Form 8-K INFINERA Corp For: Nov 06
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): November 6, 2018
INFINERA CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 001-33486 | 77-0560433 | ||
(State or other jurisdiction of incorporation) | (Commission File Number) | (I.R.S. Employer Identification No.) | ||
140 Caspian Court | ||||
Sunnyvale, CA | 94089 | |||
(Address of principal executive offices) | (Zip Code) | |||
(408) 572-5200
(Registrant’s telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
¨ | Pre-commencement communication pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
¨ | Pre-commencement communication pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Item 2.02 | Results of Operations and Financial Condition. |
On November 6, 2018, Infinera Corporation (the “Company”) issued a press release announcing financial results for its third quarter ended September 29, 2018. The Company also posted on the Investor Relations section of its website (www.infinera.com) a CFO Commentary with respect to its third quarter ended September 29, 2018. Copies of the press release and CFO Commentary are furnished as Exhibits 99.1 and 99.2, respectively, to this Current Report on Form 8-K. Information on the Company’s website is not, and will not be deemed, a part of this report or incorporated into any other filings the Company makes with the Securities and Exchange Commission.
In accordance with General Instruction B.2 of Form 8-K, the information in Item 2.02 of this Current Report on Form 8-K, including Exhibit 99.1 and Exhibit 99.2, are being furnished under Item 2.02 and shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section, nor shall such information be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, regardless of the general incorporation language of such filing, except as shall be expressly set forth by specific reference in such a filing.
The press release and CFO Commentary furnished herewith as Exhibit 99.1 and Exhibit 99.2, respectively, refer to certain non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the comparable GAAP financial measures is contained in each exhibit.
Item 9.01 | Financial Statements and Exhibits. |
(d) | Exhibits. |
Exhibit No. | Description | |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
INFINERA CORPORATION | ||||
Date: November 6, 2018 | By: | /s/ BRAD D. FELLER | ||
Brad D. Feller Chief Financial Officer | ||||
Exhibit 99.1
Infinera Corporation Reports Third Quarter 2018 Financial Results
Sunnyvale, Calif., November 6, 2018 - Infinera Corporation, provider of Intelligent Transport Networks, today released financial results for its third quarter ended September 29, 2018.
GAAP revenue for the quarter was $200.4 million compared to $208.2 million in the second quarter of 2018 and $192.6 million in the third quarter of 2017.
GAAP gross margin for the quarter was 35.0% compared to 40.5% in the second quarter of 2018 and 35.2% in the third quarter of 2017. GAAP operating margin for the quarter was (12.6)% compared to (10.4)% in the second quarter of 2018 and (17.8)% in the third quarter of 2017.
GAAP net loss for the quarter was $(32.6) million, or $(0.21) per share, compared to a net loss of $(21.9) million, or $(0.14) per share, in the second quarter of 2018, and net loss of $(37.2) million, or $(0.25) per share, in the third quarter of 2017.
Non-GAAP gross margin for the quarter was 38.4% compared to 43.9% in the second quarter of 2018 and 39.1% in the third quarter of 2017. Non-GAAP operating margin for the quarter was (2.6)% compared to (0.7)% in the second quarter of 2018 and (7.8)% in the third quarter of 2017.
Non-GAAP net loss for the quarter was $(6.7) million, or $(0.04) per share, compared to a net loss of $(1.3) million, or $(0.01) per share, in the second quarter of 2018, and net loss of $(17.0) million, or $(0.11) per share, in the third quarter of 2017.
A further explanation of the use of non-GAAP financial information and a reconciliation of the non-GAAP financial measures to the GAAP equivalents can be found at the end of this release.
“In the third quarter we delivered financial results within our guidance ranges and now, with our acquisition of Coriant closed, are executing on our integration plan with intensity,” said Tom Fallon, Infinera CEO. “We remain committed to achieving substantial cost synergies, scaling our business by delivering compelling solutions to our extensive customer base of leading Tier-1s and ICPs, and driving vertical integration of our optical engine across our expanded end-to-end portfolio. While we have experienced a spending pause from certain customers as they evaluate the combined company, I believe this is temporary and that we will grow over the course of 2019. Newly armed with a breadth of significant customers and formidable scale, we are positioned to increasingly leverage our vertical integration advantage to drive profitability and a differentiated business model.”
Financial Outlook
Infinera's outlook for the quarter ending December 29, 2018 is as follows:
• | Revenue is expected to be $325 million +/- $10 million. |
• | GAAP gross margin is expected to be 28% +/- 200 bps. Non-GAAP gross margin is expected to be 30% +/- 200 bps. |
• | GAAP operating expenses are expected to be $160 million +/- $5 million. Non-GAAP operating expenses are expected to be $140 million +/- $5 million. |
• | GAAP operating margin is expected to be approximately (21)%. Non-GAAP operating margin is expected to be approximately (13)%. |
• | GAAP EPS is expected to be $(0.43) +/- $0.02. Non-GAAP EPS is expected to be $(0.28) +/- $0.02. |
Infinera's Financial Outlook does not include the potential impact of any restructuring-related activities, purchase price allocation adjustments related to the Coriant acquisition, strategic investments and other significant transactions that may be completed or announced after November 6, 2018. Actual results may differ materially from Infinera's Financial Outlook as a result of, among other things, the factors described under “Forward-Looking Statements” below.
Third Quarter 2018 Financial Commentary Available Online
A CFO Commentary reviewing Infinera's third quarter of 2018 financial results will be furnished to the SEC on Form 8-K and published on Infinera's Investor Relations website at investors.infinera.com. Analysts and investors are encouraged to review this commentary prior to participating in the conference call webcast.
Conference Call Information
Infinera will host a conference call for analysts and investors to discuss its results for the third quarter of 2018 and its outlook for the fourth quarter of 2018 today at 5:00 p.m. Eastern Time (2:00 p.m. Pacific Time). Interested parties may join the conference call by dialing 1-866-373-6878 (toll free) or 1-412-317-5101 (international). A live webcast of the conference call will also be accessible from the Events section of Infinera’s website at investors.infinera.com. Replay of the audio webcast will be available at investors.infinera.com approximately two hours after the end of the live call.
Contacts: | ||
Media: Anna Vue | Investors: Jeff Hustis | |
Tel. +1 (916) 595-8157 | Tel. +1 (408) 213-7150 | |
About Infinera
Infinera provides Intelligent Transport Networks, enabling carriers, cloud operators, governments and enterprises to scale network bandwidth, accelerate service innovation and automate optical network operations. Infinera’s end-to-end packet-optical portfolio is designed for long-haul, subsea, data center interconnect and metro applications. To learn more about Infinera visit www.infinera.com, follow us on Twitter @Infinera and read our latest blog posts at www.infinera.com/blog.
Forward-Looking Statements
This press release contains certain forward-looking statements based on current expectations, forecasts and assumptions that involve risks and uncertainties. Such forward-looking statements include, without limitation, Infinera’s expectations regarding the execution of its integration plan; Infinera's ability to achieve substantial cost synergies, scale its business, and drive vertical integration of its optical engine across its expanded end-to-end portfolio; Infinera's ability to grow over the course of 2019 and to drive profitability; Infinera’s expectations regarding the potential impact of restructuring-related activities and purchase price allocation adjustments related to the Coriant acquisition; and Infinera's expectations regarding its financial outlook for the fourth quarter of 2018.
