Good afternoon. Welcome to today’s conference call and thank you for standing by. My name is Brent and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Infinera Corporation Q4 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise.

After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would like to now turn the call over to Amitabh Passi, Vice President of Investor Relations. Sir, please go ahead..

Thank you, operator, and good afternoon. Welcome to Infinera’s fourth 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 first quarter of our fiscal year 2022.

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 September 25, 2021, as filed with the SEC on November 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. But we ask that you limit yourself to one question and one follow-up, please. With that, I’ll 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 results for the quarter and the full year and then turn the call over to Nancy to cover the details of financial performance. Q4 was another strong quarter for us.

Non-GAAP revenue of $401 million exceeded the high end of our outlook range, while both non-GAAP gross margins and operating margins were above the midpoint of our outlook.

On a year-over-year basis, revenue grew 13% and the second half grew 9% driven primarily by the adoption of ICE6 and strong demand from our products from customers from the Americas and EMEA regions.

Gross margins in the quarter benefited from a higher mix of ICE6 partially offset by elevated supply chain costs, higher line system sales and slightly lower services margin due to a high mix of professional services to install new networks. Nancy will provide additional details of these dynamics in our commentary.

Bookings momentum continued in the quarter. On a year-over-year basis, bookings were up profoundly and set a company record and were nicely balanced across customer verticals and major geographies. Our product backlog was up 100% year-over-year.

Our record backlog provides us greater demand visibility as we enter the New Year and positions as well to execute our growth and profitability objectives for 2022. Our strong Q4 performance was a great way to wrap up 2021, a year and which we were able to navigate an ongoing global pandemic and the increased impact of supply chain disruptions.

Despite these headwinds, we executed our planned financial and strategic goals in 2021, including five key accomplishments that I now like to highlight. First, we delivered against our major financial milestones. We grew revenue faster than the market, despite absorbing 4 to 5 percentage points of supply chain impacts.

We expanded gross margins by 380 basis points at the high end of our 300 to 400 basis point goal, despite absorbing 150 to 200 basis points of increased supply chain costs. And we generated positive and improved operating margins and cash flow from operations.

Second, we drove commercial success across the customer footprint as we secured new Tier 1 design wins and one new Huawei displacement business.

During the year, we announced awards with a very diverse set of global customers, including Virgin Media, Telstra, Telefonica, Telxius, Telecom Italia - Sparkle, Hatif Libya, and Globe Telecom, amongst many other awards. Our customer successes in 2021 included a 400 gig metro win at a major North American service provider.

Commercialization of 600-gig at another Tier 1 ICP and 800-gig growth at major ICPs and CSPs were worldwide. Overall, we had a record and – record bookings and revenue year with ICPs and have grown our ICP revenue at a 30% CAGR since 2019.

And in subsea, a market characterized by stringent capacity and reach requirements, we grew overall bookings by over 50% in 2021. Third, we expanded our product portfolio securing design wins and gaining market share with our compact modular platforms, line systems and metro products.

We grew revenue from our 800-gig ICE6 GX product to the low teens as a percentage of product revenue in Q4, up from high-single digits in Q3. We exited the year with over 30 ICE6 customers, a healthy pipeline and are on track to ramp ICE6 revenue to 20% to 25% of product revenue in 2022.

In addition, line system bookings, a leading indicator of the future high-margin transponder sales grew by 100%. This was primarily driven by ICE6 deployments. And bookings from our metro portfolio, including the XTM 7100 in GX platforms grew by 25% in year.

Fourth, we unveiled our suite have vertically integrated coherent pluggables to expand our addressable market by over a billion and enable an increase in margins from higher levels of vertical integration in our metro portfolio. In June, we launched the Open XR Forum with initial members, Verizon, BT, Lumen, Windstream and Liberty Global.

Over the next couple of weeks and ahead of OFC we plan to announce other major carriers as new members in the forum. This impressive list of members collectively represents 20% of the global telecom CapEx spend.

This is a great start, especially given we only announce the forum in June, and we have a strong pipeline of additional partners interested in joining the forum. Fifth, and lastly, to execute our 8x4x1 strategy that we laid out at our Investor Day last May, we organized the company into two business groups.

One focused on optical systems and the other on coherent optical modules with both groups supported by our services organization. We also bolstered the executive leadership team by bringing in industry veterans from Cisco, Dell, Lumentum and Nokia to accelerate the execution of our growth and scale strategy.

