Infinera (INFN) Q1 2022 Earnings Call Transcript

Infinera (INFN 2.12%)
Q1 2022 Earnings Call
May 03, 2022, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Infinera Corp. first quarter 2022 earnings call. [Operator instructions] Thank you.

Amitabh Passi, head of IR, you may begin your conference.

Amitabh Passi -- Head of Investor Relations

Thank you, operator, and good afternoon. Welcome to Infinera's first quarter of fiscal 2022 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 roadmap, sales, growth, market opportunities, manufacturing operations, product, technology and strategy, statements regarding the impact of industrywide 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 second quarter of 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 25, 2021, as filed with the SEC on February 23, 2022, 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 Reg G -- 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. [Operator instructions] I'll now turn the call over to our chief executive officer, David Heard. David?

David Heard -- Chief Executive Officer

Thanks, Amitabh. Good afternoon. And thanks for joining us today. I will begin with a review of the results for the quarter and provide some color on the broader market context.

And then I'll turn the call over to Nancy to cover the details of our financial performance. We continue to benefit from strong demand and deal momentum in the quarter, both of which were above our expectations, especially following a very strong Q4 2021. However, our Q1 financial results did not represent our full potential and were at the low end of our outlook range due to uncontrollable and previously unforeseen supply chain developments late in the quarter. Non-GAAP revenue was just below the outlook range, while both non-GAAP gross margin and operating margin were within the low end of the range.

From a bookings perspective, we had a big quarter, especially in the US coming from both ICPs and service providers. Overall, bookings grew in the double-digit percentage range on a year-over-year basis, and we ended the quarter with a product book-to-bill meaningfully above one. This was our sixth consecutive quarter with book-to-bill ratio above one. Not surprisingly, our product backlog set another quarterly record and was up almost above 20% sequentially, and over 100% on a year-over-year basis.

However, from a revenue perspective, we faced two anticipated headwinds late in the quarter. First, a $5 million impact due to governmental trade sanctions and our decision to suspend operations in the Russian Federation in early March, the right decision. Second, a $20 million impact from two new supply chain related developments, including first, project delays due to customer dependencies, meaning we shipped the hardware, but our customers were delayed in commissioning their network to allow for revenue recognition due to challenges with their site readiness, availability of customer resources and customer furnished installation material. This timing impact was split roughly across product and services revenue.

We also experienced a relatively smaller impact from supplier decommits and push outs, partially caused by the COVID shutdowns in China in the last two weeks of the quarter, a time when we typically ship a very high percentage of our quarterly revenue. These new supply related impacts occurred against the backdrop of an already difficult semiconductor environment. The combined effect of the higher logistics, component cost variations, particularly in the broker market, and lower volumes impacted gross margin in the quarter by an incremental 150 basis points to 200 basis points versus our earlier expectations. On the customer front, we continue to secure new large deals with well-known brands at a faster pace than originally expected, across long haul, metro and subsea applications, further validating that our 8x4x1 strategy and refreshed portfolio are winning in the market.

In addition to our announced wins in Q1 with customers like Zayo, Windstream, PCCW, among others, we had a few other notable brand name wins. First, we secured an ICE6 win with a significant Tier 1 service provider in Western Europe. Our momentum and performance leadership in subsea are starting to translate into meaningful terrestrial network wins. Second, we signed a large metro deal for our GX product with a major US service provider, one of the largest deals in our history.

This is a multi-year deployment that we believe will benefit from improved margins as we integrate our own pluggables in the first half of next year. And third, we successfully onboarded a new top ICP with our GX family of products. We have very strong momentum in the ICP segment and for the first time in several years, an ICP was our number one customer in the quarter. ICE6 revenue grew to the high teens as a percentage of product revenue in the quarter, up from the low-teens last quarter.

Bookings have started out strong in Q2. And we're in the middle of several certifications of major ICPs and Tier 1 service providers. We remain on track to ramp by 6% to 20% to 25% of product revenue in 2022. Next, the GX metro product had a record quarter, with bookings up almost 200% year over year, driven by a combination of new wins and growth in existing accounts.

We are winning new metro deals at a much faster pace than our prior expectations. While these wins have a near term margin impact as we lay out common infrastructure, the expanded footprint lays the foundation for margin expansion in 2023 when we vertically integrate these platforms with our own products. And finally, we saw continued growth in open line systems, a good leading indicator of future high-margin transponder sales for long haul and subsea. The subsystems business group achieved several significant milestones for the quarter.

First, our 400 gig XR DSP, which is ZR plus compatible and the industry's first point-to-point and point-to-multipoint DSP, was delivered from the fab and is performing well. Initial testing is ahead of schedule. Second, we began early production of our TROSA, the optical front end that represents almost 65% of the bill of materials in pluggable. As a reminder, the DSP and the TROSA are the two critical building blocks in the pluggable and we're off to a good start with both.

We are planning for our first pluggable samples to be available in the beginning of the third quarter and to start ramping revenue in the first half of 2023 and then to drive 100s of basis points of gross margin improvement in our metro products once we integrate them into our platforms. And lastly, membership in the open XR forum continues to gain traction. During the quarter, we announced the addition of five new service providers to the forum, including AT&T and Telefonica and the list of service provider members now collectively represents over 20% of the global telecom capex spend. Furthermore, the first set of equipment manufacturers of routers, switches, servers and wireless RAN, including Juniper, Sumitomo and Arrcus have joined the forum.

We have a healthy pipeline of familiar network equipment manufacturers interested in joining. These proof points validate that we're on track to productize our pluggables, vertically integrate them into our platform and create what is potentially a new billion dollar plus addressable market to point to multipoint pluggables. There is tremendous momentum in our business. We're winning new customers, growing with existing ones, scaling our ICE6 800 gig in metro solutions, and introducing innovative products like our pluggables and software automation suite.

