Infinera Corp. Q4 2009 Earnings Conference Call

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 |  About: Infinera Corporation (INFN)
by: SA Transcripts

Operator

Welcome to the Fourth Quarter Fiscal 2009 investment community conference of Infinera Corporation. All lines will be in a listen-only mode until the question-and-answer session. (Operator Instructions) Today’s call is being recorded. If anyone has any objections you may disconnect at this time.

I would now like to turn the call over to Mr. Bob Blair of Infinera Investor Relations.

Sir, you may begin.

Bob Blair

Thank you. Good afternoon and welcome to Infinera’s Q4 2009 earnings call. 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 competitor’s products and prospects of the company in Q1 2010 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 on SEC filings including the company’s annual report on Form 10-K filed on February 17, 2009 for more information on these risks and uncertainties. Today’s press releases including Q4 2009 results and associated financial tables and investor information summary will be available today on the investor’s section of Infinera’s website. 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 includes certain non-GAAP financial measures. In our earnings press release we announced operating results for the fourth quarter of 2009, which exclude the impact of non-cash stock-based compensation expenses and restructuring and other costs associated with the closure of our Maryland fab.

These non-GAAP financial measures are provided to facilitate meaningful year-over-year comparisons. Please see the exhibit of the earnings 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.

On this call, we’ll also give guidance including guidance for the first quarter of 2010. We have excluded non-cash 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.

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

Thomas Fallon

Good afternoon and thank you for joining us. With me today our CFO, Duston Williams; and Corporate Controller, Ita Brennan. As the new CEO of Infinera, I’m delighted with the opportunity to lead the company at this time. I want to say that it’s an honor to take over the range from one of our Founders, Jagdeeb Singh. Jagdeeb has been a marvelous steward of this unique company and he remains involve for the company in part and long terms strategy row.

I did want to take a moment today to describe my priorities in the months and years ahead. As the company’s Chief Operating Office for the last several years, I’ve been part of the team that developed and deployed our current strategy and positioned the company as the leader and operate transport. Having said that, I recognize that there is a lot of continued hard work required to execute on this strategy and I’m focused on ensuring that everyone of the company maintains a high level of energy and commitment to capitalize on the significant accomplishments Infinera has made to date. These include first a strong disruptive technology lead based on both our proprietary thick approach and our ability to leverage our vertical integration model. Second, the industry’s leading intelligent optical layer that provides efficient and flexible bandwidth management as enabled by our cost effective OEO conversion.

Third, a remarkable engineering culture that thrives on tackling challenges that appears on the soluble. And fourth, a significant and growing customer base that has been to capitalize on our unique value proposition to win customers in their markets to offer profitable services and help drive changes in their own business models.

By continuing to meet the needs of these customers and potential customers, we’re focused on becoming cash generated profitable enterprise. So I don’t see the need for a change in our strategy to help our customer build the world best optical networks. I do feel the responsibility and the charge in my new role to intensely focus the team on executing with urgency in order to realize the full potential of our business.

Turning to our results for the fourth fiscal quarter. I’m pleased that our performance in current activity continued to demonstrate as our current customers and perspective customers are embracing Infinera’s disruptive fixed based approach to support their bandwidth growth needs and to provide them with competitive advantages such as speed, costs and flexibility in their markets.

It is clear that our ongoing success in wining new customers and expanding business with our existing base is driving our own improved revenue and TAM based margins over the last several quarters. Despite the continued difficult economic environment. We have seen several noteworthy developments in Q4 that’s support this view. We had record booking for the quarter finishing with record bookings for the fiscal year as well.

We posted sequential revenue growth and gross margin improvement with revenues of 90 million and gross margin up 40%. Our net loss for the quarter was smaller then anticipated at 6.5 million or $0.07 per share. We invoiced our highest level of tributary adapter modules in six quarters while we continue to see strong common equipment sales.

We shipped Infinera equipment for a nationwide build-out for an unnamed leading Internet content provider in the fourth quarter. This was for a win we had just achieved in Q3. As a result of our rapid deployment this customer finished as our top customer for the first time in Q4. On a new customer front we add three new names to our roster including Tiscali a leading carrier in Italy bring our total customer count to 69. With footprint growth critical for success for our business, we are focused on maintaining our new customer momentum in 2010.

Since the end of the quarter we achieved another new win of note with a major carrier in Japan, which now guess us two of the top three carriers in that market. We continue to see opportunity and success in the submarine network market, which we believe is one of the fastest growing segments of the WDM market. These advances the investments and advances are in our lane system combined with our superior PIC based optical performance, operational simplicity and rapid turn up have enabled us to complete for and win networks of over 50,000 kilometers deployed across the Americas and more recently a Trans-Atlantic route of 6,000 kilometers. In our three submarine network wins to date we have delivered better economics and we have doubled the wavelength of most competitive offerings. These have been important factors in our success in this market.