Looking ahead to 2022, our goal is to build on the foundation we established in 2021, the industry trends fueling our business remain robust. However, as we begin 2022, the supply chain environment remains challenging and we expect these supply challenges to persist throughout the year with some relief anticipated in the second half of the year.

These supply chain dynamics have reinforced the importance of our strategic focus on vertical integration, enabling us to have greater control over our supply chain. On the demand side, we see four drivers continuing to play out in 2022.

First, healthy global service provider CapEx environment will be driven by bandwidth demands, 5G and the proliferation of deep fiber architectures. Second, a robust 800-gig cycle based on the industry analyst forecast 800-gig is expected to be a long multi-year cycle growing to almost $4 billion by 2025.

A recent survey conducted by ACG Research found that 85% of service providers plan to deploy 800-gig solutions by the end of 2023, further substantiating the tremendous demand for 800-gig.

Third, new insertion opportunities in the metro and access networks as service providers transition to 400-gig services and drive 100-gig coherent to the edge of the network. And fourth and lastly, an increased level of competitive opportunities to displace Huawei infrastructure.

These demand drivers coupled with the size of our backlog, Tier 1 wins and growing pipeline give us confidence that we’re on the right track to grow and achieve our target business model in 2023.

This model assumes revenue growth of 8% to 12% in 2022 and 2023 gross margin expansion up 300 basis points to 400 basis points per year and double-digit operating margins in 2023. I’m excited about our cash competitive position and our market opportunities ahead of us.

We’ve strengthened our portfolio, bolstered our management team, and are investing to win.

In fact, we set an exciting portfolio – we have a set of portfolio announcements planned for this year’s OFC in San Diego from March 6th to 10th, where you’ll hear more about near-term performance enhancements to our 1.6 terabit ICE6 embedded optical engine, faster ways to integrate and open – manage open transponders in multi vendor networks with our open automation suite, the introduction of our own high performance vertically integrated pluggables.

Today, we also announce that Roop Lakkaraju will be joining our Board of Directors. I look forward to his contributions as he will work with us every day to drive value for our shareholders. Welcome Roop.

Separately, I would like to thank board members Kambiz Hooshmand and Tom Fallon, who have resigned from the Board effective today for their service to Infinera over the years. I know they will continue to be friends of mine and for the company for years to come.

Following these changes, our Board will be smaller, more diverse and reflect a lower average director tenure.

As I close today, I want to reiterate how proud I am of the Infinera team’s resilience in navigating a tough macroeconomic environment while delivering industry-leading products, record breaking revenue and bookings, improve margins and cash flow and winning new customers.

The team’s unwavering commitment drive and support have been personally humbling. I would also like to extend my thanks to our customers, partners, and shareholders for their continued support during a challenging year.

I will now hand the call over to Nancy to cover the financial details of quarter, our first quarter outlook, and the progress towards our target business model.

Nancy?.

Thanks, David. Good afternoon, everyone. I will begin by covering our Q4 results and then provide our outlook for Q1 2022, as well as our planning assumptions for the full year of fiscal year 2022. My comments reflect our non-GAAP results and outlook.

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.

I am pleased with our performance in the fourth quarter of 2021, a quarter in which we achieved record revenue and bookings for the company and exited the year with substantial increase in our backlog.

We delivered this performance while navigating a global pandemic and a tough supply chain environment that continued to constrain our top-line and put pressure on our margins.

Despite these transitory challenges, we accelerated revenue growth to 9% of the second half of the year and remain on course to execute to our 8x4x1 strategy and deliver on our target business model in 2023.

Q4 revenue of $401 million was up – $400 million was up 13% year-over-year with strong product revenue growth of 19%, primarily driven by the growth in our 800-gig ICE6 solutions and strength in the Americas and EMEA regions.

We derived 58% of our revenue from international customers compared to 64% in the year ago quarter, and no customer contributed to greater than 10% of our revenue.

Q4 gross margin of 37.2% came in just above the midpoint of our outlook range, benefiting from higher volumes and the ramp of ICE6, offset by approximately 200 basis points from the impact of elevated supply chain costs and another 200 basis points impact from a higher mix of lower margin line system.

Q4 services gross margin was slightly lower on both a sequential and a year-over-year basis, due to higher logistics costs and a higher mix of professional services from an increase in installation projects. Operating profit in the quarter was $17.1 million, equating to an operating margin of 4.3%, which was at the high end of our outlook range.

