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) |
Common shares, par value $0.001 per share | INFN | The Nasdaq Global Select Market | ||
(Title of each class) | (Trading symbol) | (Name of exchange on which registered) |
¨ | 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)) |
Item 2.02 | Results of Operations and Financial Condition. |
Item 5.02 | Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers. |
Item 9.01 | Financial Statements and Exhibits. |
(d) | Exhibits. |
Exhibit No. | Description | |
INFINERA CORPORATION | ||||
Date: May 8, 2019 | By: | /s/ BRAD D. FELLER | ||
Brad D. Feller Chief Financial Officer |
• | GAAP revenue is expected to be $298 million +/- $10 million. Non-GAAP revenue is expected to be $300 million +/- $10 million. |
• | GAAP gross margin is expected to be 25% +/- 200 bps. Non-GAAP gross margin is expected to be 30% +/- 200 bps. |
• | GAAP operating expenses are expected to be $156 million +/- $3 million. Non-GAAP operating expenses are expected to be $135 million +/- $3 million. |
• | GAAP operating margin is expected to be approximately (27)%. Non-GAAP operating margin is expected to be approximately (15)%. |
• | GAAP EPS is expected to be $(0.51) +/- $0.02. Non-GAAP EPS is expected to be $(0.28) +/- $0.02. |
Contacts: | ||
Media: Anna Vue | Investors: Ted Moreau | |
Tel. +1 (916) 595-8157 | Tel. +1 (408) 542-6205 | |
avue@infinera.com | tmoreau@infinera.com |
Three Months Ended | ||||||||
March 30, 2019 | March 31, 2018 | |||||||
Revenue: | ||||||||
Product | $ | 223,007 | $ | 171,629 | ||||
Services | 69,700 | 31,052 | ||||||
Total revenue | 292,707 | 202,681 | ||||||
Cost of revenue: | ||||||||
Cost of product | 157,817 | 102,324 | ||||||
Cost of services | 36,676 | 12,831 | ||||||
Amortization of intangible assets | 8,252 | 5,341 | ||||||
Acquisition and integration costs | 2,064 | — | ||||||
Restructuring and related | 21,466 | 17 | ||||||
Total cost of revenue | 226,275 | 120,513 | ||||||
Gross profit | 66,432 | 82,168 | ||||||
Operating expenses: | ||||||||
Research and development | 73,660 | 58,681 | ||||||
Sales and marketing | 40,037 | 28,885 | ||||||
General and administrative | 33,044 | 17,836 | ||||||
Amortization of intangible assets | 7,057 | 1,607 | ||||||
Acquisition and integration costs | 7,134 | — | ||||||
Restructuring and related | 17,188 | (163 | ) | |||||
Total operating expenses | 178,120 | 106,846 | ||||||
Loss from operations | (111,688 | ) | (24,678 | ) | ||||
Other income (expense), net: | ||||||||
Interest income | 766 | 897 | ||||||
Interest expense | (7,563 | ) | (3,683 | ) | ||||
Other gain (loss), net: | (2,923 | ) | 506 | |||||
Total other income (expense), net | (9,720 | ) | (2,280 | ) | ||||
Loss before income taxes | (121,408 | ) | (26,958 | ) | ||||
Provision for (benefit from) income taxes | 193 | (678 | ) | |||||
Net loss | (121,601 | ) | (26,280 | ) | ||||
Net loss per common share - basic and diluted: | $ | (0.69 | ) | $ | (0.17 | ) | ||
Weighted average shares used in computing net loss per common share - basic and diluted: | 176,406 | 150,333 |
Three Months Ended | ||||||||||||||||||||
March 30, 2019 | December 29, 2018 | March 31, 2018 | ||||||||||||||||||
Reconciliation of Revenue: | ||||||||||||||||||||
U.S. GAAP as reported | $ | 292,707 | $ | 332,058 | $ | 202,681 | ||||||||||||||
Acquisition-related deferred revenue adjustment(1) | 2,905 | 4,582 | — | |||||||||||||||||
Non-GAAP as adjusted | $ | 295,612 | $ | 336,640 | $ | 202,681 | ||||||||||||||
Reconciliation of Gross Profit: | ||||||||||||||||||||
U.S. GAAP as reported | $ | 66,432 | 22.7 | % | $ | 84,504 | 25.4 | % | $ | 82,168 | 40.5 | % | ||||||||
Acquisition-related deferred revenue adjustment(1) | 2,905 | 4,582 | — | |||||||||||||||||
Stock-based compensation(2) | 1,328 | 1,620 | 994 | |||||||||||||||||
Amortization of acquired intangible assets(3) | 8,252 | 8,315 | 5,341 | |||||||||||||||||
Acquisition and integration costs(4) | 2,064 | 132 | — | |||||||||||||||||
Acquisition-related inventory adjustments(5) | 1,778 | 5,337 | — | |||||||||||||||||
Restructuring and related(6) | 21,466 | 2,580 | 17 | |||||||||||||||||
Non-GAAP as adjusted | $ | 104,225 | 35.3 | % | $ | 107,070 | 31.8 | % | $ | 88,520 | 43.7 | % | ||||||||
Reconciliation of Operating Expenses: | ||||||||||||||||||||
U.S. GAAP as reported | $ | 178,120 | $ | 198,728 | $ | 106,846 | ||||||||||||||
Stock-based compensation(2) | 7,385 | 7,395 | 9,989 | |||||||||||||||||
Amortization of acquired intangible assets(3) | 7,057 | 24,735 | 1,607 | |||||||||||||||||
Acquisition and integration costs(4) | 7,134 | 13,463 | — | |||||||||||||||||
Restructuring and related(6) | 17,188 | 10,804 | (163 | ) | ||||||||||||||||
Non-GAAP as adjusted | $ | 139,356 | $ | 142,331 | $ | 95,413 | ||||||||||||||
Reconciliation of Loss from Operations: | ||||||||||||||||||||
