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Infinera Corporation Reports First Quarter 2016 Financial Results

The following excerpt is from the company's SEC filing.

- Infinera Corporation (NASDAQ: INFN), provider of Intelligent Transport Networks, today released financial results for the first quarter of 2016 ended March 26, 2016.

GAAP revenue for the quarter was $

244.8 million

compared to $260.0 million in the fourth quarter of 2015 and

$186.9 million

in the first quarter of 2015.

GAAP gross margin for the quarter was

compared to 44.5% in the fourth quarter of 2015 and 47.2% in the first quarter of 2015. GAAP operating margin for the quarter was

compared to 5.3% in the f ourth quarter of 2015 and 8.1% in the first quarter of 2015.

GAAP net income for the quarter was

$12.0 million

per diluted share, compared to $12.6 million, or $0.08 per diluted share, in the fourth quarter of 2015, and $12.4 million, or $0.09 per diluted share, in the first quarter of 2015.

Non-GAAP revenue for the quarter was

$245.0 million

$260.6 million

Non-GAAP gross margin for the quarter was

compared to 48.3% in the fourth quarter of 2015 and 47.8% in the first quarter of 2015. Non-GAAP operating margin for the quarter was

compared to 12.7% in the fourth quarter of 2015 and 12.2% in the first quarter of 2015.

Non-GAAP net income for the quarter was

$28.0 million

per diluted share, compared to $32.0 million, or $0.21 per diluted share, in the fourth quarter of 2015, and $22.1 million, or $0.16 per diluted share, in the first 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.

“We continued to execute well in the first quarter, winning deals across our product portfolio and delivering strong financial results,” said Tom Fallon, Infinera’s Chief Executive Officer. “Responding to ongoing growth in bandwidth demand, customers are increasingly turning to Infinera to address the advanced scalability and efficiency required to operate their networks. By continuing to deliver the most innovative solutions and the Infinera Experience to our customers, I am confident that we will continue to gain market share across the end-to-end optical transport market and generate outstanding bottom line results.”

Conference Call Information

Infinera will host a conference call for analysts and investors to discuss its first quarter 2016 results and its outlook for the second quarter of 2016 today at 5:00 p.m. Eastern Time (2:00 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

Investors:

Jeff Hustis

Tel. +1 (916) 595-8157

Tel. +1 (408) 213-7150

avue@infinera.com

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 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 ability to continue to address the advanced scalability and efficiency required to operate its customer's networks; and Infinera’s ability to continue to gain market share across the end-to-end optical transport market and generate outstanding bottom line 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; Infinera’s ability to successfully integrate the Infinera and Transmode businesses; 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; Infinera’s reliance on single-source suppliers; aggressive business tactics by Infinera’s competitors; Infinera’s ability to protect Infinera’s intellectual property; claims by others that Infinera infringes their intellectual property; global macroeconomic conditions; 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 Annual Report on Form 10-K for the year ended on December 26, 2015 as filed with the SEC on February 23, 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 first quarter 2016 results, including an estimate of certain non-GAAP financial measures for the second 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 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.

GAAP Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

Three Months Ended

March 28, 2015

Revenue:

Product

216,082

160,843

Services

28,736

26,019

Total revenue

244,818

186,862

Cost of revenue:

Cost of product

118,062

89,506

Cost of services

10,418

Total cost of revenue

128,480

98,750

Gross profit

116,338

88,112

Operating expenses:

Research and development

54,145

39,257

Sales and marketing

30,009

21,042

General and administrative

17,313

12,656

Total operating expenses

101,467

72,955

Income from operations

14,871

15,157

Other income (expense), net:

Interest income

Interest expense

(3,155

(2,890

Other gain (loss), net:

Total other income (expense), net

(2,847

(2,175

Income before income taxes

12,024

12,982

Provision for income taxes

Net income

11,808

12,366

Less: Net loss attributable to noncontrolling interest

Net income attributable to Infinera Corporation

12,015

Net income per common share attributable to Infinera Corporation:

Diluted

Weighted average shares used in computing net income per common share:

140,805

127,840

146,880

137,304

(In thousands, except percentages and per share data)

Reconciliation of Revenue:

U.S. GAAP as reported

260,034

Acquisition-related deferred revenue adjustment

Non-GAAP as adjusted

245,044

260,639

Reconciliation of Gross Profit:

115,764

Stock-based compensation

Amortization of acquired intangible assets

Acquisition-related inventory step-up expense

Acquisition-related costs

123,005

125,871

89,355

Reconciliation of Operating Expenses:

101,975

92,892

92,775

66,528

Reconciliation of Income from Operations:

13,789

30,113

33,096

22,827

Reconciliation of Net Income Attributable to Infinera Corporation:

12,631

Amortization of debt discount

Income tax effects

(1,502

(2,197

28,029

31,958

22,093

Net Income per Common Share Attributable to Infinera Corporation - Basic:

Net Income per Common Share Attributable to Infinera Corporation - Diluted:

Weighted Average Shares Used in Computing Net Income per Common Share:

140,015

149,439

_____________________________

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.

