Infinera Corp (INFN) 2008 Q4 法說會逐字稿

Welcome to the Fourth Quarter Fiscal 2008 Investment Community conference call of Infinera Corporation.

All participants are on a listen-only mode at this time.

(Operator Instructions).

Today's conference is being recorded.

If you have any objections, you may disconnect at this time.

I will now turn the meeting over to Mr.

Bob Blair of Infinera's Investor Relations.

Go ahead, sir.

You may begin.

Thank you.

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 condition and results of operations, business initiatives, views on our market and customers, our products and our competitors' products, and prospects of the Company in Q1 2009 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 February 19, 2008 for more information on these risks and uncertainties.

Today's press releases, including Q4 2008 and full year 2008 financial tables, an investor relations summary, and a guidance reconciliation summary, will be available today on the Investor section of Infinera's website at www.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 also include certain non-GAAP financial measures.

In our earnings release, we announced operating results for the fourth quarter of 2008, which will exclude the impact of the roll-off of certain ratable GAAP revenue and costs from the balance sheet, as well as the impact of non-cash stock-based compensation and warrant revaluation expenses.

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 first quarter of 2009.

We have excluded non-GAAP non-cash stock-based compensation expenses from this guidance because we can not readily estimate the impact of our future stock price on our future stock-based compensation expenses.

For the remainder of today's call, we will be discussing our fourth quarter 2008 adjusted GAAP results and our first quarter 2009 GAAP guidance excluding the impact of these items and will refer to these results as adjusted GAAP.

I will now turn the call over to Infinera President and Chief Executive Officer Jagdeep Singh.

Good afternoon and thanks for joining us.

With me is Chief Financial Officer Duston Williams, who will provide a report on our Q4 results and our outlook for the first quarter.

Looking briefly at the fourth quarter, we posted adjusted GAAP revenue of $86.2 million.

We continued our new customer win momentum with seven new customers.

And for the first time in a single quarter, we had an Internet content provider, a wholesale carrier, a cable MSO, and a Tier 1 incumbent all rank among our top five customers.

Our top customer in Q4 was an Internet content provider accounting for 23% of revenue.

The common equipment associated with the new customer deployments and additional expected new customer shipments in Q1 put downward pressure on our gross margins in the quarter and they came in at 36% versus 42% in the September quarter.

We posted an operating loss for Q4 of $9.3 million versus an operating loss of $1.7 million in Q3.

Another significant Q4 data point is that we derived 24% of our Q4 revenue from the EMEA region, up from 16% a year ago, demonstrating a healthy return on the resources and focus we deployed in that region over the last several years.

Clearly our major win and successful deployment at Deutsche Telekom are serving as an excellent foundation and reference account for our business development efforts throughout Europe and among incumbents worldwide.

On that note, we were pleased to announce today that OTEGLOBE, the international division of Greek incumbent national carrier OTE, has selected Infinera as its DWDM supplier for its Pan European network.

In making its selection, OTE cited as critical factors the scale, speed, and flexibility of Infinera's architecture.

OTE was one of three European-based new customers added in Q4 with an additional three new customers coming from the Americas and one from Asia Pacific.

Duston will provide some additional color on the customer mix in terms of the diversity, size, and financial wherewithal of the companies now running their networks with Infinera equipment.

The win at OTE represents our fourth win with Tier 1 incumbent carriers, joining DT and two other incumbents with whom we are doing business.

We remain pleased with our traction with Tier 1 incumbents and we expect to announce additional such wins during the remainder of 2009.

While we were among the first in the industry to highlight a slowing of our growth trajectory earlier in calendar 2008, it was nevertheless an important year for Infinera.

For fiscal year 2008, we saw record adjusted GAAP revenues of $353 million compared with fiscal year '07 invoice shipments of $309 million.

On the customer front, we expanded the base from 41 to 56 with 12 of them coming in the second half of the year.

We had zero customer churn again.

And we reduced our customer concentration as our largest customer, Level 3, represented 24% of fiscal 2008 revenue versus much higher historical levels.

