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Infinera: Infinera Corporation Reports Fourth Quarter and Fiscal Year 2008 Financial Results

^{Published on 2009-01-29 14:22:48, Last Modified on 2009-01-29 14:31:44 - Market Wire}
 

SUNNYVALE, CA--(Marketwire - January 29, 2009) - Infinera Corporation (NASDAQ: [ INFN ]), a leading provider of digital optical communications systems, today released financial results for the fourth quarter and fiscal year ended December 27, 2008.

GAAP Results for Q4 2008:

 -- GAAP revenues for the fourth quarter of 2008 were $99.3 million compared to $120.5 million in the third quarter of 2008 and $76.1 million in the fourth quarter of 2007. -- GAAP gross margins were 38% in the fourth quarter of 2008 compared to 45% in the third quarter of 2008 and 36% in the fourth quarter of 2007. -- Including non-cash stock-based compensation, the GAAP net loss was $6.7 million, or $0.07 per share, in the fourth quarter of 2008 compared to GAAP net income of $14.9 million, or $0.15 per diluted share, in the third quarter of 2008 and a GAAP net loss of $3.9 million or $0.04 per share in the fourth quarter of 2007. 

Adjusted GAAP / Invoiced Shipment Results for Q4 2008:

 -- Adjusted GAAP revenue for the fourth quarter of 2008 was $86.2 million compared to $80.9 million in the third quarter of 2008 and $93.4 million of invoiced shipments in the fourth quarter of 2007. -- Gross margins on an adjusted GAAP basis, excluding non-cash stock- based compensation, were 36% in the fourth quarter of 2008 compared to 42% in the third quarter of 2008 and 47% on an invoiced shipment basis in the fourth quarter of 2007. -- Excluding non-cash stock-based compensation, the net loss on an adjusted GAAP basis was $9.0 million, or $0.10 per basic share, for the fourth quarter of 2008 compared to net income of $0.0 million, or $0.0 per diluted share in the third quarter of 2008 and net income on an invoiced shipment basis of $15.9 million or $0.17 per diluted share in the fourth quarter of 2007. 

GAAP Results for Fiscal 2008:

 -- GAAP revenues for the year ended December 27, 2008 were $519.2 million compared to $245.9 million in 2007. -- GAAP gross margins were 45% in 2008 compared to 31% in 2007. -- Including non-cash stock-based compensation, GAAP net income was $78.7 million, or $0.81 per diluted share in 2008 compared to a GAAP net loss of $55.3 million, or $1.09 per share, in 2007. 

Adjusted GAAP / Invoiced Shipment Results for Fiscal 2008:

 -- Adjusted GAAP revenue for 2008 was $353.4 million compared to $309.3 million of invoiced shipments in 2007. -- Gross margins on an adjusted GAAP basis, excluding non-cash stock- based compensation, were 43% in 2008 compared to 41% on an invoiced shipment basis in 2007. -- Excluding non-cash stock-based compensation and warrant revaluation expenses, net income on an adjusted GAAP basis was $14.3 million or $0.15 per diluted share in 2008, compared to $24.1 million, or $0.37 per diluted share on an invoiced shipment basis in 2007. 

Footnote: For an explanation of our use of Adjusted GAAP and Invoiced Shipments measures and a full reconciliation of these measures to our GAAP results, please see the section of the accompanying tables titled "GAAP to Non-GAAP Invoiced Shipment and Adjusted GAAP Reconciliation."

New Incumbent Carrier win at OTE

In a separate release, the company announced that OTEGLOBE, the international division of Greek incumbent national carrier OTE, has selected Infinera as its DWDM supplier for its Pan-European Network. The win at OTE represents Infinera's fourth win with Tier 1 incumbent carriers, joining Deutsche Telecom and two other incumbents.

Management Commentary

"In the fourth quarter we saw continued customer win momentum, with seven new customers added in the quarter, including OTE," said Jagdeep Singh, president and chief executive officer of Infinera. "This resulted in strong top-line performance; however the common equipment associated with these deployments and additional expected new customer shipments in Q1 put downward pressure on our gross margins in the quarter.

"We believe our ongoing success at winning new customers reflects our increasingly strong position as a strategic supplier of optical transport equipment to a diverse set of customers," said Singh. "While calendar year 2009 is shaping up as a challenging one for the optical industry, we believe it will also be a year of significant long-term business opportunities for Infinera as carriers grapple with the strategic challenge of scaling their optical networks. With a strong balance sheet and established technology lead, we intend to continue our R&D investments to advance our DWDM leadership position for years to come."