The underlying demand drivers are healthy and as our customers cope with increasing bandwidth needs to accelerate the rollout of 5G, mobile edge compute and deep fiber architectures. These dynamics are playing out, while the industry's number one optical infrastructure vendor, Huawei, is excluded from many global markets. Looking ahead to Q2, we anticipate continued healthy demand, given our bookings momentum and the expectation of a strong capex cycle continuing. At the same time, we believe the acute macroeconomic and supply chain pressures from Q1 will continue into Q2.

In our Q2 outlook, which Nancy will cover in detail shortly, we've incorporated the impact of suspending our operations in Russia, as well as the projected temporal impact of further customer delays and product push outs due to constraints on the customers' end. This is a timing impact only. Despite these challenges, we expect to grow revenue sequentially Q1 to Q2. As we look out further into the year, we now believe 2022 will be a tale of two halves, not too dissimilar to 2021, albeit for different reasons.

We expect the lower first half of the year constrained entirely by supply, followed by a meaningful uplift in our financial performance in the second half with year-over-year revenue growth in the second half at or above the high end of our 8% to 12% range and gross margins in the 40% range as we exit the year. We anticipate the second half of the year will benefit from the continued ramp of our own production of ICE6, conversion of our backlog of revenue, partial benefit from first half push outs of those projects, as I mentioned, we're timing-only based and some supply chain relief given the actions we've taken over the last six quarters will continue to intensify. Specific to the supply chain, we believe there are at least two developments that are unlikely to be long lasting and therefore, temporary in nature. First, we expect the impact of the COVID-related shutdowns in China to persist through Q2, and we're assuming some relief from these shutdowns in the second half of the year.

Second, we don't believe the elevated pricing levels that we're seeing in the semiconductor broken market are sustainable. And that, frankly, they're running out of supply, which forces more direct negotiations with suppliers, which is proving healthy for forward forecasting. Taking these two factors into account, we remain focused on the elements we can control. The Infinera team has been working diligently over the last six quarters to eight quarters on the following five areas.

First, we continue to qualify additional sources of supply, including the redesign of parts for substitution. Second, we have significantly increased purchase commitments to our contract manufacturers, commensurate with the longer lead times and increasing demand. Third, we're investing more heavily in hardware cost reduction programs. Fourth, we're significantly increasing production capacity of ICE6 internally, given the robust demand we are seeing.

And lastly, we're adjusting selected commercial terms with suppliers and customers. These actions have the objective of mitigating some of the supply chain costs and revenue impacts, which I highlighted earlier and our enabling us to remain on the path to achieving our target business model. As I close today, I want to reiterate our confidence in Infinera strategy, refreshed portfolio, competitive position and customer momentum. We've made tremendous progress and our team continued to work through some unprecedented times and challenges.

I'd like to thank the Infinera team for their continued focus, intensity and dedication for servicing our customers during these dynamic times, while taking care of one another. The Infinera culture is intensely focused on doing the right thing. And our thoughts and prayers go out to everyone who has been impacted by the crisis in Ukraine. Finally, I would like to extend my thanks to our customers, partners and shareholders for your continued support.

I will now hand the call over to Nancy to cover the financial details of the quarter and our outlook for the second quarter.

Nancy Erba -- Chief Financial Officer

Thanks, David. Good afternoon, everyone. I will begin by covering our Q1 results and then provide our outlook for Q2 '22. My comments reflect our non-GAAP results and outlook.

For your reference, on our Investor Relations website, we have posted slides with financial details, including our GAAP to non-GAAP reconciliation to assist with my commentary. As you heard from David, demand in our fiscal first quarter remains strong, coming in much better than our expectations, particularly after a very strong Q4 of '21. We had another quarter with a very strong book-to-bill ratio and set a new quarterly record for both product and services backlog. However, the industrywide supply impacts proved more challenging than our expectations, resulting in our financial metrics coming in below our plan.

Despite these transitory challenges, we feel good about our strategy, deal momentum, new product milestones and NPI ramp and remain committed to delivering our target business model. Turning to the financial details of the quarter. Q1 revenue of $339 million grew 2% year over year, with product revenue up over 5%, while services revenue was down 8% on a year-over-year basis. Compared to the first quarter of last year, product revenue benefited from higher ICE6, GF metro and line systems revenue, but was attenuated by severe supply constraints and the suspension of our operations in Russia.

Services revenue declined year over year primarily from a recent dynamic, where some customer projects are being shifted out due to their own site readiness and resource constraints, coupled with the impact of our operations in Russia having been suspended. Services bookings, however, were strong in Q1 and we are entering Q2 with record backlog. Geographically, we derived 50% of our revenue from domestic customers in the latest quarter, compared to 48% in the year-ago quarter and 42% in Q4 of '21. And no customer contributed greater than 10% of our revenue in the quarter.

Q1 gross margin of 36.2% came in below the midpoint of our outlook range, primarily due to an incremental 150 basis points to 200 basis points of supply chain impacts from higher component costs and lower volumes, and secondarily, from a higher contribution of line systems and metro common infrastructure. Partially offsetting these factors was the positive contribution to gross margin from ICE6, which ramps to the high-teens as a percentage of product revenue in Q1. Operating loss for the quarter was $3.5 million, equating to an operating margin of negative 1%, which was below the midpoint of our outlook range. Operating margin in the quarter was impacted by lower revenue and gross margin, partially offset by focused expense control.

