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Executives

Jenifer Kirtland

Thomas J. Fallon - Chief Executive Officer, President and Director

Ita M. Brennan - Chief Financial Officer and Principal Accounting Officer

David F. Welch - Co-Founder, Chief Marketing & Strategy Officer, Executive Vice President, Director and Member of Technology & Acquisition Committee

Analysts

Joseph Park - JP Morgan Chase & Co, Research Division

Ehud A. Gelblum - Morgan Stanley, Research Division

Natarajan Subrahmanyan - TheJudaGroup, Research Division

Michael Genovese - MKM Partners LLC, Research Division

Sanjiv R. Wadhwani - Stifel, Nicolaus & Co., Inc., Research Division

Roderick B. Hall - JP Morgan Chase & Co, Research Division

Simona Jankowski - Goldman Sachs Group Inc., Research Division

Alexander B. Henderson - Needham & Company, LLC, Research Division

George C. Notter - Jefferies & Company, Inc., Research Division

Infinera (INFN) Q4 2012 Earnings Call February 5, 2013 5:00 PM ET

Operator

Welcome to the Fourth Quarter and Fiscal Year 2012 Investment Community Conference Call of Infinera Corporation. [Operator Instructions]. Today's call is being recorded. If anyone has any objections, you may disconnect at this time. And I would now like to turn the call over to Ms. Jenifer Kirtland of Infinera Investor Relations. Jennifer, you may begin.

Jenifer Kirtland

Thank you, operator. Today's call will include projections and estimates that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements address the financial conditions, results of operations, business initiatives, views on our market and customers, our products and our competitors' products, and prospects of the company in the first quarter of fiscal year 2013 and beyond, and are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. Please refer to the company's current press releases and SEC filings, including the company's annual report on Form 10-K filed on March 6, 2012, for more information on these risks and uncertainties. Today's press releases, including fourth quarter and fiscal year 2012 results and associated financial tables and investor information summary, will be available today on the investors section of Infinera's website at infinera.com. The company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call.

This afternoon's press release and today's conference call will also include certain non-GAAP financial measures. In our earnings release, we announced operating results for the fourth quarter and fiscal year 2012, which exclude noncash stock-based compensation expenses. These non-GAAP financial measures are provided to facilitate meaningful year-over-year comparisons. Please see the exhibit of the earnings press release for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and an explanation of why these non-GAAP financial measures are useful and how they are used by management, which will be available today on the Investors section of Infinera's website.

On this call, we'll also give guidance for the first quarter of fiscal year 2013. We have excluded noncash stock-based compensation expenses from this guidance because we cannot readily estimate the impact of our future stock price on future stock-based compensation expenses.

And I will now turn the call over to Infinera's President and Chief Executive Officer, Tom Fallon.

Thomas J. Fallon

Good afternoon, and thank you for joining us on our fourth quarter and year-end 2012 conference call. With me today are Chief Financial Officer Ita Brennan; and Chief Strategy Officer, Dave Welch.

Our fourth quarter accomplishments reflect outstanding execution of our growth strategy and a solid finish to a very busy and productive year. We shipped our first DTN-X in June, as promised, and began recognizing revenue from the product in the third quarter. Its traction has been phenomenal and we have entered the 100-gig market with force. In just over 2 full quarters of production, we have secured 22 DTN-X customer commitments, including 7 customers new to Infinera, and we have shipped over 2,000 100-gig ports. With the DTN-X, we've penetrated a broad set of customer segments and also cracked into the tier 1 market, which effectively doubles our addressable markets globally. Our tier 1 readiness is demonstrated by our backbone win with CenturyLink and our successful completion of OSMINE certification, milestones that mark substantial progress in a short period of time.

We think it is important for you to know that our trial activity for the year was significant, helping to build a solid pipeline as we entered 2013. While the sales cycle can be long, we are greatly encouraged by the continued customer interest and strong market acceptance of the DTN-X. Current market trends are contributing to our optimism. We believe that the economics for long-haul networks for 100-gig are now better than those of 40-gig, prompting many carriers to choose 100-gig. The 100-gig ramp is exceeding even the most optimistic forecast, and most analysts are increasing their near-term expectation for 100-gig purchases. Furthermore, analysts such as Ovom show the 40-gig long-haul market tailing off faster than expected. These factors reaffirm our view that there is no economic or technical justification for deployment of new 40-gig networks, and support our strategy of focusing on 100-gig with the DTN-X.

In addition to a migration the 100-gig, we're also seeing a move towards converged solutions as carriers strive to optimize their networks and reduce cost by integrating switching with DWDM transmission. OTN today and packet tomorrow. With our PIC-based super channels, the DTN-X is a capacity leader in point-to-point DWDM. And as the market embraces the benefits of mesh networks, we are uniquely positioned with our integrated approach. Unlike our competitors who, we believe, are retrofitting older 10-gig and 40-gig platforms with 100-gig, and compromised switching capability, the DTN-X was built from the ground up with terabit scale per slot and converged switching. All without compromise and with their intelligent next-generation control plane. When customers select the DTN-X, they are building state-of-the-art networks for the next decade.

Our double-digit fourth quarter revenue growth, both year-over-year and sequentially, is a positive sign we are moving in the right direction. We continue to achieve good traction with the DTN-X, adding customers across a broad range of segments, including tier 1s, both domestic and international, cable, submarine, bandwidth wholesalers, content providers, and research and education customers. We announced our first deployment for a tier 1 domestic fiber optic backbone. CenturyLink chose Infinera's DTN-X, featuring 500-gigabit per second long-haul super channels, to enhance its nationwide, next-generation backbone transport network. This network will support critical video, mobile and cloud IP services, and extend their ability to deliver up to 100-gigabit ethernet services to data centers and customer facilities around the country.

