SOURCE: Infinera

Infinera

April 27, 2016 16:15 ET

Infinera Corporation Reports First Quarter 2016 Financial Results

SUNNYVALE, CA--(Marketwired - April 27, 2016) -  Infinera Corporation (NASDAQ: INFN), provider of Intelligent Transport Networks, today released financial results for the first quarter of 2016 ended March 26, 2016.

GAAP revenue for the quarter was $244.8 million compared to $260.0 million in the fourth quarter of 2015 and $186.9 million in the first quarter of 2015.

GAAP gross margin for the quarter was 47.5% compared to 44.5% in the fourth quarter of 2015 and 47.2% in the first quarter of 2015. GAAP operating margin for the quarter was 6.1% compared to 5.3% in the fourth quarter of 2015 and 8.1% in the first quarter of 2015.

GAAP net income for the quarter was $12.0 million, or $0.08 per diluted share, compared to $12.6 million, or $0.08 per diluted share, in the fourth quarter of 2015, and $12.4 million, or $0.09 per diluted share, in the first quarter of 2015.

Non-GAAP revenue for the quarter was $245.0 million compared to $260.6 million in the fourth quarter of 2015 and $186.9 million in the first quarter of 2015.

Non-GAAP gross margin for the quarter was 50.2% compared to 48.3% in the fourth quarter of 2015 and 47.8% in the first quarter of 2015. Non-GAAP operating margin for the quarter was 12.3% compared to 12.7% in the fourth quarter of 2015 and 12.2% in the first quarter of 2015.

Non-GAAP net income for the quarter was $28.0 million, or $0.19 per diluted share, compared to $32.0 million, or $0.21 per diluted share, in the fourth quarter of 2015, and $22.1 million, or $0.16 per diluted share, in the first quarter of 2015. 

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.

"We continued to execute well in the first quarter, winning deals across our product portfolio and delivering strong financial results," said Tom Fallon, Infinera's Chief Executive Officer. "Responding to ongoing growth in bandwidth demand, customers are increasingly turning to Infinera to address the advanced scalability and efficiency required to operate their networks. By continuing to deliver the most innovative solutions and the Infinera Experience to our customers, I am confident that we will continue to gain market share across the end-to-end optical transport market and generate outstanding bottom line results."

Conference Call Information

Infinera will host a conference call for analysts and investors to discuss its first quarter 2016 results and its outlook for the second quarter of 2016 today at 5:00 p.m. Eastern Time (2:00 p.m. Pacific Time). Interested parties may join the conference call by dialing 1-866-373-6878 (toll free) or 1-412-317-5101 (international). A live webcast of the conference call will also be accessible from the Events & Webcasts section of Infinera's website at investors.infinera.com. Replay of the audio webcast will be available at investors.infinera.com approximately two hours after the end of the live call.

About Infinera

Infinera 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, data center 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 continue to address the advanced scalability and efficiency required to operate its customer's networks; and Infinera's ability to continue to gain market share across the end-to-end optical transport market and generate outstanding bottom line results. Forward-looking statements can also be identified by forward-looking words such as "anticipate," "believe," "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 new products or updates to existing 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 ability to respond to rapid technological changes; 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; global macroeconomic conditions; war, terrorism, public health issues, natural disasters and other circumstances that could disrupt the supply, delivery or demand of Infinera's products; 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 Annual Report on Form 10-K for the year ended on December 26, 2015 as filed with the SEC on February 23, 2016, 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 related to Infinera's acquisition of Transmode AB, which closed during the third quarter of 2015, 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 first quarter 2016 results, including an estimate of certain non-GAAP financial measures for the second quarter of 2016 that excludes non-cash stock-based compensation expenses, acquisition-related costs, certain purchase accounting adjustments related to Infinera's acquisition of Transmode 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  
    March 26, 2016     March 28, 2015  
Revenue:            
  Product   $ 216,082     $ 160,843  
  Services     28,736       26,019  
    Total revenue     244,818       186,862  
Cost of revenue:                
  Cost of product     118,062       89,506  
  Cost of services     10,418       9,244  
    Total cost of revenue     128,480       98,750  
Gross profit     116,338       88,112  
Operating expenses:                
  Research and development     54,145       39,257  
  Sales and marketing     30,009       21,042  
  General and administrative     17,313       12,656  
    Total operating expenses     101,467       72,955  
Income from operations     14,871       15,157  
Other income (expense), net:                
  Interest income     522       414  
  Interest expense     (3,155 )     (2,890 )
  Other gain (loss), net:     (214 )     301  
    Total other income (expense), net     (2,847 )     (2,175 )
Income before income taxes     12,024       12,982  
Provision for income taxes     216       616  
Net income     11,808       12,366  
  Less: Net loss attributable to noncontrolling interest     (207 )     -  
Net income attributable to Infinera Corporation   $ 12,015     $ 12,366  
Net income per common share attributable to Infinera Corporation:                
  Basic   $ 0.09     $ 0.10  
  Diluted   $ 0.08     $ 0.09  
Weighted average shares used in computing net income per common share:                
  Basic     140,805       127,840  
  Diluted     146,880       137,304  
                 

