×

Infinera Corporation Reports Third Quarter 2017 Financial Results and Announces Restructuring Plan

SUNNYVALE, Calif., Nov. 08, 2017 (GLOBE NEWSWIRE) -- Infinera Corporation (NASDAQ:INFN), provider of Intelligent Transport Networks, today released financial results for its third quarter ended September 30, 2017. The company also today announced a plan to restructure its worldwide operations to reduce its expenses and establish a more cost-efficient operating structure.

Third Quarter 2017 Financial Review

GAAP revenue for the quarter was $192.6 million compared to $176.8 million in the second quarter of 2017 and $185.5 million in the third quarter of 2016.

GAAP gross margin for the quarter was 35.2% compared to 36.7% in the second quarter of 2017 and 45.6% in the third quarter of 2016. GAAP operating margin for the quarter was (17.8)% compared to (22.9)% in the second quarter of 2017 and (5.9)% in the third quarter of 2016.

GAAP net loss for the quarter was $(37.2) million, or $(0.25) per share, compared to a net loss of $(42.8) million, or $(0.29) per share, in the second quarter of 2017, and net loss of $(11.2) million, or $(0.08) per share, in the third quarter of 2016.

Non-GAAP gross margin for the quarter was 39.1% compared to 40.7% in the second quarter of 2017 and 49.2% in the third quarter of 2016. Non-GAAP operating margin for the quarter was (7.8)% compared to (12.2)% in the second quarter of 2017 and 3.6% in the third quarter of 2016.

Non-GAAP net loss for the quarter was $(17.0) million, or $(0.11) per share, compared to a net loss of $(22.8) million, or $(0.15) per share, in the second quarter of 2017, and net income of $7.4 million, or $0.05 per diluted share, in the third quarter of 2016.

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.

“In the third quarter we continued to bring new products to market and delivered financial results that exceeded our guidance,” said Tom Fallon, Infinera’s Chief Executive Officer. “Our ICE4 products are delivering the technology differentiation we expected and are gaining traction across multiple customer verticals. Despite a softening near-term market outlook, over time I am confident we will return to outgrowing the market and delivering strong financial results.”

Restructuring Initiative

Infinera also announced it is implementing a plan to restructure its worldwide operations in order to reduce its expenses and establish a more cost-efficient structure that better aligns its operations with its long-term strategies. As part of this restructuring plan, Infinera will reduce headcount, rationalize certain products and programs, and close a remote R&D facility.

Infinera anticipates annual savings from the restructuring to be approximately $40.0 million, compared to what the projected run-rate of expenses for fiscal 2018 would have been prior to the restructuring. Infinera estimates total costs related to the restructuring will be in the range of $21.0 million to $27.0 million. The company anticipates a majority of the restructuring will be completed during the fourth quarter of 2017.

“In recent years we have made significant investments to become a multi-market company, deliver a fully refreshed product portfolio and establish a faster technology cadence. Reflecting on the internal expansion associated with these investments, we have identified areas where we can be more efficient going forward,” stated Mr. Fallon. “While difficult, my expectation is taking action at this time will result in a more cost-efficient structure that enables us to focus on our strengths and return to profitability as we grow. I believe these are the right steps for our shareholders, our company and our customers.”

Conference Call Information

Infinera will host a conference call for analysts and investors to discuss its third quarter 2017 results and its outlook for the fourth quarter of 2017 today at 4:30 p.m. Eastern Time (1:30 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.

Contacts:

Media:
Anna Vue
Tel. +1 (916) 595-8157
avue@infinera.com

Investors:
Jeff Hustis
Tel. +1 (408) 213-7150
jhustis@infinera.com


About Infinera

Infinera provides Intelligent Transport Networks, enabling carriers, cloud operators, governments and enterprises to scale network bandwidth, accelerate service innovation and automate 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 www.infinera.com/blog.

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 ability to continue to gain traction across multiple customer verticals; Infinera's ability to outgrow the market and deliver strong financial results; Infinera's ability to become a multi-market company, deliver a fully refreshed product portfolio and establish a faster technology cadence; Infinera’s expectations regarding its restructuring and the expected cost and annual savings associated with the restructuring plan. 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 effects of increased customer consolidation; fluctuations in demand, sales cycles and prices for products and services, including discounts given in response to competitive pricing pressures, as well as the timing of purchases by our key customers; 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 ability to adequately respond to demand as a result of the restructuring plan; Infinera's reliance on single and limited source suppliers; Infinera’s ability to protect Infinera’s intellectual property; 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 July 1, 2017 as filed with the SEC on August 8, 2017, 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, amortization of debt discount on Infinera’s convertible senior notes, amortization and impairment of acquired intangible assets, acquisition-related costs, and certain purchase accounting adjustments related to Infinera's acquisition of Transmode AB, which closed during the third quarter of 2015, along with related tax effects. 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, 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 2017 results, including an estimate of certain non-GAAP financial measures for the fourth quarter of 2017 that excludes non-cash stock-based compensation expenses, amortization of acquired intangible assets and related tax effects, 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
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)