Operating expenses in the quarter of $126 million were below our outlook range of USD130 million to USD134 million. As we tightly managed spending, while maintaining investments to keep our innovative programs on schedule, the resulting EPS in Q1 was a loss of $0.07 per share. Moving on to the balance sheet and cash flow items. We ended the quarter with $204 million in cash and restricted cash, up slightly quarter over quarter.

During the quarter, we generated $16 million of cash from operations and free cash flow was approximately breakeven. We ended the quarter with a zero balance on our credit facility. Looking ahead to the second quarter of 2022. We are encouraged by our customer wins, booking momentum and record backlog.

At the same time, as David outlined in his comments, we expect the supply challenges to continue in Q2, before seeing some relief in certain areas in the second half of the year. Taking these factors into account, we expect Q2 revenue to be in the range of $350 million, plus or minus $20 million, representing approximately 3% growth on a year-over-year basis at the midpoint of the range. However, product revenue is expected to grow faster at approximately 8% year over year. Given the increasingly uncertain supply chain environment, we have widened our revenue range for Q2, and have incorporated the following impacts in our quarterly outlook.

First, the removal of $5 million in revenue related to our prior expectations due to the suspension of operations in Russia. And second, approximately $25 million of revenue attenuation from customer delays and product push outs, including a large global ICE6 deal that is shipping in Q2, but will generate revenue in the second half of the year. These delays and push outs will continue to pressure our services revenue, especially professional services tied to new project installations. We are forecasting Q2 gross margins to be in the range of 36.5%, plus or minus 150 basis points, up slightly on a quarter-over-quarter basis.

Compared to the year-ago quarter, the primary factors influencing our gross margin outlook include a higher mix of ICE6 revenue, which is accretive to the company's gross margin, but is being offset by the impact from a combination of higher supply chain costs as we continue to bear the burden of higher components, materials, logistics and freight costs, lower services revenue and margin compared to the second quarter of 2021 and new footprint wins from large household names, which bode well for future quarters. We are planning to recover much of this margin impact as we exit the year. We are forecasting Q2 operating expenses to be in the range of USD132 million to USD136 million, as we continue to prioritize investments in both sales and R&D, consistent with the comments we made at the beginning of the year. Within R&D, our priorities are centered on pluggables metro platforms and software, areas critical to driving top line growth and margin expansion.

Additionally, Q2 was also the quarter when our annual merit increase takes effect. We expect Q2 operating margin to be a loss of 2%, plus or minus 100 basis points, with operating margins down on a year-over-year basis at the midpoint of the range, primarily due to lower gross margins compared to the year-ago quarter. In Q2, we expect to use some cash from operations as we make select investments in inventory and manage through the impact of the supply constrained environment. Below the operating income line, we assume $5 million for net interest expense and $7 million for taxes.

Finally, we are anticipating a basic share count of approximately 215 million shares for Q2. Given the recent external events, including the challenging supply chain environment and the impact to our services revenue in the year from customer project pushouts, based on what we see today, we now expect our full-year revenue growth to be at the low end of our 8% to 12% goal and for gross margin to expand by 100 basis points to 150 basis points in 2022 versus our prior 300 basis points to 400 basis points goal. Our updated outlook for the year also implies a meaningful improvement in our financial performance in the second half of the year, with revenue growth measured for the second half at or above the high end of an 8% to 12% range and gross margin of 40% plus exiting the year. Our second half financial performance is expected to benefit from product growth, the ramp of ICE6, the deployment of new customer wins secured in the first half, the timing of certain large project deployments, completions and our supply chain mitigation efforts.

Despite the slight step back in 2022 from several uncontrollable external developments, we are extremely pleased with our record demand, new customer wins and next-generation technology development. We remain confident and committed to working toward the realization of our target business model. In closing, I would like to echo David's thanks to the Infinera team, who continue to work tirelessly through a very dynamic environment and to our partners, customers and shareholders for your continued support. Josh, we can now open the line for questions.

Questions & Answers:

Operator

[Operator instructions] Your first question comes from the line of Michael Genovese with Rosenblatt Securities.

Michael Genovese -- Rosenblatt Securities -- Analyst

OK. A couple of questions here. First, if I look at the guide for 2Q, it's about $30 million below consensus, and I think you're saying $5 million is Russia. So that leaves us with $25 million for the supply chain.

And what I'm having trouble understanding from your language is how much of that is you guys having trouble getting parts versus your customers having from getting other products and delaying network builds?

David Heard -- Chief Executive Officer

Yes. So the delta -- it's a good question, Mike. The question is -- a majority of that is actually project acceptance from our customers' ability to not just get parts but have sites available, have labor available to be able to have site preparations. Good news is we have good visibility now into that happening.

And a piece of that is a very large ICE6 customer that's deploying in multiple countries. And just based on these delays that we've seen through China and the supply chain, the acceptance for that will now spread that revenue in the back half of the year.

Michael Genovese -- Rosenblatt Securities -- Analyst

OK.

David Heard -- Chief Executive Officer

It's a majority of the $25 million.

Michael Genovese -- Rosenblatt Securities -- Analyst

A couple of follow-ups on that. I mean -- so it sounds like you're saying that the stuff you can control in the supply chain, you're getting parts for yourself. You sound like you wouldn't have missed based on that. You're doing a good job there.

And then secondly, if you could comment on that, but also talk about ICE6 products. Like how much are other vendors, parts or contract manufacturing services necessary for ICE6-based products? Are you doing a lot of that yourself?