Operating margin benefited from higher revenue, higher gross margin, and good control expense in the quarter, relative to the upside we delivered. Operating expenses of $132 million were just above the midpoint of our outlook range, primarily due to higher sales commissions resulting from a very strong bookings and revenue quarter and year.

The resulting EPS in Q4 was $0.03 a share. Moving on the balance sheet and cash flow items. We ended the quarter with $203 million in cash and restricted cash. During the quarter, we generated $1.4 million of cash from operations down on a year-over-year basis.

As we accelerated investments in R&D restored bonuses, paid higher sales commissions, and made strategic investments in working capital, including inventory. Free cash flow in the quarter was a negative $7.7 million. And we ended the quarter with a zero balance on our credit facility.

As David mentioned in his commentary, fiscal year 2021 was a strong year for us with notable progress across our business model, new product introductions, customer design wins, and talent acquisition. For the full year of 2021, we delivered revenue of $1.43 billion up 5% on a year-over-year basis.

And about 200 basis points above projected market growth. We had a record bookings year and exited the year with product backlog up a 100% on a year-over-year basis. The expanded gross margin of 37.6% up 380 basis points on a year-over-year basis. And at the high end of our 300 basis points to 400 basis point margin expansion goal.

We expanded operating margin to 2.1% up 260 basis points on a year-over-year basis. And we generated positive cash flow from operations.

We delivered these strong results and a challenging supply environment, which impacted our top-line growth by four percentage points to five percentage points for the full year and constrained our gross margins by 150 basis points to 200 basis points as we absorbed additional supply chain costs.

Looking ahead to the first quarter of 2022, we are encouraged by the demand drivers fueling our business. These drivers combined with our backlog and continued order intake, give us optimism for 2022. At the same time, the supply chain challenges are real and even more intense than what we have experienced in the past few quarters.

We expect this supply environment to remain difficult through at least the first half of the year, followed by some relief in the second half as we add inventory and bring up additional capacity.

Taking these factors into account, we are forecasting Q1 revenue to be in the range of $345 million to $375 million representing approximately 8.5% growth on a year-over-year basis at the midpoint of the range constrained entirely by supply.

Sequentially the revenue forecast for Q1 is slightly better than the seasonality we have experienced over the past three years. We are forecasting Q1 gross margin to be in the range of 37% plus or minus 150 basis points down slightly on a year-over-year basis.

Compared to the first quarter of last year, the primary factors influencing our gross margin outlook include a higher mix of ICE6 revenue, which is accretive to the company’s gross margin.

That is being offset by approximately 300 basis points from the impact of higher supply chain costs as we bear the burden of higher component and logistic costs and additional capacity and inventory costs, as we plan for the continued growth in ICE6 through this year.

We are planning for Q1 operating expenses to be in the range of $130 million to $134 million. As we increase investments in both our sales organization and R&D to take advantage of the market opportunity ahead of us.

Within R&D, we are investing in pluggable vertical integration, metro platforms, and software areas critical to driving top-line growth and margin expansion. We expect Q1 operating margin to be 0.5% plus or minus 200 basis points approximately flat on a year-over-year basis at the midpoint. During the quarter, we expect to use cash from operations.

As we match inventory with our backlog. Below the operating income, we assume about $5 million for net interest expense and $7 million for taxes.

Finally, we are anticipating a basic share count of 213 million shares for Q1 in the event that we are profitable on a non-GAAP basis in the quarter diluted share count should be approximately 223 million shares.

Looking ahead to the full year of 2022, we intend to make continued progress toward our target business model and plan to grow revenue by 8% to 12% expand gross margin by 300 basis points to 400 basis points and expand operating margin by 200 basis points to 300 basis points.

Furthermore, we are assuming a typical seasonal cadence to our business this year as well with a seasonal uptick in revenue and margin in Q2 and expect revenue and margin in the second half of the year to be greater than the first half.

I would like to close today by echoing David’s thanks to the Infinera team and to our partners, customers, and shareholders for your continued support. We have made tremendous progress these pasts few years in enhancing the financial profile of the company by putting the right team in place, launching new products and securing key customer wins.

We know we have more work to do, and we look forward to delivering additional shareholder value in the years ahead. Brent, I’d now like to open the line for questions..

[Operator Instructions] Your first question comes from David Kang with B Riley. Your line is open..

Hey Dave..