Another significant milestone achieved was the successful completion of the OSMINE certification process, which enhances our ability to gain additional backbone business from U.S. tier 1 providers. Through this process, we have shown the interoperability of the DTN-X platform with existing systems, enabling providers to accelerate their network deployment upon selection of Infinera. We shipped over 1,000 100-gig ports for the DTN-X deployments in the fourth quarter.

Equally important, our deployments are going well. We have over 180 terabits of capacity on live networks in 23 countries around the globe. Because of our digital optical network approach, our customers are able to move more rapidly from purchase order to production network when compared to alternative approaches. In turn, they can start generating new service revenue quickly, demonstrating that Infinera continues to deliver on our time-is-a-weapon promise.

And while we've done very well with the DTN-X, our DTN platform also continues to create success. We added 4 new invoiced DTN customers in the fourth quarter, for a total invoice customer count of 111. We also had 3 customers announce the availability of 100-gig e-services on the DTN in the fourth quarter, showing the extensibility of the DTN's digital optical architecture. We believe that the capabilities of the DTN, in conjunction with the DTN-X, show the breadth of our portfolio, and our ability to address varying customers' market requirements.

Moving onto a technology update. We continue to lead the industry in technological advancements. In November, we announced Instant Bandwidth with our first Instant Bandwidth customer, TeliaSonera International Carrier. We followed up this week with another significant Instant Bandwidth customer, KDDI Corporation in Japan. Instant Bandwidth enables customers to activate 100-gig of line-side bandwidth to a software command the same day the service is turned on. This option offers fast feed-to-service and supports a success-based revenue model for our customers, where they can deploy bandwidth in 100-gig increments as it is required. We do not believe any competitor can match this capability.

We also announced the first successful demonstration, in conjunction with our customer ESnet, of our prototype SDN open transport switch, to control the DTN and DTN-X using the OpenFlow protocol. The fundamental digital optical network architecture of our platform already virtualizes optical wavelengths into pools of capacity. We often refer to this as bandwidth virtualization, and we believe this is optimal for an SDN approach.

In January, we completed a successful demonstration of Soft -- thin (sic) [Decision] Forward Error Correction, often referred to as SD-FEC, with Telstra Global, on a very challenging 4,200-kilometer submarine link between Hawaii and California. This technology has the potential to significantly improve existing fiber capacity, helping providers extend the life of their valuable installed fiber plant.

These technology demonstrations show that Infinera is continuing to drive innovation as we help the industry transform to a more scalable, converged and intelligent transport network architecture.

In summary, 2012 was a strong year for Infinera. To date, we have secured 22 DTN-X customers, achieved #1 market share in 100-gig ports in our first quarter of recognizing revenue, shipped well over 2,000 100-gig ports total, active over 180 terabits of capacity in 23 countries around world, and added 13 new customers. Our fourth quarter financial performance also demonstrated significant progress, with an increased cash balance, strong bookings and solid sequential revenue growth of 14%, which was on top of a 20% sequential increase in the third quarter.

We are encouraged by signs that indicate healthy market demand. Over the past 4 quarters, bandwidth consumption has increased, and customers across market segments are looking at increasing their network investments. And looking to 2013, consistent with the themes we laid out at our recent Analyst Day, our priorities are straightforward: We will focus our efforts on winning footprint and gaining market share. This will be balanced with a commitment to prudent financial management. We strongly believe our unique, vertically integrated manufacturing model, combined with continued bandwidth fill, will drive us to sustained profitability, and as a result, increase shareholder value.

Before turning the call over to Ita, I would like to thank the Infinera team and our partners for their hard work and dedication during the year, and congratulate them on a job well done. I would also like to thank our customers for their continued support. Ita will now provide a detailed financial review.

Ita M. Brennan

Thanks, Tom, and good afternoon. This analysis of our Q4 results and our guidance for Q1 '13 is based on non-GAAP, all measures exclude non-cash stock-based compensation expenses. Total GAAP revenues in Q4 were $128 million, in line with our guidance of $122 million to $132 million. Our solid revenue performance in the fourth quarter reflects robust sales of our DTN-X platform, combined with continued deployments of DTN. We recognized DTN-X revenue from 7 additional customers this quarter, one of which was a new invoice customer to Infinera. In addition to this 1 new DTN-X customer, we also added 4 new DTN customers, taking our total invoice customer roster to 111. We had 1 greater than 10% customer in the quarter, which was a competitive carrier. The top 5 customers also included 3 bandwidth wholesalers and a tier 1.

International revenues totaled $47 million or 37% of total revenues for the quarter. EMEA accounted for $40 million or 31%, with APAC and the other Americas each represented 3%.

Service revenues for the quarter were $18.6 million, up from $12.9 million in Q3, reflecting a higher level of deployment activity in the December quarter. This higher mix of deployment services also resulted in lower services gross margin at 60%, down from 69% in Q3. We expect services gross margin for Q1 to be consistent with the fourth quarter levels, reflecting ongoing deployments.

Overall gross margin in Q4 was 36%, at the higher end of our guidance of 35% to 36%, and, as anticipated on our October call, down from 39% in Q3.

Product mix for the quarter was healthy, with bandwidth-filled sales consistent with prior periods. However, our new footprint common equipment sales increased as we ramped DTN-X. In fact, fourth quarter optical amplifier shipments were amongst the highest in the company's history. This is indicative of the large number of new deployments completed in the period, and is reflective of the significant demand of 100-gig footprint that we are winning with DTN-X.