U.S. GAAP as reported | $ | (111,688 | ) | (38.2 | )% | $ | (114,224 | ) | (34.4 | )% | $ | (24,678 | ) | (12.2 | )% | |||||
Acquisition-related deferred revenue adjustment(1) | 2,905 | 4,582 | — | |||||||||||||||||
Stock-based compensation(2) | 8,713 | 9,015 | 10,983 | |||||||||||||||||
Amortization of acquired intangible assets(3) | 15,309 | 33,050 | 6,948 | |||||||||||||||||
Acquisition and integration costs(4) | 9,198 | 13,595 | — | |||||||||||||||||
Acquisition-related inventory adjustments(5) | 1,778 | 5,337 | — | |||||||||||||||||
Restructuring and related(6) | 38,654 | 13,384 | (146 | ) | ||||||||||||||||
Non-GAAP as adjusted | $ | (35,131 | ) | (11.9 | )% | $ | (35,261 | ) | (10.5 | )% | $ | (6,893 | ) | (3.4 | )% | |||||
Reconciliation of Net Loss: | ||||||||||||||||||||
U.S. GAAP as reported | $ | (121,601 | ) | $ | (133,467 | ) | $ | (26,280 | ) | |||||||||||
Acquisition-related deferred revenue adjustment(1) | 2,905 | 4,582 | — | |||||||||||||||||
Stock-based compensation(2) | 8,713 | 9,015 | 10,983 | |||||||||||||||||
Amortization of acquired intangible assets(3) | 15,309 | 33,050 | 6,948 | |||||||||||||||||
Acquisition and integration costs(4) | 9,198 | 13,595 | — | |||||||||||||||||
Acquisition-related inventory adjustments(5) | 1,778 | 5,337 | — | |||||||||||||||||
Restructuring and related(6) | 38,654 | 13,384 | (146 | ) | ||||||||||||||||
Amortization of debt discount(7) | 4,241 | 4,137 | 2,779 | |||||||||||||||||
Accretion of financing lease obligation(8) | — | 6,538 | — | |||||||||||||||||
Impairment of non-marketable equity investment(9) | — | 850 | — | |||||||||||||||||
Income tax effects(10) | (426 | ) | (1,237 | ) | (1,529 | ) | ||||||||||||||
Non-GAAP as adjusted | $ | (41,229 | ) | $ | (44,216 | ) | $ | (7,245 | ) |
Three Months Ended | |||||||||||||||||
March 30, 2019 | December 29, 2018 | March 31, 2018 | |||||||||||||||
Net Loss per Common Share - Basic and Diluted: | |||||||||||||||||
U.S. GAAP as reported | $ | (0.69 | ) | $ | (0.76 | ) | $ | (0.17 | ) | ||||||||
Non-GAAP as adjusted | $ | (0.23 | ) | $ | (0.25 | ) | $ | (0.05 | ) | ||||||||
Weighted Average Shares Used in Computing Net Loss per Common Share - Basic and Diluted: | 176,406 | 174,908 | 150,333 |
(1) | Business combination accounting principles require Infinera to write down to fair value its maintenance support |
(2) | 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 | ||||||||||||
March 30, 2019 | December 29, 2018 | March 31, 2018 | ||||||||||
Cost of revenue | $ | 538 | $ | 543 | $ | (122 | ) | |||||
Research and development | 3,603 | 3,677 | 4,324 | |||||||||
Sales and marketing | 1,547 | 2,181 | 2,898 | |||||||||
General and administration | 2,235 | 1,537 | 2,767 | |||||||||
7,923 | 7,938 | 9,867 | ||||||||||
Cost of revenue - amortization from balance sheet* | 790 | 1,077 | 1,116 | |||||||||
Total stock-based compensation expense | $ | 8,713 | $ | 9,015 | $ | 10,983 |
* | Stock-based compensation expense deferred to inventory and deferred inventory costs in prior periods recognized in the current period. |
(3) | Amortization of acquired intangible assets consists of developed technology, trade names, customer relationships and backlog acquired in connection with the Coriant acquisition, which closed during the fourth quarter of 2018. Amortization of acquired intangible assets also consists of amortization of developed technology, trade names and customer relationships acquired in connection with the Transmode AB 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. |
(4) | Acquisition and integration costs consist of legal, financial, employee-related costs and other professional fees incurred in connection with Infinera's acquisition of Coriant. 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. |
(5) | Business combination accounting principles require Infinera to measure acquired inventory at fair value. The fair value of inventory reflects the acquired company’s cost of manufacturing plus a portion of the expected profit margin. The non-GAAP adjustment to Infinera's cost of sales excludes the amortization of the acquisition-related step-up in carrying value for units sold in the quarter. Additionally, in connection with the Coriant acquisition, cost of sales excludes a one-time adjustment in inventory as a result of renegotiated supplier agreements that contained unusually higher than market pricing. Management believes these adjustments are useful to investors as an additional means to reflect ongoing cost of sales and gross margin trends of Infinera's business. |
(6) | Restructuring and related costs are associated with Infinera's two restructuring initiatives implemented during the fourth quarter of 2018 and during the fourth quarter of 2017, as well as the planned closure of the Company's Berlin, Germany manufacturing facility and Coriant's historical restructuring plan associated with their early retirement plan. In addition, management included accelerated amortization on operating lease right-of-use assets due to the cease use of certain facilities. 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. |
