Infinera Corporation Reports Fourth Quarter and Fiscal Year 2013 Financial Results

SUNNYVALE, CA–(Marketwired – Jan 29, 2014) – Infinera Corporation ( NASDAQ : INFN ), provider of Intelligent Transport Networks”, today released financial results for the fourth quarter and fiscal year ended December 28, 2013.

GAAP revenues for the quarter were $139.1 million compared to $142.0 million in the third quarter of 2013 and $128.1 million in the fourth quarter of 2012.

GAAP gross margins for the quarter were 40% compared to 48% in the third quarter of 2013 and 34% in the fourth quarter of 2012. GAAP net loss for the quarter was $(10.2) million, or $(0.08) per share, compared to net income of $3.3 million, or $0.03 per diluted share, in the third quarter of 2013 and a net loss of $(16.1) million, or $(0.14) per share, in the fourth quarter of 2012.

Non-GAAP gross margins for the quarter were 41% compared to 49% in the third quarter of 2013 and 36% in the fourth quarter of 2012. Non-GAAP net loss for the quarter was $(0.2) million, or breakeven on an earnings per share basis, compared to net income of $12.8 million, or $0.10 per diluted share in the third quarter of 2013 and net loss of $(6.0) million, or $(0.05) per share, in the fourth quarter of 2012. These Non-GAAP measures exclude non-cash stock-based compensation expenses and the amortization of debt discount on our convertible senior notes.

GAAP revenues for the year were $544.1 million compared to $438.4 million in 2012.

GAAP gross margins for the year were 40% compared to 36% in 2012. GAAP net loss for the year was $(32.1) million, or $(0.27) per share compared to $(85.3) million, or $(0.77) per share in 2012.

Non-GAAP gross margins for the year were 42% compared to 38% in 2012. Non-GAAP net income for the year was $4.0 million or $0.03 per diluted share in 2013, compared to net loss of $(43.5) million or $(0.38) per diluted share in 2012. These Non-GAAP measures exclude non-cash stock-based compensation expenses and the amortization of debt discount on our 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.

Management Commentary

“The fourth quarter was a solid finish to a very good year for Infinera, driven by continued acceptance of the DTN-X,” said Tom Fallon, chief executive officer. “We received purchase commitments from three additional customers in the quarter, including one new to Infinera, and we set another quarterly record for 100G port shipments.

“Our financial results for 2013 demonstrate the strong potential of the DTN-X. Revenues grew 24%, at least double the long haul DWDM market growth estimated by industry analysts; gross margins expanded significantly; we achieved $4 million Non-GAAP net income compared with $43.5 million Non-GAAP net loss in 2012; and we generated $12 million in net free cash flow for the year. Since its introduction in mid 2012, we have received purchase commitments for the DTN-X from a total of 42 customers, representing a cross section of industries including Tier 1 carriers, cable operators, Internet content providers and bandwidth wholesalers. Of these, 15 are new customers to Infinera. These achievements met or exceeded the targets that we provided at our Analyst Day in December of 2012.

“As we look ahead, we believe the opportunity for the DTN-X remains wide open with the 100G cycle still in its early stages. Infinera’s Intelligent Transport Network and the DTN-X offers important differentiated features, including its super-channel scale, converged OTN switching and GMPLS network automation. For 2014, we plan to continue our focus on winning new deployments and gaining market share, while driving enhanced profitability, and we remain optimistic about our outlook over the short, intermediate and long-term.”

Conference Call Information:

Infinera will host a conference call for analysts and investors to discuss its fourth quarter results and its outlook for the first quarter 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 the company’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 1-866-379-4236 . International parties can access the replay at 1-203-369-0338 .

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. 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 that deliver the industry’s only commercially available 500 Gb/s FlexCoherent super-channels. Infinera Intelligent Transport Network solutions include the DTN-X, DTN and ATN platforms. Find more at 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 the opportunity for DTN-X and the Company’s plans for 2014. 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 our results to differ materially from those expressed or implied by such forward-looking statements include aggressive business tactics by our competitors, our reliance on single-source suppliers, our ability to protect our intellectual property, claims by others that we infringe their intellectual property, and our ability to respond to rapid technological changes, and other risks that may impact our business are set forth in our annual report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 5, 2013, as well as subsequent reports filed with or furnished to the SEC. These reports are available on our website atwww.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 our convertible senior notes. We believe these adjustments are appropriate to enhance an overall understanding of our underlying financial performance and also our 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 our 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.” We anticipate disclosing forward-looking non-GAAP information in our conference call to discuss our fourth quarter results, including an estimate of non-GAAP earnings for the first quarter of 2014 that excludes non-cash stock-based compensation expenses and amortization of debt discount on our convertible senior notes.

