Infinera Corp (INFN) 2009 Q2 法說會逐字稿

Welcome to the second-quarter fiscal 2009 investment community conference call of Infinera Corporation.

(Operator Instructions).

Today's call is also being recorded.

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

I would now like to turn it over to Bob Blair of Infinera Investor Relations.

Sir, you may begin.

Good afternoon and welcome to Infinera's Q2 2009 earnings call.

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 market, and customers, our products and our competitors' products, and prospects for the Company in Q3 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 17, 2009, for more information on these risks and uncertainties.

Today's press releases, including Q2 2009 results and associated financial tables and investor information 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 press release we announced operating results for the second quarter of 2009, which exclude the impact of non-cash stock-based compensation.

These non-GAAP financial measures are provided for 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 measure, and for an explanation of why these non-GAAP financial measures are useful and how they are used by the management of the Company.

On this call we will also give guidance, including guidance for the third quarter of 2009.

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 our future stock-based compensation expenses.

For the remainder of today's call we will be excluding the impact of these items as we discuss the second-quarter 2009 and results and cover our third-quarter 2009 guidance and we will refer to these results.

I will now turn the call over Infinera President and CEO, Jagdeep Singh.

Good afternoon and thanks for joining us for our Q2 results conference call.

With me is CFO, Duston Williams.

As we announced earlier today, after nine very satisfying years at the helm of Infinera, I plan to step down as CEO in January 2010.

I will be succeeded as CEO by our COO, Tom Fallon.

And at that time I will assume the role of Executive Chairman, remaining actively involved in working with Tom and the team on product strategy and the long-term direction of the Company.

As an experienced operations executive, Tom has an exceptional background for this role.

He spent many years in management at Cisco, including his role as VP and GM of Cisco's optical business unit.

He is one of the veterans of the Infinera management team, having joined us early in our development, and has led an increasingly broad set of functional groups at our Company over the years.

I would like to congratulate Tom, and I look forward to working with him on his transition into the CEO role over the next six months, and to introducing him to many of you in our Investor activities in the months ahead.

Turning to the second-quarter and current outlook, there are several highlights worth noting.

We posted revenue of $69 million, showing a net loss of $18 million and had gross margins of 31%.

We saw significant quarter-over-quarter increase in bookings during Q2.

One of our strongest quarters ever, in fact.

We derived 36% of our revenue in Q2 from Europe and Asia, a record high on both a percentage and absolute basis.

These are regions where we have devoted significant focus and resources in the last two years.

In fact, three of our top five Q2 customers were from these regions; one from Europe and two from Asia.

Our TAM bookings in Q2 rose above the 2000 unit level, reversing the trend from the last two quarters, and suggesting that Q1 may have been the bottom relative to bandwidth demand, and by extension our business.

In addition, this increase in TAM orders is an important development from a gross margin standpoint, given the importance of TAMs to our overall business model.

And today we are providing an outlook that shows sequentially higher revenues and gross margins in the third quarter.

So on balance, although we remain cautious given the macro environment and the inherent volatility of our sector, we appear to be seeing an improving outlook.

On the customer win front in Q2, we added four new customers to bring our total customer count to 62.

And we believe that we will add at least three new customers in the third quarter.

In our recent win at COLT we beat a number of other suppliers for a large corporate deal with this $2 billion European-based carrier.

The first phase of COLT's Infinera Pan European network connects major cities in eight countries in Europe, including the UK, France, Germany, Spain and Italy.

We believe that it is significant that our speed of service and delivery advantages, part of our strategic value proposition, won the business at COLT.

I would also note that we have already won additional business at COLT beyond the initial win.

We are also pleased to announce today that we have been selected by NTT Communications, the world's second-largest service provider, to build out its new IP backbone network in the Tokyo metropolitan area.

This win demonstrates our continued momentum with the world's leading Tier 1 service providers.

And is there the better example of the Infinera value proposition, enabling our customers to achieve large capacity and network flexibility at reduced operating expenditures.

Last quarter we spoke with you about two new Tier 1 wins in Europe, and subsequently we were able to announce TeliaSonera as one of those wins.

TeliaSonera, the incumbent telecommunications provider in Sweden and Finland and the largest operator in the Nordic and Baltic regions, selected Infinera to build a new nationwide network in the United States.

