Hi. Good morning. I'm Samik Chatterjee. I cover the technology hardware companies at JP Morgan. With me for this next session is Infinera, and I have the pleasure of hosting Nancy Erba, who's the CFO of the company. Nancy, thanks for being here. Thank you everyone for being here. Let's start with a more sort of common question that we've been asking companies. Clearly, as you mentioned, even with the markets today, you can see sort of the macro concerns being top of investor minds. Relative to your business, when you think about sort of the remainder of the year, what are the top macro concerns that you would have? What are the key things you're watching out for from a macro perspective? Yeah. I mean, thanks for having us, by the way, and it's been really good meeting so far and appreciate the interest in the company and what we're doing. I mean, for the macro view, I mean, we obviously are very cognizant of what's happening in the discussions around the debt ceiling and, you know, larger recessionary concerns in the back half of the year. We try and take all of that, pull it together, obviously be thoughtful about it, but really look at the micro, right? What's happening at our customers and the specific pipeline that we're seeing from them in terms of demand. As we started the year, we outlined a year that looked similar to 22, quite frankly, where back half, second half of the year really stronger than the first half. We've seen that play out with the book-to-bill, you know, lower than one in the first half, but expected to grow to be above one in the second half. We get there by looking at the specific pipeline that we see from our customers. Our pipeline this year, better than last year at this stage of the year, and also at better margin than last year. That's what gives us kind of the confidence as we came out earlier this year and held our full year guide even against this backdrop. Okay. Maybe then diving into something more company specific. You recently hosted Investor Day around OFC, and outlined sort of your strategy around 8x4x1 strategy. Can you just sort of delve into a bit more about sort of the strict six milestones that you outlined at the Investor Day, and how's progress been on those fronts? Maybe take that as a second part in terms of how does that position the company for share gains, that's really what you're going after? Sure. Yeah, our strategy of 8x4x1 is really serving the long-haul subsea markets, which the company has historically been strong in those spaces. The 400 Gb, which is the metro, then the 100 Gb, which is more of the access space for us. Each of those have their own milestones that we obviously track. For the company as a whole, we laid out continuing to grow in our ICE6 revenue as a percent of our total product revenue to get that over 35% for the year. That's going well. We were over 31% in Q1. Laying out the roadmap of ICE6, ICE7, and ICE8, making sure that those milestones are on track. They are. Vertically integrating our own metro platform, so putting our own pluggables into those metro products, moving away from external purchases. That is happening as we speak, and we'll be shipping with our own vertically integrated metro later this year. Going through the numbers, making sure that we're positioning ourselves well for the CHIPS Act. We have an optical semiconductor fab in California with advanced packaging in Pennsylvania. We believe we are a good fit and line up well with what the government is looking for, so we're pursuing that. That's on plan. Lastly, but certainly not least, is hitting our model for 23. That is what sets us up for hitting $1 of EPS in 25, 26, as we shared at Investor Day. Q1, we grew at 16% year-over-year. We said with our Q1 outlook that we thought first half would be at about 10% growth, albeit using working through backlog, and then growing in the second half, faster, first half versus second half to hit the 8% overall. Gross margin of 40 points for the year and over $0.20 of EPS. Okay. Maybe let's start on the more margin front, but in relation to the vertical integration, just more maybe give us an update on that front. How does that sort of roadmap look like for the vertical integration piece? What does it imply for gross margin tailwinds as you sort of continue to scale that vertical integration across your portfolio? Vertical integration for us means we're using our own technology within our products. You can think of that as electrical and optical coming together into our systems. We have historically, and you see the benefit of that margin in our long-haul subsea, been vertically integrated. We are currently in the process of vertically integrating our metro portfolio. That's what's gonna allow us to really drive that margin expansion in 2024. We've put out a target of hitting 300-400 basis point improvement in our gross margin from 2023 to 2024. That's largely driven by the metro vertical integration. We've outgrown and gained share in metro over the last three years. That is setting us up well to be able to see that margin expansion next year. Okay. Can we talk about then vertical integration in terms of your ICE6 to ICE7 to ICE8? Like, how much of a step function change are we expecting as we go through those products? Just which areas are you sort of now incrementally integrating in so that that's providing you that step function change? I mean, we look at our roadmap, we're trying to meet