Infinera Corporation Reports Third Quarter 2015 Financial

SUNNYVALE, CA--(Marketwired - October 27, 2015) - Infinera Corporation (NASDAQ: INFN), provider of Intelligent Transport Networks, today released financial results for the third quarter of 2015 ended September 26, 2015. Infinera's financial results for the third quarter of 2015 include the operating results of Transmode from the date the acquisition closed on August 20, 2015.

GAAP financial results for the quarter were impacted by certain purchase accounting adjustments and one-time acquisition-related costs related to the Transmode acquisition. Additionally, GAAP results include non-cash stock-based compensation expenses and the amortization of debt discount on Infinera's convertible senior notes. The foregoing items have been excluded from Infinera's non-GAAP results.

GAAP revenue for the quarter was $232.5 million compared to $207.3 million in the second quarter of 2015 and $173.6 million in the third quarter of 2014.

GAAP gross margin for the quarter was 44.2% compared to 46.7% in the second quarter of 2015 and 43.4% in the third quarter of 2014. GAAP operating margin for the quarter was 6.1% compared to 8.0% in the second quarter of 2015 and 4.3% in the third quarter of 2014.

GAAP net income for the quarter was $8.5 million, or $0.06 per diluted share, compared to $17.9 million, or $0.13 per diluted share, in the second quarter of 2015, and $4.8 million, or $0.04 per diluted share, in the third quarter of 2014.

Non-GAAP revenue for the quarter was $233.2 million compared to $207.3 million in the second quarter of 2015 and $173.6 million in the third quarter of 2014.

Non-GAAP gross margin for the quarter was 47.5% compared to 47.4% in the second quarter of 2015 and 44.2% in the third quarter of 2014. Non-GAAP operating margin for the quarter was 14.4% compared to 13.0% in the second quarter of 2015 and 8.6% in the third quarter of 2014.

Non-GAAP net income for the quarter was $32.2 million, or $0.22 per diluted share, compared to $25.7 million, or $0.18 per diluted share, in the second quarter of 2015, and $14.2 million, or $0.11 per diluted share, in the third quarter of 2014.

A further explanation of the use of non-GAAP financial information and a reconciliation of the non-GAAP financial measures to the GAAP equivalents can be found at the end of this release.

"Our excellent third quarter results reflect continued strength across our core business, including growing Cloud Xpress revenues as well as the initial contribution from the new metro business. Adding the recently announced metro core and long haul interconnect products along with Transmode's suite of metro solutions enables Infinera to further enhance the superior experience we deliver to our customers," said Tom Fallon, Infinera's Chief Executive Officer. "As the most vertically integrated transport provider in the world, now armed with a broad end-to-end portfolio, Infinera is in a terrific position to continue to deliver differentiated financial results on both the top and bottom lines."

Conference Call Information

Infinera will host a conference call for analysts and investors to discuss its third quarter of 2015 results and its outlook for the fourth quarter of 2015 today at 5:00 p.m. Eastern Time (2:00 p.m. Pacific Time). Interested parties may join the conference call by dialing 1-800-593-9940 (toll free) or 1-630-395-0029 (international), pass-code PIC. A live webcast of the conference call will also be accessible from the Investor Relations section of Infinera's website at www.infinera.com. Following the webcast, an archived version will be available on the website for 90 days. To hear the replay, parties in the United States and Canada should call 1-800-884-1527. International parties can access the replay at 1-203-369-3842.

About Infinera

Infinera (NASDAQ: INFN) provides Intelligent Transport Networks, enabling carriers, cloud operators, governments and enterprises to scale network bandwidth, accelerate service innovation and simplify optical network operations. Infinera's end-to-end packet-optical portfolio is designed for long-haul, subsea, datacenter interconnect and metro applications. Infinera's unique large scale photonic integrated circuits enable innovative optical networking solutions for the most demanding networks. To learn more about Infinera visit www.infinera.com, follow us on Twitter @Infinera and read our latest blog posts at blog.infinera.com.

