Infinera Corp (INFN) 2009 Q4 法說會逐字稿

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

All lines will be in a listen-only mode until the question-and-answer session.

(Operator Instructions).

Today's call is being recorded.

If anyone has any objections, you may disconnect at this time.

I would now like to hand the call over to Mr.

Bob Blair of Infinera Investor Relations.

Sir, you may begin.

Thank you.

Good afternoon, and welcome to Infinera's Q4 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 condition and results of operations, business initiatives, views on our market and customers, our products and our competitors' products from prospects of the Company in Q1 2010 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 Q4 2009 results and associated financial tables, and investor information summary will be available today on the Investor section of Infinera's website.

The Company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call.

This afternoon's press release and today's conference call also include certain non-GAAP financial measures.

In our earnings press release, we announced operating results for the fourth quarter of 2009, which exclude the impact of non-cash stock-based compensation expenses and restructuring, and other costs associated with the closure of our Maryland fab.

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 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 2010.

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

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

Good afternoon and thank you for joining us.

With me today, our CFO, Duston Williams, and Corporate Controller, Ita Brennan.

As the new CEO of Infinera, I am delighted with the opportunity to lead the Company at this time, and I want to say that it is an honor to take over the reins from one of our founders, Jagdeep Singh.

Jagdeep has been a marvelous steward of this unique company, and he remains involved with the Company in a product and long-term strategy role.

I did want to take a moment today to describe my priorities in the months and years ahead.

As the Company's Chief Operating Officer for the last several years, I've been part of the team that developed and deployed our current strategy, and positioned the Company as a leader in optical transport.

Having said that, I recognize that there is a lot of continued hard work required to execute on the strategy, and then focus on ensuring that everyone in the Company maintains their high level of energy and commitment to capitalize on the significant accomplishments Infinera has made to date.

These include -- first, a strong disruptive technology lead, based on both our proprietary PIC approach and our ability to leverage our vertical integration model.

Second, the industry's leading intelligent optical layer that provides efficient and flexible bandwidth management, as enabled by our cost-effective OEO conversion.

Third, our remarkable engineering culture that thrives on tackling challenges that appear unsolvable.

And fourth, a significant and growing customer base that has been able to capitalize on our unique value proposition to win customers in their markets, to offer profitable services, and to help drive changes in their own business models.

By continuing to meet the needs of these customers and potential customers, we are focused on becoming a cash-generating, profitable enterprise.

So while I don't see the need for a change in our strategy to help our customers build the world's best optical networks, I do feel the responsibility and the charge in my new role to intensely focus the team on executing with urgency in order to realize the full potential of our business.

Turning to our results for the fourth fiscal quarter.

I am pleased that our performance and current activity continue to demonstrate that both current customers and prospective customers are embracing Infinera's disruptive PIC-based approach to support their bandwidth growth needs, and to provide them with competitive advantages such as speed, cost, and flexibility in their markets.

It is clear that our ongoing success in winning new customers and expanding business with our existing base is driving our own improved revenue and TAM-based margins over the last several quarters, despite the continued difficult economic environment.

We have seen several noteworthy developments in Q4 that support this view.

We had record bookings, finishing with record bookings for the fiscal year as well.

We posted sequential revenue growth and gross margin improvement with revenues of $90 million and gross margin of 40%.

Our net loss for the quarter was smaller than anticipated at $6.5 million or $0.07 per share.

We invoiced our highest level of Tributary Adapter Modules in the six quarters, while we continued to see strong common equipment sales.

We shipped Infinera equipment for a nationwide buildout for an unnamed leading Internet content provider in the fourth quarter.

This was for a win we had just achieved in Q3.

As a result of our rapid deployment, this customer finished as our top customer for the first time in Q4.

On the new customer front, we added three new names to our roster, including Tiscali, a leading carrier in Italy, bringing our total customer count to 69.

With footprint growth critical to the success of our business, we are focused on maintaining our new customer momentum in 2010.

Since the end of the quarter, we achieved another new win of note with a major carrier in Japan, which now gives us two of the top three carriers in that market.

We continue to see opportunity and success in the submarine network market, which we believe is one of the fastest-growing segments of the WDM market.

These advances -- the investments and advances in our line system, combined with our superior PIC-based optical performance, operational simplicity, and rapid turn-up have enabled us to compete for and win networks of over 50,000 kilometers deployed across the Americas, and more recently, a trans-Atlantic route of 6,000 kilometers.

In our three submarine network wins to date, we have delivered better economics and we have doubled the wavelengths of most competitive offerings.

These have been important factors in our success in this market.

During the quarter, we invoiced four customers for our new ATN Metro Edge product, bringing our total of ATN customers to six.

In addition, we have healthy trial activity underway with the ATN, and we would expect to convert several of these trials into ATN customers by the end of Q2.

