Infinera Corporation Reports Third Quarter 2012 Financial Results

Sunnyvale, CA, October 24, 2012 – Infinera Corporation (NASDAQ:INFN, news, filings), a leading provider of digital optical networks, today released financial results for the third quarter ended September 29, 2012.

GAAP revenues for the third quarter of 2012 were $112.2 million compared to $93.5 million in the second quarter of 2012 and $104.0 million in the third quarter of 2011.

GAAP gross margin for the third quarter of 2012 was 37% compared to 35% in the second quarter of 2012 and 39% in the third quarter of 2011.  GAAP net loss for the 2012 third quarter was $(19.1) million, or $(0.17) per share, compared to net loss of $(29.5) million, or $(0.27) per share, in the second quarter of 2012 and net loss of $(21.8) million, or $(0.21) per share, in the third quarter of 2011.

Non-GAAP gross margin, which excludes non-cash stock-based compensation expenses, for the third quarter of 2012 was 39% compared to 37% in the second quarter of 2012 and 41% in the third quarter of 2011. Non-GAAP net loss for the third quarter of 2012 was $(7.8) million, or $(0.07) per share, compared to net loss of $(18.6) million, or $(0.16) per share, in the second quarter of 2012 and net loss of $(9.2) million, or $(0.09) per share, in the third quarter of 2011.

Management Commentary

“The DTN-X is experiencing strong traction around the world,” said Tom Fallon, president and chief executive officer. “We now have 16 purchase commitments, representing five new customers and 11 existing customers. These commitments come from customers in North America, Europe and Asia Pacific and include commitments from all of our vertical markets. The DTN-X is in full deployment across the globe and, as  forecasted, we began recognizing revenue from this platform in the third quarter.

“We are at the beginning of what we believe will be an expansive market opportunity for 100G that will extend over many years. We are pleased with the very strong initial support for the DTN-X, reaffirming the value proposition of this unique and market-changing 100G converged WDM/OTN switching platform. We believe that customers appreciate the superior scale, efficiency, reliability, simplicity and lower total cost of ownership offered by the DTN-X and we are very optimistic about the outlook for its continued adoption.

“We are also seeing continued wins with our DTN platform with three new DTN customers in the quarter. Our Digital Optical Network portfolio now delivers the same ease-of-use and quality across multiple applications in multiple markets.”

Conference Call Information:

Infinera will host a conference call for analysts and investors to discuss its third quarter results and its outlook for the fourth quarter today at 5:00 p.m. Eastern Time (2:00 p.m. Pacific Time).  A live webcast of the conference call will 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 1-800-891-8251. International parties can access the replay at 1-203-369-3377.

About Infinera

Infinera provides Digital Optical Networking systems to telecommunications carriers worldwide.  Infinera’s systems are unique in their use of a breakthrough semiconductor technology: the photonic integrated circuit (PIC). Infinera’s systems and PIC technology are designed to provide customers with simpler and more flexible engineering and operations, faster time-to-service, and the ability to rapidly deliver differentiated services without reengineering their optical infrastructure. For more information, please visit www.infinera.com.

Forward-Looking Statements

This press release contains forward-looking statements, including statements regarding our expectations for customer interest in and adoption of our DTN-X product, and expectations for the market opportunity for 100G to be expansive and to continue for a significant period of time. These forward-looking statements involve risks and uncertainties, as well as assumptions that, if they do not fully materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The risks and uncertainties that could cause our results to differ materially from those expressed or implied by such forward-looking statements include unexpected delays in the development, production or availability of the DTN-X product; decisions by customers to delay orders of the product; changes in the marketplace that would affect customer demand for the product, as well as our general ability to react to trends and challenges in our business and the markets in which we operate; our ability to anticipate market needs and develop new or enhanced products to meet those needs; the adoption rate of our products; our ability to establish and maintain successful relationships with our customers; our ability to reduce customer concentration; our ability to compete in our industry; fluctuations in demand, sales cycles and prices for our products and services; our ability to operate profitably; aggressive business tactics by our competitors; our reliance on single-source suppliers; shortages or price fluctuations in our supply chain; our ability to protect our intellectual property rights; and general, political, economic and market conditions and events.   Further information about these risks and uncertainties, and other risks and uncertainties that affect our business, are contained in the risk factors section and other sections of our annual report on Form 10-K filed with the Securities Exchange Commission on March 6, 2012, as well as subsequent reports filed with or furnished to the SEC.  These reports are available on our website at www.infinera.com and the SEC’s website at www.sec.gov.  We assume no obligation to, and do 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.  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 third quarter results, including an estimate of non-GAAP earnings for the fourth quarter of 2012 that excludes non-cash stock-based compensation expenses.

