Infinera Corp (INFN) 2010 Q1 法說會逐字稿

Welcome to the first quarter fiscal 2010 investment community conference call for 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 turn the call over to Mr.

Bob Blair of Infinera Investor Relations.

Sir, you may begin.

Thank you.

Good afternoon and welcome to Infinera's Q1 2010 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, and prospects for the Company in Q2 2010 and beyond, and are subject to risks and certainties that could cause actual results to differ materially from such forward-looking statements.

Please refer to the Company's current press releases and SEC filings, including the Company's annual report on Form 10-K filed on March 1, 2010 for more information on these risks and uncertainties.

Today's press release is including Q1 2010 results and associated financial tables.

An investor information summary will be available today date on the Investors 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 from the first quarter of 2010, 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 second 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 our 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 are CFO, Duston Williams, and Corporate Controller, Ita Brennan.

We are pleased with the numbers we delivered in the first quarter, which showed revenue growth for the fourth consecutive quarter, a trend that we believe will continue in the June quarter.

We also posted gross margins that were improved over Q4 and slightly higher than forecasted, while achieving operating expenses that were slightly below our expectations.

Against the backdrop of an improved technology spending environment, we continue to see robust demand from our customers as we achieved record bookings again in the first quarter.

We are encouraged that customers continue to embrace Infinera's vision and roadmap to deliver the most cost-effective networks and to satisfy their current and future bandwidth needs.

This response from the marketplace has resulted in substantially improved near-term pipeline activity for Infinera versus a year ago.

The key factors behind our sequential revenue growth and pipeline strength are continued new customer additions and healthy business with our current customers, including some of the largest.

We are seeing this customer activity across multiple market segments, including the carrier, cable, and Internet content provider spaces with our expanded set of optical transport solutions.

In the first quarter, we added five new customers -- three of them in North America, and one each in Europe and Asia.

The new Asian customer, which we first mentioned in our January call, has begun Infinera network deployments in both Japan and North America.

These additions bring our total roster of customers to 74.

We also added one additional customer for our new ATN Metro Edge product for a total of seven ATN customers.

We expect to add new customers for both our DTN and ATN in Q2.

We are also making good progress in another new market for our products, Submarine Networks.

During the quarter, we won our fourth Submarine Network and continue to see a number of potential opportunities in this area.

With Global Crossing, a leading IT solutions provider and longtime Infinera customer, we are participating in a series of large overbuilds in a global capacity expansion that they announced last month to meet growing demand for IP and Internet ethernet transport among their enterprise, carrier and service provider customers.

We have been very active with our cable company and Internet content provider customers, including a new rollout of our combined ATN and DTN solution with one of the largest cable operators.

In addition, two of the world's largest Internet content providers were among our top five customers in Q1, with one of them at 16% of revenue.

Collectively, our cable and ITP customers -- essentially all leaders in their industries -- accounted for nearly 35% of our revenue in Q1 -- the high end of a historic 20% to 35% range we have seen from these two non-traditional segments combined.

We recently won a new opportunity that will extend our footprint in Latin America with an existing Tier 1 carrier customer, displacing the incumbent supplier and providing an upgrade to the customer's Infinera summary network and a new terrestrial deployment.

The previously mentioned new customer win in Japan means we are now deployed with two of the top three carriers in Japan.

These early wins in Japan are a testament to Infinera's demonstrated commitment to quality, and we believe that our deployments with these highly regarded customers will lead to additional opportunities in this important market.

All of this activity represents substantial long-term investments by our customers.

Essentially, they are betting the success of their businesses on the ability of the Infinera network to meet their current and future needs, and to help differentiate themselves in their markets.

We believe that these decisions confirm their belief in the industry's only PIC-based Digital Optical Network and in our ability to address their future needs to bring Internet scale and economics to play in these Digital Optical Networks.

As pipes continue to handle larger capacity with wavelength speeds rising to 40 and 100 gig, the services required to fill those pipes become more complex and diverse.

This complexity is further increased as the optical layer is being driven to cost-effectively implement more network functions with an ever-growing number of optical and electrical components to process and transport network data.

