global service provider CapEx and we have a large number of global carriers and ecosystem partners interested in joining the forum.

Turning to the specifics of our financial results, Q2 revenue was within our outlook range while gross margin and operating margin exceeded the high end of our outlook range. Revenue in the quarter grew 2% on a year-over-year basis with our growth rate entirely constrained by supply. These supply issues limited our cumulative revenue by a total of $35 million to $40 million. Q2 gross margin expanded by nearly 400 basis points year-over-year, operating margins expanded by over 250 basis points year-over-year, and cash flow from operations increased by approximately $60 million compared to Q2 of 2020.

Our quarterly results give us confidence that we are on track to achieve that target business model I disclosed earlier. We believe the supply chain challenges we are facing are temporary and not unique to us and are forecasted to continue in their intensity. Nancy will provide additional details in her commentary. Interestingly, these supply chain constraints have opened the doors to greater collaboration with our customers, providing us increased visibility into their forward demand profile and underscoring the importance of our 8 by 4 by 1 strategy.

From a regional and customer segment perspective, we experienced solid growth both sequentially quarter-over-quarter and on a year-over-year basis in the Americas and amongst our ICP customers benefiting from regional subsea builds and high-speed metro upgrades. Bookings in EMEA were up year-over-year in the quarter where ICE6 in the core and our metro portfolio are doing well in addition to an increase in our engagement in meaningful Huawei displacement opportunities. While seasonality and timing of a few major projects affected our Asia-Pacific performance in the quarter, our pipeline is healthy for the second half as we are rolling out ICE6 and driving additional success with our XTM and GX metro products.

Overall, our Tier 1s fared well in Q2 with broad-based demand strength while sales in the cable segment moderated after a good start in Q1. On a product basis, revenue and bookings growth were robust across our open optical portfolio. The GX platform grew double-digit year-over-year and continued to be broadly deployed across all applications, metro, long haul and subsea.

At this year's OFC Optical Industry Show, a major North American Tier 1 service provider highlighted that they have chosen Infinera's open optical portfolio including our 400 gig GX metro solution for deployments across their network. Additionally, we operationalize another major web-scale customer in quarter 4, our 600 gig GX solution for their Metro network. And this customer is actively testing our ICE6 800 gig solution.

These are important strategic customer wins as they demonstrate the strength of our broad and flexible portfolio. Line system bookings which are a leading indicator of future high margin transponder sales are trending 60% higher than our plan for the year and are up meaningfully both sequentially and on a year-over-year basis. While these line systems carriers lower margins in the short term, they're critical to expanding our customer footprint and are also a good leading indicator of the adoption of ICE6.

It's worth noting that in Q2 over 70% of the line systems that we booked were specifically related to ICE6 800 gig deployments. Speaking of which, the 800 gig front, we have now secured purchase orders from 19 customers, 6 more than we reported in our Investor Day on May 19th. Our initial customer success includes those that we announced publicly such as Celsius Cables, TPG Telecom, PCCW, UCNET, and Seaborn as well as other unannounced customers.

In Q2, we recognize the initial revenue from ICE6, albeit at modest levels. Demand is growing a trend that is continuing in Q3 and we're ramping production and deploying systems with Tier 1 and ICP customers globally, across both terrestrial and subsea applications. As evidenced in our field appointments and customer qualifications, the performance of ICE6 remains industry leading and surpassing our original specifications. We remain of the view that 800 gig opportunity is a long multi-year cycle and are focused on growing ICE6 to represent 20% to 25% of our product revenue in 2022, which is reinforced by the increased demand for line systems that we are experiencing.

And lastly, we are seeing strong growth in interest in XR optics. Customer trial activity for the quarter in the first half has been strong, and we conducted over 30 XR optics customer technology trials and demos in the first half of 2021. And as I mentioned earlier, we're seeing tremendous interest in the open XR forum amongst our customers, suppliers and ecosystem partners.

Overall, I'm encouraged by the broad base demand strength across geographies and customers for open optical portfolio. While demand indicators are healthy across our customer base, the near-term supply challenges are real and are impacting the entire networking industry. This is a challenge in the near term, but the underlying demand strength bodes well for our future, including our paths to our target business model. We are working closely with our supply chain partners and customers to address those short-term supply issues.

In closing with many regions around the world facing spikes in COVID-19 variants, we continue to put a priority on keeping our employees safe. We have an incredibly dedicated team and I really can't thank them enough for their resilience, as the pandemic continues to pose formidable challenges in their personal and professional lives. Their tireless commitment to serving our customers is reflected in our achievements this quarter, and the progress we are making towards our target business model. And quite frankly are humbling and inspiring to me personally.

I will now hand the call over to Nancy to provide additional financial details on the quarter and our third quarter outlook and the progress towards our target business model.