During the quarter we invoiced four customers for our new ATN metro edge products. Brining our total of ATN customer success. In addition we have healthy trial activity underway with ATN and we would expect convert several of these trails in the ATN customers to the end of Q2.

Although we remain cautious about the macroeconomic environment we are more optimistic today about the overall optical transport market than a year ago. We are hearing more positive sentiment from our customers and we are seeing some customers add route at growth to existing routes and invent in new markets. After five years Infinera’s differentiated digital optical network remains a market leader in North America and in markets only large scale commercialized PIC based optical system.

We continue to grow our business internationally in markets like Europe and Japan and we are well positioned to address potential growth opportunities in the U.S., such as the project that will be funded by broadband stimulus funds the market for low latency transport solutions for financial institutions.

And we’ve remained focused on growing our business with our existing six Tier-1 customers and addressing the other Tier-1 opportunities in the market. As we have mentioned in the past. Our customers ability to capitalize on our unit value preposition to win customers (Inaudible) to offer profitable services and to drive changes in our own business models is shared by both our Tier-1 and non Tier-1 customers. This value preposition has resulted in a significant majority of our customers including our Tier-1 providing us with additional business opportunities after initial deployments.

To extend our differentiation and leadership position we continue to invest in our core technologies. These investments are critical to our ability to achieve our long-term business model and they are reflected in the product loan with the current and new customers are embracing.

One of my priorities is getting these technologies to market in a timely manner to ensure we capture the business opportunities at hand. On that note, I am happy to report that we delivered our 400 PIC to our systems developers as promised in the fourth quarter.

We continue to believe that the 40 gig market with the wide spread adoption when the cost structure issues of that solution are addressed with the differentiated and integrated solutions. And we continue to believe that the (Inaudible) 40-gig system will be the catalyst that accelerates the 40-gig market to mass adoption.

I want to make a final note regarding the investment and development of our core capabilities and resources along with Photanic integration and other significant innovation and optical transport in the last 10 years has been the development of coherent or advanced modulation technologies, which provide higher capacity for fiber. Along with PIC coherent will be a cornerstone in building our customer’s next generation optical networks and our PIC capability allows us to uniquely exploit digital signal processing with its fundamental coherent technologies.

I'm pleased to report that both the engineering work and hiring activity for advanced modulation techniques and in new design center in Ottawa are progressing well. Enabling us to accelerate our development in this important area. I would like to turn the call over now to Duston for our financial report and outlook.

Duston Williams

Thank you, Tom. I’ll review our Q4 actual results and then follow that up with our outlook for Q1. The following analysis of our Q4 results is based on non-GAAP. All references exclude non-cash stock-based compensation and restructuring costs associated with the previously announced closure of our Maryland fab. Looking at the specifics for the quarter, GAAP revenues in Q4 were $90.2 million has compared to our guidance of $86 to $88 million versus revenue of $83.4 million in Q3. Our services revenue for the quarter was 7.1 million versus 8.8 million in Q3. Our installation or EF&I related services revenue which can be volatile quarter-of a quarter decline by approximately 2 million in the quarter we expect this aspect of the services revenue to increase in Q1.

We had 210% customers in Q4 including a new one with the unnamed leading Internet content provider representing 17% of revenue and also level 3. Leading Internet provider is the same company that we announced that having one in our October earnings call. In this quarter we not only took revenue from that customer, but they were a largest revenue contributor for the quarter.

Level three sales contributed to 12% of our GAAP revenue versus slightly less than 10% in Q3. Our top five customers included these two customers together with one other unnamed Internet content provider and two existing European customers. We added three new customers in Q4 we previously announced that we have six ATN - and we are please to report that all those wins have been officially converted to new customer. Five of the ATN customers are also DTN customers with – with ATN only customer. We envoy two of these customers in Q3 and invoice the remaining four customers in Q4. We remain encouraged with the ATN opportunity as enabled us to extend the digital optical network in to the metro.

We believe that future product releases in 2010 and beyond will continue to enhance ATNs overall appeal in the market place and enable us to continue to gain market share with this product. Gross margins in Q4 over 40% versus 38% in Q3 reflecting a continued upward trend in recent quarter. This compares to our guidance of 38 to 40%. In Q4 we continued our recent strong common equipment sales. Nonetheless we still managed the increased gross margins during the quarters our – sales began to show some signs of improvement from prior quarters. In fact our tamed invoice units crossed over the 2000 unit threshold for the first time in six quarters.