David Heard -- Chief Executive Officer

Yes, it's good -- another good question. So again, just to try to put this into perspective that the -- if you think about the miss to the midpoint of guidance for Q1, $5 million of Russia, $15 million of project acceptance, all based on customer site availability. However, typically, Mike, we have enough wiggle room with the supply chain in what we've been doing over the last eight quarters to be able to hit the high end of that range. So obviously, the late in-quarter supply decommits did not allow us to cover that $20 million impact of Russia in the supply chain.

So I appreciate we've been hanging in there quite well for the last eight quarters and the team is working around the clock, but was not able to pull in enough supply to mitigate that 20%. Based on our carryforward of the Russia, in typical markets, given our -- Mike, we're now sitting on $822 million of RPOs. That grew $58 million over the quarter. I expect that to top $100 million for the first half of the year in terms of growth of the RPOs.

So there's plenty of opportunity to go get. But based on the fact that supply chain lead times are no longer 12 weeks, it's hard for us to flip the Russia turn off into another opportunity without having that supply. And third, to your question -- yes, sorry, go ahead.

Michael Genovese -- Rosenblatt Securities -- Analyst

About the ICE6, how much you working yourselves?

David Heard -- Chief Executive Officer

Yes. So look, well, we have way more control over ICE6. We always -- these supply chain challenges are across. You can have a transistor, ferrite, a small device that's coming through your contract manufacturer.

And you've seen the reports from the primary contract manufacturers that went through. They also had some challenges in the supply chain in the quarter. But ICE6 much more in our control, not completely. You can always be, again, impacted by some small device, but a lot more in our control.

The remainder of what we see and what our customers see are things like power supplies and things that they need in building out their local networks.

Michael Genovese -- Rosenblatt Securities -- Analyst

I can ask a lot more questions, but -- and I'm probably pass my time, but maybe I'll just get one more and then that would be my last one, which is you're comparing this next -- this year to last year with the back half, but we didn't see the kind of, I think, ramp you're implying in the third quarter of 15% plus sequential revenues in the third quarter. We didn't have that last year. We had a strong fourth quarter sequentially, but not as strong as the third quarter. Talk more about your confidence that not a lot of companies are saying things are going to get better before the end of the year.

So the confidence in the third quarter, please talk about that some more?

David Heard -- Chief Executive Officer

Yes. I'd say the confidence in the back half isn't that the supply chain environment gets better. It's that -- the projects that we already have out to go to revenue, again, remembering those $822 million of RPOs, we'll convert, and we have visibility to that. The second thing is there is a very large degree of that, that is on the production of our own ICE6 for Q3 and Q4.

And given our visibility to that supply chain environment and the fact that we in Q2 grew our production capacity by 6%, by 30% and are continuing to increase that on a quarterly basis, we feel good about the flow through of our own and the service conversion in the back half of the year. We're kind of holding the supply chain environment, the only improvements we expect to see, Mike, are because we ordered a bunch of parts for a very hefty demand and above even the demand we were seeing last year to be able to cover, and we're starting to see that visibility of supply in the back half, albeit, it wasn't in the first quarter.

Amitabh Passi -- Head of Investor Relations

OK. Thanks, Mike. We need to move on, Mike. Thanks.

Operator, next question, please?

Operator

Your next question comes from the line of Matt Disord with Needham.

Alex Henderson -- Needham and Company -- Analyst

I think that's Alex. That's right?

David Heard -- Chief Executive Officer

Yes, Alex. Maybe you were putting somebody else in there. How you doing, Alex?

Alex Henderson -- Needham and Company -- Analyst

I'm fine. So it's nice to hear Mike on the call here. I just wanted to clarify a couple of the numbers to start with. The Russian number was $5 million in the first quarter.

You're saying additional $5 million in the June quarter. Is it $20 million for the year then?

David Heard -- Chief Executive Officer

Yes. It's $20 million for the year. But given the -- again, strong RPO position and lead time, we'll be able to convert the back half and cover that with other existing demand.

Alex Henderson -- Needham and Company -- Analyst

Yes. I'm just trying to get the numbers straight. That's all. The second question is, it sounds like you're suggesting that there was $15 million in project in 1Q, and it's going to be an additional $20 million or so in 2Q.

Is that correct? So there's $35 million in the first half?

David Heard -- Chief Executive Officer

Yes. Sorry, it was $20 million in Q1, and it's going to be 25% in Q2. And that's because of the large multi-country project, as Nancy mentioned, for ICE6.

Alex Henderson -- Needham and Company -- Analyst

OK. So that revenue, that $45 million in revenue will show up in the back half of the year and that's contributing to the upside to the back half growth rates?

David Heard -- Chief Executive Officer

Yes, some piece of that. And so what we're saying is that, that will time shift out in the waterfall of those -- that revenue recognition will happen in the back half of the year. We will see some push ups from the back half of the year, but we think the impact of that, Nancy, will be about --

Nancy Erba -- Chief Financial Officer

About $30 million on the services line.

David Heard -- Chief Executive Officer

Only.

Nancy Erba -- Chief Financial Officer

Yes. We're going to make up on the products that some of the services will take longer to deploy. So think about $30 million impact on the year in terms of services revenue.

Alex Henderson -- Needham and Company -- Analyst

OK. So I'm shifting $30 million out of '22 into '23 as a result of that?

David Heard -- Chief Executive Officer

Correct. Yes.

Alex Henderson -- Needham and Company -- Analyst

OK.

David Heard -- Chief Executive Officer

That does not go away.

Nancy Erba -- Chief Financial Officer

Yes. In the back -- I mean, the growth rate in products, as you can see, good in Q1 at 5%, expecting 7% to 8%, eight percentage on Q2. And then it will be higher revenue growth in Q3 and Q4 as we end up with product revenue in the back half of the year at or above the high end of the 8% to 12% range.