(7) | 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. |
(8) | Accretion of financing lease obligation included in interest expense relates to a failed sale-leaseback transaction executed by Coriant in the past and assumed by Infinera in the acquisition. Management believes that this adjustment is not indicative of ongoing operating performance and its exclusion provides a better indication of Infinera's underlying business performance. |
(9) | Management has excluded the impairment charge related to non-marketable equity investments in arriving at Infinera's non-GAAP results because they are non-recurring, and management believes that these expenses are not indicative of ongoing operating performance. |
(10) | The difference between the GAAP and non-GAAP tax provision is due to the net tax effects of the purchase accounting adjustments, acquisition-related costs and amortization of acquired intangible assets. |
March 30, 2019 | December 29, 2018 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 167,259 | $ | 202,954 | |||
Short-term investments | 16,022 | 26,511 | |||||
Short-term restricted cash | 4,671 | 13,229 | |||||
Accounts receivable, net of allowance for doubtful accounts of $5,276 in 2019 and $5,084 in 2018 | 267,117 | 317,115 | |||||
Inventory | 332,495 | 311,888 | |||||
Prepaid expenses and other current assets | 87,871 | 85,400 | |||||
Total current assets | 875,435 | 957,097 | |||||
Property, plant and equipment, net | 161,146 | 342,820 | |||||
Operating lease right-of-use assets | 65,598 | — | |||||
Intangible assets | 215,964 | 233,119 | |||||
Goodwill | 221,517 | 227,231 | |||||
Long-term restricted cash | 23,316 | 26,154 | |||||
Other non-current assets | 11,975 | 14,849 | |||||
Total assets | $ | 1,574,951 | $ | 1,801,270 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 163,834 | $ | 191,187 | |||
Accrued expenses and other current liabilities | 141,087 | 131,891 | |||||
Accrued compensation and related benefits | 71,973 | 71,152 | |||||
Accrued warranty | 19,187 | 20,103 | |||||
Deferred revenue | 95,344 | 88,534 | |||||
Total current liabilities | 491,425 | 502,867 | |||||
Long-term debt, net | 279,738 | 266,929 | |||||
Long-term financing lease obligation | — | 193,538 | |||||
Accrued warranty, non-current | 20,564 | 20,918 | |||||
Deferred revenue, non-current | 30,727 | 31,768 | |||||
Deferred tax liability | 11,423 | 13,347 | |||||
Operating lease liabilities | 59,949 | — | |||||
Other long-term liabilities | 63,826 | 68,082 | |||||
Commitments and contingencies (Note 19) | |||||||
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 March 30, 2019 and December 29, 2018 | |||||||
Issued and outstanding shares – 177,415 as of March 30, 2019 and 175,452 as of December 29, 2018 | 177 | 175 | |||||
Additional paid-in capital | 1,702,710 | 1,685,916 | |||||
Accumulated other comprehensive loss | (30,714 | ) | (25,300 | ) | |||
Accumulated deficit | (1,054,874 | ) | (956,970 | ) | |||
Total stockholders' equity | 617,299 | 703,821 | |||||
Total liabilities and stockholders’ equity | $ | 1,574,951 | $ | 1,801,270 |
Three Months Ended | ||||||||
March 30, 2019 | March 31, 2018 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net loss | $ | (121,601 | ) | $ | (26,280 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 30,939 | 16,976 | ||||||
Non-cash restructuring and related credits | 19,882 | (81 | ) | |||||
Amortization of debt discount and issuance costs | 4,614 | 3,018 | ||||||
Operating lease expense, net of accretion | 16,704 | — | ||||||
Stock-based compensation expense | 8,713 | 10,983 | ||||||
Other loss | 1,775 | 84 | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | 49,754 | (30,928 | ) | |||||
Inventory | (24,937 | ) | (2,329 | ) | ||||
Prepaid expenses and other assets | (352 | ) | (3,950 | ) | ||||
Accounts payable | (23,439 | ) | 19,286 | |||||
Accrued liabilities and other expenses | (25,139 | ) | (6,181 | ) | ||||
Deferred revenue | 6,933 | 5,293 | ||||||
Net cash used in operating activities | (56,154 | ) | (14,109 | ) | ||||
Cash Flows from Investing Activities: | ||||||||
Purchase of available-for-sale investments | — | (2,986 | ) | |||||
Proceeds from maturities of investments | 10,542 | 50,168 | ||||||
Acquisition of business, net of cash acquired | (10,000 | ) | — | |||||
Purchase of property and equipment | (6,590 | ) | (8,019 | ) | ||||
Net cash provided by (used in) investing activities | (6,048 | ) | 39,163 | |||||
Cash Flows from Financing Activities: | ||||||||
Proceeds from issuance of debt, net | 8,584 | — | ||||||
Proceeds from issuance of common stock | 7,740 | 10,644 | ||||||
Minimum tax withholding paid on behalf of employees for net share settlement | — | (97 | ) | |||||
