Infinera’s CEO David Heard and CFO Nancy Erba described a paradoxical first quarter during the company’s Q1 earnings call.
“On the one hand,” said Erba, “bookings were in line with our expectations, while design win momentum was unprecedented and the strongest the company has ever seen. On the other hand, quarterly revenue of $307 million came in 4% below our outlook range and was down 22% on a year-over-year basis.”
Heard attributed this revenue decline to a slower release of orders and a pushout of shipments from the first half of the year to the second half of the year.
“We believe these market dynamics will continue through the second quarter before business conditions start to normalize in the back half of the year, enabling us to get back to year-over-year growth in the second half,” he said.
Hyperscalers, managed fiber opportunities
Despite the negatives, Heard said that Infinera is positioned to meet customer needs going forward.
“We remain laser-focused on our priorities,” he said, “which are to grow and take market share in the $11 billion-plus systems market, ramp our business in the growing $5 billion market for coherent pluggables, and leverage our vertical integration capabilities to break into the high-volume $2 billion intra-data center segment driven from the optical payloads of AI.”
Heard reported continued momentum with hyperscalers, thanks in part to the company’s GX portfolio. He also reported that Infinera continues to win managed fiber optical network deals in India, the Middle East, Africa, and Asia.
“These land-and-expand opportunities start out small, but with the expected growth in these regions, we expect them to become a more significant portion of our revenue in the future,” he said.
Behind the decline
Erba delved deeper into the quarter’s financial details, outlining some explanations for the revenue decline.
“Our Q1 revenue decline was primarily attributable to lower volumes in the U.S. across both our major service provider and ICP customers due to the slower release of book ship orders and project pushouts and an overall cautious spending posture from our customers,” she said. “Geographically, we derived approximately 54% of our Q1 revenue from domestic customers, a lower percentage than the trend of the past two quarters.”
Gross margin for Q1 was 36.6%, decreasing 220 basis points year-over-year.
“Compared to the prior year,” she said, “the primary driver of the lower gross margin in the quarter was the higher contribution of line systems to product mix, and secondarily, the impact of fixed costs under absorption from lower revenue and volume.”
Despite overall revenue declines, Erba reported that Infinera’s line systems revenue was up approximately 20% year-over-year which she said positions the company for future transponder deployment.
Operating loss for the first quarter was $25.9 million, and Infinera generated $24 million in cash flow from operations and $16 million in free cash flow.
Erba reported that Infinera anticipates Q1 business dynamics to carry into Q2 and the company gave an outlook of a year-over-year decline of 10% to 15% in Q2. For the full year, the company expects revenue to be down 1% to 5% compared to 2023.
“The near-term operating environment remains very challenging across the industry as our customers continue to work down excess inventory and push out some projects,” she said.
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