Forward-looking statements can also be identified by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “should,” “will,” and "would” or similar words. These statements are based on information available to Infinera as of the date hereof and actual results could differ materially from those stated or implied due to risks and uncertainties. The risks and uncertainties that could cause Infinera’s results to differ materially from those expressed or implied by such forward-looking statements include, the combined company's ability to promptly and effectively integrate the businesses; Infinera's ability to realize synergies in a timely manner; market acceptance of the combined company's end-to-end portfolio; the diversion of management time on issues related to the acquisition and integration; delays in the development and introduction of new products or updates to existing products and market acceptance of these products; fluctuations in demand, sales cycles and prices for products and services, including discounts given in response to competitive pricing pressures, as well as the timing of purchases by Infinera's key customers; the effect that changes in product pricing or mix, and/or increases in component costs could have on Infinera’s gross margin; the effects of customer consolidation; Infinera’s ability to respond to rapid technological changes; aggressive business tactics by Infinera’s competitors; Infinera's reliance on single and limited source suppliers; Infinera’s ability to protect Infinera’s intellectual property; claims by others that Infinera infringes their intellectual property; the effect of global macroeconomic conditions on Infinera's business; war, terrorism, public health issues, natural disasters and other circumstances that could disrupt the supply, delivery or demand of Infinera's products; and other risks and uncertainties detailed in Infinera’s SEC filings from time to time. More information on potential factors that may impact Infinera’s business are set forth in its Quarterly Report on Form 10-Q for the quarter ended on June 30, 2018 as filed with the SEC on August 8, 2018, as well as subsequent reports filed with or furnished to the SEC from time to time. These reports are available on Infinera’s
website at www.infinera.com and the SEC’s website at www.sec.gov. Infinera assumes no obligation to, and does not currently intend to, update any such forward-looking statements.
Use of Non-GAAP Financial Information
In addition to disclosing financial measures prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP), this press release and the accompanying tables contain certain non-GAAP measures that exclude restructuring and related costs (credits), non-cash stock-based compensation expenses, amortization of debt discount on Infinera’s convertible senior notes, impairment charge and the gain on the sale related to non-marketable equity investments, amortization and impairment of acquired intangible assets, acquisition and integration costs related to Infinera's acquisitions of Coriant and Transmode AB, and certain purchase accounting adjustments related to Infinera's acquisition of Transmode AB, along with related tax effects. For a description of these non-GAAP financial measures and a reconciliation to the most directly comparable GAAP financial measures, please see the section titled, “GAAP to Non-GAAP Reconciliations.”
Infinera has included forward-looking non-GAAP information in this press release, including an estimate of certain non-GAAP financial measures for the fourth quarter of 2018 that exclude non-cash stock-based compensation expenses, acquisition and integration costs related to Infinera's acquisition of Coriant, and amortization of acquired intangible assets and related tax effects. Please see the section titled, “GAAP to Non-GAAP Reconciliations of Financial Outlook” below on specific adjustments.
Infinera believes these adjustments are appropriate to enhance an overall understanding of its underlying financial performance and also its prospects for the future and are considered by management for the purpose of making operational decisions. In addition, these results are the primary indicators management uses as a basis for its planning and forecasting of future periods. The presentation of this additional information is not meant to be considered in isolation or as a substitute for gross margin, operating margin, net loss, or basic and diluted net loss per share prepared in accordance with GAAP. Non-GAAP financial measures are not based on a comprehensive set of accounting rules or principles and are subject to limitations.
A copy of this press release can be found on the Investor Relations page of Infinera’s website at www.infinera.com.
Infinera and the Infinera logo are trademarks or registered trademarks of Infinera Corporation. All other trademarks used or mentioned herein belong to their respective owners.
Infinera Corporation
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 29, 2018 | September 30, 2017 | September 29, 2018 | September 30, 2017 | |||||||||||||
Revenue: | ||||||||||||||||
Product | $ | 167,030 | $ | 159,579 | $ | 513,947 | $ | 449,992 | ||||||||
Services | 33,383 | 33,001 | 97,374 | 94,931 | ||||||||||||
Total revenue | 200,413 | 192,580 | 611,321 | 544,923 | ||||||||||||
Cost of revenue: | ||||||||||||||||
Cost of product | 117,152 | 111,803 | 335,674 | 311,437 | ||||||||||||
Cost of services | 13,075 | 12,951 | 38,945 | 36,772 | ||||||||||||
Restructuring and related | 7 | — | 50 | — | ||||||||||||
Total cost of revenue | 130,234 | 124,754 | 374,669 | 348,209 | ||||||||||||
Gross profit | 70,179 | 67,826 | 236,652 | 196,714 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development | 50,658 | 56,616 | 165,497 | 169,076 | ||||||||||||
Sales and marketing | 26,073 | 27,824 | 86,286 | 86,662 | ||||||||||||
General and administrative | 18,415 | 17,634 | 54,616 | 53,556 | ||||||||||||
Restructuring and related | 191 | — | 1,708 | — | ||||||||||||
Total operating expenses | 95,337 | 102,074 | 308,107 | 309,294 | ||||||||||||
Loss from operations | (25,158 | ) | (34,248 | ) | (71,455 | ) | (112,580 | ) | ||||||||
Other income (expense), net: | ||||||||||||||||
Interest income | 292 | 857 | 1,818 | 2,470 | ||||||||||||
Interest expense | (2,160 | ) | (3,549 | ) | (8,344 | ) | (10,408 | ) | ||||||||
Other gain (loss), net: | (5,449 | ) | (80 | ) | (3,514 | ) | (462 | ) | ||||||||
Total other income (expense), net | (7,317 | ) | (2,772 | ) | (10,040 | ) | (8,400 | ) | ||||||||
Loss before income taxes | (32,475 | ) | (37,020 | ) | (81,495 | ) | (120,980 | ) | ||||||||
Provision for (benefit from) income taxes | 135 | 211 | (667 | ) | (459 | ) | ||||||||||
Net loss | (32,610 | ) | (37,231 | ) | (80,828 | ) | (120,521 | ) | ||||||||
Net loss per common share - basic and diluted: | $ | (0.21 | ) | $ | (0.25 | ) | $ | (0.53 | ) | $ | (0.82 | ) | ||||
Weighted average shares used in computing net loss | ||||||||||||||||
per common share - basic and diluted: | 153,492 | 148,777 | 152,028 | 147,367 | ||||||||||||
Infinera Corporation
GAAP to Non-GAAP Reconciliations
(In thousands, except percentages and per share data)
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||