The company also provided the following Q4 highlights regarding its customer base:

 -- The top 10 customers accounted for 72% of total revenue, the lowest concentration in the history of the company. -- The largest customer for the fourth quarter was an internet content provider at 23%. -- With the seven new customer additions, total customer count for the company is now at 56. -- Geographically, new customer wins for the quarter included three European-based customers including OTE, three from the Americas and one from Asia Pacific. -- 24 percent of Q4 revenue came from customers based in the EMEA region. -- For the first time in a single quarter, the company had an internet content provider, a wholesale carrier, a cable MSO and a tier one incumbent all ranked among its top 5 customers. 

Conference Call Information:

Infinera will host a conference call for analysts and investors to discuss its fourth quarter and fiscal year 2008 results today at 6:00 p.m. Eastern Time (3:00 p.m. Pacific Time). A live webcast of the conference call will also be accessible from the "Investor Relations" section of the company's website at [ www.infinera.com ]. Following the webcast, an archived version will be available on the website for 30 days. To hear the replay, parties in the United States and Canada should call 1-866-424-7870. International parties can access the replay at +1-203-369-0862.

About Infinera

Infinera provides Digital Optical Networking systems to telecommunications carriers worldwide. Infinera's systems are unique in their use of a breakthrough semiconductor technology: the Photonic Integrated Circuit (PIC). Infinera's systems and PIC technology are designed to provide optical networks with simpler and more flexible engineering and operations, faster time-to-service, and the ability to rapidly deliver differentiated services without reengineering their optical infrastructure. For more information, please visit [ www.infinera.com ].

Forward-Looking Statements

This press release contains forward-looking statements, including statements about the strong reception by our installed base and new customers for our products, our belief that we have continued customer win momentum, our belief regarding our increasingly strong position as a strategic supplier, our belief that our value proposition is resonating with customers and prospects, our belief that 2009 will be a year of significant long-term business opportunities for Infinera, and our belief that we may advance our DWDM leadership role for years to come. These forward-looking statements involve risks and uncertainties, as well as assumptions that if they do not fully materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The risks and uncertainties that could cause our results to differ materially from those expressed or implied by such forward-looking statements include our ability to react to trends and challenges in our business and the markets in which we operate; our ability to anticipate market needs and develop new or enhanced products to meet those needs; the adoption rate of our products; our ability to establish and maintain successful relationships with our customers; our ability to reduce customer concentration; our ability to compete in our industry; fluctuations in demand, sales cycles and prices for our products and services; shortages or price fluctuations in our supply chain; our ability to protect our intellectual property rights; general political, economic and market conditions and events; and other risks and uncertainties described more fully in our documents filed with or furnished to the Securities and Exchange Commission (SEC). More information about these and other risks that may impact Infinera's business are set forth in our annual report on Form 10-K, which was filed with the SEC on February 19, 2008, as well as subsequent reports filed with the SEC. All forward-looking statements in this press release are based on information available to us as of the date hereof, and we assume no obligation to update these forward-looking statements.

Non-GAAP and other Financial Measures

In addition to disclosing financial measures prepared in accordance with United States Generally Accepted Accounting Principles (GAAP), this press release and the accompanying tables contain certain non-GAAP and other financial measures that reflect invoiced shipments, adjusted GAAP revenue and exclude non-GAAP non-cash stock-based compensation. For a description of these non-GAAP financial measures, including the reasons why management uses each measure, and reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures, please see the section of the accompanying tables titled "GAAP to Non-GAAP Invoiced Shipment and Adjusted GAAP Reconciliation" as well as the accompanying notes on the use of certain non-GAAP measures. We anticipate disclosing forward-looking non-GAAP and other financial information in our conference call to discuss our fourth quarter of 2008 results, including an estimate of non-GAAP earnings for the first quarter of 2009 that excludes non-cash stock-based compensation expenses related to our equity awards and the right to purchase common stock under our Employee Stock Purchase Plan in the period.

A copy of this press release can be found on the investor relations page of Infinera's website at [ www.infinera.com ].