Forward-Looking Statements

This press release contains certain forward-looking statements based on current expectations, forecasts and assumptions that involve risks and uncertainties. Such forward-looking statements include, without limitation, Infinera's ability to provide a superior experience to its customers and Infinera's ability to continue to deliver differentiated financial results on both the top and bottom lines. Forward-looking statements can also be identified by forward-looking words such as "anticipated," "believed," "could," "estimate," "expect," "intend," "may," "should," "will," and "would" or similar words. These statements are based on information available to Infinera as of the date hereof and actual results could differ materially from those stated or implied due to risks and uncertainties. The risks and uncertainties that could cause Infinera's results to differ materially from those expressed or implied by such forward-looking statements include delays in the development and introduction of Infinera's products and market acceptance of these products; Infinera's ability to successfully integrate the Infinera and Transmode businesses; the effect that changes in product pricing or mix, and/or increases in component costs could have on Infinera's gross margin; Infinera's reliance on single-source suppliers; aggressive business tactics by Infinera's competitors; Infinera's ability to protect Infinera's intellectual property; claims by others that Infinera infringes their intellectual property; war, terrorism, public health issues, natural disasters, and other circumstances that could disrupt supply, delivery or demand of products; Infinera's ability to respond to rapid technological changes; and other risks and uncertainties detailed in Infinera's SEC filings from time to time. More information on potential factors that may impact Infinera's business are set forth in its Quarterly Report on Form 10-Q for the quarter ended on June 27, 2015 as filed with the SEC on July 31, 2015, as well as subsequent reports filed with or furnished to the SEC from time to time. These reports are available on Infinera's website at www.infinera.com and the SEC's website at www.sec.gov. Infinera assumes no obligation to, and does not currently intend to, update any such forward-looking statements.

Use of Non-GAAP Financial Information

In addition to disclosing financial measures prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP), this press release and the accompanying tables contain certain non-GAAP measures that exclude non-cash stock-based compensation expenses, acquisition-related costs, certain purchase accounting adjustments and amortization of debt discount on Infinera's convertible senior notes. Infinera believes these adjustments are appropriate to enhance an overall understanding of its underlying financial performance and also its prospects for the future and are considered by management for the purpose of making operational decisions. In addition, these results are the primary indicators management uses as a basis for its planning and forecasting of future periods. The presentation of this additional information is not meant to be considered in isolation or as a substitute for net income, basic and diluted net income per share, gross margin or operating margin prepared in accordance with GAAP. Non-GAAP financial measures are not based on a comprehensive set of accounting rules or principles and are subject to limitations. For a description of these non-GAAP financial measures and a reconciliation to the most directly comparable GAAP financial measures, please see the section titled, "GAAP to Non-GAAP Reconciliations." Infinera anticipates disclosing forward-looking non-GAAP information in its conference call to discuss its third quarter 2015 results, including an estimate of certain non-GAAP financial measures for the fourth quarter of 2015 that excludes non-cash stock-based compensation expenses, acquisition-related costs, certain purchase accounting adjustments and amortization of debt discount on Infinera's convertible senior notes.

A copy of this press release can be found on the Investor Relations page of Infinera's website at www.infinera.com.

Infinera and the Infinera logo are trademarks or registered trademarks of Infinera Corporation. All other trademarks used or mentioned herein belong to their respective owners.


Infinera Corporation
GAAP Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)

			Three Months Ended						Nine Months Ended
			September 26,			September 27,			September 26,			September 27,
			2015			2014			2015			2014
Revenue:
	Product		$	202,365		$	147,178		$	542,190		$	413,784
	Services			30,107			26,381			84,490			67,989
		Total revenue		232,472			173,559			626,680			481,773

Cost of revenue:
	Cost of product			117,154			86,703			306,151			251,047
	Cost of services			12,513			11,554			32,816			26,765
		Total cost of revenue		129,667			98,257			338,967			277,812

Gross profit				102,805			75,302			287,713			203,961

Operating expenses:
	Research and development			45,466			35,051			128,144			96,135
	Sales and marketing			24,721			20,794			67,298			56,738
	General and administrative			18,358			11,977			46,324			36,612
		Total operating expenses		88,545			67,822			241,766			189,485

Income from operations				14,260			7,480			45,947			14,476

Other income (expense), net:
	Interest income			406			373			1,371			1,046
	Interest expense			(3,014	)		(2,781	)		(8,851	)		(8,186	)
	Other gain (loss), net			(3,293	)		(24	)		1,788			(1,017	)
		Total other income (expense), net		(5,901	)		(2,432	)		(5,692	)		(8,157	)

