SOURCE: Infinera

Infinera

July 27, 2016 16:15 ET

Infinera Corporation Reports Second Quarter 2016 Financial Results

SUNNYVALE, CA--(Marketwired - July 27, 2016) - Infinera Corporation (NASDAQ: INFN) provider of Intelligent Transport Networks, today released financial results for the second quarter of 2016 ended June 25, 2016.

GAAP revenue for the quarter was $258.8 million compared to $244.8 million in the first quarter of 2016 and $207.3 million in the second quarter of 2015.

GAAP gross margin for the quarter was 47.8% compared to 47.5% in the first quarter of 2016 and 46.7% in the second quarter of 2015. GAAP operating margin for the quarter was 6.2% compared to 6.1% in the first quarter of 2016 and 8.0% in the second quarter of 2015.

GAAP net income for the quarter was $11.5 million, or $0.08 per diluted share, compared to $12.0 million, or $0.08 per diluted share, in the first quarter of 2016, and $17.9 million, or $0.13 per diluted share, in the second quarter of 2015.

Non-GAAP revenue for the quarter was $259.0 million compared to $245.0 million in the first quarter of 2016 and $207.3 million in the second quarter of 2015.

Non-GAAP gross margin for the quarter was 50.4% compared to 50.2% in the first quarter of 2016 and 47.4% in the second quarter of 2015. Non-GAAP operating margin for the quarter was 13.2% compared to 12.3% in the first quarter of 2016 and 13.0% in the second quarter of 2015.

Non-GAAP net income for the quarter was $30.9 million, or $0.21 per diluted share, compared to $28.0 million, or $0.19 per diluted share, in the first quarter of 2016, and $25.7 million, or $0.18 per diluted share, in the second 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.

"While I am very pleased with our second quarter and year to date financial results, demand is softening in certain areas of our business and we face a difficult near-term revenue outlook," said Tom Fallon, Infinera's Chief Executive Officer. "Despite the current challenges, I am confident that by continuing to deliver the differentiated technologies and superior service that our customers have come to expect, we will earn significant market share over time across all of the markets that we serve."

Conference Call Information

Infinera will host a conference call for analysts and investors to discuss its second quarter 2016 results and its outlook for the third 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 deliver the differentiated technologies and superior service that its customers have come to expect, and Infinera's ability to earn significant market share over time across all of the markets that it serves. 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 Quarterly Report on Form 10-Q for the quarter ended on March 26, 2016 as filed with the SEC on May 4, 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 second quarter 2016 results, including an estimate of certain non-GAAP financial measures for the third 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 AB 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   Six Months Ended
    June 25, 2016   June 27, 2015   June 25, 2016   June 27, 2015
Revenue:                    
  Product   $ 227,532     $ 178,982     $ 443,614     $ 339,825  
  Services    31,290      28,364      60,026      54,383  
   Total revenue    258,822      207,346      503,640      394,208  
Cost of revenue:                    
  Cost of product    122,438      99,491      240,500      188,997  
  Cost of services    12,638      11,059      23,056      20,303  
   Total cost of revenue    135,076      110,550      263,556      209,300  
Gross profit    123,746      96,796      240,084      184,908  
Operating expenses:                    
  Research and development    59,541      43,421      113,686      82,678  
  Sales and marketing    30,465      21,535      60,474      42,577  
  General and administrative    17,658      15,310      34,971      27,966  
   Total operating expenses    107,664      80,266      209,131      153,221  
Income from operations    16,082      16,530      30,953      31,687  
Other income (expense), net:                    
  Interest income    595      551      1,117      965  
  Interest expense    (3,176 )    (2,947 )    (6,331 )    (5,837 )
  Other gain (loss), net:    (714 )    4,780      (928 )    5,081  
   Total other income (expense), net    (3,295 )    2,384      (6,142 )    209  
Income before income taxes    12,787      18,914      24,811      31,896  
Provision for income taxes    1,475      1,008      1,691      1,624  
Net income    11,312      17,906      23,120      30,272  
 Less: Net loss attributable to noncontrolling interest    (171 )    -      (378 )    -  
Net income attributable to Infinera Corporation   $ 11,483     $ 17,906     $ 23,498     $ 30,272  
Net income per common share attributable to Infinera Corporation:                    
  Basic   $ 0.08     $ 0.14     $ 0.17     $ 0.23  
  Diluted   $ 0.08     $ 0.13     $ 0.16     $ 0.22  
Weighted average shares used in computing net income per common share:                    
  Basic    142,396      130,349      141,600      129,094  
  Diluted    145,891      140,642      146,385      138,973  