A copy of this press release can be found on the Investor Relations’ page of Infinera’s website atwww.infinera.com .

Infinera Corporation 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								Twelve Months Ended
				December 28,				December 29,				December 28,				December 29,
				2013				2012				2013				2012
Revenue:
	Product			$	115,102			$	109,444			$	465,424			$	380,035
	Services				23,990				18,620				78,698				58,402
		Total revenue			139,092				128,064				544,122				438,437
Cost of revenue (1) :
	Cost of product				73,385				77,127				295,715				259,437
	Cost of services				9,795				7,669				29,768				21,431
		Total cost of revenue			83,180				84,796				325,483				280,868
Gross profit					55,912				43,268				218,639				157,569
Operating expenses (1) :
	Research and development				30,859				26,660				124,794				117,233
	Sales and marketing				19,857				20,558				72,778				75,862
	General and administrative				12,277				11,563				45,253				47,475
		Total operating expenses			62,993				58,781

242,825       240,570                                     Loss from operations     (7,081 )     (15,513 )     (24,186 )     (83,001 )                                   Other income (expense), net:                                   Interest income     287       233       923       911     Interest expense     (2,634 )     –       (6,061 )     –     Other gain (loss), net:     (336 )     (158 )     (1,141 )     (1,050 )     Total other income (expense), net     (2,683 )     75       (6,279 )     (139 )                                   Loss before income taxes     (9,764 )     (15,438 )     (30,465 )     (83,140 ) Provision for income taxes     414       650       1,654       2,190   Net loss   $ (10,178 )   $ (16,088 )   $ (32,119 )   $ (85,330 )                                   Net loss per common share, basic and diluted   $ (0.08 )   $ (0.14 )   $ (0.27 )   $ (0.77 )                                   Weighted average shares used in computing basic
and diluted net loss per common share

119,743

112,311

117,425

110,739
(1) The following table summarizes the effects of stock-based compensation related to employees and non-employees for the three and twelve months ended December 28, 2013 and December 29, 2012:                                           Three Months Ended       Twelve Months Ended         December 28,       December 29,       December 28,       December 29,         2013       2012       2013       2012    Cost of revenue   $ 489     $ 735     $ 1,871     $ 2,710     Research and development     2,725       2,852       10,900       13,306     Sales and marketing     1,965       2,802       7,624       10,450     General and administration     1,789       1,797       5,956       9,529           6,968       8,186       26,351       35,995     Cost of revenue – amortization from balance sheet*     1,206       1,949       5,625       5,824     Total stock-based compensation expense   $ 8,174     $ 10,135     $ 31,976     $ 41,819                                        * Stock-based compensation expense deferred to inventory and deferred inventory costs in prior periods and recognized in the current period.

Infinera Corporation

GAAP to Non-GAAP Reconciliations

(In thousands, except per share data)

(Unaudited)

		Three Months Ended												Twelve Months Ended
		December 28,				September 28,				December 29,				December 28,				December 29,
		2013				2013				2012				2013				2012
Reconciliation of Gross Profit:
U.S. GAAP as reported		$	55,912			$	68,371			$	43,268			$	218,639			$	157,569
Stock-based compensation(1)			1,695				1,549				2,684				7,496				8,534
Non-GAAP as adjusted		$	57,607			$	69,920			$	45,952			$	226,135			$	166,103
Reconciliation of Gross Margin:
U.S. GAAP as reported			40	%			48	%			34	%			40	%			36	%
Stock-based compensation(1)			1	%			1	%			2	%			2	%			2	%
Non-GAAP as adjusted			41	%			49	%			36	%			42	%			38	%
Reconciliation of Income (Loss)
from Operations:
U.S. GAAP as reported		$	(7,081	)		$	6,445			$	(15,513	)		$	(24,186	)		$	(83,001	)
Stock-based compensation(1)			8,174				7,643				10,135				31,976				41,819
Non-GAAP as adjusted		$	1,093			$	14,088			$	(5,378	)		$	7,790			$	(41,182	)
Reconciliation of Net Income (Loss):
U.S. GAAP as reported		$	(10,178	)		$	3,347			$	(16,088	)		$	(32,119	)		$	(85,330	)
Stock-based compensation(1)			8,174				7,643				10,135				31,976				41,819
Amortization of debt discount(2)			1,814				1,770				–				4,164				–
Non-GAAP as adjusted		$	(190	)		$	12,760			$	(5,953	)		$	4,021			$	(43,511	)
Net Income (Loss) per Common
Share – Basic:
U.S. GAAP as reported		$	(0.08	)		$	0.03			$	(0.14	)		$	(0.27	)		$	(0.77	)
Non-GAAP as adjusted		$	–			$	0.11			$	(0.05	)		$	0.03			$	(0.39	)
Net Income (Loss) per Common
Share – Diluted:
U.S. GAAP as reported		$	(0.08	)		$	0.03			$	(0.14	)		$	(0.27	)		$	(0.77	)
Non-GAAP as adjusted(3)		$	–			$	0.10			$	(0.05	)		$	0.03			$	(0.38	)
Weighted average shares
used in computing net income (loss)
per common share – U.S. GAAP:
Basic			119,743				118,740				112,311				117,425				110,739
Diluted			119,743				124,679				112,311				117,425				110,739
Weighted average shares
used in computing net income (loss)
per common share – Non-GAAP:
Basic			119,743				118,740				112,311				117,425				110,739
Diluted(3)			125,134				124,679				114,115				122,167				113,124