Income before income taxes				8,359			5,048			40,255			6,319
Provision for (benefit from) income taxes				(151	)		205			1,473			1,070
	Net income		$	8,510		$	4,843		$	38,782		$	5,249

Net income per common share:
	Basic		$	0.06		$	0.04		$	0.30		$	0.04
	Diluted		$	0.06		$	0.04		$	0.27		$	0.04

Weighted average shares used in computing net income per common share:
	Basic			134,834			124,378			131,007			122,953
	Diluted			145,300			128,964			141,082			127,062

Infinera Corporation

GAAP to Non-GAAP Reconciliations

(In thousands, except percentages and per share data)

(Unaudited)

		Three Months Ended														Nine Months Ended
		September 26, 2015					June 27, 2015					September 27, 2014				September 26, 2015					September 27, 2014
Reconciliation of Revenue:
U.S. GAAP as reported		$	232,472				$	207,346				$	173,559			$	626,680				$	481,773
Acquisition-related deferred revenue adjustment⁽¹⁾			721					-					-				721					-
Non-GAAP as adjusted		$	233,193				$	207,346				$	173,559			$	627,401				$	481,773

Reconciliation of Gross Profit:
U.S. GAAP as reported		$	102,805		44.2	%	$	96,796		46.7	%	$	75,302	43.4	%	$	287,713		45.9	%	$	203,961	42.3	%
Acquisition-related deferred revenue adjustment⁽¹⁾			721					-					-				721					-
Stock-based compensation⁽²⁾			1,621					1,493					1,491				4,357					4,135
Amortization of acquired intangible assets⁽³⁾			1,922					-					-				1,922					-
Acquisition-related inventory step-up expense⁽⁴⁾			3,620					-					-				3,620					-
Non-GAAP as adjusted		$	110,689		47.5	%	$	98,289		47.4	%	$	76,793	44.2	%		298,333		47.6	%	$	208,096	43.2	%

Reconciliation of Income from Operations:
U.S. GAAP as reported		$	14,260		6.1	%	$	16,530		8.0	%	$	7,480	4.3	%	$	45,947		7.3	%	$	14,476	3.0	%
Acquisition-related deferred revenue adjustment⁽¹⁾			721					-					-				721					-
Stock-based compensation⁽²⁾			8,451					8,209					7,371				23,868					20,847
Amortization of acquired intangible assets⁽³⁾			2,608					-					-				2,608					-
Acquisition-related inventory step-up expense⁽⁴⁾			3,620					-					-				3,620					-
Acquisition-related costs⁽⁵⁾			3,950					2,264					-				6,676					-
Non-GAAP as adjusted		$	33,610		14.4	%	$	27,003		13.0	%	$	14,851	8.6	%		83,440		13.3	%	$	35,323	7.3	%

Reconciliation of Net Income:
U.S. GAAP as reported		$	8,510				$	17,906				$	4,843			$	38,782				$	5,249
Acquisition-related deferred revenue adjustment⁽¹⁾			721					-					-				721					-
Stock-based compensation⁽²⁾			8,451					8,209					7,371				23,868					20,847
Amortization of acquired intangible assets⁽³⁾			2,608					-					-				2,608					-
Acquisition-related inventory step-up expense⁽⁴⁾			3,620					-					-				3,620					-
Acquisition-related costs⁽⁵⁾			3,950					2,264					-				6,676					-
Acquisition-related forward contract (gain) loss⁽⁶⁾			3,728					(4,782	)				-				(1,054	)				-
Amortization of debt discount⁽⁷⁾			2,162					2,109					1,956				6,328					5,724
Income tax effects⁽⁸⁾			(1,529	)				-					-				(1,529	)				-
Non-GAAP as adjusted		$	32,221				$	25,706				$	14,170			$	80,020				$	31,820

Net Income per Common
	Share - Basic:
U.S. GAAP as reported		$	0.06				$	0.14				$	0.04			$	0.30				$	0.04
Non-GAAP as adjusted		$	0.24				$	0.20				$	0.11			$	0.61				$	0.26

