Infinera Corporation Reports Third Quarter 2014 Financial

SUNNYVALE, CA--(Marketwired - Oct 22, 2014) - Infinera Corporation ( NASDAQ : INFN ), provider of Intelligent Transport Networks , today released financial results for the third quarter of 2014 ended September 27, 2014.

GAAP revenue for the quarter was $173.6 million compared to $165.4 million in the second quarter of 2014 and $142.0 million in the third quarter of 2013. GAAP gross margin for the quarter was 43.4% compared to 42.5% in the second quarter of 2014 and 48.1% in the third quarter of 2013. GAAP operating margin for the quarter was 4.3% compared to 4.9% in the second quarter of 2014 and 4.5% in the third quarter of 2013.

GAAP net income for the quarter was $4.8 million, or $0.04 per diluted share, compared to net income of $4.8 million, or $0.04 per diluted share, in the second quarter of 2014, and net income of $3.3 million, or $0.03 per diluted share, in the third quarter of 2013.

Non-GAAP gross margin for the quarter was 44.2% compared to 43.3% in the second quarter of 2014 and 49.2% in the third quarter of 2013. Non-GAAP operating margin for the quarter was 8.6% compared to 9.0% in the second quarter of 2014 and 9.9% in the third quarter of 2013.

Non-GAAP net income for the quarter was $14.2 million, or $0.11 per diluted share, compared to net income of $13.5 million, or $0.11 per diluted share, in the second quarter of 2014, and net income of $12.8 million, or $0.10 per diluted share, in the third quarter of 2013. 

These non-GAAP measures exclude non-cash stock-based compensation expenses and the amortization of debt discount on Infinera's convertible senior notes. 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.

"I'm pleased that we continue to achieve significant revenue growth while expanding our gross margin and profit levels," said Tom Fallon, Infinera's Chief Executive Officer. "Our business outlook remains positive as we've strengthened our product portfolio with the introduction of the Cloud Xpress while enhancing our market leading DTN-X. I believe Infinera has never been better positioned as we continue to deliver what we believe are the right products at the right time."

Conference Call Information Infinera will host a conference call for analysts and investors to discuss its third quarter of 2014 results and its outlook for the fourth quarter of 2014 today at 5:00 p.m. Eastern Time (2:00 p.m. Pacific Time). 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 1-888-562-5415 . International parties can access the replay at 1-203-369-3763 .