Alex Henderson -- Needham and Company -- Analyst

All right. If I'm doing my math correctly, the Russian impact is 1.4% and the impact of the $30 million sliding out is another 2.5%. So that's effectively four percentage points of drift because of those two factors, and that's what's bringing the full year down?

Nancy Erba -- Chief Financial Officer

Yes. And we are going to obviously do what we can to offset that in the back half, but it's still very early in the year. So I think you have it captured correctly.

Alex Henderson -- Needham and Company -- Analyst

Great. And so if the products are shipping now but recognized in the back half of the year, then I would assume that there's a significant improvement in gross margins in the back half. But it sounds like you're talking 40 percentage gross margins in the back half. I think we were already there before this.

So am I talking about gross margins benefiting in addition to that from that shift?

Nancy Erba -- Chief Financial Officer

No. I think we exit the year at or slightly above 40%. We've still got the hangover effect on the cost of supply, right? Even though we're able to manage through on the product revenue and product growth, the supply costs are still very real and continuing. And we'll offset as many of those as we can at the back half and then you'll also have the impact of a lower percentage of services revenue.

Alex Henderson -- Needham and Company -- Analyst

All right. Got it. OK. And then my final question, if I could, just one on the point to multi-point products.

Very good news that you're pulling that forward. Can you quantify the magnitude of the portfolio? Is it like one quarter? Is it -- what's the thought process in terms of the timing of getting that product to market?

David Heard -- Chief Executive Officer

Yes. Well, I think first and most importantly, the DSP that we got back is point-to-point and point to multipoint. So it fulfills the ZR plus portion of our market, which allows us to put that pluggable in our own metro platforms to improve our margin in the first half of the year. And the fact that, that DSP is back from the fab ahead of schedule and testing well, just puts us a high degree of confidence, a higher degree of confidence in our ability to go ahead and hit that margin improvement in the first half of next year and the fact that we're going to have samples out bodes well for all the customers looking to deploy both point to point and kind of the industry's first point to multipoint.

It's a big, big, big deal, big confidence boost for us.

Amitabh Passi -- Head of Investor Relations

Thank you, Alex. Operator, we'll go to next question, please.

Operator

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

Meta Marshall -- Morgan Stanley -- Analyst

A couple of questions for me. I mean, I guess, just in terms of -- you guys are seeming to indicate that this large project that you guys aren't kind of controlling, the timing of is pushed out and that you can basically pull some other orders in or just fill that with kind of the other order activity that you guys are seeing. I guess, just in terms of, if the timing of this kind of project that's being pushed out, like what kind of gives you confidence of when that timing will take place, that some of that is moving into kind of '23? Or what gives you confidence in kind of the timing that is there? And do you think that kind of all these other orders can be pulled in? And then the second question that I have is just, you mentioned kind of taking some of the negotiations direct and avoiding maybe some of the gray market and that actually being helpful. I just wanted to see if you could give more detail as far as kind of what you're seeing as far as improvements there.

David Heard -- Chief Executive Officer

Yes. No. Both excellent questions. So look, let me restate for Q1.

So for Q1, from a shipment perspective, we shipped the amount of hardware that we would have expected to cover to the midpoint of our range. The fact that it didn't revenue recognized due to kind of customer requirements, that was an unexpected dynamic that developed in the last month of the quarter and was not expected given the supply chain impacts. And then typically, we have more supply chain to cover that. What gives us confidence in this large project that we're talking about that has an impact to Q2 is we are intimately involved with deploying the product in this one under lots of things that will be under our purview as we implement this.

And we've implemented a first phase of this maybe two years ago, Nancy? Two years ago, that had a negative impact to the first quarter of 2020. And this is ICE6 global big revenue and big margin impact that we feel comfortable will spread between Q3 and Q4 based on the contract details that we have. And we're being, I think, good and conservative given what we learned in Q1. To your second question, look, I think if you listen to some of our suppliers like Fabrinet and others in their commentary, they're seeing the same thing where the broker market, which has been ridiculous, where we saw 200% markups go to 600%.

We've even seen them up to 1,000%. It's beginning to dry up. And some of the suppliers are monitoring that broker market to see when parts go to it, trying to punish is probably the wrong word, but really control anybody that's dumping and taking profit by moving their parts to the broker market. And so by in that, we're having more direct discussions directly with the manufacturers or the suppliers themselves.

And that's giving us more visibility to the capacity they're adding in analog technologies and fabs and in digital technologies and fabs and to when things begin to come online. And when we can view the commits they're giving to us for our forward needs, more confidence when they'll be met. So that transparency is a good thing right now.

Meta Marshall -- Morgan Stanley -- Analyst

Got it.

David Heard -- Chief Executive Officer

The brokers are a bad thing. Yes.

Amitabh Passi -- Head of Investor Relations

Thank you, Meta. Operator, next question?

Operator

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

Simon Leopold -- Raymond James -- Analyst

I guess somebody needs to ask, and I will volunteer. You opted not to preannounce the quarter. And given the degree of the mix and the factors, I just want a little bit of insight into the thought process as to why you opted not to preannounce this quarter? And then I've got a follow-up regarding one of the projects you were discussing.

Nancy Erba -- Chief Financial Officer

Sure. So the outlook range for revenue was USD345 million to USD375 million. And where we landed was about 2%, a little less than 2% below that bottom end of the range. And our gross margin and our operating margin were within the outlook range.

We have some challenges with supply. Supply chain is very well known in terms of an industry dynamic. The impact of Russia in terms of the suspension of activity there, also a very well-known and well publicized event globally. So we felt that we didn't need to make a pre-announcement and make that call.