Thank you. Yes, good afternoon. Thank you. I guess my first question is on 800-gig customers went from 25% to 30% and you’re still targeting 20% to 25%. I’m just wondering if you can talk about customer concentration.

Is that going to be driven by maybe just you know, a couple of customers or, more broader than that?.

No, it’s broader. I think when you look at, we don’t have any 10% customers now we could use a little bit more customer concentration, but I think when it comes to ICE6, 800-gig, we’re continuing to win both in this quarter. And we obviously racked up a bunch of design wins last quarter.

So customer wins are really across the footprint, both with ICPs and CSPs with ICPs being a little bit lumpier in terms of larger initial deployment CSPs taken a little bit longer when they roll new products into their networks..

Got it. And my follow-up is on 800-gig, 20% to 25% for the years. So, I just wondering, what the exit rate will be in fourth quarter, I’m assuming it’s going to be much higher than 25%..

That’d be right on kind of a weighted average basis. Yes.

So, if you think about us finishing Q4 in the early teens, which is exactly what we said same as what we had mentioned for finishing in high single-digits in Q3 that continues to build quarter over quarter over quarter with an exit rate that should be greater than 25%, which is why you’ll see the margins both in terms of, as we build that out, our entitlements become even much better.

So our margins get even stronger as we go throughout the year..

Thanks, Dave..

[Operator Instructions] Your next question comes from the line of Alex Henderson with Needham. Your line is open..

Great. Thank you very, very much. I was hoping you could talk a little bit about the pricing environment. There’s still obviously a lot of raises and cost of supply chain industry-wide we’ve heard some players are actually pushing up pricing.

I know that’s never happened in this industry before, but I was wondering if you’re getting any pricing help, and then I have a follow-up..

That’s never help in this industry. Right. Yes and look, I don’t think we’re going to go through our complete pricing strategy. Our view is right now, there’s a bunch of customers that are looking to deploy bandwidth. We’re trying to give them the price value by heavily working Moore’s Law of optical and getting in that price per bit.

You’ll see some new, some new announcements at OFC, which will help even more. We go through kind of a cleanup on our list structure now, annually.

But again, we’re trying to be very careful that we’re a market taker in this environment, and we want to be very cautious of that and continue to drive the impact of our R&D to the lowest cost per bit without, kind of the same impact we’re getting from our supply base on temporary price increases. We are seeing it in the industry.

We’re going to be opportunistic to continue to take share while keeping to our margin commitments..

Yes.

So the question and this isn’t the follow-up, yes, the question really is what are you doing and – what are you seeing? Did you – are you actually seeing, can you quantify the price height by your competitors at all?.

We’re – now we’re seeing, we are seeing and hearing from some of our customers that they are being approached by some telecom infrastructure companies with price increases. And again, our response to that is, we’re trying to provide them solutions in an open architecture environment to be able to take share and drive lower costs with newer platforms.

I think all of this is, yes, go ahead..

So the question, the follow-up question I wanted was earlier on the backlog, I think you said the backlog is up a 100%. But I guess I don’t have a clarity on what the dollar value of that backlog is relative to the base. So, I don’t know what a 100% of what, right.

So can you give us a dollar characterization of what the backlog looks like?.

Hi, Alex we’re not going to disclose the backlog number per se, but I can share with you that our book-to-bill was meaningfully above one, this year and we’re starting the year with great coverage from our backlog as we go into Q1 and for the year. And it gives us even more confidence in the revenue growth that we’re projecting for 2022.

And as David said, you’ll see that start to grow through the year, quarter to quarter to quarter. We’re really pleased that our – we were able to hit the high end of our outlook range for revenue in Q4 and feel very well positioned as we go into 2022..

All right. Thank you..

Thanks Alex..

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

Great, thanks. Sorry. Joined late. So hopefully I’m not rehashing. Quarter was good in December, and I imagine that some of this might have been revenue recognition on projects that you had shipped during the course of the year.

Could you quantify where you are in terms of acceptance on new products and how that might have contributed to the reported quarter?.

Yes, I would tell you that the overachievement to the midpoint that we provided in the outlook, wasn’t just the, the acceptance. It was actually better execution from the team on actually getting shipments out heavier flow of bookings than we expected with a nice match to the supply and just better execution from the team.

There has been no change in actually the acceptance criteria or acceptance intervals across our footprint during that time..