Infinera Corporation
GAAP to Non-GAAP Reconciliations
(In thousands, except percentages and per share data)
(Unaudited)

       
    Three Months Ended  
    March 26,
2016
          December 26,
2015
          March 28,
2015
     
Reconciliation of Revenue:                                  
U.S. GAAP as reported   $ 244,818           $ 260,034           $ 186,862      
Acquisition-related deferred revenue adjustment(1)     226             605             -      
Non-GAAP as adjusted   $ 245,044           $ 260,639           $ 186,862      
                                         
Reconciliation of Gross Profit:                                        
U.S. GAAP as reported   $ 116,338     47.5 %   $ 115,764     44.5 %   $ 88,112   47.2 %
Stock-based compensation(2)     1,532             1,733             1,243      
Acquisition-related deferred revenue adjustment(1)     226             605             -      
Amortization of acquired intangible assets(3)     4,870             4,640             -      
Acquisition-related inventory step-up expense(4)     -             3,090             -      
Acquisition-related costs(5)     39             39             -      
Non-GAAP as adjusted   $ 123,005     50.2 %   $ 125,871     48.3 %   $ 89,355   47.8 %
                                         
Reconciliation of Operating Expenses:                                        
U.S. GAAP as reported   $ 101,467           $ 101,975           $ 72,955      
Stock-based compensation(2)     6,455             6,979             5,965      
Amortization of acquired intangible assets(3)     1,632             1,656             -      
Acquisition-related costs(5)     488             565             462      
Non-GAAP as adjusted   $ 92,892           $ 92,775           $ 66,528      
                                         
Reconciliation of Income from Operations:                                        
U.S. GAAP as reported   $ 14,871     6.1 %   $ 13,789     5.3 %   $ 15,157   8.1 %
Stock-based compensation(2)     7,987             8,712             7,208      
Acquisition-related deferred revenue adjustment(1)     226             605             -      
Amortization of acquired intangible assets(3)     6,502             6,296             -      
Acquisition-related inventory step-up expense(4)     -             3,090             -      
Acquisition-related costs(5)     527             604             462      
Non-GAAP as adjusted   $ 30,113     12.3 %   $ 33,096     12.7 %   $ 22,827   12.2 %
                                         
Reconciliation of Net Income Attributable to Infinera Corporation:                                        
U.S. GAAP as reported   $ 12,015           $ 12,631           $ 12,366      
Stock-based compensation(2)     7,987             8,712             7,208      
Acquisition-related deferred revenue adjustment(1)     226             605             -      
Amortization of acquired intangible assets(3)     6,502             6,296             -      
Acquisition-related inventory step-up expense(4)     -             3,090             -      
Acquisition-related costs(5)     527             604             462      
Amortization of debt discount(6)     2,274             2,217             2,057      
Income tax effects(7)     (1,502 )           (2,197 )           -      
Non-GAAP as adjusted   $ 28,029           $ 31,958           $ 22,093      
                                         
                                         
                                         
