Infinera's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Infinera (INFN)

Q1 2012 Earnings Call

April 25, 2012 5:00 pm ET

Executives

Bob Blair -

Thomas Fallon - Chief Executive Officer, President and Director

Ita M. Brennan - Chief Financial Officer

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

Analysts

Ehud Gelblum - Morgan Stanley, Research Division

George C. Notter - Jefferies & Company, Inc., Research Division

Kevin J. Dennean - Citigroup Inc, Research Division

Rod B. Hall - JP Morgan Chase & Co, Research Division

Alex B. Henderson - Miller Tabak + Co., LLC, Research Division

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

Simona Jankowski - Goldman Sachs Group Inc., Research Division

Michael Genovese - MKM Partners LLC, Research Division

Presentation

Operator

Welcome to the First Quarter Year 2012 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, our competitors' products and prospects for the company in the second quarter of fiscal year 2012 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 6, 2012, for more information on these risks and uncertainties. Today's press releases, including results of the first quarter of fiscal year 2012 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 first quarter of fiscal year 2012, 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 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, which will be available today on the Investors section of Infinera's website.

On this call, we will also give guidance for the second quarter of fiscal year 2012. 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 are Chief Strategy Officer, Dave Welch; and Chief Financial Officer, Ita Brennan. I will start with some commentary on market trends and how we believe they will impact architecture and technology choices by service providers moving forward. Then I will provide an update on the reception to our new products and highlight some results from our first quarter before turning it over to Ita for a full review of our Q1 performance.

We continue to see 3 fundamental trends that are driving significant network traffic growth: cloud, mobile and video. First, cloud continues to grow in importance for our service provider customers across both enterprise and consumer applications. Forrester Research predicts that the cloud service market will approach $240 billion at 2020. Many analysts predict that most applications in the future will be cloud-based, increasing the role of the network. We see cloud growth driving a need for large amounts of optical bandwidth that can be provisioned quickly to absorb unpredictable spikes in the case of disaster recovery, over large workload shifts. In order to satisfy this without wastefully over-provisioning these networks, carriers will require an optical layer that delivers large pools of virtualized bandwidth that can be deployed quickly in minutes instead of days or weeks.

Second, mobile traffic is growing rapidly, driven by increasing access rates combined with an explosion of smartphones, tablets and wirelessly connected laptops. Industry analysts estimate mobile data usage will grow approximately 18-fold by 2016. There has been tremendous investment in 3G, 4G, and Wi-Fi infrastructure, but these are simply access methods into the wired backbone. We anticipate this dramatic increase in mobile traffic will require additional optical investment.

Finally, we believe that streaming video will continue to be a huge driver for added optical capacity. Video streaming from multiple sources, including user-generated content from YouTube, and aggregators like Netflix and Amazon, and content creators like HBO, will be our service providers delivering managed IPTV services. We are also seeing improved quality at each stream from standard definition to high definition and on to 3D. This growth in video traffic is being further amplified by cloud-based service delivery, mobile access and significantly increased wired broadband access capacity.

Overall, we see these trends underpinning the requirement for a significantly increased investment in optical transport spending. We believe this optical reboot is a cyclical transition that happens about once every decade. It has just begun, evidenced by some 19 million miles of optical fiber that were installed in the U.S. last year, the most since the boom year of 2000 according to research firm, CRU Group. All of this fiber will need to be lit, and Dell'Oro sees that the DWDM transport market going at a 5-year compound annual growth rate of 10% to $11.7 billion in 2016. We believe that the traffic growth and patterns for cloud, mobile and video data will require investment in a next-generation optical network that can scale smoothly to multi-terabits while simultaneously delivering increased intelligence and functionality. We believe that this increased intelligence and functionality will require OTN and MPLS switching integrated with DWDM into a single platform. Dell'Oro calls this segment optical packet transport, and it includes Infinera's new DTN-X and forecast it to grow at a 5-year compound annual growth rate of 22%, obtaining $7 billion by 2016.

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