Thanks, David. Good afternoon, everyone. I will begin by covering our Q2 results and then provide our outlook for Q3. My comments reflects 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 second quarter of 2021. The Company performed well against the backdrop of a challenging supply environment while ramping new products and winning new customers. As David covered looking for robots in the quarter, continuing the strength we saw in Q1 with Q2 product bookings up double-digit year-over-year. We ended the quarter with the book-to-bill ratio meaningfully above one and with record backlog. Our primary challenge right now is navigating the impact of the industry-wide component shortages, extended lead times and elevated costs while staying on course for our 8 by 4 by 1 strategy.

Q2 revenue was $339 million within our outlook range, while gross margin of 37.7% and operating margin of 0.8% came in above the high end of our outlook range. Coming into the quarter, our outlook contemplated a potential quarterly revenue impact of $20 million to $25 million from the industry-wide supply chain shortages. And we now believe that the actual impact was about 10 million worse. Taking that into account, we now believe that the cumulative impact to our total revenue in the first half is in the range of $30 million to $35 million. Q2 gross margin of 37.7% 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 in the quarter, primarily due to 2 factors. First, a more favorable product mix as the deployment of some line systems shifted out into Q3; and second higher services margin. Keep in mind this was while absorbing approximately 100 basis points of unexpected temporal supply chain related costs in the quarter.

On a year-over-year basis, gross margin expanded by approximately 400 basis points, as we benefited from improvements in our cost structure, which were reflected in higher product and service margin. Operating profit in the quarter was $2.6 million or 0.8% operating margin, which was also above the high end of our outlook with operating margin up over 250 basis points year-over-year.

The year-over-year improvements and better than anticipated profitability in the quarter was due to higher gross margin and operating expenses of $125 million coming in towards the lower end of our outlook range. Even as we continue to prioritize R&D spend are vertically integrated 8 by 4 by 1 portfolio. The result in EPS in Q2 was a loss of $0.03 per share, representing a $0.03 per share improvement year-over-year.

Moving on to the balance sheet and cash flow items, we ended the quarter with $233 million in cash and restricted cash. Our ending cash position benefited from $21 million of cash flow from operations and after CapEx resulted in $7 million of positive free cash flow. During the quarter, we completed the transport inventory with one of our contract manufacturers, as we continue to drive a more variable and efficient business model. At the end of the quarter, we had 0 drawn against our $150 million credit facility. As I reflect on the first half of 2021, I'm pleased with the progress we have made over the last year against a tough macroeconomic backdrop while navigating a global pandemic and the industry wide and supply chain challenges. Comparing our financial results for the first half of 2021 to the first half of 2020 bookings grew in the double-digit percentage range, while we grew revenue by 1%, constrained entirely by supply.

Furthermore, we expanded gross margin and operating margin by 650 basis points and 620 basis points respectively. And improved our operating cash flow by almost $170 million, generating approximately $40 million of operating cash flow in the first half of 2021. The momentum in our business, along with our focus on execution sets us on well to achieve our target business model in 2023.

Looking ahead to the third quarter of 2021, we are encouraged by the continuation of healthy demand, and our record backlog exiting Q2. 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 Q3.

For Q3, we are forecasting revenue to be in the range of $340 million to $370 million. This wider range is not demand related but entirely due to the current supply chain environment. It is important to reiterate that customer demand remains robust, especially for our ICE6, 800 gig products and sets us up well for the 8% to 12% growth we expect in 2022.

As we mentioned earlier, bookings momentum is strong across our portfolio, including for our line systems, and we expect these bookings to drive increased revenue in Q3. We had initially planned for modest impact to gross margin in Q3 from line system deployments. But now given the increased demand and the timing of these deployments, we estimate the impact to be 100 to 200 basis points on gross margin.

In addition, we expect to see 100 to 150 basis points of gross margin pressure in Q3 from higher than normal supply chain-related costs associated with freight, expedite fees and component costs required to mitigate longer lead times and constrained capacity. Taking these factors into account, we are anticipating Q3 gross margin to be 34% to 37%. We are planning for Q3 operating expenses to be in the range of $126 million to $130 million as we invest in R&D to align with our 8x4x1 strategy, focused on high-performance coherent optical engines, open optical platforms, vertical integration in and our entry and deployable.

We expect Q3 operating margin to be negative 1%, plus or minus 200 basis points. During the quarter, we expect to prudently use cash from operations, provisioning for inventory and working capital to support the rollout of our new products. Finally, we assume a basic share count of 210 million shares for Q3. In the event that we are profitable on a non-GAAP basis in the quarter, diluted share count should be approximately 224 million shares.

As we look ahead to the full year of 2021, based on the market environment, our growing backlog and demand profile, it gives us further confidence in our previously shared expectations. To grow our revenue slightly ahead of the projected market growth of 2% to 3%, to expand gross margin by approximately 300 and 400 basis points compared to fiscal year '20 and to be profitable on a non-GAAP operating income level for the full year.

