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Infinera Corporation (NASDAQ:INFN)

Q4 2008 Earnings Call

January 29, 2009 6:00 pm ET

Executives

Bob Blair - Investor Relations

Jagdeep Singh - President and Chief Executive Officer

Duston M. Williams - Chief Financial Officer and Principal Accounting Officer

Analysts

Subu Subrahmanyan - Sanders Morris-Harris Group

George Notter - Jefferies & Co.

Ehud Gelblum - J.P. Morgan

George Notter – Jefferies & Co.

Hussein Eman – Investor

Simona Jankowski – Goldman Sachs

Shagai W. – Investor

Jeff Schreiner - Capstone Investments

Operator

Welcome to the fourth quarter fiscal 2008 investment community conference call of Infinera Corporation. (Operator Instructions). I will now turn the call over to Mr. Bob Blair of Infinera’s Investor Relations. Go ahead, sir, you may begin.

Bob Blair

Thank you. Good afternoon. Today’s call will include projections and estimates that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements address the financial condition, results of operations, business initiatives, views on our market and customers, our products and our competitors’ products and prospects of the company in Q1 2009 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 February 19, 2008, for more information on these risks and uncertainties.

Today's press releases including Q4 2008 and full year 2008 financial tables and investor information summary and a guidance reconciliation summary will be available today on the Investor section of Infinera’s website at www.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 also include certain non-GAAP financial measures. In our earnings release, we announced operating results for the fourth quarter of 2008, which will exclude the impact of the roll-off of certain ratable GAAP revenue and costs from the balance sheet, as well as the impact of non-cash stock-based compensation and warrant revaluation expenses.

These non-GAAP financial measures are provided to facilitate meaningful year-over-year comparisons. Please see the exhibit to the earnings press release for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures and for an explanation of why these non-GAAP financial measures are useful and how they are used by management.

On this call, we also give guidance, including guidance for the first quarter of 2009. We have excluded non-GAAP, non-cash stock based compensation expenses from this guidance, because we cannot readily estimate the impact of our future stock price on our future stock base compensation expenses.

For the remainder of today's call, we'll be discussing our fourth quarter 2008 adjusted GAAP results and our first quarter 2009 GAAP guidance, excluding the impact of these items and we'll refer to these results as adjusted GAAP.

I will now turn the call over to Infinera President and CEO, Jagdeep Singh.

Jagdeep Singh

Good afternoon and thanks for joining us. With me is CFO, Duston Williams, who will provide the a report on our Q4 results and our outlook for the first quarter.

Looking briefly at the fourth quarter, we posted adjusted GAAP revenue of $86.2 million. We continued our new customer win momentum with seven new customers and for the first time in a single quarter we had an internet content provider, a wholesale carrier, a cable MSL, and a tier one incumbent all rank among our top five customers.

Our top customer in Q4 was an internet content provider, accounting for 23% of revenue. The common equipment associated with the new customer deployment and additional expected new customer shipments in Q1 put downward pressure on our gross margins in the quarter and they came in at 36% versus 42% in the September quarter.

We posted an operating loss for Q4 of $9.3 million versus an operating loss of $1.7 million in Q3. Another significant Q4 data point is that we derived 24% of our Q4 revenue from the Anea region, up from 16% a year ago, demonstrating a healthy return on the resources and focus we deployed in that region over the last several years.

Clearly, our major win and successful deployment of Deutsche Telekom are serving as a an excellent foundation and reference account for our biggest development efforts throughout Europe and among incumbents worldwide.

On that note, we were pleased to announce today that OTEGLOBE, the international division of Greek incumbent national carrier OTE, has selected Infinera as its supplier for Pan-European network. In making a selection, OTE cited as critical factors the scale, speed, and flexibility of Infinera’s architecture.

OTE was one of three European-based new customers added in Q4, with an additional three new customers coming from the Americas and one from Asia-Pacific.

Duston will provide some additional color on the customer mix in terms of the diversity, size and financial wherewithal of the companies running their networks with Infinera equipments.

OTE represents our fourth win with tier one incumbent carriers joining DT and two other incumbents with whom we are doing business. We remain pleased with our traction with tier one incumbents and we expect to announce additional such wins during the remainder of 2009.