Simon Leopold -- Raymond James -- Analyst

OK. And regarding the GX metro deal that you talked about, you characterized it, David, as the largest in your history. I think I know what you're talking about, but I'd like to maybe get a little bit more color to confirm. Is this something related to an open ROADM type of an architecture?

David Heard -- Chief Executive Officer

No.

Simon Leopold -- Raymond James -- Analyst

Just maybe give us a little bit more color on the nature of the -- either the customer deployment that makes it special?

David Heard -- Chief Executive Officer

Yes. Nationwide metro footprint on our GX platform, starting with merchant integration and will ultimately better in our own vertical integration via our own pluggables. We are also engaged with that other opportunity with the Tier 1 in the metro. We are winning large initial design wins and initial footprint in the metro, as I mentioned, at a much faster pace.

So we are involved in that other opportunity, I think you're alluding to. But this is a nationwide US carrier that we don't define as a Tier 1. It's a very large footprint of somebody who's laying out fiber to try to get lots of bandwidths out to -- 2 gig out to everybody's home.

Simon Leopold -- Raymond James -- Analyst

Great. That's helpful. I appreciate that insight.

Operator

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

Rod Hall -- Goldman Sachs -- Analyst

So I wanted to ask you on the product growth. Just to clarify what you were saying, you're expecting product revenue on a full-year basis to more or less catch up in the second half. So no change there. But services revenue will be impacted because of the fact that it takes longer to recover.

Is that what you're saying?

David Heard -- Chief Executive Officer

Correct. So basically, product catches up services timing delay of $30 million impacting the quarter. That's how I frame it.

Rod Hall -- Goldman Sachs -- Analyst

Right. Yes. OK. That's what we understood.

And then the other thing I wanted -- following up on that, the Russian impact, and this may come back to kind of an ICE6 question ultimately. But you're dropping $20 million out of the model for Russia. I guess a lot of that's product. You're going to end up kind of flat on the product for the full year.

What fills that in? And is that just better ICE6 performance than you expected? Or can you give us a little bit of more color on kind of what's doing better than you anticipated to come back and infill that revenue?

David Heard -- Chief Executive Officer

Well, just real quick, just -- I want to make sure we're not misstating. On the front half of this year, as Nancy said, we grew 5% in product in the first quarter. And we expect that to be 7% to 8%, as you said in Q2. And in the back half, it's much higher than that, right? So it will -- product will be growing across the board.

It will be growing certainly, highly driven by ICE6 deployment. But also the thing that's quite surprising is the GX platform as a metro platform is just winning much more than anticipated. Our line system is winning much more than anticipated. And these are across the board between -- certainly in the metro, it's CSPs, but we're also seeing even more opportunity with ICPs.

Rod Hall -- Goldman Sachs -- Analyst

And do you -- David, do you guys think that -- so you've got this 20% to 25% ICE6 mix target for the full year?

David Heard -- Chief Executive Officer

Yes.

Rod Hall -- Goldman Sachs -- Analyst

Do you end up above that now given what you know? Or do you think -- is most of the extra over on the year?

David Heard -- Chief Executive Officer

Rod, given the unknowns that we saw, I think in Q1 that we didn't predict the Russian conflict, nor the China shutdown of the pandemic. So given that, look, I think our -- giving the color of outlook that we have, we're just trying to give you assurance that, again, when you're sitting on $822 million RPOs and you know the contracts, you know the design wins you have and you're expecting that to grow again, again, commensurate with the first half growing another $100 million in RPOs, that's what gives us confidence. I don't want to get a little too far ahead of our skis here on the ICE6 rates.

Operator

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

George Notter -- Jefferies -- Analyst

I guess I wanted to ask about -- I wanted to ask about vertically integrated products. I think last quarter, you told us that 44% or 45% of sales came from vertically integrated products. I'm just curious what that is right now.

Nancy Erba -- Chief Financial Officer

Yes. It's about the same right now, George. We have -- as David said, we're seeing the impact of the metro wins that are starting to offset some of that. Not changing our objective though to get that into the 60% range next year.

But for this quarter, it was about flat last quarter.

George Notter -- Jefferies -- Analyst

Got it. OK. And then so as I think about the gross margin discussion for the full year, you took the expectation down a bit. It sounds like the issue there is really about component costs.

I think you mentioned services mix, but the issue was not the mix of vertically integrated products. Is that correct?

Nancy Erba -- Chief Financial Officer

That's correct.

George Notter -- Jefferies -- Analyst

And then as you guys work to vertically integrate more of your products, I guess I'm wondering what the milestones are. I think you mentioned pluggable for the first half. But are there other details in that, sort of transition that you can share with us?

David Heard -- Chief Executive Officer

Yes. So first and foremost, we try to give the ICE6 measure of that growing into the 20% to 25%. No, we're not going to top that off right now, as we mentioned, Rod. On the second piece, it's a huge chunk of this.

45% of the bill of materials of a metro deployment for us is the optical engine. And that is the DSP and the TROSAs. So the fact that we're already producing the TROSAs and we got our DSP back gives me more confidence that as we exit the year, we will feel very good about our margin accretion plan for the pluggable in the metro in 2023, which has always been part of our margin story. This year was about ICE6, about getting the wins and scaling and next year was about getting additional margin accretion with the pluggable.

Those are the biggest pieces of our vertical integration.

George Notter -- Jefferies -- Analyst

Got it. OK.

David Heard -- Chief Executive Officer

And the fact that the GX platform -- yes, sorry, the fact that the GX platform is up 200% as that footprint is beginning to -- there's demand for the footprint, which is good.