Our service margins increased during the quarter raising back about 60% dual part of the previously mentioned reduction and lower margin EF&I revenue increased significantly during the quarter. Operating expenses for the quarter excluding restructuring cost of 0.2 million or 43.6 million versus our guidance of 42 to 43 million and versus 37.7 million in Q3. All over the quarter-over-quarter increased in spending of 5.9 million was largely assumed in the guidance estimates we did exceed the top end of the estimate 5.6 million. This over to – SG&A and was related to increased compensation of – as well as some consulting related activities.

Looking forward in the Q1 we expect sales in marketing expenses decreased G&A expenses to be flat to slightly up due to some onetime outside services – related cost. Before trending down in Q2 in R&D the trend upward due to increased NRE and prototype expenses. The overall headcount for the quarter 974 versus 970 in Q3. Head count addition to R&D during the quarter we are mostly offset by reductions associated with our staff consolidated efforts.

Total headcount has been virtually flat for the last three quarters. The operating loss for Q4 was $7.5 million other income expense in for Q4 was the favorable $0.4 million versus favorable $1.2 million in Q3. Income tax for the quarter was favorable $0.5 million and net loss for the quarter $6.5 million a loss of $0.07 verses our guidance of copper lost of $0.08 to $0.09 per share versus the loss of 3.1 million in Q3.

Turning to the balance sheet, the cash, cash equivalents, restricted cash and investments ended the quarter at $275.5 million versus $280.5 million in Q3. We used $2.7 million of cash from operations in Q4 versus a use of $18.3 million in Q3. The Q4 cash from operation with our best performance since Q3 of 2008. DSOs were 71 days versus 61 days, reflecting a few larger transactions invoice towards the later part of the quarter inventory turns were 3.2 versus 3. Accounts payable days came in at 41 days versus 44 days and capital expenditures were $4.4 million in Q4 versus $2.8 million Q3.

As we look into Q1, although the economic uncertainty clearly fell exists, we feel encouraged on numerous trends. We ended Q1 with good visibility based on solid backlog and then appears that TAM seventh have stabilized and that also become somewhat more predictable.

Our Q1 operating outlook call were another sequential increase in revenue versus Q4 are at the same time a general optical market based on an historical five year average typically declined by 15% in the first quarter of the year.

Goss margin appeared to be flat but slightly down from Q4 with common equipment sales remaining strong as another deployment for the large Internet content provider will occur in Q1 as well as increase sale for level three.

In addition, we should also see increase in low margin services revenue along with slightly lower TAM shipments from Q4. We are pleased with the overall TAM shipments and TAM linearity in Q4 until we move a data point showing a sustained recovery, we believe it’s prudent have some what cautious TAM view in our operating outlook.

Although operating expense will increase in Q1 primarily due to significant increases in R&D and NRE and pro type material charges, we believe that Q1 would be our peak expense level for 2010. Looking beyond Q1 our operating expense level should fluctuate someone, but most likely will increase modestly from our previous view. As we expect 2010. We believe that our operating expense run rate will be in the mid 40 million range for quarter.

We continue to walk a fine line between our desire to reduce our operating losses or at the same time insuring that our R&D investment today are adequate enough to enable us to continue to leverage our significant existing technological leadership with competitive differentiation well into the future.

The following guidance for Q1 is based on non-GAAP results and exclusive to be non- cash stock based compensation expenses. Revenue of approximately $92 million to $94 million gross margins of approximately 39% to 40%, operating expenses approximately $47 million, operating in net loss of approximately $10 million to $11 million, and based on an average estimated basic weighted shares outstanding of $98 million this would lead to an EPS loss between $0.10 and $0.11.

And now just like to briefly turn the call back over to Tom before we open it for questions. Tom.

Fallon Thomas

Thanks, Duston. Before opening the call for Q&A, I wanted to call your attention to other announcement this afternoon. Ita Brennan will be succeeding Duston, our CFO of Infinera by the end of June. Ita brings a wealth experience to the job and I’m excited about having her as a member of the senior executive team. (Inaudible) partner Duston and helping to build and lead a world-class financial organization here at Infinera. We are grateful for Duston’s outstanding contributions as our CFO since 2006. He has up guided our company to input paces in its growth and development and both and outstanding team. I’m pleased to be on board for a smooth transaction over the next several months.

Operator, we are now ready to open the car for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Brent Bracelin from Pacific Crest Securities. Your line is open.