While we were among the first in the industry to highlight a slowing of our growth projectory earlier in calendar 2008, it was nevertheless an important year for Infinera. In FY08, we saw record adjusted GAAP revenues of $353 million compared with FY07 invoice shipments of $309 million.

On the customer front, we expanded the base from 41 to 56, with 12 of them coming in the second half of the year. We had zero customer turn again and we reduced our customer concentration as our largest customer, level three, represented 24% of FY08 revenue versus much higher historical levels and no other customer accounted for more than 7%, thus diminishing our dependence on any one customer.

In addition, we showed growth across each major geographical region as well as growth in each of our five targeted customer market segments.

We also achieved several significant technology milestones in 2008. We provided our customers with what we believe is the industry’s first and only pick-based road map, indicating our belief that it’s possible to double capacity per chip every two years.

We began shipping our new 2 Line System, extending the reach and increase in capacity for our DTN system.

We also surpassed a total of 130 million hours of operation in live networks worldwide without any failures in the field and shipped over 10,000 Infinera DLM line cards.

We are very encouraged with Infinera’s continued development as a long-term strategic optical transport supplier to leading companies across a set of growing markets. Based on our customer retention and win rate, it’s clear that our value proposition is resonating as a most compelling and economic option for aggressing future.

While calendar 2009 is shaping up as a challenging one for participants in the optical industry, from a growth standpoint, we also believe it will be a year in which many carriers will make significant strategic decisions and some of our competitors will be challenged to address carriers long-term optical transport requirements.

With a strong balance sheet and established technology need, we intend to convert these circumstances into opportunities for Infinera to advance our leadership position.

This is clearly an uncertain time in the market with reduced visibility. Despite this, our customers tell us that over the next several years they expect width will continue to grow, driven by a broad range of applications. This is encouraging for us, because we believe that demand for optical transport equipment, including our systems, is tied directly to growth and demand. Our basic strategy is to be the vendor of choice to fulfill that demand.

We try to accomplish through continued technology and leadership in the long haul market, our metro business beyond the core with new products, expanding our customer base in Asia Pacific as we have in Europe, and continuing our penetration of tier one incumbents.

At a time when many in the industry are retrenching, we remain committed to focusing our energies on developing new products that will allow us to continue to differentiate our DTN system and compete in adjacent markets, including ultra long haul and metro access.

We will continue to focus our R&D on integrating additional functionality into our picks and delivering additional services through systems enabled with those more powerful picks. We believe this will create even greater value for our customers and prospects and further differentiate us from our competitors. This strategy continues to be embraced by service providers worldwide as evidenced by the continued customer win momentum discussed earlier.

Duston will now cover our Q4 performance and outlook.

Duston Williams

Thank you, Jagdeep. I’ll review the Q4 actual results and then follow that up with an outlook for Q1.

The following analysis of our Q4 and Q3 results is based on adjusted GAAP and the results from other quarters in fiscal year are based on invoice shipments and all references exclude non-GAAP stock-based compensation.

Please see the GAAP to non-GAAP invoice shipment and adjusted GAAP reconciliation, which is attached as an exhibit to today’s earnings press release for a reconciliation of these results to our GAAP results.

Looking at the specifics for the quarter, adjusted GAAP revenues in Q4 totaled $86.2 million versus $80.9 million in Q3. In Q4 we had two 10% or greater customers on an adjusted GAAP basis, an unannounced internet content provider, and Level 3. Our largest customer, the internet content provider, accounted for 23% of our Q4 adjusted GAAP revenue. Level 3 accounted for 18% f revenue versus 27% in Q3.

Gross margins were 36% in Q4 versus 42% in Q3. Related mostly to new deployments and new customers ads in Q4, an additional anticipated customer ads in Q1.

As our business model dictates, a high level of new customer activity within any given quarter will almost always be correlated with relatively higher amounts of low margin common equipment revenue in that quarter.

The seven new customer ads in the quarter equaled our previous high point in Q3 2007 when we add the same number of new customers.

In Q4, we shipped more common equipment chassis than in any other previous quarter in our history. Our common equipment revenue as a percentage of total revenue was the highest in well over a year.

Our TAM revenue as a percent of total revenue was lowest it has been in well over two years. We also booked significant lower cost to market or LCM adjustments that reflect loss leading common equipment to be shipped in Q1.

