SOURCE: Infinera

Infinera

October 27, 2015 16:15 ET

Infinera Corporation Reports Third Quarter 2015 Financial Results

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