Brent Bracelin – Pacific Crest Securities

Tom, First question you have two internet content providers now that are in the top five one 17% of revenue, could you provide a little color on how the product is actually being deployed at these large internet content providers, how different are these customers relative your typical carrier customer and then could you walk us through the drivers of purchasing patterns you’ve seen so far at these content providers and kind of what we should expect on a go forward basis?

Thomas Fallon

First of all, I think you asked how do these networks – what’s the decision for them deploying these and I think it comes down to a couple of things, one as these content providers have higher, higher expenses around providing traffic. This is a way of control their expenses. I think more importantly it allows them to take control of the destiny around having a vehicle to distribute their content. And I think that one of the reasons we’ve been very successful in this space is because we provide a digital optical network. We allow people who are historically not run transport networks to successfully build and operate transport networks at an extension of their normal networking capability. So I think that is the dynamic that’s driving this (Inaudible) mentioned in the call locating some business model, this is one of the ways that our technology is allowing our customers to change their business models. In regard to the similarities of the networks, they are fairly similar, they are building nationwide backbones and having a significant reasonable amount of ad dropped in two major cities. So I think that’s the similarities between the two networks. And I won’t comment on the future plans and sale other than we expected to see some opportunity to continue to fill out our networks as their traffic patterns increase.

Brent Bracelin – Pacific Crest Securities

Great. And then one follow up on that, you did indicate, I think Duston indicated that you also have another deployments of equipment installed revenue could actually be up with a internet content provider in Q1, is that what a new internet content provider or is the existing content provider?

Thomas Fallon

It’s a different one than we referred to in Q4, but not a new customer.

Brent Bracelin – Pacific Crest Securities

Okay. Then my last question for (Inaudible). You did talk about expenses in Q1 kind of being a peak of level, is that solely tight to kind of the 40 gig kind of product launch cost NREs high end, if so how much should we think about the contribution being to kind of R&D in Q1 here?

Thomas Fallon

So yes, the increase from Q4 to Q1 primarily is that in the R&D piece related to prototype material and NRE type charges. So they went up – we’re projecting to go up significantly in Q1 and a good portion of our overall R&D expenses has geared obviously towards the future products.

Brent Bracelin – Pacific Crest Securities

Okay. Thank you.

Operator

The next question comes from George Notter – Jefferies.

George Notter – Jefferies

I wanted to ask about Incumbent Telcos customers, I think if I heard you correctly, you’re still right now about 6 in (Inaudible) NTT customers, I think that’s flat versus quarter ago and I think roughly the same versus even the June quarter. Can you tell us where you were and progress on winning those customers, is it more about the cycle, the sales cycle and give us an update there, thanks?

Thomas Fallon

Most recent announcements in regard to our Tier 1 were fairly recent NTT and a fairly recent Telefonica terrestrial and subsea win. I think we announced in Q2. With our Tier 1s we had six now, five of them announced. We continue to experience for the once we had for a while, new opportunities of the mission on the call. These are fairly long cycles to win. Once you win, they have an opportunity, as we’ve been successful to extend new opportunities within new regions for us to participate in. And we have experience a lot of success with that and we anticipate creating more opportunities with the current Tier 1s that we have won. We’re also continuing to improve and peruse our Tier 1s that we have not won, but I won’t make any specific comments on those.

George Notter – Jefferies

Is there something different about the competitive environment right now versus few quarters ago, is that a factor here in common account wins or is it again back to the sale cycles?

Thomas Fallon

There is nothing currently that I see that is passing any difference these cycles are filling on cycles and it typically driven a specific opportunity that Tier 1 will have. So as those opportunities present themselves because we pursue them very aggressively and we will continue to do that.

Operator

Our next question is from Simona Jankowski with Goldman Sachs.

Simona Jankowski – Goldman Sachs

I’ve just want to ask you first on the balance sheet deferred revenue was up 57% quarter-on-quarter and 75% year-on-year. Can you just give us a little more visibility into watching the deferred there and kind of over how many quarters you can that will be recognized be increased?

Duston Williams

You’re right is up about $8 million Simona on quarter-over-quarter roughly. And if you look at that we’re flat it about $4 million in services and about $4 million in products. On the services front what we’re seeing kicking in little bit some extended hardware warranty, which the company being three, four years old we just now starting to see some of that fall off and existing warranty and some of those revenues come approving to watch there so that’s were you talking to deferred increase there. Our sales management which to problem which we’ve rolled out several quarters ago that revenue is trying to come in software subscription has also come in there and increased a deferred amount there so. Most of that very low anywhere from a quarter to fourth quarter amortizing on the $4 million increase in product that has various maturities in quite honest way and you’ll see that over several quarter period.

Simona Jankowski – Goldman Sachs

That’s very helpful. Thank you Duston, and in terms of the $4 million of services is that higher margin services business or is that a more idea if an idea services type business you’ve talked about?