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):

General and administration

Cost of revenue - amortization from balance sheet*

Total stock-based compensation expense

Stock-based compensation expense deferred to inventory and deferred inventory costs in prior periods and recognized in the current period.

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.

Business combination accounting principles require Infinera to measure acquired inventory at fair value as of the date of the acquisition. The fair value of inventory reflects the acquired company’s cost of manufacturing

plus a portion of the expected profit margin. The non-GAAP adjustment to Infinera's cost of sales excludes the amortization of the step-up in carrying value for units sold in the quarter. Management believes the adjustment is useful to investors as an additional means to reflect cost of sales and gross margin trends of Infinera's business.

Acquisition-related costs related to Transmode acquisition include legal, financial, employee retention costs and other professional fees incurred in connection with the transaction. 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.

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.

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.

Condensed Consolidated Balance Sheets

(In thousands, except par values)

ASSETS

Current assets:

Cash and cash equivalents

179,974

149,101

Short-term investments

95,116

125,561

Accounts receivable, net of allowance for doubtful accounts of $630 in 2016 and $630 in 2015

184,309

186,243

Inventory

189,744

174,699

Prepaid expenses and other current assets

29,689

29,511

Total current assets

678,832

665,115

Property, plant and equipment, net

115,372

110,861

Intangible assets, net

151,311

156,319

Goodwill

193,498

191,560

Long-term investments

80,488

76,507

Cost-method investment

14,500

Long-term restricted cash

Other non-current assets

Total assets

1,243,364

1,224,181

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable

83,035

92,554

Accrued expenses

33,319

33,736

Accrued compensation and related benefits

34,572

49,887

Accrued warranty

17,663

17,889

Deferred revenue

48,285

42,977

Total current liabilities

216,874

237,043

Long-term debt

125,796

123,327

Accrued warranty, non-current

22,336

20,955

Deferred revenue, non-current

18,391

13,881

Deferred tax liability

35,436

35,731

Other long-term liabilities

18,528

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 March 26, 2016 and December 26, 2015

Issued and outstanding shares - 141,425 as of March 26, 2016 and 140,197 as of December 26, 2015

Additional paid-in capital

1,313,783

1,300,301

Accumulated other comprehensive income

Accumulated deficit

(527,398

(539,413

Total Infinera Corporation stockholders' equity

791,300

762,151

Noncontrolling interest

14,703

14,910

Total stockholders’ equity

806,003

777,061

Total liabilities and stockholders’ equity

Condensed Consolidated Statements of Cash Flows

(In thousands)

Cash Flows from Operating Activities:

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

14,666

Amortization of debt discount and issuance costs

Amortization of premium on investments

Changes in assets and liabilities:

23,391

(16,155

(12,103

Prepaid expenses and other assets

(9,041

(10,317

Accrued liabilities and other expenses

(15,036

(12,895

(1,501

Net cash provided by operating activities

19,842

Cash Flows from Investing Activities:

Purchase of available-for-sale investments

(37,393

(80,022

Proceeds from sales of available-for-sale investments

Proceeds from maturities of investments

63,759

91,280

Purchase of property and equipment

(10,844

(7,367

Change in restricted cash

Net cash provided by investing activities

15,492

Cash Flows from Financing Activities:

Proceeds from issuance of common stock

10,131

Minimum tax withholding paid on behalf of employees for net share settlement

(2,444

(3,950

Net cash provided by financing activities

Effect of exchange rate changes on cash

Net change in cash and cash equivalents

30,873

32,128

Cash and cash equivalents at beginning of period

86,495

Cash and cash equivalents at end of period

118,623

Supplemental disclosures of cash flow information:

Cash paid for income taxes, net of refunds

Cash paid for interest

Supplemental schedule of non-cash investing activities:

Transfer of inventory to fixed assets

Supplemental Financial Information

Revenue ($ Mil)

$165.4

$173.6

$186.3

$207.3

$232.5

$244.8

GAAP Gross Margin %

Non-GAAP Gross Margin %

Revenue Composition:

Domestic %

International %

Customers >10% of Revenue

Cash Related Information:

Cash from Operations ($ Mil)

Capital Expenditures ($ Mil)

Depreciation & Amortization ($ Mil)

Inventory Metrics:

Raw Materials ($ Mil)

Work in Process ($ Mil)

Finished Goods ($ Mil)

Total Inventory ($ Mil)

$130.9

$130.8

$146.5

$157.2

$169.9

$174.7

Inventory Turns

Worldwide Headcount

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.

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.

The above information was disclosed in a filing to the SEC. To see the filing, click here.

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