Our ability to win and execute new network builds with Tier 1 service providers has proven to be an effective door opener strategy for us with several other carriers.

To date and in the last 12 months we have won business with six Tier 1 service providers, including DT, OTE, TeliaSonera, NTT and two additional operators.

It is also worth noting that during the quarter we won a competitive build for a full overbuild at a North American wholesale carrier and that our recent momentum in some marine networks continued with another such win, our second in six months.

Submarine networks require greater performance in their DWDM applications, and typically they comprise larger sized deals.

Our ability to compete with these opportunities is based on the ultra-long-haul system that we added to our portfolio last year.

When you look at the highly competitive environment in which we operate, it is important to consider why we have captured so many of these significant wins and demanding new pieces of business.

After all, we are going up against entrenched incumbents and aggressive challenges in each and every situation, some with alternative 40 gig solutions and others with deep enough pockets to fund a very aggressive pricing strategy.

In this context we are winning major pieces of business around the world with the likes of DT, NTT, TeliaSonera, COLT and OTE, and with our major customers in the Internet content provider and cable MSO spaces.

We are winning because of our unique PIC-based value proposition.

And an important piece of that is the future evolution of our PIC to 40 gig and beyond.

On that subject I would note that we are pleased with the progress on the development of our 40 gig product.

The customers have seen the technology in our labs, and that we look forward to addressing the window of opportunity for 40 gig.

I would also remind you that while Infinera brought its 10 gig solution to market seven years after the industry's first 10 gig deployment, our value proposition was so compelling that in a very short time we achieved the leading marketshare position.

Our strategy during the economic downturn has been to stay focused on winning new footprint with accounts, such as [Bill] has just named, a footprint that would generate growth once the economy recovers, and that will help us achieve margin improvement over time as relationships with our customers expand.

We believe that our financial results, as well as our new customer wins and existing customer activity, validate the strategy as a sound one.

While these new deployments have resulted in some downward margin pressure over recent quarters, we believe that as these customers fill out these systems with TAMs, this margin trend could eventually reverse itself.

Our analysis of gross margin evolution with customers over time demonstrates that our profitability with new customers is typically at its lowest in the first quarter of our business with them.

Over a 10 quarter period of time our analysis shows that gross margin improved to a steady state level, as customers populate their installed Infinera networks with additional services and TAMs.

And in the last year we have been in the mode of adding lots of new customers -- 18 of them in total, many of which were Tier 1 providers with significant footprints.

In the long-term we believe this strategy of adding to our customer base, coupled with return to more normalized industry volumes, positions Infinera for a continued and growing leadership position in the DWDM space with our long-term targeted gross margins.

In the meantime, we will continue to focus on executing against the strategy of winning new footprint, and look forward to reporting on these successes in future quarters.

I will now turn the call over to Duston, who will cover our second-quarter financial results and third-quarter guidance.

I will review our Q2 actual results and then follow that up with an outlook for Q3.

The following analysis of our Q2 results was based on non-GAAP, and all references exclude non-cash and stock-based compensation.

Looking at the specifics for the quarter, GAAP revenues in Q2 totaled $68.9 million, compared with -- to guidance of $70 million versus $66.6 million in Q1.

We had two 10% customers in Q2 represented by Level 3 and COLT.

Level 3 was our largest customer and represented 20% of our GAAP revenues versus 30% in Q1.

Additionally, as Jagdeep mentioned, our international revenues represented 36% of total revenues.

The revenue contribution, both in percentage and absolute numbers, were the highest in the history of the Company.

Revenue from Asia was 7% of revenue.

Revenue contribution from our top 10 customers was 70%, the lowest historic concentration we have experienced.

Gross margins in Q2, which exceeded our guidance of 25% to 30%, where 31% versus a similar level in Q1.

Although well below our longer-term target, relative to expectations, we were pleased with the gross margin performance for the quarter.

TAM billings for the quarter were a few hundred higher than our previous expectations set forth on the Q1 conference call.

And the TAM bookings for the quarter were in excess of the billings for the quarter.

It is also important to note that we experienced record chassis shipments in Q2, surpassing our previous high quarter by about 10%, a continued indicator of the new customer momentum we have seen.

Operating expenses for the quarter were $40.2 million versus our guidance of $40 million and versus $37.5 million in Q1.