And no other customer accounted for more than 7%, thus diminishing our dependence on any one customer.

In addition, we showed growth across each major geographical region, as well as growth in each of our five targeted customer market segments.

We also achieved several significant technology milestones in 2008.

We provided our customers with what we believe is the industry's first and only PIC-based roadmap, indicating our belief that it's possible to double capacity per chip every three years.

We began shipping our new ILS2 line system, extending the reach and increasing capacity for our DTN system.

We also surpassed a cumulative total of 130 million hours of operations in live networks worldwide without any PIC failures in the field and shipped over 10,000 Infinera DLM line cards, two achievements that demonstrated the quality and success of our system.

We were very encouraged with Infinera's continued development as a long-term, strategic optical transport supplier to leading companies across a set of growing markets.

Based on our customer retention and win rate, it's clear that our value proposition is resonating as the most compelling and economically viable option for addressing future bandwidth growth needs.

What I find particularly encouraging is that customers are telling us they're selecting Infinera for strategic reasons tied to their long-term need to grow bandwidth and increase the functionality of their networks while reducing cost, space, and power.

While calendar year 2009 is shaping up as a challenging one for participants in the optical industry from a growth standpoint, we also believe it will be a year in which many carriers will make significant strategic decisions and some of our competitors will be challenged to address carriers' long-term optical transport requirements.

With a strong balance sheet and established technology lead, we intend to convert these circumstances into opportunities for Infinera to advance our leadership position.

This is clearly an uncertain time in the market with reduced visibility.

Despite this, our customers tell us that over the next several years, they expect bandwidth will continue to grow, driven by a broad range of applications.

This is encouraging for us because we believe that demand for optical transport equipment, including our systems, is tied directly to growth in bandwidth demand.

Our basic strategy is to be the vendor of choice to fulfill that demand.

We've tried to accomplish this through continued technology leadership in the core long-haul market, broadening our metro business beyond the core with new products, expanding our customer base in Asia Pacific as we have in Europe, and continuing our penetration of Tier 1 incumbents.

At a time when many in the industry are retrenching, we remain committed to focusing our energies on developing new products that will allow us to continue to differentiate our DTN system and compete in adjacent markets, including ultra long-haul and metro access.

We will continue to focus our R&D on integrating additional functionality into our PICs and delivering additional services through systems enabled with those more powerful PICs.

We believe this will create even greater value for our customers and prospects and further differentiate us from our competitors.

This strategy continues to be embraced by service providers worldwide as evidenced by the continued new customer win momentum discussed earlier.

Duston will now cover our Q4 performance and outlook.

Thank you, Jagdeep.

I'll review the Q4 actual results and then follow that up with an outlook for Q1.

The following analysis of our Q4 and Q3 results are based on adjusted GAAP and the results from other quarters and fiscal years are based on invoice shipments.

And all references exclude non-GAAP stock-based compensation.

Please see the GAAP to non-GAAP invoice shipment and adjusted GAAP reconciliation, which is attached as an exhibit to today's earnings press release for a reconciliation of these results to our GAAP results.

Looking at the specifics for the quarter, adjusted GAAP revenues in Q4 totaled $86.2 million versus $80.9 million in Q3.

In Q4, we had two 10% or greater customers on an adjusted GAAP basis, an unannounced Internet content provider and Level 3.

Our largest customer, the Internet content provider, accounted for 23% of our Q4 adjusted GAAP revenue.

Level 3 accounted for 18% of revenue versus 27% in Q3.

Gross margins were 36% in Q4 versus 42% in Q3 where the delta related mostly to new deployments and new customer adds in Q4 and additional anticipated customer adds in Q1.

As our business model dictates, a high level of new customer activity within any given quarter will most - almost always be correlated with relatively higher amounts of low margin common equipment revenue in that quarter.

The seven new customer adds in the quarter equaled our previous high point in Q3 2007 when we added the same number of new customers.