(1) Stock-based compensation expense is calculated in accordance with the fair value recognition provisions of Financial Accounting Standards Board Accounting Standards Codification (ASC) Topic 718, Compensation-Stock Compensationeffective January 1, 2006. The following table summarizes the effects of stock-based compensation related to employees and non-employees:

		Three Months Ended									Twelve Months Ended
		December 28,			September 28,			December 29,			December 28,			December 29,
		2013			2013			2012			2013			2012
Cost of revenue		$	489		$	422		$	735		$	1,871		$	2,710
Research and development			2,725			2,434			2,852			10,900			13,306
Sales and marketing			1,965			1,853			2,802			7,624			10,450
General and administration			1,789			1,807			1,797			5,956			9,529
			6,968			6,516			8,186			26,351			35,995
Cost of revenue – amortization from balance sheet*			1,206			1,127			1,949			5,625			5,824
Total stock-based compensation expense		$	8,174		$	7,643		$	10,135		$	31,976		$	41,819

* 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, we are 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 our $150 million 1.75% convertible debt issuance in May 2013 over the term of the notes. These amounts have been adjusted in arriving at our non-GAAP results because management believes that this non-cash expense is not indicative of ongoing operating performance and provides a better indication of our underlying business performance.
(3) Diluted shares used to calculate net loss per share on a non-GAAP basis provided for informational purposes only.

Infinera Corporation
Condensed Consolidated Balance Sheets
(In thousands, except par values)
(Unaudited)
				December 28,				December 29,
				2013				2012
ASSETS
Current assets:
	Cash and cash equivalents			$	124,330			$	104,666
	Short-term investments				172,660				76,146
	Accounts receivable, net of allowance for doubtful accounts of $43 in 2013 and $147 in 2012				100,643				107,039
	Other receivables				1,313				2,909
	Inventory				123,685				127,809
	Deferred inventory costs				705				1,029
	Deferred tax asset				1,322				155
	Prepaid expenses and other current assets				14,412				9,744
		Total current assets			539,070				429,497
Property, plant and equipment, net					79,668				80,343
Deferred inventory costs, non-current					2				100
Long-term investments					64,419				2,874
Cost-method investment					9,000				9,000
Long-term restricted cash					3,904				3,868
Other non-current assets					4,863				2,488
		Total assets		$	700,926			$	528,170
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable			$	39,843			$	61,428
	Accrued expenses				22,431				26,288
	Accrued compensation and related benefits				33,899				22,325
	Accrued warranty				12,374				7,262
	Deferred revenue				32,402				26,744
		Total current liabilities			140,949				144,047
	Long-term debt				109,164				–
	Accrued warranty, non-current				10,534				9,220
	Deferred revenue, non-current				4,888				3,210
	Deferred tax liability				1,364				117
	Other long-term liabilities				16,217				15,440
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 December 28, 2013 and December 29, 2012
		Issued and outstanding shares – 119,887 as of December 28, 2013 and 112,461 as of December 29, 2012			120				112
	Additional paid-in capital				1,025,661				930,618
	Accumulated other comprehensive loss				(3,486	)			(2,228	)
	Accumulated deficit				(604,485	)			(572,366	)
	Total stockholders’ equity				417,810				356,136
		Total liabilities and stockholders’ equity		$	700,926			$	528,170