Our progress since 2021 should position us well for increased growth in 2022 and put us on a path to achieving our target business model of 8% to 12% revenue growth, mid-40s gross margin and double-digit operating margin in 2023.

Before turning the call over to Q&A, I want to echo David's sincere appreciation for our employees, customers and partners as we collectively navigate these challenging but opportunistic times and also to our shareholders for their continued support.

Then I'd now like to open the line for questions.

(Operator Instructions) Your first question comes from the line of John Marchetti of Stifel.

Just wanted to do a quick question on the guides for 3Q. The 340 to 370 range, Nancy, you mentioned that being wider given some of the constraints out there. Just try to reconcile that with the $25 million to $35 million hit that you think you took. Is there more still to come there? Is that incorporated in that guidance? Just trying to get a sense of how to level set that guidance relative to shortfalls that you saw on 2Q?

Yes. It's been certainly an unusual time with the supply shortages. So I want to try and clarify what we're seeing and how we're thinking about it. So the parts that are short right now, think of it as about 2% of the parts that we're purchasing are causing this impact. And on a margin basis, that represents about 100 basis points in Q2, and we said 100 to 150 basis points in Q3. That's short-term impact from the situation that we're in. If we think about it on a revenue basis, we've been trying to give that quarterly view. But for the first half, it was $30 million to $35 million. So you can think about it like $15 million a quarter that we're not achieving in revenue right now because of the supply.

So if I look at Q3, and I would think it's similar, about another $15 million a quarter, that puts the revenue that we haven't achieved or wouldn't achieve in the first 3 quarters in that $45 million to $50 million range. That is all covered by backlog and really strong bookings growth. This will -- I know the next question. So this is going to waterfall into future quarters as the supply loosens up. And we're thinking about that in Q4 and then Q1, Q2, really into the first half of 2022 as we start to see the supply come back online.

Maybe just a quick follow-up then. Just given that comment about Q4 and then into Q1 and Q2. Are you expecting then that Q3 is sort of the worst for this supply constraint and those should ease as you get late this year and then certainly into the first half of '22?

Yes. Based on what we see today, yes, but I'm going to hold that because it's absolutely been a little bit longer than we had probably anticipated coming into the year.

Next question comes from the line of Simon Leopold of Raymond James.

I wanted to check in on the outlook for the 800 gig products gaining traction. I know it seems to have split out later into this year. But we're now getting closer to that point. And just seeking an update of when you think you'll start recognizing material revenue, I believe on the prior earnings call, we left with the impression you expected hyperscalers beginning deployment in the fourth quarter this year and becoming more meaningful in 2022. I just want to see if we could update that?

Sure. Let me kind of clarify what we had talked about. I think what we had mentioned was we were shipping commercial product in our last quarter. And so we have had first revenues coming in that second quarter. We do expect more material revenues in Q3 and Q4, building to 20% to 25% of our product revenues in 2022, pretty consistent with our comments we made at our Analyst Day on May 19. We've added 6 additional customers.

On the positive side, we've laid out 60% more line systems than we've bargained for in the year. So the demand for the product is foundationally very strong and has grown since we last talked. So we do expect those rollouts and are on path to that 20% to 25% of product revenue. You're going to ask me is it ICP? Yes. Is it CSP? Yes. It's across the spectrum, both for a long haul, metro core and subsea applications. And the performance of the product continues to climb way ahead of spec of what we original spec, which is good news commercially for our customers and for our shareholders as we scale the technology.

Just a quick follow-up. You've talked in the past about the need for the investment community patient regarding Huawei swap-type opportunities. Just like to see if you could kind of update your thinking and the progress in terms of deals, one that you would consider at Huawei's expense?

Yes. No, it's -- I think even on May 19, I don't think we ever demanded the investment community to be patient. I would never expect such -- sorry, bad humor. But I think what I'm trying to do is have realistic expectations of how long it takes to do an RFP and then go ahead and engineer, install, furnish and then revenue recognize a lot of these projects because, again, rip-outs or replacements or overlays are all long term. And I think you'll hear that even from our industry competitors. We are seeing, even since May 19, an increase in these opportunities in locations all around the world. So we have seen both an increase in RFP. We have been awarded contracts. And I think what I said even in Q4 of last year, Q1 as well as in our Analyst Day, is we would expect to see those RFPs and wins and to be able to see material contribution in 2022 and beyond, contributing to the 8% to 12% growth rate that we gave in that 05/19. So as Nancy said prior, the $45 million to $50 million, she's contemplated of supply chain constraint that we have covered in bookings plus those Huawei orders give us even more confidence in that 8% to 12% growth rate as we go into 2022.