In Q4, we shipped more common equipment chassis than in any other previous quarter in our history.

Our common equipment revenue as a percentage of total revenue was the highest in well over a year.

Our TAM revenue as a percent of total revenue was its lowest it has been in well over two years.

We also booked significant lower cost to market or LCM adjustments that reflect loss-leading common equipment to be shipped in Q1.

Operating expenses for the quarter were $40 million versus $35.9 million in Q3, which exceeded our high end guidance by $1 million.

A majority of the increase in spending from Q3 to Q4 was attributable to R&D headcount increases as well as additional project and prototype expenses.

The higher-than-expected spending was entirely related to a $1.7 million bad debt provision booked for a Russian customer.

The operating loss for Q4 was $9.3 million versus an operating loss of $1.7 million in Q3.

Other income and expense for Q4 was an unfavorable $0.4 million versus a favorable $1.7 million in Q3.

The quarter-over-quarter decrease was attributable to unfavorable foreign currency impacts of $1 million and unrealized losses of $0.9 million related to our auction rate securities.

Regarding the auction rate securities, under an agreement signed in Q4 with UBS, they have agreed to purchase these securities at par value on June 30, 2010.

However, in the meantime, we are required to record these securities at fair value and discount the par value to any credit risk associated with UBS and the timing of the cash flows.

We expect to adjust the fair value of these securities back to par between now and June 30, 2010 and we will record the resulting unrealized gains in the periods in which they occur.

In Q4, we recorded a tax benefit of $0.7 million.

This Q4 tax benefit reflects a significant reduction to taxable income related to a request for a tax accounting method change filed during the quarter, offset by the previously communicated unfavorable impact of the California law change which eliminated the utilization of California net operating loss carry-forwards for two years retroactive back to January 1, 2008.

Net income was a loss of $9 million or a loss of $0.10 per basic share or $0.09 per diluted share versus a breakeven performance in Q3.

Now turning to the balance sheet, cash, cash equivalents, restricted cash, and investments ended the quarter at $312.6 million versus $324.6 million in Q3.

We used $5.4 million of cash from operations in Q4 versus a positive $9.9 million.

DSOs were 74 days versus 55 days.

If you look a bit further into the increase in the DSO days, the 19-day quarter-over-quarter increase breaks down as follows -- five days were attributable to a few customers delaying payments until after the end of the quarter.

These customers have since paid with the exception of one customer for which we've booked a bad debt reserve.

Six days came from customers not electing to take early pay discounts, but rather paying within normal payment terms.

An additional six days were associated with a customer mix in Q4 that included fewer early pay and shorter payment term customers and more longer-payment term customers.

And finally, two days were the result of giving two customers slightly longer payment terms on their initial product deployments.

Further shipments to these customers will revert back to normal payment terms.

It is also worth noting that as of the end of last week, our A/R aging was almost completely current with very little significant past due amounts.

Inventory turns were 3.8 versus 3.2.

Accounts payable days came in at 45 days versus 38 days.

And capital expenditures were $7.8 million in Q4 versus $5.9 million.

I'd like to talk a little bit now about our customers.

Based on the current economic environment and the investment community's interest surrounding the composition of Infinera's customer base, we thought at this point in time it would make sense to provide a bit more insight into our customer base, which, by the way, we are quite proud of and which we believe gets stronger every quarter.

Infinera currently has 56 customers, of which 36 are announced customers and 20 are not announced.

The unannounced customers accounted for 43% of the Q4 adjusted GAAP revenue.

37 of the 56 customers are in the US, 14 in Europe, and five in Asia, reflecting the sequence of where we have focused our investments and sales structure since our founding eight years ago.

We would also like to give you a feel on a rough order-of-magnitude basis the average revenue size and profitability of an Infinera customer on a weighted average basis based on our Q4 revenue profile.

In Q4, we recognized product revenue from 41 customers.