We are also pleased with our continued progress on yield improvements and cost reductions on the DTN-X platform, and continue to make progress toward entitlement deals. All things being equal, we'd expect to see the benefit of these improvements in the financials later in the year, once existing inventories have been consumed. In the meantime, the DTN-X units we're selling have a higher cost structure and this, combined with the higher common equipment mix reference area, contributes to the lower gross margin levels experienced in Q4.

Operating expenses for the quarter came in at $51 million, slightly better than our guidance which calls for spending of approximately $52 million, and flat with spending levels in Q3. Looking forward to the March quarter, we expect operating expenses to be approximately $51 million, reflecting continued focus on cost control and cash management, balanced with spending to support trials and other critical customer-facing activities.

Overall headcount for the quarter was 1,242 versus 1,235 in Q3. Headcount additions were primarily related to a small number of R&D hires and increased direct labor for manufacturing.

Our operating loss for the quarter was $5.4 million. Other income and expense for the quarter was favorable at $0.1 million. Net loss for the quarter was $6 million, resulting in a loss per diluted share of $0.05 at the better end of our guidance which called for a loss of $0.04 to $0.08 per diluted share, and a continuation of the improvement seen in Q3, with a loss per share of $0.07.

Now turning to the balance sheet. Cash, cash equivalents, restricted cash and investments ended the quarter at $188 million, up from $183 million in Q3. We generated $8.3 million of cash from operations in the December quarter, a significant improvement over usage of $29.3 million in Q3.

DSOs came in at 76 days, up from 74 days in Q3. This increase was contrary to our outlook on the October call, as we had expected DSOs to improve significantly. We executed well on collection, but linearity remained a challenge, with a larger portion of our revenue coming from new deployments with acceptance term. As we look forward to the March quarter, we anticipate some improvements in DSOs.

Inventory turns were 2.6x versus 2.3x in Q3. Overall inventory levels increased to $128 million, mainly due to increased levels of inventory awaiting customer acceptance at the end of the quarter.

Accounts payable days were 56 days, up from 48 days in Q3. Capital expenditures were $3.2 million compared to $2.5 million in Q3. This resulted in capital expenditure for the year of $25.4 million, down significantly from the $39.4 million spent in 2011. We intend to continue to manage capital expenditure to an approximate run rate of $20 million per annum.

We are pleased with the improvement in our cash balance in the December quarter. However, we still have work to do around working capital management and the optimization of inventory levels. This will remain a focus area for the company as we continue to grow the business.

Now, turning to our outlook for the first quarter and beyond. We continue to see strong interest in the DTN-X platform, with a healthy pipeline of RFPs and lab trials. We are pleased at the level of project commitments driven by the platform today, and especially with the number of new customers the DTN-X platform has generated. Although most of the network builds are DTN-X-based, we continue to win new customers and new deployments with the DTN platform.

The seasonality associated with Q1 can have an impact on the timing of bookings and revenue, and while not changing the underlying momentum, it does limit our visibility to the quarter. Based on our current view, we believe that revenue for the first quarter will range from $115 million to $125 million, and while reduced from Q4 levels, this represents a 12% growth on a year-over-year basis.

Looking beyond the March quarter, we would reiterate our 2013 outlook discussed at Analyst Day, which calls for growth on a year-over-year basis of 10% to 20%. We continue to expect pressure on gross margin for the next couple of quarter as we ramp deployments and production of the DTN-X. Our guidance for Q1 '13 calls for gross margin level in line with those experienced in the December quarter of 35% to 36%. This assumes continued footprint and DTN-X wins in the quarter, with high levels of common equipment driving lower initial gross margins. This footprint is the foundation required to achieve an ongoing profitable business model and longer term sustainable growth. We remain committed to our 2013 gross margin outlook of 38% to 40%, with the expected benefit of cost reductions and product mix improvements during the year.

As outlined in our Analyst Day, we believe that with solid revenue growth, our vertically integrated model can deliver significant leverage and allows for a healthy gross margin expansion. In addition, over time, we expect to see a more balanced mix of new footprint and network fill. These factors allow for gross margin expansion towards our revised midterm target of 45%. As we look at operating expenses, we intend to tailor spending to levels that support a consistent cash flow breakeven point by the second half of 2013. This must be done in a manner that supports a competitive roadmap and continued growth in new footprint wins.

So, in summary, our guidance for Q1, which is based on non-GAAP results and excludes any non-cash stock-based compensation expenses, is as follows: revenues of approximately $115 million to $125 million; gross margins of approximately 35% to 36%; operating expenses of approximately $51 million; operating and net loss of approximately $6 million to $11 million; and based on estimated average weighted diluted shares outstanding of $115 million, this will lead to a loss per share of approximately $0.05 to $0.09. Please note, the basic share count is expected to be 114 million for the quarter.

Now, operator, would you please open up the call for questions? Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Rod Hall of JPMorgan.

Joseph Park - JP Morgan Chase & Co, Research Division

This Joe Park calling on behalf of Rod Hall. I just wanted to talk a little bit about your outlook and really dig into DTN-X specifically. It seems like there's a lot of big customer attraction, but it seems like the revenue ramp is going to be delayed -- understanding that the sale cycles are longer. What type of visibility do you have versus what you saw at your Analyst Day regarding your 2013 revenue outlook? And I'd also like to ask you about the gross margin progression. Because even though you're at the high-end of your guidance range this; quarter, it seems like you're sticking with that range. So why exactly do you think that you'll be trending with that current guidance range?