September 29, 2018 | June 30, 2018 | September 30, 2017 | September 29, 2018 | September 30, 2017 | ||||||||||||||||||||||||||||||
Reconciliation of Gross Profit: | ||||||||||||||||||||||||||||||||||
U.S. GAAP as reported | $ | 70,179 | 35.0 | % | $ | 84,305 | 40.5 | % | $ | 67,826 | 35.2 | % | $ | 236,652 | 38.7 | % | $ | 196,714 | 36.1 | % | ||||||||||||||
Stock-based compensation(1) | 1,968 | 2,039 | 2,063 | 5,001 | 5,965 | |||||||||||||||||||||||||||||
Amortization of acquired intangible assets(2) | 4,876 | 4,943 | 5,390 | 15,160 | 15,305 | |||||||||||||||||||||||||||||
Acquisition and integration costs(3) | — | — | — | — | 46 | |||||||||||||||||||||||||||||
Restructuring and related(4) | 7 | 26 | — | 50 | — | |||||||||||||||||||||||||||||
Non-GAAP as adjusted | $ | 77,030 | 38.4 | % | $ | 91,313 | 43.9 | % | $ | 75,279 | 39.1 | % | $ | 256,863 | 42.0 | % | $ | 218,030 | 40.0 | % | ||||||||||||||
Reconciliation of Operating Expenses: | ||||||||||||||||||||||||||||||||||
U.S. GAAP as reported | $ | 95,337 | $ | 105,924 | $ | 102,074 | $ | 308,107 | $ | 309,294 | ||||||||||||||||||||||||
Stock-based compensation(1) | 9,399 | 10,005 | 10,104 | 29,393 | 29,458 | |||||||||||||||||||||||||||||
Amortization of acquired intangible assets(2) | 1,467 | 1,487 | 1,622 | 4,561 | 4,605 | |||||||||||||||||||||||||||||
Acquisition and integration costs(3) | 2,067 | — | — | 2,067 | 322 | |||||||||||||||||||||||||||||
Restructuring and related(4) | 191 | 1,680 | — | 1,708 | — | |||||||||||||||||||||||||||||
Intangible asset impairment(5) | — | — | — | — | 252 | |||||||||||||||||||||||||||||
Non-GAAP as adjusted | $ | 82,213 | $ | 92,752 | $ | 90,348 | $ | 270,378 | $ | 274,657 | ||||||||||||||||||||||||
Reconciliation of Loss from Operations: | ||||||||||||||||||||||||||||||||||
U.S. GAAP as reported | $ | (25,158 | ) | (12.6 | )% | $ | (21,619 | ) | (10.4 | )% | $ | (34,248 | ) | (17.8 | )% | $ | (71,455 | ) | (11.7 | )% | $ | (112,580 | ) | (20.7 | )% | |||||||||
Stock-based compensation(1) | 11,367 | 12,044 | 12,167 | 34,394 | 35,423 | |||||||||||||||||||||||||||||
Amortization of acquired intangible assets(2) | 6,343 | 6,430 | 7,012 | 19,721 | 19,910 | |||||||||||||||||||||||||||||
Acquisition and integration costs(3) | 2,067 | — | — | 2,067 | 368 | |||||||||||||||||||||||||||||
Restructuring and related(4) | 198 | 1,706 | — | 1,758 | — | |||||||||||||||||||||||||||||
Intangible asset impairment(5) | — | — | — | — | 252 | |||||||||||||||||||||||||||||
Non-GAAP as adjusted | $ | (5,183 | ) | (2.6 | )% | $ | (1,439 | ) | (0.7 | )% | $ | (15,069 | ) | (7.8 | )% | $ | (13,515 | ) | (2.2 | )% | $ | (56,627 | ) | (10.4 | )% | |||||||||
Reconciliation of Net Loss: | ||||||||||||||||||||||||||||||||||
U.S. GAAP as reported | $ | (32,610 | ) | $ | (21,938 | ) | $ | (37,231 | ) | $ | (80,828 | ) | $ | (120,521 | ) | |||||||||||||||||||
Stock-based compensation(1) | 11,367 | 12,044 | 12,167 | 34,394 | 35,423 | |||||||||||||||||||||||||||||
Amortization of acquired intangible assets(2) | 6,343 | 6,430 | 7,012 | 19,721 | 19,910 | |||||||||||||||||||||||||||||
Acquisition and integration costs(3) | 4,567 | — | — | 4,567 | 257 | |||||||||||||||||||||||||||||
Restructuring and related(4) | 198 | 1,706 | — | 1,758 | — | |||||||||||||||||||||||||||||
Intangible asset impairment(5) | — | — | — | — | 252 | |||||||||||||||||||||||||||||
Amortization of debt discount(6) | 1,578 | 1,892 | 2,643 | 6,249 | 7,734 | |||||||||||||||||||||||||||||
Gain on non-marketable equity investment(7) | (1,050 | ) | — | — | (1,050 | ) | — | |||||||||||||||||||||||||||
Impairment of non-marketable equity investment(7) | 4,260 | — | — | 4,260 | — | |||||||||||||||||||||||||||||
Income tax effects(8) | (1,395 | ) | (1,415 | ) | (1,543 | ) | (4,339 | ) | (4,467 | ) | ||||||||||||||||||||||||
Non-GAAP as adjusted | $ | (6,742 | ) | $ | (1,281 | ) | $ | (16,952 | ) | $ | (15,268 | ) | $ | (61,412 | ) | |||||||||||||||||||
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||
September 29, 2018 | June 30, 2018 | September 30, 2017 | September 29, 2018 | September 30, 2017 | |||||||||||||||||||||||||
Net Loss per Common Share - Basic and Diluted: | |||||||||||||||||||||||||||||
U.S. GAAP as reported | $ | (0.21 | ) | $ | (0.14 | ) | $ | (0.25 | ) | $ | (0.53 | ) | $ | (0.82 | ) | ||||||||||||||
Non-GAAP as adjusted | $ | (0.04 | ) | $ | (0.01 | ) | $ | (0.11 | ) | $ | (0.10 | ) | $ | (0.42 | ) | ||||||||||||||
Weighted Average Shares Used in Computing Net Loss per Common Share - Basic and Diluted: | 153,492 | 152,259 | 148,777 | 152,028 | 147,367 | ||||||||||||||||||||||||
____________________________
(1) | Stock-based compensation expense is calculated in accordance with the fair value recognition provisions of Financial Accounting Standards Board Accounting Standards Codification Topic 718, Compensation – Stock Compensation effective January 1, 2006. The following table summarizes the effects of stock-based compensation related to employees and non-employees (in thousands): |
Three Months Ended | Nine Months Ended | |||||||||||||||||||
September 29, 2018 | June 30, 2018 | September 30, 2017 | September 29, 2018 | September 30, 2017 | ||||||||||||||||
Cost of revenue | $ | 590 | $ | 624 | $ | 779 | $ | 1,092 | $ | 2,337 | ||||||||||
Research and development | 4,077 | 4,192 | 4,040 | 12,593 | 12,004 | |||||||||||||||
Sales and marketing | 2,744 | 3,046 | 3,025 | 8,688 | 9,024 | |||||||||||||||
General and administration | 2,578 | 2,767 | 3,039 | 8,112 | 8,431 | |||||||||||||||
9,989 | 10,629 | 10,883 | 30,485 | 31,796 | ||||||||||||||||
Cost of revenue - amortization from balance sheet* | 1,378 | 1,415 | 1,284 | 3,909 | 3,628 | |||||||||||||||
Total stock-based compensation expense | $ | 11,367 | $ | 12,044 | $ | 12,167 | $ | 34,394 | $ | 35,424 | ||||||||||
_____________________________
* | Stock-based compensation expense deferred to inventory in prior periods and recognized in the current period. |
(2) | Amortization of acquired intangible assets consists of amortization of developed technology, trade names, and customer relationships acquired in connection with the Transmode acquisition. U.S. GAAP accounting requires that acquired intangible assets are recorded at fair value and amortized over their useful lives. As this amortization is non-cash, Infinera has excluded it from its non-GAAP operating expenses, gross margin and net income measures. Management believes the amortization of acquired intangible assets is not indicative of ongoing operating performance and its exclusion provides a better indication of Infinera's underlying business performance. |
(3) | Acquisition and integration costs consist of legal, financial, employee-related costs and other professional fees incurred in connection with Infinera's recent acquisition of Coriant, which closed in October 2018, and the acquisition of Transmode AB, which closed during the third quarter of 2015. These amounts have been adjusted in arriving at Infinera's non-GAAP results because management believes that these expenses are non-recurring, not indicative of ongoing operating performance and their exclusion provides a better indication of Infinera's underlying business performance. |