Infinera Corporation 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 GAAP Condensed Consolidated Statements of Operations (In thousands, except per share data) (Unaudited) Three Months Ended Twelve Months Ended -------------------------- -------------------------- December 27, December 29, December 27, December 29, 2008 2007 2008 2007 ------------ ------------ ------------ ------------ Revenue: Product $ 80,045 $ 832 $ 306,808 $ 8,107 Ratable product and related support and services 12,243 75,257 193,705 237,745 Services 7,056 - 18,699 - ------------ ------------ ------------ ------------ Total revenue 99,344 76,089 519,212 245,852 Cost of revenue(1): Cost of product 52,306 222 184,234 4,091 Cost of ratable product and related support and services 5,088 48,710 91,625 165,172 Cost of services 3,984 - 9,798 - ------------ ------------ ------------ ------------ Total cost of revenue 61,378 48,932 285,657 169,263 Gross profit 37,966 27,157 233,555 76,589 Operating expenses(1): Sales and marketing 10,985 10,689 43,262 32,721 Research and development 23,256 16,093 80,428 60,851 General and administrative 10,650 7,981 36,282 25,965 Amortization of intangible assets 39 37 150 148 ------------ ------------ ------------ ------------ Total operating expenses 44,930 34,800 160,122 119,685 ------------ ------------ ------------ ------------ Income (loss) from operations (6,964) (7,643) 73,433 (43,096) Other income (expense), net: Interest income 1,313 3,149 8,549 6,522 Interest expense - (2) (3) (2,251) Other gain (loss), net(2) (1,741) 733 (528) (16,249) ------------ ------------ ------------ ------------ Total other income (expense), net (428) 3,880 8,018 (11,978) Income (loss) before income taxes (7,392) (3,763) 81,451 (55,074) Provision for (benefit from) income taxes (704) 144 2,723 268 ------------ ------------ ------------ ------------ Net income (loss) $ (6,688) $ (3,907) $ 78,728 $ (55,342) ============ ============ ============ ============ Net income (loss) per common share: Basic $ (0.07) $ (0.04) $ 0.85 $ (1.09) ============ ============ ============ ============ Diluted $ (0.07) $ (0.04) $ 0.81 $ (1.09) ============ ============ ============ ============ Weighted average shares used in computing net income (loss) per share: Basic 93,449 87,672 92,427 50,732 ============ ============ ============ ============ Diluted 93,449 87,672 97,088 50,732 ============ ============ ============ ============ (1) The following table summarizes the effects of stock-based compensation related to employees, non-recourse notes and non-employees for the three and twelve months ended December 27, 2008 and December 29, 2007, respectively: Three Months Ended Twelve Months Ended -------------------------- -------------------------- December 27, December 29, December 27, December 29, 2008 2007 2008 2007 ------------ ------------ ------------ ------------ Cost of revenue $ 308 $ 156 $ 1,086 $ 410 Research and development 1,821 1,315 6,543 3,751 Sales and marketing 1,176 732 4,440 1,854 General and administration 1,933 1,282 7,463 3,314 ------------ ------------ ------------ ------------ 5,238 3,485 19,532 9,329 Cost of revenue - amortization from balance sheet* 738 198 4,287 327 ------------ ------------ ------------ ------------ Total stock-based compensation expense $ 5,976 $ 3,683 $ 23,819 $ 9,656 ============ ============ ============ ============ * Stock-based compensation expense deferred to inventory and deferred inventory costs in prior periods and recognized in the current period. (2) The following table summarizes the remeasurement of our freestanding preferred stock warrants under FAS 150: Three Months Ended Twelve Months Ended -------------------------- -------------------------- December 27, December 29, December 27, December 29, 2008 2007 2008 2007 ------------ ------------ ------------ ------------ Other gain (loss) $ - $ - $ - $ (19,761) Infinera Corporation GAAP to Non-GAAP Invoiced Shipment and Adjusted GAAP Reconciliation (In thousands, except per share data) (Unaudited) Three Months Ended December 27, 2008 ------------------------------------------------------------- Adjusted Adjusted GAAP Adjusted GAAP Excluding Deferral GAAP Stock Stock GAAP Adjustments Results Comp Comp --------- --------- --------- --------- --------- Revenue Product and ratable revenue $ 92,288 $ (13,102) (a) $ 79,186 $ - $ 79,186 Services revenue 7,056 - 7,056 - 7,056 --------- --------- --------- --------- --------- Total revenue 99,344 (13,102) 86,242 - 86,242 Cost of revenue 61,378 (4,951) (d) 56,427 (904) (g) 55,523 --------- --------- --------- --------- --------- Gross profit 37,966 (8,151) 29,815 904 30,719 Gross margin 38% 36% Operating expenses 44,930 - 44,930 (4,930) (g) 40,000 --------- --------- --------- --------- --------- Income (loss) from operations (6,964) (8,151) (15,115) 5,834 (9,281) Other income (expense), net (428) - (428) - (428) --------- --------- --------- --------- --------- Income (loss) before income taxes (7,392) (8,151) (15,543) 5,834 (9,709) Provision for (benefit from) income taxes (704) - (704) - (704) --------- --------- --------- --------- --------- Net income (loss) $ (6,688) $ (8,151) $ (14,839) $ 5,834 $ (9,005) ========= ========= ========= ========= ========= Net income (loss) per common share: Basic $ (0.07) $ (0.10) ========= ========= Diluted $ (0.07) $ (0.09)* ========= ========= Weighted average shares used in computing net income (loss) per common share: Basic 93,449 93,449 ========= ========= Diluted 93,449 97,167* ========= ========= * Diluted shares used to calculate net loss per share on an Adjusted GAAP basis provided for informational purposes only. Three Months Ended September 27, 2008 ------------------------------------------------------------- Adjusted Adjusted GAAP Adjusted GAAP Excluding Deferral