Net Income per Common
	Share - Diluted:
U.S. GAAP as reported		$	0.06				$	0.13				$	0.04			$	0.27				$	0.04
Non-GAAP as adjusted		$	0.22				$	0.18				$	0.11			$	0.57				$	0.25

Weighted Average Shares
	Used in Computing Net Income per Common Share:
Basic			134,834					130,349					124,378				131,007					122,953
Diluted			145,300					140,642					128,964				141,082					127,062



⁽¹⁾		Business combination accounting principles require Infinera to write down to fair value its maintenance support contracts assumed in the Transmode acquisition. The revenue for these support contracts is deferred and typically recognized over a one year period, so Infinera's GAAP revenue for the one year period after the acquisition will not reflect the full amount of revenue that would have been reported if the acquired deferred revenue was not written down to fair value. The non-GAAP adjustment eliminates the effect of the deferred revenue write-down. Management believes these adjustments to the revenue from these support contracts are useful to investors as an additional means to reflect revenue trends of Infinera's business.

⁽²⁾		Stock-based compensation expense is calculated in accordance with the fair value recognition provisions of Financial Accounting Standards Board Accounting Standards Codification Topic 718, Compensation-Stock Compensation effective January 1, 2006. The following table summarizes the effects of stock-based compensation related to employees and non-employees (in thousands):


	Three Months Ended						Nine Months Ended
	September 26,		June 27,		September 27,		September 26,		September 27,
	2015		2015		2014		2015		2014
Cost of revenue	$	645	$	613	$	492	$	1,740	$	1,421
Research and development		2,788		2,817		2,270		8,183		6,488
Sales and marketing		2,131		2,070		1,982		5,922		5,517
General and administration		1,911		1,829		1,628		5,406		4,707
		7,475		7,329		6,372		21,251		18,133
Cost of revenue - amortization from balance sheet*		976		880		999		2,617		2,714
Total stock-based compensation expense	$	8,451	$	8,209	$	7,371	$	23,868	$	20,847


		* Stock-based compensation expense deferred to inventory and deferred inventory costs in prior periods and recognized in the current period.

⁽³⁾		Amortization of acquisition-related intangible assets consists of amortization of developed technology, trade names, and customer relationships acquired in connection with the Transmode acquisition. U.S. GAAP accounting requires that acquired intangible assets are recorded at fair value and amortized over their useful lives. As this amortization is non-cash, Infinera has excluded the effect in calculating its non-GAAP operating expenses, gross margin and net income measures. Management believes the amortization of acquired intangible assets are not indicative of ongoing operating performance and their exclusion provide a better indication of Infinera's underlying business performance.

⁽⁴⁾		Business combination accounting principles require Infinera to measure acquired inventory at fair value. The fair value of inventory reflects the acquired company's cost of manufacturing plus a portion of the expected profit margin. The non-GAAP adjustment to Infinera's cost of sales excludes the amortization of the step-up in carrying value for units sold in the quarter. Management believes the adjustment is useful to investors as an additional means to reflect cost of sales and gross margin trends of Infinera's business.

⁽⁵⁾		Acquisition-related costs related to Transmode acquisition, which closed during the third quarter of 2015, include legal, financial and other professional fees incurred in connection with the transaction. These amounts have been adjusted in arriving at Infinera's non-GAAP results because management believes that these expenses are non-recurring, not indicative of ongoing operating performance and their exclusion provides a better indication of Infinera's underlying business performance.

⁽⁶⁾		In April 2015, Infinera entered into a foreign currency forward contract and in July 2015, Infinera entered into a series of foreign currency exchange option contracts to hedge currency exposures associated with the cash portion of the offer to acquire Transmode. The forward contract and option contracts were subsequently closed during the third quarter of 2015. The net change in the fair value of the forward contract and option contracts impacted Infinera's financial statements for the current interim reporting period. Management has excluded the impact of these gains and losses in arriving at Infinera's non-GAAP results because they are non-recurring and management believes that these gains are not indicative of ongoing operating performance.