Although we remain cautious about the macroeconomic environment, we are more optimistic today about the overall optical transport market than a year ago.

We are hearing more positive sentiment from our customers, and we are seeing some customers add routes, add growth to existing routes, and invest in new markets.

After five years, Infinera's differentiated digital optical network remains a market leader in North America, and the market's only large-scale commercialized PIC-based optical system.

We continue to grow our business internationally in markets like Europe and Japan, and we are well-positioned to address potential growth opportunities in the US, such as the projects that will be funded by broadband stimulus funds and the market for low latency transport solutions for financial institutions.

We remain focused on growing our business with our existing six Tier One customers and addressing the other Tier One opportunities in the market.

As we have mentioned in the past, our customer's ability to capitalize on our unique value proposition to win customers in their markets, to offer profitable services, and to drive changes in their own business models, is shared by both our Tier One and non-Tier One customers.

This value proposition has resulted in a significant majority of our customers, including our Tier One's, providing us with additional business opportunities after initial deployments.

To extend our differentiation and leadership position, we continue to invest in our core technologies.

These investments are critical to our ability to achieve our long-term business model, and they are reflected in the product road map that current and new customers are embracing.

One of my priorities is getting these technologies to market in a timely manner to ensure we capture the business opportunities at hand.

On that note, I am happy to report that we delivered our 400 gig PIC to our systems developers as promised in the fourth quarter.

We continue to believe that the 40 gig market will see widespread adoption when the cost structure issues of that solution are addressed with a differentiated and integrated solution.

We continue to believe that the introduction of Infinera's disruptive 40 gig system will be the catalyst that accelerates the 40 gig market to mass adoption.

I want to make a final note regarding the investment and development of our core capabilities and resources.

Along with photonic integration, the other significant innovation in optical transport in the last 10 years has been the development of coherent or advanced modulation technologies, which provide higher capacity for fiber.

Along with PICs, coherent will be a cornerstone in building our customers' next-generation optical networks, and our PIC capability allows us to uniquely exploit digital signal processing, which is fundamental to coherent technologies.

I am pleased to report that both the engineering work and hiring activity for advanced modulation techniques in our new design center in Ottawa are progressing well, enabling us to accelerate our development in this important area.

I would like to turn the call over now to Duston for our financial report and outlook.

Thank you, Tom.

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

The following analysis of our Q4 results is based on non-GAAP.

All references exclude non-cash stock-based compensation and restructuring costs associated with the previously announced closure of our Maryland fab.

Looking at the specifics for the quarter, total GAAP revenues in Q4 were $90.2 million, as compared to guidance of $86 million to $88 million versus revenue of $83.4 million in Q3.

Our services revenue for the quarter was $7.1 million versus $8.8 million in Q3.

Our installation or EF&I-related services revenue, which can be volatile quarter-over-quarter, declined by approximately $2 million in the quarter.

We expect this aspect of the services revenue to increase in Q1.

We had two 10% customers in Q4, including a new win with an unnamed leading Internet content provider, representing 17% of revenue and also Level 3.

The leading Internet content provider is the same company that we announced as having one in our October earnings call.

In this quarter, we not only took revenue from that customer, but they were our largest revenue contributor for the quarter.

Level 3 sales contributed 12% of our GAAP revenue versus slightly less than 10% in Q3.

Our top five customers included these two customers, together with one other unnamed Internet content provider and two existing European customers.

We added three new customers in Q4.

We previously announced that we had six ATN wins, and we are pleased to report that all those wins have been officially converted to new customers.

Five of the ATN customers are also DTN customers, with one being an ATN-only customer.

We invoiced two these customers in Q3 and invoiced the remaining four customers in Q4.

We remain encouraged with the ATN opportunity, as it enables us to extend the digital optical network into the Metro.

We believe that future product releases in 2010 and beyond will continue to enhance ATN's overall appeal in the marketplace and enable us to continue to gain market share with this product.

Gross margins in Q4 were 40% versus 38% in Q3, reflecting a continued upward trend in recent quarters.

This compares to our guidance of 38% to 40%.

In Q4, we continued our recent strong common equipment sales.

Nonetheless, we still managed to increase gross margins during the quarter, as our TAM sales began to show some signs of improvement from prior quarters.

In fact, our TAM invoice units crossed over the 2,000-unit threshold for the first time in six quarters.

Our service margins increased significantly during the quarter, rising back about 60%, due in part to the previously mentioned reduction in lower margin EF&I revenue.

However, in Q1, we anticipate some downward pressure on the service margins, as we expect EF&I revenue to increase significantly during the quarter.

Operating expenses for the quarter, excluding restructuring costs of $0.2 million, were $43.6 million versus our guidance of $42 million to $43 million, and versus $37.7 million in Q3.