Net Income per Common Share Attributable to Infinera Corporation - Basic:                                        
U.S. GAAP as reported   $ 0.09           $ 0.09           $ 0.10      
Non-GAAP as adjusted   $ 0.20           $ 0.23           $ 0.17      
Net Income per Common Share Attributable to Infinera Corporation - Diluted:                                        
U.S. GAAP as reported   $ 0.08           $ 0.08           $ 0.09      
Non-GAAP as adjusted   $ 0.19           $ 0.21           $ 0.16      
Weighted Average Shares Used in Computing Net Income per Common Share:                                        
Basic     140,805             140,015             127,840      
Diluted     146,880             149,439             137,304      
                                         

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
    March 26, 2016   December 26, 2015   March 28, 2015
Cost of revenue   $ 673   $ 665   $ 482
Research and development     2,321     2,872     2,578
Sales and marketing     2,235     2,159     1,721
General and administration     1,899     1,948     1,666
      7,128     7,644     6,447
Cost of revenue - amortization from balance sheet*     859     1,068     761
Total stock-based compensation expense   $ 7,987   $ 8,712   $ 7,208
                   

* 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 it from its non-GAAP operating expenses, gross margin and net income measures. Management believes the amortization of acquired intangible assets is not indicative of ongoing operating performance and its exclusion provides a better indication of Infinera's underlying business performance.

4 Business combination accounting principles require Infinera to measure acquired inventory at fair value as of the date of the acquisition. 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 include legal, financial, employee retention costs 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 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 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 excluded from 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.

7 The difference between the GAAP and non-GAAP tax is due to the net tax effects of the purchase accounting adjustments and acquisition related costs related to the Transmode acquisition.

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

             
    March 26, 2016     December 26, 2015  
ASSETS            
Current assets:            
  Cash and cash equivalents   $ 179,974     $ 149,101  
  Short-term investments     95,116       125,561  
  Accounts receivable, net of allowance for doubtful accounts of $630 in 2016 and $630 in 2015     184,309       186,243  
  Inventory     189,744       174,699  
  Prepaid expenses and other current assets     29,689       29,511  
    Total current assets     678,832       665,115  
Property, plant and equipment, net     115,372       110,861  
Intangible assets, net     151,311       156,319  
Goodwill     193,498       191,560  
Long-term investments     80,488       76,507  
Cost-method investment     14,500       14,500  
Long-term restricted cash     5,331       5,310  
Other non-current assets     4,032       4,009  
    Total assets   $ 1,243,364     $ 1,224,181  
LIABILITIES AND STOCKHOLDERS' EQUITY                
Current liabilities:                
  Accounts payable   $ 83,035     $ 92,554  
  Accrued expenses     33,319       33,736  
  Accrued compensation and related benefits     34,572       49,887  
  Accrued warranty     17,663       17,889  
  Deferred revenue     48,285       42,977  
    Total current liabilities     216,874       237,043  
  Long-term debt     125,796       123,327  
  Accrued warranty, non-current     22,336       20,955  
  Deferred revenue, non-current     18,391       13,881  
  Deferred tax liability     35,436       35,731  
  Other long-term liabilities     18,528       16,183  
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 March 26, 2016 and December 26, 2015                
    Issued and outstanding shares - 141,425 as of March 26, 2016 and 140,197 as of December 26, 2015     141       140  
  Additional paid-in capital     1,313,783       1,300,301  
  Accumulated other comprehensive income     4,774       1,123  
  Accumulated deficit     (527,398 )     (539,413 )
  Total Infinera Corporation stockholders' equity     791,300       762,151  
 Noncontrolling interest     14,703       14,910  
  Total stockholders' equity     806,003       777,061  
    Total liabilities and stockholders' equity   $ 1,243,364     $ 1,224,181  
                 