(4) | Restructuring and related costs are related to Infinera's plan to restructure its worldwide operations, which was implemented during the fourth quarter of 2017. Management has excluded the impact of these charges in arriving at Infinera's non-GAAP results as they are non-recurring in nature and its exclusion provides a better indication of Infinera's underlying business performance. |
(5) | Intangible asset impairment is associated with previously acquired intangibles, which Infinera has determined that the carrying value will not be recoverable. Management has excluded the impact of this charge in arriving at Infinera's non-GAAP results because it is non-recurring, and management believes that these expenses are not indicative of ongoing operating performance. |
(6) | Under GAAP, certain convertible debt instruments that may be settled in cash on conversion are required to be separately accounted for as liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer's non-convertible debt borrowing rate. Accordingly, for GAAP purposes, Infinera is required to amortize as debt discount an amount equal to the fair value of the conversion option that was recorded in equity as interest expense on the $402.5 million in aggregate principal amount of its 2.125% convertible debt issuance in September 2018 due September 2024, and the $150 million in aggregate principal amount of its 1.75% convertible debt issuance in May 2013 due June 2018, over the term of the respective notes. Interest expense has been excluded from Infinera's non-GAAP results because management believes that this non-cash expense is not indicative of ongoing operating performance and provides a better indication of Infinera's underlying business performance. |
(7) | Management has excluded the impairment charge and the gain on the sale related to non-marketable equity investments in arriving at Infinera's non-GAAP results because it is non-recurring, and management believes that these expenses are not indicative of ongoing operating performance. |
(8) | The difference between the GAAP and non-GAAP tax is due to the net tax effects of the purchase accounting adjustments, acquisition-related costs and amortization of acquired intangible assets. |
Infinera Corporation
Condensed Consolidated Balance Sheets
(In thousands, except par values)
(Unaudited)
September 29, 2018 | December 30, 2017 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 416,406 | $ | 116,345 | ||||
Short-term investments | 30,480 | 147,596 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $866 in 2018 and $892 in 2017 | 153,901 | 126,152 | ||||||
Inventory | 211,945 | 214,704 | ||||||
Prepaid expenses and other current assets | 43,756 | 43,140 | ||||||
Total current assets | 856,488 | 647,937 | ||||||
Property, plant and equipment, net | 131,923 | 135,942 | ||||||
Intangible assets | 66,144 | 92,188 | ||||||
Goodwill | 180,986 | 195,615 | ||||||
Long-term investments | 850 | 36,129 | ||||||
Other non-current assets | 11,007 | 9,859 | ||||||
Total assets | $ | 1,247,398 | $ | 1,117,670 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 83,249 | $ | 58,124 | ||||
Accrued expenses | 43,324 | 39,782 | ||||||
Accrued compensation and related benefits | 35,738 | 45,751 | ||||||
Short-term debt | — | 144,928 | ||||||
Accrued warranty | 13,475 | 13,670 | ||||||
Deferred revenue | 42,724 | 72,421 | ||||||
Total current liabilities | 218,510 | 374,676 | ||||||
Long-term debt | 262,580 | — | ||||||
Accrued warranty, non-current | 17,007 | 17,239 | ||||||
Deferred revenue, non-current | 15,790 | 22,502 | ||||||
Deferred tax liability | 14,977 | 21,609 | ||||||
Other long-term liabilities | 14,217 | 16,279 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, $0.001 par value | ||||||||
Authorized shares - 25,000 and no shares issued and outstanding | — | — | ||||||
Common stock, $0.001 par value | ||||||||
Authorized shares - 500,000 as of September 29, 2018 and December 30, 2017 | ||||||||
Issued and outstanding shares - 153,988 as of September 29, 2018 and 149,471 as of December 30, 2017 | 154 | 149 | ||||||
Additional paid-in capital | 1,547,451 | 1,417,043 | ||||||
Accumulated other comprehensive income (loss) | (19,785 | ) | 6,254 | |||||
Accumulated deficit | (823,503 | ) | (758,081 | ) | ||||
Total stockholders’ equity | 704,317 | 665,365 | ||||||
Total liabilities and stockholders’ equity | $ | 1,247,398 | $ | 1,117,670 | ||||
Infinera Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended | ||||||||
September 29, 2018 | September 30, 2017 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net loss | $ | (80,828 | ) | $ | (120,521 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 50,339 | 49,391 | ||||||
Non-cash restructuring and related credits | (81 | ) | — | |||||
Amortization of debt discount and issuance costs | 6,752 | 8,399 | ||||||
Realized gain on sale of non-marketable equity investment | (1,050 | ) | — | |||||
Impairment on non-marketable equity investment | 4,260 | — | ||||||
Stock-based compensation expense | 34,394 | 35,424 | ||||||
Other loss | 214 | 622 | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | (27,728 | ) | 15,078 | |||||
Inventory | (926 | ) | (9,601 | ) | ||||
Prepaid expenses and other assets | 294 | (15,366 | ) | |||||
Accounts payable | 26,254 | 25,840 | ||||||
Accrued liabilities and other expenses | (30,754 | ) | (18,757 | ) | ||||
Deferred revenue | (8,669 | ) | 8,575 | |||||
Net cash used in operating activities | (27,529 | ) | (20,916 | ) | ||||
Cash Flows from Investing Activities: | ||||||||
Purchase of available-for-sale investments | (2,986 | ) | (122,249 | ) | ||||
Proceeds from sales of available-for-sale investments | 53,039 | 10,531 | ||||||
Proceeds from maturities of investments | 98,112 | 111,970 | ||||||
Proceeds from sale of non-marketable equity investment | 1,050 | — | ||||||
Purchase of property and equipment | (27,027 | ) | (50,247 | ) | ||||
Net cash provided by (used in) investing activities | 122,188 | (49,995 | ) | |||||
Cash Flows from Financing Activities: | ||||||||
Proceeds from issuance of debt, net | 391,431 | — | ||||||
Purchase of capped call transactions | (48,880 | ) | — | |||||
Repayment of debt | (150,000 | ) | — | |||||
Acquisition of noncontrolling interest | — | (471 | ) | |||||
Proceeds from issuance of common stock | 17,693 | 17,991 | ||||||
Minimum tax withholding paid on behalf of employees for net share settlement | (1,093 | ) | (963 | ) | ||||
Net cash provided by financing activities | 209,151 | 16,557 | ||||||
Effect of exchange rate changes on cash and restricted cash | (3,054 | ) | 3,855 | |||||
Net change in cash, cash equivalents and restricted cash | 300,756 | (50,499 | ) | |||||
Cash, cash equivalents and restricted cash at beginning of period | 121,486 | 177,580 | ||||||
Cash, cash equivalents and restricted cash at end of period(1) | $ | 422,242 | $ | 127,081 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid for income taxes, net of refunds | $ | 3,320 | $ | 4,159 | ||||
Cash paid for interest | $ | 1,332 | $ | 1,317 | ||||
Supplemental schedule of non-cash investing and financing activities: | ||||||||
Transfer of inventory to fixed assets | $ | 1,165 | $ | 3,110 | ||||
(1) Reconciliation of cash, cash equivalents and restricted cash to the condensed consolidated balance sheets:
September 29, 2018 | September 30, 2017 | ||||||
