Infinera Corporation Reports Third Quarter 2016 Financial Results

SUNNYVALE, CA --(Marketwired - October 26, 2016) - Infinera Corporation (NASDAQ: INFN), provider of Intelligent Transport Networks, today released financial results for the third quarter of 2016 ended September 24, 2016.

GAAP revenue for the quarter was $185.5 million compared to $258.8 million in the second quarter of 2016 and $232.5 million in the third quarter of 2015.

GAAP gross margin for the quarter was 45.6% compared to 47.8% in the second quarter of 2016 and 44.2% in the third quarter of 2015. GAAP operating margin for the quarter was (5.9)% compared to 6.2% in the second quarter of 2016 and 6.1% in the third quarter of 2015.

GAAP net loss for the quarter was $(11.2) million, or $(0.08) per share, compared to net income of $11.5 million, or $0.08 per diluted share, in the second quarter of 2016, and net income of $8.5 million, or $0.06 per diluted share, in the third quarter of 2015.

Non-GAAP revenue for the quarter was $185.5 million compared to $259.0 million in the second quarter of 2016 and $233.2 million in the third quarter of 2015.

Non-GAAP gross margin for the quarter was 49.2% compared to 50.4% in the second quarter of 2016 and 47.5% in the third quarter of 2015. Non-GAAP operating margin for the quarter was 3.6% compared to 13.2% in the second quarter of 2016 and 14.4% in the third quarter of 2015.

Non-GAAP net income for the quarter was $7.4 million, or $0.05 per diluted share, compared to $30.9 million, or $0.21 per diluted share, in the second quarter of 2016, and $32.2 million, or $0.22 per diluted share, in the third 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.

"As expected, weak demand across much of our business in the third quarter led to financial results that were below our standards," said Tom Fallon, Infinera's Chief Executive Officer. "While the revenue environment is likely to remain challenging in the near term, we are making continued progress towards delivering our next generation of products and increasing the cadence in which we will introduce step function technology improvements. I firmly believe that we have the team and the core technologies that will enable us to recover from our current challenges and ultimately return to delivering differentiated financial results."

Conference Call Information

Infinera will host a conference call for analysts and investors to discuss its third quarter 2016 results and its outlook for the fourth quarter of 2016 today at 5:30 p.m. Eastern Time (2:30 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 expectations regarding its next generation of products and step function technology improvements; and Infinera's ability to recover from its current challenges and ultimately return to delivering differentiated financial 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; 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; aggressive business tactics by Infinera's competitors; Infinera's reliance on single-source suppliers; Infinera's ability to protect Infinera's intellectual property; Infinera's ability to successfully integrate the Infinera and Transmode businesses; claims by others that Infinera infringes their intellectual property; the effect of global macroeconomic conditions on Infinera's business; 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 June 25, 2016 as filed with the SEC on August 2, 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 third quarter 2016 results, including an estimate of certain non-GAAP financial measures for the fourth 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								Nine Months Ended
				September 24, 2016				September 26, 2015				September 24, 2016				September 26, 2015
Revenue:
	Product			$	156,188			$	202,365			$	599,802			$	542,190
	Services				29,264				30,107				89,290				84,490
		Total revenue			185,452				232,472				689,092				626,680
Cost of revenue:
	Cost of product				91,064				117,154				331,564				306,151
	Cost of services				9,786				12,513				32,842				32,816
		Total cost of revenue			100,850				129,667				364,406				338,967
Gross profit					84,602				102,805				324,686				287,713
Operating expenses:
	Research and development				50,855				45,466				164,541				128,144
	Sales and marketing				27,960				24,721				88,434				67,298
	General and administrative				16,646				18,358				51,617				46,324
		Total operating expenses			95,461				88,545				304,592				241,766
Income (loss) from operations					(10,859	)			14,260				20,094				45,947
Other income (expense), net:
	Interest income				647				406				1,764				1,371
	Interest expense				(3,313	)			(3,014	)			(9,644	)			(8,851	)
	Other gain (loss), net:				(188	)			(3,293	)			(1,116	)			1,788
		Total other income (expense), net			(2,854	)			(5,901	)			(8,996	)			(5,692	)
Income (loss) before income taxes					(13,713	)			8,359				11,098				40,255
Provision for (benefit from) income taxes					(2,416	)			(151	)			(725	)			1,473
Net income (loss)					(11,297	)			8,510				11,823				38,782
	Less: Net loss attributable to noncontrolling interest				(125	)			-				(503	)			-
Net income (loss) attributable to Infinera Corporation				$	(11,172	)		$	8,510			$	12,326			$	38,782
Net income (loss) per common share attributable to Infinera Corporation:
	Basic			$	(0.08	)		$	0.06			$	0.09			$	0.30
	Diluted			$	(0.08	)		$	0.06			$	0.08			$	0.27
Weighted average shares used in computing net income (loss) per common share:
	Basic				143,850				134,834				142,350				131,007
	Diluted				143,850				145,300				145,921				141,082