That’s helpful. And then I wanted to just follow-up on what you’re seeing in terms of component supply issues and drill down a little bit. And part of the reason for this question is that with, with the pick architecture, you’ve got a different build and not like maybe all your peers in terms of your components.

So could you maybe double click on what you’re seeing as constraints currently? Thank you..

Yes, it’s a good question. And I think what Nancy had mentioned in her comments is, look, I think we’re going to all live with this supply chain environment for 2022.

I think we’re beginning to see the back half with commitments that we’ve put in place as well as commitments we’re getting back from the supply chain that are becoming a little bit more reliable for the back half of the quarter. What we are seeing Simon is kind of more acute supply chain cost being extracted.

Maybe this is the final wave from folks that are providing call it processors for packet switch architectures. Obviously a lot of our optical stuff is we have a little bit more under our control. So it really is around, think of them as microcontroller’s, processors, packet processors and switch fabrics out in the network space.

So in comparison to some of our competitors, those might be bigger constraints than we have. But we’re obviously mindful that, we’ve been to challenging with them too, but the team executed well in Q4..

Thank you very much for taking the questions. Appreciated..

Your next question comes from the line of Alex Henderson with Needham. Your line is open..

Hey, Alex,.

I wasn’t expecting to get back in that. So I’m, I got my headset on here. We have a second..

No worries. Hey, back to your last question, Alex, one way you can kind of gauge, the kind of build up that we’re having, is as we put the K out and have RPOs disclose there that we’re just seeing that continue to grow. So, our coverage overall for the first half and even for the first half is pretty profound.

We also see when we’re looking at orders that are coming in, we measure what orders for this quarter, plus one and for orders outside of that. So, we kind of have a more normalized view of bookings as we go. So, we’re not getting too far ahead of our skis..

Yes, that’s smart way of doing it – duration is misleading a lot of people or relative to the backlogs..

Right..

I wanted to address, the component issue from a slightly different perspective as you build out your ICE6 production and that becomes an increasing portion of your business.

Does that have a measure it impact in reducing your exposure to some of the areas that are, in short supply or particularly constrained, or is it as you described a moment ago, just processors that sit around the element, the other elements that therefore is not directly related to the 800-gig platform per se..

Yes. Good question. I’d say three follow on tidbits for you. One it does kind of happen implicitly as people. People are going to transition from legacy platforms quicker to newer platforms. So that is helpful.

When they go off the legacy stuff that they might – we might have had a commercial solution and merchant integration, and now we can go into our own vertical integration. That’s helpful.

And we do see customers that are much more sensitive of the age of the profile based on the in the supply chain environments, not only you can’t get the parts, but many suppliers are coming out in end of lifeing older geometries, which is going to push people to fresher platforms.

Number two, yes, we’ll still will have some dependence on microprocesors and other things for fans and packet processing in the platform just less dependent, right, something that we want to consider.

And thirdly, you’re aware that when we run our fab and our own packaging, while we haven’t had a huge entitlement bump like we used to we will see, and as Nancy described, we will see a nice entitlement push when we move from Q1 into Q2, Q3, Q4 moving forward from a volume perspective of ICE6.

Did that help Alex?.

Absolutely, exactly what I was looking for. On the DSP side, have you seen a change in pricing behavior out of your primary supplier in the sense that we’re understanding that they’ve raised prices across most of their products by as much as 20% and including a 10% price hike effective of February 1.

So have we seen any pricing changes in the DSP supply that, that you’ve gone some third parties?.

Yes. I think we absolutely have, and that as Nancy talked through a little bit more pressure on the PPV. As we ended the year, the good news is when we look at the bill of material for what we do given what we do in the fab, what we do in the packaging, the DSP itself is – it’s a piece of it, but it’s not a huge piece of the bill of material.

So what we’ve worked on over the last year are ways to countervail that. And again, you’ll hear a little bit more about that in OFC to get more again more efficient bits per dollar out of the platform..

Hey, thanks, Alex. Apologies. There is actually several people in the queue, Alex. Thank you..

Thank you..

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

I’ll jump in before Alex’s third turn.

So just a question, Nancy, maybe as you look forward to the gross margin outlook for 2022, and calling for the 300 to 400 basis point uplift throughout the year, how much of that is from kind of supply chain getting back some of the supply chain costs or those cost mitigating or how much of that is from the uplift of ICE6 becoming a greater piece of the portfolio.