The overall headcount for the quarter was 973, which reflect only 11 additions over Q1, the lowest quarterly headcount additions in the last several years.

Effectively all the additions were R&D related.

The operating loss for Q2 to was $18.6 million versus an operating loss of $16.6 million in Q1.

Other income expense for Q2 was a favorable $0.5 million versus an unfavorable $0.9 million in Q1.

Net loss for the quarter was $18.2 million, or a loss of $0.19 per basic share, or $0.18 per diluted share, versus a loss of $17.6 million in Q1.

Turning to the balance sheet, cash, cash equivalents, restricted cash and investments ended the quarter at $287.1 million versus $306.5 million in Q1.

We used $18.8 million of cash from operations in Q2, versus a use of $2.9 million in Q1.

Increases in accounts receivable and inventory drove a large part of the increase in cash uses for the quarter.

DSOs were 72 days versus 61 days.

The DSO increase was primarily driven by the billing linearity during the quarter.

Our accounts receivable aging has been and continues to be very current.

Inventory turns were 2.6 versus 2.8.

The primary driver for the decrease in the turns was a $6 million increase in our inventory awaiting customer acceptance balance, product that we have shipped and that is at customer sites waiting for acceptances.

Accounts Payable days came in at 51 days versus 44 days.

Capital expenditures were $2.8 million in Q2 versus $6 million, the lowest quarterly total since Q1 '08.

Our Q3 base operating outlook shows higher revenue and gross margins, reflecting revenues from several large, previously announced deals, and to some degree the abatement of significant LCM charges.

TAM billings should be reasonable.

Operating expenses should be relatively flat quarter over quarter.

In addition to the base operating outlook for Q3, we will also experience restructuring charges in both Q3 and Q4 related to the upcoming restructuring of our Maryland fab.

As part of this action we will be closing our Maryland fab.

We will transfer these capabilities to our existing California fab, which will have two leading photonic integration platforms in one fab, enabling active PIC and passive PIC designers to work seamlessly across integration platforms for our next-gen products.

This move is not expected to have any impact on our existing product offerings.

Some of the specific details around the fab closure and the restructuring are as follows.

The operations will be ceased by the beginning of Q4 2009.

Approximately 50 positions will be eliminated Company-wide.

Current planning suggests an $8 million charge associated with the restructuring -- $6 million recognized in Q3, $2 million in Q4.

And approximately $3 million of this is cash related.

Starting Q2 2010 we should experience about a 2% quarterly gross margin improvement related to the fab consolidations.

Turning back to the outlook, the following guidance for Q3 is based on GAAP results and excludes any non-cash stock-based compensation expenses and the Maryland fab related restructuring charges.

Revenue of approximately $80 million to $82 million, gross margins of 30% to 36%, operating expenses of approximately $41 million, an operating and net loss of approximately $12 million to $13 million.

And based on an average -- an estimated average diluted weighted shares outstanding of 98 million, this would lead to an EPS loss of $0.12 to $0.13.

As previously mentioned, in addition to the above outlook, we will expect to book approximately $6 million of restructuring charges in Q3.

Approximately 60% of this charge will be included in cost of goods sold, with the remaining 40% included in R&D expenses.

In summary, we are encouraged by the sequential revenue improvement we experienced in Q2, and with the continued further revenue and gross margin improvement we expect in Q3 based on our current outlook.

We certainly hope that both Q1 revenue and -- Q1 revenue and gross margin performance were the low points and that we can continue to build off the second half of the year and into 2010.

Just before that I think, if you go back to the gross margin guidance, I might have inadvertently said 30% to 36%.

The gross margin guidance should be 30% to 35%.

35% to 36%.

I am sorry, 35% to 36%.

For some reason I am having trouble with giving you that guidance.

So anyway 35% to 36% here.

I apologize for that.

And then with that, operator, you are more than welcome to open the call up to questions please.

Simona Jankowski.

Your line is open.

State your affiliation please.

Thank you.

I am with Goldman Sachs.

Hi, guys.

So the first question just on the sales trajectory and linearity during the quarter.

It looked like you were just a little bit light relative to your guidance and street expectations in terms of sales.

Then you also made the comment that you had record chassis shipments in the quarter.

And it also seems that your TAMs are actually doing pretty well.

It looked like the orders and the billings accelerated in particular into the end of the quarter.