Although the quarter-over-quarter increase in spending of $5.9 million was largely assumed in the guidance estimate, we did exceed the top end of the estimate by $0.6 million.

This overage occurred in S&G and was related to increased compensation accruals, as well as some consulting-related activities.

Looking forward into Q1, we expect sales and marketing expenses to decrease; G&A expenses to be flat to slightly up, due to some one-time outside services and consulting-related costs, before trending down in Q2; and R&D to trend upward, due to increased NRE and prototype expenses.

The overall headcount for the quarter was 974 versus 970 in Q3.

Headcount additions in R&D during the quarter were mostly offset by reductions associated with our fab consolidation efforts.

Total headcount has been virtually flat for the last three quarters.

The operating loss for Q4 was $7.5 million.

Other income expense for Q4 was a favorable $0.4 million versus a favorable $1.2 million in Q3.

Income taxes for the quarter were favorable, $0.5 million.

Net loss for the quarter was $6.5 million or a loss of $0.07 versus our guidance, which called for a loss of $0.08 to $0.09 per share, versus a loss of $3.1 million in Q3.

Turning now to the balance sheet -- cash, cash equivalents, restricted cash, and investments ended the quarter at $275.5 million versus $280.5 million in Q3.

We used $2.7 million of cash from operations in Q4 versus a use of $8.3 million in Q3.

The Q4 cash from operations was our best performance since Q3 of 2008.

DSOs were 71 days versus 61 days, reflecting a few larger transactions invoiced towards the latter part of the quarter.

Inventory turns were 3.2 versus 3.0.

Accounts Payable days came in at 41 days versus 44 days, and capital expenditures were $4.4 million in Q4 versus $2.8 million in Q3.

As we look into Q1, although the economic uncertainty clearly still exist, we feel encouraged on numerous fronts.

We ended Q1 with good visibility based on solid backlog, and it appears that TAM shipments have stabilized and have also become somewhat more predictable.

Our Q1 operating outlook calls for another sequential increase in revenue versus Q4, while at the same time, the general optical market, based on an historical five-year average, typically declines by 15% in the first quarter of the year.

Gross margins appear to be flat to slightly down from Q4, with common equipment sales remaining strong as another deployment with a large Internet content provider will occur in Q1, as well as increase sales to Level 3.

In addition, we should also see an increase in lower margin services revenue, along with slightly lower TAM shipments from Q4.

While we're pleased with the overall TAM shipments and TAM linearity in Q4, until we have more data points showing a sustained recovery, we believe it's prudent to have a somewhat cautious TAM view in our operating outlook.

Although operating expenses will increase in Q1, primarily due to significant increases in R&D, NRE and prototype material charges, we believe that Q1 will be our peak expense level for 2010.

Looking beyond Q1, operating expense levels should fluctuate somewhat, but most likely will increase modestly from our previous view.

As we exit 2010, we believe that our operating expense run rate will be in the mid-$40 million range per quarter.

We continue to walk a fine line between balancing our desire to reduce our operating losses, while at the same time ensuring that our R&D investments today are adequate enough to enable us to continue to leverage our significant existing technological leadership and competitive differentiation well into the future.

The following guidance for Q1 is based on non-GAAP results and excludes any non-cash stock-based compensation expenses.

Revenue of approximately $92 to $94 million; gross margins of approximately 39% to 40%; operating expenses of approximately $47 million; operating a net loss of approximately $10 million to $11 million; and based on an average estimated basic weighted shares outstanding of 98 million, this would lead to an [EPF] loss of between $0.10 and $0.11.

I'd now just like to briefly turn the call back over to Tom before we open it up for questions.

Tom?

Thanks, Duston.

Before opening the call for Q&A, I wanted to call your attention to our other announcement this afternoon.

Ita Brennan will be succeeding Duston as CFO of Infinera by the end of this June.

Ita brings a wealth of experience to the job and I'm excited about having her as a member of the senior executive team.

She has been an indispensable partner to Duston in helping to build and lead a world-class finance organization here at Infinera.

We are grateful for Duston's outstanding contributions as our CFO since 2006.

He has helped guide our Company through important phases in its growth and development, and built an outstanding team.

I am pleased he'll be remaining on Board for a smooth transition over the next several months.

Operator, we are now ready to open the call for questions.

(Operator Instructions).

Brent Bracelin, Pacific Crest Securities.

Tom, first question.

You have two Internet content providers now that are in the top five.

One is 17% of revenue.

Could you provide a little color on how the product is actually being deployed at these large Internet content providers?

How different are these customers relative to your typical carrier customer?

And then could you maybe walk us through the drivers of purchasing patterns that you've seen so far at these content providers, and kind of what we should expect on a go-forward basis.