If you look at the yearly revenue and EBITDA from each of these 41 customers and weight it based on the Q4 revenue profile, an average Infinera customer has revenue - yearly revenue of greater than $13 billion, EBITDA in excess of $4 billion.

Even more interesting is a similar analysis of our top ten customers, eight which are public, two which are private, and four of which are unannounced customers.

Our top ten customers accounted for 72% of our total revenue, the lowest concentration by 9% in the history of the Company.

Looking at the latest quarterly revenue, EBITDA, and cash flow from each of our top ten customers, annualizing it, and then weighting it based on our Q4 top ten revenue profile, an average Infinera top ten customer has yearly revenue of greater than $19 billion, EBITDA approaching $6 billion, cash from operations of $6 billion, and cash from operations net of capital expenditures well in excess of $3 billion.

We believe that all top ten customers have positive EBITDA and all but one -- that being a smaller private company -- have positive cash flow net of capital expenditures.

The above analysis is not meant to portray that our customer set is perfect, but is intended to give you a better feel for the overall makeup of the roster.

We look forward to keeping you informed of many additional great new customers during 2009.

And then one final word before we talk about the Q1 outlook, our last I believe VSOE update, as previously discussed and previously promised beginning in Q1 of 2009, Infinera will convert to full GAAP reporting.

Our Q1 revenue guidance will be significantly impacted and our gross margin guidance will be somewhat impacted by the anticipated addition of several new, large customers during the quarter.

At this point, we believe that these larger, newly acquired customers not in the current 56 customer count will be in various stages of deployment at the end of the quarter and the majority of the revenue recognition will most likely fall outside of Q1.

Specifically, we have three significant new customer wins with European customers for which we believe all of the revenue will be recognized outside of Q1.

Consistent with my earlier discussion on the nature of new customer deployments, these anticipated Q1 additions will have a greater portion of lower margin common equipment associated with them, which can significantly impact margins, both prior to shipment through lower cost to market adjustments, inventory adjustments, and upon customer invoicing.

Gross margins are also assumed to be impacted by a shift in Q1 within our existing customer base to some lower margin profile customers.

With these factors in mind, the following guidance for Q1 is based on GAAP results and excludes any non-GAAP stock-based compensation expense -- revenue of approximately $65 million to $70 million, gross margins of 35% to 40%, operating expenses of $41 million, operating loss of $13 million to $18 million, a net loss of approximately $12 million to $18 million.

And based on an average - estimated average diluted weighted shares outstanding of 98 million, this would lead to an EPS loss of $0.12 to $0.18.

Operator, if you could now open the call up for questions, please.

Thank you.

We will now begin the question and answer session.

(Operator Instructions).

Our first question comes from Subu Subrahmanyan.

Go ahead, sir.

Your line is open.

Thank you.

I had a couple of clarifications, Duston, if you could just walk us through the gross margin adjustments for the December quarter.

Did I understand you right to say that the invoice shipment gross margin was a 47% number?

I just wanted to understand that and understand the level of impact that the lower cost to market had on the numbers.

And also the bad debt expense, what that number was.

And then I had a question on the guidance.

Sure.

So no, the Q4 margins were 36%.

What I mentioned is that we booked significant lower cost to market adjustments in anticipation of Q1 shipments.

And that was several million dollars that we booked for those adjustments.

The --

Can you quantify the impact of that on that 36%?

Yes.

Well, let's just say over 5 percentage points.

Okay.

Okay.

And on the bad debt, as I say, it was $1.7 million related to one specific Russian customer.

And is that typical for the lower cost to market to book it ahead of when you even ship and recognize revenues?

Yes.

In this case, we're selling some common equipment below cost.

That common equipment we currently have in inventory or purchase commitments on our suppliers, which require us to effectively book that inventory at lower cost to market.

Got it.

And then moving on to guidance, it sounds like there are several large customers that you will ship stuff to and, again, you will incur some lower cost to market expenses.

But you expect relatively minimal revenues in 1Q, so is -- given those factors, should the first quarter mark a bottom for revenues, given these turn into revenues?