About Infinera Infinera provides Intelligent Transport Networks to help carriers exploit the increasing demand for cloud-based services and data center connectivity as they advance into the Terabit Era. With solutions from Infinera, network operators may easily deploy high-capacity transport networks across the metro and around the world. Infinera is unique in its use of breakthrough semiconductor technology to deliver large scale Photonic Integrated Circuit (PICs) and the application of PICs to vertically integrated optical networking solutions. www.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. 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. Forward-looking statements include statements regarding Infinera's expectations, beliefs, intentions or strategies including statements regarding Infinera's expectations for its business outlook; belief that Infinera has never been better positioned; and ability to deliver the right products at the right time. Such forward-looking statements can be identified by forward-looking words such as "anticipated," "believed," "could," "estimate," "expect," "intend," "may," "should," "will," and "would" or similar words. The risks and uncertainties that could cause Infinera's results to differ materially from those expressed or implied by such forward-looking statements include aggressive business tactics by Infinera's competitors; delays in the development and introduction of Infinera's products and market acceptance of these products; the effect of 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; 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 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 June 28, 2014 and filed with the SEC on August 1, 2014, 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 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 (loss), basic and diluted net income (loss) per share, or gross 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 results, including an estimate of non-GAAP earnings for the fourth quarter of 2014 that excludes non-cash stock-based compensation expenses 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 share data)
(Unaudited)
				Three Months Ended						Nine Months Ended
				September 27,			September 28,			September 27,			September 28,
				2014			2013			2014			2013
Revenue:
		Product		$	147,178		$	121,332		$	413,784		$	350,322
		Services			26,381			20,688			67,989			54,708
			Total revenue		173,559			142,020			481,773			405,030
Cost of revenue:
		Cost of product			86,703			66,685			251,047			222,330
		Cost of services			11,554			6,964			26,765			19,973
			Total cost of revenue		98,257			73,649			277,812			242,303
Gross profit					75,302			68,371			203,961			162,727
Operating expenses:
		Research and development			35,051			32,528			96,135			93,935
		Sales and marketing			20,794			17,720			56,738			52,921
		General and administrative			11,977			11,678			36,612			32,976
			Total operating expenses		67,822			61,926			189,485			179,832
Income (loss) from operations					7,480			6,445			14,476			(17,105	)
Other income (expense), net:
		Interest income			373			232			1,046			636
		Interest expense			(2,781	)		(2,578	)		(8,186	)		(3,427	)
		Other gain (loss), net			(24	)		(444	)		(1,017	)		(805	)
			Total other income (expense), net		(2,432	)		(2,790	)		(8,157	)		(3,596	)
Income (loss) before income taxes					5,048			3,655			6,319			(20,701	)
Provision for income taxes					205			308			1,070			1,240
Net income (loss)				$	4,843		$	3,347		$	5,249		$	(21,941	)
Net income (loss) per common share:
	Basic			$	0.04		$	0.03		$	0.04		$	(0.19	)
	Diluted			$	0.04		$	0.03		$	0.04		$	(0.19	)
Weighted average shares used in computing net income (loss) per common share:
	Basic				124,378			118,740			122,953			116,653
	Diluted				128,964			124,679			127,062			116,653

Infinera Corporation
GAAP to Non-GAAP Reconciliations
(In thousands, except percentages and per share data)
(Unaudited)
		Three Months Ended												Nine Months Ended
		September 27,				June 28,				September 28,				September 27,				September 28,
		2014				2014				2013				2014				2013
Reconciliation of Gross Profit:
U.S. GAAP as reported		$	75,302			$	70,253			$	68,371			$	203,961			$	162,727
Stock-based compensation (1)			1,491				1,360				1,549				4,135				5,801
Non-GAAP as adjusted		$	76,793			$	71,613			$	69,920			$	208,096			$	168,528
Reconciliation of Gross Margin:
U.S. GAAP as reported			43.4	%			42.5	%			48.1	%			42.3	%			40.2	%
Stock-based compensation (1)			0.8	%			0.8	%			1.1	%			0.9	%			1.4	%
Non-GAAP as adjusted			44.2	%			43.3	%			49.2	%			43.2	%			41.6	%
Reconciliation of Income (Loss) from Operations:
U.S. GAAP as reported		$	7,480			$	8,052			$	6,445			$	14,476			$	(17,105	)
Stock-based compensation (1)			7,371				6,804				7,643				20,847				23,802
Non-GAAP as adjusted		$	14,851			$	14,856			$	14,088			$	35,323			$	6,697
Reconciliation of Operating Margin:
U.S. GAAP as reported			4.3	%			4.9	%			4.5	%			3.0	%			(4.2	)%
Stock-based compensation (1)			4.3	%			4.1	%			5.4	%			4.3	%			5.9	%
Non-GAAP as adjusted			8.6	%			9.0	%			9.9	%			7.3	%			1.7	%
Reconciliation of Net Income (Loss):
U.S. GAAP as reported		$	4,843			$	4,780			$	3,347			$	5,249			$	(21,941	)
Stock-based compensation (1)			7,371				6,804				7,643				20,847				23,802
Amortization of debt discount (2)			1,956				1,908				1,770				5,724				2,350
Non-GAAP as adjusted		$	14,170			$	13,492			$	12,760			$	31,820			$	4,211
Net Income (Loss) per Common Share - Basic:
U.S. GAAP as reported		$	0.04			$	0.04			$	0.03			$	0.04			$	(0.19	)
Non-GAAP as adjusted		$	0.11			$	0.11			$	0.11			$	0.26			$	0.04
Net Income (Loss) per Common Share - Diluted:
U.S. GAAP as reported		$	0.04			$	0.04			$	0.03			$	0.04			$	(0.19	)
Non-GAAP as adjusted		$	0.11			$	0.11			$	0.10			$	0.25			$	0.03
Weighted average shares used in computing net income (loss) per common share - U.S. GAAP:
Basic			124,378				123,128				118,740				122,953				116,653
Diluted			128,964				126,758				124,679				127,062				116,653
Weighted average shares used in computing net income (loss) per common share - Non-GAAP:
Basic			124,378				123,128				118,740				122,953				116,653
Diluted			128,964				126,758				124,679				127,062				121,178
(1) 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 27,				June 28,				September 28,				September 27,				September 28,
		2014				2014				2013				2014				2013
Cost of revenue		$	492			$	477			$	422			$	1,421			$	1,382
Research and development			2,270				2,080				2,434				6,488				8,175
Sales and marketing			1,982				1,815				1,853				5,517				5,659
General and administration			1,628				1,549				1,807				4,707				4,167
			6,372				5,921				6,516				18,133				19,383
Cost of revenue - amortization from balance sheet*			999				883				1,127				2,714				4,419
Total stock-based compensation expense		$	7,371			$	6,804			$	7,643			$	20,847			$	23,802
* Stock-based compensation expense deferred to inventory and deferred inventory costs in prior periods and recognized in the current period.
(2) 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. These amounts have 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.