So, I'll answer, Brent, I think, a couple of pieces.

First of all, I think you asked how do these networks -- what's the decision for them deploying these.

And I think it comes down to a couple of things.

One, as these content providers have higher and higher expenses around providing traffic, this is a way to contain and control their expenses.

I think more importantly, it allows them to take control of their destiny around having a vehicle to distribute their content.

And I think that one of the things that -- one of the reasons we have been very successful in this space is because we provide a Digital Optical Network.

We allow people who have historically not run transport networks to successfully build and operate transport networks as an extension of their normal networking capability.

So I think that is the dynamic that's driving this -- as I mentioned in the call, changing some business models.

This is one of the ways that our technology is allowing our customers to change their business models.

In regard to the similarities of the networks, they are fairly similar.

They are building nationwide backbones and are having a significant -- a reasonable amount of add-drop into major cities.

So I think that that's the similarities between the two networks.

And I won't comment on what their future plans entail other than we expect to see some opportunity to continue to fill out their networks as their traffic patterns increase.

Great.

Then one follow-up on that.

You did indicate -- I think Duston indicated that you also have another deployment of equipment and install; revenue could actually be up with an Internet content provider in Q1.

Is that with a new Internet content provider or the existing content provider?

It's a different one than we referred to in Q4, but not a new customer.

Okay.

Then my last question before I cede the floor -- you did talk about expenses in Q1 kind of being at peak level.

Is that solely tied to kind of the 40 gig product launch costs and NREs?

And if so, how much should we think about the contribution being to R&D in Q1 here?

So, yes, the increase from Q4 to Q1 primarily is thrown in the R&D piece related to prototype material and NRE-type charges.

So they went up -- or are projecting to go up significantly in Q1.

And a good portion of our overall R&D expenses is geared, obviously, towards the future products.

Okay, thank you.

George Notter, Jefferies.

I wanted to ask about incumbent telco customers.

I think if I heard you correctly, you're still right now about six incumbent PTT customers.

And I think that's flat versus a quarter ago and I think roughly the same versus even the June quarter.

Can you tell us where you are in progress on winning those customers?

Is it more about the cycle, the sales cycle?

Give us an update there.

Thanks.

Yes.

Our most recent announcements in regard to Tier One's was our fairly recent NTT win and our fairly recent Telefonica terrestrial and subsea win that I think we announced in -- Q2?

With our Tier One's -- we have six now; five of them announced -- we continue to experience, for the ones we've had for awhile, new opportunities, as I mentioned on the call.

These are fairly long cycles to win.

Once you win, they have an opportunity -- there's the opportunity, as we've been successful, to extend new opportunities within new regions for us to participate in.

And we are -- have experienced a lot of success with that and we anticipate creating more opportunities for the current year Tier One's that we have won.

We are also continuing to improve -- or pursue our Tier One's that we have not won, but I won't make any specific comments on those.

Is there something that's different about the competitive environment right now versus a few quarters ago?

Is that a factor here in coming account wins?

Or is it just, again, back to the sales cycles?

There's nothing currently that I see that is causing any difference.

These cycles are fairly long cycles and they're typically driven by a specific opportunity that a Tier One will have.

So as those opportunities present themselves, we pursue them very aggressively and we will continue to do that.

Got it.

Great.

Thanks very much.

Simona Jankowski, Goldman Sachs.

It's Simona Jankowski from Goldman.

Just wanted to ask you first on the balance sheet -- deferred revenue was up 57% quarter-on-quarter and 25% year-on-year.

Can you just give us a little more visibility into what's in the deferred revenue there?

And kind of over how many quarters do you think that will be recognized -- the increase?

Yes.

No, you're right, it's up about $8 million quarter-over-quarter roughly.

And if you look at that where it's split, it's about $4 million in services and about $4 million in product.

On the services front, what we're seeing kicking in a little bit is some extended hardware warranty, which as a Company being three, four years old, we're just now starting to see some of that fall off, the existing warranty, and some of those revenues come -- accruing to us there.

So that's where you saw some deferred increase there.

Our spares management program, which we've rolled out several quarters ago, that revenue is starting to come in.

Software subscription has also come in there and increased the deferred amount there.

So, most of that stuff varies over anywhere from a quarter to four quarters, amortizing out.

On the $4 million increase in product, that has various maturities in it, quite honestly.

And you'll see that over a several quarter period.

That's very helpful.

Thank you, Duston.

And in terms of the $4 million of services, is that higher margin services business?

Or is it more like the EF&I services type business you talked about?

Certainly higher margin than the EF&I, yes.

Okay.

And then when I look into your gross margins, when you actually just look at the product gross margins, they were flat quarter-on-quarter.

Some of the upside seemed to have come from the deferred products and then from the services.