market needs, meet customer needs. Certain products are gonna have longer life cycles than others. ICE6 is one of those products that really is a longer life cycle. You should think four-seven years in terms of how long that product will be sold. There'll be other products that come in. We talked about ICE7. We haven't officially announced ICE8 yet, but those will, as we move through that roadmap, continue to drive down cost, continue to enhance gross margin. So that vertical integration in total, we're driving to get back into the 60% and 70% level over the next several years. That will continue to drive the margin expansion as well. Okay. Any color on which are those sort of additional areas that you are externally sourcing early or that you're going to vertically integrate now? On our long-haul subsea, we've primarily been vertically integrated there, meaning using either our own DSP, our own optical components, and/or leveraging externally pieces of it when we want to for time to market, but when it makes sense, right? When it makes sense from a cost perspective and when it makes sense from an overall margin perspective. You should look to those products to be primarily vertically integrated. Got it. Got it. Okay. Moving to share gains, you talked about metro has been a strong area for you. As you look forward, what are the sort of three or four big areas where you expect to see the most share gains? Yeah, I mean, we're coming in at a place where overall you can think of our margin in the 12%, 12%-13%, so we are definitely in the share gain mode. We look to grow across the board in terms of all of the segments, but we have been outpacing the metro over the last two years. We've been growing at about 13% on a CAGR against a market that, you know, you can think overall growing in the 1.5%-3% in metro. We'll continue to grow there, continue to expand. I think the thing that is most encouraging to me right now, as I look at the RFPs that we're seeing, in particular in the U.S., North America, and in Europe, those RFPs give us an opportunity to continue to gain that share. It's across all of the markets, long-haul, subsea, and metro. The new market for us in pluggables, in terms of selling those pluggables externally, opens up a $2 billion market between now and 2026, an area that we've been investing in over the last three years, spending R&D dollars to drive those plugs. Now that we're able to actually see our customers qualifying them, we've received POs, we've got qualification units out. That product is outperforming even our own expectations, which is, you know, very positive for us. Opening up that $2 billion market, you know, getting that revenue into our P&L and being able to see that leverage through after all of these years of R&D investment, I think is a real exciting opportunity for us. Okay. Maybe just to follow up on that. In terms of those share gains, what's the primary driver? Is it the product portfolio that's starting to now resonate and you have more vertical integration, so that obviously has its own advantages, or is it more about the competitive landscape, like as you mentioned in the U.S., are there competitors that have not really kept up with the product generation changes? Particularly where does, and you haven't touched on this yet, but on the EMEA front, how much of the share gain is like the Huawei displacement that you've already talked about? Yeah, I think the supply chain challenges that we all lived through and are continuing to live through really showed the value of multi-source, right. We hear that quite a bit in terms of customers looking to have dual source or even three sources in terms of their network. You can't be there if you don't have the right product roadmap and you don't have the right portfolio. I think the improvements that we've made to our overall portfolio, we think it's the strongest it's ever been right now. That is opening up and giving us more opportunities to bid on these RFPs. You're right. It's difficult to say, are you winning share because of Huawei? I can say particularly, I mean, obviously in the U.S., but in EMEA more and more, we just don't see them invited to participate. There's still multiple sources, of course, competing for this business that our customers and the clients, as we talk to them, you know, they're looking to broaden and reduce their risk in terms of exposure on supply side as well. That gives us, you know, opportunity to continue to gain share there. Got it. Related to share gains, what's sort of the go-to-market investment, or, how are you thinking about sort of the investment planning here, as you sort of drive these share gains? What needs to happen be it on the sales and marketing side to then sort of support this, growth driver? Yeah. The company historically, if you look back, has underinvested in sales and marketing, if you look at our peer group and just the% to revenue. Last year, we started to communicate with the street that we knew that had to shift. You've seen us put more, and you'll continue to see us invest more in go-to-market, partly because of what we were just talking about in terms of that roadmap and that product offering being the strongest it's ever been. We can't win if we're not there. We're investing go-to-market resources in some cases at customers where we need to have more support for that customer in order to continue to grow there, or in regions where we