A copy of this press release can be found on the investor relations page of Infinera’s website at www.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 amounts)
(Unaudited)
				Three Months Ended								Nine Months Ended
				September 29, 2012				September 24, 2011				September 29, 2012				September 24, 2011
Revenue:
	Product			$	98,853			$	89,554			$	269,087			$	256,443
	Ratable product and related support and services				450				847				1,504				2,583
	Services				12,911				13,621				39,782				33,842
		Total revenue			112,214				104,022				310,373				292,868
Cost of revenue (1):
	Cost of product				66,510				57,449				181,851				158,607
	Cost of ratable product and related support
	and services				102				167				459				846
	Cost of services				4,102				5,757				13,762				12,608
		Total cost of revenue			70,714				63,373				196,072				172,061
Gross profit					41,500				40,649				114,301				120,807
Operating expenses (1):
	Research and development				27,912				31,694				90,573				95,902
	Sales and marketing				19,285				17,545				55,304				46,437
	General and administrative				12,508				13,112				35,912				40,256
		Total operating expenses			59,705				62,351				181,789				182,595
Loss from operations					(18,205	)			(21,702	)			(67,488	)			(61,788	)
	Other income (expense), net:
	Interest income				175				205				678				742
	Other gain (loss), net				(617	)			188				(892	)			(203	)
		Total other income (expense), net			(442	)			393				(214	)			539
Loss before income taxes					(18,647	)			(21,309	)			(67,702	)			(61,249	)
Provision for income taxes					434				497				1,540				1,145
Net loss				$	(19,081	)		$	(21,806	)		$	(69,242	)		$	(62,394	)
Net loss per common share, basic and diluted				$	(0.17	)		$	(0.21	)		$	(0.63	)		$	(0.59	)
Weighted average shares used in computing basic and diluted net loss per common share					111,579				106,264				110,216				104,936
	(1) The following table summarizes the effects of stock-based compensation related to employees and non-employees for the three and nine months ended September 29, 2012 and September 24, 2011:
					Three Months Ended								Nine Months Ended
					September 29, 2012				September 24, 2011				September 29, 2012				September 24, 2011
	Cost of revenue			$	683			$	722			$	1,975			$	2,213
	Research and development				3,439				3,745				10,454				11,075
	Sales and marketing				2,685				2,216				7,648				6,501
	General and administration				2,804				4,410				7,732				14,021
					9,611				11,093				27,809				33,810
	Cost of revenue – amortization from balance sheet*				1,706				1,487				3,875				3,617
	Total stock-based compensation expense			$	11,317			$	12,580			$	31,684			$	37,427
* 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												Nine Months Ended
		September 29, 2012				June 30, 2012				September 24, 2011				September 29, 2012				September 24, 2011
Reconciliation of Gross Profit:
U.S. GAAP as reported		$	41,500			$	32,374			$	40,649			$	114,301			$	120,807
Stock-based compensation(1)			2,389				1,786				2,209				5,850				5,830
Non-GAAP as adjusted		$	43,889			$	34,160			$	42,858			$	120,151			$	126,637
Reconciliation of Gross Margin:
U.S. GAAP as reported			37	%			35	%			39	%			37	%			41	%
Stock-based compensation(1)			2	%			2	%			2	%			2	%			2	%
Non-GAAP as adjusted			39	%			37	%			41	%			39	%			43	%
Reconciliation of Loss from Operations:
U.S. GAAP as reported		$	(18,205	)		$	(29,399	)		$	(21,702	)		$	(67,488	)		$	(61,788	)
Stock-based compensation(1)			11,317				10,930				12,580				31,684				37,427
Non-GAAP as adjusted		$	(6,888	)		$	(18,469	)		$	(9,122	)		$	(35,804	)		$	(24,361	)
Reconciliation of Net Loss:
U.S. GAAP as reported		$	(19,081	)		$	(29,549	)		$	(21,806	)		$	(69,242	)		$	(62,394	)
Stock-based compensation(1)			11,317				10,930				12,580				31,684				37,427
Non-GAAP as adjusted		$	(7,764	)		$	(18,619	)		$	(9,226	)		$	(37,558	)		$	(24,967	)
Net Loss per Common Share – Basic:
U.S. GAAP as reported		$	(0.17	)		$	(0.27	)		$	(0.21	)		$	(0.63	)		$	(0.59	)
Non-GAAP as adjusted		$	(0.07	)		$	(0.17	)		$	(0.09	)		$	(0.34	)		$	(0.24	)
Net Loss per Common Share – Diluted:
U.S. GAAP as reported		$	(0.17	)		$	(0.27	)		$	(0.21	)		$	(0.63	)		$	(0.59	)
Non-GAAP as adjusted(2)		$	(0.07	)		$	(0.16	)		$	(0.09	)		$	(0.34	)		$	(0.24	)
Weighted average shares used in computing net loss per common share – U.S. GAAP:
Basic			111,579				110,403				106,264				110,216				104,936
Diluted			111,579				110,403				106,264				109,534				104,936
Weighted average shares used in computing net loss per common share – Non-GAAP:
Basic			111,579				110,403				106,264				110,216				104,936
Diluted(2)			113,443				112,931				108,885				112,113				108,345
(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 Compensation effective January 1, 2006. The following table summarizes the effects of stock-based compensation related to employees and non-employees:

			Three Months Ended									Nine Months Ended
			September 29, 2012			June 30, 2012			September 24, 2011			September 29, 2012			September 24, 2011
	Cost of revenue		$	683		$	686		$	722		$	1,975		$	2,213
	Research and development			3,439			3,695			3,745			10,454			11,075
	Sales and marketing			2,685			2,744			2,216			7,648			6,501
	General and administration			2,804			2,705			4,410			7,732			14,021
				9,611			9,830			11,093			27,809			33,810
	Cost of revenue – amortization from balance sheet*			1,706			1,100			1,487			3,875			3,617
	Total stock-based compensation expense		$	11,317		$	10,930		$	12,580		$	31,684		$	37,427
* Stock-based compensation expense deferred to inventory and deferred inventory costs in prior periods and recognized in the current period.
(2) 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)
				September 29,2012				December 31,2011
ASSETS
	Cash Current assets:and cash equivalents			$	76,600			$	94,458
	Short-term investments				92,258				101,296
	Accounts receivable, net of allowance for doubtful accounts of $94 in 2012 and $0 in 2011				91,544				80,616
	Other receivables				3,245				1,346
	Inventory				118,463				88,996
	Deferred inventory costs				1,891				5,987
	Prepaid expenses and other current assets				12,094				10,532
		Total current assets			396,095				383,231
Property, plant and equipment, net					79,140				76,753
Deferred inventory costs, non-current					134				1,020
Long-term investments					10,361				54,315
Cost-method investment					9,000				9,000
Long-term restricted cash					3,615				3,047
Deferred tax asset					822				822
Other non-current assets					1,854				3,516
		Total assets		$	501,021			$	531,704
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable			$	45,292			$	48,838
	Accrued expenses				23,669				22,421
	Accrued compensation and related benefits				18,280				18,966
	Accrued warranty				6,911				5,692
	Deferred revenue				17,267				22,781
	Deferred tax liability				767				767
		Total current liabilities			112,186				119,465
	Accrued warranty, non-current				8,388				7,173
	Deferred revenue, non-current				2,241				3,410
	Other long-term liabilities				15,706				13,853
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 29, 2012 and December 31, 2011
		Issued and outstanding shares – 112,119 as of September 29, 2012 and 106,976 as of December 31, 2011			112				107
	Additional paid-in capital				920,482				876,927
	Accumulated other comprehensive loss				(1,816	)			(2,195	)
	Accumulated deficit				(556,278	)			(487,036	)
	Total stockholders’ equity				362,500				387,803
		Total liabilities and stockholders’ equity		$	501,021			$	531,704

