Infinera Corporation ( INFN)

Q3 2010 Earnings Call Transcript

October 18, 2010 5:00 pm ET

Executives

Bob Blair – IR

Tom Fallon – President and CEO

Ita Brennan – CFO

Analysts

Kevin Dennean – Citi

Alex Henderson – Miller Tabak

George Notter – Jefferies

Ehud Gelblum – Morgan Stanley

Michael Genovese – Soleil Securities

Simona Jankowski – Goldman

Brent Bracelin – Pacific Crest Securities

Sanjiv Wadhwani – Stifel Nicolaus

Blair King – Avondale Partners

Presentation

Operator

Good afternoon. Welcome to the third quarter fiscal 2010 investment community conference call of Infinera Corporation. All lines will be on a listen-only mode until the question-and-answer session. (Operator instructions) Today’s call is being recorded. If anyone has any objections, you may disconnect at this time.

I would now like to turn the call over to Mr. Bob Blair of Infinera Investor Relations. Sir, you may begin.

Bob Blair

Good afternoon. Today’s call will include projections and estimates that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements address the financial conditions, results of operations, business initiatives, views on our markets and customers, our products and our competitors’ products and prospects of the company, including Q4 2010 and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements.

Please refer to the company’s current press releases and SEC filings including the company’s Annual Report on Form 10-K filed on March 1st, 2010 for more information on these risks and uncertainties. Today’s press releases, including Q3 2010 results and associated financial tables and investor information summary will be available today on the Investors section of Infinera’s website. The company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call.

This afternoon’s press release and today’s conference call also includes certain non-GAAP financial measures. In our earnings press release, we announced operating results for the third quarter of 2010, which exclude the impact of non-cash stock-based compensation expenses and restructuring and other costs associated with the closure of our Maryland Fab.

These non-GAAP financial measures are provided to facilitate meaningful year-over-year comparisons. Please see the exhibit to the earnings press release for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and for an explanation of why these non-GAAP financial measures are useful and how they are used by management.

On this call, we will also give guidance including guidance for the fourth quarter of 2010. We have excluded non-cash stock-based compensation expenses from this guidance, because we cannot readily estimate the impact on future – of our future stock price on our future stock-based compensation expenses.

I will now turn the call over to Infinera President and Chief Executive Officer, Tom Fallon.

Tom Fallon

Thanks, Bob. Good afternoon and thanks for joining us. With me is our CFO, Ita Brennan. Our financial results for the third quarter of fiscal 2010 were outstanding, representing the strongest validation yet of our long-term business model. We posted records in revenue, corporate gross margin, and shipments of our Tributary adapter module shipments.

In addition, a combination of stronger revenue, higher profit margins, and ongoing operating expense control resulted in significant income leverage with an operating income contribution of $18.5 million for the quarter. This compares to operating income of $3 million for Q2.

At the beginning of the year, we stated we would focus on profitability and I believe these numbers speak clearly the result of that effort. Specifically, our gross margin achievement of 51% in Q3 is a powerful proof point of the long-term business model and representative of where we can – we believe we can take the business consistently over the long term.

While our financial results for the third quarter were exceptional, our bookings during the quarter were below our expectations. We believe this is related to a number of factors, a return to more typical shorter lead times in North America, the completion of some customers' recent capacity additions, renewed economic uncertainty affecting some of our customers' buying behavior, and the inherent lumpiness of the DWDM industry. Overall, this gives us less visibility than we have had in recent quarters.

We continue to have strong market share, both domestically and internationally, which we believe is the ultimate litmus test of customers' continued confidence in our product road map. However, we think it's reasonable to expect that our growth trajectory will moderate from time to time to accommodate periods of network absorption and that our fourth quarter appears to be one of those periods.

It is important to note that we are seeing strength in the overall pipeline of deals in our major geographies as demand for capacity continues its inevitable growth. We are competing for these significant pieces of business, but the outcomes and timing are hard to predict at this time.

Our market share success demonstrates customers' continued confidence in our unique and differentiated PIC-based networks and our expanded product road map that provides end-to-end solutions. We believe that carriers continue to invest in our networks because we consistently deliver on our proven value proposition of superior economics, quality, reliability, and network utilization.

More than six years after our introduction of the industry's first PIC-based Digital Optical Network, not one of our numerous DWDM competitors have accomplished the feat of bringing to market a network based on the intelligence of a digital optical architecture. We think that optics and bandwidth management are the core of the optical network and that optical integration is critical to achieving the all important scaling and lowest total cost of ownership for our customers' transport networks. This approach is what makes Infinera foundationally different than other DWDM players.

Our value proposition has led us to an expansion of our number – of the number of our DWDM market share position on a revenue basis in North America to 39% versus 20% a year ago and our worldwide share to 15%, up from 10% a year ago based on data from Dell'Oro for the first half of this calendar year. We are confident based on our Q3 performance that we will continue to have strong market share. Considering that we do not yet participate in most North America Tier 1 opportunities, this is a remarkable accomplishment and validation of our unique value proposition in the marketplace.

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