Net cash provided by financing activities | 16,324 | 10,547 | ||||||
Effect of exchange rate changes on cash and restricted cash | (1,213 | ) | (58 | ) | ||||
Net change in cash, cash equivalents and restricted cash | (47,091 | ) | 35,543 | |||||
Cash, cash equivalents and restricted cash at beginning of period | 242,337 | 121,486 | ||||||
Cash, cash equivalents and restricted cash at end of period(1) | $ | 195,246 | $ | 157,029 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid for income taxes, net of refunds | $ | 1,353 | $ | 1,537 | ||||
Cash paid for interest | $ | 4,315 | $ | 9 | ||||
Supplemental schedule of non-cash investing and financing activities: | ||||||||
Transfer of inventory to fixed assets | $ | 1,805 | $ | 893 |
March 30, 2019 | March 31, 2018 | ||||||
(In thousands) | |||||||
Cash and cash equivalents | $ | 167,259 | $ | 151,436 | |||
Short-term restricted cash | 4,671 | 84 | |||||
Long-term restricted cash | 23,316 | 5,509 | |||||
Total cash, cash equivalents and restricted cash | $ | 195,246 | $ | 157,029 |
Q2'17 | Q3'17 | Q4'17 | Q1'18 | Q2'18 | Q3'18 | Q4'18 | Q1'19 | |||||||||||||||||||||||||
GAAP Revenue ($ Mil) | $176.8 | $192.6 | $195.8 | $202.7 | $208.2 | $200.4 | $332.1 | $292.7 | ||||||||||||||||||||||||
GAAP Gross Margin % | 36.7 | % | 35.2 | % | 24.1 | % | 40.5 | % | 40.5 | % | 35.0 | % | 25.4 | % | 22.7 | % | ||||||||||||||||
Non-GAAP Gross Margin %(1) | 40.7 | % | 39.1 | % | 37.5 | % | 43.7 | % | 43.9 | % | 38.4 | % | 31.8 | % | 35.3 | % | ||||||||||||||||
Revenue Composition: | ||||||||||||||||||||||||||||||||
Domestic % | 63 | % | 59 | % | 53 | % | 64 | % | 58 | % | 49 | % | 39 | % | 45 | % | ||||||||||||||||
International % | 37 | % | 41 | % | 47 | % | 36 | % | 42 | % | 51 | % | 61 | % | 55 | % | ||||||||||||||||
Customers >10% of Revenue | 3 | 2 | 1 | 2 | 2 | 2 | 2 | 1 | ||||||||||||||||||||||||
Cash Related Information: | ||||||||||||||||||||||||||||||||
Cash from Operations ($ Mil) | ($3.0 | ) | ($20.9 | ) | ($1.0 | ) | ($14.1 | ) | $7.0 | ($20.4 | ) | ($71.6 | ) | ($56.2 | ) | |||||||||||||||||
Capital Expenditures ($ Mil) | $24.5 | $11.0 | $7.8 | $8.0 | $13.5 | $5.5 | $10.7 | $6.6 | ||||||||||||||||||||||||
Depreciation & Amortization ($ Mil) | $16.6 | $16.8 | $16.6 | $17.0 | $16.3 | $17.1 | $50.2 | $31.0 | ||||||||||||||||||||||||
DSOs | 64 | 65 | 59 | 73 | 65 | 70 | 87 | 83 | ||||||||||||||||||||||||
Inventory Metrics: | ||||||||||||||||||||||||||||||||
Raw Materials ($ Mil) | $36.7 | $35.8 | $27.4 | $30.3 | $30.5 | $33.6 | $74.5 | $82.5 | ||||||||||||||||||||||||
Work in Process ($ Mil) | $91.6 | $84.3 | $59.6 | $66.5 | $61.6 | $56.4 | $57.2 | $63.0 | ||||||||||||||||||||||||
Finished Goods ($ Mil) | $117.7 | $122.7 | $127.7 | $119.1 | $127.2 | $121.9 | $180.2 | $187.0 | ||||||||||||||||||||||||
Total Inventory ($ Mil) | $246.0 | $242.8 | $214.7 | $215.9 | $219.3 | $211.9 | $311.9 | $332.5 | ||||||||||||||||||||||||
Inventory Turns(2) | 1.7 | 1.9 | 2.3 | 2.1 | 2.1 | 2.3 | 2.9 | 2.3 | ||||||||||||||||||||||||
Worldwide Headcount | 2,272 | 2,296 | 2,145 | 2,084 | 2,070 | 2,079 | 3,876 | 3,708 | ||||||||||||||||||||||||
Weighted Average Shares Outstanding (in thousands): | ||||||||||||||||||||||||||||||||
Basic | 147,538 | 148,777 | 149,412 | 150,333 | 152,259 | 153,492 | 174,908 | 176,406 | ||||||||||||||||||||||||
Diluted | 148,662 | 149,714 | 150,098 | 151,633 | 154,777 | 154,228 | 175,629 | 176,602 |
(1) | Non-GAAP adjustments include restructuring and related costs (credit), non-cash stock-based compensation expense, certain purchase accounting adjustments related to Infinera's acquisition of Coriant and 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. |
Q2'19 | ||||
Outlook | ||||
Reconciliation of Revenue: | ||||
U.S. GAAP | $ | 298 | ||
Acquisition-related deferred revenue adjustment | 2 | |||
Non-GAAP | $ | 300 | ||
Reconciliation of Gross Margin: | ||||
U.S. GAAP | 25 | % | ||
Acquisition-related deferred revenue adjustment | 1 | % | ||
Stock-based compensation | 1 | % | ||
Amortization of acquired intangible assets | 2 | % | ||
Restructuring and related | 1 | % | ||
Non-GAAP | 30 | % | ||
Reconciliation of Operating Expenses: | ||||
U.S. GAAP | $ | 156 | ||
Stock-based compensation | (9 | ) | ||
Amortization of acquired intangible assets | (5 | ) | ||
Acquisition and integration costs | (6 | ) | ||
Restructuring and related | (1 | ) | ||
Non-GAAP | $ | 135 | ||
Reconciliation of Operating Margin: | ||||
U.S. GAAP | (27 | )% | ||
Acquisition-related deferred revenue adjustment | 1 | % | ||
Stock-based compensation | 3 | % | ||
Amortization of acquired intangible assets | 4 | % | ||
Acquisition and integration costs | 2 | % | ||
Restructuring and related | 2 | % | ||
Non-GAAP | (15 | )% | ||
Reconciliation of Net Loss per Common Share: | ||||
U.S. GAAP | $ | (0.51 | ) | |
