Infinera Corporation Reports Second Quarter 2014 Financial Results

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 second quarter results, including an estimate of non-GAAP earnings for the third 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						Six Months Ended
	June 28,			June 29,			June 28,			June 29,
	2014			2013			2014			2013
Revenue:
Product	$	142,364		$	120,647		$	266,606		$	228,990
Services		23,035			17,738			41,608			34,020
Total revenue		165,399			138,385			308,214			263,010

Cost of revenue:
Cost of product		85,906			80,198			164,344			155,645
Cost of services		9,240			6,533			15,211			13,009
Total cost of revenue		95,146			86,731			179,555			168,654

Gross profit		70,253			51,654			128,659			94,356

Operating expenses:
Research and development		31,738			31,681			61,084			61,407
Sales and marketing		18,082			17,155			35,944			35,201
General and administrative		12,381			11,426			24,635			21,298
Total operating expenses		62,201			60,262			121,663			117,906

Income (loss) from operations		8,052			(8,608	)		6,996			(23,550	)

Other income (expense), net:
Interest income		337			207			673			404
Interest expense		(2,728	)		(849	)		(5,405	)		(849	)
Other gain (loss), net		(264	)		(158	)		(993	)		(361	)
Total other income (expense), net		(2,655	)		(800	)		(5,725	)		(806	)

Income (loss) before income taxes		5,397			(9,408	)		1,271			(24,356	)
Provision for income taxes		617			601			865			932
Net income (loss)	$	4,780		$	(10,009	)	$	406		$	(25,288	)

Net income (loss) per common share
Basic	$	0.04		$	(0.09	)	$	0.00		$	(0.22	)
Diluted	$	0.04		$	(0.09	)	$	0.00		$	(0.22	)

Weighted average shares used in computing net income (loss) per common share

Basic		123,128			116,911			122,240			115,609
Diluted		126,758			116,911			126,112			115,609


Infinera Corporation
GAAP to Non-GAAP Reconciliations
(In thousands, except percentages and per share data)
(Unaudited)

	Three Months Ended									Six Months Ended
	June 28,			March 29,			June 29,			June 28,			June 29,
		2014			2014			2013			2014			2013
Reconciliation of Gross Profit:
U.S. GAAP as reported	$	70,253		$	58,406		$	51,654		$	128,659		$	94,356
Stock-based compensation ⁽¹⁾		1,360			1,284			2,164			2,644			4,252
Non-GAAP as adjusted	$	71,613		$	59,690		$	53,818		$	131,303		$	98,608

Reconciliation of Gross Margin:
U.S. GAAP as reported		42.5	%		40.9	%		37.3	%		41.7	%		35.9	%
Stock-based compensation ⁽¹⁾		0.8	%		0.9	%		1.6	%		0.9	%		1.6	%
Non-GAAP as adjusted		43.3	%		41.8	%		38.9	%		42.6	%		37.5	%

Reconciliation of Income (Loss) from Operations:
Reconciliation of Income (Loss) from Operations:
U.S. GAAP as reported	$	8,052		$	(1,056	)	$	(8,608	)	$	6,996		$	(23,550	)
Stock-based compensation ⁽¹⁾		6,804			6,672			8,184			13,476			16,159
Non-GAAP as adjusted	$	14,856		$	5,616		$	(424	)	$	20,472		$	(7,391	)

Reconciliation of Net Income (Loss):
U.S. GAAP as reported	$	4,780		$	(4,374	)	$	(10,009	)	$	406		$	(25,288	)
Stock-based compensation ⁽¹⁾		6,804			6,672			8,184			13,476			16,159
Amortization of debt discount ⁽²⁾		1,908			1,860			580			3,768			580
Non-GAAP as adjusted	$	13,492		$	4,158		$	(1,245	)	$	17,650		$	(8,549	)

Net Income (Loss) per Common Share - Basic:
Net Income (Loss) per Common Share - Basic:
U.S. GAAP as reported	$	0.04		$	(0.04	)	$	(0.09	)	$	0.00		$	(0.22	)
Non-GAAP as adjusted	$	0.11		$	0.03		$	(0.01	)	$	0.14		$	(0.07	)

Net Income (Loss) per Common Share - Diluted:
Net Income (Loss) per Common Share - Diluted:
U.S. GAAP as reported	$	0.04		$	(0.04	)	$	(0.09	)	$	0.00		$	(0.22	)
Non-GAAP as adjusted ⁽³⁾	$	0.11		$	0.03		$	(0.01	)	$	0.14		$	(0.07	)

Weighted average shares used in computing net income (loss) per common share - U.S. GAAP:


Basic		123,128			121,352			116,911			122,240			115,609
Diluted		126,758			121,352			116,911			126,112			115,609

Weighted average shares used in computing net income (loss) per common share - Non-GAAP:


Basic		123,128			121,352			116,911			122,240			115,609
Diluted ⁽³⁾		126,758			125,435			121,254			126,112			119,428


⁽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 (in thousands):

		Three Months Ended						Six Months Ended
		June 28,		March 29,		June 29,		June 28,		June 29,
		2014		2014		2013		2014		2013
	Cost of revenue	$	477	$	452	$	474	$	929	$	960
	Research and development		2,080		2,138		2,622		4,218		5,741
	Sales and marketing		1,815		1,720		1,807		3,535		3,806
	General and administration		1,549		1,530		1,591		3,079		2,360
			5,921		5,840		6,494		11,761		12,867
	Cost of revenue - amortization from balance sheet*		883		832		1,690		1,715		3,292
	Total stock-based compensation expense	$	6,804	$	6,672	$	8,184	$	13,476	$	16,159

	* 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.