Thomas J. Fallon

So, this is Tom. You asked a number of questions there. I'm going to poke at the first one first, which was your comment that it appears that the DTN-X revenue ramp is delayed. And I'm just going to disagree with you pretty vehemently. I don't think that the revenue ramp is delayed at all. In 6 months, we've won 22 customers, we've raised our top line, we've achieved #1 market share in 100-gig. I think the ramp has been phenomenal, and quite frankly, it's pretty much right on track with what we said we would do at the Analyst Day in Q4. In regard to visibility, the first quarter of any year in our industry has a little bit of lightness in visibility as new budgets are awarded, and as people make their plans. We still feel comfortable that there will be a reasonable amount of investment in network builds this year. We feel very comfortable that the majority of them are going to be migrating to 100-gig. We believe, very vehemently, that more and more people are going to be looking at making an investment in platforms that not only are 100-gig-ready but are ready for expansion into both converged networks and in terabit capabilities, which is the sweet spot of what the DTN-X was designed for. So I believe that the short-term visibility, in this period of time, is a little challenged. The more macro visibility, we are very comfortable with. We believe, roughly, that industry analysts are correct and that this market should grow roughly 10% this year, and we are staying committed to growing between 10% and 20%, if that's the case. In regard to gross margin, I'll let Ita comment after I do. Our gross margins are -- as we kind of laid out, as we ramp this product, there are a number of gross margin opportunities to improve, as we tried to declare at Analyst Day. First and foremost is just ramping volumes and achieving the yield profile that we think this technology can earn. We are well on that path, but as Ita can explain more thoroughly, we have the cost structure of the PICs that we've made 2 quarters ago, that are hitting our bottom line this quarter, and we need to flush those out. In addition, we need to continue to drive further cost reduction of the PIC technology. Second of all, and this is the phase of our product deployment, and because the deployments are going very well, we are putting in a lot of footprint. That footprint, not only for us but anybody in the industry, is going to have a low margin and that creates the opportunity to fulfill -- or fill that capacity, over time, with higher margin product. So as customers deploy, as customers start generating revenue and then need to expand their capabilities, which will happen starting anywhere from a couple of quarters after initial deployments to longer than that, we'll have the ability to generate substantial margins on that revenue for a long period of time. Ita?

Ita M. Brennan

Yes. I'm not sure there's a whole lot to add to that other than your question about referencing where we are now versus where we were at Analyst Day. I mean, I don't think anything has changed in terms of our outlook. We had cautioned around Q1, just given the typical industry dynamic that we see. And I think that's what we're seeing here, it just takes longer to get ramped up from a bookings perspective in Q1. From a gross margin perspective, I think it's been clear that there was always going to be a ramp improvement in margins and expansion in margins as we went through the year. So I don't think anything has necessarily changed in our view since Analyst Day in December.

Operator

Our next question comes from Ehud Gelblum with Morgan Stanley.

Ehud A. Gelblum - Morgan Stanley, Research Division

Question one, the CenturyLink/Qwest deployment. Can you give us a sense as to where we are in that and the pace of that as we look into Q1, and as we look into the rest of the year? And then another question about 100-gig shipments. Are we at a point where we can start counting them and kind of just seeing how much they were up or were they flat in Q4, and kind of what they do, again, in your estimation of Q1?

Thomas J. Fallon

So, on CenturyLink/Qwest, as we've announced, we have been selected. We have achieved OSMINE certification which was required to expand that capability beyond the original FOA or First Office Application. We have rails that are up and running, and carrying live traffic. And we have a roll out, for the rest of the year, extending that backbone across more and more of their service to markets. So I'm very excited about that opportunity and I think that we've worked with these guys for a very long time. They are a very great customer, while they decide to go in a direction and you execute, you have a lot of opportunity. We also continued to do very well with them in their Metro, both in their regulated and unregulated, with the DTN. So we anticipate our relationship with CenturyLink to continue to blossom and grow over the foreseeable future. In regard to 100-gig, we do break out the ports. We do that for market analysts and we will be doing that, any time now, where the market analysts will report, I think, in the middle of February, what the overall port count was. Port count was up over Q3, but I don't think we are specifically stating what ports, how many we shipped this quarter versus Q3.

Ita M. Brennan

Yes. We're not going to break out the revenue between kind of 10-gig or 100-gig, because that's really not how the business works, right? There are things that you should look at, as we did say we invoiced 7 new DTN-X customers in the quarter. And I think it's fair to say that the DTN-X revenue continues to grow and is becoming more significant from a total revenue perspective.

Ehud A. Gelblum - Morgan Stanley, Research Division

Yes. Back to the question on CenturyLink. Did you recognize revenue in Q4 or is that still unrecognized?

Ita M. Brennan

Yes. We have recognized revenue on the CenturyLink DTN-X deployment.

Thomas J. Fallon

First builds.

Ehud A. Gelblum - Morgan Stanley, Research Division

Okay. And you expect that to ramp pretty much all throughout the year, or do you think it'll be lumpy?

Thomas J. Fallon

I think, in this industry, everything is lumpy. People buy a whole bunch 1 quarter then they tend to deploy it the next quarter, but I think that...

Ehud A. Gelblum - Morgan Stanley, Research Division

Not necessarily. Initial builds will actually grow over a course of 2, 3, 4 quarters in a row before they hit the lumpy stage. I'm just wondering where we are in that process.

Thomas J. Fallon

Well, we're in the growth phase right now. They continue to award us extensions to the network that we have already built.