⁽⁷⁾		Under GAAP, certain convertible debt instruments that may be settled in cash on conversion are required to be separately accounted for as liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer's non-convertible debt borrowing rate. Accordingly, for GAAP purposes, Infinera is required to amortize as a debt discount an amount equal to the fair value of the conversion option that was recorded in equity as interest expense on its $150 million 1.75% convertible debt issuance in May 2013 over the term of the notes. Interest expense has been adjusted in arriving at Infinera's non-GAAP results because management believes that this non-cash expense is not indicative of ongoing operating performance and provides a better indication of Infinera's underlying business performance.

⁽⁸⁾		The difference between the GAAP and non-GAAP tax rates were due to the net tax effects of the purchase accounting adjustments related to the Transmode acquisition, which closed during the third quarter of 2015.


Infinera Corporation
Condensed Consolidated Balance Sheets
(In thousands, except par values)
(Unaudited)

			September 26,			December 27,
			2015			2014
ASSETS

Current assets:
	Cash and cash equivalents		$	161,103		$	86,495
	Short-term investments			126,218			239,628
	Accounts receivable, net of allowance for doubtful accounts of $630 in 2015 and $38 in 2014			141,586			154,596
	Inventory			169,875			146,500
	Prepaid expenses and other current assets			31,780			24,636
		Total current assets		630,562			651,855

Property, plant and equipment, net				98,720			81,566
Intangible assets, net				162,082			361
Goodwill				190,119			-
Long-term investments				51,422			59,233
Cost-method investment				14,500			14,500
Long-term restricted cash				5,319			5,460
Other non-current assets				6,867			5,041
		Total assets	$	1,159,591		$	818,016

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
	Accounts payable		$	69,983		$	61,533
	Accrued expenses			35,704			26,441
	Accrued compensation and related benefits			40,586			38,795
	Accrued warranty			17,802			12,241
	Deferred revenue			31,411			35,321
		Total current liabilities		195,486			174,331

	Long-term debt, net			123,222			116,894
	Accrued warranty, non-current			18,939			14,799
	Deferred revenue, non-current			15,368			10,758
	Other long-term liabilities			53,661			19,327

Commitments and contingencies

Stockholders' equity:
	Preferred stock, $0.001 par value
	Authorized shares - 25,000 and no shares issued and outstanding			-			-
	Common stock, $0.001 par value
	Authorized shares - 500,000 as of September 26, 2015 and December 27, 2014
	Issued and outstanding shares - 139,785 as of September 26, 2015 and 126,160 as of December 27, 2014			140			126
	Additional paid-in capital			1,289,087			1,077,225
	Accumulated other comprehensive income (loss)			360			(4,618	)
	Accumulated deficit			(552,044	)		(590,826	)
	Total Infinera stockholders' equity			737,543			481,907
Noncontrolling interest				15,372			-
	Total stockholder's equity			752,915			481,907
		Total liabilities and stockholders' equity	$	1,159,591		$	818,016


Infinera Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

				Nine Months Ended
				September 26,			September 27,
				2015			2014
Cash Flows from Operating Activities:
Net income				$	38,782		$	5,249
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization				22,094			19,340
	Amortization of debt discount and issuance costs				6,873			6,217
	Amortization of premium on investments				2,405			2,720
	Realized gain from forward contract				(1,053	)		-
	Stock-based compensation expense				23,868			20,847
	Other loss				605			15
	Changes in assets and liabilities:
		Accounts receivable			28,838			(35,463	)
		Inventory			(8,901	)		(9,015	)
		Prepaid expenses and other assets			(6,058	)		(4,965	)
		Accounts payable			(2,339	)		11,009
		Accrued liabilities and other expenses			(7,196	)		657
		Deferred revenue			700			(4,272	)
		Accrued warranty			8,742			4,898
			Net cash provided by operating activities		107,360			17,237

Cash Flows from Investing Activities:
	Purchase of available-for-sale investments				(126,940	)		(214,272	)
	Acquisition of business, net of cash acquired				(144,038	)		-
	Realized gain from forward contract for business acquisition				1,053			-
	Purchase of cost-method investment				-			(5,500	)
	Proceeds from sale of available-for-sale investments				67,303			17,876
	Proceeds from maturities and sales of investments				178,717			168,137
	Purchase of property and equipment				(26,710	)		(14,364	)
	Change in restricted cash				127			(320	)
			Net cash used in investing activities		(50,488	)		(48,443	)