Next question is from Alex Henderson of Needham.

I was hoping you could talk a little bit about when you talk about 20% to 25% of revenues come -- product revenues coming from the new product in '22. I mean it seems as an average for the full year. So should we then thinking that that would ramp say 10% of the first half going to say 30% in the back half to average 20% to 25%? Is that the right way to think about the mechanics of that?

It's a good question and I will give you a specific answer other than the trend is about right meaning. Typically, as you're deploying a lot of these elements, you're going to get a heavier weighting in the back half just by nature of we're onboarding more and more customers winning more and more contracts and filling up those wind systems that I mentioned, were 60% ahead of our original plans. So I would expect on a weighted average basis, that 20% to 25% with more opportunity, as the market continues to unfold, but it to be heavier weighted in the second half.

And within that contractor are the parts that are being difficult to achieve, are those predominantly going into the line system elements and it's the slowdown in the line system deployment that is a gating factor to the realization of demand? Is that the primary area and if that's the case, so as that ramps up then there's a direct relation to the line card, which I wouldn't seem to be more 100 gig related. Is that the right way to think about the mechanics?

Yes, it's good point. I depicted, but nothing is left alone. Meaning a microcontroller and a fan tray can be on shortage right now in that 2% and can hold up shipments, but you hit the nail on the head. We've seen part shortages online, systems which delayed our deployments from Q2 to Q3, which had a good guy and margin on Q2, as Nancy mentioned, but puts more pressure on the margins along with the increase in volume that we've seen for Q3. And you're right, less so with 800 gig transponders with our own vertical integration. So again, the line system deployment gives you that Q2 to Q3 shift in margin. But for the long-term, both the increase in those line systems, as well as the timing of them give us again, more confidence towards that original question of yours that 20% to 25% product revenue by 800 gig.

I can just clarify one last thing before we see the floor. You said $20 million to $25 million, was your expected impact in 2Q and that it was substantially more than that? I think you said $30 million to $35 million in the quarter. And then in one point, you said it was $15 million per quarter. So it's a cumulative impact, right? So you're specking that maybe that $15 million in 1Q would have potentially ship in 2Q, it didn't pay for it, the net impact of $30 million to $35 million in 2Q that sliding sequentially?

Correct. So the state about $30 million to $35 million is cumulative for the first half. We were looking originally had we said $10 million it ended up being closer to $15 million, in Q1 that flies in the Q2. So I think the simplest way to look at it is about $15 million a quarter. And right now and we're going into Q3. I think in about that $15 million into the Q3 guidance.

And if you look at the year of this 2% part shortage causing the 100 to 150 basis points of gross margin temporal impact is having what 400 basis points of suppression. On growth in revenue that ultimately will get rolled in waterfall as we get into 2022.

Just to be clear, when you say $15 million in Q3 then it would be the cumulative impact the $30 million plus another $15 million exiting to that.

You got it.

You got it, exactly.

Asked so that everybody will be on the same page.

Next question comes from the line of Michael Genovese of WestPark Capital.

Two questions for me. So it seems like from an ordered sort of demand basis going into 2022, we're sort of right where we should be to be -- to feel good about the 8% to 12% guidance. But given that because of supply constraints for growing in the low single digits, right now, we assuming too much that they're going to be gone next year, and that we won't be talking about the same level of supply constraints, next year as we are right now, or something similar, we were assuming it's going to go away next year, but is that a safe assumption?

Well, so in -- I think 2 elements to look at is, one, when a lead time goes from 15 weeks to 50 weeks, when we were in December or January dealing with this, it does put quite a hole when you do the math, the delta between those. It puts the hole into Q1, Q2, Q3 for orders that you get in. And thus, even a bit in Q4. We'd have provisioned out and gotten a lot closer to our customers, which has been a positive of this in terms of getting their lead times extended for things they're looking for and their forecasting.

So again, we're expecting that at least by math, in terms of forecasting, we have been able to cover a lot of that demand that by the time we hit Q1 and Q2, we will be able to hit in terms of lead time. Although as new orders come in, we'll see what the capacity yield when things roll off the automotive and get back online and even keel across the industry. Most people are expecting some moderation in Q1 and Q2 with the second half being relatively clear. It's too soon to tell, but that's what we're estimating in our business outlook, which is, hey, there'll be some impact in Q4, but we keep fighting through it and that in Q1 and Q2 of next year, we've moderated a big piece of that through our forward planning elements in putting additional inventory lead time and then commitments with our contract manufacturers.

Great. Perfect. The second question is that, we've been hearing and I think you've been talking about, ICE6 having some really good 800G performance, long haul or for long haul subsea type distances. And I guess my question is, what's the perspective on how much in those markets are customers actually deploying 800G wavelengths? Has that started? Where were the real inflection in pure native sort of 800G wavelength demands for long-haul and subsea? Have we already seen it and subsea, or is it coming in long-haul? What's your comments there?