GAAP Stock Stock GAAP Adjustments Results Comp Comp --------- --------- --------- --------- --------- Revenue Product and ratable revenue $ 115,625 $ (39,588) (b) $ 76,037 $ - $ 76,037 Services revenue 4,881 - 4,881 - 4,881 --------- --------- --------- --------- --------- Total revenue 120,506 (39,588) 80,918 - 80,918 Cost of revenue 66,268 (18,338) (e) 47,930 (1,270) (g) 46,660 --------- --------- --------- --------- --------- Gross profit 54,238 (21,250) 32,988 1,270 34,258 Gross margin 45% 42% Operating expenses 41,013 - 41,013 (5,076) (g) 35,937 --------- --------- --------- --------- --------- Income (loss) from operations 13,225 (21,250) (8,025) 6,346 (1,679) Other income (expense), net 1,712 - 1,712 - 1,712 --------- --------- --------- --------- --------- Income (loss) before provision for income taxes 14,937 (21,250) (6,313) 6,346 33 Provision for income taxes - - - - - --------- --------- --------- --------- --------- Net income (loss) $ 14,937 $ (21,250) $ (6,313) $ 6,346 $ 33 ========= ========= ========= ========= ========= Net income (loss) per common share: Basic $ 0.16 $ 0.00 ========= ========= Diluted $ 0.15 $ 0.00 ========= ========= Weighted average shares used in computing net income (loss) per common share: Basic 92,888 92,888 ========= ========= Diluted 97,208 97,208 ========= ========= Infinera Corporation GAAP to Non-GAAP Invoiced Shipment and Adjusted GAAP Reconciliation (In thousands, except per share data) (Unaudited) Three Months Ended December 29, 2007 ------------------------------------------------------------- Non-GAAP Invoiced Shipments Non-GAAP Excluding Deferral Invoiced Stock Stock GAAP Adjustments Shipments Comp Comp --------- --------- --------- --------- --------- Revenue $ 76,089 $ 17,287 (a) $ 93,376 $ - $ 93,376 Cost of revenue 48,932 1,735 (d) 50,667 (965) (g) 49,702 --------- --------- --------- --------- --------- Gross profit 27,157 15,552 42,709 965 43,674 Gross margin 36% 47% Operating expenses 34,800 - 34,800 (3,329) (g) 31,471 --------- --------- --------- --------- --------- Income (Loss) from operations (7,643) 15,552 7,909 4,294 12,203 Other income (expense), net 3,880 - 3,880 - 3,880 --------- --------- --------- --------- --------- Income (Loss) before provision for income taxes (3,763) 15,552 11,789 4,294 16,083 Provision for income taxes 144 - 144 - 144 --------- --------- --------- --------- --------- Net income (loss) $ (3,907) $ 15,552 $ 11,645 $ 4,294 $ 15,939 ========= ========= ========= ========= ========= Net income (loss) per common share: Basic $ (0.04) $ 0.18 ========= ========= Diluted $ (0.04) $ 0.17 ========= ========= Weighted average shares used in computing net income (loss) per common share: Basic 87,672 87,672 ========= ========= Diluted 87,672 95,317 ========= ========= Twelve Months Ended December 27, 2008 ------------------------------------------------------------- Adjusted Adjusted GAAP Adjusted GAAP Excluding Deferral GAAP Stock Stock GAAP Adjustments Results Comp Comp --------- --------- --------- --------- --------- Revenue Product and ratable revenue $ 500,513 $(165,787) (c) $ 334,726 $ - $ 334,726 Services revenue 18,699 - 18,699 - 18,699 --------- --------- --------- --------- --------- Total revenue 519,212 (165,787) 353,425 - 353,425 Cost of revenue 285,657 (78,401) (f) 207,256 (4,491) (g) 202,765 --------- --------- --------- --------- --------- Gross profit 233,555 (87,386) 146,169 4,491 150,660 Gross margin 45% 43% Operating expenses 160,122 - 160,122 (18,446) (g) 141,676 --------- --------- --------- --------- --------- Income (loss) from operations 73,433 (87,386) (13,953) 22,937 8,984 Other income (expense), net 8,018 - 8,018 - 8,018 --------- --------- --------- --------- --------- Income (loss) before provision for income taxes 81,451 (87,386) (5,935) 22,937 17,002 Provision for income taxes 2,723 - 2,723 - 2,723 --------- --------- --------- --------- --------- Net income (loss) $ 78,728 $ (87,386) $ (8,658) $ 22,937 $ 14,279 ========= ========= ========= ========= ========= Net income (loss) per common share: Basic $ 0.85 $ 0.15 ========= ========= Diluted $ 0.81 $ 0.15 ========= ========= Weighted average shares used in computing net income (loss) per common share: Basic 92,427 92,427 ========= ========= Diluted 97,088 97,088 ========= ========= Infinera Corporation GAAP to Non-GAAP Invoiced Shipment and Adjusted GAAP Reconciliation (In thousands, except per share data) (Unaudited) Twelve Months Ended December 29, 2007 ------------------------------------------------------------- Non-GAAP Invoiced Shipments Non-GAAP Excluding Deferral Invoiced Stock Stock GAAP Adjustments Shipments Comp Comp --------- --------- --------- --------- --------- Revenue $ 245,852 $ 63,484 (c) $ 309,336 $ - $ 309,336 Cost of revenue 169,263 14,369 (f) 183,632 (1,661) (g) 181,971 --------- --------- --------- --------- --------- Gross profit 76,589 49,115 125,704 1,661 127,365 Gross margin 31% 41% Operating expenses 119,685 - 119,685 (8,919) (g) 110,766 --------- --------- --------- --------- --------- Income (Loss) from operations (43,096) 49,115 6,019 10,580 16,599 Other income (expense), net (11,978) - (11,978) 19,761 (h) 7,783 --------- --------- --------- --------- --------- Income (Loss) before provision for income taxes (55,074) 49,115 (5,959) 30,341 24,382 Provision for income taxes 268 - 268 - 268 --------- --------- --------- --------- --------- Net income (loss) $ (55,342) $ 49,115 $ (6,227) $ 30,341 $ 24,114 ========= ========= ========= ========= ========= Net income (loss) per common share: Basic $ (1.09) $ 0.48 ========= ========= Diluted $ (1.09) $ 0.37 ========= ========= Weighted average shares used in computing net income (loss) per common share: Basic 50,732 50,732 ========= ========= Diluted 50,732 64,785 ========= ========= 