So can you just help us reconcile and understand how the quarter developed versus expectations and where the slight shortfall came from?

As you know, we guided to $70 million.

We came in effectively at $69 million.

So we did have a fair amount, as I mentioned, inventory awaiting customer acceptance.

And any time you try to pick that timing perfectly, you're never going to get it exact there, but we did build up that inventory that is sitting at customers waiting for acceptance.

Some of those could have gotten accepted in the quarter.

You never know when that is going to happen at the end of the quarter.

And a few of them just went into Q3.

Got it.

And you said that was a $6 million amount.

The increase was a $6 million increase quarter over quarter in that balance.

And that was the amount that fell into the third quarter that you thought might have fallen into Q2 or was it --?

No, no.

I'm just saying in general it is just hard to pick what is going to get accepted and what is not going to get accepted.

Okay.

Then on the closing of the Maryland fab, is that primarily a COGS driven decision.

Yes.

Effectively what it is, is it allows us to more effectively consolidate our fabrication capabilities here in Sunnyvale.

So we leverage the same design capabilities we have on the PTT side, and that has a single fab that we believe has higher volumes, and therefore better economics going forward.

And then just lastly for me, I guess, Jagdeep, if you can just comment a bit on the CEO change.

And how will your role change day to day?

And what, if any, shift in strategy or operations can we expect under Tom's leadership?

Yes, it is a good question.

It turns out that actually there really isn't much change in terms of the overall impact to the Company.

If you think about it, Tom has already been taking on an increasingly greater and greater role in terms of running the Company overall.

He started out running operations, and he added PIC and module and customer service and support and HR and IT, and most recently even engineering.

And so effectively there isn't that much that Tom doesn't already run, and this is really just a continuation of that process.

I will continue to be involved, focusing on the things that I have been involved in relating to long-term product direction and strategy.

So overall it really doesn't represent any kind of change into the Company's direction or execution strategy.

It is really a continuation of both those things.

Okay.

Thank you so much.

Subu Subrahmanyan.

Your line is open.

State your affiliation please.

Thank you.

Sanders Morris.

Two questions.

First, just can you repeat your EPS guidance number?

I missed that.

And then I wanted to talk about the competitive environment.

One of the concerns is just increased pricing pressure across the board for deals.

I wanted to see if you -- can you talk about just overall price pressure in deals?

And then specifically on COLT you mentioned it was a pretty competitive process.

Can you talk about what you saw in terms of competition?

And if you could go again into longer-term business model, how and what period of time as the mix starts to stabilize between TAM and chassis in a typical contact you start seeing more normal gross margins, so to speak?

Let me just take the first part and hand it over to Jagdeep for the remainder there.

The EPS guidance was a $0.12 to $0.13 loss, which was an operating loss of $12 million to $13 million, which equated to the same $0.12 to $0.13 EPS loss.

On the first question regarding competition, as we said, basically we compete with the usual suspects, the larger suppliers of telecom equipment in the world.

And they all largely tend to have a very similar set of offerings.

The two primary things we tend to see are the guys that are trying to push the 40 gig-based solutions now, and then the guys that try to -- or one guy in particular tries to be very aggressive on pricing.

And what we are saying is we are actually being -- we are able to be quite effective overall against both those guys.

So you asked about COLT in particular, and in COLT that was a great example where the incumbent vendor there -- well, actually Nortel, and the challenger, besides Infinera, was a Chinese challenger.

And as you can imagine, it is a big network with a lot of capacity on it, so all the competitors were very seriously into bidding the business.

And it turns out that in the end Infinera won the business.

And we won because of the value proposition that we offer of rapid service delivery and very a high level of network flexibility.

So I think all in all our basic competitive strategy is to compete on the value proposition of our offering, not to try to get into a price war.

We believe from what customers are telling us that they see enough value in our overall offering that we do not need to be the lowest bidder.

And if for some reason a competitor wants to buy the business, if you will, at a given account, we are not going to play that game.

We are going to focus on building a viable business model going forward.

And just to that point, sort of to follow-up, at what stage of a contract, given your mix of -- the way chassis slip and the way TAM shift at timing, do you get to more normalized margins?

The reason I ask is you have several deals in a very early stage with large carriers announced over the last few quarters, and we are trying to get a sense of when it starts to normalize out a little bit.