(In thousands) | |||||||
Cash and cash equivalents | $ | 416,406 | $ | 122,042 | |||
Short-term restricted cash | 402 | 740 | |||||
Long-term restricted cash | 5,434 | 4,299 | |||||
Total cash, cash equivalents and restricted cash | $ | 422,242 | $ | 127,081 | |||
Infinera Corporation
Supplemental Financial Information
(Unaudited)
Q4'16 | Q1'17 | Q2'17 | Q3'17 | Q4'17 | Q1'18 | Q2'18 | Q3'18 | |||||||||||||||||||||||||
GAAP Revenue ($ Mil) | $181.0 | $175.5 | $176.8 | $192.6 | $195.8 | $202.7 | $208.2 | $200.4 | ||||||||||||||||||||||||
GAAP Gross Margin % | 38.1 | % | 36.5 | % | 36.7 | % | 35.2 | % | 24.1 | % | 40.5 | % | 40.5 | % | 35.0 | % | ||||||||||||||||
Non-GAAP Gross Margin %(1) | 41.8 | % | 40.3 | % | 40.7 | % | 39.1 | % | 37.5 | % | 43.7 | % | 43.9 | % | 38.4 | % | ||||||||||||||||
Revenue Composition: | ||||||||||||||||||||||||||||||||
Domestic % | 53 | % | 57 | % | 63 | % | 59 | % | 53 | % | 64 | % | 58 | % | 49 | % | ||||||||||||||||
International % | 47 | % | 43 | % | 37 | % | 41 | % | 47 | % | 36 | % | 42 | % | 51 | % | ||||||||||||||||
Customers >10% of Revenue | 2 | 1 | 3 | 2 | 1 | 2 | 2 | 2 | ||||||||||||||||||||||||
Cash Related Information: | ||||||||||||||||||||||||||||||||
Cash from Operations ($ Mil) | ($5.0 | ) | $3.0 | ($3.0 | ) | ($20.9 | ) | ($1.0 | ) | ($14.1 | ) | $7.0 | ($20.4 | ) | ||||||||||||||||||
Capital Expenditures ($ Mil) | $10.4 | $14.7 | $24.5 | $11.0 | $7.8 | $8.0 | $13.5 | $5.5 | ||||||||||||||||||||||||
Depreciation & Amortization ($ Mil) | $15.7 | $16.0 | $16.6 | $16.8 | $16.6 | $17.0 | $16.3 | $17.1 | ||||||||||||||||||||||||
DSOs | 81 | 64 | 64 | 65 | 59 | 73 | 65 | 70 | ||||||||||||||||||||||||
Inventory Metrics: | ||||||||||||||||||||||||||||||||
Raw Materials ($ Mil) | $33.2 | $34.8 | $36.7 | $35.8 | $27.4 | $30.3 | $30.5 | $33.6 | ||||||||||||||||||||||||
Work in Process ($ Mil) | $74.5 | $81.1 | $91.6 | $84.3 | $59.6 | $66.5 | $61.6 | $56.4 | ||||||||||||||||||||||||
Finished Goods ($ Mil) | $125.3 | $118.0 | $117.7 | $122.7 | $127.7 | $119.1 | $127.2 | $121.9 | ||||||||||||||||||||||||
Total Inventory ($ Mil) | $233.0 | $233.9 | $246.0 | $242.8 | $214.7 | $215.9 | $219.3 | $211.9 | ||||||||||||||||||||||||
Inventory Turns(2) | 1.8 | 1.8 | 1.7 | 1.9 | 2.3 | 2.1 | 2.1 | 2.3 | ||||||||||||||||||||||||
Worldwide Headcount | 2,240 | 2,245 | 2,272 | 2,296 | 2,145 | 2,084 | 2,070 | 2,079 | ||||||||||||||||||||||||
Weighted Average Shares Outstanding (in thousands): | ||||||||||||||||||||||||||||||||
Basic | 144,770 | 145,786 | 147,538 | 148,777 | 149,412 | 150,333 | 152,259 | 153,492 | ||||||||||||||||||||||||
Diluted | 145,497 | 147,017 | 148,662 | 149,714 | 150,098 | 151,633 | 154,777 | 154,228 | ||||||||||||||||||||||||
(1) | Non-GAAP adjustments include restructuring and related costs, non-cash stock-based compensation expense, certain purchase accounting adjustments related to Infinera's acquisition of Transmode and amortization of acquired intangible assets. For a description of this non-GAAP financial measure, please see the section titled, “GAAP to Non-GAAP Reconciliations” of this press release for a reconciliation to the most directly comparable GAAP financial measures. |
(2) | Infinera calculates non-GAAP inventory turns as annualized non-GAAP cost of revenue before adjustments for restructuring and related costs, non-cash stock-based compensation expense, and certain purchase accounting adjustments, divided by the average inventory for the quarter. |
Infinera Corporation
GAAP to Non-GAAP Reconciliation of Financial Outlook
(In millions, except percentages and per share data)
(Unaudited)
The following amounts represent the midpoint of the expected range:
Q4'18 | ||||
Outlook | ||||
Reconciliation of Gross Margin: | ||||
U.S. GAAP | 28 | % | ||
Stock-based compensation | 1 | % | ||
Amortization of acquired intangible assets | 1 | % | ||
Non-GAAP | 30 | % | ||
Reconciliation of Operating Expenses: | ||||
U.S. GAAP | $ | 160 | ||
Stock-based compensation | (9 | ) | ||
Acquisition and integration costs | (2 | ) | ||
Amortization of acquired intangible assets | (9 | ) | ||
Non-GAAP | $ | 140 | ||
Reconciliation of Operating Margin: | ||||
U.S. GAAP | (21 | )% | ||
Stock-based compensation | 3 | % | ||
Acquisition and integration costs | 2 | % | ||
Amortization of acquired intangible assets | 3 | % | ||
Non-GAAP | (13 | )% | ||
Reconciliation of Net Loss per Common Share: | ||||
U.S. GAAP | $ | (0.43 | ) | |
Stock-based compensation | 0.06 | |||
Acquisition and integration costs | 0.04 | |||
Amortization of acquired intangible assets | 0.05 | |||
Non-GAAP | $ | (0.28 | ) | |
Exhibit 99.2
CFO Commentary - Third Quarter 2018 Financial Results
The following metrics and commentary are provided by management and should be reviewed in conjunction with our third quarter 2018 financial results press release, available on the Investor Relations section of our website at http://investors.infinera.com.
Third Quarter 2018 Financial Results
GAAP
(In millions, except per share amounts and percentages) | Q3'18 | Q2'18 | Q3'17 | Q/Q Change | Y/Y Change | |||||||||||||||
Revenue | $ | 200.4 | $ | 208.2 | $ | 192.6 | (4 | )% | 4 | % | ||||||||||
Product | 167.0 | 175.3 | 159.6 | (5 | )% | 5 | % | |||||||||||||
Service | 33.4 | 32.9 | 33.0 | 2 | % | 1 | % | |||||||||||||
Gross margin % | 35.0 | % | 40.5 | % | 35.2 | % | (5.5)pts | (0.2)pts | ||||||||||||
Research and development | 50.6 | 56.1 | 56.6 | (10 | )% | (11 | )% | |||||||||||||
Sales and marketing | 26.1 | 29.7 | 27.8 | (12 | )% | (6 | )% | |||||||||||||
General and administrative | 18.4 | 18.4 | 17.6 | — | % | 5 | % | |||||||||||||
Restructuring and related | 0.2 | 1.7 | — | (88 | )% | NMF* | ||||||||||||||
Total operating expenses | $ | 95.3 | $ | 105.9 | $ | 102.0 | (10 | )% | (7 | )% | ||||||||||
Operating margin % | (12.6 | )% | (10.4 | )% | (17.8 | )% | (2.2)pts | 5.2pts | ||||||||||||
Net loss | $ | (32.6 | ) | $ | (21.9 | ) | $ | (37.2 | ) | (49 | )% | 12 | % | |||||||
EPS | $ | (0.21 | ) | $ | (0.14 | ) | $ | (0.25 | ) | $ | (0.07 | ) | $ | 0.04 | ||||||
*NMF = Not meaningful
Non-GAAP
(In millions, except per share amounts and percentages) | Q3'18 | Q2'18 | Q3'17 | Q/Q Change | Y/Y Change | |||||||||||||||
Revenue | $ | 200.4 | $ | 208.2 | $ | 192.6 | (4 | )% | 4 | % | ||||||||||
Product | 167.0 | 175.3 | 159.6 | (5 | )% | 5 | % | |||||||||||||
Service | 33.4 | 32.9 | 33.0 | 2 | % | 1 | % | |||||||||||||
Gross margin % | 38.4 | % | 43.9 | % | 39.1 | % | (5.5)pts | (0.7)pts | ||||||||||||
Research and development | 46.6 | 52.0 | 52.6 | (10 | )% | (11 | )% | |||||||||||||
Sales and marketing | 21.7 | 25.2 | 23.1 | (14 | )% | (6 | )% | |||||||||||||
General and administrative | 13.9 | 15.6 | 14.6 | (11 | )% | (5 | )% | |||||||||||||
Total operating expenses | $ | 82.2 | $ | 92.8 | $ | 90.3 | (11 | )% | (9 | )% | ||||||||||
Operating margin % | (2.6 | )% | (0.7 | )% | (7.8 | )% | (1.9)pts | 5.2pts | ||||||||||||
Net loss | $ | (6.7 | ) | $ | (1.3 | ) | $ | (17.0 | ) | (415 | )% | 61 | % | |||||||
EPS | $ | (0.04 | ) | $ | (0.01 | ) | $ | (0.11 | ) | $ | (0.03 | ) | $ | 0.07 | ||||||
This CFO Commentary contains non-GAAP financial measures. The reconciliation of the GAAP to non-GAAP financial measures can be found at the end of this document.