And again, obviously, you're guiding it down.

Can you just explain a little bit more why now that the revenues have started to kind of finally move in the right direction?

Why it's not slowing a little bit stronger to the gross profit lines?

Yes.

If you look still, we've talked about some new deployments again.

And if you look at our -- actually, we don't disclose this, but generically, if you look at our common equipment revenue as a percent of our total revenue, I think it's -- I'll have to go back and doublecheck -- I think it's the second highest since we've been public.

So, that common equipment is still a -- it's actually the highest, I think, certainly, all year.

And although we shipped more TAMs, because of the higher common equipment percent, the TAM percent of revenue was the lowest as a percent of revenue for 2009 in Q4.

So, again, it's just feeding the common deployments there.

And over time, obviously, that gets filled up with higher margin equipment.

Can you just also help me reconcile that with the number of customer additions?

You added three customers this quarter, which is on the low end of what you typically add, yet common equipment, which I kind of associate with new customer buildouts, seem to be so high.

Is that just really very highly associated with that one Internet customer that was 17% of sales?

Well, don't forget, we have new deployments with existing customers.

You just don't have new deployments with new customers.

That's the beauty, again, of the model.

And Tom mentioned it in his comments, that you could have a customer for two years and then they could have a very big new deployment that would be common equipment-intensive in any given quarter.

Okay.

And just last question, and thank you for your patience -- just on OpEx coming down after Q1.

How much visibility do you have into that?

Because R&D can sometimes be more an art than a science.

So how do you know that it's going to be more under control after Q1?

Well, I mean, it's the things that aren't necessarily perfectly controlled is the timing of some of these bigger NRE-type charges and prototype materials.

When exactly are you're going to get the materials in and when are you going to have the NRE charges?

In totality, you can corral that; but any given quarter is a little tough.

But directionally, we feel pretty good about getting it down to those levels by the end of the year.

Okay, terrific.

Thank you so much.

Blair King, Avondale Partners.

Thanks for taking the call.

The first question I have would center around the broadband stimulus opportunity that you mentioned, Tom, in your remarks.

And given such a high percentage of the first round of funds were middle mile-oriented, and I guess they were awarded in December, how much of that was factored into your first quarter guidance?

How do you think about the revenue opportunity for stimulus through 2010 and even beyond?

Hey, Blair.

Thanks.

We have not really [placard] any specific monies into our Q1 based on broadband stimulus.

We believe broadband stimulus money is being spent.

We see it in the same place as you do, as middle mile, second mile, that could impact us.

We see some of our customers being the recipient of this and a lot of target customers who we believe we could help build appropriate networks to solve the problem that the stimulus is aimed to solve.

But we're not baking that into our specific plans.

I do think that we will have an opportunity to participate in some of these dollars, but we are going to be cautious on how we commit that to our Company and to you.

But we do believe there are some dollars out there.

All right.

Last question would have to do, Duston, with the Maryland fab closure.

I think the opportunity for a couple hundred basis point improvement by the second quarter was communicated on the last call.

And I'm wondering, all else being equal, would that be a 200 basis point improvement over the first quarter guide?

Or is some of that already factored into your first quarter gross margin guide?

No, all things being equal, nothing has changed to that previous comment.

You're absolutely right.

Okay.

Thank you very much.

Kevin Dennean, Citi.

Congratulations on a solid quarter.

Just wondering if you could talk a little bit about geographic performance?

Particularly -- I know you don't disclose it until the filings come out, but if you could talk a little bit about Latin America.

I know you had the Telefonica win.

Just wondering how that theater of operations performed and what type of opportunity you still see ahead of you with Telefonica?

Yes, let me talk about the first part and I'll let Tom talk about the second part.

Obviously, with some of those deployments behind us, you'll see that percent of revenue coming down for that geography rather substantially.

That's no surprise; that's just a big build that happened there and a big chunk of that's over with.

Regarding Telefonica in general, I'll pass that to Tom.

Yes.

Our successful rollout with Telefonica has gone very well from both our perspective and, more importantly, from Telefonica perspective.

The network is up carrying traffic.

We deploy the network and beat the timelines that we had laid out to Telefonica.

The quality of the network and all the product has been exceptionally high.

We did this while breaking into these new markets, so had to do a lot of organizational learning through that first process.

I am very convinced that we will have ongoing opportunities within the current network to expand the capacity of that.

I also believe that we will be well-positioned for next opportunities, new business opportunities that this first win has allowed us to participate in.

So I'm fairly bullish on the relationship with Telefonica and the other Tier One's.

And then it was good to see Level 3 show some sequential growth with you folks.

Can you talk a little bit about what's going on there?

Was that just filling in some kind of unused capacity that they had with some TAMs?

Or are you deploying new routes for them or lighting up new fibers?