I think what we have said about that too is that the first quarter of the business typically is the absolute lowest the margin will be.

And the reason for that is that is when you have primarily common equipment, heavy deployment with some smaller number of TAMs.

Overtime those TAM slots get filled.

And as they get filled, the quarterly margin clearly goes up.

In fact, the cumulative margin of the deal goes up as well.

The data that we have analyzed suggests that that general upward trend continues for many quarters into the future.

Where it is specifically ends up is obviously a function of the specific customer network configuration, and their network capacity, growth rate and so on, so I can't answer specifically.

But the general point is that the margin for any given account is typically as low as it will ever be upfront, and then from there it goes up relatively smoothly over the next many quarters.

Got it.

And then final question, if I could slip in one, you mentioned 40 gig in trials -- or your customers are seeing it in their labs, can you give us a little bit more color on when it would trial, and when you can have revenues from 40 gig platform, and how the timing is compared to where you initially thought it would be, where you would be in the process with your 40 gig platform?

Thank you.

Yes, as you know, we don't comment on unannounced products before they are announced, so I can't provide any more context on the timing of the product.

But what I can say is that we, as I mentioned on the call earlier, we obviously are very pleased with the progress we are making on the 40 gig.

We demonstrated PICs, as you guys all know, at the [Org show] earlier this year, the results from some of those PICs.

And for the more customers that come in here and get to see our labs with our 40 gig technology there.

So I think overall I would say that our progress continues well.

We are happy with where we are.

And we fully expect to be a factor in the industry with our 40 gig solution.

George Notter.

Your line is open.

State your affiliation please.

Hi.

Jefferies & Co.

I just wanted to ask about gross margins.

The gross margin performance in the quarter was good -- better than expected.

Obviously there is a number of moving parts there.

You said that the TAM modules were better than you thought.

But I know there is also some other factors in there.

Lower cost to market write-downs I think are a factor here, mixture of existing and new customers.

Any other kind of components to the gross margin outperformance that you can walk us through?

And how big was the LCM piece in the quarter?

Thanks.

It is Duston.

Most all of the -- or vast majority of the margin greater than the guidance number was TAM related.

We had a little bit -- we talked about a specific customer discount that we thought was going to be exhausted in Q2.

We talked about that on the Q1 call.

Most of that did, but there is a little bit remaining, so that might have helped margins by 1% or so.

But most all the other stuff was TAM related, which is obviously good news from our perspective.

Got it.

Then what was the LCM -- the LCM write-down in the quarter?

I don't have that right in front of me.

I have to get back to you on that.

I guess I am just trying to drive towards a margin number that is more normalized.

That we can get a sense for what your margins would look like without those LCM write-downs, and normal kinds of mixtures of chassis versus modules -- normal situations in terms of discount with customers.

What can you point us to to give us a sense for what the norm is for you guys?

The norm is -- if you look at historical averages, we have been anywhere in the 30%s to 47%.

In any given quarter, you are right, you're going to have more things going on with LCMs and customer mix and new customers.

And as the big new customers stop in any given quarter, we're going to have a pop in margins at some point when the TAMs return.

Again, it is hard to give you a normalized, if you will, because there's so many factors in this current quarter.

But the trend is in the right direction.

The TAM so far, as what we have seen from a TAM volume perspective it looks pretty good.

So hopefully we will get back to where we have been in the 40% range plus over the next several quarters.

Got it.

Then just as a follow-up, the gross margin for -- the guidance for Q3, what is your expectation on the LCM write-down there?

It will be within normal historical levels, except, obviously, we had the big one in some Q4 and Q1, but normal -- take those out of the equation, it was the big customer add.

There shouldn't be anything unusual that we know about from an LCM in Q3.

Got it.

Okay, thanks very much.

Sanjiv Wadhwani.

Your line is open.

State your affiliation please.

Stifel Nicolaus.

Thanks.

Just a question for Jagdeep.

If you're looking at Q3, your guidance called for about 15% sequential growth, which is obviously a big ramp up.

Can you just talk about visibility.

Where is it coming from?

Is it COLT, is it NTT?

Any color there would be helpful.

Thanks.

Obviously we can't talk about any specific accounts, but I think as you know our basic process is that we work with our customers across the board on their network plans and their deployment objectives for the upcoming quarter.

And based on that we have a sense for what their needs are going to be.

