Infinera (INFN)

Q1 2011 Earnings Call

April 28, 2011 5:00 pm ET

Executives

Ita Brennan - Chief Financial Officer

Thomas Fallon - Chief Executive Officer, President and Director

Bob Blair - Investor Relations

David Welch - Co-Founder, Chief Marketing & Strategy Officer, Executive Vice President and Director

Analysts

Sanjiv Wadhwani - Stifel, Nicolaus & Co., Inc.

Kevin Dennean - Citigroup Inc

Alex Henderson - Miller Tabak + Co., LLC

Rod Hall - JP Morgan Chase & Co

Michael Genovese - MKM Partners LLC

George Notter - Jefferies & Company, Inc.

Unknown Analyst -

Presentation

Operator

Welcome to the First Quarter 2011 Investment Community Conference Call of Infinera Corporation. [Operator Instructions] Today's call is being recorded. If you have any objections, please 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

Thank you. 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 condition, results of operations, business initiatives, views on our market and customers in our products and our competitors' products, and prospects of the company in Q2 2011 and beyond that are subject to risks and uncertainties that could cause actual results to materially differ 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 1, 2011, for more information on these risks and uncertainties. Today's press releases' including Q1 2011 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 include certain non-GAAP financial measures. In our earnings release, we announced operating results for the first quarter of 2011, which exclude the impact of restructuring and other related costs and non-cash stock-based compensation expenses.

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

On this call, we'll also give guidance, including guidance for the second quarter of 2011. We have excluded non-cash stock-based compensation expenses from this guidance because we cannot readily estimate the impact of our future stock price on future stock-based compensation expenses.

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

Thomas Fallon

Good afternoon, and thanks for joining us. With me are Chief Strategy Officer, Dave Welch; and CFO, Ita Brennan.

Our first quarter results reflects stable bandwidth demand from our terrestrial and subsea customers, evidenced by strong comp purchases at the quarter. However, we saw slower new put productivity in Q1, versus a year ago as certain of our customers and prospects await the introduction of our new higher capacity products later this year and some have opted for competitive 40G solutions in the interim on a tactical basis.

While our reputation for customer care, high-quality and rapid turn up are assuring customer loyalty, our ability to compete for certain capacity sensitive opportunities is impaired by our current lack of a high-fiber capacity solution.

In order to address our customers interim need for 40G transmission and advance of the rollout of our 500 gig PIC-based system for 100G transmission, we will be introducing our 40G products in the third quarter. The introduction of this product will enable our DTN systems over 64 terabits of capacity on a fiber, which we believe will be up to two times the capacity of most competitive offerings in the market.

It is also important to note that we continue to grow the number of network customers. Customers who are buying a multi-product Infinera solution. This includes customers employing either a combination of long-haul and metro-applications from us, or a combination of terrestrial and subsea applications.

At the end of Q1, we had 26 such network customers out of a total of 86 customers worldwide. An important trend as network customers have made a more significant Infinera architectural commitment. We believe we are earning network customers because our portfolio delivers important end-to-end benefits such as; simplified network management, improved CapEx through efficient interconnect and improved end user experience by integrating provisioning and performance monitoring.

In the metro, we continue to build additional features and capabilities into our ATN (Application Transport Network) platform. And in the second quarter, we will add ethernet aggregation functionality.

Turning to the Optical Transport industry. We are in early stages of a series of significant and complex transitions. We believe these changes create a unique opportunity to successfully launch new products and new architectures because customers are looking for more efficient and cost-effective ways to grow and manage our future networks and to compete for new business.

One of the most important of these transitions is the to move to higher bit rate transmissions, specifically from to 10 to 100G. These higher bit rates are necessitated by the need to increase the carriers capacity for fiber. However, this move does raise issues for carrier regarding network economics, both on the cost of transmission and in avoiding the inherent inefficiency of stranded bandwidth when service capacity and wavelength capacity are mismatched in conventional transponder base optical networks.

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