Operating expenses for the quarter were $40 million versus $35.9 million in Q3, which exceeded our high end guidance by $1 million. A majority of the increase in spending from Q3 to Q4 was attributable to R&D headcount increases, as well as additional project and prototype expenses. The higher than expected spending was entirely related to a $1.7 million bad debt provision booked for a Russian customer.

The operating loss for Q4 was $9.3 million versus an operating loss of $1.7 million in Q3. Other income and expense for Q4 was a unfavorable $0.4 million versus a favorable $1.7 million in Q3. The quarter-over-quarter decrease was attributable to unfavorable foreign currency impacts of $1 and unrealized losses of $0.9 million related to our auction rate securities.

Regarding the auction rate securities, under an agreement signed in Q4 with UBS, they have agreed to purchase the securities at par value on June 30, 2010; however, in the meantime, we are required to record these securities at their value and discount the par value to any credit risk associated with UBS and the timing of the cash flows.

We expect to adjust the fair value of these securities back to par between now and June 30, 2010 and we will record the resulting unrealized gains in the periods in which they occur.

In Q4, we recorded a tax benefit of $0.7 million. This Q4 tax benefit reflects a significant reduction to taxable income related to requests for a tax accounting method change filed during the quarter. Offset by the previously communicated unfavorable impact of the California law change, which eliminated the utilization of California net operating loss carry forwards for two years retroactive back to January 1, 2008.

Net income was a loss of $9 million or a loss of $0.10 per basic share or $0.09 per diluted share versus a break even performance in Q3.

Turning to the balance sheet, cash, cash equivalent, restricted cash and investments ended the quarter at $312.6 million versus $324.6 million in Q3. We used $5.4 million cash from operations in Q4 versus a positive $9.9 million. DSOs were 74 days versus 55 days.

If you look a bit further into the increase in the DSO days, the 19 day quarter-over-quarter increase breaks down as follows. Five days were attributable to a few customers delaying payments until after the end of the quarter. These customers have since paid with the exception of one customer for which we booked a bad debt reserve.

Six days came from customers not electing to take early pay discounts but rather paying within normal payment terms. An additional six days were associated with a customer mix in Q4 that included fewer early pay and shorter payment term customers and more longer payment term customers. And finally, two days were the result of giving two customers slightly longer payment terms on their initial product deployment. Further shipment to these customers will revert back to normal payment terms.

It is also worth noting that as of the end of last week, our IAR aging was almost completely current with very little significant past due amounts.

Inventory turns were 3.8 versus 3.2. Accounts payable days came in at 45 days versus 38 days and capital expenditures were $7.8 million in Q4 versus $5.9 million.

I would like to talk a little bit now just about our customers. Based on the current economic environment and the investment community’s interest surrounding the composition of Infinera’s customer base, we thought at this point in time it would make sense to provide a bit more insight into our customer base, which by the way we are quite proud of and which we believe gets stronger every quarter.

Infinera currently has 56 customers of which 36 are announced customers and 20 are not announced. The unannounced customers accounted for 43% of the Q4 adjusted GAAP revenue. 37 of the 56 customers are in the U.S., 14 in Europe, and 5 in Asia, reflecting the sequence of where we focused our investments and sales structure since our founding eight years ago.

We would also like to give you a feel on a rough order of magnitude basis. The average revenue size and profitability of an Infinera customer on a weighted average basis, based on our Q4 revenue profile.

In Q4, we recognized product revenue from 41 customers. If you look at the yearly revenue in EBITDA from each of these 41 customers and weighted based on the Q4 profile, an average Infinera customer has revenue, yearly revenue, of greater than $13 billion. EBITDA in excess of $4 billion. Even more interesting is a similar analysis of our top ten customers, eight which are public, two which are private, and four of which are unannounced customers.

Our top ten customers accounted for 72% of our total revenue. The lowest concentration by nine percentage points in the history of the company. Looking at the latest quarterly revenue, EBITDA and cash flow from each of our top ten customers, annualizing it, and then weighting based on our Q4 top ten revenue profile, an average Infinera top ten customer has yearly revenue of greater than $19 billion. EBITDA approaching $6 billion. Cash from operations of $6 billion and cash from operations net of capital expenditures well in excess of $3 billion.