Ehud A. Gelblum - Morgan Stanley, Research Division

So we're not in the lumpy stage yet, we're still in the growth phase?

Thomas J. Fallon

You know -- fine. Backward-looking...

Ita M. Brennan

Ehud, to be honest...

Thomas J. Fallon

Backward-looking it's really easy to tell you. Right now, we anticipate they're going to continue purchasing.

Ehud A. Gelblum - Morgan Stanley, Research Division

All right. So let me try something else. Pricing in the competitive environment. How are you seeing pricing in 100-gig? You mentioned it's below 40-gig, it's been that way for some time, on a per bit basis. When you look at the competitors you're up against, the Ciena's, the Alcatel-Lucent's, the Huawei's, how have you seen the pricing environment? Have people kind of taken their foot off the gas pedal in terms of declining pricing or are they still aggressive? I mean, obviously they are still aggressive, but have you seen it take another step down?

Thomas J. Fallon

Yes, it's -- I'll, I guess, answer it in a couple of ways. One, the first way, which is if you're looking at a transponder-based comparison, prices came down radically year-over-year, as people were interested in making sure that market share was preserved, particularly, I think, as we came to market. They were interested in not letting us have a foothold. I think that the pricing, on a transponder basis, has gone to more normal levels now. So I don't think we're going to continue to see the dramatic reductions that the last year had. And I also think customers are more and more interested in the cost of converged networks versus alternative architectures. And when you bake that into it, it becomes more of a network cost versus a transponder cost discussion. And I think that discussion is going to take more and more meaning every year moving forward.

Ehud A. Gelblum - Morgan Stanley, Research Division

Okay. One last thing. EMEA was pretty strong this quarter. Anything in particular we should read into that, with the one customer issue, was that a...

Ita M. Brennan

Yes. I mean, I think it's just more that as customers start to deploy DTN-X, we start to see -- we'll see some lumpiness around the geographical split, but we are seeing a lot of interest in the DTN-X and the 100-gig in Europe.

Thomas J. Fallon

Europe has a number of customers who have deployed and are in the process of making a DTN-X decision. So we're seeing fairly robust activity on new builds. I guess, the backdrop, as you know, of a European financial challenge. And I would say more metered fill coming out of Europe, but reasonable amount of new build activity, in both Eastern and Western Europe.

Operator

And our next question comes from Subu Subrahmanyan with JudaGroup.

Natarajan Subrahmanyan - TheJudaGroup, Research Division

Could you talk, maybe, about profitability? Kind of what the model looks like as you get to breakeven and if you anticipate that happening in any given quarter in 2013.

Ita M. Brennan

Yes. So I think if we go back to what we talked about on Analyst Day, just in terms of 2013 first, we've talked about getting to a cash flow breakeven point in the second half of 2013, right? And obviously, we've put a revenue range out there that's in the 10% to 20% growth range. So you can envisage a ramping revenue line and some margin expansion as we go through the year, to stay in that 38% to 40% gross margin rate for the year, right? Beyond that, we've talked about margin expansion to 45% at the gross margin level, right? And I think that becomes a combination of us leveraging the PICs and the modules plants and the factories that we have. But also starting to see the benefits from the PICs, from the network footprint that we're putting in now. And I mean we are making heavy new footprint deployments right now. We shipped more amplifiers in Q4 than we have since way back in the beginning of 2009, right? We're definitely investing right now in footprint, and you will start to see margin expand out of that as we go through the year, and then onwards beyond that.

Natarajan Subrahmanyan - TheJudaGroup, Research Division

Understood. And cash flow breakeven, it'll be operating breakeven as well in the second half of '13?

Ita M. Brennan

Yes. I mean, right now, for sure, we say you'd start to hit the cash flow breakeven point. And when it kind of turns to P&L break-even, whether that's kind of in the second half or a little bit later, it's hard to tell yet, right? Our kind of guidance, right now, has been around saying we would hit a consistent cash flow breakeven by the second half.

Natarajan Subrahmanyan - TheJudaGroup, Research Division

Understood. On pricing, Tom, the question was around 10-gig. I mean, how does 100-gig compare to 10-gig, in terms of pricing right now? For the top carriers. I know it is less expensive than 40, but on a per bit basis versus 10.

Thomas J. Fallon

I'm going to ask Dave. Dave, you want to answer that?

David F. Welch

Yes. I think the -- I understand that 10-gig and 100-gig are slowly migrating to where they're applying to different applications. I mean, it's not really a head-to-head number of 10-gig to 100-gig. You've got more 10-gig in the metro area and lower capacity issues in the long-haul -- with long-haul routes, 10- to 100-gig is probably on par to a little bit below that, of 10-gig, on an application, application. In lots of applications where you don't need the capacity of the 100-gig or you don't need the better granularity, on a wavelength basis 10-gig is more competitive. So it's not quite a fair comparison to have between the 2.

Natarajan Subrahmanyan - TheJudaGroup, Research Division

Fair enough. For a carrier that has 10-gig in the backbone today, though, it's sounded like -- if they replace it with 100-gig, it's less expensive on a per-gig basis than 10-gig. Did I understand that right, Dave?

David F. Welch

For incremental business, if I have a 10-gig previously deployed network, it will be less expensive to incrementally put more 10-gigs on that network than it will be to upgrade the system and all the commons that are required of that to 100-gig. If I'm planning a network that I have an incremental build of multiple 100-gigs of bandwidth that I need to put on a network, then I will likely pay that commons expense to install a 100-gig so I can get on a better dollar-per-gigabit train. But there's an entry price to that.