Infinera Corporation

GAAP to Non-GAAP Reconciliations

(In thousands, except percentages and per share data)

(Unaudited)

   Three Months Ended   Six Months Ended  
   June 25, 2016       March 26,
2016
      June 27, 2015       June 25, 2016       June 27, 2015      
Reconciliation of Revenue:                                              
                                               
U.S. GAAP as reported  $258,822       $244,818       $207,346       $503,640       $394,208      
Acquisition-related deferred revenue adjustment(1)   174        226        -        400        -      
                                               
Non-GAAP as adjusted  $258,996       $245,044       $207,346       $504,040       $394,208      
                                               
Reconciliation of Gross Profit:                                              
                                               
U.S. GAAP as reported  $123,746   47.8 % $116,338   47.5 % $96,796   46.7 % $240,084   47.7 % $184,908   46.9 %
Stock-based compensation(2)   1,658        1,532        1,493        3,190        2,736      
Acquisition-related deferred revenue adjustment(1)   174        226        -        400        -      
Amortization of acquired intangible assets(3)   4,998        4,870        -        9,868        -      
Acquisition-related costs(4)   40        39        -        79        -      
                                               
Non-GAAP as adjusted  $130,616   50.4 % $123,005   50.2 % $98,289   47.4 % $253,621   50.3 % $187,644   47.6 %
                                               
Reconciliation of Operating Expenses:                                              
                                               
U.S. GAAP as reported  $107,664       $101,467       $80,266       $209,131       $153,221      
Stock-based compensation(2)   9,335        6,455        6,716        15,790        12,681      
Amortization of acquired intangible assets(3)   1,584        1,632        -        3,216        -      
Acquisition-related costs(4)   402        488        2,264        890        2,726      
                                               
Non-GAAP as adjusted  $96,343       $92,892       $71,286       $189,235       $137,814      
                                               
Reconciliation of Income from Operations:                                              
                                               
U.S. GAAP as reported  $16,082   6.2 % $14,871   6.1 % $16,530   8.0 % $30,953   6.1 % $31,687   8.0 %
Stock-based compensation(2)   10,993        7,987        8,209        18,980        15,417      
Acquisition-related deferred revenue adjustment(1)   174        226        -        400        -      
Amortization of acquired intangible assets(3)   6,582        6,502        -        13,084        -      
Acquisition-related costs(4)   442        527        2,264        969        2,726      
                                               
Non-GAAP as adjusted  $34,273   13.2 % $30,113   12.3 % $27,003   13.0 % $64,386   12.8 % $49,830   12.6 %
                                               
Reconciliation of Net Income Attributable to Infinera Corporation:                                              
                                               
U.S. GAAP as reported  $11,483       $12,015       $17,906       $23,498       $30,272      
Stock-based compensation(2)   10,993        7,987        8,209        18,980        15,417      
Acquisition-related deferred revenue adjustment(1)   174        226        -        400        -      
Amortization of acquired intangible assets(3)   6,582        6,502        -        13,084        -      
Acquisition-related costs(4)   862        527        2,264        1,389        2,726      
Acquisition-related forward contract (gain) loss(5)   -        -        (4,782 )      -        (4,782 )    
Amortization of debt discount(6)   2,331        2,274        2,109        4,605        4,166      
Income tax effects(7)   (1,510 )      (1,502 )      -        (3,012 )      -      
                                               
Non-GAAP as adjusted  $30,915       $28,029       $25,706       $58,944       $47,799      
                                               
Net Income per Common Share Attributable to Infinera Corporation - Basic:                                              
                                               