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

       
    Three Months Ended  
    March 26, 2016     March 28, 2015  
Cash Flows from Operating Activities:            
Net income   $ 11,808     $ 12,366  
Adjustments to reconcile net income to net cash provided by operating activities:                
  Depreciation and amortization     14,666       6,586  
  Amortization of debt discount and issuance costs     2,469       2,234  
  Amortization of premium on investments     481       954  
  Stock-based compensation expense     7,987       7,208  
  Other gain     -       (19 )
  Changes in assets and liabilities:                
    Accounts receivable     2,165       23,391  
    Inventory     (16,155 )     (12,103 )
    Prepaid expenses and other assets     (274 )     1,141  
    Accounts payable     (9,041 )     (10,317 )
    Accrued liabilities and other expenses     (15,036 )     (12,895 )
    Deferred revenue     9,776       2,797  
    Accrued warranty     1,133       (1,501 )
      Net cash provided by operating activities     9,979       19,842  
Cash Flows from Investing Activities:                
  Purchase of available-for-sale investments     (37,393 )     (80,022 )
  Proceeds from sales of available-for-sale investments     -       2,001  
  Proceeds from maturities of investments     63,759       91,280  
  Purchase of property and equipment     (10,844 )     (7,367 )
  Change in restricted cash     (30 )     352  
      Net cash provided by investing activities     15,492       6,244  
Cash Flows from Financing Activities:                
  Proceeds from issuance of common stock     7,787       10,131  
  Minimum tax withholding paid on behalf of employees for net share settlement     (2,444 )     (3,950 )
      Net cash provided by financing activities     5,343       6,181  
Effect of exchange rate changes on cash     59       (139 )
Net change in cash and cash equivalents     30,873       32,128  
Cash and cash equivalents at beginning of period     149,101       86,495  
Cash and cash equivalents at end of period   $ 179,974     $ 118,623  
Supplemental disclosures of cash flow information:                
  Cash paid for income taxes, net of refunds   $ 1,554     $ 897  
  Cash paid for interest   $ 37     $ -  
Supplemental schedule of non-cash investing activities:                
  Transfer of inventory to fixed assets   $ 1,409     $ 1,403  
                 

Infinera Corporation
Supplemental Financial Information
(Unaudited)

                                                 
    Q2'14     Q3'14     Q4'14     Q1'15     Q2'15     Q3'15     Q4'15     Q1'16  
Revenue ($ Mil)   $ 165.4     $ 173.6     $ 186.3     $ 186.9     $ 207.3     $ 232.5     $ 260.0     $ 244.8  
GAAP Gross Margin %     42.5 %     43.4 %     45.3 %     47.2 %     46.7 %     44.2 %     44.5 %     47.5 %
Non-GAAP Gross Margin %(1)     43.3 %     44.2 %     46.1 %     47.8 %     47.4 %     47.5 %     48.3 %     50.2 %
Revenue Composition:                                                                
Domestic %     82 %     70 %     58 %     68 %     75 %     68 %     62 %     71 %
International %     18 %     30 %     42 %     32 %     25 %     32 %     38 %     29 %
Customers >10% of Revenue     2       1       1       2       3       2       2       3  
Cash Related Information:                                                                
Cash from Operations ($ Mil)   $ 10.3     $ 22.3     $ 18.7     $ 19.8     $ 55.0     $ 32.5     $ 25.8     $ 10.0  
Capital Expenditures ($ Mil)   $ 4.4     $ 4.4     $ 8.8     $ 7.4     $ 8.7     $ 10.6     $ 15.3     $ 10.8  
Depreciation & Amortization ($ Mil)   $ 6.5     $ 6.5     $ 6.6     $ 6.6     $ 6.3     $ 9.2     $ 13.7     $ 14.7  
DSO's     66       71       76       64       48       55       65       69  
Inventory Metrics:                                                                
Raw Materials ($ Mil)   $ 11.2     $ 11.6     $ 15.2     $ 22.4     $ 30.2     $ 24.2     $ 27.9     $ 33.1  
Work in Process ($ Mil)   $ 40.6     $ 44.4     $ 50.0     $ 45.9     $ 43.9     $ 48.5     $ 52.6     $ 59.4  
Finished Goods ($ Mil)   $ 79.1     $ 74.8     $ 81.3     $ 88.9     $ 83.1     $ 97.2     $ 94.2     $ 97.2  
Total Inventory ($ Mil)   $ 130.9     $ 130.8     $ 146.5     $ 157.2     $ 157.2     $ 169.9     $ 174.7     $ 189.7  
Inventory Turns(2)     2.9       3.0       2.7       2.5       2.8       2.9       3.1       2.6  
Worldwide Headcount     1,396       1,456       1,495       1,530       1,598       1,978       2,056       2,128  
                                                                 

1 Non-GAAP adjustments include non-cash stock-based compensation expense, certain purchase accounting adjustments related to Infinera's acquisition of Transmode 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.

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