George Notter -- Jefferies -- Analyst

OK. Great. And then -- so you said the pluggable would ship in the first half of the year, next year. Is that early in the first half? Is that midyear?

David Heard -- Chief Executive Officer

Yes. No, early. So sorry. Samples come out in Q3 this year, and we'll be going through qualification and qualification in our -- even our own platforms, which is a lot more under our control.

So we're ready to go as fast as possible as we enter 2023. But we wouldn't expect the revenue impact given the capital conversion cycle, if you think about revenue recognition to happen until full half, kind of second quarter, we'll probably see the biggest. So it's the first step. Yes.

Operator

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

Jim Suva -- Citi -- Analyst

A question for Nancy. Nancy, I see that you upgraded your gross margin guidance, which I think is appropriate and prudent in this stage. Am I correct that it's folded in the impact of higher ASPs of your components coming in, higher expedited costs, but also these new orders that Dave talked about coming in that some of those new orders are at pricing that kind of say, was subdued before this recent environment we're in now? And so that also has been fully folded into your gross margin outlook. Or how should we think about that?

Nancy Erba -- Chief Financial Officer

Yes. I mean, that would all be rolled into the full-year outlook in terms of now being at 100 basis points to 150 basis points up versus the 300 basis points to 400 points. So I think you've captured the components there.

Jim Suva -- Citi -- Analyst

OK. Great. And then Dave, I noticed your optimism about the second half of the year for the recovery of the component availability. I guess, can you give us any insights about your conviction behind that? Because I think that there may be some of us who may just be a little more uncertain about all of that kind of becoming closer toward delivering.

David Heard -- Chief Executive Officer

Jim, if I'm coming off as super confident about component availability in the second half, let me clarify. I think -- I'm not expecting the component availability to get better, and I'm not expecting for any massive erosion. What we experienced in the first quarter was we had enough at least to ship. It was tighter than normal, meaning we didn't have enough to cover this, hey, we ship the parts but our customer couldn't get it -- couldn't get the parts, nor the people to be able to deploy.

In the back half, we're just assuming that if stuff comes through, the other projects we have been deferred and then RPO begin to come through because we provisioned for the parts, we see them in our supply chain right now and we're not seeing right now additional risk. That doesn't mean I'm super fired up about the supply chain environment we're in. It's been a tough slog. We've been going at this for six quarters to eight quarters now and holding ourselves reasonably well.

But I will tell you that there's a bit of this that's under our control, which is the production of ICE6. So as long as the supply chain holds, we've increased the production output capability of ICE6 and our own capacity to be able to keep up with a consistent supply chain environment to what it is today. Is that helpful?

Jim Suva -- Citi -- Analyst

That was very useful and helpful, and clarifies all of it for me.

Operator

Your next question comes from the line of Fahad Najam with Loop Capital.

Fahad Najam -- Loop Capital Markets -- Analyst

I want to double click more on the component shortages. Are the component shortages that you're facing -- correct me, if they are like universal products that go across all your product lines? Or are they -- are the products more skewed toward your vertically integrated products?

David Heard -- Chief Executive Officer

No. I'd say actually that a lot of them go to older geometries and things like line systems, other things in the metro. I'd say it's skewed less toward our vertical integration in newer geometries. However, there are some parts, power supplies as an example, all kinds of chipsets and ferrites and other things that -- look, just -- it's -- again, they go across the portfolio.

Certainly, much more line system in metro, but there is an impact even when you have your own vertical integration because you're going to have some element you need from an outside supplier. And what we're doing now is not only managing our direct supply, but even if we get it from a supplier in many cases from a CM or from a supply, we're going to the second and tertiary source to make sure that, that will change us through because some of our decommits were the secondary or tertiary impact to that and that happens primarily when you see things like China happen unexpectedly.

Fahad Najam -- Loop Capital Markets -- Analyst

Got it. So if the parts like the power supplies or power stretch are [Inaudible] why wouldn't you optimize your ICE6, maybe prefer your ICE6 shipments over any other portfolio product because it's better margin. I'm just trying to understand why aren't you maybe allocating more of your limited supply to ICE6 and rest ICE6 more strongly in the rest of the year?

David Heard -- Chief Executive Officer

Yes. I mean, look, we first optimized to what our customers' demand is and what our requirements and our expectations are from our customer. But then certainly, we look at the mix. But even ICE6, when put in -- it needs to be put into a line system and things like power supplies.

Again, RACs and other things that, again, the industry has been pinched on. So we do -- we've been doing our best to try to optimize our shipping volumes and hitting customer service, but also our shareholder expectations. And for the last eight quarters, that's been going pretty good. This new dynamic of Russia and us shipping the actual goods that we thought would hit revenue, but did not on behalf of the customers and ability to get power supplies and other things into their network, that was new.

So we're making an adjustment. And again, that's that $30 million of services that we've kind of pushed out in timing only to the year. Now, we'll continue to stay super, super diligent and we've got an awesome team that's on it, but -- and are working with our supply chain partners as well to make sure that we shore up more that's in our control. It tells you how important vertical integration is and the more we can put in our control, the better.

Fahad Najam -- Loop Capital Markets -- Analyst

I have another question on pricing. A number of your peers have now started talking about a second round of price increases. Can you remind us where you are in the -- I guess, you haven't really talked much about price increases that much. One, when should we expect your new price increases to go in effect? And are you also talking about the second round of price increases?

David Heard -- Chief Executive Officer

Yes. It's a good question, and I've been pretty consistent on this, that I don't -- this isn't the forum that we talk about our commercial strategies. We have made some adjustments to contractual terms with our supply chain, as well as customer network. But I think we're enjoying winning some new footprint and focused on products that drive the lowest cost per bit.

