February 2, 2012
Article from Seeking Alpha
Infinera (INFN) Q4 2011 Earnings Call February 2, 2012 5:00 PM ET
Operator
Welcome to the Fourth Quarter Year 2011 Investment Community Conference Call with Infinera Corporation. [Operator Instructions] Today's call is being recorded. [Operator Instructions] I would now like the turn the call over to Mr. Bob Blair of Infinera Investor Relations. Sir, you may begin.
Bob Blair
Thank you. Today's call will include projections and estimates that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements address the financial condition, results of operations, business initiatives, views on our market and customers, our products and our competitors' products and prospects of the company in the first quarter of fiscal year 2012 and beyond and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements.
Please refer to company's current press releases and SEC filings, including the company's annual report on Form 10-K filed on March 1, 2011, for more information on these risks and uncertainties.
Today's press releases, including fourth quarter and fiscal year 2011 results and associated financial tables and investor information summary will be available today 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 will also include certain non-GAAP financial measures. In our earnings release, we announced operating results for the fourth quarter and fiscal year 2011, which exclude the impact of restructuring and other related costs and noncash stock-based compensation expenses.
These non-GAAP financial measures are provided to facilitate meaningful year-over-year comparisons. Please see the exhibit of the earnings press release for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and an explanation of why these non-GAAP financial measures are useful and how they are used by management, which will be available today on the Investors section of our website.
On this call, we will also give guidance for the first quarter of fiscal year 2012. We have excluded noncash stock-based compensation expenses from this guidance because we cannot readily estimate the impact of our future stock price on future stock-based compensation expenses.
I will now turn the call over to Infinera's President and Chief Executive Officer, Tom Fallon.
Thomas Fallon
Good afternoon and thanks for joining us. With me are Chief Strategy Officer, Dave Welch; and CFO, Ita Brennan. I will spend a few minutes today commenting on the market, touch on our Q4 results and then provide an update on the reception to our new products before turning it over to Ita for a full review of our Q4 performance and Q1 outlook.
Internet bandwidth continues to expand with unabated growth, driven by video, mobile and cloud computing applications. Simultaneously, we are observing the transformation of the Internet into the primary and mission-critical telecommunications network of the future. We believe these trends are causing service providers to take a hard look at how they build and manage their next-generation transport infrastructure. This transformed transport infrastructure will need to: scale smoothly to multi-terabits of optical transmission, starting with a 100 Gig and quickly moving to terabit capacities; efficiently accommodate more fluid, cloud-based traffic demands and support mesh networking while maintaining the predictability and reliability of transport networks; and become a simpler and more cost-effective, requiring significantly less human resource, power, cooling and space per bit of traffic carry.
We believe that our recently launched DTN-X is optimized to accelerate this important transformation. Our competitors are starting to ship 100 Gig and present concepts and demos of 200 hundred Gig on a line card. Customers are testing our DTN-X today, with 500 Gig super-channel line cards, and we've already demonstrated technology to go to 1 terabit of super-channel capacity on a single card.
The DTN-X is the step function that service providers and in particular Tier 1 carriers need to properly prepare their networks for the high-capacity future. We believe that our new DTN-X, in conjunction with our enhanced DTN and existing ATN, all with control plane unification software, enable us to better address our traditional customer, as well as a new set of Tier 1 customers across verticals and geographies.
In Q4, we saw an active market in the cable, Tier 1 and bandwidth wholesale segments, while much of the industry conversation and our own go-to-market strategy centers around 100 Gig and greater than 100 Gig super-channel speeds. The 10 Gig market remains strong. It is a consensus view among analysts that 10 Gig will continue to grow in volume throughout the next several years. And we believe it will remain robust for another decade. In fact, we believe the strength of the 10 Gig market was a key factor enabling Infinera to achieve the #1 share position in the North America, terrestrial long-haul WDM transport and ROADM market, and advanced to #3 worldwide, based on Infenera's data for the third quarter of 2011.
Our view continues to be that 40 Gig will flatten out and serve as an interim solution as carriers continue to deploy more cost-effective 10 Gig for lower-capacity links and move to 100 Gig and 500 Gig super-channels for high-capacity links. Our opportunity is clearly defined, maintain leadership in the 10 Gig market and repeat that success with 100 Gig. We also continued to see an increasingly competitive pricing environment, which we expect to remain so as multiple vendors now compete with 3 DWDM transmission speeds: 10, 40 and 100 Gig. We are also seeing more [indiscernible] consolidation among our carrier customers, reducing the universe of customers and increasing the leverage of each customer as they become larger.
Our better-than-expected revenue performance in Q4 reflects continued the solid demand for DWDM equipment, along with the benefit of some unanticipated year-end budget spending by a number of our customers. We recovered well from the disruption caused to the optical supply chain by the historic flooding in Thailand, muting the negative impact to our performance that we had originally singled in November. Our operations team and supply partners worked tirelessly to deliver on our disaster recovery plan and ensure that our customers we're not hurt as a result of this catastrophe.