Q3’18 Overview
(Note that this commentary does not incorporate the Coriant acquisition, which closed at the beginning of Q4’18)
In the third quarter of 2018, our revenue grew 4% year-over-year and declined 4% sequentially. In the quarter, we continued to see strong customer adoption of our ICE4-based products adding 16 new ICE4 customers primarily driven by the newest platforms, the AOFX-1200 and the XT-3600. Revenue came in at the lower end of our revenue guidance of $200 million to $220 million as we experienced a delay on an approximately $10 million order from a large internet content provider (“ICP”) customer. This order has since been received and shipped.
Through the first three quarters of 2018, we have outgrown the market and are driving strong leverage in our financial model, growing revenue faster than expenses while expanding gross margin, as compared to the first three quarters of 2017:
• | Revenue grew 12% |
• | GAAP gross profit grew 20%; non-GAAP gross profit grew 18% |
• | GAAP operating expenses were flat; non-GAAP operating expenses decreased 2% |
Revenue:
In the third quarter of 2018, our revenue growth versus the prior year was driven by strength from Tier-1s in our APAC region where we continued to expand with our largest customer in the region and also began recognizing revenue from a new large customer, the first piece of what could prove to be a large multi-year opportunity. In the third quarter of 2018, revenue from our Tier-1, Tier-2 and wholesale verticals (collectively, referred to in this document as “Service Providers”) accounted for approximately 60% of our overall revenue and was up nearly 13% sequentially and more than 8% year-over-year. Our sequential decline in the third quarter of 2018 was attributable to a combination of anticipated lower spend in cable and the aforementioned delay of a key ICP deal that was delayed from the third quarter to the fourth quarter, partially offset by incremental revenue in APAC in the third quarter as discussed above.
Services revenue increased 1% year-over-year as a result of higher deployment revenue from customers building new networks based on our ICE4-based products. In the third quarter of 2018, services revenue of $33.4 million was up 2% sequentially, primarily driven by higher on-going maintenance services due to the large installed base of customer networks.
We had two greater than 10% customers in the third quarter of 2018, a cable operator and a domestic Tier-1. Our top five customers consisted of a domestic Tier-1, an international Tier-1, two cable operators and an ICP.
Geographies
North America (49% of total revenue):
• | North America revenue in the third quarter of 2018 declined 14% year-over-year and 19% sequentially. Key year-over-year drivers were weaker spending from our largest Tier-1 customer in the region and lower revenue within the ICP vertical as key customers shifted their builds to international regions. Sequentially, the biggest driver was the anticipated decline in our cable business after a strong first half. |
International (51% of total revenue):
• | EMEA (30% of total revenue): In the third quarter of 2018, revenue in EMEA grew 1% year-over-year but declined 4% on a sequential basis. In the quarter, year-over-year growth was driven by the continued trend of one of our largest ICP customers continuing to invest in data center expansion in the region. We also enjoyed growth from certain Tier-2 customers and wholesalers, who invested in ICE4 and XTM II platforms despite weak seasonal spending patterns of our European customer base. On a sequential basis, the decline was largely driven by a weak seasonal spending pattern during the third quarter. |
• | APAC (18% of total revenue): APAC continued to be our strongest growth region in the third quarter of 2018, up more than 100% year-over-year and more than 80% sequentially. Spending from our largest historical customer in the region remained strong. In addition, we started to generate revenue from a new large Tier-1 customer in Southeast Asia and visibility on potentially winning additional multi-year opportunities, particularly in subsea and long-haul. Our two largest customers in the region are investing substantially in ICE4-based products and our Instant Bandwidth capabilities. |
• | Other Americas (LATAM) (3% of total revenue): Our LATAM business had a solid quarter with double digit percentage growth, both year-over-year and sequentially. This growth was driven by multiple ICE4 deployments for long-haul and subsea. |
Customer Verticals
• | Cable revenue was lower sequentially in the third quarter as expected given typical historic buying patterns within North American cable. In the quarter, we had one customer that accounted for 14% of our overall revenue and continued its investment in ICE4 solutions with ongoing deployments of AOFX-1200 after significant XT-3300 deployments in the first half of 2018. In addition, we enjoyed sequential revenue growth from a cable operator in Europe who is the largest customer for our XTM metro solutions. Additionally, our second largest cable customer in North America was one of the first adopters of our new XT-3600 solution. On a year-over-year basis, cable revenue declined slightly. |
• | Service Providers overall was our strongest performing vertical in the third quarter of 2018, accounting for approximately 60% of our overall revenue, with increases both year-over-year and sequentially. Strength in APAC was the primary driver of these results. AOFX-1200 is already seeing strong adoption from Service Providers and there is good interest in the recently released XT-3600. |
• | ICP results declined in the third quarter of 2018 year-over-year and sequentially. The year-over-year decline is driven by several customers who have still not refreshed their networks with our ICE4 solutions. The sequential decline was due to our largest customer completing an ICE4 European build out as well as the impact of the delay in certain customers upgrading to ICE4. |
Gross Margin (GAAP 35.0%; Non-GAAP 38.4%)
• | Our gross margin on a GAAP basis in the third quarter of 2018 was, as expected, lower on a sequential basis due to customer mix and a continued product mix skewed towards new footprint builds, many of which included Instant Bandwidth (“IBW”) enabled hardware with only minimal bandwidth actually turned up. New builds typically carry lower margins initially, especially those with IBW enabled hardware. As customers grow their networks utilizing IBW licenses, this contributes to both higher in period but also cumulative gross margins. |
• | Our gross margin on a non-GAAP basis in the third quarter of 2018 was at the higher end of our guidance range of 36% to 40%, due to a higher volume of follow on IBW licenses from previously deployed gear sold in the quarter. The reason for the sequential decline in non-GAAP gross margin is consistent with the GAAP gross margin discussion above. |
Operating Expenses (GAAP $95.3 million; Non-GAAP $82.2 million)
• | Our GAAP operating expenses in the third quarter of 2018 declined approximately 12% on a sequential basis as we continued to tightly control our spending in anticipation of the closure of the Coriant acquisition. Additionally, we had a one-time benefit from adjusting down our incentive compensation accruals for the year based on our revised financial forecast. The overall decline was partially offset by acquisition and integration costs incurred in the quarter. |
• | Our non-GAAP operating expenses in the third quarter of 2018 came in lower relative to our guidance range of $84 million to $88 million. This was primarily due to the one-time benefit from adjusting down our incentive compensation accruals for the year. |