We believe that all top ten customers have a positive EBITDA and all but one, that being a smaller private company, have positive cash flow net of capital expenditures.

The above analysis is not meant to portray that our customer set is perfect, but is intended to give you a better feel for the overall makeup of the roster.

We look forward to keeping you informed of many additional great new customers during 2009.

One final word before we talk about Q1 outlook. Our last VSOE update, as previously discussed and promised, beginning in Q109, Infinera will convert to full GAAP reporting.

Our Q1 revenue guidance will be significantly impacted and our gross margin guidance will be somewhat impacted by the anticipated addition of several new large customers during the quarter. At this point, we believe that these larger newly acquired customers, not in the current 56 customer count, will be in various stages of deployment at the end of the quarter and a majority of the revenue recognition will most likely fall outside of Q1. Specifically, we have three significant new customer wins with European customers which we believe all the revenue will be recognized outside of Q1.

Consistent with my earlier discussion on the nature of new customer deployments, these anticipated Q1 additions will have a greater portion of lower margins, common equipment associated with them, which can significantly impact margins, both prior to shipment through lower cost to market adjustments, inventory adjustments and upon customer invoicing.

Gross margins are also assumed to be impacted by a shift in Q1 within our existing customer base to some lower margin profile customers.

With these factors in mind, the following guidance for Q1 is based on GAAP results and excludes any non-GAAP stock-based compensation expense. Revenue of approximately $65 - $70 million. Gross margins of 35-40%. Operating expenses of $41 million. Operating loss of $13 to $18 million. A net loss of approximately $12 to $18 million. Based on estimated average diluted weighted shares outstanding of $98 million, this would lead to an EPS loss of 0.12 to $0.18.

Operator, if you could now open the call up for questions please.

Question-and-Answer Session

Operator

(Operator Instructions).

Your first question is from Subu Subrahmanyan of Sanders Morris-Harris Group.

Subu Subrahmanyan - Sanders Morris-Harris Group

If you could walk us through the gross margin adjustments for the December quarter. Did I understand you right, was it 47%, and understand the level of impact that lower cost market had on the numbers and also the debt expense, what that number was.

Duston Williams

Sure. The Q4 margins were 36%. What I mentioned is that we booked significant lower cost to market adjustments in anticipation of Q1 shipments and that was several million dollars that we booked for those adjustments.

Subu Subrahmanyan - Sanders Morris-Harris Group

Impact on that 36%.

Duston Williams

Over five percentage points. On the bad debt, $1.7 million related to one specific Russian customer.

Subu Subrahmanyan - Sanders Morris-Harris Group

Is that typical for the lower cost of market to book it ahead of when even ship and recognizes revenues?

Duston Williams

Yes, in this case, we’re selling some common equipment below cost. That common equipment we currently have in inventory or purchase commitments on our suppliers, which require us to effectively book that inventory at lower cost of market.

Subu Subrahmanyan - Sanders Morris-Harris Group

Moving onto guidance, it sounds like there are several large customers that you ship stuff to in lower cost market expenses, but you expect relatively minimal revenues in 1Q, so given those factors, should the first quarter mark a bottom for revenues?

Duston Williams

Yeah, good question, all things being equal, Subu, with our existing customer base. I think that’s a logical assumption. From a revenue perspective, I think most of these customers will recognize if everything goes as expected, revenue in Q2, there’ll probably be one that might stretch out potentially into Q3.

Subu Subrahmanyan - Sanders Morris-Harris Group

You mentioned three. Are there more than three that are being impacted, this quarter, and will start in Q2 or later?

Duston Williams

Yeah.

Operator

The next question is from Ehud Gelblum of J.P. Morgan.

Ehud Gelblum - J.P. Morgan

Duston, doing a little math of what you reported versus what you gave guidance for. The mid point of guidance would have suggested that your cogs would have been about $43 million this quarter on $75 million in Op Ex. You did cogs of $55 million on $86 million Op Ex, but numbers aren’t that important, besides to say that you beat your revenue guidance by $11 million and your cogs guidance, your cogs ended up being $12 million higher. As we look into next quarter, how do I take that correlation between cogs being essentially the same as additional revenue. How do I take that and apply that to the next quarter in terms of how much does a new customer cost in terms of common equipment?