We also have what the accountant refer to as inventory awaiting customer acceptance, or IACA, which is of course equipment that has been shipped to customers, and in some cases been turned up but has not officially been accepted yet, so there is no revenue recognized on that until it is accepted.

So between all the different parts of our process, we roll that up to come up with what believe the most likely outcome is for the quarter.

And that is what -- that is what gives us comfort relative to our guidance.

Duston, I don't know if you want to add anything there?

No, from a visibility perspective, again, we have always said, and this quarter is really no different, the current quarter that we are in we've got reasonable visibility outwards.

It gets a little bit less visible there.

I will tell you probably, as Jagdeep mentioned, the inventory awaiting customer acceptance, I think between what we know we have there and in backlog it is quite honestly probably a little bit stronger going into this quarter than it has been.

So that gives us a little added confidence also.

Got it.

Just two quick follow-ups.

The $6 million incremental inventory awaiting customer acceptance, is that with one customer, but -- or with multiple customers?

And then second question, as far as mix between domestic and international, obviously skewed towards international in Q2 in terms of growth, should we expect that momentum to continue to Q3, or how does that make mix fall out in Q3?

The $6 million is the total bucket, so it could have numerous customers in there.

So it is just the aggregate increase quarter-over-quarter and that, as I say, has numerous customers.

Also, the $6 million is the total value of the account -- it is the increase, not the total value (multiple speakers).

Increase, right.

(multiple speakers).

(multiple speakers) not the total value of the account basically.

Right, quarter over -- (multiple speakers).

It is more (inaudible) (multiple speakers).

Right, correct.

I am sorry, the second part?

Just in the international versus domestic mix for Q3.

That is going to bounce a lot around a lot.

It will probably most likely because it was so high in Q2 -- it is probably going to come down in Q3, most likely.

Got it, fair enough.

Thanks so much.

One thing I would add is that -- in general our mix within any given quarter is totally going to vary from quarter to quarter, whether it is mix by international versus domestic customers or mix by customer segments -- our wholesalers versus cable MSOs versus Internet content guys, for example.

Those individual mixes will obviously vary on a quarter-to-quarter basis.

One of the benefits of having more diversification in our business is that we are less exposed to any one sector or geography relative to the overall business.

Got it.

All right.

Thanks so much guys.

[Shubo Gosh].

Your line is open.

State your affiliation please.

Thomas Weisel Partners.

This is Shubo for Hasan Imam.

I just wanted to go through the 2% incremental increase in gross margins from Q2 of 2010.

Could you perhaps give us some more color on is this going to be all going to hit on Q2 '10 and be at the same steady level going forward.

or should we expect further increases and benefits of that restructuring going through the year?

Thank you.

As we see it now, it is -- we believe almost all, or all of it, will be realized in Q2.

And that balance most likely continues at a fairly steady state level going forward.

Great, thanks.

And restructuring expenses that you mentioned of $6 million and $2 million, that is also one-time offset.

And is that going to be -- you are not factoring that in when you're taking the non-GAAP OpEx, or are you?

Correct.

It is not -- it is excluded from our guidance.

Got it.

Thank you.

Jeff Schreiner.

Your line is open.

State your affiliation please.

It is Jeff Schreiner with CapStone Investments.

Thanks for taking my call, gentlemen.

I was just wondering if we could talk a little bit about in the service margins -- and there was obviously some type of growth there over what they have been running.

Is that implied to continue somewhat as we move into the third quarter?

Again, depends on what we are deploying and who we are deploying with and other stuff there.

So, again, that is probably going to bounce around a little bit also.

And, Duston, [would you] be able to give us any maybe color in terms of the distribution of TAM ordering, whether it was from newer customers or -- just trying to bucket customers here -- maybe newer customers versus what we will call legacy customers?

I think it was pretty well spread around actually.

We had several larger deals we have deployed.

And there were a fair amount of TAMs associated with that.

In our existing customer base, although not back to the levels that we think it should be, not too bad there.

So some reasonable signs.

We will have to see how we progress here into Q3.

Okay, and final question for me.

How are we going to get to a point where we can reconcile the strong new customer growth, which obviously is needed for the longer-term success of the model, and when maybe the current customers or some of the newer customers that have come up here recently in the last few quarters, when -- let's call than the legacy business is going to be able to offset the impact of adding new customers into the model.

