Infinera (INFN)

Q3 2011 Earnings Call

October 18, 2011 5:00 pm ET

Executives

Thomas Fallon - Chief Executive Officer, President and Director

Bob Blair - Investor Relations

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

Ita M. Brennan - Chief Financial Officer

Analysts

Kevin J. Dennean - Citigroup Inc, Research Division

Blair King - Avondale Partners, LLC, Research Division

Ashwin Kesireddy - JP Morgan Chase & Co, Research Division

David Kaczorowski - Stifel, Nicolaus & Co., Inc., Research Division

Jody Farquhar - Jefferies & Company, Inc., Research Division

Nathan Johnsen - Pacific Crest Securities, Inc., Research Division

Jeremy David - Morgan Stanley, Research Division

Presentation

Operator

Welcome to the Third Quarter Year 2011 Investment Community Conference Call of Infinera Corporation. [Operator Instructions] Today's call is being recorded. If you have 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

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, our products and our competitors' products and prospects of the company in Q4 2011 and beyond 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 1, 2011, for more information on these risks and uncertainties.

Today's press releases, including Q3 2011 results and associated financial tables and investor information summary, will be available today on the Investors section of Infinera's website at infinera.com. 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 will also include certain non-GAAP financial measures. In our earnings release, we announced operating results for the third quarter of 2011, which exclude the impact of restructuring and other related costs and noncash 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 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, which will be available today on the Investors section of our website.

On this call, we'll also give guidance for the fourth quarter of 2011. We have excluded noncash 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, our Chief Strategy Officer, Dave Welch; and CFO, Ita Brennan. I'll spend a few minutes today commenting on our market position, touch on our Q3 results and then conclude with some thoughts on our technology and the recent launch of our new DTN-X platform. Ita will then review our Q3 performance and Q4 outlook in detail, as well as provide some directional commentary on how we believe 2012 will trend in the context of the anticipated ramp of our new products.

With the recently announced DTN-X and the newly enhanced DTN, we have a portfolio of products that provide a wide range of transport capabilities, including 10G, 40G FlexCoherent and 500G FlexCoherent super-channels to address several growth markets. Coupled with our investments in an expanded and focused sales force, we are now position to service more opportunities with more customers than ever before in both key vertical markets and across geographies.

Consistent with my commentary last quarter, we continue to see an active market. In particular, we believe that the cable, content and subsea providers remain in investment cycle as the North American and European wholesale carriers. While there is demand for 40G in fiber-constrained environments, particularly in submarine, it is also worth noting that demand for 10G remains strong. We believe that most carriers planning to expand capacity are looking to upgrade to 100 Gig and 500 Gig super-channels in 2012 and beyond.

All of this activity is reflected in our recent financial performance and continued good momentum and bookings. Relative to guidance, our Q3 revenues came in at the high end with a net loss that was better than forecast.

We also experienced a continuation of healthy TAM purchases by an increasingly broad set of customers looking to meet their bandwidth growth needs. As evidence of our deeper focus on verticals, in Q3, our top customer was one of the leading cable providers, and our submarine pipeline remained strong.

I'm also pleased to note that one of our Tier 1 customers was among our top 5 accounts for the quarter. We added 3 new customers in Q3, bringing our total to 93. One of them was a broadband stimulus customer. We continue to see this funding as an ongoing opportunity, but as we've said before, timing of these awards can be unpredictable, and we don't bake them into our business outlook. We believe our recently launched DTN-X and the roadmap it provides for customers has underpinned some of this overall increased activity.

On the new product front, we have received initial orders for our new 40 Gig product. We have begun shipping the 40G Coherent line cards, and we anticipate recognizing some revenue in Q4, which is dependent on the timing of customer acceptance. In Q3, we completed 6 trials or qualification tests for the 40G offering, and 14 additional trials are scheduled or are being scheduled across the next 2 quarters.

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