Three Months Ended Nine Months Ended
September 30,
2017
September 24,
2016
September 30,
2017
September 24,
2016
Revenue:
Product $159,579 $156,188 $449,992 $599,802
Services 33,001 29,264 94,931 89,290
Total revenue 192,580 185,452 544,923 689,092
Cost of revenue:
Cost of product 111,803 91,064 311,437 331,564
Cost of services 12,951 9,786 36,772 32,842
Total cost of revenue 124,754 100,850 348,209 364,406
Gross profit 67,826 84,602 196,714 324,686
Operating expenses:
Research and development 56,616 50,855 169,076 164,541
Sales and marketing 27,824 27,960 86,662 88,434
General and administrative 17,634 16,646 53,556 51,617
Total operating expenses 102,074 95,461 309,294 304,592
Income (loss) from operations (34,248) (10,859) (112,580) 20,094
Other income (expense), net:
Interest income 857 647 2,470 1,764
Interest expense (3,549) (3,313) (10,408) (9,644)
Other gain (loss), net: (80) (188) (462) (1,116)
Total other income (expense), net (2,772) (2,854) (8,400) (8,996)
Income (loss) before income taxes (37,020) (13,713) (120,980) 11,098
Provision for (benefit from) income taxes 211 (2,416) (459) (725)
Net income (loss) (37,231) (11,297) (120,521) 11,823
Less: Net loss attributable to noncontrolling interest (125) (503)
Net income (loss) attributable to Infinera Corporation $(37,231) $(11,172) $(120,521) $12,326
Net income (loss) per common share attributable to Infinera Corporation:
Basic $(0.25) $(0.08) $(0.82) $0.09
Diluted $(0.25) $(0.08) $(0.82) $0.08
Weighted average shares used in computing net income (loss) per common share:
Basic 148,777 143,850 147,367 142,350
Diluted 148,777 143,850 147,367 145,921


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

Three Months Ended Nine Months Ended
September 30,
2017
July 1,
2017
September 24,
2016
September 30,
2017
September 24,
2016
Reconciliation of
Revenue:
U.S. GAAP as reported$192,580 $176,821 $185,452 $544,923 $689,092
Acquisition-related
deferred revenue
adjustment(1)
400
Non-GAAP as adjusted$192,580 $176,821 $185,452 $544,923 $689,492
Reconciliation of Gross Profit:
U.S. GAAP as reported$67,826 35.2% $64,832 36.7% $84,602 45.6% $196,714 36.1% $324,686 47.1%
Acquisition-related
deferred revenue
adjustment(1)
400
Stock-based
compensation(2)
2,063 2,071 1,424 5,965 4,614
Amortization of acquired
intangible assets(3)
5,390 5,035 5,102 15,305 14,970
Acquisition-related costs(4) 6 38 46 117
Non-GAAP as adjusted$75,279 39.1% $71,944 40.7% $91,166 49.2% $218,030 40.0% $344,787 50.0%
Reconciliation of Operating Expenses:
U.S. GAAP as reported$102,074 $105,337 $95,461 $309,294 $304,592
Stock-based
compensation(2)
10,103 10,309 8,787 29,458 24,577
Amortization of acquired
intangible assets(3)
1,622 1,515 1,537 4,605 4,753
Acquisition-related costs(4) 16 563 322 1,453
Intangible asset
impairment(5)
252
Non-GAAP as adjusted$90,349 $93,497 $84,574 $274,657 $273,809
Reconciliation of Income
(Loss) from Operations:
U.S. GAAP as reported$(34,248) (17.8)% $(40,505) (22.9)% $(10,859) (5.9)% $(112,580) (20.7)% $20,094 2.9%
Acquisition-related
deferred revenue
adjustment(1)
400
Stock-based compensation(2)12,166 12,380 10,211 35,423 29,191
Amortization of acquired
intangible assets(3)
7,012 6,550 6,639 19,910 19,723
Acquisition-related costs(4) 22 601 368 1,570
Intangible asset
impairment(5)
252
Non-GAAP as adjusted$(15,070) (7.8)% $(21,553) (12.2)% $6,592 3.6% $(56,627) (10.4)% $70,978 10.3%
Reconciliation of Net
Income (Loss)
Attributable to Infinera
Corporation:
U.S. GAAP as reported$(37,231) $(42,839) $(11,172) $(120,521) $12,326
Acquisition-related
deferred revenue
adjustment(1)
400
Stock-based
compensation(2)
12,166 12,380 10,211 35,423 29,191
Amortization of acquired
intangible assets(3)
7,012 6,550 6,639 19,910 19,723
Acquisition-related costs(4) (4) 874 257 2,263
Intangible asset
impairment(5)
252
Amortization of debt
discount(6)
2,643 2,577 2,391 7,734 6,996
Income tax effects(7)(1,543) (1,450) (1,519) (4,467) (4,531)
Non-GAAP as adjusted$(16,953) $(22,786) $7,424 $(61,412) $66,368
Net Income (Loss) per
Common Share
Attributable to Infinera
Corporation - Basic:
U.S. GAAP as reported$(0.25) $(0.29) $(0.08) $(0.82) $0.09
Non-GAAP as adjusted$(0.11) $(0.15) $0.05 $(0.42) $0.47
Net Income (Loss) per
Common Share
Attributable to Infinera
Corporation - Diluted:
U.S. GAAP as reported$(0.25) $(0.29) $(0.08) $(0.82) $0.08
Non-GAAP as adjusted$(0.11) $(0.15) $0.05 $(0.42) $0.45
Weighted Average
Shares Used in
Computing Net Income
(Loss) per Common
Share:
Basic148,777 147,538 143,850 147,367 142,350
Diluted148,777 147,538 144,993 147,367 145,921