Duston Williams

During the higher margin in the ethanol, yes.

Simona Jankowski – Goldman Sachs

Okay, and then when I looking to your gross margins, when you actually just look at the product gross margins they were flat quarter-on-quarter some of the outside seen just comes from the deferred product coming from the services. And again obviously you’re guiding it down, can you just explain a little bit more wine now that the revenue just started to kind of finally move in the right direction why its not flowing a little bit stronger to the growth profit line?

Duston Williams

If you look that we’ve talked about the new deployment again and if you look at our actually we don’t disclose it, but generically if you look at our common equipment revenue as a percent of our total revenue, I think its back and double check I think it’s the second highest since we’ve been public. So that common equipment if still its actually the highest I think it’s the certainly all year and although we ship more teams because of the higher common equipment percent of 10% of revenue was the lowest as the percent of revenue for 2009 and Q4, so again its just feeling the common deployment there and overtime obviously that get filled up with higher margin equipment.

Simona Jankowski – Goldman Sachs

And can you just also help me a reconcile that with the number of customer additions you added three customers this quarter which is on the low end or what you typically add yet common equipment which I kind of associate with new customer build out seem to be so high. If that is really very highly associated with that one Internet customer that was 17% of sales.

Duston Williams

Don’t forget we have new deployment with existing customers, we just don’t have new deployments with new customers then it really again of the model and Tom mentioned in his comments that you had a customer for two years and then could have a very big new deployment that would be common equipment intensive in the given quarter.

Simona Jankowski – Goldman Sachs

Okay and then just last question and thank you for your patients. Just on OpEx coming down after Q1, how much visibility do you having to that because R&D can sometimes be more or than a science. So how do you know that it going to be more into control after Q1?

Duston Williams

The things that aren’t necessarily specifically control as the timing of some of the bigger NRE type charges and prototype materials when exactly are going to get the materials in and when you going to have NRE charges in totality we can grab that but any given quarter is a little tough. But directionally we feel pretty good about getting it down those levels by the end of the year.

Operator

Your next question is from Blair King – Avondale Partners.

Blair King – Avondale Partners

Yeah, hi guys thanks for taking the call. The first question I have to turnaround the broadband stimulus opportunity that you mentioned Tom in your remarks, and given such your high percentage of the funds were minimal oriented and I guess you rewarded in December. How much that was effected in to your first quarter guidance, how do you think about the revenue opportunity for stimulus through 2010 and even beyond?

Thomas Fallon

Hi, Blair, thanks, we have not only factored any specific money in to our Q1 based on broadband stimulus we believe broadband stimulus money is being spend and see if the same (Audio Gap) second mile that are could impact us, we see some of our customers paying the recipient of this and lot of private customers to be believe we could help build appropriate networks to solve the problem the stimulus was in result. But we are not based on our specific plans. I do think that we would have an opportunity to participate in some of these dollars but we are going to be cautious and how we committed to our company into you. But we do believe there are some dollars after.

Blair King – Avondale Partners

Right, last question would have to do Duston with the Maryland tab closure, I think the opportunities for couple 100 basis points improvement by the second quarter was communicated on the last call and I’m wondering who else being equal with that the 200 basis point improvement over the first quarter guide or is some that already factored in your first quarter gross margin guys?

Thomas Fallon

No, all things being equal nothing has change to that previous comment you’re absolutely right.

Operator

The next question is from Kevin Dennean with Citi.

Kevin Dennean – Citi

Just wondering if you could talk a little bit about on geographic performance, particularly I know you disclose it until to following to (Inaudible) did you talk a little bit about Latin America and you have the Telefonica when just wondering have a that here operations performed in what type of opportunities so see ahead of you with Telefonica?

Thomas Fallon

Yeah, I mean talk about the first (Inaudible) second part, obviously with some of those deployments behind that you will see that presence of revenue coming down for that a geography rather substantially there is no surprise just quick build with that happened and big chunk that over that. Regarding Telefonica in general updated Tom?

Company Representative

Yeah, successful rollout with Telefonica has its gone very well from those our perspective and more importantly from Telephonica perspective network is upgrading traffic we deployed the network be for timeline that we had late out to Telefonica the quality of the network and all the product has been exceptionally high and we did breaking in to these new markets. So, how do knew a lot of organizational earnings of that process. I am very convinced you have ongoing opportunities this in the current network to expand the capacity of that I also believe that you will be position to next opportunities a new business opportunities that this first one has a lot to participating some fairly bullish on the relationship with Telefonica in the Q1?