Infinera Corporation
GAAP to Non-GAAP Reconciliations
(In thousands, except percentages and per share data)
(Unaudited)
		Three Months Ended																					Nine Months Ended
		September 24, 2016							June 25, 2016							September 26, 2015							September 24, 2016							September 26, 2015
Reconciliation of Revenue:
U.S. GAAP as reported		$	185,452						$	258,822						$	232,472						$	689,092						$	626,680
Acquisition-related deferred revenue adjustment(1)			-							174							721							400							721
Non-GAAP as adjusted		$	185,452						$	258,996						$	233,193						$	689,492						$	627,401
Reconciliation of Gross Profit:
U.S. GAAP as reported		$	84,602			45.6	%		$	123,746			47.8	%		$	102,805			44.2	%		$	324,686			47.1	%		$	287,713			45.9	%
Stock-based compensation(2)			1,424							1,658							1,621							4,614							4,357
Acquisition-related deferred revenue adjustment(1)			-							174							721							400							721
Amortization of acquired intangible assets(3)			5,102							4,998							1,922							14,970							1,922
Acquisition-related inventory step-up expense(4)			-							-							3,620							-							3,620
Acquisition-related costs(4)			38							40							-							117							-
Non-GAAP as adjusted		$	91,166			49.2	%		$	130,616			50.4	%		$	110,689			47.5	%		$	344,787			50.0	%		$	298,333			47.6	%
Reconciliation of Operating Expenses:
U.S. GAAP as reported		$	95,461						$	107,664						$	88,545						$	304,592						$	241,766
Stock-based compensation(2)			8,787							9,335							6,830							24,577							19,511
Amortization of acquired intangible assets(3)			1,537							1,584							686							4,753							686
Acquisition-related costs(4)			563							402							3,950							1,453							6,676
Non-GAAP as adjusted		$	84,574						$	96,343						$	77,079						$	273,809						$	214,893
Reconciliation of Income (Loss) from Operations:
U.S. GAAP as reported		$	(10,859	)		(5.9	)%		$	16,082			6.2	%		$	14,260			6.1	%		$	20,094			2.9	%		$	45,947			7.3	%
Stock-based compensation(2)			10,211							10,993							8,451							29,191							23,868
Acquisition-related deferred revenue adjustment(1)			-							174							721							400							721
Amortization of acquired intangible assets(3)			6,639							6,582							2,608							19,723							2,608
Acquisition-related inventory step-up expense(4)			-							-							3,620							-							3,620
Acquisition-related costs(4)			601							442							3,950							1,570							6,676
Non-GAAP as adjusted		$	6,592			3.6	%		$	34,273			13.2	%		$	33,610			14.4	%		$	70,978			10.3	%		$	83,440			13.3	%
Reconciliation of Net Income (Loss) Attributable to Infinera Corporation:
U.S. GAAP as reported		$	(11,172	)					$	11,483						$	8,510						$	12,326						$	38,782
Stock-based compensation(2)			10,211							10,993							8,451							29,191							23,868
Acquisition-related deferred revenue adjustment(1)			-							174							721							400							721
Amortization of acquired intangible assets(3)			6,639							6,582							2,608							19,723							2,608
Acquisition-related inventory step-up expense(4)			-							-							3,620							-							3,620
Acquisition-related costs(4)			874							862							3,950							2,263							6,676
Acquisition-related forward contract (gain) loss(5)			-							-							3,728							-							(1,054	)
Amortization of debt discount(6)			2,391							2,331							2,162							6,996							6,328
Income tax effects(7)			(1,519	)						(1,510	)						(1,529	)						(4,531	)						(1,529	)
Non-GAAP as adjusted		$	7,424						$	30,915						$	32,221						$	66,368						$	80,020
Net Income (Loss) per Common Share Attributable to Infinera Corporation - Basic:
U.S. GAAP as reported		$	(0.08	)					$	0.08						$	0.06						$	0.09						$	0.30
Non-GAAP as adjusted		$	0.05						$	0.22						$	0.24						$	0.47						$	0.61
Net Income (Loss) per Common Share Attributable to Infinera Corporation - Diluted:
U.S. GAAP as reported		$	(0.08	)					$	0.08						$	0.06						$	0.08						$	0.27
Non-GAAP as adjusted		$	0.05						$	0.21						$	0.22						$	0.45						$	0.57
Weighted Average Shares Used in Computing Net Income (Loss) per Common Share:
Basic			143,850							142,396							134,834							142,350							131,007
Diluted			144,993							145,851							145,300							145,921							141,082