Acquisition-related deferred revenue adjustment | 0.01 | |||
Stock-based compensation | 0.06 | |||
Amortization of acquired intangible assets | 0.06 | |||
Acquisition and integration costs | 0.04 | |||
Restructuring and related | 0.04 | |||
Amortization of debt discount | 0.02 | |||
Non-GAAP | $ | (0.28 | ) |
(In millions, except per share amounts and percentages) | Q1'19 | Q4'18 | Q1'18 | Q/Q Change | Y/Y Change | |||||||||||||||
Revenue | $ | 292.7 | $ | 332.1 | $ | 202.7 | (12 | )% | 44 | % | ||||||||||
Product | 223.0 | 249.6 | 171.6 | (11 | )% | 30 | % | |||||||||||||
Service | 69.7 | 82.5 | 31.1 | (16 | )% | 124 | % | |||||||||||||
Gross margin % | 22.7 | % | 25.4 | % | 40.5 | % | (2.7)pts | (17.8)pts | ||||||||||||
Research and development | 73.7 | 78.8 | 58.7 | (6 | )% | 26 | % | |||||||||||||
Sales and marketing | 40.0 | 42.7 | 28.9 | (6 | )% | 38 | % | |||||||||||||
General and administrative | 33.0 | 28.2 | 17.8 | 17 | % | 85 | % | |||||||||||||
Amortization of intangible assets | 7.1 | 24.7 | 1.6 | (71 | )% | 344 | % | |||||||||||||
Acquisition and integration costs | 7.1 | 13.5 | — | (47 | )% | NMF* | ||||||||||||||
Restructuring and related | 17.2 | 10.8 | (0.2 | ) | 59 | % | NMF* | |||||||||||||
Total operating expenses | $ | 178.1 | $ | 198.7 | $ | 106.8 | (10 | )% | 67 | % | ||||||||||
Operating margin % | (38.2 | )% | (34.4 | )% | (12.2 | )% | (3.8)pts | (26.0)pts | ||||||||||||
Net loss | $ | (121.6 | ) | $ | (133.5 | ) | $ | (26.3 | ) | 9 | % | (362 | )% | |||||||
EPS | $ | (0.69 | ) | $ | (0.76 | ) | $ | (0.17 | ) | $ | 0.07 | $ | (0.52 | ) |
(In millions, except per share amounts and percentages) | Q1'19 | Q4'18 | Q1'18 | Q/Q Change | Y/Y Change | |||||||||||||||
Revenue | $ | 295.6 | $ | 336.6 | $ | 202.7 | (12 | )% | 46 | % | ||||||||||
Product | 223.0 | 249.6 | 171.6 | (11 | )% | 30 | % | |||||||||||||
Service | 72.6 | 87.0 | 31.1 | (17 | )% | 133 | % | |||||||||||||
Gross margin % | 35.3 | % | 31.8 | % | 43.7 | % | 3.5pts | (8.4)pts | ||||||||||||
Research and development | 70.1 | 75.1 | 54.3 | (7 | )% | 29 | % | |||||||||||||
Sales and marketing | 38.5 | 40.5 | 26.0 | (5 | )% | 48 | % | |||||||||||||
General and administrative | 30.8 | 26.7 | 15.1 | 15 | % | 104 | % | |||||||||||||
Total operating expenses | $ | 139.4 | $ | 142.3 | $ | 95.4 | (2 | )% | 46 | % | ||||||||||
Operating margin % | (11.9 | )% | (10.5 | )% | (3.4 | )% | (1.4)pts | (8.5)pts | ||||||||||||
Net loss | $ | (41.2 | ) | $ | (44.2 | ) | $ | (7.2 | ) | 7 | % | (472 | )% | |||||||
EPS | $ | (0.23 | ) | $ | (0.25 | ) | $ | (0.05 | ) | $ | 0.02 | $ | (0.18 | ) |
• | In the first quarter of 2019, our business in North America was distributed across all major verticals with three Tier-1s representing nearly 50% of the region’s revenue, followed by a cable operator and a Tier-2 operator. The top 10 customers in this region accounted for over 75% of the region's total revenue. During the quarter, we experienced strong growth from two of the region’s Tier-1s, which included first revenue on an important services migration project utilizing our Maestro software automation suite to help Verizon with their circuit to packet network migration. We saw ICP weakness due to a muted spend environment in the first quarter, but we anticipate improvement in the second quarter and beyond as we are now fully certified at a new global ICP customer who will begin deploying our Groove solution. |
• | EMEA (34% of total revenue): Following the Coriant acquisition, the EMEA region represents a greater portion of global revenue than it had historically. Revenue declined fairly significantly sequentially as the first quarter is typically seasonally weak. Exacerbating the seasonal decline, we had one Tier-1 customer accelerate demand into the fourth quarter of 2018, leaving a hole in the first quarter of 2019. Additionally, two other carriers had completed large projects during the fourth quarter of 2018. These events were partially offset by strength from our largest cable customer in the region, which continues to deploy our XTM Metro solutions. The top 10 customers represented over 50% of the total revenue in the region during the quarter. |
• | APAC (16% of total revenue): During the quarter, we experienced a surge in revenue from a large service provider in Southeast Asia deploying equipment based on our ICE4 optical engine. This was offset by weakness elsewhere throughout the region, particularly in subsea, as a major customer slowed its overall capex spending. Importantly, we had a major network project in SE Asia that we included in our revenue plan for the quarter that didn’t progress as expected during the quarter. Despite the uncertainty of this project’s timing, we are optimistic about our growth prospects in the region. The top 10 customers represented approximately 75% of the total revenue in the region during the quarter. |