What do you see the model at now, and how long before maybe we could get to something like that?

Well, I mean again in any given quarter if we sign-up three big customers, we are always going to have impact to margins.

Because again the common equipment, which we put in -- lower comment to begin with and then get filled over time.

Jagdeep mentioned a little bit on the history how a customer can progresses.

The first quarter obviously very low, and then increasing every quarter after that.

I'm not sure how to give you a whole lot of detail there.

Also, to some extent what we are seeing right now is the fact -- exactly that effect.

We obviously -- one of the reasons why Q1 margins were lower than normal was because of the one-time deployments that we had made -- the big wins we had.

And one of the reasons why the Q3 margins appear to be recovering to some extent is because the TAM ratios are starting to go up.

So I think that is happening in the current set of quarters that we see here.

And over time we expect that as we sell more TAMs those margins continue to trend upwards.

(Operator Instructions).

Mike Genovese.

Your line is open.

State your affiliation please.

Soleil Securities.

Thanks.

Asking the same question, I guess just a slightly different way, knowing -- given where we are in terms of pricing and expected new customer deployments, do you expect that if you in the next say two to three quarters build about 2,100 TAMs in a quarter, would you expect your gross margins to be in the mid-40s, based on those TAM shipments and billings?

We are not obviously going to give gross margin guidance for several quarters here.

Again, I am only going to tell you it is -- the TAM levels in any given quarter have significant impact on the margins, but there is lots of other variables that can happen.

You've got customer mix, who we should to, how much common, etc.

So the biggest thing and the best thing we can do for the business is increase TAM shipments.

And we had a good quarter in Q2.

Q3 looks pretty good.

And as long as that continues, we feel pretty good about margins going forward.

Okay, does the -- switching gears here, the win with NTT for the Tokyo area, it looks like a Metro deployment.

Is that something that you have -- is this similar to previous deployments or is this something new?

Is this signaling a newer capability or cost effective use of the platform or this deal is similar to other deals you have won and networks you have built?

The win at NTT is for their IP DWM network in the Tokyo area.

Tokyo obviously is the biggest metro area in Japan.

And we said that the deal is about deploying more capacity.

It is obviously a traditional WDM type deal.

But what is interesting about it is that they had a layer 2 network that they were using to transport their (inaudible) traffic, and they are moving that to a next gen IP WDM network, and just wanted a very flexible and sort of IP friendly WDM platform, and that is why they chose Infinera.

So I think the -- I guess the real significance of this for us is that we have a really good beachhead at NTT now from which we can launch further attacks into the account.

Okay, last question for me.

Jagdeep, do you think -- will being Executive Chairman be a full-time job, or do you expect to get involved in something entrepreneurial again?

I think I am pretty energized about the change.

I remain very committed to the Company.

I think we have some really great opportunities ahead here.

I think, in fact, this new role is going to actually help me frankly spend more of my time focused on the long-term strategy and direction of the Company, and allowing Tom to pick up some of the more day-to-day responsibilities.

So from my standpoint, I think as long as I am adding value and the company sees value in it, my intention is to stick around.

Subu Subrahmanyan.

Your line is open.

Please state your affiliation.

Sanders Morris.

I had a follow-up question on gross margins and TAMs.

If I remember right, you guys had said they would be about a 700 basis point negative impact of that one-time discounted or fixed discounted customer orders taken this quarter, and then there was some LCM impacts, and at least that discount impact was expected to go away.

And then we have some growth in TAM.

So I am wondering what the offsetting factors are, which are on gross margins, since the guidance for gross margins is up more like 4% at the midpoint of the range?

And TAMs, the guidance for this quarter was about a 25% decline of that 2100 number, which is somewhere in the 1500 to 1600 range.

Can you tell us where you fell versus that guidance?

Sure.

Actually -- we actually mentioned that in my script.

I basically said that we built a few hundred more than what we had expected that we outlined in the Q1 call.

So your math is approximately correct.

And we did a few hundred better than that in Q2.

But it was below the 2000 level that you booked?

Yes, the billings were still a significant chunk below the historical 2100 level that we had with a lot fewer customers.

Correct.

Okay.

Relative to Q3 margins again, if we get lucky and the TAM orders hold to be pretty good, and we ship more TAMs, and everything else being equal, we should do better.