Infinera Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
					Twelve Months Ended
					December 28,				December 29,
					2013				2012
Cash Flows from Operating Activities:
Net loss					$	(32,119	)		$	(85,330	)
Adjustments to reconcile net loss to net cashused in operating activities:
	Depreciation and amortization					24,562				23,661
	(Recovery of) provision for other receivables					(88	)			–
	Provision for doubtful accounts					55				94
	Amotization of debt discount and issuance costs					4,522				–
	Amortization of premium on investments					1,539				2,068
	Stock-based compensation expense					31,976				41,819
	Non-cash tax benefit					–				(7	)
	Other gain					(243	)			(475	)
	Changes in assets and liabilities:
		Accounts receivable				6,341				(26,517	)
		Other receivables				1,435				(1,894	)
		Inventory				(3,036	)			(40,623	)
		Prepaid expenses and other assets				(4,992	)			2,293
		Deferred inventory costs				395				5,741
		Accounts payable				(20,202	)			15,410
		Accrued liabilities and other expenses				11,272				6,915
		Deferred revenue				7,337				3,763
		Accrued warranty				6,426				3,616
			Net cash provided by (used in) operating activities			35,180				(49,466	)
Cash Flows from Investing Activities:
	Purchase of available-for-sale investments					(288,140	)			(54,150	)
	Proceeds from sale of available-for-sale investments					2,850				11,584
	Proceeds from maturities and calls of investments					125,624				117,605
	Proceeds from disposal of assets					3				1
	Purchase of property and equipment					(21,068	)			(25,395	)
	Reimbursement of manufacturing capacity advance					–				50
	Change in restricted cash					(69	)			(827	)
			Net cash provided by (used in) investing activities			(180,800	)			48,868
Cash Flows from Financing Activities:
	Proceeds from issuance of debt, net					144,469				–
	Proceeds from issuance of common stock					23,185				11,580
	Repurchase of common stock					(1,544	)			(882	)
		Net cash provided by financing activities				166,110				10,698
Effect of exchange rate changes on cash						(826	)			108
Net change in cash and cash equivalents						19,664				10,208
Cash and cash equivalents at beginning of period						104,666				94,458
Cash and cash equivalents at end of period					$	124,330			$	104,666
Supplemental disclosures of cash flow information:
	Cash paid for income taxes				$	2,135			$	923
	Cash paid for interest				$	1,320			$	–
Supplemental schedule of non-cash financing activities:
	Non-cash settlement for manufacturing capacity advance				$	–			$	275
	Transfer of inventory to fixed assets				$	5,458			$	3,222

Infinera Corporation
Supplemental Financial Information
(Unaudited)
	Q1’12	Q2’12	Q3’12	Q4’12	Q1’13	Q2’13	Q3’13	Q4’13
Revenue ($ Mil)	$104.7	$93.5	$112.2	$128.1	$124.6	$138.4	$142.0	$139.1
Gross Margin % (1)	40%	37%	39%	36%	36%	39%	49%	41%
Invoiced Shipment Composition:
Domestic %	71%	70%	70%	63%	63%	64%	73%	54%
International %	29%	30%	30%	37%	37%	36%	27%	46%
Largest Customer %	13%	15%	13%	13%	14%		17%	11%
Cash Related Information:
Cash from (used in) Operations ($ Mil)	($5.8)	($22.7)	($29.3)	$8.3	($21.3)	$17.9	$12.8	$25.8
Capital Expenditures ($ Mil)	$13.6	$6.1	$2.5	$3.2	$4.9	$4.5	$4.2	$7.5
Depreciation & Amortization ($ Mil)	$5.5	$5.7	$6.1	$6.4	$6.3	$6.3	$5.9	$6.0
DSO’s	57	55	74	76	82	64	56	66
Inventory Metrics:
Raw Materials ($ Mil)	$15.3	$14.8	$12.4	$13.0	$12.2	$9.8	$12.1	$14.3
Work in Process ($ Mil)	$41.6	$49.4	$59.8	$57.3	$53.1	$41.0	$45.7	$49.2
Finished Goods ($ Mil)	$44.7	$50.9	$46.3	$57.5	$65.7	$70.5	$65.7	$60.2
Total Inventory ($ Mil)	$101.6	$115.1	$118.5	$127.8	$131.0	$121.3	$123.5	$123.7
Inventory Turns (1)	2.5	2.1	2.3	2.6	2.4	2.8	2.3	2.6
Worldwide Headcount	1,210	1,228	1,235	1,242	1,219	1,238	1,296	1,318
(1) Amounts reflect non-GAAP results. Non-GAAP adjustments include non-cash stock-based compensation expense.

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