Yes, our business with Level 3 -- they continue to be an important and significant customer.

We continue to earn every PO with them every day.

And we continue to bring them opportunities to evaluate us, both on fill, which we obviously have a good opportunity with, but also on new opportunities.

So, for Q4, it was a mix of organic growth and new opportunities that we deployed with them.

Okay.

And then last thing for me, congrats on delivering the PIC to your developers.

Just any update on the timeline there for turning the PIC into a finished system?

Thank you for the congratulations.

The only thing I will reflect is what we have reflected before, which on the 100 gig PIC somewhere between 12 and 24 months after we delivered that to our engineering teams, we delivered our first DTM platform.

And that's the only type of reference we've given to date.

And then I guess I'll just sneak in one last follow-up, Tom.

But I think Jagdeep, in particular, often discussed 40 gig adoption rates being gated by the inherent cost in statistic multiplexing in required components.

Any updated view from you, Tom, or from anyone else on the team, that either reinforces that view or maybe gives you reason to reconsider?

Our position is the same, in that it's an economic discussion -- dollar per bit per mile is going to be the economic driver of all of these speeds.

And if you look over the history of this last year, 40 gig had a fairly robust beginning of the year.

In Q3, the analysts report that 40 gig took a substantial reduction in deployments.

I don't want to speculate that that's completely based upon the cost, but when analysts called it the Infinera effect of the continued price reduction of 10 gig, making it economically a better choice to deploy 10 gig.

I think that if you look at our market share numbers in Q3, we actually grew market share in longhaul in North America in Q3 to our highest level yet.

And I think that is a combination, quite frankly, of the value proposition of our digital optical network; and it's also the value proposition of 10 gig wavelengths being substantially less expensive on a per-bit basis than 40 gig.

And until that bridge is crossed around how do you make 40 gig or 100 gig economic, then it will fit a certain market niche; but it's not an affordable proposition to make it mass adopted.

Terrific.

Thanks very much.

Subu Subrahmanyan, CS Capital.

I have two somewhat big picture questions.

One is -- I think we're trying the one quarter revenue guidance; but given that this is the seasonally slow quarter and [your office grew], do you see kind of a growth trajectory continuing through the course of 2010, given the opportunities you're looking at?

That's one question.

The other question is in gross margin.

Now when should we see the benefit from the fab restructuring?

Which quarter will we see the full 200 base point benefit?

And when do we see kind of a more normalized mix, you think, of in a (inaudible) versus TAM, given that the last few quarters you've had very high common percentage?

Subu -- Duston.

You're right.

We guide one quarter at a time; so, probably not going to offer a whole lot more commentary on the revenue levels there.

On the -- again, on the fab consolidation, you're right -- Q2 2010, which we mentioned the 200 basis points.

Again, all things being equal, there will be better by 200 basis points than they would have if we had not closed the fab in Maryland.

So to answer your question, Q2 2010.

And in terms of the mix, Duston, I mean --?

Yes.

When is it going to be normalized?

When we stop, I guess, winning new customers and winning new deployments with existing customers.

I mean, it's as simple as that really.

And it's going to be volatile and the more business we win, the more it's going to be tilted to common equipment.

I don't think it's going to be normalized for, hopefully, for quite some time, quite honestly.

Because we want to continue to win as many new deals with new customers and new deals with existing customers as we can.

Understood.

Yes, I was just thinking more about when those new wins that you had over the last couple of years have a better mix of TAM and commons, (multiple speakers) because your wins have gone up pretty significantly in the last few quarters.

Yes.

No, you know, the TAM shipments and invoice shipments for the quarter did come up nicely.

So we're obviously seeing some of that starting to flow into the TAM level.

We just boosted up, if you will, common equipment a little bit more than the TAM revenue for the quarter.

But it's starting to happen.

Now, whether it continues or not and how much, we'll have to see how we progress for the next several quarters.

Got it.

Thank you.

Sanjiv Wadhwani, Stifel Nicolaus.

This is actually [Chris Casado] in for Sanjiv.

I'll just take a step back and ask you guys kind of a big picture question.

Can you comment on any changes in the competitive environment that you're seeing out there, specifically being in Europe?

And what you guys anticipate, I guess, going forward.

Is it getting easier, I guess, to win deals from your perspective?

Or what's your perspective?

The competitive environment remains fairly much like it has been.

It's a very competitive environment.

We see particularly in Europe, Huawei in fundamentally every opportunity that we compete in.

I think we continue to win certainly our share and we want to continue to win more than our fair share of the business.

I think that our reputation around technology and quality, and delivery and flexibility, and speed all service well in that regard.

They are going to continue to be the low-cost leader and we want to be the value leader.

Yes, and in regard to what's happening competitively in the landscape, obviously, is Nortel and Ciena.