Operating Margin (GAAP (12.6)%; Non-GAAP (2.6)%)
• | Our operating margin for the third quarter of 2018 on a GAAP basis declined sequentially primarily due to lower revenue and acquisition and integration costs. |
• | Our operating margin for the third quarter of 2018 on a non-GAAP basis was roughly in line with our guidance of (3)%. |
Earnings per Share (GAAP $(0.21); Non-GAAP $(0.04))
• | EPS for the third quarter of 2018 on a GAAP basis declined sequentially due to lower revenue and gross margin, along with an impairment of a non-marketable equity investment, and charges related to acquisition and integration costs. Having had lower interest expense since the maturity of our $150 million convertible senior notes on June 1, 2018, we issued new convertible senior notes in the third quarter of 2018 that resulted in interest expense being higher. |
• | EPS for the third quarter of 2018 on a non-GAAP basis was slightly better than the midpoint of our guidance of ($0.05). |
Balance Sheet and Cash Flow
(In millions) | Q3'18 | Q2'18 | Q3'17 | |||||||||
Cash, investments & restricted cash | $ | 453.6 | $ | 134.4 | $ | 316.0 | ||||||
Accounts receivable | $ | 153.9 | $ | 148.0 | $ | 137.1 | ||||||
Inventory | $ | 211.9 | $ | 219.3 | $ | 242.8 | ||||||
Cash provided by (used in) operations | $ | (20.4 | ) | $ | 7.0 | $ | (20.9 | ) | ||||
Capital expenditures | $ | 5.5 | $ | 13.5 | $ | 11.0 | ||||||
• | Cash, investments and restricted cash, increased $319.2 million in the third quarter of 2018 on a sequential basis. This increase was largely driven by net proceeds of $342.6 million from our convertible senior notes offering, net of capped call payments completed in the quarter. This increase was partially offset by $20.4 million of cash used in operations due to our lower financial results. |
• | Net accounts receivable in the third quarter of 2018 increased $5.9 million from the prior quarter primarily driven by a higher volume of shipments towards the end of the quarter. |
• | Net inventory decreased $7.4 million in the third quarter of 2018 on a sequential basis primarily due to reductions in inventory levels of previous generation products as customers continue to transition to our ICE4 products. |
• | Cash used in operations in the third quarter of 2018 was $20.4 million, stemming from an operating loss and negative changes in working capital. |
• | Capital Expenditures were $5.5 million, significantly lower versus prior periods in an effort to actively manage cash and rationalize capital investments. |
Forward-Looking Statements
This CFO Commentary contains a forward-looking statement based on current expectations, forecasts and assumptions that involve risks and uncertainties. Such forward-looking statement includes, without limitation, our expectations regarding a multi-year opportunity from a new large customer in APAC; and expectations regarding strong adoption by Service Providers of our AOFX-1200 and the recently released XT-3600. These statements are based on information available to us as of the date hereof and actual results could differ materially from those stated or implied due to risks and uncertainties. For a list of risks and uncertainties that could cause our results to differ materially from those expressed or implied by such forward-looking statement please refer to our third quarter of 2018 earnings release of the same date. More information on potential factors that may impact our business are set forth in its Quarterly Report on Form 10-Q for the quarter ended on June 30, 2018 as filed with the SEC on August 8, 2018, as well as subsequent reports filed with or furnished to the SEC from time to time. These reports are available on our website at www.infinera.com and the SEC’s website at www.sec.gov. We assume no obligation to, and do not currently intend to, update any such forward-looking statements.
Use of Non-GAAP Financial Information
This CFO Commentary contains references to the following non-GAAP financial measures: gross margin, operating expenses, operating margin, net loss and EPS. To supplement our financial results presented on a GAAP basis, we use the non-GAAP measures indicated above, which exclude restructuring and related costs (credits), non-cash stock-based compensation expenses, amortization of debt discount on our convertible senior notes, impairment
charge and the gain on the sale related to non-marketable equity investments, amortization and impairment of acquired intangible assets, acquisition and integration costs related to our acquisitions of Coriant and Transmode AB, and certain purchase accounting adjustments related to our acquisition of Transmode AB, along with related tax effects. We believe these adjustments are appropriate to enhance an overall understanding of our underlying financial performance and also our prospects for the future and are considered by management for the purpose of making operational decisions. In addition, these results are the primary indicators management uses as a basis for its planning and forecasting of future periods. The presentation of this additional information is not meant to be considered in isolation or as a substitute for net loss, basic and diluted net loss per share, gross margin or operating margin prepared in accordance with GAAP. Non-GAAP financial measures are not based on a comprehensive set of accounting rules or principles and are subject to limitations. For a description of these non-GAAP financial measures and a reconciliation to the most directly comparable GAAP financial measures, please see the section titled, “GAAP to Non-GAAP Reconciliations.”
Infinera Corporation
GAAP to Non-GAAP Reconciliations
(In thousands, except percentages and per share data)
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||
September 29, 2018 | June 30, 2018 | September 30, 2017 | September 29, 2018 | September 30, 2017 | ||||||||||||||||||||||||||||||
Reconciliation of Gross Profit: | ||||||||||||||||||||||||||||||||||
U.S. GAAP as reported | $ | 70,179 | 35.0 | % | $ | 84,305 | 40.5 | % | $ | 67,826 | 35.2 | % | $ | 236,652 | 38.7 | % | $ | 196,714 | 36.1 | % | ||||||||||||||
Stock-based compensation(1) | 1,968 | 2,039 | 2,063 | 5,001 | 5,965 | |||||||||||||||||||||||||||||
Amortization of acquired intangible assets(2) | 4,876 | 4,943 | 5,390 | 15,160 | 15,305 | |||||||||||||||||||||||||||||
Acquisition and integration costs(3) | — | — | — | — | 46 | |||||||||||||||||||||||||||||
Restructuring and related(4) | 7 | 26 | — | 50 | — | |||||||||||||||||||||||||||||
Non-GAAP as adjusted | $ | 77,030 | 38.4 | % | $ | 91,313 | 43.9 | % | $ | 75,279 | 39.1 | % | $ | 256,863 | 42.0 | % | $ | 218,030 | 40.0 | % | ||||||||||||||
Reconciliation of Operating Expenses: | ||||||||||||||||||||||||||||||||||
U.S. GAAP as reported | $ | 95,337 | $ | 105,924 | $ | 102,074 | $ | 308,107 | $ | 309,294 | ||||||||||||||||||||||||
Stock-based compensation(1) | 9,399 | 10,005 | 10,104 | 29,393 | 29,458 | |||||||||||||||||||||||||||||
Amortization of acquired intangible assets(2) | 1,467 | 1,487 | 1,622 | 4,561 | 4,605 | |||||||||||||||||||||||||||||
Acquisition and integration costs(3) | 2,067 | — | — | 2,067 | 322 | |||||||||||||||||||||||||||||
Restructuring and related(4) | 191 | 1,680 | — | 1,708 | — | |||||||||||||||||||||||||||||
Intangible asset impairment(5) | — | — | — | — | 252 | |||||||||||||||||||||||||||||
Non-GAAP as adjusted | $ | 82,213 | $ | 92,752 | $ | 90,348 | $ | 270,378 | $ | 274,657 | ||||||||||||||||||||||||