Let me clarify the comment we make on performance. It's not just the performance at 800G. It's the performance of our ICE6 portfolio. So that means, how many bits per dollar, can we carry over distance? So when you look at a subsea network, in what capacity can we carry over that same fiber when we look at how long can we carry a 600 gig signal, or a 700 gig signal, or a 500 gig signal? So we've seen double-digit performance benefits head to head, as we've been out there. And our performance has been well ahead of the specification that you put out, which again, yields to better economics for the client base. So it's not just an 800 gig.

Okay. And then on the question is just the timing of the 800 gig market for production deployment of 800 gig wavelengths?

Yes. I think, again, it's now that the people are deploying, you're asking who, at what distance, what percent. And as we get into 2022, we'll try to give you some more relevant statistics that's based on our deployments to date with, again, the number of purchase orders, we just announced, it's probably not materially relevant. But as we go forward, what percent of operators are operating at 800 gig, 700 gig, 600 gig, our ICE6 will try to give you a better profile. I just don't have that for you now.

Next question comes from the line of Rod Hall of Goldman Sachs.

This is Bala Reddy on for Rod. I have clarification and then a question. So of the $30 million revenue shortfall that you're talking about, could you maybe give us some color on how much of it was related to 800 gig?

0.

Yes, none.

Got you. Makes sense. And along the same lines. So as you think about this 800 gig contribution. I understand this is still a relatively small stage and then there could be few large products -- projects rather so that could fluctuate the revenue contribution. But do you at least have some milestones on how you're thinking about 800 gig revenue contribution by the end of the year?

Well, by the -- for 2022, what we've said is 20% to 25% of our product revenue will come from the ICE6 product. So we are shipping the recognized our first revenue in Q2 as we've been saying that we'll begin to ramp in the back half of this year and represent 20% to 25% of product revenue next year.

For the full year. And as Alex asked earlier is that on average 20% to 25% of every quarter, now, it will be sought for the total year, which means probably as gradually growing from Q1 to Q2 to Q3 to Q4, as you go through deployment, revenue recognition cycles across ICPs, across regions, across CSPs in exchange carriers. Does that answer your question?

It does, but I have a quick clarification.

Sure.

Could you -- I mean, I don't know if this has been asked earlier but could you maybe give us some color on what percentage do you think the 800 gig revenue contribution could finish that year with?

This year?

This year or in fact, even next year could also be helpful.

So let me try this again. Next year, by the end of the year, we expect as we mentioned in our May 19 Analyst Day and today for the full year 2022, ICE6 800 gig product would be 20% to 25% of our product revenue for the year on average total year.

I'm sorry, maybe I didn't clarify enough, David, but I meant in Q4 of the year like do you see it maybe ranging up to 30% or just what it is within...

No. We just -- yes, we haven't provided that level of granularity yet. So again, as we get closer to that, we'll try to give you more of the ramp. We think that it should give you a good indication that 20% to 25% will be a pretty good ramp, going from Q1 through Q4. It'll be a positive slope. I can't tell you what that is just yet. Sorry about that.

Fair enough, I guess. I just had a quick follow-up if I can on visibility. So you talked about increased visibility. Is that mostly towards through the end of this year or do you have some larger customers that are giving you some transparency on that equipments even into say maybe the next year?

Yes. Yes, so when we're laying out that strategy of 8 by 4 by 1, these are architectural changes. So in the core of the network and sub-sea networks, you're dealing with these 8 people that are going with fifth-generation ICE6 800 gig technology, which obviously takes multi quarters to go plan. When you're re-dimensioning the metrop to 400 gig, again, those are multi-quarter plans. When you're doing Huawei replacement deals, those are multi-quarter plans, so all the way into next year. And we've gone through our supply chain and are placing demand. And then if you go to look at the impact of our own 400 gig VR plus pluggables as well as the ability for XR point-to-multipoint, these are, again, multiyear architectural shifts that are going on. And so look, it's just necessity has set core stuff all together in the industry to get a lot tighter in our planning, and I actually think that's part of it is healthy. So talk about making lemonade from lemons, in the supply chain situation, that's what we're doing given the short-term impact.

Next question comes from the line of Fahad Najam of MKM Partners.

So I want to understand the component shortage dynamic a bit more and get the $30 million, $35 million cumulative revenues that you're experiencing and the higher 20 points impact on gross margin in Q2. What -- is it just 1 or 2 components that are a very small portion of your bill of materials, is it more than one component, and what are the lead times for these components that you're having a hard time getting hold on?