Kevin Dennean – Citi

And then you get see level three show some sequential growth with these folks, can you talk a little bit about what is going on there was that just filling in some kind of unused capacity of that had with terms or you deploying new graphs for them or waiting up new fibers?

Thomas J. Fallon

Yeah, our business with level three they continue to be a important and significant in customer we continued to earn (Audio Gap) and we continue to bring them opportunity evaluate us both on fill, which we obviously have a good opportunity with that also on new opportunities. So, Q4 was a mix organic growth and new opportunities that we deployed with them.

Kevin Dennean – Citi

And then last things from me, congrats on delivering the (Inaudible) developers just any update on the timeline there for turning the back in to a finish system?

Thomas Fallon

Thank you for the congratulations and building our reflective (Inaudible) which on the 100 gain pick somewhat between 12 and 24 months after that we deliver that to our engineering teams, we delivered our first DTN platform and that’s the only type of reconcile leave given today.

Kevin Dennean – Citi

Now, I guess I’ll just thinking one last follow up Tom, I think (Inaudible) particulars loss in discuss 40G adoption rate be engaged by inherent cost in testing multiplexing in required components. Any updated view from you Tom or from (inaudible) that either green forces have to you or may be gives you a reason and so we consider?

Company Representative

Our position is the same in that the economic discussion dollar to bit of the miles is going to be the economic driver of all of these speed and if you look over the history this last year, 40 gig had a fairly robust beginning in the year in Q3 the analyst required that 40 gig, that took a substantial reduction in deployments that I want to speculate that – that’s completely based upon the cost. But one analyst called that (Inaudible) affected the continued price reduction of 10gig–making it economically better choice for to play 10 gig. And then I think that and if you look at the market share number in Q3 we actually grew the market share in Long haul in North America, in Q3 to our highest level yet and I think that is a combination quite frankly of the value proposition of our digital optical network and it shows the value proposition 10 gig wave lengths, being substantially less expensive on a (inaudible) in 40 gig and until that bridge is across around how do you make 40 gig or 100 gig economic. Then it will about a certain market mix, but it’s not affordable proposition to make it massive optimum.

Operator

Your next question is from (inaudible) CS Capital.

Unidentified Analyst

Thank you, I have two big picture questions. One is I think we are trying on the one quarter revenue guidance with given that –this is the seasonally slow quarter and you have this growth, did you see kind of the growth trajectory continuing through the course of 2010 given the opportunities we are looking out that, one question the other question is the gross margin when should we see the benefit from the fabulous structuring which quarter we see the four tuned basis point benefit and when do we see kind of more normalize makes you think it in Southeast versus TAM given that the last three quarters you had very high (inaudible)

Duston Williams

Its Duston you’re right we guide one quarter at time so probably not going to after a whole lot or more commentary on the revenue levels there and again on the fab consolidation you’re right Q2, 2010, if you mentioned the 200 basis point again all things being equal that will be better by 200 basis point and they would have if we are not close the fab and Maryland, so to answer your question Q2 2010.

Unidentified Analyst

And in terms of mix doesn’t –

Duston Williams

Yes once again I can normalize – when we stop I guess winning new customers and winning deployment with the existing customers it is simple that really it is going to volatile and the more business we win the more its going to tilted to the common equipment. I don’t think it’s going to be normalized for hopefully for quite sometime quite honestly. Because you want to continue to win as many new deals with the new customers and new deal with the existing customers as we can.

Unidentified Analyst

Thinking more about when those new win that you had over the last couple years haven’t better (inaudible) common – gone up pretty significantly in the last few quarters.

Duston Williams

Yeah now the TAM shipments and invoice shipment for the quarter didn’t come up nicely so we are obviously seeing some of that starting to flowing to the TAM level we just boosted up if you will common equipment a little bit more then the TAM revenue for the quarter, but its starting to happen, whether it continues and how much will have to see, how we progress to the next level quarters.

Operator

Your next question is from (inaudible), your lines are open.

Unidentified Analyst

Hi, thank you this is actually Chris (inaudible) for Sanjeev, stays that back- you guys can have big picture question on would you comment on any change in the competitive environment that you seeing of there – and what you guys and just say I guess going forward, (inaudible) deals going perspective.. what is your projected

Company Representative

The competitive environment remains fairly much like it has – it is very competitive environment we see particularly in Europe, Huawei in fundamentally every opportunity that we competing I think we continue to win certainly are share we want to continue to and more than our per share of the business and I think that reputation around technology and quality and delivery and flexibility in speed also as well and that regard they are going to continue to be the low cost leader and we want to be the value leader. And in regard to – what’s happening competitively in landscape – Nortel and Siena the issue has drop on

Unidentified Analyst

What happened with Nortel?