Duston Williams

Obviously every customer is different. So the analysis is a little difficult, but if you want to just take it, probably the most simplistic approach and that extra revenue call it 45% margin, 40% margin, would have generated that much more cogs and basically the residual you could argue associated with new customers and lower cost of market type adjustments.

Ehud Gelblum - J.P. Morgan

So in that case, you had additional $7 to $8 million in cogs this quarter out of thin air more than you anticipated in most of that $7 to $8 million associated with the future?

Duston Williams

That may be a little aggressive, but close.

Ehud Gelblum - J.P. Morgan

Now how many new customers are you talking about for next quarter?

Duston Williams

We count customers, which is that we recognize $100,000 of revenue, it will probably be a low quarter for new customers adds. We will ship to a lot of new customers in Q1 that won’t be counted as a customer in Q1.

Ehud Gelblum - J.P. Morgan

Let me follow up on the prior question. With all of these new customers coming in and deploying common equipment, how big is Q2 and Q3. I mean should they be $100 million each or is that out of the question?

Duston Williams

We’re not talking about anything but Q1 today, but so Subu’s question, all things being equal, Q2 should be higher than Q1, but we need to get through Q1 to figure out what that might be.

Ehud Gelblum - J.P. Morgan

Now when you do look at Q1, the revenue number you gave us $65 to $70 million, I mean it’s down substantially from where you were in Q4. What about your customers that were purchasing in Q4 right now and the ones that you are selling common equipment to in Q4, don’t they start doing TAMs and DOMs in Q1 and what about the other guys? What happened to your existing customer base?

Duston Williams

They’re all still there obviously and they have various levels of deployment. Every customer goes up and down every quarter and they have different spending patterns on a quarterly basis. So you got some guys going up, some guys going down, which is not unusual.

Jagdeep Singh

A part of customers is there are three different words that come to mind is the customer win. We know we’ve been awarded a certain customer network. The shipment to that customer and there’s the recognizing revenues from that customer, which happens when that’s accepted and officially turned over. So the revenue impacted by the timing of revenue recognition and part of the Q4 beat, if you will, reflect some level of recognition that happened earlier than revenue might otherwise have expected it and part of these wins that Duston referred to that wins now will be recognized until after Q1 and so part of that is pushing out. You look at the Q1 guidance and say some of that is in fact pulled into Q4, because of timing and some of it gets pushed out into the subsequent quarters based on timing.

Ehud Gelblum - J.P. Morgan

Is there any change in VSOE status of these new customers?

D Telecom, there was a change in VSOE status for that one particular customer and then it changed back. Is there any difference with these new ones?

Duston Williams

Not as we know it today.

Ehud Gelblum - J.P. Morgan

So your revenue numbers are apples to apples. Last thing I was going to ask you, if we back up three months ago and you’re in October giving us guidance for Q4 of the $75 million, what did you anticipate your Q1 to have been and how does this Q1 look versus what you thought in your plan back three months ago?

Duston Williams

We’ve got various forecasts. They change all the time. So I probably wouldn’t comment on that.

Ehud Gelblum - J.P. Morgan

I’m trying to get a sense as to is your Q1 impacted by economic and macro, things got worse for the fourth quarter for you and that’s why your Q1 guidance is worse than you would have thought it was going to be or just regular seasonality and you sort of suspected it would be down here, but you only give guidance a quarter out?

Duston Williams

No. As we see it, our Q1 is the Q1, simply what Jagdeep just said. Some of the deployments in Q4 happened quicker than we thought. So normally would have happened in Q1 and some we’re deploying now, it looks like it’s going to into Q2 and could you find pockets of somebody maybe taking off purchase because of the economy? Maybe if you looked hard enough, but it’s not intuitively obvious that that is any significant impact in Q1. It’s rather the big deployments and the timing of those deployments and just the underlying volatility of our customer base.

Operator

The next question comes from George Notter of Jefferies & Co.

George Notter - Jefferies & Co.

I wanted to ask about pricing. What’s going on with pricing here in terms of the impact on gross margins. I guess I struggle to delineate if there’s any impact from pricing here. Obviously mix shift of customers towards newer and incumbent customers is creating pressure on margins near term. You got a bigger mix of common equipment, but how do I think about the marketplace? Is pricing a factor here at all?