Yes. No, it's a really good question. And I don't mean to be tried in the answer because we have daily meetings on this as well as the rest of the industry does. But as Nancy said earlier, the best way to depict it is it's only 2% of our overall components that we're having the supply chain issues with. But as you know, if you go buy a car, if there's no tires, you can't drive the car off the lot. And it's the same in terms of recognizing revenue. So 2% of the components is attenuating revenue. Now the bookings are coming in, in fact, coming in ahead of the revenue -- what could be the revenue growth, and it's attenuating 2% of parts as attenuating revenue of 400 basis points growth that as Nancy said will be pushed. As we -- we'll determine whether how much of that can fall into Q4 if any or whether it's going to be in the front half of 2022 which is our expectation. So the good news is, bookings are coming in well ahead of that. It's not a huge portion of the parts. The lead times on those parts, as I said earlier, many of them used to be 8 weeks or 12 weeks and that turned into 30 weeks or 50 weeks in many cases. So if you have something where you get an order for something that has moved by a net of 20 to 40 weeks, it's going to move revenue out 2 to 3 quarters and that's what we're dealing with. So, so far, again, it's been $15 million a quarter in actual revenue to our results or in Q3 towards the midpoint of the guidance we've provided, and what normally based on bookings and demand, we would have put in the range. So each quarter Q1, Q2, Q3, you could have added $15 million to. Does that help?

Got it. It helps. So the $30 million cumulative that you have missed in the first half most likely, if everything resumed by Q4, you probably would have a very steep Q4. That said...

Yes. Once everything resumes in Q4, which I do not expect everything to open up all at once. Because we do this, as I mentioned, on a daily basis. And just to correct your prior point, if you look at Q2 results to the midpoint of guidance, it was less than 1% impact versus again, a $15 million number. So you're talking about maybe $5 million versus $15 million that we would have expected to be in Q2. If you look at the midpoint of our guidance, we're providing for Q3, again, that would have been up by $15 million without the spillover effect coming in. Make sense?

Make sense. Now with my real question, which is, are you seeing an increased cost? So you've got obviously a revenue impact, but are the costs going up for your components across the board, even those that you can easily get access to, are you paying more for them? And if you are, have those components that -- whose lead time is extending to 30 weeks, wouldn't it be fair to assume that your gross margin in the -- when you recognize the revenue concept in that system in 30 different hours, we are initially experiencing that headwind, so I'm just trying to understand like how long would this gross market impact flow through into your outlook even in 2022, assuming things begin to normalize by the second half of this year, but I'm assuming you're still taking in orders that were coming in 30 weeks late, and you're now shipping in first half of next year for example?

It's a very good question. So if you think about Q2, within the 37.7% of gross margin that we reported, we had about 100 basis points of impact from the -- whether it'd be expedite fees or increased cost on components, freight. All of this -- all of the actions that our supply-chain team is really, literally driving 24 hours a day. When I look at Q3, we estimate it to be about 100 to 150 basis points. As we start to see the shortages abate, I would expect that to go back to what would be more normal ranges. But again, it's too soon to tell on Q4. But that's the level of impact we've seen in Q2 and expect in Q3.

And last question. Do you intend to pass on any increased costs to your customer because clearly, you don't have a demand-side problem. So are you planning to jack up prices to compensate for the higher freight charges, et cetera? At this point, again, our strategy with our clients is to provide value for what we do. And you know, on an earnings call, we're probably not going to talk about, our pricing strategy competitively, but I understand your point. We remember suppliers who treat us the right way in these environments, and the ones that treat us the wrong way. And then we engineer our designs in the future, remembering that. Partnership is a long-term thing.

Next question comes from the line of Samik Chatterjee of JPMorgan.

I just wanted to start with question on inventory levels. If I'm not wrong, your inventory levels did move up modestly quarter-over-quarter. But any thoughts around how comfortable you are with those inventory levels or as you now think about the supply kind of a demand situation would you rather increase from these levels? Or accelerate what inventory you have? And does that mean you go and buy components at higher prices and maybe increase all the headwinds going into next year on margins?

No, it's a really good question. Well, we've provisioned and we've put out lots of additional demand both because our demand itself is increased, whether it's a 50% wide system increase or the demand we're seeing for ICE6 800 gig, or our Metro products, or the Huawei insertions. Look, any inventory that comes in, the operations team would turn around and get assembled to be able to ship out to meet customer demand ASAP. So we think that'll turn relatively quickly and again, given we have better demand views. To your point of costs, as I said, yes, and Nancy said it was 100 basis points we didn't expect in Q2, on 2% of the parts that we have. So again, as we went into Q3, we see that now. And we've identified that to 100 to 150 basis points. Our goal is going to be to continue to secure supply to meet our customer commitments out in the marketplace. And as we get closer to Q4, if there's any impact, like we have been, I think we've been letting you know, both the cumulative impact and the incremental impact on revenue and margins, pretty transparently on a quarter by quarter basis as best as we can see it.