Company Representative

Currently they will merge with Siena, I think that the delta now that’s left is you know what’s going to happened to the rationalized product lines either they will have to – one product line or the other to achieve the efficiencies that they have promised on the integration or they will suffer from efficiencies and I think that the Alcatel Lucent acquisition almost that happened several years ago that still continues to ring in the market and we think that the integration of these two companies couldn’t be that’s the having opportunities as there is uncertainty within their customer base as what the future will look like. So we are hoping to take advantage of that.

Operator

(Operator Instructions). Next question comes from (Inaudible) Securities.

Unidentified Analyst

Just a clarification on the Internet content provider that you that was a largest customer in the quarter is that a initial task you build out primarily finished.

Company Representative

Big chunk of it when in Q4.

Unidentified Analyst

Okay and then a couple of technology questions you’ve got competitors coming out in a last week or couple of months depending on the competitor coming out with these very large OTN switches so Siena, Alcatel with switches that come out around 4 terabytes of switching capacity. What is your take on the competitive environment specifically against these high capacity optical switches.

Company Representative

Yeah, the Alcatel announces a very recent and what we look we don’t have third competitive analysis done on it yet. For my perspective these switches are not integrating DWDM into them for their operating as a quarter record with placement opportunity versus integrated DWDM and packets capable – having said that I think that you are going to say larger and larger switching capabilities both in the quarter record space but also with integrated with DWDM as we move forward across the next several years and probably – packet functionality in to those switches.

Unidentified Analyst

And when you talk about coherent modulation in your hardware development team in your view is the coherent signal processing important for 40G or is that primarily important for the 100G products.

Duston Williams

We believe that technology is a [pickable] for 40 property and its plugable for all higher speeds our first generation of our 400G PIC we articulating will not include the coherent technology in our first release of that technology and we do believe that will be important as we go to faster speed 100-Gig. We believe that we are uniquely positioned to take advantage of the coherent technology because once again just like packet and its all about how can you get photonic to the electrical domain and our PIC. Today is the only integrated solution to allow very, very cost effective optical to electrical conversion. That position advantage position to packet process it put us in a advantage position to digital signal process so believe that combination of the PIC and any of those packets or processing capabilities is quite frankly in our great advantage.

Thomas Fallon

Specifically on the numbers I mean Duston commented that you obviously don’t give more than one quarter guidance, but if we put any kind of even modest sequential growth throughout the year on your first quarter guidance then we are going to come out with numbers that are 25 to 30% up for the year on the revenue line so basically if you don’t comment on that, that’s probably what’s going to happen for the consensus maybe that’s right, but is there any help that you can give us there do have and do you think grow 25, 30% top line for the year.

Unidentified Participant

We do one quarter time and see how we got through Q1 and we’ll take a look and take it directly too.

Unidentified Analyst

Okay last question from me. Duston just in your own words I mean its in the press release you had a close, but in the call you haven’t really address personally by your regions for moving on and your feelings about it, can you just take a minute if [give]?

Duston Williams

Sure and its actually treat simple if you step back from it, you’ve been here almost be here for almost four years I guess in June and just comes down that I’ve personally accomplish the lot of what I wanted to accomplishment when I came here almost four years about if you look back help to take the company, but prepare the company to be public and I believe to that in the pretty successful manner and bringing some very differentiated technology to public company atmosphere and competing pretty effectively with that company sometimes 10 times greater our size and very, very competitive environment so that’s clearly been our rewarding at the same time through the IPO and quite honestly a time and secondary we’ve manage to capitalize the company in the sufficient manner that allowed up to continue our R&D efforts to make sure that we maximize our differentiated technology well under the future. And then another big, big focus over the last several years have been building the financing quite honestly. When Ede and I both came here in mid I guess 2006 there were I think one or two key members in the team, but beyond that it was pretty much rebuild Ede and I’ve been working on that over a last several years and I think its come to be highly regarded internally to the company and hopefully externally. So that’s been a big focus and then combination with that the development of Ede to become the next CFO of the company and happy with our company and absolutely delighted to Ede that have the opportunity she’s an outstanding talent and I think will be in excellent CFO for the company. So our transition at very famously over the next six months and Ede will take over at the (Inaudible) hopefully that summarizes. And I think financially you can summarizes up I’m ready and she’s ready, I’m ready to do something different and Ether is ready clearly ready to be the CFO of the company.

Operator

Thank you, the next question is from Alex Henderson with Miller Tabak & Co.

Alex Henderson – Miller Tabak & Co.