currently today aren't strong, that are growing fast, that we believe can really make a difference to us in the bottom line. We're doing it thoughtfully, and we're being very planful about it, but you will see that sales and marketing tick up a little bit. Overall, of course, managing our operating expenses and our investments very carefully. Can you talk about the pluggables market now, when we think about the opportunity for pluggables to cannibalize some of the system sales, that's been a sort of concern for investors for a period of time? You also have a more broader portfolio on the pluggable side than most of your competitors do. You have XR, you're already working on the normal sort of ZR standard and the ZR+. How do you think about cannibalization of systems? What's sort of the market for pluggables looking like, and how does having a broader portfolio on pluggables help you [repeer] competition? A lot in that question. Overall, and we shared this at Investor Day, right? The metro space, I think, is what you're really referring to and, you know, metro DCI. Is there gonna be some systems cannibalization from pluggables? Probably at some point. I mean, that metro growth rate, based on, again, the Omdia, Cignal AI numbers, is about 1.5% between now and 2026. We though, as I said, are growing much faster than that as we are share gainers in that space. Having the pluggable, to me, is a really good balance in our portfolio because we're now able to sell our own products with our own pluggable inside of it, which gives us margin expansion above our current rate, as well as sell those pluggables externally. We feel like we're positioned well to win. We hear a lot of... I mean, today's meetings, you know, a lot of questions about what's happening in the data center, and I think that's been a common theme here. Having the ability to sell our pluggables externally and seeing the level of interest that we are from customers today, that is why I think opening up that $2 billion market for us, which is brand new, and giving us opportunity to go after that revenue, whether that be through the 400 Gb ZR+, which is what we're selling today, or through the 100 Gb or 800 Gb, which will be coming in the future. Okay. Any updates on the XR product, where it stands in relation to sort of getting to market and getting to revenue? We've branded our pluggables as ICE-X. You'll see that on our website. The 400 Gb ZR+ available now, right? For sale, have POs in hand. The 100 and the 800 are coming. We will announce dates on those in the future, but they're under development now. I mean, I think you're referring to kind of the balance between whether it's point-to-point, the ZR+, which we're selling today, or the point-to-multipoint, which basically is driven. I mean, the software enabling these pluggables is of great interest to our customers. We expect that to start to take hold in the, call it, 2025 timeframe. Maybe we'll move to some of the financial questions in the meantime, and then come back if we have time for more of the product questions. Your target for 8% revenue growth, sort of maybe just provide your thoughts around because you did have a strong start to the year. You're seeing 10% in the first half. Sort of help us bridge that gap between 10% in the first half to going 8% for the full year. Yeah. I think it's looking first half, second half and getting more confidence in getting that book-to-bill above one in the second half and being very cognizant of the environment that we're operating in. Again, it comes down to taking that macro and translating it into the micro by customer. What gives us the confidence in maintaining that 8% is seeing that pipeline and seeing the improvement in the pipeline year-over-year. All of that said, I mean, you know, there's inventory being worked through. It's really customer by customer. Certain customers have come back and reiterated their CapEx and said, "Yes, we're spending as planned, and you know, orders will be as planned." Others are saying, "I'm gonna take some more time to digest some of this inventory, and I may shift things to the right a little bit." It really is specific to each client. Based on what we saw after our Q1 results and based on the pipeline that we're watching literally weekly, I didn't feel like I had anything that would take me or make me change that outlook of 8%. We held it. We also still held the gross margin of 40 points for the year and then, of course, the $0.20 EPS plus. Okay. If I break that down, the customer set by telecom or service providers versus the ICPs, I mean, the general feedback from the peer group as well as competitors has been that there is weakness probably more on the ICP side in terms of orders coming in related to telcos. Maybe what are you seeing on the book-to-bill being less than one? What's driving that primarily? Where are you seeing more weakness in those bookings or billings at this point? As you think about the pipeline, you said multiple times the pipeline is really what's driving your expectation for book-to-bill to be more than one in the second half. What's, again, sort of which customers are going to drive that? Yeah. We've actually seen quite a bit of strength in ICPs if you look, you know, over the last several years and even, you know, quarter by quarter last year. That I think is because of the portfolio that we have to offer, because of the fact that historically we didn't