As a result, we believe that the only way to cost-effectively solve these complexity and scalability issues is through integration.

As the only player with commercially deployed PICs, we believe Infinera is uniquely qualified to provide these solutions economically.

We believe that photonic integration will deliver the most cost-effective, not to mention space-efficient and power-efficient solutions to these optical challenges.

In addition, Infinera's investment in Coherent Technologies, which builds upon our significant experience building silicon [AC] chips, should enable us to meet the challenges of building higher bandwidth solutions.

We believe systems based on photonic and electrical integration will be the best way to meet our customer needs for a cost-effective network that can enable them to carry the ever-growing traffic loads, while still generating healthy financials for their own shareholders.

Our unique approach to the market has earned us a market-leading 32% share in the longhaul DWDM market in North America.

We believe that with the exception of the Chinese market, there are no structural issues that would prevent us from significantly increasing our current international market share of 10%.

Before turning the call over to Duston, I wanted to say a few words about our long-term business model and how this management team views it.

We articulated a target model at the time of our IPO in 2007 with gross margins of 50%; operating expenses at 35%; and operating margins of 15%.

Nearly three years and a worldwide recession later, we remain committed to achieving this model.

We believe we can obtain a better than historic optical industry model because of our unique PIC-based value proposition, leadership in Digital Optical Networking economics, and because of the leverage our vertically-integrated model can achieve, once we are operating at appropriate volume levels.

We are driving to achieve the target model first and foremost through topline growth and through ongoing careful consideration of our operating expenses.

It is a delicate balancing act, because while we are building our footprint, we are also making significant investments in our future products.

These investments extend well beyond the funding of our 40 gig program, and include investments in multiple products and technologies.

We are pleased that some of these investments have already resulted in new revenue opportunity for the Company.

For example, in the past year, we have introduced both an ATN Metro platform and a submarine platform for the DTN.

These new platforms have created substantial new revenue streams, nearly doubling our -- a saleable market, and both will require continuing investment to remain competitive and to continue to solve our customers' evolving network challenges.

On the expense side, our intent is to grow into our current expense structure, while continuing to make investments necessary to maintain our product leadership.

We believe that the increasing breadth of our customer base and our expanding presence in geographic and product markets will help us achieve this objective over time.

I would now like to ask Duston to provide his report on Q1 financials and our outlook.

Okay.

Thank you, Tom.

I'll review the Q1 actual results and then follow that up with our outlook for Q2.

The following analysis of our Q1 results is based on non-GAAP.

All references exclude non-cash stock-based compensation and any restructuring costs.

Total GAAP revenues in Q1 were a record $95.8 million compared to guidance of $92 million to $94 million versus revenue of $90.2 million in Q4.

Our services revenue for the quarter was $8 million versus $7.1 million in Q4.

We originally expected our installation or EF&I-related service revenue to increase in Q1.

However, it remains basically flat from Q4.

We now expect to realize the increased EF&I revenue in Q2.

The increase in the Q1 service revenue was driven by incremental extended hardware warranty and [Sparus] management-related revenue.

We had two 10% customers in Q1, including Level 3 at 22% of revenue, and an unnamed, leading Internet content provider -- not the same Internet content provider that was our largest customer in Q4.

In Q2, we expect Level 3 to account for a reasonable level of revenues, but significantly below its Q1 share and most likely below 10%.

Gross margins in Q1 were 41% versus 40% in Q4.

This compares to our guidance of 39% to 40%.

Similar to Q4, in Q1, we continue to experience strong comm and equipment sales with chassis shipments coming in at their second-highest level in the Company's history.

Our TAM shipments were relatively strong, but slightly below the Q4 level; however, remaining above 2,000 units for the quarter.

This was in line with our expectations that we communicated on the Q4 earnings call.

It's interesting to note that Q4 and Q1 reflected the first consecutive quarterly 2000-plus TAM unit performance since Q1 and Q2 of 2008.

The slightly better gross margin performance for the quarter was related to the shift in a portion of the lower margin EF&I revenues into Q2.

Our service margins in Q1 increased to 69%, due largely to the less than expected lower margin EF&I revenue.