Any time frame for when they could and what kind of ramp we could see just from those customers?

Yes, good question.

All things being equal, Subu, with our existing customer base, I think that's a logical assumption.

From a revenue perspective, I think most of these customers we'll recognize if everything goes as expected revenue in Q2.

There will probably be one that might stretch out potentially into Q3.

And you mentioned three.

Are there more than three that are being -- which are you're shipping to this quarter and will start in Q2 or later?

Yes.

Okay, got it.

Thank you.

Our next question comes from Ehud Gelblum.

Go ahead, Sir.

Your line is open.

Thank you.

Duston, just doing a little math versus -- of what you reported versus what you gave guidance for, the midpoint of guidance would have suggested that your COGS would've been about $43 million this quarter on $75 million in OpEx.

You did COGS of $55 million on $86 million in OpEx.

The numbers aren't that important, aside to say that you beat your revenue guidance by $11 million and your COGS guidance -- your COGS ended up being $12 million higher.

As we look into next quarter, how do I take that -- the correlation between COGS being essentially the same as additional revenue, how do I take that and apply that to the next quarter in terms of how much does a new customer cost in terms of common equipment?

I'm just trying to take those numbers and parse how much of that extra COGS -- some of it's due to the extra revenue and some of it's due to just this pre-stuff that you have to do for marking down your inventory?

How do I get a handle on how much of your gross margin hit in future quarters -- and let's take Q1 -- is because of common equipment and this pre-stuff you have to do before you even deploy?

Yes, I mean, if you wanted to take -- obviously every customer is different, so the analysis is a little difficult.

But if you wanted to just take it probably from the most simplistic approach and that extra revenue at call it 45% margin, 40% margin, would've generated that much more COGS.

And basically the residual you could argue is associated with new customers and lower cost to market type adjustments.

Okay.

So then in that case, you had an additional $7 million to $8 million in COGS this quarter out of thin air more than you anticipated?

And is most of that $7 million to $8 million associated with the future revenue?

Yes, probably that may be a little aggressive, but close.

Okay.

Now how many new customers are you talking about for next quarter?

(multiple speakers).

Yes, yes, from a how we count customers, which is that we recognize $100,000 of revenue, it will probably be a low quarter for new customer adds.

We will ship to a lot of new customers in Q1 that won't be counted as a customer in Q1.

Okay.

So then let me follow on the prior question.

With all of these new customers coming in and deploying common equipment, how big is Q2 and Q3?

I mean, should they be $100 million each, $120 million each?

Or is that out of the question?

Yes, obviously we're not talking about anything but Q1 today.

But to Subu's question, all things being equal, Q2 will be - should be higher than Q1.

But we need to get through Q1 to figure out what that might be.

Now when you do look at Q1, the revenue number you gave us, $65 million to $70 million, I mean, it's down substantially from where you were in Q4.

Do you attribute that to seasonality?

What about your customers that were purchasing in Q4 right now and the ones that you are selling common equipment to in Q4, don't they start doing TAMs and DLMs in Q1?

And what about the other guys?

Yes.

What happened to your existing customer base?

They're all still there obviously.

And they have various levels of deployment.

Every customer goes up and down every quarter.

And they have different spending patterns on a quarterly basis.

So you've got some guys going up, some guys going down, which is not unusual.

This is Jagdeep.

If I can chime in here, part of our -- sort of there, from our customers there are three different words that come to mind.

There's a customer win, which is a win, which is a point which we know that we've been awarded a certain customer network.

The shipment is when we ship the gear to that customer.

And then there's recognizing revenue from that customer, which happens when our gear is accepted and officially turned over.

So the revenue number clearly is going to be impacted by the timing of revenue recognition.

And part of the Q4 beat if you will by the [government] that you mentioned reflects some level of recognition that happened earlier than when we might otherwise have expected it.

And part of these wins that Duston referred to that are wins now won't be recognized until after Q1.

And so part of that is a pushing out.