Infinera Corporation
Condensed Consolidated Balance Sheets
(In thousands, except par values)
(Unaudited)
					September 27,				December 28,
					2014				2013
ASSETS
Current assets:
	Cash and cash equivalents				$	110,864			$	124,330
	Short-term investments					206,713				172,660
	Accounts receivable, net of allowance for doubtful accounts of $20 in 2014 and $43 in 2013					136,085				100,643
	Inventory					130,833				123,685
	Prepaid expenses and other current assets					21,714				17,752
			Total current assets			606,209				539,070
Property, plant and equipment, net						74,964				79,668
Long-term investments						55,886				64,419
Cost-method investment						14,500				9,000
Long-term restricted cash						4,224				3,904
Other non-current assets						5,309				4,865
			Total assets		$	761,092			$	700,926
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable				$	51,456			$	39,843
	Accrued expenses					23,593				22,431
	Accrued compensation and related benefits					29,632				33,899
	Accrued warranty					12,736				12,374
	Deferred revenue					24,386				32,402
			Total current liabilities			141,803				140,949
	Long-term debt, net					114,888				109,164
	Accrued warranty, non-current					15,070				10,534
	Deferred revenue, non-current					8,633				4,888
	Other long-term liabilities					18,741				17,581
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 27, 2014 and December 28, 2013
		Issued and outstanding shares - 125,267 as of September 27, 2014 and 119,887 as of December 28, 2013				125				120
	Additional paid-in capital					1,064,723				1,025,661
	Accumulated other comprehensive loss					(3,655	)			(3,486	)
	Accumulated deficit					(599,236	)			(604,485	)
	Total stockholders' equity					461,957				417,810
			Total liabilities and stockholders' equity		$	761,092			$	700,926