Although vast majority of our Q4 revenue was 10 Gig-related, we did achieve our first 40 Gig revenue addressing pent-up demand from key customers. We saw a broad balance across our customer base in the fourth quarter, with the top 5 customers accounting for approximately 40% of revenue. 2 cable companies were among our top 5 customers, including one in excess of 10%. I am also happy to report that one of our Tier 1 customers is one of our top 5 for the second consecutive quarter. As a reminder, our strategy has been to demonstrate our value in the international and regional networks of Tier 1 carriers with the DTN and then to leverage the multi-terabit scalability, efficiency and simplicity of the DTN-X to earn an insertion opportunity in their core backbone networks.
On the customer win front, we added 5 new customers in the fourth quarter. This gives us 16 customer additions in 2011, for a total roster of 98. Given that we were primarily shipping our 10 Gig DTN for most of the year, the growth and stability of our customer base is a testimony to the importance placed on the Infinera value proposition, anchored of course by our differentiated digital, optical approach to the network. In another validation, we now have 36 network customers, customers who have purchased multiple products from us across multiple applications.
On the new product front, customer interest in our new DTN-X, since its launch, has been very strong, which we believe is in recognition of the unique advantage Infinera's integrated platform brings to market, the only platform operating integrated DWDM and OTN switching functionality without compromise. As a reminder, this platform is fundamentally 3 products in one: A DWDM transmission system that will support the world's first 500 Gig super-channels based upon 100 Gig of FlexCoherent channels, upgradable in the future to 1 terabit super channels, unleashing highly efficient DWDM transmission capacity at the lowest operational cost; an integrated OTN switching system that will scale from 5 terabits in its first release to 100 terabits in the future and will enable operators to efficiently tame these large pipes, through the grooming of traffic down to 1 Gig granularity; and third, a system that is designed to be upgradeable to MPLS switching in the future, which will further enable convergence of the network for improved efficiency, reducing the number of interconnections between layers while preserving network investment.
Infinera pioneered the integration of OTN switching and DWDM with the DTN in 2005. Leveraging this unique learning for more than a decade of development in 7 years of field operation, the DTN-X integrates 3 technology-building blocks to deliver value and differentiate itself from the competition: 500 Gig photonic integrated circuits with FlexCoherent DSPs; custom switching ASICs and a multi-terabit nonblocking switch fabric; and intelligent GMPLS control plane software that scales to thousands of nodes.
The DTN-X design has been optimized to meet the needs of Tier 1 carriers and addresses their need to prepare for extremely, high capacity in dynamic networks, opening up a large and new market for Infinera. Competitors are following Infinera's architectural lead, announcing integrated solutions. However, unlike the DTN-X, design for this integration from day 1, competitors are taking existing systems and adding DWDM or switching after the fact. This approach results in a compromise between the switching and transmission capacity of these systems. This does not occur with the DTN-X. We believe that DTN-X will be the only platform on the market that will allow all components, including the optical functions based on our PIC technology, to be consistent with Moore's Law, delivering best-of-breed switching integrated with best-of-breed DWDM, without compromise.
The DTN-X is on track with lab trials in Q1 and volume production starting in Q2. We have begun to scale the production capability, and the 500 Gig PICs have been released to manufacturing. On the trial front, we have scheduled 4 DTN-X lab trials in our current quarter. All 4 of these trials are with Tier 1 carriers, reflecting a mix of both new prospects and current customers, with 2 located in North America and 2 located in Europe.
In addition to these trials, we've had numerous demonstrations of the full DTN-X system. While we are pleased with the early interest by the carriers in our DTN-X platform, it is important to note that Tier 1s often have extensive qualification testing and that a lab trial is only one of several steps toward revenue. In the quarters ahead, we will be -- report to you on additional trials and DTN-X wins.
Infinera's mission is to transform the way telecommunications transport networks are built. Our first step on this journey was the DTN, introduced in 2005. This platform delivered the world's only commercially available 100 Gig photonic integrated circuit, the world's first optical transport platform that integrated DWDM, OTN switching and a GMPLS control plane into one platform, and the world's first digital optical network.
Our customers have validated this architectural approach of integrating photonic elements, platforms and network layers, delivered network scale, efficiency, simplicity and reliability. We are now taking this decade of experience on our scaling and improving upon this architecture with the DTN-X. Infinera is delivering on a promise of the terabit age in 2012 and preparing our current and future customers to transform their networks to scale efficiently across the next decade. This is what the network will be.
Before turning it over to Ita for a detailed review of our Q4 performance and our outlook for Q1, I want to thank the Infinera team for their continued commitment to innovation and their focus on execution, allowing us to make sure we deliver on the promise of helping our customers be successful in their markets. I want to say a special thanks to our supply partners that helped us navigate a uniquely challenging Q4. And I will close by thanking our customers for their continued business and partnership as we move forward into terabit age together.
Ita will now provide you her review of Q4 and outlook for Q1. Ita?
Ita M. Brennan
Thanks, Tom. I'll review our Q4 actual results and then follow that up with our outlook for Q1 '12. This analysis our Q4 results and our guidance for Q1 '12 is based on non-GAAP. All references exclude noncash stock-based compensation expenses.