____________________________

(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 non-cash stock-based compensation related to employees and non-employees (in thousands):


Three Months Ended Nine Months Ended
September 30,
2017
July 1,
2017
September 24,
2016
September 30,
2017
September 24,
2016
Cost of revenue $779 $834 $756 $2,337 $2,175
Research and development 4,040 4,184 3,496 12,004 9,721
Sales and marketing 3,025 3,273 2,826 9,024 8,006
General and administration 3,039 2,852 2,465 8,431 6,850
10,883 11,143 9,543 31,796 26,752
Cost of revenue - amortization from balance sheet* 1,284 1,237 668 3,628 2,439
Total stock-based compensation expense $12,167 $12,380 $10,211 $35,424 $29,191

_____________________________

* 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) Intangible asset impairment is associated with previously acquired intangibles, which Infinera has determined that the carrying value will not be recoverable. Management has excluded the impact of this charge in arriving at Infinera's non-GAAP results because it is non-recurring and management believes that these expenses 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 in aggregate principal amount of 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, acquisition-related costs and amortization of acquired intangible assets.


Infinera Corporation
Condensed Consolidated Balance Sheets
(In thousands, except par values)
(Unaudited)

September 30,
2017
December 31,
2016
ASSETS
Current assets:
Cash and cash equivalents $122,042 $162,641
Short-term investments 134,319 141,697
Short-term restricted cash 740 8,490
Accounts receivable, net of allowance for doubtful accounts of $885 in 2017 and $772 in 2016 137,133 150,370
Inventory 242,848 232,955
Prepaid expenses and other current assets 50,320 34,270
Total current assets 687,402 730,423
Property, plant and equipment, net 143,217 124,800
Intangible assets 99,953 108,475
Goodwill 197,325 176,760
Long-term investments 47,575 40,779
Cost-method investment 7,000 7,000
Long-term restricted cash 4,299 6,449
Other non-current assets 4,328 3,897
Total assets $1,191,099 $1,198,583
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $89,310 $62,486
Accrued expenses 30,080 31,580
Accrued compensation and related benefits 40,571 46,637
Short-term debt, net 141,985
Accrued warranty 14,245 16,930
Deferred revenue 65,328 58,900
Total current liabilities 381,519 216,533
Long-term debt, net 133,586
Accrued warranty, non-current 17,917 23,412
Deferred revenue, non-current 21,794 19,362
Deferred tax liability 23,384 25,327
Other long-term liabilities 14,547 18,035
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 30, 2017 and December 31, 2016
Issued and outstanding shares - 149,305 as of September 30, 2017 and 145,021 as of December 31, 2016 149 145
Additional paid-in capital 1,406,936 1,354,082
Accumulated other comprehensive income (loss) 8,949 (28,324)
Accumulated deficit (684,096) (563,575)
Total stockholders’ equity 731,938 762,328
Total liabilities and stockholders’ equity $1,191,099 $1,198,583