And so in some ways, you take a look at the Q1 guidance and say some of that is in fact, you know, has been pulled into Q4 because it was just the timing of rev rec and some of it gets pushed out into subsequent quarters based on the timing of rev rec there, so.

Is there any change in VSOE status of these new customers?

When you first brought on Deutsche Telekom, there was a change in VSOE status for that one particular customer and then it changed back.

Is there any difference with these new ones?

Not as we know it today.

Okay, so your revenue numbers are apples to apples.

Last thing I was going to ask you, if we back up three months ago and you're in October giving us guidance for Q4 of the $75 million, what did you anticipate your Q1 to have been and how does this Q1 look versus what you thought in your plan back three months ago?

Yes, yes, we're not - we've got various forecasts.

They change.

They change all the time, you know, quarters (inaudible).

So we probably wouldn't comment on that.

So this - what I'm trying to get a sense as to is your Q1 impacted by economic and macro or -- in which case things got worse during the fourth quarter for you and that's why your Q1 guidance is worse than you would have thought it was going to be?

Or is this regular seasonality and you sort of suspected it would be down here, but you only give guidance a quarter out?

No.

As we see it, you know, our Q1 is the Q1, simply what Jagdeep just said.

Some of the deployments in Q4 happened quicker than we thought, so normally would've happened in Q1.

And, you know, some of the guys we're deploying now it looks like it's going to go into Q2.

And, you know, could you find pockets of somebody maybe taking off purchase because of the economy?

Maybe if you looked hard enough, but it's not intuitively obvious that that is any significant impact in Q1.

It's rather the big deployments and the timing of those deployments and just the underlying volatility of our customer base.

They purchased and not in equal amounts every quarter.

Okay.

I appreciate it.

Thank you.

Our next question comes from George Notter.

Go ahead, Sir.

Your line is open.

Hi, thanks.

I guess I wanted to ask about pricing.

What's going on with pricing here in terms of the impact on gross margins?

I guess I struggle to delineate if there is any impact from pricing here.

Obviously mix shift of customers towards newer and incumbent customers is creating pressure on margins near term.

You've got a bigger mix of common equipment.

But how do I think about the marketplace?

Is pricing a factor here at all that's playing into this vis-a-vis the mix shift?

Not significantly.

Much more impact from the percentage of common that we ship and the percentage of TAMs.

Every -- obviously every customer is different and every win is different.

But our model is still the model that we sell common equipment sometimes at a loss or low margins and the DLMs and TAMs obviously are quite a bit higher margins.

So if I look out into the future, a year from now, two years from now, and I assume that you have a bigger mix of incumbent telcos in your revenue stream and a mixture of commons versus DLMs and TAMS is consistent with what it was let's say in the last few quarters.

Would we be back at a mid to high 40s gross margin or not?

Again, all other things being equal and the customer mix is the same and you've got a bunch of variables going on in there, but there's the -- I guess the best way to answer it is nothing has fundamentally changed in the business model that would yield those results.

And so do you still think the long-term model for gross margins in the Company is 50%?

Depends how fast we grow.

Again, if it's tilted towards a lot of customers and the growth is there, but fundamentally at - once we at some point in time if we stopped adding customers on a steady state, there's nothing to suggest that that has changed.

Great.

Thanks very much.

Our next question is from Hasan Imam.

Go ahead.

Your line is open.

Hasan Imam, your line is open.

Yes, thank you.

I just have one question.

Given the macro backdrop, what's your confidence level that the existing customer base is not weakening as reflected in Q1?

Are they sharing some concrete plans that give you confidence?

So in other words, is there a danger that existing base weakens and new customers essentially just offset that?

So (inaudible) this is Jagdeep.

Why don't I take that and maybe Duston can chime in if he has additional thoughts.

I think the way to think about that really, and the way that we think about that is if we look at our pipeline of activity, which is customers that have been contemplating new network build-outs, there actually has been very little change in that pipeline of activity since the last earnings call that we had.