However, in Q2, we anticipate downward pressure on the service margin, as EF&I revenue that we expected to realize in Q1 will roll into Q2.

We continued our careful consideration of expenses during the quarter.

Operating expenses for the quarter were $46.3 million versus our guidance of $47 million and versus $43.6 million in Q4.

The slightly better than expected operating expense performance was primarily attributed to timing differences for certain NRE and prototype charges.

The overall headcount for the quarter was 999 versus 974 in Q4.

Virtually all the headcount additions occurred within R&D.

The operating loss for the quarter for Q1 was $7.3 million.

Other income expense for Q1 was a favorable $0.2 million versus a favorable $0.4 million in Q4.

Net loss for the quarter was $7 million or a loss of $0.07 versus our guidance, which called for a loss of $0.10 to $0.11 per share versus a loss of $6.5 million in Q4.

Looking at the balance sheet, cash, cash equivalents, restricted cash and investments ended the quarter at $277.2 million versus $275.5 million in Q4.

We generated $2.3 million of cash from operations in Q1 versus a use of $2.7 million in Q4.

Q1 reflected our first positive cash flow from operations since Q3 of 2008.

DSO's were 56 days versus 71 days.

Better linearity within the quarter attributed to this improvement.

Inventory turns are at -- unchanged at 3.2.

Accounts Payable days came in at 42 days versus 41 days.

And capital expenditures were $4.7 million in Q1 versus a $4.4 million in Q4 of '09.

Turning to the Q2 outlook.

Much like Q1, we entered Q2 with good visibility based on solid backlog.

It also appears that Q2 will continue to exhibit a healthy mix of business spread over our carrier, Internet content providers, and MSO customers.

Our Q2 operating outlook calls for our fifth consecutive quarter of sequential revenue growth.

At this point, gross margins appear to be flat to up slightly from Q1, impacted in part by the anticipated recognition of a large amount of low margin EF&I revenue in Q2.

In general, we continue to be cautiously optimistic about the shipment level of our TAMs, which have higher gross margins.

We are currently assuming that Q2 TAM shipments will be roughly equal to that of Q1.

Having said that, we are encouraged by the number of TAMs booked during the first three weeks of Q2.

Operating expenses for the first two quarters of 2010 should average around $47 million.

Q2 expenses may increase somewhat from Q1.

However, any increase will be primarily reflective of some NRE and prototype rollover from Q1, and potentially some likely increase in commissions and incentives, due to the revenue outperformance versus planned.

We continue to be committed to our previous target to exit 2010 at an operating expense run rate in the mid-$40 million range per quarter.

We believe any potential deviation from this expense target would be solely related to additional commissions and incentives if we are fortunate enough to continue to outpace our internal growth plans.

The following guidance for Q2 is based on non-GAAP results and excludes any non-cash stock-based compensation expenses.

Revenue of approximately $99 million to $101 million; gross margins of approximately 41% to 42%; operating expenses of approximately $47 million to $48 million, and an operating loss and a net loss of approximately $5 million to $6 million; and based on average and estimated average basic weighted shares outstanding of 98 million, this would lead to an EPS loss of $0.05 to $0.06.

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

Thank you.

(Operator Instructions).

Kevin Dennean, Citi.

Tom, just wondering if you can give us an update on the 40 gig solution development -- how you feel you're moving along in that process?

Hi, Kevin.

Yes, as we said I think last time, we delivered the 40 gig chip and module to our Systems Developer in Q4, as we had said we would back in September.

And we gave as a reference point the 100 gig chip, 10 gig module, that it was 12 to 24 months later, we delivered systems.

And that's the same reference point that I'm going to give you today and I'm not going to give any updated guidance beyond that at this point.

Okay, fair enough.

Just moving on to -- I think I heard that Level 3 is expected to drop off in the next quarter.

And I think I heard that it could be less than 10%.

Correct.

Okay.

Duston, I'm wondering, can you give us some insights as to what's behind that?

-- that sequential drop-off?

And also, in the last couple of quarters, has Level 3 been an outsized buyer of TAMs?