As I outlined on the September call, our revenue guidance for the fourth quarter had a wider range than normal due to uncertainty around the timing of revenue recognition on a number of large deals. The flooding in Thailand, which occurred just after our call, triggered notification from the supplier that they would not be able to achieve their previous supply commitments. This increased the uncertainty around our revenue guidance and required us to expand the range of potential outcomes in the subsequent press release.
As Tom mentioned in his remarks, we were successful in securing supply of impacted components and met most customer requirements. In addition, we completed and recognized revenues on all 3 large deployments that were targeted for completion at or around at the end of the quarter. This included recognizing the first revenue from our 40 Gig solution. As it often happens in the industry, we also had a number of customers approach us with some year-end budget money, and we were pleased to be in a position to accept and satisfy that demand in the quarter.
All of these factors resulted in total GAAP revenues in Q4 of $112 million compared to our original guidance of $100 million to $110 million and our revised guidance after the Thailand flood of $85 million to $105 million. Our revenues were broadly diversified across our customer base, with one greater than 10% customer in the quarter, which as Tom mentioned, was a cable provider. We saw a healthy mix of new footprint deployments combined with continued strong TAM shipments. International revenues amounted to $34 million or 30% of total revenues for the quarter. EMEA accounted for $24 million or 21%, with APAC and the other Americas representing 5% and 4%, respectively. Our service revenues for the quarter were $18.4 million, up from $13.6 million in Q3, reflecting the completion of a number of large deployments and the renewal of some significant entitlement contracts. Services margins were favorable at 68%. Overall gross margin in Q4 were 42%, up from 41% in Q3, reflecting continued strong TAM shipments, improved volumes and a healthy services mix.
Operating expenses for the quarter were $53 million, in line with our guidance and compared to $52 million in Q3. Looking forward to the March quarter, we expect operating expenses to be approximately $54 million, reflecting increased R&D testing and verification activities as the DTN-X product moves closer to final release.
Overall headcount for the quarter was 1,181 versus 1,151 in Q3. Head count addition is primarily related to direct labor for manufacturing and for the software verification adds for R&D.
Our operating loss for Q4 was $6.3 million. Other income and expense for Q4 was favorable at $0.1 million. Net loss for the quarter was $6.7 million, resulting in a loss per diluted share of $0.06 compared with our original guidance, which called for a loss of $0.08 to $0.12 per diluted share and compared to a loss of $9.2 million or $0.08 per diluted share in Q3.
Now turning to the balance sheet. Cash, cash equivalent, restricted cash and investments ended the quarter at $253 million versus $276 million in Q3. We used $5.1 million of cash from operations in Q4 versus generating $4.1 million in Q3. DSOs were 65 days up from 60 days in Q3, mainly due to shipments occurring later in the quarter as we work through supply issues.
Inventory turns were 2.9x versus 3.5x in Q3. As a result of executing on our disaster recovery process, some double sourcing occurred and we exited the quarter with higher DTN inventory levels. We expect to consume these inventories in the first and second quarters.
We also began production of components for the new DTN-X products and plan to ramp this production in the March quarter. As a result, we expect to drive increased inventory levels over the coming 2 quarters, in advance of recognizing revenue on the DTN-X in the second half of the year. Accounts payable days were 53 days, up from 43 days in Q3, again, reflecting delayed receipts from suppliers in the quarter.
Capital expenditures were $16.1 million in Q4 versus $5.9 million in Q3, for a total of $39 million for the year. As we look to 2012, we expect CapEx to average approximately $10 million per quarter for the first half of the year and then return to the lower levels in the second half.
Now turning to our guidance for Q1 '12 and beyond. We may experience some seasonality in the first quarter as service providers typically take time to plan their annual budgets and deployments. As a result, we've been somewhat cautious with our assumptions around TAM shipment volumes for the March quarter. In addition, reflecting recent success and new footprint wins, we plan to take revenue on a number of significant deployments of both new and existing customers, driving a stronger common equipment mix.
As mentioned above, we will ramp DTN-X rate of production in both our FAB and module factories this quarter. And depending on volume and yields, this may drive some gross margin volatility. As we look beyond Q1 '12, we see good overall demand for our products and strong interest in the DTN-X platform.
Revenue in the second quarter may be tempered by some existing customers choosing the DTN-X for their new footprint deployments. We expect that the shipments and acceptance criteria for these initial DTN-X deployment may push revenue recognition for this business into the September quarter.
With these factors in mind, the following guidance for Q1 is based on non-GAAP results and excludes any noncash stock-based compensation expenses: revenues of approximately $102 million to $108 million; gross margins of approximately 38% to 40%; operating expenses of approximately $54 million; operating and net loss of approximately $11 million to $15 million; and based on estimated average, weighted diluted shares of outstanding of 110 million, this would lead to a loss per share of approximately $0.10 to $0.14. Please note the basic share count is expected to be at $108 million for the quarter.
Operator, would you now please open up the call for questions? Thank you.
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