The shoe has dropped on what happened with Nortel.

Clearly, they will merge with Ciena.

I think that the [delta] now that's left is, what's going to happen to the rationalized product lines?

Either they will have to truncate one product line or the other to achieve the efficiencies that they have promised on the integration or they will suffer from some inefficiencies.

And I think the Alcatel-Lucent acquisition or merger that happened several years ago, that still continues to linger in the market.

We think that the integration of these two companies could lead us to having opportunities, as there's uncertainty within their customer base as to what the future will look like.

So we're hoping to take advantage of that.

All right.

Thank you very much.

(Operator Instructions).

Michael Genovese, Soleil Securities.

Just a clarification on the Internet content provider that you -- that was the largest customer in the quarter.

Is that an initial chassis buildout, is primarily finished?

A big chunk of it went in Q4.

Okay.

And then a couple of technology questions.

You've got competitors coming out in the last week or couple of months, depending on the competitor, coming out with these very large OTN switches.

So, Ciena, Alcatel with switches that come out with around 4 terabits of switching capacity.

What is your take on the competitive environment, specifically against these high-capacity optical switches?

Yes, the Alcatel announcement was very recent.

And while we've looked at it, we don't have a thorough competitive analysis done on it yet.

From my perspective of it, these large switches are not integrating DWDM into them.

So they're operating as a core director or a core director replacement opportunity versus a integrated DWDM in packet-capable platform.

Having said that, I think that you're going to see larger and larger switching capabilities, both in the core director space but also with integrated DWDM, as we move forward across the next several years, and probably will integrate full packet functionality into those switches.

Okay.

And when you talk about coherent modulation in your Ottawa development team, in your view, is the coherent signal processing important for 40G?

Or is that primarily important for the 100G products?

We believe that technology is applicable for 40 and it's applicable for all higher speeds.

Our first generation of our 400 gig PIC, as we've articulated, will not include the coherent technology in our first release of that technology.

And we do believe it will be important as we go to faster speeds, 100 gig.

We believe that we are uniquely positioned to take advantage of the coherent technology because, once again, just like packet, it's all about how can you get from photonic to the electrical domain?

And our PIC today is the only integrated solution to allow very, very cost-effective optical to electrical conversion.

That puts us in an advantaged position to packet process.

It puts us in an advantaged position to digital signal process.

So, we believe that the combination of the PIC in any of those packets or processing capabilities is, quite frankly, in our great advantage.

Okay.

Specifically on the numbers -- well, I mean, Duston commented that you obviously don't give more than one quarter guidance.

But if we put any kind of even modest sequential growth throughout the year on your first quarter guidance, then we're going to come out with numbers that are 25% to 30% up for the year on the revenue line.

So, basically, I think if you don't comment on that, that's probably what's going to happen for the consensus, and maybe that's right.

But is there any help that you can give us there?

I mean, do you think you could grow 25%, 30% top line for the year?

My same response, sorry.

We do one quarter at a time and we'll see how we get through Q1, and then we'll take a look and take a stab at Q2.

Okay, last question for me then.

Duston, just in your own words, I mean, it was in the press release, you had a quote, but on the call, you haven't really addressed personally, well, your reasons for moving on and your feelings about it.

Can you just take a minute to give us your view there?

Sure.

And it's actually pretty simple if you step back from it.

I've been here -- I'll be here almost four years, I guess, in June.

And it just comes down that I've personally accomplished a lot of what I wanted to accomplish when I came here almost four years ago.

If you look back, I helped take the Company -- or prepare the Company to be public.

And we, I believe, have done that in a pretty successful manner in bringing some very differentiated technology to a public company atmosphere; and competing pretty effectively with companies sometimes 10 times greater our size in a very, very competitive environment.

So, that's clearly been rewarding.

At the same time, through the IPO and a, quite honestly, a timely secondary, we've managed to capitalize the Company in a sufficient manner that's allowed us to continue our R&D efforts to make sure that we maximize our differentiated technologies well into the future.

And then another big -- big, big focus over the last several years have been building the finance team, quite honestly.

We -- when Ita and I both came here in mid, I guess, 2006, there were, I think, one or two key members in the team.

But beyond that, it was pretty much rebuilt.

Ita and I have been working on that over the last several years.

I think it's come to be highly regarded internally to the Company and, hopefully, externally.

So that's been a big focus.

And then in combination with that, the development of Ita to become the next CFO of the Company.

And I'm happy with our Company and absolutely delighted to Ita to have the opportunity.

She's an outstanding talent and I think will be an excellent CFO for the Company.

So, we'll transition it very seamlessly over the next six months and Ita will take over at the end of June.

So, in a nutshell, anyway, hopefully, that summarizes it.

And I think quite honestly, you can summarize it up -- I'm ready and she's ready.