In other words, are they -- within their revenue mix, would you say they're buying primarily TAMs?

Yes, let me take the first part of that, what's causing the drop-off in Q2.

Well, we always thought that the Level 3 revenues would drop off during 2010.

Now, Q4 to Q1 Level 3 revenues increased by over 100%.

So, in going from $10.5 million to $21 million, there's just no way that they're going to stay at the $21 million level.

And quite honestly, we don't expect that.

And $21 million was a pretty good quarter for Q1.

I think the good news there, coming down to maybe 10% or less of revenues, what that does mean is that our other non-Level 3 customers will be growing significantly in the quarter.

So we look at that as pretty good news there.

Right.

And would you say that they've been an outsized buyer of TAMs?

That their mix is skewed more towards TAMs?

Or would you prefer not to (multiple speakers) --?

They've been buying a pretty well-rounded mix of product.

Okay.

And last question for me, Duston -- it looks to me like G&A popped quite a bit in the quarter.

Any one-off drivers there?

Anything that we should think about there?

Well, I think last call, we mentioned there'd be some consulting costs both in Q4 and Q1.

So that's some of what you're seeing there in G&A, some increasing consulting costs.

And I believe there's probably some incremental incentives also in G&A there, in some of the little stuff.

But that's part of the primary drivers.

Okay, great.

Okay, thanks very much.

Appreciate it.

(Operator Instructions).

George Notter, Jefferies.

Thanks very much, guys.

I guess I was trying to better understand your commentary about improving visibility of business.

Is that something that you see generically throughout the marketplace?

Is it a function of market share capture or anything going on with specific customers that you have?

Any more flavor about improving visibility and backlog would be helpful.

Yes, George, this is Duston, and Tom can chime in here too.

We've been fortunate -- obviously, we've added a fair amount of customers over the last several quarters.

And I think more importantly, the amount of business that we're seeing from existing customers has been pretty strong.

And it hasn't just been strong in one segment; it's been very well-rounded for us, quite honestly.

So that's given us some better insight and, obviously, encouragement.

And then just the raw backlog numbers -- you know, as we go into -- you know we don't disclose backlog on a quarterly basis, but as we go into Q2, the backlog is, quite honestly, pretty robust as we have gone into Q2 here.

Got it.

And then I didn't hear it on the monologue, but can you talk about Tier 1 customers?

It's the same question I think we ask every quarter.

Certainly, it seems like with Internet content providers and cable operators coming in and out of other revenue stream, maybe it matters a little bit less, but can you talk about where you are in Tier 1's?

An update there would be great.

Yes, George, we have the same six Tier 1's that we've had.

You know we won three Tier 1's last year.

And we continue to have activity with, I would say, probably at least currently half of the Tier 1's that we've won footprint with, we are currently in ongoing opportunities to win further business with, some of which we implied on the call today.

I'm not naming any names, that we are -- have won some ongoing business with them.

So we are continuing to have ongoing Tier 1 wins with the -- in the current set.

We are also having ongoing dialogues with Tier 1's that we have not won yet and are not at liberty to discuss them specifically.

But as you know, they are opportunities that take a long time to win.

I continue to believe we are well-positioned to continue to win Tier 1's.

And, I think, just as importantly or more importantly, the ones that we have won, we have executed extremely well.

And they are, to my belief, every one of them is more impressed with us now than when we actually won their initial rollouts.

So we have done a good job of exceeding their expectations and I think that, over a period of time, we will continue to grow with them.

Got it.

And then last thing, any comments you could make about new Tier 1 customers coming into the revenue stream this year?

I mean, is it reasonable to think that we'd have other Tier 1's coming in for RevRec this year?

I'm not going to comment on any potential Tier 1 wins.

Okay, thank you.

Blair King, Avondale Partners.

This is actually Chris Glancy in for Blair King.

I was just going to touch on the submarine wins real quick.

How should we think about the gross margin there, relative to some of your other business?

I mean, it seems like with there being so many more optical line amplifiers, non-revenue-producing equipment and what-not, those could potentially be lower margin sales.