• | Other Americas (LATAM) (5% of total revenue): Revenue experienced a typical, across the board seasonal decline during the quarter, with overall revenue in the region led by Tier-1 carriers. We are particularly optimistic about our disaggregated solutions opportunities in the region. The top 10 customers accounted for nearly 80% of the total revenue in the region. |
• | Tier-1s represented approximately 45% of total revenue during the quarter. The Coriant acquisition brings long standing relationships with several of the largest Tier-1s in the world, which represent a strong revenue stream and a large opportunity for growth. As many of these customers represent mobile carriers, we believe the emergence of 5G technology will drive significant opportunities for the new Infinera over the next several years. Overall, revenue was negatively impacted by a typical seasonal decline with sequential revenue growth from North American Tier-1s partially offsetting revenue declines in EMEA and Asia Pacific. North American based Tier-1s represented over 50% of our global Tier-1 revenue, followed by EMEA at approximately 25%, APAC at 17% and LATAM the remaining 8%. |
• | Other Service Providers represented approximately 37% of our total revenue in the quarter. Customers in this vertical predominantly represent Tier-2 operators, bandwidth wholesalers, and governmental organizations. Revenue among these customers was widespread, though two customers in this vertical entered the overall top 10 customer list during the quarter. Geographically, revenue from these customers was split approximately 70% international and 30% domestic. |
• | ICPs represented approximately 7% of our total revenue during the quarter. Within this end customer vertical, Infinera and Coriant have both historically had reasonable levels of success, but with different customers. As such, the new Infinera now serves most of the top global ICPs. With a current product portfolio including the Cloud Xpress, the XTSeries and the Groove, significant opportunities to address ICP subsea demand, and a roadmap of future products combining the strengths of both platforms, we believe we are well positioned to grow this vertical and anticipate a new deployment with a major ICP to begin shipping during the second quarter of 2019. Similar to the experiences of other providers in our industry, we were negatively impacted in the first quarter of 2019 by lighter demand within this vertical. |
• | Cable represented approximately 11% of our total revenue in the quarter, with the vast majority of this revenue coming from the Infinera classic side. Overall cable revenue increased sequentially during the quarter as this vertical tends to be seasonally stronger during the first half of the year. Our strongest regions within this vertical are North America and EMEA, with presence at many of the largest customers in these regions and both regions demonstrating growth during the quarter. Our longstanding relationships with these customers should benefit us as they roll out their DAA architectures over the next several years. However, our near-term cable outlook has deteriorated from prior expectations. |
• | The largest driver of the difference between GAAP gross margin of 22.7% and non-GAAP gross margin of 35.3% was restructuring expenses, primarily related to the transition of our Berlin, Germany manufacturing facility to a manufacturing partner. |
• | Non-GAAP gross margin was higher than our guidance range of 29% to 33% primarily due to a favorable product and customer mix. While the inclusion of the Coriant business continues to impact our margins, we saw improvements on the Coriant side of the business for the second consecutive quarter as we drive more cost discipline in our decision-making and materials spend, and also benefit from headcount reductions from restructuring actions. |
• | Our GAAP operating expenses included $17 million associated with restructuring actions primarily due to accelerated amortization on operating lease right-of-use assets due to the cease use of certain facilities and $7 million each from acquisition-related intangibles amortization and integration costs. |
• | Our non-GAAP operating expenses came in a bit higher than the midpoint of our guidance range of $135 million to $141 million. This was mainly due to incremental rent expense in connection with the adoption of the new lease accounting standard and higher than anticipated outside professional service fees to support year-end audit activities. In the first quarter of 2019, we began to see the benefits associated with |
• | Our operating margin on a GAAP basis declined sequentially primarily due to lower revenue and higher restructuring costs associated with the Berlin site transition. |
• | Our operating margin on a non-GAAP basis was better than the implied midpoint of our guidance of (13.5)%, as lower revenue was more than offset by better than anticipated gross margin. |