Following up on the bookings, can you give me some color on how it's progressing on a geographic basis if you kind of split it by customers in each geography? Because the reason I ask is when I look at the quarterly revenue at least looks like most of the growth that you had here really came from united -- U.S. and other Americas whereas EMEA and APAC were either more kind of flat or down year-over-year. So just curious how that book is that showing up consistent with the bookings or is it a different picture in the bookings?

Yes, no, it's I think there's a different, it's a bit of a different picture in the bookings. Other Americas are up in bookings year-over-year, quarter-over-quarter for both Subsea and Metro. As you mentioned, Asia Pacific is really about timing. And so we expect both the bookings and the revenue to be able to hop up. In the U.S., the bookings we've gotten have been good about line systems and wallet share of the existing Tier 1s where we just haven't had a ton of wallet share or customer concentration, so one of our goals that we outlined in our May 19 Analyst Day. Again, EMEA, again, well, revenue was down, the bookings were up quite solidly on a quarter-over-quarter and year-over-year basis, as well. Again by segments, we saw the Tier 1 ICP is up quarter-over-quarter and year-over-year on both revenue and bookings. In the Tier 1s again, we're very much in line, other system, service providers, a lot of inner exchange carriers connecting a lot of other carriers are up quarter-over-quarter solid line system bookings and ICE6 bookings as we look at.

Next question is from George Notter of Jefferies.

I hate to belabor this with you, but I guess I had another question on bookings. If you go through earnings season, I think it's pretty clear that companies are benefiting from customers placing orders, longer-dated purchase orders, given the supply chain concerns that are out there. And I guess what I'm trying to do with you guys is kind of parse your commentary. You said meaningfully better book-to-bill, double-digit orders. Is there any way to parse that for sort of organic demand, if you will, versus customers simply placing orders with you earlier than they have in the past?

Yes. I guess what I would tell you is things like line systems, we typically don't get orders for well in advance, people are planning to layout the line systems with the budgets they have. And so the way we look at it is we know that our customer base at the beginning of the year, George had a particular CapEx that they were looking for and budgets that they've communicated to our sales teams. And we're trending meaningfully above our plans for Q1 and Q2, I mean our results are meaningfully above and that continues in Q3. And so far, forecasts say that for the year, they will be meaningfully above what they expected to be within their budgets for the full year. So I don't have a these many points of the double-digit is people bringing things forward versus normal demand. What I do know is within the budget envelope for the year we're trending in bookings higher than we expected to be when we started the year.

And I think another example, there is just the fact that we, as I characterize the revenue of call it $45 million to $50 million from Q1 to Q3. Those are orders placed that we wouldn't have shipped and recognize revenue. So those were ordered that were wanted by our customers in that time period. So I think you just need to make sure that you keep that in perspective in terms of the higher bookings numbers going out into the future as well.

Got it.

We aren't seeing people with a horse race on things. We don't see many people where we believe they're placing 2 orders to see who comes in with the order first. It's tougher, as you know, in optical systems, for that to be, for people to onboard that technology and to insert that technology.

Said differently, I guess what you're telling us is that the weighted average delivery dates in your bookings isn't changing significantly. Is that accurate?

Weighted average, I think the lead times, the lead times I think have gone up in the industry and our customers are giving us more lead time which would say our first half finished heavier in terms of bookings. So I then look at the year forecast, which we've been pretty good at when I look back over the last few years from the booking spaces. And I'd say, if I see a dip in the second half of the year, given budgets are finite. Do I believe that I just told you like last year, we saw a little bit of this in bookings with the first half being heavy, heavier than the second half. The good news for us is for the total year, we still think see things tracking above that rate.

Next question comes from the line of Jim Suva of Citi.

My first question is I noticed you increase the guidance range for revenues, which makes sense given the uncertainty, but we're already like, well, past 1 month into the quarters, there's less than 60 days left. By the shortages of that 2% of parts just so unclear, you don't even know for sure, if you're going to get the right parts in the next 50 days?

So we know where the where the shortages are, as we've mentioned. We said it's 2% of the parts. What happens Jim in this world is that somebody's commitment date, that's 30 days out that we affect 30 days out, may not ship at that time. And that's not a unique Infinera dynamic. You'll find the best happening across the industry, where supply is just not as dependable in terms of timing. And so that's why we're on it every day 24/7. And that can happen the last week of the quarter, that can happen the last day of the quarter, that can happen the first day of the quarter. And so we're just being mindful that a wider range, but then, execution and achievement to execute and be above our midpoint of guidance on the bottom-line and gross margin, as well as continuing to collect those bookings really, really important to executing that 8 by 4 by 1 strategy and 8% to 12% growth.