(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 24, 2016			June 25, 2016			September 26, 2015			September 24, 2016			September 26, 2015
Cost of revenue		$	756		$	746		$	645		$	2,175		$	1,740
Research and development			3,496			3,904			2,788			9,721			8,183
Sales and marketing			2,826			2,945			2,131			8,006			5,922
General and administration			2,465			2,486			1,911			6,850			5,406
			9,543			10,081			7,475			26,752			21,251
Cost of revenue - amortization from balance sheet*			668			912			976			2,439			2,617
Total stock-based compensation expense		$	10,211		$	10,993		$	8,451		$	29,191		$	23,868

*		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)
				September 24, 2016				December 26, 2015
ASSETS
Current assets:
	Cash and cash equivalents			$	130,996			$	149,101
	Short-term investments				136,643				125,561
	Short-term restricted cash				9,700				-
	Accounts receivable, net of allowance for doubtful accounts of $807 in 2016 and $630 in 2015				152,467				186,243
	Inventory				231,528				174,699
	Prepaid expenses and other current assets				30,520				29,511
		Total current assets			691,854				665,115
Property, plant and equipment, net					120,137				110,861
Intangible assets					133,939				156,319
Goodwill					187,927				191,560
Long-term investments					72,439				76,507
Cost-method investment					19,500				14,500
Long-term restricted cash					6,467				5,310
Other non-current assets					4,196				4,009
		Total assets		$	1,236,459			$	1,224,181
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable			$	76,789			$	92,554
	Accrued expenses				37,857				33,736
	Accrued compensation and related benefits				37,942				49,887
	Accrued warranty				15,875				17,889
	Deferred revenue				38,063				42,977
		Total current liabilities			206,526				237,043
	Long-term debt, net				130,924				123,327
	Accrued warranty, non-current				22,746				20,955
	Deferred revenue, non-current				18,369				13,881
	Deferred tax liability				31,419				35,731
	Other long-term liabilities				18,161				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 September 24, 2016 and December 26, 2015
		Issued and outstanding shares - 144,536 as of September 24, 2016 and 140,197 as of December 26, 2015			145				140
	Additional paid-in capital				1,341,501				1,300,301
	Accumulated other comprehensive income (loss)				(6,010	)			1,123
	Accumulated deficit				(527,322	)			(539,413	)
	Total Infinera Corporation stockholders' equity				808,314				762,151
Noncontrolling interest					-				14,910
	Total stockholders' equity				808,314				777,061
		Total liabilities and stockholders' equity		$	1,236,459			$	1,224,181