• | EPS on a GAAP basis improved sequentially as stronger gross margin offset weaker revenue and higher restructuring costs. |
• | EPS on a non-GAAP basis was better than the midpoint of our guidance of $(0.27) due to stronger than anticipated gross margin. |
(In millions) | Q1'19 | Q4'18 | Q1'18 | |||||||||
Cash, investments & restricted cash | $ | 211.3 | $ | 268.8 | $ | 293.4 | ||||||
Accounts receivable | $ | 267.1 | $ | 317.1 | $ | 161.5 | ||||||
Inventory | $ | 332.5 | $ | 311.9 | $ | 215.9 | ||||||
Accounts payable | $ | 163.8 | $ | 191.2 | $ | 77.8 |
• | Cash, investments and restricted cash, decreased by $57.5 million in the first quarter of 2019 on a sequential basis due to negative operating results, severance payments and working capital changes. In the quarter we continued to make investments in restructuring-related items and in integration costs to drive current and future synergies. |
• | Net accounts receivable in the first quarter of 2019 declined $50.0 million, commensurate with lower revenue and due to collecting cash from longer payment term deals inherited from the Coriant business. Overall DSOs decreased from 87 to 83. |
• | Net inventory increased by $20.6 million in the first quarter of 2019 on a sequential basis as we built buffer inventory to reduce risk related to revenue plan execution and manufacturing transitions. |
• | Accounts payable decreased by $27.4 million in the first quarter, largely due to the significant cost of goods decrease associated with lower revenue and higher gross margin. |
Three Months Ended | ||||||||||||||||||||
March 30, 2019 | December 29, 2018 | March 31, 2018 | ||||||||||||||||||
Reconciliation of Revenue: | ||||||||||||||||||||
U.S. GAAP as reported | $ | 292,707 | $ | 332,058 | $ | 202,681 | ||||||||||||||
Acquisition-related deferred revenue adjustment(1) | 2,905 | 4,582 | — | |||||||||||||||||
Non-GAAP as adjusted | $ | 295,612 | $ | 336,640 | $ | 202,681 | ||||||||||||||
Reconciliation of Gross Profit: | ||||||||||||||||||||
U.S. GAAP as reported | $ | 66,432 | 22.7 | % | $ | 84,504 | 25.4 | % | $ | 82,168 | 40.5 | % | ||||||||
Acquisition-related deferred revenue adjustment(1) | 2,905 | 4,582 | — | |||||||||||||||||
Stock-based compensation(2) | 1,328 | 1,620 | 994 | |||||||||||||||||
Amortization of acquired intangible assets(3) | 8,252 | 8,315 | 5,341 | |||||||||||||||||
Acquisition and integration costs(4) | 2,064 | 132 | — | |||||||||||||||||
Acquisition-related inventory adjustments(5) | 1,778 | 5,337 | — | |||||||||||||||||
Restructuring and related(6) | 21,466 | 2,580 | 17 | |||||||||||||||||
Non-GAAP as adjusted | $ | 104,225 | 35.3 | % | $ | 107,070 | 31.8 | % | $ | 88,520 | 43.7 | % | ||||||||
Reconciliation of Operating Expenses: | ||||||||||||||||||||
U.S. GAAP as reported | $ | 178,120 | $ | 198,728 | $ | 106,846 | ||||||||||||||
Stock-based compensation(2) | 7,385 | 7,395 | 9,989 | |||||||||||||||||
Amortization of acquired intangible assets(3) | 7,057 | 24,735 | 1,607 | |||||||||||||||||
Acquisition and integration costs(4) | 7,134 | 13,463 | — | |||||||||||||||||
Restructuring and related(6) | 17,188 | 10,804 | (163 | ) | ||||||||||||||||
Non-GAAP as adjusted | $ | 139,356 | $ | 142,331 | $ | 95,413 | ||||||||||||||
Reconciliation of Loss from Operations: | ||||||||||||||||||||
U.S. GAAP as reported | $ | (111,688 | ) | (38.2 | )% | $ | (114,224 | ) | (34.4 | )% | $ | (24,678 | ) | (12.2 | )% | |||||
Acquisition-related deferred revenue adjustment(1) | 2,905 | 4,582 | — | |||||||||||||||||
Stock-based compensation(2) | 8,713 | 9,015 | 10,983 | |||||||||||||||||
Amortization of acquired intangible assets(3) | 15,309 | 33,050 | 6,948 | |||||||||||||||||
Acquisition and integration costs(4) | 9,198 | 13,595 | — | |||||||||||||||||
Acquisition-related inventory adjustments(5) | 1,778 | 5,337 | — | |||||||||||||||||
Restructuring and related(6) | 38,654 | 13,384 | (146 | ) | ||||||||||||||||
Non-GAAP as adjusted | $ | (35,131 | ) | (11.9 | )% | $ | (35,261 | ) | (10.5 | )% | $ | (6,893 | ) | (3.4 | )% | |||||
Reconciliation of Net Loss: | ||||||||||||||||||||
U.S. GAAP as reported | $ | (121,601 | ) | $ | (133,467 | ) | $ | (26,280 | ) | |||||||||||
Acquisition-related deferred revenue adjustment(1) | 2,905 | 4,582 | — | |||||||||||||||||
Stock-based compensation(2) | 8,713 | 9,015 | 10,983 | |||||||||||||||||
Amortization of acquired intangible assets(3) | 15,309 | 33,050 | 6,948 | |||||||||||||||||
Acquisition and integration costs(4) | 9,198 | 13,595 | — | |||||||||||||||||
Acquisition-related inventory adjustments(5) | 1,778 | 5,337 | — | |||||||||||||||||
Restructuring and related(6) | 38,654 | 13,384 | (146 | ) | ||||||||||||||||
Amortization of debt discount(7) | 4,241 | 4,137 | 2,779 | |||||||||||||||||
Accretion of financing lease obligation(8) | — | 6,538 | — | |||||||||||||||||