Outside that, we'll work our commercial terms in a more private form.

Operator

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

Alex Henderson -- Needham and Company -- Analyst

A couple of things I wanted to go back to. The first one was, there was a comment on the questions about the product being -- or the Russian business being more product. It seems very stable at $5 million a quarter. It sounds like it's more servicer as opposed to product.

Can you talk about what the mix is between service and products within that $20 million?

David Heard -- Chief Executive Officer

Yes. So I would tell you that out of that $5 million a quarter --

Nancy Erba -- Chief Financial Officer

$1.5 million.

David Heard -- Chief Executive Officer

Yes, $1.5 million is service, the rest product.

Alex Henderson -- Needham and Company -- Analyst

That's great. And then second, you made a comment and Jim Suva talked a little bit about it. But I don't think he -- we addressed the right issue, which is, you implied that the pricing was going to come down as volumes of parts have gotten tighter and that seems a contradiction in terms to me.

David Heard -- Chief Executive Officer

In economics, yes.

Alex Henderson -- Needham and Company -- Analyst

Not the other way around. I'm a little confused despite that comment. Why would you think prices would come down as supply has gotten tighter?

David Heard -- Chief Executive Officer

No. So I think what I'm saying is that the broker market itself, when you buy a part from a broker versus directly from a Broadcom, Intel, whoever, you're paying more implicitly. And again, we've seen crazy pricing there. Just multiples of the product, taking a full of $90 part and charging $4,000 for it, but they're running out of parts.

And so that's forcing you to go directly to the direct -- make sure that you're with the direct manufacturer. The direct manufacturer doesn't like that either. And so my point isn't that this quarter, that's going to go down or next quarter. But ultimately, this will not be something that will be permanent in the market on the broker market --

Amitabh Passi -- Head of Investor Relations

At these levels.

David Heard -- Chief Executive Officer

-- at these levels. We do not believe that, that will continue. So didn't mean to state that, that goes away this quarter or next quarter. When we say temporal, we mean it's not -- we're not permanently baking those costs of something that's a $90 part, paying thousands of dollars for it is permanent.

And we're tracking that.

Alex Henderson -- Needham and Company -- Analyst

I see. And then you made a comment about purchase commitments.

David Heard -- Chief Executive Officer

Yes.

Alex Henderson -- Needham and Company -- Analyst

One of the common side of the roster was that they took their purchase commitments up by over 50%. Clearly, that's giving them a chip to play with their customers saying, hey, we're looking out for you. Can you quantify the degree that which you taken the purchase commitments up?

David Heard -- Chief Executive Officer

Sure. Give us a second. Nancy will pick that up. But yes, it's a very good point.

So if you think of starting or ending the year at, what, $764 million of RPO and adding $58 million and I said, in the first half, we'll add -- my expectation is we'll add $100 million. We have significantly increased our purchase commitments with RCMs and our suppliers. Nancy will pull that in a second, and we'll read it off before Q&A ends.

Alex Henderson -- Needham and Company -- Analyst

One last quick question. The comment around service sliding out, does that pressure your service gross margins to at or below the recent levels?

David Heard -- Chief Executive Officer

Yes. Partial pressure, but I think we'll offset because on some of those projects, you're using variable labor. So you're using contract labor for pieces of that and that stuff that we're obviously not committing to in the same timeframe. So we can kind of follow the matching principle.

Amitabh Passi -- Head of Investor Relations

Alex, on the purchase commitments, we'll get it to you. We typically disclose it in our 10-K, and the number I can -- we can give it to you after the call. It was up quite meaningfully from 2020, '21. We'll disclose it.

David Heard -- Chief Executive Officer

And it continued to go up in Q1.

Amitabh Passi -- Head of Investor Relations

Thanks, operator.

Operator

Sorry. There are no further questions. I'll turn the call back to CEO, David Heard, for closing remarks.

David Heard -- Chief Executive Officer

Thank you. So I appreciate everybody's patient questions. We look forward to getting back to you in one-on-ones. We are expanding our customer reach, the demand strength and customer wins ahead -- are ahead of our company expectation.

The execution of our new products with ICE6 momentum, the initial production of our pluggable elements are in line with what we told you on our 8x4x1 strategy and the business model impacts that, that brings. The global supply chain impact on our customer rollouts and the cost of expediting parts to fulfill the demand has pushed out due to the timing, and that's impacted the timing of revenue and margin. As we talked about, that has a service impact of $30 million. We know we're not alone, and we fared well in the supply chain up to this point over the last six quarters.

We did have some late-breaking impacts between the supply chain in Russia in Q2. We do have remediation actions in place, and we are addressing these developments accordingly. Really do appreciate the partnership with our supply chain partners, with our customers and the continued tenacity of our employees and your patience. Look forward to catching up with you more in one-on-ones and next quarter.

Be safe. Be well.

Amitabh Passi -- Head of Investor Relations

Thank you, operator.

Operator

[Operator signoff]

Duration: 62 minutes

Call participants:

Amitabh Passi -- Head of Investor Relations

David Heard -- Chief Executive Officer

Nancy Erba -- Chief Financial Officer

Michael Genovese -- Rosenblatt Securities -- Analyst

Alex Henderson -- Needham and Company -- Analyst

Meta Marshall -- Morgan Stanley -- Analyst

Simon Leopold -- Raymond James -- Analyst

Rod Hall -- Goldman Sachs -- Analyst

George Notter -- Jefferies -- Analyst

Jim Suva -- Citi -- Analyst

Fahad Najam -- Loop Capital Markets -- Analyst

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