have as broad of exposure to ICPs, and we're now able to cover all of them and feel like that gives us some level of buffer, right? If one is very strong and one is seeing growth, whether it be driven by, you know, their own bandwidth needs or others that are digesting, that balance gives us some level of protection there. We are seeing growth there. We are seeing, as I mentioned, Tier 1 RFPs in the U.S., as well as in Europe that, you know, should we win some of them, I won't say we'll win all of them, but should we win some and see that, start to take hold exiting this year and going into next year, that visibility is really important as well and gives me that comfort, right? As we're, as we're looking out that, the opportunity is there for us to continue to grow and to stay on that 8%- 12% growth rate that we put out, into 2024, 2025, 2026. One of the questions that I had for you for the later, but let's maybe talk about it now, is for most companies that I cover, the growth outlook, given some of the backlog being digested this year, has been that this is sort of the year of peak growth as supply comes in, eases, backlog is digested, and sort of the slowdown is more expected to be next year, even as the macro slows down, just a more of a lagged impact of the macro. When we think about your targets right now, how they stand is for 8% this year, and then potential acceleration to 8%- 12%, starting next year. How do you sort of match that up versus what your competitors or peers are even seeing in terms of growth rates? The peer group seems to be a lot more dependent on backlog. Automatically, the implication there is the peer group has a lot more backlog than you have to work through. Is that the right way to think about it? Like, why the discrepancy between your peers and your growth sort of trajectory from here on? Well, I mean, we're starting off of a growth rate over the last three years. I think you're speaking of one of our competitors who didn't grow last year, so, right? Their growth expectations are off of a lower growth rate from a prior year. I mean, our expectations are again, we build up from the bottom up, right? We look market by market, customer by customer. If I look at the growth rates that we are going after in terms of being a share taker, right? Again, we're 13%, 12%, 13%, depending on the market share player. We are going to grow in these spaces, which is going to allow us to outpace the overall market growth. That is driven by the ICE6 revenue, and that expansion and going into ICE7 in future years. Also the metro platform, which has been growing and outpacing the market as we've gained share there, continuing to do that. These all kind of triangulate, and then you add in the pluggables, which starts, you know, in some size next year, but really going into 2025. That expansion in that market is what allows us to be at the 8%-12%. Okay. Got it. The 8% growth target for this year, if I try to look at it a bit more by customer vertical, I think from the way you're talking about the ICPs, you're clearly expecting growth from ICPs to be higher than the 8%. Maybe just help us think through sort of the magnitude of the growth rates you're expecting from the each of the customer verticals to the extent you can break it down for us. Yeah. I think you've, I mean, you hit it. The ICPs are growing faster than the 8%, which then says... Also our, you know, other service providers as well, growing ahead of that 8% rate. Then you look at the tier ones, which we are off to go and grow, right? We aren't huge share players there yet. We wanna be more concentrated there, that's why these RFPs are important. That growth rate is what balances out to get us to the 8% for the year. I think the, you know, the interesting thing that we're hearing and seeing is the roadmap right now and the timing of new product introductions, which we talked a little bit about, and the timing of the fact that the pluggables are coming out when they are, we think really hits that growth curve well. 8% in 2023, yes, important. And, you know, we're all monitoring and watching what's happening, you know, in the broader macro. As we look forward into 2024, 2025, and 2026, that growth rate, the products that we have available and the RFPs that we're seeing and are expecting to have some level of wins at, you know, that drives the margin expansion with metro as in pluggables, as well as the overall EPS expansion and what's gonna allow us to get to $1 of EPS in the 2025-2026 timeframe. Okay. Okay. Hoping we don't have to talk about supply chain for a lot longer, we've seen, I think it's fair to say in terms of supply chain, the constraints have been going on for far longer than we expected on the optical side, particularly relative to other hardware categories. Are you seeing any constraints still? Where are the lead times sort of the longest? What are you promising your customers in terms of lead times, as they now sort of look at order patterns, and how is that influencing their order pattern? Yeah, it has been longer than expected. Just to level set, we absorbed $64 million of extra or unusual supply chain costs in 2022, so that cost us 400 basis points on the margin line. We came into this year expecting that to drop by about half, so not disappearing, but certainly improving. I would say based on Q1 and what we see in Q2, we're about on track there. You'll see some level of improvement this