Infinera Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
					Nine Months Ended
					September 27,				September 28,
					2014				2013
Cash Flows from Operating Activities:
Net income (loss)					$	5,249			$	(21,941	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
	Depreciation and amortization					19,340				18,574
	Amotization of debt discount and issuance costs					6,217				2,552
	Amortization of premium on investments					2,720				870
	Stock-based compensation expense					20,847				23,802
	Other loss (gain)					15				(278	)
	Changes in assets and liabilities:
		Accounts receivable				(35,463	)			19,805
		Inventory				(9,015	)			(3,603	)
		Prepaid expenses and other assets				(4,965	)			(6,427	)
		Accounts payable				11,009				(30,624	)
		Accrued liabilities and other expenses				657				1,640
		Deferred revenue				(4,272	)			(1,655	)
		Accrued warranty				4,898				6,680
			Net cash provided by operating activities			17,237				9,395
Cash Flows from Investing Activities:
	Purchase of available-for-sale investments					(214,272	)			(206,528	)
	Purchase of cost-method investment					(5,500	)			-
	Proceeds from sale of available-for-sale investments					17,876				2,850
	Proceeds from maturities and calls of investments					168,137				77,143
	Purchase of property and equipment					(14,364	)			(13,605	)
	Change in restricted cash					(320	)			110
			Net cash used in investing activities			(48,443	)			(140,030	)
Cash Flows from Financing Activities:
	Proceeds from issuance of debt, net					-				144,469
	Proceeds from issuance of common stock					19,683				21,551
	Minimum tax withholding paid on behalf of employees for net share settlement					(1,846	)			(1,541	)
			Net cash provided by financing activities			17,837				164,479
Effect of exchange rate changes on cash						(97	)			(881	)
Net change in cash and cash equivalents						(13,466	)			32,963
Cash and cash equivalents at beginning of period						124,330				104,666
Cash and cash equivalents at end of period					$	110,864			$	137,629
Supplemental disclosures of cash flow information:
	Cash paid for income taxes, net of refunds				$	1,056			$	1,536
	Cash paid for interest				$	1,313			$	-
Supplemental schedule of non-cash financing activities:
	Transfer of inventory to fixed assets				$	1,838			$	6,672

Infinera Corporation
Supplemental Financial Information
(Unaudited)
		Q4'12	Q1'13	Q2'13	Q3'13	Q4'13	Q1'14	Q2'14	Q3'14
Revenue ($Mil)		$128.1	$124.6	$138.4	$142.0	$139.1	$142.8	$165.4	$173.6
Gross Margin% (1)		35.9%	35.9%	38.9%	49.2%	41.4%	41.8%	43.3%	44.2%
Revenue Composition:
	Domestic%	63%	63%	64%	73%	54%	78%	82%	70%
	International%	37%	37%	36%	27%	46%	22%	18%	30%
	Customers > 10% of Revenue	1	1	-	3	1	2	2	1
Cash Related Information:
	Cash from (Used in) Operations ($Mil)	$8.3	$(21.3)	$17.9	$12.8	$25.8	$(15.4)	$10.3	$22.3
	Capital Expenditures ($Mil)	$3.2	$4.9	$4.5	$4.2	$7.5	$5.6	$4.4	$4.4
	Depreciation & Amortization ($Mil)	$6.4	$6.3	$6.3	$5.9	$6.0	$6.3	$6.5	$6.5
	DSO's	76	82	64	56	66	68	66	71
Inventory Metrics:
	Raw Materials ($Mil)	$13.0	$12.2	$9.8	$12.1	$14.3	$13.2	$11.2	$11.6
	Work in Process ($Mil)	$57.3	$53.1	$41.0	$45.7	$49.2	$47.8	$40.6	$44.4
	Finished Goods ($Mil)	$57.5	$65.7	$70.5	$65.7	$60.2	$65.5	$79.1	$74.8
Total Inventory ($Mil)		$127.8	$131.0	$121.3	$123.5	$123.7	$126.5	$130.9	$130.8
Inventory Turns (2)		2.6	2.4	2.8	2.3	2.6	2.6	2.9	3.0
Worldwide Headcount		1,242	1,219	1,238	1,296	1,318	1,346	1,396	1,456
(1) Amounts reflect non-GAAP results. Non-GAAP adjustments include non-cash stock-based compensation expense.
(2) Infinera calculates non-GAAP inventory turns as annualized non-GAAP cost of revenue before adjustments for non-cash stock-based compensation expense divided by the average inventory for the quarter.