Good afternoon. So couple of questions, first one can you just talk a little bit about the about of the metro product and how were kind of responses you’re getting from new customers based on it.

Unidentified Participant

As you know that the announcement product in October and we announced six customers winds up to date. Those of are been deployed and are being deployed and continue deployed typically physically are very successfully, the new thoughts (Inaudible) making sure that the product work side max volume as we anticipated too we are closing exceptionally high customers satisfaction quality in the liability of this product, we’re in number of trial right now some that have just completed and a pipeline of them that are going to start after this quarter so in customer tractions come in interest of perspective is going very well, we continue to absolutely believe at the 8pm uniquely differentiates our customers and their markets to be specifically both to help our DTN customers provide service risk and take advantage of a thick architecture as (Inaudible) to the metro we believe that is to filling that requirement and anticipate as I mentioned several of these files are turning into customer winds sometime if we now the end of Q2.

Alex Henderson – Miller Tabak & Co.

So is there any of the deferred revenue coming in the metro product?

Unidentified Participant

Yeah, some of it included that, yes.

Alex Henderson – Miller Tabak & Co.

On the R&D trajectory obviously you have got fair amount of one time cost here with respective new product launches, and particular that has a direct impact on the spike in Q1. I would think if you would have some granularity on the timing of those falling back of as we look into the second quarter, to might give us some sense given the for the one time of nature of that – how fast you expect that to come back down with step up, step down are let step up can gradually truncate over the next end of the year second quarter?

Unidentified Participant

Yeah I think we have given couple (inaudible) all we said for Q1 that $47 million will be the highest, so we believe Q1 of 2010, will be the peak quarter for R&D spending for total spending actually for 2010, it was said by timely acted 2010, -would be at a $45 million run rate..

Alex Henderson – Miller Tabak & Co.

Yeah, I understand where I’m just trying the question really is the matter of next between the R&D and the sales marketing G&A cost as we look in to the second quarter, since we have got normal spike going on having to do with product launch time and I will think that you would be able to give us some granularity on with that steps down quickly in Q2 or not?

Unidentified Participant

Yeah, the given total guidance for Q1 we thought it was important to put a cup of – in the ground, for Q1 in the end of the year properties, but we are not going to go into guiding for two operating – to this point.

Alex Henderson – Miller Tabak & Co.

Okay, going back to the – you commented on that several times, but I’m – go back to one more times which is the closing – in the two point benefit coat and coat all – I’m assuming in the –here we investing some of that- we shouldn’t be looking at two point just to be clear in OpEx cost quarter-to-quarter from March to June, that’s not going to happen.

Unidentified Participant

Well what we can tell you – what really happen is it will be two points higher than it would have been if we did not close the Fab,

Alex Henderson – Miller Tabak & Co.

Step down

Unidentified Participant

Right its not like – you close the fab on the 31st in the next day its start – it’s a lower rate

Alex Henderson – Miller Tabak & Co.

That’s not that simple

Unidentified Participant

Right

Alex Henderson – Miller Tabak & Co.

So it shouldn’t step down sequentially, it should be part of our feathering process in the quarters?

Unidentified Participant

Fully realized in Q2

Alex Henderson – Miller Tabak & Co.

Right, okay on level three obviously there was a fairly dramatic win over there. Can you talk a little bit about what the mix between boards and new system are still selling new systems in to that account or is it predominately just filling line cards in the existing install base?

Unidentified Participant

Just a mix of everything.

Alex Henderson – Miller Tabak & Co.

Great, last question I didn’t catch the headcount can you give me that?

Unidentified Participant

Yeah, 974.

Operator

Next question is from [Jay Albany with Galaxy Capital].

Unidentified Analyst

I just had a question apologies you recover this but would you refresh us on probably speaking that the plan to get free cash deposit state what kind of revenue level do you think need to get to what the time minus for that we have been there before material products I am going to curies, what you see now?

Unidentified Participant

Yeah, again really depends on why you want to peg a margin number but we’ve been ask that 45%, 47% margin number levels. So, just if you want to take a 45% margin number for some (Inaudible) purposes $1,200 million revenue number on it. You would be breakeven with the $45 million run rate of the senses.

Unidentified Analyst

Okay, still 100 million of quarter with the better mix. Okay, all right and what kind of your long-term target on CapEx as plunger revenue?

Unidentified Participant

We always somewhere around 5% to 7% of revenues if you look at this quarter was rate above 5%. So, somewhere in that ballpark.

Thomas Fallon

Thank you. In closing, I want to thank the entire Infinera team and our customers for their contributions to our success. We look forward to keeping you informed of our progress in the months and quarters ahead.

Operator

This concludes the conference. All parties may disconnect.

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