year. Then as we exit this year and go into 2024, we think it's largely behind us. Right now there are still certain components, call it more, microactuator-type components that are still very difficult to get and are impacting our ability to supply to our customers in a timeframe that they're looking for. You've seen that come in terms of an inventory growth at the same time, which I know people kind of scratch their head and say, "How is your inventory growing in this environment?" It, it's somewhat of a mismatch. If a customer is buying a line system to deploy into their network, they may say, "We won't take the transponders until we get the line system," right? Which makes sense. As those line systems free up, and we're starting to see that, but it's really a Q2, Q3, and through this year, as that starts to free up, that will allow us to start to move the other inventory as well, and we would expect to start to see that to improve as we exit the year. Overall improving, about as we would have expected in terms of first half and the, and the impact to overall costs. Exiting this year, you know, barring anything else unusual, we see that really abating, we shouldn't be talking about this next year at the conference. When I think about gross margin drivers for this year, you have the supply cost premiums coming down, you have the vertical integration contributing to it as well. Almost it seems like the same repeats next year. You have another step of in vertical integration, you have the same supply costs going down an equal amount, right? Mm-hmm. Is it a fair way of thinking what you're seeing in terms of gross margin performance for this year repeats next year, which is an outsized number because you're sort of moderating the supply premiums in both these years? Yeah. It's This year is really driven by ICE6 as the vertical integration that you referenced, and the supply chain, correct. Next year, what's different is that you have that ICE6 continuing to grow, but you're also adding in the fact that your metro is becoming vertically integrated. That is a meaningful impact to our margin in 2024 and then going into 2025. When you think about the cost drivers on that BOM, right? Over 45% of that coming externally, meaning we're paying someone and paying their margin. Mm. When we bring that in-house, that takes our margin on that product from being dilutive to our overall margin percentage to being accretive. That's where we see the 300 to 400 basis point improvement in 2024 margins. Okay. Interesting. Actually, let me just check if any questions in the room. Okay. Let me move to the balance sheet. Can you talk about sort of where you stand in terms of overall liquidity and cash on the balance sheet? We can get into some of the recent actions that you've done, maybe, you know, anything that you've said in terms of even cash flow outlook for the year as well. Yeah. Similar to the P&L, right? Front half, back half story on cash flow. We expected to be utilizing cash in the first half and then, building cash in the second. Still seeing that, as playing out as we had planned. The inventory and the working capital usage, still managing within our balance sheet as we have it today. We do have a $200 million ABL, which we have not tapped into, but it is available to us if we need it. We also, you saw recently moved a maturity that we had. We have a convertible that was due in September of 2024. There was $100 million remaining on that. We reopened a 2028 convertible and moved about $84 million of that in from 2024 out to 2028. Overall, our average coupon in terms of our debt is still at 3.3%, which I feel very good in terms of this environment. I wanna get us to a point and where we're driving to overall that dollar EPS, certainly important from an earnings power perspective, but also cash generation and giving us more options and more flexibility on our capital structure as we improve overall in terms of our business model. Right now, feel good about where we are. Feel good about the fact that we were able to move that maturity given this environment and position us to be able to grow in 2024 and continue to drive free cash flow in 2024 and 2025. I mean, if you think about a $1 EPS target that you have of $1 per share, typically, what would your sort of outlook be for free cash flow conversion at that point, rate of net income? We see typically companies hitting very high on rates of free cash flow conversion, obviously, you're working through many different things, including probably next year, you'll be still working through working capital. How do you think about a normalized free cash flow conversion for your business once you get to 2025, 2026? Yeah. I think about as you've said, I mean, where I wanna get us to, you know, as we're making these investments and, growing the business in terms of overall R&D and product development and sales and marketing as we've talked about. Our working capital should definitely make a flip as we get through the supply chain in 2024. Get to a point where we're generating, I'll say, meaningful cash flow as you would expect on a dollar EPS. I think between now and then, what's important is, getting back to generating cash in the second half of this year, starting a more meaningful cash generation in 2024, that then sets us up to have different options in 2025 and 2026. Moving this $80 million out of next year, I think was important from the