Infinera Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
					Nine Months Ended
					September 29, 2012				September 24, 2011
Cash Flows from Operating Activities:
Net loss					$	(69,242	)		$	(62,394	)
Adjustments to reconcile net loss to net cash provided by operating activities:
	Depreciation and amortization					17,274				13,355
	Provision for doubtful accounts					94				–
	Provision for other receivables					–				563
	Amortization of premium on investments					1,610				3,290
	Stock-based compensation expense					31,684				37,427
	Non-cash tax benefit					(18	)			(130	)
	Other gain					(479	)			(337	)
	Changes in assets and liabilities:
		Accounts receivable				(11,021	)			6,976
		Other receivables				(2,228	)			3,622
		Inventories, net				(28,774	)			12,333
		Prepaid expenses and other assets				33				5,471
		Deferred inventory costs				4,877				549
		Accounts payable				(1,048	)			(2,888	)
		Accrued liabilities and other expenses				3,690				(10,946	)
		Deferred revenue				(6,683	)			(3,459	)
		Accrued warranty				2,434				(316	)
			Net cash provided by (used in) operating activities			(57,797	)			3,116
Cash Flows from Investing Activities:
	Purchase of available-for-sale investments					(50,134	)			(206,829	)
	Purchase of cost-method investment					–				(4,500	)
	Proceeds from sale of available-for-sale investments					6,694				3,035
	Proceeds from maturities and calls of investments					95,368				218,798
	Proceeds from disposal of assets					–				262
	Purchase of property and equipment					(22,238	)			(23,236	)
	Advance to secure manufacturing capacity					–				(1,500	)
	Reimbursement of manufacturing capacity advance					50				375
	Change in restricted cash					(564	)			1,262
		Net cash provided by (used in) investing activities				29,176				(12,333	)
Cash Flows from Financing Activities:
	Proceeds from issuance of common stock					11,280				9,964
	Repurchase of common stock					(875	)			(1,239	)
	Payments for purchase of assets under financing arrangement					–				(262	)
		Net cash provided by financing activities				10,405				8,463
Effect of exchange rate changes on cash						358				(254	)
Net change in cash and cash equivalents						(17,858	)			(1,008	)
Cash and cash equivalents at beginning of period						94,458				113,649
Cash and cash equivalents at end of period					$	76,600			$	112,641
Supplemental disclosures of cash flow information:
	Cash paid for income taxes				$	755			$	852
Supplemental schedule of non-cash investing and financing activities:
	Transfer of inventory to fixed assets				$	738			$	–
	Non-cash settlement for manufacturing capacity advance				$	275			$	–

Infinera Corporation
Supplemental Financial Information
(Unaudited)
		Q4’10				Q1’11				Q2’11				Q3’11				Q4’11				Q1’12				Q2’12				Q3’12
Revenue ($ Mil)		$	117.1			$	92.9			$	96.0			$	104.0			$	112.0			$	104.7			$	93.5			$	112.2
Gross Margin % (1)			51	%			48	%			41	%			41	%			42	%			40	%			37	%			39	%
Invoiced Shipment Composition:
Domestic %			70	%			74	%			72	%			65	%			70	%			71	%			70	%			70	%
International %			30	%			26	%			28	%			35	%			30	%			29	%			30	%			30	%
Largest Customer %			10	%			14	%			10	%			< 10	%			14	%			13	%			15	%			13	%
Cash Related Information:
Cash from (used in) Operations ($ Mil)		$	7.0			$	(0.9	)		$	(0.1	)		$	4.1			$	(5.1	)		$	(5.8	)		$	(22.7	)		$	(29.3	)
Capital Expenditures ($ Mil)		$	5.0			$	10.6			$	6.7			$	5.9			$	16.1			$	13.6			$	6.1			$	2.5
Depreciation & Amortization ($ Mil)		$	4.0			$	4.2			$	4.2			$	4.9			$	4.5			$	5.5			$	5.7			$	6.1
DSO’s			59				60				70				60				65				57				55				74
Inventory Metrics:
Raw Materials ($ Mil)		$	23.1			$	20.1			$	7.3			$	7.0			$	12.1			$	15.3			$	14.8			$	12.4
Work in Process ($ Mil)		$	14.8			$	17.2			$	27.7			$	26.9			$	37.0			$	41.6			$	49.4			$	59.8
Finished Goods ($ Mil)		$	44.0			$	41.0			$	34.4			$	36.4			$	39.9			$	44.7			$	50.9			$	46.3
Total Inventory ($ Mil)		$	81.9			$	78.3			$	69.4			$	70.3			$	89.0			$	101.6			$	115.1			$	118.5
Inventory Turns (1)			2.8				2.5				3.3				3.5				2.9				2.5				2.1				2.3
Worldwide Headcount			1,072				1,118				1,136				1,151				1,181				1,210				1,228				1,235
(1) Amounts reflect non-GAAP results. Non-GAAP adjustments include non-cash stock-based compensation expense.

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