Duston Williams

Not significantly. Much more impact from the percentage of common that we ship and percentage of TAMs. Obviously every customer is different and every win is different, but our model is still the model that we felt common equipment, you know, sometimes at a loss or low margins and the DOMs and TAMs obviously are quite a bit higher margins.

George Notter - Jefferies & Co.

So if I look out into the future a year from now, two years from now, and I assume that you have a bigger mix of incumbent and the mixture of common versus DOMs and TAMs is consistent with what it was let’s say in the last few quarters? Would we back at a mid to high 40’s gross margin or not?

Duston Williams

Again, all things being equal and the customer mix is the same and you got a bunch of variables going on there, but I guess the best way to answer it is nothing has fundamentally changed in the business model that would yield those results.

George Notter - Jefferies & Co.

Do you still think the long-term model for gross margins in the company is 50%?

Duston Williams

Depends how fast we grow. Again, if it’s tilted towards a lot of customers and the growth is there, but fundamentally at some point in time if we stopped adding customers on a steady state, there’s nothing to suggest that that has changed.

Operator

The next question is from Hussein Eman.

Hussein Eman – Investor

Thank you. Just one question. Given the macro backdrop, what’s your confidence level the existing customer base is not weakening as reflected in Q1? Are they sharing some concrete plans that give you confidence? In other words, is there a danger that existing base weakens and new customers just stops at that?

Jagdeep Singh

I think the way to think about that really is if we look at our pipeline of activity, customers that have been new network build-outs, there actually have been very little change in that pipeline of activity since last earnings call that we had. We still see a number of large customers around the world that are planning significant network build-outs and there doesn’t appear to have been any fundamental cancellation of those builds. The other thing of course that’s interesting is we see ourselves winning a reasonable fraction of those builds and that’s part of the new wins that we’ve been awarded but will kick in later on. So I think it’s unclear to us just how or in what way the obvious macro economic turmoil is affecting network build-outs, but from a bottoms-up standpoint, we haven’t really seen any kind of dramatic evaporation of network build-out activity in the way that one might suspect, just looking at the mainstream.

Duston Williams

We believe we’ve got a reasonable feel for the quarter, but the fact do you book and chip stuff, there’s some level of risk there, but usually within a given quarter we’ve had some pretty good insights of what’s going to happen.

Operator

The next question is from Simona Jankowski – Goldman Sachs

Simona Jankowski – Goldman Sachs

You think basically that because of the large number of new customer additions we are in a period of very low profitability and should remain so in the near term. Now last time when you added seven customers in the same quarter was back in September of 07 and back then you were able to have margins of 3%, positive, of over $0.10. Obviously some of that is being impacted by the higher R&D rate that you’ve got now, but structurally what changed in that year and a half period where for the same level of customer additions you’re now generating such a dramatically lower margin?

Duston Williams

Well not every customer is equal. So you have to go back and look at those exact seven customers and who they were. Some of those could have driven LCM, maybe none of them drove LCM or very little, quite honestly. So again, every customer is kind of different there and the size of the customer. We’re talking this time some customers that the initial deployment, I’m pretty sure it’s quite bigger than those seven back in Q307 and then also it depends a lot on our inventory levels and what we have for inventory in-house and what we have purchase commitments that are suppliers. So you’d have to go back and look at all those scenarios as far as the impact of the current quarter there.

Simona Jankowski – Goldman Sachs

Not even speaking that specific quarter. It just seems that you had a period of quarters before when you were able to add five to seven customers a quarter and maintain profitability and that now seems to have changed and it doesn’t appear necessarily that the competitive environment changed at least not for the worst, especially with Nortel declaring bankruptcy. So is there anything else, I mean is quality just becoming much more aggressive? Is there anything else causing it to price more aggressively now than a year and a half ago?

Duston Williams

No, I don’t think it’s gotten that much more aggressive. The R&D expenses were a lot lower back in Q307. So clearly that’s a big difference in that. We’d have to go back and look at the percentage of TAMs back in Q307. They might have been a higher percentage. So there so many variables as far as who we ship to and things like that.

Simona Jankowski – Goldman Sachs

Your customer activity base has noticeably quickened in the last couple quarters. Does that correlate to Nortel’s announcement of divesting their business and customer activity you’ve seen since that announcement.