But if you can give any color around any kind of different pricing strategy you use or how we should think about sub-win gross margins, that'd be great.

Thanks.

Yes, this is Duston.

Probably won't talk about strategies from a pricing perspective there, but what we've seen so far, quite honestly, is the opposite a little bit -- the higher margin profile in the submarine business.

Now we're not assuming necessarily that that holds, but so far, it's been a little bit higher margin business.

Okay.

That helps.

And also, you guys used to breakout how many chassis you shipped or some indication of a level and route kilometers deployed during the quarter.

Are you still doing that?

Or can you comment on that at all?

We haven't talked about lately the route kilometers deployed.

You're right; there was a chart at one point in time that we put that out there.

We have not done that lately.

The only comment on the chassis we mentioned on this quarter was the second-highest in the history.

So, it kind of gives you a feel for the level there.

But we haven't disclosed those specifics.

Okay.

And last one for me.

I'm wondering, the Internet content provider that's in the 10% customer list this quarter, you said it's not the same as the one in Q4 '09.

Is it the same that was in 4Q '08?

I believe that was a different Internet content provider.

The same that was in that quarter, correct.

Okay.

That's it.

Thank you.

Appreciate it.

Sanjiv Wadhwani, Stifel Nicolaus.

This is actually [Chris Casado] in for Sanjiv.

Now, just two questions.

One is if you comment on any changes in dialogue, positive or negative, I guess, with the ongoing Tier 1's that you carried in the quarter, given the Ciena/Nortel acquisition and how that new [pot form] is rolling out?

And second of all, if you can just reiterate what your target is that you need to hit in order to get your operating -- target operating model from a revenue perspective.

And given the strength that you see in your current backlog, do you plan to get there sooner or later?

Or any timeframe on that would be helpful.

So, on the first question -- this is Tom -- I couldn't quite understand -- is it in regard to Tier 1's and regard to Ciena/Nortel?

Correct.

So, we have ongoing dialogue with Tier 1's on an ongoing basis.

We clearly are watching and trying to utilize the Ciena/Nortel integration to our advantage.

I think the biggest advantage will continue to play out as Tier 1's, almost all of them have a dual sourcing strategy.

And any of them that had Nortel and Ciena as source number one and number two are going to have to come up with a new second source strategy.

We certainly have engaged in conversations around that, but it's too early to tell you how any of those conversations will yield.

And I think that in addition to having the opportunity of being a viable second source, I think that there's ongoing questions around the financial strain that this integration will put under the new Ciena entity being a significant net debtor.

So we are going to continue to use those two points to our advantage and continue to press opportunities around the world for not only Tier 1's, but other customers.

In regard to achieving our long-term business model, I'm actually going to ask Ita to answer that.

Ita, as you know, is our incoming -- she's our current Controller and our incoming CFO to replace Duston.

And she will be responsible, with the rest of us, to assure that we achieve our long-term business model.

Ita?

Yes.

So, Chris, we haven't put any specific timing out there around the business model, but we do see that once we reach kind of a steady state business, that the model is still very achievable and that the 50% gross margin-ish levels are achievable.

They're highly dependent on kind of product mix and customer mix; you know, how fast do we grew the business?

We've had a reasonable track record over the last couple of years, adding new customers.

If we see a return to historical growth levels with those customers, then that would certainly put us on the right track to kind of achieving that 50-ish gross margin profile.

Another thing that should help us along would be growth in services revenues and stuff as our installed base matures; start seeing a little help from some hardware warranty and other higher margin service revenues that should also come on track there.

But, you know, in terms of specific timing, we'll have to see how it goes here; but we've certainly seen some pointers kind of heading in the right direction.

All right.

Thanks very much.

(Operator Instructions).

Well, thank you again for joining us on today's call.

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

As you know, Ita Brennan will be succeeding Duston as Chief Financial Officer at Infinera at the end of Q2, and I'm excited about having her join the senior executive team.

I also want to once again acknowledge and thank Duston for his tremendous contributions in leading and building the Infinera finance organization over the last four years.

We wish Duston the very best.

Thank you.

This does conclude today's conference call.

You may go ahead and disconnect.