And then maybe second question, just any customer categories that you’re expecting to lead growth in 2022. Are there any kind of project based dynamics like we saw with Tier 1 that we should just be mindful of that would lead to different kind of growth rates between the categories? Thanks..

Sure. No problem, Meta. Yes. As we look at the trend in margin through the year, and I’m sure you’re doing the math, just like we do in terms of where we’re looking at Q1 and how we exit the year with 300 to 400 basis points up, it’s – we are going to see the continued improvement quarter-over-quarter.

I am planning for as I mentioned the first half still remaining, very, very tight on supply and having those pressures we may see some relief in the back half, but really it’s the continued ramp of ICE6 and that margin impacting from the vertical integration to our overall gross margin for the company.

But you’ll see it be kind of [Technical Difficulty] the second half really of stepping up in the gross margin..

And then on the customer category piece, I’d say we continue to see strong uptake from the ICPs in this open line system environment. We’re now seeing that and CSPs worldwide. So we are – we had a number of Tier 1 design wins last year. And we continue already this year with those.

And so we expect to be ramping those as we exit the quarter, which you should see some relief in that Tier 1 category that you’re talking about as well as continued strength in the ICPs very, very strong business in Europe. And we’re looking to ramp up our presence in Asia..

Great. Thanks..

Thanks, Meta.

Operator?.

Your next question comes from line of Rod Hall with Goldman Sachs. Your line is open..

Hey guys, thanks for taking my question. This is Bala on for Rod. Congrats and good results by the way, especially in this environment. David, I want to start off with 800-gig mix. It was high single digits last quarter. It’s now been low teens in Q4 and full year 20%, 25%, which probably indicates that ending the year it would be about 30% ICE6 mix.

So you mentioned new customer wins, but just wondering what’s the visibility for this 20%, 25% ICE6 mix. They have either in the form of existing backlog of orders or even pipeline. I have a follow-up..

Excellent. Yes, all of the above, but quite a bit of pipeline – but quite a bit of backlog, I mean, we have existing backlog for the product. We have design wins that, that we haven’t yet deployed and reached the orders for. And we have a growing pipeline of opportunity. So it’s a nice mix.

And again it’s a nice global mix and it’s a nice mix between CSPs and ICPs. But a substantial backing of backlog to back up the confidence in that 20% to 25% number, as well as a couple of quarters now of revenue hitting where we said it would hit in terms of its percentage of revenue. So we feel pretty solid there..

Very good. And again competition in 800-gig, you mentioned 30 customer wins for the year. Just wondering how many of them were against what those that you went head to head against your major U.S. competitor..

Yes. Look, in an open architecture environment, the best transponder wins, we’re not keeping public score of how many of those are there, but very few of our customers go into a single supply scenario. So they’re all competitive environments. And they look for, again, the best solution, the lowest cost per bit.

Some people may be trying to provide that via 400 gig. Some may be providing it via a single wave 800-gig. We just tend to provide it in a 1.6 terabit to wave 800-gig platform. So, it’s a mix..

Got it..

Thanks, Bala..

Thanks so much..

Your next question comes from line of Jim Suva with Citigroup. Your line is open..

Thank you. And I just have one question. A lot of the discussion was focused on gross margins, which was rightfully so.

Could we just take it one level a little bit lower and focus a little bit on operating margins kind of as the year progresses, because I would assume we’re seeing some inflation or salary payroll increases or R&D or something? Can you talk to us about the gross margin flow through? Should we expect a similar flow through to operating margins or do we need to adjust for some inflationary environment for operating margins? Thank you..

So great question, right. We are expecting for the year, as I mentioned in my comments, 200 to 300 basis point improvement year-over-year on operating income. Certainly, we are planning for as everyone is in this inflationary environment step up to a certain expenses there.

But managing through those as we did in fiscal year 2021 really carefully in terms of our expense profile. But you will see a step up investments in sales and marketing as we go after the market growth that we need to do some further investing there.

In addition to the ongoing R&D and pluggables and metro and software, as I mentioned, because we really want to see that vertical integration percentage go up to be able to flow through to the bottom line. But you can expect 2 to 3x what we did in fiscal year 2021 or 2022 in terms of operating margin..

Thank you so much..

Your next question comes from line of Tim Savageaux with Corporate – Northland Capital Markets. Your line is open. Your next question….

Am I still there?.

Yes. We hear you..

Okay, great. Got to be quick on the draw here. I want to go back to –.

Alex, forget it again..

We’re having some technically challenges. Go ahead..