Jagdeep Singh

I think there’s no question that their announcement, not just the recent bankruptcy announcement, but even the prior announcement of looking to sell their optical business, clearly had an impact on their customers. I think the acceleration that we’ve seen in customer wins is more a reflection of fact that the value proposition that we’re offering, flexibility and so on, really seems to be resonating with more and more customers. Again, the typical set of competitors we see, particularly at the larger accounts, for example in Europe, tend to be the incumbent vendor whoever that is. You don’t usually see a lot of other players that make the final short list.

Operator

The next question is from Shagai W. Go ahead, sir.

Shagai W. – Investor

Quick question about the internet content provider that was your largest customer in Q4. Do you expect that carrier to continue at those levels? Any clarity of what you expect them to do in Q1?

Duston Williams

Generically speaking, most of the times when a customer does a large deployment, it’s not followed up immediately with another large deployment. There’s usually always some revenues, but I think that’s somewhat the nature of our business being lumpy. So if you can correlate it to how some of the others have gone and suggest that you shouldn’t expect that level from that customer in Q1.

Shagai W. – Investor

In terms of Q4 order patterns and obviously you had a spike up in DSOs, related to how customers are paying you, but just in terms of order patterns in Q4, was that skewed toward the end of the quarter or pretty evenly spread out and reason asking is Juniper just finished their call and it looks like they had a lot of orders skewed the very end of the quarter. I’m just curious to see what your experience was.

Duston Williams

No, it wasn’t, the bookings wasn’t too bad actually. Some of the rev-rac and shipments and stuff like that got a little tilted towards the end, but in the bookings perspective, not too bad.

Operator

The next question is from Jeff Schreiner of Capstone Investments.

Jeff Schreiner - Capstone Investments

I guess one question I’d like to understand with the announcements you had here in the quarter and some of the customers, are there any markets that are holding up better on a geographic basis than others at this time?

Jagdeep Singh

I think geographically the most activity we see tends to be in the markets where we’ve had the longest presence. So North America and Europe are the two that we’ve had the most presence in and that’s where we see the most activity. We started investing in and we expect to grow over time, but we clearly don’t have as much activity as we have in North America and now Europe.

Jeff Schreiner - Capstone Investments

Following along on that, when can we start seeing some expansion, not only in geographic, but perhaps the kind of core businesses in the DWM transport and the DWM long haul market. Any information you’ll be able to provide on that?

Jagdeep Singh

We haven’t provided any specific dates relative to product plans. We don’t pre-announce products, but we clearly have expressed interest in some of the adjacent markets and we’ve said that if you think about our market space, the three main access, the geographic access, North America, Europe, Asia. The product access of long haul and metro and then the tier one versus non-tier one access and we started out in the North American non-tier one long haul space, a tenth of the total that we market to, but we intend to basically expand our product to play in the metro space. We’ve had to play more aggressively in Europe, which is already paying off and Asia Pacific. That’s another increase in the market and we’ve already seen traction with the tier one worldwide. That’s about another doubling of the market. So we think there’s an opportunity to increase the market substantially by executing those initiatives, but we haven’t said specifically the timing of when we’re having products.

Jeff Schreiner - Capstone Investments

What uncertainly has the global macro economy caused in terms of concerns regarding the viability of some of the current customers within the customer base. Obviously we see the charge to a Russian service provider. Are there going to be more concerns moving forward through calendar 09 with regard to this?

Duston Williams

I think we gave you a pretty good feel for the strength of the customer base in my comments. I think maybe just some further insight there. Whether it gives you comfort or not, I don’t know, but if you want to pick on Russia, you know we’ve got two Russian accounts, one Bulgarian account, fairly small accounts. I think those accounted for 3% of revenues for the year. Customers in China, I think those revenues were 2% or less for the year. So exposure from that type of customer base is pretty minimal.

Bob Blair

Okay, let me close by thanking you all for joining us today and I also want to thank our customers and all the members of the Infinera team for their contributions in making 2008 a year of progress for the company. We remain focused on continuing to grow our customer base by providing the world’s best optical transport equipment and extending our technology leadership through continued smart R&D investments.

We look forward to keeping you informed of our progress during 2009.

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Source: Infinera Corporation Q4 2008 Earnings Call Transcript
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