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

Nine Months Ended
September 30,
2017
September 24,
2016
Cash Flows from Operating Activities:
Net income (loss) $(120,521) $11,823
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization 49,391 45,764
Amortization of debt discount and issuance costs 8,399 7,598
Amortization of premium on investments 359 925
Impairment of intangible assets 252
Stock-based compensation expense 35,424 29,191
Other loss 11 261
Changes in assets and liabilities:
Accounts receivable 15,078 33,044
Inventory (9,601) (61,078)
Prepaid expenses and other assets (15,366) (1,625)
Accounts payable 25,840 (13,935)
Accrued liabilities and other expenses (10,310) (7,580)
Deferred revenue 8,575 (805)
Accrued warranty (8,447) (179)
Net cash provided by (used in) operating activities (20,916) 43,404
Cash Flows from Investing Activities:
Purchase of available-for-sale investments (122,249) (118,017)
Proceeds from sales of available-for-sale investments 10,531
Proceeds from maturities of investments 111,970 110,554
Purchase of cost-method investment (5,000)
Purchase of property and equipment (50,247) (32,878)
Change in restricted cash 4,389 (4,950)
Net cash used in investing activities (45,606) (50,291)
Cash Flows from Financing Activities:
Security pledge to acquire noncontrolling interest 5,596 (5,921)
Acquisition of noncontrolling interest (471) (16,771)
Proceeds from issuance of common stock 17,991 16,486
Minimum tax withholding paid on behalf of employees for net share settlement (963) (3,592)
Net cash provided by (used in) financing activities 22,153 (9,798)
Effect of exchange rate changes on cash 3,770 (1,420)
Net change in cash and cash equivalents (40,599) (18,105)
Cash and cash equivalents at beginning of period 162,641 149,101
Cash and cash equivalents at end of period $122,042 $130,996
Supplemental disclosures of cash flow information:
Cash paid for income taxes, net of refunds $4,159 $5,557
Cash paid for interest $1,317 $1,445
Supplemental schedule of non-cash investing activities:
Transfer of inventory to fixed assets $3,110 $5,211


Infinera Corporation
Supplemental Financial Information
(Unaudited)

Q4'15 Q1'16 Q2'16 Q3'16 Q4'16 Q1'17 Q2'17 Q3'17
GAAP Revenue ($ Mil) $260.0 $244.8 $258.8 $185.5 $181.0 $175.5 $176.8 $192.6
GAAP Gross Margin % 44.5% 47.5% 47.8% 45.6% 38.1% 36.5% 36.7% 35.2%
Non-GAAP Gross Margin %(1) 48.3% 50.2% 50.4% 49.2% 41.8% 40.3% 40.7% 39.1%
Revenue Composition:
Domestic % 62% 71% 64% 56% 53% 57% 63% 59%
International % 38% 29% 36% 44% 47% 43% 37% 41%
Customers >10% of Revenue 2 3 2 2 2 1 3 2
Cash Related Information:
Cash from Operations ($ Mil) $25.8 $10.0 $28.2 $5.2 ($5.0) $3.0 ($3.0) ($20.9)
Capital Expenditures ($ Mil) $15.3 $10.8 $12.5 $9.6 $10.4 $14.7 $24.5 $11.0
Depreciation & Amortization ($ Mil) $13.7 $14.7 $15.2 $15.9 $15.7 $16.0 $16.6 $16.8
DSOs 65 69 68 75 81 64 64 65
Inventory Metrics:
Raw Materials ($ Mil) $27.9 $33.1 $39.1 $37.2 $33.2 $34.8 $36.7 $35.8
Work in Process ($ Mil) $52.6 $59.4 $61.0 $65.5 $74.5 $81.1 $91.6 $84.3
Finished Goods ($ Mil) $94.2 $97.2 $102.2 $128.8 $125.3 $118.0 $117.7 $122.7
Total Inventory ($ Mil) $174.7 $189.7 $202.3 $231.5 $233.0 $233.9 $246.0 $242.8
Inventory Turns(2) 3.1 2.6 2.5 1.6 1.8 1.8 1.7 1.9
Worldwide Headcount 2,056 2,128 2,218 2,262 2,240 2,245 2,272 2,296
Weighted Average Shares Outstanding (in thousands):
Basic 140,015 140,805 142,396 143,850 144,770 145,786 147,538 148,777
Diluted 149,439 146,880 145,891 144,993 145,497 147,017 148,662 149,714

_____________________________

(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.


Source:Infinera Corporation