Cash Flows from Financing Activities:
	Proceeds from issuance of common stock				23,433			19,683
	Minimum tax withholding paid on behalf of employees for net share settlement				(5,043	)		(1,846	)
			Net cash provided by financing activities		18,390			17,837

Effect of exchange rate changes on cash					(654	)		(97	)

Net change in cash and cash equivalents					74,608			(13,466	)
Cash and cash equivalents at beginning of period					86,495			124,330
Cash and cash equivalents at end of period				$	161,103		$	110,864

Supplemental disclosures of cash flow information:
	Cash paid for income taxes, net of refunds			$	2,301		$	1,056
	Cash paid for interest			$	1,313		$	1,313
Supplemental schedule of non-cash investing and financing activities:
	Transfer of inventory to fixed assets			$	5,861		$	1,838
	Common stock issued in connection with acquisition			$	169,507		$	-


Infinera Corporation
Supplemental Financial Information
(Unaudited)

	Q4'13			Q1'14			Q2'14			Q3'14			Q4'14			Q1'15			Q2'15			Q3'15
Revenue ($ Mil)	$	139.1		$	142.8		$	165.4		$	173.6		$	186.3		$	186.9		$	207.3		$	232.5
GAAP Gross Margin %		40.2	%		40.9	%		42.5	%		43.4	%		45.3	%		47.2	%		46.7	%		44.2	%
Non-GAAP Gross Margin % ⁽¹⁾		41.4	%		41.8	%		43.3	%		44.2	%		46.1	%		47.8	%		47.4	%		47.5	%
Revenue Composition:
Domestic %		54	%		78	%		82	%		70	%		58	%		68	%		75	%		68	%
International %		46	%		22	%		18	%		30	%		42	%		32	%		25	%		32	%
Customers >10% of Revenue		1			2			2			1			1			2			3			2
Cash Related Information:
Cash from (Used in) Operations ($ Mil)	$	25.8		$	(15.4	)	$	10.3		$	22.3		$	18.7		$	19.8		$	55.0		$	32.5
Capital Expenditures ($ Mil)	$	7.5		$	5.6		$	4.4		$	4.4		$	8.8		$	7.4		$	8.7		$	10.6
Depreciation & Amortization ($ Mil)	$	6.0		$	6.3		$	6.5		$	6.5		$	6.6		$	6.6		$	6.3		$	9.2
DSO's		66			68			66			71			76			64			48			55
Inventory Metrics:
Raw Materials ($ Mil)	$	14.3		$	13.2		$	11.2		$	11.6		$	15.2		$	22.4		$	30.2		$	24.2
Work in Process ($ Mil)	$	49.2		$	47.8		$	40.6		$	44.4		$	50.0		$	45.9		$	43.9		$	48.5
Finished Goods ($ Mil)	$	60.2		$	65.5		$	79.1		$	74.8		$	81.3		$	88.9		$	83.1		$	97.2
Total Inventory ($ Mil)	$	123.7		$	126.5		$	130.9		$	130.8		$	146.5		$	157.2		$	157.2		$	169.9
Inventory Turns ⁽²⁾		2.6			2.6			2.9			3.0			2.7			2.5			2.8			2.9
Worldwide Headcount		1,318			1,346			1,396			1,456			1,495			1,530			1,598			1,978



⁽¹⁾		Non-GAAP adjustments include non-cash stock-based compensation expense, certain purchase accounting adjustments and amortization of acquired intangible assets. For a description of this non-GAAP financial measure, please see the section titled, "GAAP to Non-GAAP Reconciliations" of this press release for a reconciliation to the most directly comparable GAAP financial measures.
⁽²⁾		Infinera calculates non-GAAP inventory turns as annualized non-GAAP cost of revenue before adjustments for non-cash stock-based compensation expense and certain purchase accounting adjustments, divided by the average inventory for the quarter.

Contact Information:

Contacts:

Media:
Anna Vue
Tel. +1 (916) 595-8157
avue@infinera.com

Investors:
Jeff Hustis
Tel. +1 (408) 213-7150
jhustis@infinera.com

Infinera Corporation Reports Third Quarter 2015 Financial Results