We still see a number of large customers around the world that are planning significant -- fairly significant network build-outs and there doesn't appear to have been any fundamental cancellation of those builds.

The other thing, of course, that's interesting is we see ourselves winning a reasonable fraction of those builds.

And that's part of what Duston was referring to with the new wins that we've been awarded but that will kick in later on past Q1 in terms of rev rec.

So I think it's unclear to us just how or in what way the obvious macroeconomic turmoil is affecting network build-outs, but if you -- from a bottoms-up standpoint, we haven't really seen any kind of dramatic evaporation of network build-out activity in the way that one might suspect just looking at the mainstream news.

Yes, and we believe we've got a reasonable feel for the quarter, but the fact is to your point, until we book and ship stuff, there's some level of risk there, but usually within a given quarter we've had some pretty good insights of what's going to happen.

Great.

Thank you.

(Operator Instructions).

Our next question comes from Simona Jankowski.

Go ahead, ma'am.

Your line is open.

Yes, hi guys.

So you seem to basically be saying that because of the large number of new customer additions we are in a period of very low profitability and should remain so in the near term.

The last time when you added seven customers in the same quarter was back in September of '07.

And back then, you were able to have gross margins of 43% and also have positive EPS of over $0.10.

Obviously some of that is being impacted by the higher R&D rate that you've got now, but structurally what changed in that year-and-a-half period where for the same level of customer additions you are now generating such a dramatically lower margin?

Well, not every customer is equal.

So you have to go back and look at those exact seven customers and who they were.

Some of those are -- could've driven LCM.

Maybe none of them drove LCM or very little, quite honestly.

It's just that it depends on -- I'm sorry?

So again, every customer is kind of different there and the size of the customer.

We're talking this time some customers that the initial deployment anyway are -- I'm pretty sure it's quite bigger than those seven back in Q3 of '07.

And then also it depends a lot on our inventory levels and what we have for inventory in-house and what we have purchase commitments at our suppliers.

So you'd have to go back and look at all those scenarios as far as the impact of the current quarter there.

But, I mean, not even speaking of that specific quarter.

It just seems that you had a period of quarters before when you were able to add five to seven customers a quarter and maintain profitability and that now seems to have changed.

And it doesn't appear necessarily that the competitive environment has changed, at least not for the worse, especially with Nortel declaring bankruptcy.

So is there anything else?

I mean, is Huawei just becoming much more aggressive?

Is there anything else causing it to maybe price more aggressively now than you would've a year and a half ago?

No, I don't think it's gotten that much more aggressive.

The R&D expenses were a lot lower back in Q3 of '07.

So clearly that's a big difference in that.

We'd have to go back and look at the TAM -- the percentage of TAMs back in Q3 of '07.

They might have been a higher percentage.

We could've shipped some more TAMs.

So there so many variables as far as who we ship to and things like that.

Okay.

And then your customer activity pace has noticeably quickened in the last couple of quarters.

Is that at all do you think correlated to Nortel's announcement of divesting their business?

And just more broadly if you can comment on the kind of customer activity you've seen since that announcement?

Well, I think there's no question that their announcement, not just the recent bankruptcy announcement, but even the prior announcement of looking for a seller, or looking to sell their optical business, clearly had an impact on their customers.

Many -- clearly we and probably other vendors in the industry sort of got interest from a number of customers that were concerned about their long-term commitment to that business.

So there's no question that had an impact there.

But I think the main acceleration that we've seen in customer wins is more a reflection of fact that the value proposition that we're offering, which is including things like rapid service turn up and flexibility and so on, really seems to be resonating with more and more customers.

Again, the typical set of competitors we see, particularly at the larger accounts, for example, in Europe tend to be the incumbent vendor, whoever that is, sometimes Huawei and then Infinera.

You don't usually see a lot of other players that make the final short list in the deals that we're familiar with.

Great.

Thank you.

Our next question comes from Sanjiv Wadhwani.

Go ahead, sir.

Your line is open.

Thanks so much.