But right now we are comfortable with the 35% to 36% numbers there.

But again, TAMs have a big swing in the equation.

We will have to see how that goes.

We are encouraged with what we have seen so far.

Hopefully those trends will continue.

And the fixed discount impact, can you tell us what it ended up being for the quarter?

Yes, you are right.

We basically said 7% last time.

It was probably 5.5%, maybe somewhere around there impact, instead of the 7%.

Some of that is going to roll.

We thought it would all be exhausted in Q2.

It was actually a piece of that is going to roll into Q3.

Got it.

Thank you.

Blair King.

Your line is open.

State your affiliation please.

Avondale Partners.

Just a couple of quick questions.

In the first quarter you guys mentioned that you would ship products to your two new European PTTs, which you announced.

And I am curious if -- and that would account for tens of millions of dollars this quarter and then tens of million dollars again, I think, in Q3.

I am just curious if that came to fruition, and then again you plan to continue to ship product from that second carrier into Q3?

On the call, it is Duston -- on the call last quarter I believe we said it would be above $10 million or so for one of those European customers.

And that basically happened in Q2.

And we also mentioned that we expect more -- similar levels in Q3 for those customers.

And we expect that to happen in Q3.

Okay, great.

And then if you could, you see the outlook improving, and without getting into specific customer detail, is there a geographic region that is improving more than others or is it widespread improvement?

Europe has been pretty strong, and we continue to see a lot of things happening there.

Whether we win them or don't win them, the existing customer base -- we see some new orders coming in from the existing base.

I don't know, Jagdeep, if you want to say anything there.

I think that generally once we establish a certain presence in a geography then of course it is just a function of the normal bandwidth demand growth in that geography and our ability to win different accounts.

So I would say that North America and Europe we are at this point I think quite well established.

And we continue to work on establishing our footprint in Asia.

So over time you might expect to see some movement there over the long run.

But otherwise I think it is really just more a function of individual customer activity than any macro geography type activity.

Okay, super.

One last thing.

You had mentioned -- you had mentioned I think in your remarks, 10% customers, Level 3 being 20%.

Did you mention how much COLT was in the quarter?

It was -- it is Duston.

We did not.

No, typically if they are an announced customer we will give the percentage for the number one customer, but not anybody under that.

Okay.

Fair enough.

Thank you very much.

Shubo Gosh.

Your line is open.

Please state your affiliation.

Thomas Weisel Partners.

Hi, this is Shubo here again for Hasan Imam.

I just had a couple of questions on the other income expense line item in your balance sheet.

I was looking at your cash and cash equivalent in Q4 '08 versus Q4 '09.

I am sorry -- I beg your pardon, Q2 '08 versus Q2 '09.

It is around the same.

It is about $211 million to $212 million.

But your interest income is one-fourth that size.

Could you comment on what is going on there?

And also the second question is about the other temporary impairment losses, any further details on what the $2.7 million of impairment losses is?

I think the cash balances you are referring to were not all-inclusive of total cash and long-term investments and all that.

I think you are off a little bit on the cash balance.

It should have been in that $300 million [around].

I don't have the exact Q2 '08 number in front of me.

But it was 300 and something million all-in there.

So your $200 million is probably just cash and cash equivalents, probably.

It is actually $284 million in '08 versus $360 million in '09, but still that is four times more of interest income versus --.

Well, our rates had come down over that time frame, and we are mostly invested in some pretty boring, very low yielding securities at this point.

So to get any reasonable yields out of a portfolio without taking extended risk is kind of hard to do.

Great.

Thank you.

And the second part about the other temporary impairment losses?

For this quarter?

Correct.

We had a couple of things moving around there.

Yes, I don't have a full breakout.

We've got some auction rate securities that you have got in two different buckets here that pretty much offset each other.

I will have to get you the exact breakout of that.

There is two separate transactions there that go in the opposite direction, which kind of -- there is another line there on the P&L.

But we'll get back to you on the full detail there.

Great, thank you.

Okay.

So in summary -- sorry, in closing, let me just thank everyone for joining us.

I also want to just thank all the members of the entire team and our customers for their contribution to our results.

And we look forward to keeping you abreast of our efforts going forward.

Thank you.

At this time that will conclude today's conference.

You may disconnect.

And thank you for your attendance.