standpoint of not that we wouldn't have had the cash available to pay it down, but it gives us more flexibility in that investment timeframe that we need to as we're growing our business and driving share in 2024. Yeah. When we think about the use of the cash that you obviously have more visibility into generating and particularly starting next year, how do we think about the primary use of it? Is there an appetite to then sort of do, continue to sort of try and work the leverage down a bit as you start to see that... Mm-hmm. Wait till you get to some of the maturities before you do anything? No, I think obviously wanting to work it down is important, and also the structure of that debt is important. I think the options that are available to us in 2025 and 2026 are greater 'cause at that time, we'll have meaningful EBITDA. You know, we do have some runway between now and 2027 to get there. Given the fact that the coupon on these is fairly low, particularly relative to where our interest rates are today, you know, I feel like we've got that runway, and we'll have ample time to address that and potentially look at different options for the capital structure, you know, when we get there. Okay. Last couple of questions. One, the dollar EPS target is for 2025, 2026. Like, what in your mind drives it to be either the 2025 or? Mm-hmm ... stretch out to 2026? What are those sort of guardrails around it? What are the factors you're keeping in mind, just make it much more of a sort of blended target rather than a- Yeah defined target for you? It's really about the growth rate, right? And our ability to drive that VI. If the growth rate is on the lower end versus the higher end of that 8%-12%, and making sure that we're at a target gross margin in the mid-forties, that's what's gonna allow us to either pull that in a little bit or make it shift to the right to 2026. We certainly have the ability to do it in 2025, but I'm trying to be somewhat cognizant of the fact that it's, you know, very much growth rate dependent. I mean, I guess what I was trying to also get to there is when you think about growth rate on the top line and the gross margins and then sort of the operating leverage that you get out of that, do you see the ability to meet sort of your gross margin expectations or operating margin expectations embedded in that $1 of EPS target being very contingent on the revenue growth rates? Do you see enough levers to pull that the gross margin and operating margin is relatively more immune and really depends on the revenue growth rate? I'll never say immune, given some of the things we've seen over the last couple of years. Our ability to hit that gross margin and our ability to see the vertical integration that drives it, we've proven. We've proven it in the past. We've seen it in the past. I feel like as that metro becomes more and more vertically integrated, the timing of that, starting this year and moving into next year, that's what gives me comfort on that gross margin. Yeah, it really does become a, are we growing at the lower end toward 8%, or are we growing at the higher end towards 12%? Couple that with a mid-40s gross margin and our ability to manage our operating investments. Yeah, it really is a revenue growth story in terms of how quickly we can get to the dollar. Okay. Last question from my side, and it would be sort of probably not fair to let you off the stage without asking you about the latest news that has been there, which you haven't confirmed as a company, but in terms of the company exploring strategic alternatives or looking at different options. Any, any color you can provide? To the extent that you can, what's the thought process on sort of where your share price is? What should be appropriate valuation? What the investors are maybe underappreciating as you sort of execute on this growth. I'll start with we never comment on rumors. This was a rumor. It came off the heels of OFC, which was really interesting to us 'cause we had a great show, had tremendous interest at the booth from customers and saw, you know, actual orders coming out of those discussions. We had an investor day where we reiterated our target business model and put out the $1 of EPS in 2025, 2026. You know, it's public that we had a board meeting, you know, at that time. It's just, it was odd timing to us. It created a lot of churn, quite honestly, because then you had competitors out talking to customers saying, "Look at this." Meanwhile, we're, you know, kind of scratching our heads a little bit. Certainly at a $5 stock price, I'm really focused on execution right now. That is, you know, heads down. We gotta, we gotta just continue to do what we say we're gonna do. We gotta hit our outlook. We've got to be very cognizant of the environment that we're in, but I also think that, you know, we got. Our stock price was impacted a lot starting in April when others in the space started pre-announcing negatively. We saw our stock get hit there. We ended up coming out and actually beating our numbers in Q1. We reiterated the year. I am of a firm believer that, you know, markets eventually are rational. We continue to do what we say we're gonna do, and the stock should expand from where it is today. I will turn that to you because you are the expert in the space, not me. I'll take it offline. Thank you. Thanks. I'll wrap it up there. Thank you for the coming to the conference. Thank you. Thank you.