Reconciliation of Loss from Operations: | ||||||||||||||||||||||||||||||||||
U.S. GAAP as reported | $ | (25,158 | ) | (12.6 | )% | $ | (21,619 | ) | (10.4 | )% | $ | (34,248 | ) | (17.8 | )% | $ | (71,455 | ) | (11.7 | )% | $ | (112,580 | ) | (20.7 | )% | |||||||||
Stock-based compensation(1) | 11,367 | 12,044 | 12,167 | 34,394 | 35,423 | |||||||||||||||||||||||||||||
Amortization of acquired intangible assets(2) | 6,343 | 6,430 | 7,012 | 19,721 | 19,910 | |||||||||||||||||||||||||||||
Acquisition and integration costs(3) | 2,067 | — | — | 2,067 | 368 | |||||||||||||||||||||||||||||
Restructuring and related(4) | 198 | 1,706 | — | 1,758 | — | |||||||||||||||||||||||||||||
Intangible asset impairment(5) | — | — | — | — | 252 | |||||||||||||||||||||||||||||
Non-GAAP as adjusted | $ | (5,183 | ) | (2.6 | )% | $ | (1,439 | ) | (0.7 | )% | $ | (15,069 | ) | (7.8 | )% | $ | (13,515 | ) | (2.2 | )% | $ | (56,627 | ) | (10.4 | )% | |||||||||
Reconciliation of Net Loss: | ||||||||||||||||||||||||||||||||||
U.S. GAAP as reported | $ | (32,610 | ) | $ | (21,938 | ) | $ | (37,231 | ) | $ | (80,828 | ) | $ | (120,521 | ) | |||||||||||||||||||
Stock-based compensation(1) | 11,367 | 12,044 | 12,167 | 34,394 | 35,423 | |||||||||||||||||||||||||||||
Amortization of acquired intangible assets(2) | 6,343 | 6,430 | 7,012 | 19,721 | 19,910 | |||||||||||||||||||||||||||||
Acquisition and integration costs(3) | 4,567 | — | — | 4,567 | 257 | |||||||||||||||||||||||||||||
Restructuring and related(4) | 198 | 1,706 | — | 1,758 | — | |||||||||||||||||||||||||||||
Intangible asset impairment(5) | — | — | — | — | 252 | |||||||||||||||||||||||||||||
Amortization of debt discount(6) | 1,578 | 1,892 | 2,643 | 6,249 | 7,734 | |||||||||||||||||||||||||||||
Gain on non-marketable equity investment(7) | (1,050 | ) | — | — | (1,050 | ) | — | |||||||||||||||||||||||||||
Impairment of non-marketable equity investment(7) | 4,260 | — | — | 4,260 | — | |||||||||||||||||||||||||||||
Income tax effects(8) | (1,395 | ) | (1,415 | ) | (1,543 | ) | (4,339 | ) | (4,467 | ) | ||||||||||||||||||||||||
Non-GAAP as adjusted | $ | (6,742 | ) | $ | (1,281 | ) | $ | (16,952 | ) | $ | (15,268 | ) | $ | (61,412 | ) | |||||||||||||||||||
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||
September 29, 2018 | June 30, 2018 | September 30, 2017 | September 29, 2018 | September 30, 2017 | |||||||||||||||||||||||||
Net Loss per Common Share - Basic and Diluted: | |||||||||||||||||||||||||||||
U.S. GAAP as reported | $ | (0.21 | ) | $ | (0.14 | ) | $ | (0.25 | ) | $ | (0.53 | ) | $ | (0.82 | ) | ||||||||||||||
Non-GAAP as adjusted | $ | (0.04 | ) | $ | (0.01 | ) | $ | (0.11 | ) | $ | (0.10 | ) | $ | (0.42 | ) | ||||||||||||||
Weighted Average Shares Used in Computing Net Loss per Common Share - Basic and Diluted: | 153,492 | 152,259 | 148,777 | 152,028 | 147,367 | ||||||||||||||||||||||||
____________________________
(1) | Stock-based compensation expense is calculated in accordance with the fair value recognition provisions of Financial Accounting Standards Board Accounting Standards Codification Topic 718, Compensation – Stock Compensation effective January 1, 2006. The following table summarizes the effects of stock-based compensation related to employees and non-employees (in thousands): |
Three Months Ended | Nine Months Ended | |||||||||||||||||||
September 29, 2018 | June 30, 2018 | September 30, 2017 | September 29, 2018 | September 30, 2017 | ||||||||||||||||
Cost of revenue | $ | 590 | $ | 624 | $ | 779 | $ | 1,092 | $ | 2,337 | ||||||||||
Research and development | 4,077 | 4,192 | 4,040 | 12,593 | 12,004 | |||||||||||||||
Sales and marketing | 2,744 | 3,046 | 3,025 | 8,688 | 9,024 | |||||||||||||||
General and administration | 2,578 | 2,767 | 3,039 | 8,112 | 8,431 | |||||||||||||||
9,989 | 10,629 | 10,883 | 30,485 | 31,796 | ||||||||||||||||
Cost of revenue - amortization from balance sheet* | 1,378 | 1,415 | 1,284 | 3,909 | 3,628 | |||||||||||||||
Total stock-based compensation expense | $ | 11,367 | $ | 12,044 | $ | 12,167 | $ | 34,394 | $ | 35,424 | ||||||||||
_____________________________
* | Stock-based compensation expense deferred to inventory in prior periods and recognized in the current period. |
(2) | Amortization of acquired intangible assets consists of amortization of developed technology, trade names, and customer relationships acquired in connection with the Transmode acquisition. U.S. GAAP accounting requires that acquired intangible assets are recorded at fair value and amortized over their useful lives. As this amortization is non-cash, we have excluded it from its non-GAAP operating expenses, gross margin and net income measures. Management believes the amortization of acquired intangible assets is not indicative of ongoing operating performance and its exclusion provides a better indication of our underlying business performance. |
(3) | Acquisition and integration costs consist of legal, financial, employee-related costs and other professional fees incurred in connection with our recent acquisition of Coriant, which closed in October 2018, and the acquisition of Transmode AB, which closed during the third quarter of 2015. These amounts have been adjusted in arriving at our non-GAAP results because management believes that these expenses are non-recurring, not indicative of ongoing operating performance and their exclusion provides a better indication of our underlying business performance. |
(4) | Restructuring and related costs are related to our plan to restructure our worldwide operations, which was implemented during the fourth quarter of 2017. Management has excluded the impact of these charges in arriving at our non-GAAP results as they are non-recurring in nature and its exclusion provides a better indication of our underlying business performance. |
(5) | Intangible asset impairment is associated with previously acquired intangibles, which we have determined that the carrying value will not be recoverable. Management has excluded the impact of this charge in arriving at our non-GAAP results because it is non-recurring, and management believes that these expenses are not indicative of ongoing operating performance. |
(6) | Under GAAP, certain convertible debt instruments that may be settled in cash on conversion are required to be separately accounted for as liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer's non-convertible debt borrowing rate. Accordingly, for GAAP purposes, we are required to amortize as debt discount an amount equal to the fair value of the conversion option that was recorded in equity as interest expense on the $402.5 million in aggregate principal amount of our 2.125% convertible debt issuance in September 2018 due September 2024, and the $150 million in aggregate principal amount of our 1.75% convertible debt issuance in May 2013 due in June 2018, over the term of the respective notes. Interest expense has been excluded from our non-GAAP results because management believes that this non-cash expense is not indicative of ongoing operating performance and provides a better indication of our underlying business performance. |
(7) | Management has excluded the impairment charge and the gain on the sale related to non-marketable equity investments in arriving at our non-GAAP results because it is non-recurring, and management believes that these expenses are not indicative of ongoing operating performance. |
(8) | The difference between the GAAP and non-GAAP tax is due to the net tax effects of the purchase accounting adjustments, acquisition-related costs and amortization of acquired intangible assets. |