I'm ready to do something different and Ita is ready -- clearly ready to be CFO of the Company.

Alex Henderson, Miller Tabak.

So, a couple of questions.

First one, can you just talk a little bit about the uptake of the Metro product and how -- what kind of responses you're getting from your customers -- customer base on it?

Yes.

As you know that we announced this product in October and we've announced six customers' wins to date.

Those have all been deployed and are being deployed -- continued deployed, particularly with Tiscali, very successfully.

As a new product, one of the challenges is always making sure that the product works in mass volume as you would anticipate it to.

And we are experiencing especially high customer satisfaction, quality and reliability with this product.

We're in a number of trials right now; some that have just completed and a pipeline of them that are going to start through this quarter.

So I think customer traction from an interest perspective is going very well.

We continue to absolutely believe that the ATN uniquely differentiates our customers in their markets.

It was specifically built to help our DTM customers provide services and take advantage of a thick architecture as extended into the Metro.

We believe that it is fulfilling that requirement.

And we anticipate, as I mentioned, several of these trials turning into customer wins sometime between now and the end of Q2.

So is there any of the deferred revenue coming in the Metro product?

Yes.

Some of it included that, yes.

On the R&D trajectory, obviously, you've got a fair amount of quasi-one-time costs here with respect to new product launches.

In particular, that has a direct impact on the spike in 1Q.

I would think that you would have some granularity on the timing of those falling back off as we look into the second quarter.

You might give us some sense of, given the quasi-one-time in nature of that, how fast do you expect that to come back down?

Will it step up/step down?

Or will it step up and gradually truncate over the next end of the second quarter?

Yes, I think we've given you a couple of goal posts here.

What we said for Q1, the $47 million will be the highest.

So we believe Q1 of 2010 will be the peak quarter for R&D spending for total spending actually for 2010.

And we said by the time we exit 2010, we'd be at a $45 million run rate.

So (multiple speakers) --

Yes, I understand, but I'm just trying -- I mean, the question really is a matter of mix between the R&D and the sales, marketing and G&A costs, as we look into the second quarter.

Since you've got somewhat of an abnormal spike going on having to do with product launch timing, I would think that you would be able to give us some granularity on whether that steps down quickly in 2Q or not.

Yes.

No, again, we've given total guidance for Q1.

We thought it was important to put a couple of stakes in the ground for Q1 and the end of the year for operating expenses.

But we're not going to go into guiding Q2 operating expenses at this point.

Okay.

Going back to the -- I know you've commented on it several times, but I'm going to go back to it one more time -- which is the closing the facility and the two point benefit, quote/unquote, all in.

I'm assuming that you're reinvesting some of that and that we shouldn't be looking at a two point swing, just to be clear, in OpEx costs quarter-to-quarter from March to June -- that's not going to happen.

Well, what we can tell you will absolutely happen is it will be two points higher than it would have been if we did not close the fab.

(multiple speakers)

Great.

But it's not a step down.

A step down?

Right.

It's not like bang, you close the fab day -- on the 31st and the next day it starts at the lower rate.

Oh, well, it's not that simple, no.

Right.

So it shouldn't step down sequentially; it should be part of a feathering process in the quarters.

Fully realized in Q2.

Right.

Okay, on Level 3, obviously, there was a fairly dramatic win over there.

Can you talk a little bit about what the mix between boards and new systems is?

Are you still selling new systems into that account?

Or is it predominantly just filling line cards into the existing installed base?

It's a mix of everything.

Great.

Last question, I didn't catch the headcount.

Can you just give me that?

Yes, 974.

Great.

Thanks.

[Jay Albany, Scalags Capital].

Congratulations on a strong quarter.

I just had a question and I apologize if you've covered this, but would you just refresh us on, broadly speaking, the plan to get to a free cash flow positive state?

What kind of revenue level you'd think you would need to get to or what the timeline is for that?

I know you've been there before with mature products, so I'm just kind of curious what you see now.

Again, it really depends on where you want to peg a margin number.

But we've been at 45%, 47% margin number levels.

So, just if you want to take a 45% margin number for simplicity purposes, throw a $100 million revenue number on it, you'd be at breakeven with a $45 million run rate of expenses.

Okay.

So, $100 million a quarter with a better mix.

Okay.

All right.

And what's kind of your long-term target on Capex as a percentage of revenue?

We've always said somewhere around 5% to 7% of revenues.

If you look at this quarter, it was right about 5%.

So, somewhere in that ballpark.

Great.

Thanks very much.

Congratulations.

Thank you.

In closing, I want to thank the entire Infinera team and our customers for their contributions to our success.

We look forward to keeping you informed of our progress in the months and quarters ahead.

This concludes today's conference.

All parties may disconnect.