Use of Non-GAAP Invoiced Shipments / Adjusted GAAP Information:

Prior to the second quarter of 2008, in order to supplement our condensed consolidated financial statements presented on a GAAP basis, Infinera used invoiced shipment measures of operating results, net income and net income per share, which are adjusted to reflect invoiced shipments and exclude non-GAAP stock-based compensation and warrant revaluation expenses. Invoiced shipment measures reflected GAAP results adjusted for changes in our deferred revenue and deferred cost of inventory balances from the prior period. We further presented non-GAAP measures of operating results, net income and net income per share, which included invoiced shipments and excluded non-GAAP stock-based compensation expense. These adjustments to our GAAP results were made to provide both management and investors with an understanding of Infinera's underlying operating results and trends as they would have been reflected had we established vendor specific objective evidence (VSOE) of fair value for our service offerings and not been required to recognize revenue ratably.

Effective April 2008, we had established VSOE of fair value for most of our service offerings. Therefore beginning in the second quarter of 2008, we have used adjusted GAAP measures of operating results and net income. Adjusted GAAP results reflect our GAAP results reduced for amounts released from deferred revenue and deferred cost of inventory balances recorded prior to the second quarter of 2008 and previously reported in our invoiced shipment results. Deferred services and deferred ratable and product revenue and cost amounts recorded after March 29, 2008 have not been adjusted and are recognized on a GAAP basis in arriving at the adjusted GAAP results. We have continued to present non-GAAP measures of operating results, net income and net income per share, which include adjusted GAAP results and exclude non-GAAP stock-based compensation expense.

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 our 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 income or basic and diluted net income 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) Adjustment amount represents the release of ratable and product deferred revenue amounts related to periods prior to March 29, 2008 as these amounts have been previously reported as invoiced shipments. No adjustment has been made for changes in services deferred revenue as these amounts relate to future service deliverables and are appropriately deferred. Deferred ratable and product amounts recorded after March 29, 2008 have not been adjusted as these amounts are recognized on a GAAP basis in arriving at the adjusted GAAP results.

The deferred revenue adjustments recorded above are reconciled to the deferred revenue balance on our balance sheet in the table below:

 Three Months Ended December Three Months Ended December 27, 2008 29, 2007 ---------------------------------------------- --------- Pre Mar 29, Post Mar 29, 2008 2008 Ratable and Ratable and Deferred Product Product Revenue Revenue Revenue Services Total Total ----------- ----------- --------- ---------- --------- (In thousands) Beginning balance $ 21,752 $ 4,296 $ 6,408 $ 32,456 $ 157,150 Additions to deferred revenue - 1,086 7,577 8,663 92,544 Amortization to revenue (13,102) (1,205) (4,405) (18,712) (75,257) ----------- ----------- --------- ---------- --------- Ending balance $ 8,650 $ 4,177 $ 9,580 $ 22,407 $ 174,437 =========== =========== ========= ========== ========= Change in deferred revenue balance $ (13,102) $ (119) $ 3,172 $ (10,049) $ 17,287 =========== =========== ========= ========== ========= 

(b) Adjustment amount represents the release of ratable and product deferred revenue amounts related to periods prior to March 29, 2008 as these amounts have been previously reported as invoiced shipments. No adjustment has been made for changes in services deferred revenue as these amounts relate to future service deliverables and are appropriately deferred. Deferred ratable and product amounts recorded after March 29, 2008 have not been adjusted as these amounts are recognized on a GAAP basis in arriving at the adjusted GAAP results.