⁽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)

	June 28,			December 28,
	2014			2013
ASSETS

Current assets:
Cash and cash equivalents	$	83,307		$	124,330
Short-term investments		230,694			172,660
Accounts receivable, net of allowance for doubtful accounts of $41 in 2014 and $43 in 2013
		120,686			100,643
Inventory		130,853			123,685
Prepaid expenses and other current assets		20,167			17,752
Total current assets		585,707			539,070

Property, plant and equipment, net		76,886			79,668
Long-term investments		37,086			64,419
Cost-method investment		9,000			9,000
Long-term restricted cash		4,404			3,904
Other non-current assets		5,571			4,865
Total assets	$	718,654		$	700,926

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	33,162		$	39,843
Accrued expenses		22,546			22,431
Accrued compensation and related benefits		28,742			33,899
Accrued warranty		13,860			12,374
Deferred revenue		29,657			32,402
Total current liabilities		127,967			140,949

Long-term debt, net		112,932			109,164
Accrued warranty, non-current		14,088			10,534
Deferred revenue, non-current		6,187			4,888
Other long-term liabilities		18,173			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 June 28, 2014 and December 28, 2013 Issued and outstanding shares – 123,615 as of June 28, 2014 and 119,887 as of December 28, 2013

		124			120
Additional paid-in capital		1,046,375			1,025,661
Accumulated other comprehensive loss		(3,113	)		(3,486	)
Accumulated deficit		(604,079	)		(604,485	)
Total stockholders’ equity		439,307			417,810
Total liabilities and stockholders’ equity	$	718,654		$	700,926


Infinera Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

	Six Months Ended
	June 28,			June 29,
	2014			2013
Cash Flows from Operating Activities:
Net income (loss)	$	406		$	(25,288	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		12,813			12,621
(Recovery of) provision for other receivables		-			(88	)
Provision for doubtful accounts		-			40
Amotization of debt discount and issuance costs		4,092			630
Amortization of premium on investments		1,747			450
Stock-based compensation expense		13,476			16,159
Other gain		(22	)		(243	)
Changes in assets and liabilities:
Accounts receivable		(20,043	)		10,332
Inventory		(8,107	)		791
Prepaid expenses and other assets		(3,389	)		(2,238	)
Accounts payable		(6,428	)		(23,980	)
Accrued liabilities and other expenses		(3,318	)		(220	)
Deferred revenue		(1,448	)		4,440
Accrued warranty		5,040			3,219
Net cash used in operating activities		(5,181	)		(3,375	)

Cash Flows from Investing Activities:
Purchase of available-for-sale investments		(158,496	)		(130,828	)
Proceeds from sale of available-for-sale investments		9,824			2,850
Proceeds from maturities and calls of investments		116,290			62,647
Purchase of property and equipment		(9,985	)		(9,431	)
Change in restricted cash		(491	)		(6	)
Net cash used in investing activities		(42,858	)		(74,768	)

Cash Flows from Financing Activities:
Proceeds from issuance of debt, net		-			144,469
Proceeds from issuance of common stock		8,401			12,496
Minimum tax withholding paid on behalf of employees for net share settlement		(1,619	)		(1,499	)
Net cash provided by financing activities		6,782			155,466

Effect of exchange rate changes on cash		234			(778	)

Net change in cash and cash equivalents		(41,023	)		76,545
Cash and cash equivalents at beginning of period		124,330			104,666
Cash and cash equivalents at end of period	$	83,307		$	181,211

Supplemental disclosures of cash flow information:
Cash paid for income taxes, net of refunds	$	482		$	1,148
Cash paid for interest	$	1,313		$	-
Supplemental schedule of non-cash financing activities:
Transfer of inventory to fixed assets	$	978		$	4,684


Infinera Corporation
Supplemental Financial Information
(Unaudited)

	Q3'12	Q4'12	Q1'13	Q2'13	Q3'13	Q4'13	Q1'14	Q2'14
Revenue ($ Mil)	$112.2	$128.1	$124.6	$138.4	$142.0	$139.1	$142.8	$165.4
Gross Margin % ⁽¹⁾	39.1%	35.9%	35.9%	38.9%	49.2%	41.4%	41.8%	43.3%
Revenue Composition:
Domestic %	70%	63%	63%	64%	73%	54%	78%	82%
International %	30%	37%	37%	36%	27%	46%	22%	18%
Customers >10% of Revenue	1	1	1	-	3	1	2	2
Cash Related Information:
Cash from (Used in) Operations ($ Mil)	$(29.3)	$8.3	$(21.3)	$17.9	$12.8	$25.8	$(15.4)	$10.3
Capital Expenditures ($ Mil)	$2.5	$3.2	$4.9	$4.5	$4.2	$7.5	$5.6	$4.4
Depreciation & Amortization ($ Mil)	$6.1	$6.4	$6.3	$6.3	$5.9	$6.0	$6.3	$6.5
DSO's	74	76	82	64	56	66	68	66
Inventory Metrics:
Raw Materials ($ Mil)	$12.4	$13.0	$12.2	$9.8	$12.1	$14.3	$13.2	$11.2
Work in Process ($ Mil)	$59.8	$57.3	$53.1	$41.0	$45.7	$49.2	$47.8	$40.6
Finished Goods ($ Mil)	$46.3	$57.5	$65.7	$70.5	$65.7	$60.2	$65.5	$79.1
Total Inventory ($ Mil)	$118.5	$127.8	$131.0	$121.3	$123.5	$123.7	$126.5	$130.9
Inventory Turns ⁽²⁾	2.3	2.6	2.4	2.8	2.3	2.6	2.6	2.9
Worldwide Headcount	1,235	1,242	1,219	1,238	1,296	1,318	1,346	1,396

	⁽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.

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