Impairment of non-marketable equity investment(9) | — | 850 | — | |||||||||||||||||
Income tax effects(10) | (426 | ) | (1,237 | ) | (1,529 | ) | ||||||||||||||
Non-GAAP as adjusted | $ | (41,229 | ) | $ | (44,216 | ) | $ | (7,245 | ) |
Three Months Ended | |||||||||||||||||
March 30, 2019 | December 29, 2018 | March 31, 2018 | |||||||||||||||
Net Loss per Common Share - Basic and Diluted: | |||||||||||||||||
U.S. GAAP as reported | $ | (0.69 | ) | $ | (0.76 | ) | $ | (0.17 | ) | ||||||||
Non-GAAP as adjusted | $ | (0.23 | ) | $ | (0.25 | ) | $ | (0.05 | ) | ||||||||
Weighted Average Shares Used in Computing Net Loss per Common Share - Basic and Diluted: | 176,406 | 174,908 | 150,333 |
(1) | Business combination accounting principles require us to write down to fair value our maintenance support contracts assumed in the Coriant acquisition. The revenue for these support contracts is deferred and typically recognized over a one-year period, so our GAAP revenue for the one year period after the acquisition will not reflect the full amount of revenue that would have been reported if the acquired deferred revenue was not written down to fair value. The non-GAAP adjustment eliminates the effect of the deferred revenue write-down. Management believes these adjustments to the revenue from these support contracts are useful to investors as an additional means to reflect revenue trends of our business. |
(2) | 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 | ||||||||||||
March 30, 2019 | December 29, 2018 | March 31, 2018 | ||||||||||
Cost of revenue | $ | 538 | $ | 543 | $ | (122 | ) | |||||
Research and development | 3,603 | 3,677 | 4,324 | |||||||||
Sales and marketing | 1,547 | 2,181 | 2,898 | |||||||||
General and administration | 2,235 | 1,537 | 2,767 | |||||||||
7,923 | 7,938 | 9,867 | ||||||||||
Cost of revenue - amortization from balance sheet* | 790 | 1,077 | 1,116 | |||||||||
Total stock-based compensation expense | $ | 8,713 | $ | 9,015 | $ | 10,983 |
* | Stock-based compensation expense deferred to inventory and deferred inventory costs in prior periods recognized in the current period. |
(3) | Amortization of acquired intangible assets consists of developed technology, trade names, customer relationships and backlog acquired in connection with the Coriant acquisition, which closed during the fourth quarter of 2018. Amortization of acquired intangible assets also consists of amortization of developed technology, trade names and customer relationships acquired in connection with the Transmode AB 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. |
(4) | Acquisition and integration costs consist of legal, financial, employee-related costs and other professional fees incurred in connection with our acquisition of Coriant. 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. |
(5) | Business combination accounting principles require us to measure acquired inventory at fair value. The fair value of inventory reflects the acquired company’s cost of manufacturing plus a portion of the expected profit margin. The non-GAAP adjustment to our cost of sales excludes the amortization of the acquisition-related step-up in carrying value for units sold in the quarter. Additionally, in connection with the Coriant acquisition, |
(6) | Restructuring and related costs are associated with our two restructuring initiatives implemented during the fourth quarter of 2018 and during the fourth quarter of 2017, as well as the planned closure of our Berlin, Germany manufacturing facility and Coriant's historical restructuring plan associated with their early retirement plan. In addition, management included operating lease right-of-use assets accelerated amortization and related costs due the cease use of certain facilities. 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. |
(7) | 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 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 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. |
(8) | Accretion of financing lease obligation included in interest expense relates to a failed sale-leaseback transaction executed by Coriant in the past and assumed by us in the acquisition. Management believes that this adjustment is not indicative of ongoing operating performance and its exclusion provides a better indication of our underlying business performance. |
(9) | Management has excluded the impairment charge related to non-marketable equity investments in arriving at our non-GAAP results because they are non-recurring, and management believes that these expenses are not indicative of ongoing operating performance. |
(10) | The difference between the GAAP and non-GAAP tax provision is due to the net tax effects of the purchase accounting adjustments, acquisition-related costs and amortization of acquired intangible assets. |