The deferred revenue adjustments recorded above are reconciled to the deferred revenue balance on our balance sheet in the table below:

 Three Months Ended September 27, 2008 ---------------------------------------------- Pre Mar 29, Post Mar 29, 2008 2008 Ratable and Ratable and Deferred Product Product Revenue Revenue Revenue Services Total ----------- ----------- --------- ---------- (In thousands) Beginning balance $ 61,340 $ 3,113 $ 5,456 $ 69,909 Additions to deferred revenue - 2,075 3,567 5,642 Amortization to revenue (39,588) (891) (2,616) (43,095) ----------- ----------- --------- ---------- Ending balance $ 21,752 $ 4,297 $ 6,407 $ 32,456 =========== =========== ========= ========== Change in deferred revenue balance $ (39,588) $ 1,184 $ 951 $ (37,453) =========== =========== ========= ========== 

(c) Adjustment amount represents the release of ratable and product deferred revenue amounts related to periods prior to March 29, 2008 as these amounts have been previously reported as invoiced shipments. No adjustment has been made for changes in services deferred revenue as these amounts relate to future service deliverables and are appropriately deferred. Deferred ratable and product amounts recorded after March 29, 2008 have not been adjusted as these amounts are recognized on a GAAP basis in arriving at the adjusted GAAP results.

The deferred revenue adjustments recorded above are reconciled to the deferred revenue balance on our balance sheet in the table below:

 Twelve Months Ended December Twelve Months Ended December 27, 2008 29, 2007 ----------------------------------------------- --------- Pre Mar 29, Post Mar 29, 2008 2008 Ratable and Ratable and Deferred Product Product Revenue Revenue Revenue Services Total Total ----------- ----------- --------- ---------- --------- (In thousands) Beginning balance $ 174,437 $ - $ - $ 174,437 $ 110,953 Additions to deferred revenue 29,639 8,140 19,356 57,135 301,229 Amortization to revenue (195,426) (3,963) (9,776) (209,165) (237,745) ----------- ----------- --------- ---------- --------- Ending balance $ 8,650 $ 4,177 $ 9,580 $ 22,407 $ 174,437 =========== =========== ========= ========== ========= Change in deferred revenue balance $ (165,787) $ 4,177 $ 9,580 $ (152,030) $ 63,484 =========== =========== ========= ========== ========= 

(d) Adjustment amount represents the release of ratable and product deferred cost amounts related to periods prior to March 29, 2008 as these amounts have been previously included as invoiced shipments. Deferred ratable and product amounts recorded after March 29, 2008 have not been adjusted as these amounts are recognized on a GAAP basis in arriving at the adjusted GAAP results.

The deferred cost of inventory adjustments recorded above are reconciled to the deferred cost of inventory balance on our balance sheet in the table below:

 Three Months Ended Three Months Ended December 27, December 2008 29, 2007 ----------------------------------- ---------- Pre Mar 29, Post Mar 29, 2008 2008 Ratable and Ratable and Deferred Product Product Inventory Cost Cost Cost Total Total ----------- ----------- --------- ---------- (In thousands) Beginning balance $ 8,172 $ 1,120 $ 9,292 $ 79,887 Additions to deferred cost of revenue - 32 32 39,580 Amortized to cost of revenue (4,951) (136) (5,087) (37,845) ----------- ----------- --------- ---------- Ending balance $ 3,221 $ 1,016 $ 4,237 $ 81,622 =========== =========== ========= ========== Change in deferred inventory cost balance $ (4,951) $ (104) $ (5,055) $ 1,735 =========== =========== ========= ========== 

(e) Adjustment amount represents the release of ratable and product deferred cost amounts related to periods prior to March 29, 2008 as these amounts have been previously included as invoiced shipments. Deferred ratable and product amounts recorded after March 29, 2008 have not been adjusted as these amounts are recognized on a GAAP basis in arriving at the adjusted GAAP results.

The deferred cost of inventory adjustments recorded above are reconciled to the deferred cost of inventory balance on our balance sheet in the table below:

 Three Months Ended September 27, 2008 ----------------------------------- Pre Mar 29, Post Mar 29, 2008 2008 Ratable and Ratable and Deferred Product Product Inventory Cost Cost Cost Total ----------- ----------- --------- (In thousands) Beginning balance $ 26,510 $ 450 $ 26,960 Additions to deferred cost of revenue - 710 710 Amortized to cost of revenue (18,338) (40) (18,378) ----------- ----------- --------- Ending balance $ 8,172 $ 1,120 $ 9,292 =========== =========== ========= Change in deferred inventory cost balance $ (18,338) $ 670 $ (17,668) =========== =========== ========= 

(f) Adjustment amount represents the release of ratable and product deferred cost amounts related to periods prior to March 29, 2008 as these amounts have been previously included as invoiced shipments. Deferred ratable and product amounts recorded after March 29, 2008 have not been adjusted as these amounts are recognized on a GAAP basis in arriving at the adjusted GAAP results.