I want to go back to 800-gig mix here and try and get underneath those dynamics a little bit. And I don’t know if you’ve given a contribution for the full year 2021, but given what you’ve said about the second half, I’m assume we’re in the mid-single digits or maybe mid to high. And so you’re looking at a pretty dramatic increase in 2022.

And I guess the overall question is how incremental is the 800-gig business to the total business? I mean looks like you could grow as much as fourfold, certainly 3.5 fold. In 2022, obviously, you’re cannibalizing some of the older stuff.

So would – do you look at these dynamics of more bringing in new customers with 800-gig or maybe current customers transitioning from previous generations and when you net that out what kind of overall growth dynamic do you see?.

Yes, it’s a good question. So again, overall, we see the 800-gig ICE6 product line pretty confidently hitting that 20% to 25%.

As you said, some portion of that is people moving from previous generations, whether they’re ours or more hopefully for us, our competitors as people roll off the older technologies, we’ve kind of baked that into our overall growth rate.

So that 8% to 12% does include any kind of single-digit fall offs, which typically happens in older product lines as you go through the cycle. So again, higher pickup with the ICPs and with CSPs just taking a bit longer to onboard into their environment. So the 8% to 12% includes that offset..

Yes, that’s sort of a netting. And that’s most of your competitors and I think some of this is supply catch up and maybe this is true for you guys as well, are looking to grow kind of in that double-digit, low double-digit area. I mean, as you look at Infinera’s growth relative to the overall market.

I mean, do we need to kind of normalize for those supply issues and look for an above trend growth here this year? Or you’re talking about that growth being sustainable into 2023? Or I guess it’s a long way saying….

Yes, good question..

Of market growth kind of baseline market growth changed or accelerated a bit?.

Yes, it’s, we probably accelerated that. I mean, look we came back in April, May in our Analyst Day and said we were going to grow 8% to 12% and many people in the after calls and suggested we might want to go calm to down a little bit. Right.

And we saw that based on the market dynamics of what were going on with open the growth of 800-gig the open line system growth. And our line system bookings, which grew a 100% year-over-year. So, we do believe we’re going to grow faster than the market. The market says the analyst today say 3% to 3.5% growth for this year. I just don’t buy it.

I think the market will probably grow more like 5%. Now, I think there are winners and losers in the market. So there are certainly people that are going to lose share like the Huawei infrastructure opportunity, that’s a substantial portion of the market. It’s $2 billion outside of China annually.

So, I expect the market analyst to – I’ll wait for them, they’ll change their view, on real numbers. But I expect that to maybe move from 3% to 3.5% maybe up to 5% and we still expect to grow well above that. I do expect, and we set back in May of last year. We expected that to continue into 2023.

So, I don’t think that we measure our bookings and what we think are people stocking for a later period very carefully. And we feel good about that 8% to 12% growth rate in 2022 and in the continuance, as long as we keep our heads down and execute, do the right thing for our customers and shareholders..

Thank you, Tim..

Okay. Thanks very much..

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

Hi guys. Thanks very much. I guess my question, I was wondering what the mixture of vertically integrated products was in Q4. I think you guys have given us that number in the past, you gave us the ICE6 piece, certainly, but I’d love to know what the bigger number is for overall..

Yes. Give me one second. We’re pulling it up right now..

Yes, it was in close to mid-40s, George in the quarter..

Okay. Got it. And if memory serves, you were also close to mid-40s in Q3, so it sounds like the growth in ICE6 is coming at the expense of, I presume the heritage DTN-X product.

Is that the right read here or am I missing something?.

No. So remember it’s also on a lower number. So, I think what we’re seeing is new opportunities. We didn’t see a precipitous decline from Q3 to Q4 on that. So we were in the – I want to say it was 42% or 43% in Q3 and then in the mid-45%, 46% in Q4, which obviously on a higher revenue base. So, no, I wouldn’t make that as a for drawn conclusion..

Got it. Okay. So it’s a mix of new customers and then….

Correct..

Existing. And then I guess, I also wanted to ask about the XTM portfolio, you guys didn’t say much about it here. I know metro’s been a source of growth for you guys in recent quarters. That is not a vertically integrated product.

I know you guys are looking to redesign XTM, but do you guys have a sense for when those redesign products will come into the marketplace, and help you kind of juice that vertically integrated mix?.