U.S. GAAP as reported  $0.08       $0.09       $0.14       $0.17       $0.23      
                                               
Non-GAAP as adjusted  $0.22       $0.20       $0.20       $0.42       $0.37      
                                               
Net Income per Common Share Attributable to Infinera Corporation - Diluted:                                              
                                               
U.S. GAAP as reported  $0.08       $0.08       $0.13       $0.16       $0.22      
                                               
Non-GAAP as adjusted  $0.21       $0.19       $0.18       $0.40       $0.34      
                                               
Weighted Average Shares Used in Computing Net Income per Common Share:                                              
Basic   142,396        140,805        130,349        141,600        129,094      
Diluted   145,851        146,880        140,642        146,366        138,973      

_____________________________

(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  Six Months Ended
   June 25, 2016  March 26, 2016  June 27, 2015  June 25, 2016  June 27, 2015
Cost of revenue  $746  $673  $613  $1,419  $1,095
Research and development   3,904   2,321   2,817   6,225   5,395
Sales and marketing   2,945   2,235   2,070   5,180   3,791
General and administration   2,486   1,899   1,829   4,385   3,495
    10,081   7,128   7,329   17,209   13,776
Cost of revenue - amortization from balance sheet*   912   859   880   1,771   1,641
Total stock-based compensation expense  $10,993  $7,987  $8,209  $18,980  $15,417

_____________________________

* 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)Acquisition-related costs associated with the Transmode acquisition include legal, financial, employee retention costs and other professional fees incurred in connection with the transaction, including squeeze-out proceedings. 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.
  
(5)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.
  
(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)

    June 25, 2016   December 26, 2015
ASSETS             
Current assets:             
 Cash and cash equivalents   $138,380    $149,101  
 Short-term investments    119,370     125,561  
 Short-term restricted cash    24,942     -  
 Accounts receivable, net of allowance for doubtful accounts of $630 in 2016 and 2015    193,414     186,243  
 Inventory    202,280     174,699  
 Prepaid expenses and other current assets    29,210     29,511  
   Total current assets    707,596     665,115  
Property, plant and equipment, net    120,095     110,861  
Intangible assets    142,108     156,319  
Goodwill    189,982     191,560  
Long-term investments    87,944     76,507  
Cost-method investment    14,500     14,500  
Long-term restricted cash    5,355     5,310  
Other non-current assets    4,194     4,009  
   Total assets   $1,271,774    $1,224,181  
LIABILITIES AND STOCKHOLDERS' EQUITY             
Current liabilities:             
 Accounts payable   $83,875    $92,554  
 Accrued expenses    36,466     33,736  
 Accrued compensation and related benefits    41,461     49,887  
 Accrued warranty    17,737     17,889  
 Deferred revenue    47,277     42,977  
   Total current liabilities    226,816     237,043  
 Long-term debt, net    128,328     123,327  
 Accrued warranty, non-current    23,252     20,955  
 Deferred revenue, non-current    19,671     13,881  
 Deferred tax liability    33,264     35,731  
 Other long-term liabilities    18,182     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 June 25, 2016 and December 26, 2015             
  Issued and outstanding shares - 143,141 as of June 25, 2016 and 140,197 as of December 26, 2015    143     140  
 Additional paid-in capital    1,325,238     1,300,301  
 Accumulated other comprehensive income (loss)    (1,737 )   1,123  
 Accumulated deficit    (515,915 )   (539,413 )
 Total Infinera Corporation stockholders' equity    807,729     762,151  
Noncontrolling interest    14,532     14,910  
 Total stockholders' equity    822,261     777,061  
   Total liabilities and stockholders' equity   $1,271,774    $1,224,181  