The deferred cost of inventory adjustments recorded above are reconciled to the deferred cost of inventory balance on our balance sheet in the table below:

 Twelve Months Ended Twelve Months Ended December 27, December 2008 29, 2007 ----------------------------------- ---------- Pre Mar 29, Post Mar 29, 2008 2008 Ratable and Ratable and Deferred Product Product Inventory Cost Cost Cost Total Total ----------- ----------- --------- ---------- (In thousands) Beginning balance $ 81,622 $ - $ 81,622 $ 67,253 Additions to deferred cost of revenue 11,162 1,202 12,364 144,374 Amortized to cost of revenue (89,563) (186) (89,749) (130,005) ----------- ----------- --------- ---------- Ending balance $ 3,221 $ 1,016 $ 4,237 $ 81,622 =========== =========== ========= ========== Change in deferred inventory cost balance $ (78,401) $ 1,016 $ (77,385) $ 14,369 =========== =========== ========= ========== 

(g) Excluded amount represents stock-based compensation expense on a non-GAAP basis. Stock-based compensation is a non-cash expense accounted for in accordance with the fair value recognition provisions of Statement of Financial Accounting Standards No. 123(R). While this is a large component of our expense, we believe investors want to evaluate our financial results both including and excluding the effects of stock-based compensation expense in order to compare our financial performance with that of other companies and between time periods.

The stock-based compensation expense excluded from cost of revenue is a non-GAAP financial measure and is reconciled to the corresponding GAAP amount in the table below:

 Three Months Ended Twelve Months Ended ------------------------------- -------------------- December September December December December 27, 27, 29, 27, 29, 2008 2008 2007 2008 2007 --------- --------- --------- --------- --------- (In thousands) GAAP stock-based compensation in cost of revenue $ 308 $ 299 $ 156 $ 1,086 $ 410 GAAP stock-based compensation in cost of revenue - amortization from balance sheet 739 1,180 198 4,288 327 Stock-based compensation not deferred to deferred inventory cost - - 797 215 1,213 Stock-based compensation previously recognized on invoiced shipment basis (143) (209) (186) (1,098) (289) --------- --------- --------- --------- --------- Non-GAAP stock-based compensation in cost of revenue $ 904 $ 1,270 $ 965 $ 4,491 $ 1,661 ========= ========= ========= ========= ========= 

(h) The following table summarizes the re-measurement of our freestanding preferred stock warrants under FAS 150:

 Twelve Months Ended --------------------- December December 27, 29, 2008 2007 ---------- --------- Other gain (loss) $ - $ (19,761) ========== ========= Infinera Corporation Condensed Consolidated Balance Sheets (In thousands) (Unaudited) December 27, December 29, 2008 2007 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 166,770 $ 91,209 Short-term investments 68,232 181,168 Short-term restricted cash 720 743 Accounts receivable, net of allowance for doubtful accounts of $1,700 in 2008 and $0 in 2007 69,354 39,216 Other receivables 1,085 1,127 Inventory 58,986 58,579 Deferred inventory costs 1,744 78,362 Prepaid expenses and other current assets 6,311 3,941 ------------ ------------ Total current assets 373,202 454,345 Property, plant and equipment, net 46,820 36,973 Intangible assets 1,276 1,541 Deferred inventory costs, non-current 2,493 3,260 Long-term investments 74,684 30,116 Long-term restricted cash 2,179 2,594 Other non-current assets 6,413 359 ------------ ------------ Total assets $ 507,067 $ 529,188 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 34,048 $ 17,504 Accrued expenses 16,092 9,497 Accrued compensation and related benefits 13,472 17,749 Accrued warranty 5,205 4,974 Deferred revenue 14,683 167,031 ------------ ------------ Total current liabilities 83,500 216,755 Accrued warranty, non-current 4,735 5,018 Deferred revenue, non-current 7,724 7,406 Long-term exercised unvested options 221 825 Other long-term liabilities 5,424 4,610 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 December 27, 2008 and December 29, 2007 Issued and outstanding shares - 94,163 as of December 27, 2008 and 91,580 as of December 29, 2007 94 92 Additional paid-in capital 699,705 663,870 Accumulated other comprehensive income (loss) (3,598) 78 Accumulated deficit (290,738) (369,466) ------------ ------------ Total stockholders' equity 405,463 294,574 ------------ ------------ Total liabilities and stockholders' equity $ 507,067 $ 529,188 ============ ============ Infinera Corporation Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited) Twelve Months Ended --------------------------- December 27, December 29, 2008 2007 ------------ ------------ Cash Flows from Operating Activities: Net income (loss) $ 78,728 $ (55,342) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 12,975 9,824 Provision for doubtful accounts 1,700 - Amortization of debt discount - 282 Accretion of investment discount (893) (572) Asset impairment charges - 393 Stock-based compensation expense 23,819 9,656 Put Rights gain (15,866) - Mark-to-market, trading 16,762 - Excess tax benefit from stock option transactions (248) - Tax benefit from stock option transactions 593 - Revaluation of warrant liabilities - 19,761 Gain on disposal of fixed assets (1,107) (2,776) Other (gain) loss 7 (73) Changes in assets and liabilities: Accounts receivable (31,796) 2,054 Inventory (821) 2,515 Prepaid expenses and other current assets (2,463) (770) Deferred inventory costs 76,538 (14,696) Other non-current assets (6,081) 706 Accounts payable 16,767 (24,220) Accrued liabilities and other expenses 3,387 5,557 Deferred revenue (152,030) 63,484 Accrued warranty (53) 7,275 ------------ ------------ Net cash provided by operating activities 19,918 23,058 Cash Flows from Investing Activities: Purchases of available-for-sale investments (226,014) (299,159) Proceeds from sale of investments 108,190 57,200 Proceeds from maturities of investments and restricted cash 183,778 28,620 Proceeds from disposal of assets 1,192 3,286 Purchase of property and equipment (22,941) (20,215) ------------ ------------ Net cash provided by (used in) investing activities 44,205 (230,268) Cash Flows from Financing Activities: Principal payments on loan obligations - (35,401) Proceeds from loans - 7,119 Proceeds from initial public offering, net of issuance costs - 190,078 Proceeds from follow-on offering, net of issuance costs - 104,016 Proceeds from issuance of common stock 11,482 3,535 Proceeds from exercise of warrants - 45 Proceeds from repayment of non-recourse notes - 145 Excess tax benefit from stock option transactions 248 - Repurchase of common stock (29) (59) ------------ ------------ Net cash provided by financing activities 11,701 269,478 Effect of exchange rate changes (263) 57 Net change in cash and cash equivalents 75,561 62,325 Cash and cash equivalents at beginning of period 91,209 28,884 ------------ ------------ Cash and cash equivalents at end of period $ 166,770 $ 91,209 ============ ============ Supplemental disclosures of cash flow information: Cash paid for interest $ 3 $ 2,497 Cash paid for income taxes $ 1,036 $ 121 Infinera Corporation Supplemental Financial Information Q1'07 Q2'07 Q3'07 Q4'07 Q1'08 Q2'08 Q3'08 Q4'08 ----- ----- ----- ----- ----- ----- ----- ----- Invoiced Shipments $66.7 $69.0 $80.4 $93.4 $95.5 $90.8 $80.9 $86.2 Gross Margin % 35% 37% 43% 47% 45% 47% 42% 36% ----- ----- ----- ----- ----- ----- ----- ----- Invoiced Shipment Composition: Domestic % 89% 84% 81% 81% 82% 78% 81% 73% International % 11% 16% 19% 19% 18% 22% 19% 27% Largest Customer % 57% 48% 28% 18% 31% 21% 27% 23% ----- ----- ----- ----- ----- ----- ----- ----- Cash Related Information: Cash from Operations $ 6.9 $(0.8) $(2.0) $18.9 $ 9.8 $ 5.6 $ 9.9 $(5.4) Capital Expenditures $ 5.2 $ 3.6 $ 3.0 $ 8.5 $ 4.5 $ 4.8 $ 5.9 $ 7.8 Depreciation & Amortization $ 2.1 $ 2.0 $ 2.7 $ 2.7 $ 2.6 $ 2.9 $ 3.4 $ 4.1 DSO's 27 36 47 39 42 57 55 74 ----- ----- ----- ----- ----- ----- ----- ----- Inventory Metrics: Raw Materials $ 7.4 $ 8.8 $ 7.5 $10.5 $ 7.9 $ 9.2 $10.0 $ 9.1 Work in Process $31.6 $36.0 $34.8 $35.1 $40.6 $34.6 $35.8 $37.9 Finished Goods $18.4 $13.7 $14.8 $13.0 $10.7 $13.8 $12.8 $12.0 ----- ----- ----- ----- ----- ----- ----- ----- Total Inventory $57.3 $58.5 $57.1 $58.6 $59.2 $57.6 $58.6 $59.0 Inventory Turns 3.0 3.0 3.2 3.4 3.5 3.3 3.2 3.8 ----- ----- ----- ----- ----- ----- ----- ----- Worldwide Headcount 617 646 668 711 799 853 889 937 ----- ----- ----- ----- ----- ----- ----- -----