Natarajan Subrahmanyan - TheJudaGroup, Research Division

Right. Yes, I meant transponder to transponder, really, comparison.

Thomas J. Fallon

Certainly, from an operating cost, 100-gig for a core backbone, is substantially less power, space, ease-of-use, provisioning. The CapEx is probably, as Dave said, roughly on par. From an operating expense it's substantially less. There's nobody that's going to, in my mind, build a 10-gig core network at this point, that has any substantial volume. It's just not practical.

David F. Welch

But they will add 10-gigs to their...

Thomas J. Fallon

They will add 10-gig.

Operator

And our next question comes from Michael Genovese, MKM Partners.

Michael Genovese - MKM Partners LLC, Research Division

Ita, I believe that you said during the prepared remarks that you shipped 1,000 10-gig ports during the fourth quarter. I just want to verify that you said that. And based on that number, all of you, do you think that you are #1 on that metric in the fourth quarter? It looks like you might be. And could you just speak, kind of qualitatively, about the competitors? Ciena, Alcatel, Huawei. Anybody you're seeing more than anyone else? Anyone whose technology looks better? Anyone acting differently than others on pricing? And then I have a second question later.

Ita M. Brennan

Yes, so I think it was over 1,000 100-gig ports, right? Obviously we think that's a very compelling shipment number. Whether it puts us in #1 market share or not, we'll have to wait and see when the market share data comes out. But we do think that's a pretty compelling metric. In terms of the competitive landscape, I'd ask Tom maybe to chime in on that a little bit.

Thomas J. Fallon

So it's a competitive environment. The people that we primarily see continue to be Ciena, very spread across almost all areas. And certainly, in certain areas, we see a lot of Alcatel. Alcatel continues to be aggressive on pricing, which continues to perplex me. We see less and less Huawei and that's, I would say, a statement that applies in both North America and in Europe.

Michael Genovese - MKM Partners LLC, Research Division

Great. That's a very helpful answer. And then, second question. Here in the fourth quarter, and with the first quarter guidance, I mean, very solid performance. But this is actually a time when your comps, suppliers, different people on the value chain have been seeing some weakness, I think, particularly in December and the March quarter. Everybody's hoping CapEx -- or confident CapEx will ramp in the second quarter in the back half. But you've done well in this period of CapEx weakness. What are your expectations for CapEx in the second quarter and the second half and is that a part of the story here? Do you think that it's just the 100-g product cycle or is this the 100-g product cycle plus better CapEx?

Thomas J. Fallon

I think that my view is that when people have CapEx discussions, what they're vastly talking about is what is Verizon and AT&T going to buy. And I think that looks at the world too narrowly. And if you look over the history of time, more and more flows of traffic on the Internet are moving to alternatives besides that. Those alternatives, be they wholesalers, be they Internet content people, be they cable people, have been the core of Infinera's business. And we see, both with our core, but also new opportunities of tier 1s domestically and international, we see an environment where there are more plans to build more networks at this time of the year than we have seen in the last couple of years. So I think part of it certainly is a 100-gig migration to the optical reboot of 100-gig. Part of it is people trying to make a more intelligent transport layer by putting some of the intelligence of historically routing and switching layers into the optical layer. Because it can be done more cost effectively. And part of it is, there is a lot of just fundamental demand for increased high-capacity capability. I think we are seeing a reasonable amount of that. But that's different than the discussion of AT&T and Verizon are having bigger CapEx plans. And it's very easy to, I think, use those synonymously with the industry, and I don't believe they're synonymous anymore.

Michael Genovese - MKM Partners LLC, Research Division

That's another great answer. So do you not necessarily then have a view on the second half of the year and whether CapEx will be 20% higher in the second half of the year, this year, or not? It sounds like it's almost irrelevant to your trajectory. But just for the heck of it, do have a view there?

Thomas J. Fallon

Yes, I don't really have a view that would be unique or have any insight into that other than what I hear from the same people you hear it from: Analysts and suppliers.

Operator

Our next question comes from Sanjiv Wadhwani with Stifel, Nicolaus.

Sanjiv R. Wadhwani - Stifel, Nicolaus & Co., Inc., Research Division

Tom, I just wanted to get a gauge. When you look at the RFPs and RFIs that are out there, would you be able to characterize as to sort of what percentage of them are on the 100-gig side?

Thomas J. Fallon

I'll have Dave answer that question.

David F. Welch

Yes. We see a bunch of RFIs, RFPs in the long-haul space. And understand that these are questions, not necessarily decision points, but I'd say probably about 70% of the RFIs and RFPs, that we have out there, ask the question of 100-gig capability. They also, we're seeing, actually, a substantive takeup of -- 75% of the RFPs are asking for integrated OTN switching with that, and that plays right into our strengths for them.

Sanjiv R. Wadhwani - Stifel, Nicolaus & Co., Inc., Research Division

So, I guess, within that context -- and it's a broad-level question, when you look at the product revenue increase in December versus September, it is about $10 million. I'm guessing the DTN-X sort of probably did north of that $10 million. I'm just trying to get a gauge. I know you don't want to break out, specifically, on the DTN-X. But in 2013, should we be looking at DTN-X accounting for half of your shipments or revenues, or any metrics that you can broadly talk about?