A quick question about the Internet content provider that was your largest customer in Q4.

Do you expect that carrier to sort of continue at those levels?

Any sort of granularity as to what you expect them to do in Q1, in this coming quarter essentially?

I guess just generically speaking, most of the times when a customer does a large deployment it's not followed up immediately with another large deployment.

There's usually always some revenues, but I think that's somewhat the nature of our business being lumpy.

So if you could correlate it to how some of the others have gone and it suggests that you shouldn't expect that level from that customer in Q1.

Got it, okay.

And then just in terms of Q4 order patterns and obviously you had a spike up in DSOs, but that was looks like related to how customers are paying you, but just in terms of order patterns in Q4, was that skewed towards the end of the quarter, or was that pretty evenly spread out?

And the why I was asking is Juniper just finished their call and it looks like they had a lot of orders skewed towards the very end of the quarter.

I'm just curious to see what your experience was.

No, it wasn't -- the bookings wasn't too bad actually.

Some of the rev rec and shipments and stuff like that got a little tilted towards the end, but on the bookings perspective, not too bad.

Got it.

All right.

All right.

Thanks so much.

Our next question comes from Jeff Schreiner.

Go ahead, sir.

Your line is open.

Yes, thank you, gentlemen, for taking my call.

I guess one question I'd like to understand with the announcements you've had here in the quarter and some of the customers, are there any other -- are there any markets that are holding up better on a geographic basis than others at this time?

Well, I think geographically we -- the most activity that we see tends to be in the markets where we've had the longest presence, right?

So North America and Europe are the two theaters that we've had the most presence in and that's where we see the most of the activity.

Asia-Pac we've started investing in and we expect to grow over time, but we clearly don't have as much activity there as we have in North America and now Europe.

Okay.

And to that, following along on that, when can we start seeing some expansion, not only in geographic, but perhaps maybe out of the kind of core businesses you've served to date in the DWM transport and the DWM long-haul market?

Any information you might be able to provide on that?

We haven't provided any specific dates relative to product plans.

We don't preannounce products, but we clearly have expressed interest in some of the adjacent markets.

And we've said that if you think about our market space in a sort of a three-dimensional matrix, the three main axes are the geographic axis, North America, Europe, Asia, the product axis of long haul and metro, and then the Tier 1 versus non-Tier 1 axis.

And we started out in the North American non-Tier 1 long-haul space, which to rough order is about a tenth or so of the total available market to us.

And we intend to basically expand our products to play in the metro space.

That's about a doubling of the addressable market.

We've tend to play more aggressively in Europe, which is already paying off, and Asia Pacific.

That's another factor-of-3 increase in the market.

And then we expect -- and we've already seen traction with the Tier 1s worldwide.

That's about another doubling of the market.

So we think there's an opportunity to increase the market substantially by executing on those initiatives, but we haven't said specifically the timing of when we're having new products in that area.

Okay.

One final question.

I appreciate your time, gentlemen.

What uncertainly has the global macro economy caused in terms of concerns regarding the viability of some of the current customers within the customer base?

Obviously we see the charge related to a Russian service provider.

Are there going to be more concerns moving forward through calendar year '09 with regard to this?

Well, I think we gave you a pretty good feel for the strength of the customer base in my comments.

I think maybe just some further insight there.

Whether it gives you comfort or not, I don't know, but if you want to pick on Russia or something like that, we've got two Russian accounts, one Bulgarian account, fairly small accounts.

I think those accounted for 3% of revenues for the year.

We have got several accounts -- customers in China.

I think those revenues were 2% or less for the year.

So exposure from that type of customer base is pretty minimal.

Okay, thank you very much.

Okay, let me close by thanking you all for joining us today.

And I also want to thank our customers and all the members of the Infinera team for their contributions in making 2008 a year of significant progress for the Company.

We remain focused on continuing to grow our customer base by providing the world's best optical transport equipment and on extending our technology leadership through continued smart R&D investments.

We look forward to keeping you informed of our progress during 2009.