Okay. Then, my follow-up is and this is a bit of a not for 1 quarter or multi-quarter. Do you feel Infinera is in line with your peers for placing all your components orders into the supply chain or a little bit ahead or a little bit below? Because my -- reason I asked is, I know, for 1 quarter, it's not a horse race as you'd mentioned and people can't double order and switch between the 2 easily. But multi quarters, they kind of can't. That's kind of what I'm wondering about how you feel your position with the supply chain relative to your competitors?

That's a good question. Don't forget that people are making decisions based on that 8 by 4 by 1 strategy based on who's got the technology. So I guess the good news is there are less participants in the field with qualifying technology that delivers the price performance. How our handful of competitors are leveraging the supply chain and their balance sheet, I can't be certain. What I can tell you is, we've placed orders out through 2022 and are looking at our capacities and working this on a daily basis.

Next question is from Jeff Kvaal of Wolfe Research.

My question is, I guess, did things get significantly worse and it's applied over the course of the quarter because I would have thought that the midpoint guidance would have been your target zone there, and you came up a little shy that for this quarter. So just if you could talk us through that, that would be super. And then I have a follow-up.

I think the supply challenges, as we said have been intense, they continue to be intense. We are driving that execution every single day. Our supply changing to close in on increases we can get on making sure that we are providing outlets to our vendors as part as possible. As far as Q2, we did come in and we still within the range but below the guidance. We talked about certain live systems that are shifting into Q3. We also are really focused on execution right now internally. You saw margins come in about the range of $0.37 that we generated operating margins as well above the range. We're trying to manage this as tightly and as closely as we can. And the great news though, is that the demand continues to be really robust with double-digit growth in bookings. And that continues even as we sit here today.

I appreciate your effort. It can be awesome.

If I could add just one thing. I mean, I guess the way I'd look at it is, again, the $45 million to $50 million total that Nancy mentioned, Q1, Q2 and Q3 and the results. Look, our view is absolutely, we should have been able to do an additional $15 million in quarter plus, there's that opportunity to pull in from the $50 million. We're just very realistic and we look at those. We know what the lead times are. And we know what's available and what's not available, which is why the wider range. So I think it has intensified in Q2 and Q3 by math. When 10 weeks comes to 40 or 10 goes to 50, I -- we expect Q3 to be the, kind of the bottom. But we're cognizant that we're living in a very dynamic world right now. So we do expect it to get better. But we'll keep you guys with these numbers of what's incremental and what's cumulative. And we do expect this to roll over into next year. And to George's earlier question, we are mindful that some portion of our bookings are people pre-ordering for Q3 and Q4, because they try to keep within the year. But overall, for the year, we feel good that our bookings are well ahead. The industry growth rates well ahead of the industry growth rates.

And I guess that was my follow-up, which is should we be thinking for next year about an 8% to 12% growth rate, plus the $45 million or $50 million that is come from 2021 or inclusive of that $45 million to $50 million?

It should be inclusive, but it's giving us a lot more confidence than that 8% to 12%.

It's a little early. But as you think about the roll-off of that $45 million, do I expect that into 2022? Yes, we do. But as we get closer to giving our results in Q3 and for Q4, we'll try to give you a bit more color based on what we see from the supply chain. It does give us great, much more confidence.

Operator, let's take one last question.

Yes. It's from Meta Marshall with Morgan Stanley.

This is Dave Nwokonko for Meta Marshall. My first question was, are you seeing any sort of pause as far as those customers, wireless carrier customers focus on advanced spectrum implementations? And I have one other.

No to your first question.

And then, sorry for the second question, with your 10% customer having slipped below 10% during the quarter, would you respect to have a 10% customer some point in the second half?

Potentially, but I mean, we don't usually put into that, so we'll just have to see how the year plays out.

Yes. I think for the first half of the year, we have one 10% customer when you look at the first 6 months of the year. But we do need, we are -- I mean, we're planning the scenes with line systems and new wins. And that's what open optical is about, is about grabbing more wallet share, and actually having some more customer concentration, which I've never asked for in running the company.

David, I'll hand it back to you for any last-minute comments.

Yes. I appreciate it. Look, we are entering a robust optical cycle, one that I think we haven't seen for many, many years. Our strategy and business model are clear 8 by 4 by 1. And we have a business model that we're committed to achieving and feel more comfortable based on the results of the first half of the year and even in Q2. Our product portfolio and results give us that confidence as we fight the short-term battles. Our global team is locked in on execution to deal with these temporal issues, both from supply chain as well as again the impacts of different variants of COVID. And they do, they just humbled me every day. My team members around the world that are working together through unbelievable challenges in today's environment. So I thank you for your patience and your questions and your ongoing confidence and support and so be well and be safe.

Thank you, operator.

There are no further questions at this time. I would now like to turn the call back to David Heard. Please go ahead, sir. This concludes today's conference call. Thank you for your participating. You may now disconnect.