Infinera Corporation

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

    Six Months Ended
    June 25, 2016   June 27, 2015
Cash Flows from Operating Activities:             
Net income   $23,120    $30,272  
Adjustments to reconcile net income to net cash provided by operating activities:             
 Depreciation and amortization    29,891     12,850  
 Amortization of debt discount and issuance costs    5,001     4,524  
 Amortization of premium on investments    733     1,792  
 Stock-based compensation expense    18,980     15,417  
 Other loss (gain)    84     (4,780 )
 Changes in assets and liabilities:             
  Accounts receivable    (7,404 )   45,140  
  Inventory    (31,304 )   (12,774 )
  Prepaid expenses and other assets    (328 )   (1,080 )
  Accounts payable    (7,339 )   (23,597 )
  Accrued liabilities and other expenses    (5,528 )   1,491  
  Deferred revenue    10,129     4,216  
  Accrued warranty    2,165     1,399  
   Net cash provided by operating activities    38,200     74,870  
Cash Flows from Investing Activities:             
 Purchase of available-for-sale investments    (97,051 )   (112,940 )
 Proceeds from sales of available-for-sale investments    -     9,998  
 Proceeds from maturities of investments    91,714     143,483  
 Purchase of property and equipment    (23,278 )   (16,098 )
 Change in restricted cash    (60 )   290  
   Net cash provided by (used in) investing activities    (28,675 )   24,733  
Cash Flows from Financing Activities:             
 Security pledge to acquire noncontrolling interest    (24,942 )   -  
 Proceeds from issuance of common stock    8,586     16,488  
 Minimum tax withholding paid on behalf of employees for net share settlement    (3,082 )   (4,561 )
   Net cash provided by (used in) financing activities    (19,438 )   11,927  
Effect of exchange rate changes on cash    (808 )   (7 )
Net change in cash and cash equivalents    (10,721 )   111,523  
Cash and cash equivalents at beginning of period    149,101     86,495  
Cash and cash equivalents at end of period   $138,380    $198,018  
Supplemental disclosures of cash flow information:             
 Cash paid for income taxes, net of refunds   $3,237    $1,481  
 Cash paid for interest   $1,410    $1,313  
Supplemental schedule of non-cash investing activities:             
 Transfer of inventory to fixed assets   $4,009    $2,205  

Infinera Corporation

Supplemental Financial Information

(Unaudited)

   Q3'14  Q4'14  Q1'15  Q2'15  Q3'15  Q4'15  Q1'16  Q2'16
Revenue ($ Mil)  $173.6   $186.3   $186.9   $207.3   $232.5   $260.0   $244.8   $258.8  
GAAP Gross Margin %   43.4 %  45.3 %  47.2 %  46.7 %  44.2 %  44.5 %  47.5 %  47.8 %
Non-GAAP Gross Margin %(1)   44.2 %  46.1 %  47.8 %  47.4 %  47.5 %  48.3 %  50.2 %  50.4 %
Revenue Composition:                                         
Domestic %   70 %  58 %  68 %  75 %  68 %  62 %  71 %  64 %
International %   30 %  42 %  32 %  25 %  32 %  38 %  29 %  36 %
Customers >10% of Revenue   1    1    2    3    2    2    3    2  
Cash Related Information:                                         
Cash from Operations ($ Mil)  $22.3   $18.7   $19.8   $55.0   $32.5   $25.8   $10.0   $28.2  
Capital Expenditures ($ Mil)  $4.4   $8.8   $7.4   $8.7   $10.6   $15.3   $10.8   $12.5  
Depreciation & Amortization ($ Mil)  $6.5   $6.6   $6.6   $6.3   $9.2   $13.7   $14.7   $15.2  
DSO's   71    76    64    48    55    65    69    68  
Inventory Metrics:                                         
Raw Materials ($ Mil)  $11.6   $15.2   $22.4   $30.2   $24.2   $27.9   $33.1   $39.1  
Work in Process ($ Mil)  $44.4   $50.0   $45.9   $43.9   $48.5   $52.6   $59.4   $61.0  
Finished Goods ($ Mil)  $74.8   $81.3   $88.9   $83.1   $97.2   $94.2   $97.2   $102.2  
Total Inventory ($ Mil)  $130.8   $146.5   $157.2   $157.2   $169.9   $174.7   $189.7   $202.3  
Inventory Turns(2)   3.0    2.7    2.5    2.8    2.9    3.1    2.6    2.5  
Worldwide Headcount   1,456    1,495    1,530    1,598    1,978    2,056    2,128    2,218  
         
(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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