Yes, we do. So when did our Analyst Day, we talked about the one great – we had a great year record year with XTM bookings. Overall metro grew 25%, and I believe was about 45% of our overall bookings, product bookings.

As we get into 2023, you’ll hear a little bit OFC about our pluggable that we will have our own CFP2 and DD pluggables available to be able to provide 400-gigs ZR Plus, as well as our XR point to multipoint of which that forum is growing. That will start phasing in, in the first half of 2023, and should significantly improve our margin profile.

And those CFP2s can be used on older products as well as newer products..

Got it. Very good. Thank you very much..

Thanks, George..

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

Yes. Hi. Thanks for taking my questions. Have a couple here. So just starting first one with just a broader one. I know the 8% to 12% you’re guiding for revenue growth in 2022. I mean, that’s a strong growth guidance in itself, but that’s more in line with your long-term guidance that you’re presented at the Analyst Day.

And when we look across most optical companies that have talked till date during this earning season, or recently most are expecting to exceed their long-term rate growth rates over the next 12 months, given some of the pent-up demand that we are seeing. So just wanted to get your thoughts around that.

I mean, this is still a good growth number, but why not more upside to your long-term growth rates. And I have a follow-up with that. Please go ahead..

No, I appreciate the comment. But we also are empathetic to others in this industry that, when you have a supply chain shortage and miss your number, you guys, aren’t very happy. So ignore our shareholders. So, I think we’ve done a good job as you saw with last year and with Q3 and Q4, the back half grew at 9%. Q4 grew at 13%.

We’re just not trying to get ahead of our skis. Again, we’re very, very in tune with our supply chain environment and we want to provide you the right range as we go. As Nancy said, that 8% to 12% was entirely constrained in our outlook was constrained by supply, which we expect to continue through 2022.

We might see some light as we get to the back half just based on inventory. That’s been provisioned in some of the activity we see among to the supply base of starting to give a little bit clearer of a picture of how capacities are going to be met, but it’s too early to tell that. So 8% to 12% is pretty good.

Our intention is always to beat that like we came at the high end of the range in Q4..

Follow-up, I mean, yes, you did have some Huawei in displacement revenues already starting to creep in 2021.

How should we support the magnitude of that in 2022? How much of a contribution is it from that aspect in 2022?.

Yes, I think when we did our Analyst Day, we kind of had a bar chart that we had an indicative view and it hasn’t really changed actually. So, we see it, it was a nice taste, a nice appetizer in 2021, but I think we set all along.

We would see the design wins and RFPs really scaling, and we thought that we’d see revenues from that really beginning to take hold as we got into 2023. And we did contemplate that way back in May when we gave you our 8% to 12% growth rate..

Okay. Thank you. Thanks for taking my questions..

No, thank you..

[Operator Instructions] Your next question comes from David Kang with B Riley. Your line is open..

Thanks again. Nancy, I may have missed it, but fourth quarter, what was the impact on – you talked about margin impact.

Well, what about revenue impact? Was it approximately $20 million, as you said before?.

Yes. In that range. So, we did still have constraint on our revenue in Q4 because of supply..

Got it. And my follow-up is, you said the supply impact was about four to five points for 2021. Should we expect, nearly all of that four or five points to be shifted to next quarter? So it’s more like 8% or 6% on top of that, you’re adding by 4% from last year.

So you’re, you know, that’s how you get to like 10% growth this year, something like that?.

We expect in the supply chain environment that backlog and lead times are extended and backlog is going to continue to – we’re going to bleed off the older backlog as the lead time hits, and we’ll be building out new backlogs for the future.

So we’re not – our view – all along was the 8% to 12% growth if the supply chain environment attenuates and we can overachieve that, that’d be great. But right now we don’t think it’s prudent to call that..

Got it. Thank you..

Thanks, Dave..

There are no further questions at this time. I would like to now turn the call back over to Mr. David Heard..

Thanks. Appreciate the thoughtful questions. Appreciate the engagement, 2021 was a great year for Infinera. We achieved our financial targets. Demand was robust, new products, ramped nicely, and our momentum with customers continue to build and continues to build as we sit here today.

We feel good about our position and the opportunity in the future for both our financial targets and our strategic goals. So, we couldn’t do that without the extended global Infinera team, our suppliers, our customers, and again, our loyal shareholders. So thank you all. And be safe. Be well. We look forward to a bright 2022..

Thank you..

Ladies and gentlemen, thank you for your participation. This concludes today’s conference call. You may now disconnect..