Ita M. Brennan

Yes. I mean, Sanjiv, I don't think we're going to break that out. And to be honest, it's not really a relevant metric. Once we're steady-state with the DTN-X, and we can provide the network infrastructure, either a 10, DTN or DTN-X, it doesn't really matter. So we're selling networks and we're selling both products into the same customers, right? So I'm not sure, we're probably not going to break that out, just from an accounting perspective, and I'm not sure it's really a helpful metric. I mean, we have tried to provide some metrics around the numbers of customers that are invoicing and so on, so you can see us invoice another 7 DTN-X customers this quarter. So, clearly, it's ramping and it is becoming a significant part of the overall revenue number.

Roderick B. Hall - JP Morgan Chase & Co, Research Division

Okay. But just on a clarification point of view, is it fair to assume that the $10 million increase that you saw in product revenues, from Q3 to Q4, the DTN-X did higher than that?

Ita M. Brennan

Yes. I mean, clearly, we've said a lot of the new higher capacity, new network deployments are going would DTN-X. So that should say that it's higher than that, right?

Operator

And our next question comes from Simona Jankowski with Goldman Sachs.

Simona Jankowski - Goldman Sachs Group Inc., Research Division

I just wanted to ask some questions about your Instant Bandwidth program. I think you now have a couple of customers on that, including TeliaSonera and KDDI. How does that impact revenues and margins relative to your traditional sales model? And also, what kind of customer do you think would be more attracted to using this kind of sales model versus the traditional one?

Ita M. Brennan

Yes. I mean, I think the Instant Bandwidth, for us, is an added tool to the toolbox in terms of how we sell and how we approach customers. It allows us to, for a particular customer type, where they really want to match their spending with revenue, it allows us to kind of more closely align ourselves with their business, right? What we see is that lots of customers want to come in and buy the 500-gig capacity upfront, but we'll also see some customers where this model is a better fit to their needs and what they want. So we see it as a competitive tool in certain circumstances, but we still see a lot of customers wanting to actually go and purchase the capacity upfront.

Thomas J. Fallon

I think Ita provided the right context. We're providing a choice to customers. We have no bias one way or the other. And the opportunity for us is to be on the same side of the table as our customers. So as they're trying to win business, we can put them in the best spot to do that today and tomorrow. And I think that we give them a choice, the people who want to use 500-gig today, and there's several of those, we have that choice. People who want to pay for 100-gig today because they're uncertain about tomorrow. They know they're going to grow, they're not sure when. We give them that choice. We're on the same side of the table as our customer and none of our competitors can offer this.

Simona Jankowski - Goldman Sachs Group Inc., Research Division

Just to be clear. So $1 of revenue that is booked as Instant Bandwidth, does that have the same margin profile as if it had been sold as a 500-gig increment?

David F. Welch

I think the network margin -- what Instant Bandwidth allows us to do is, one, win more deals and take greater market share because it's an added tool; two, it impacts -- or positively impacts our overall margin portfolio profile.

Simona Jankowski - Goldman Sachs Group Inc., Research Division

And that positive impact is over the life of the sale or is it in that initial 100-gig increment?

David F. Welch

It's over the medium-range. Relatively short amount of time for it to play catch-up and surpass. It's a value to the customer. The customers can turn on a circuit instantaneously in a day as opposed to a 40-day process that might exist in an alternative mechanism. That value, we get credit for it.

Simona Jankowski - Goldman Sachs Group Inc., Research Division

Okay. And then just separate question. You commented on 100-gig price pressure normalizing now or subsiding. What about 10-gig? How are pricing trends evolving in that part of the market?

David F. Welch

They're pretty stable. Stable in the realm of standard yearly reductions that go on within the industry. Again, you have to look at it -- 10-gig is being utilized on a brownfield fill, and in the long-haul, if there's not a lot of greenfield long-haul, there is some for 10-gig, and then there's a lot of lower capacity, different application metrics where 10-gig plays a role.

Operator

And our next question comes from Alex Henderson with Needham and Company.

Alexander B. Henderson - Needham & Company, LLC, Research Division

First off, congratulations on the really nice customer win rate. I was hoping you could give us a little bit more clarity on the 22-customer piece. What portion of those 22 were existing customers and what portion were new customers? Is that 7 DTN-X new customers that you were invoiced all new customers, or are those the only new customers there that are in the 22? I would assume they're not.

Ita M. Brennan

Yes. So out of the 22 purchase commitments, we said there are 7 that are new, right? If you look at kind of what's been invoiced versus that, we've probably invoiced a little over half of those 7 new customers at this point, right?

Alexander B. Henderson - Needham & Company, LLC, Research Division

Okay. And can you help me out a little bit on the guidance for 1Q, on the mix between product and service? Obvious your service jumped up quite a bit in the December quarter. You've probably made comments about this earlier, I missed the first 10 or 15 minutes of the call. So will that come down back to a similar level to the mix that you had in the first half of 2012 or will it -- is that driven by the installation rates which, therefore, will keep it higher and, therefore, higher as a percentage of the overall revenues?

Ita M. Brennan

Yes. I mean, I think we would expect it to come down off of Q4, but probably not back to the levels that we saw earlier in 2012 or even at the end of last year, right? So we have enough -- the volatility has been driven by the amount of deployments, and the level of deployment activity that we're doing. So Q1 will still have a very healthy deployment -- amount of deployments going on. So it won't be as high as Q4, but it'll probably be higher than what you had seen historically for a while.

Alexander B. Henderson - Needham & Company, LLC, Research Division

Okay. One last question, and I'll try to keep a little short here. The mix of customers that you're seeing, as we're going into the first half of 2013, between customers that were existing customers driving revenue and customers that you're seeing with extended period of acceptance criteria associated with new builds. Can you talk a little bit about what the mix is between those in terms of dollar value of revenues ordered? Is there a fair amount of pent-up revenue that is waiting for accrual of that acceptance criteria?