Infinera Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands)(Unaudited)
					Nine Months Ended
					September 24, 2016				September 26, 2015
Cash Flows from Operating Activities:
Net income					$	11,823			$	38,782
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization					45,764				22,094
	Amortization of debt discount and issuance costs					7,598				6,873
	Amortization of premium on investments					925				2,405
	Stock-based compensation expense					29,191				23,868
	Other loss (gain)					261				(448	)
	Changes in assets and liabilities:
		Accounts receivable				33,044				28,838
		Inventory				(61,078	)			(8,901	)
		Prepaid expenses and other assets				(1,625	)			(6,058	)
		Accounts payable				(13,935	)			(2,339	)
		Accrued liabilities and other expenses				(7,580	)			(7,196	)
		Deferred revenue				(805	)			700
		Accrued warranty				(179	)			8,742
			Net cash provided by operating activities			43,404				107,360
Cash Flows from Investing Activities:
	Purchase of available-for-sale investments					(118,017	)			(126,940	)
	Acquisition of business, net of cash acquired					-				(144,445	)
	Realized gain from forward contract for business acquisition					-				1,053
	Purchase of cost-method investment					(5,000	)			-
	Proceeds from sales of available-for-sale investments					-				67,303
	Proceeds from maturities and calls of investments					110,554				178,717
	Purchase of property and equipment					(32,878	)			(26,710	)
	Change in restricted cash					(4,950	)			127
			Net cash used in investing activities			(50,291	)			(50,895	)
Cash Flows from Financing Activities:
	Security pledge related to Squeeze-out Proceedings					(5,921	)			-
	Acquisition of noncontrolling interest					(16,771	)			-
	Proceeds from issuance of common stock					16,486				23,433
	Minimum tax withholding paid on behalf of employees for net share settlement					(3,592	)			(5,043	)
			Net cash provided by (used in) financing activities			(9,798	)			18,390
Effect of exchange rate changes on cash						(1,420	)			(247	)
Net change in cash and cash equivalents						(18,105	)			74,608
Cash and cash equivalents at beginning of period						149,101				86,495
Cash and cash equivalents at end of period					$	130,996			$	161,103
Supplemental disclosures of cash flow information:
	Cash paid for income taxes, net of refunds				$	5,557			$	2,552
	Cash paid for interest				$	1,445			$	1,317
Supplemental schedule of non-cash investing activities:
	Transfer of inventory to fixed assets				$	5,211			$	5,861
	Common stock issued in connection with acquisition				$	-			$	169,507

Infinera Corporation
Supplemental Financial Information
(Unaudited)
	Q4'14				Q1'15				Q2'15				Q3'15				Q4'15				Q1'16				Q2'16				Q3'16
Revenue ($ Mil)	$	186.3			$	186.9			$	207.3			$	232.5			$	260.0			$	244.8			$	258.8			$	185.5
GAAP Gross Margin %		45.3	%			47.2	%			46.7	%			44.2	%			44.5	%			47.5	%			47.8	%			45.6	%
Non-GAAP Gross Margin %(1)		46.1	%			47.8	%			47.4	%			47.5	%			48.3	%			50.2	%			50.4	%			49.2	%
Revenue Composition:
Domestic %		58	%			68	%			75	%			68	%			62	%			71	%			64	%			56	%
International %		42	%			32	%			25	%			32	%			38	%			29	%			36	%			44	%
Customers >10% of Revenue		1				2				3				2				2				3				2				2
Cash Related Information:
Cash from Operations ($ Mil)	$	18.7			$	19.8			$	55.0			$	32.5			$	25.8			$	10.0			$	28.2			$	5.2
Capital Expenditures ($ Mil)	$	8.8			$	7.4			$	8.7			$	10.6			$	15.3			$	10.8			$	12.5			$	9.6
Depreciation & Amortization ($ Mil)	$	6.6			$	6.6			$	6.3			$	9.2			$	13.7			$	14.7			$	15.2			$	15.9
DSO's		76				64				48				55				65				69				68				75
Inventory Metrics:
Raw Materials ($ Mil)	$	15.2			$	22.4			$	30.2			$	24.2			$	27.9			$	33.1			$	39.1			$	37.2
Work in Process ($ Mil)	$	50.0			$	45.9			$	43.9			$	48.5			$	52.6			$	59.4			$	61.0			$	65.5
Finished Goods ($ Mil)	$	81.3			$	88.9			$	83.1			$	97.2			$	94.2			$	97.2			$	102.2			$	128.8
Total Inventory ($ Mil)	$	146.5			$	157.2			$	157.2			$	169.9			$	174.7			$	189.7			$	202.3			$	231.5
Inventory Turns(2)		2.7				2.5				2.8				2.9				3.1				2.6				2.5				1.6
Worldwide Headcount		1,495				1,530				1,598				1,978				2,056				2,128				2,218				2,262

(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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Media:
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Investors:
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