Ita M. Brennan

I think, you'll see this in the 10-K when we file it, but our backlog, and that includes kind of our financial backlog, is pretty much flat to where it was at the end of last year, right? So it's not that there is a tremendous backlog of stuff kind of on the books coming into Q1. That's why the visibility in Q1 is important, right? What we do see, though, is that -- I think the comment about the linearity as the cause of the acceptance, it's pushing some of our revenue to the back end of the quarter. And it's taken longer to kind of process that revenue in a quarter, right? But it's not that we're coming in with a huge backlog kind of into Q1.

Thomas J. Fallon

Even customers who we've had a relationship for a longtime, when they buy a new platform like the DTN-X, some of them want to do acceptance on the first network build. Not all of them, but some of them. So it's important that we don't parse too fine around new customer versus old customer because sometimes a new DTN-X customer who is an old customer will have the same acceptance criteria. I think one of the things that you should look at, as Ita pointed out, our backlog is roughly where it was on growing bookings. That's a very significant sign, and I mentioned it in my commentary. The DTN-X networks that we're deploying, not only are we ramped and are shipping aggressively, but the turnups are going very well. I think that you will find, and if go talk to customers, when they're deploying our networks it's not taking them a long time to turn them from a PO into a revenue collecting network for them, and that means the acceptance is happening as planned. And I think on a new technology, sometimes that's a risk or a challenge. The DTN-X is leveraging the lessons learned on the DTN, and it is continued to be easy to buy, easy to deploy, easy to turn up and easy to start collecting revenue on.

Alexander B. Henderson - Needham & Company, LLC, Research Division

At the risk of being a liar, I'm going to ask one more question, because you spurred a question. Can you give us some sense of what the percent fill is on the boxes that are being shipped out? I mean, are you shipping 25% loaded, 30% loaded, 35%? What kind of ratio?

David F. Welch

People typically deploy things relatively lightly-loaded. And these are 5 terabit boxes. They're not going out with 5 terabits of bandwidth, they're going with something less than that

Alexander B. Henderson - Needham & Company, LLC, Research Division

25% a reasonable guess?

Ita M. Brennan

We're not going to go there.

Operator

And we do have time for one final question. And that question comes from George Notter with Jefferies.

George C. Notter - Jefferies & Company, Inc., Research Division

I guess I wanted to ask about -- Tom, I'd love your perspective on the disclosure from Alcatel-Lucent around the time of their financing, they said their terrestrial optical gross margins were around 17%. And I guess I bring the question up because you guys are trying to drive a margin expansion story here. Here is a competitor that feels like, based on the gross margin, really being aggressive on pricing. I mean, do you think that's a real inhibitor to your ability to expand margins over time or do you kind of look through that? What's your perspective?

Thomas J. Fallon

I think my perspective is a couple fold. One, we do see them being aggressive in the market. And we were never sure what allowed them to do that. When they had to publicly disclose their margins, it became clear that they were doing it not because a cost structure advantage, but because -- I assume, because they desperately need to hold and grow their market position to allow time for them as a company to right their ship. I think that the 17 points they articulated has -- is probably lower than reality of true cost of goods. I assume that, as a company like Alcatel, there's a fairly significant corporate overhead that they have to pay to the mother ship. I don't know what that percentage would be, but I assume it's nontrivial. But even if you add 5 to 10 points, you're still talking mid-20s from a gross margin perspective. And that tells me a couple of things: one, they have a cost structure disadvantage, not a cost structure advantage; second of all, when we compete head-to-head with them, we are winning a reasonable amount of business and we -- candidly, customers who use both, they say our experience is significantly better. So sometimes you can lower price when you're trying to buy market share, sometimes you'd lower price if you have a product that is, in certain characteristics, inferior. Sometimes you have to lower price to get rid of the risk premium if Alcatel goes away. I don't know what is their thinking process, but I feel pretty comfortable that they cannot continue to be price leaders and cost laggards over the intermediate term. And we are going to continue to develop cutting-edge technology. We are going to continue to deploy networks that carry live traffic quickly. We're going to continue to work very hard to delight our customers. And I think that combination is going to be pretty hard to beat.

George C. Notter - Jefferies & Company, Inc., Research Division

One last one. NSN recently, sold their optical business to a private equity firm. Are you guys seeing any impact from that in the marketplace? Is that dislocating customers or creating RFP or RFI activity? Any impact there would be interesting to hear about.

Thomas J. Fallon

In my observation, George, it would be it's probably too soon to see an impact from that event. We are seeing an impact from the events with NSN over the last year, where companies became suspicious of the commitment to staying in the optical space. We've recently won a couple of deals that's displacing old NSN optical gear. But that's not triggered by the recent sale, that was triggered a while back by the concerns of NSN not being committed to optical. I do think that, that shoe was going to drop, still. I think that the acquisition, I think, reaffirms that the industry is going to change and consolidate, because the structure of the industry, today, probably isn't viable. I think that -- I don't know, Marlon [ph], but I certainly respect their courage of attacking this industry with a company like NSN who has good footprint, but to the best of my knowledge, has no differentiating technology. And I think they're going to have -- they got a mouthful to swallow, that's all I know.

Thomas J. Fallon

Thank you, all, for joining us this afternoon, and for your questions. We look forward to staying in touch in the months and quarters ahead, with reports on our continued progress. Have a great day.

Operator

And that concludes conference. Thank you very much for your participation. You may disconnect at this time.

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