INFN-6.27.2015-10Q
Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-Q
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 27, 2015
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number: 001-33486
Infinera Corporation

(Exact name of registrant as specified in its charter)
Delaware
 
77-0560433
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
140 Caspian Court
Sunnyvale, CA 94089
(Address of principal executive offices, including zip code)
(408) 572-5200
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer  x
 
Accelerated filer  o
  
 
Non-accelerated filer  o
 
Smaller reporting company  o
 
 
 
  
        (Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of July 27, 2015, 131,213,134 shares of the registrant’s Common Stock, $0.001 par value, were issued and outstanding.

Table of Contents

INFINERA CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE FISCAL QUARTER ENDED JUNE 27, 2015
INDEX
 
 
 
Page
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 6.
 
 
 
 

Table of Contents

PART I. FINANCIAL INFORMATION
 

Item 1.
Condensed Consolidated Financial Statements
INFINERA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par values)
(Unaudited)
 
June 27,
2015
 
December 27,
2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
198,018

 
$
86,495

Short-term investments
199,204

 
239,628

Accounts receivable, net of allowance for doubtful accounts of $47 in 2015 and $38 in 2014
109,448

 
154,596

Inventory
157,181

 
146,500

Prepaid expenses and other current assets
29,368

 
24,636

Total current assets
693,219

 
651,855

Property, plant and equipment, net
86,981

 
81,566

Long-term investments
57,519

 
59,233

Cost-method investment
14,500

 
14,500

Long-term restricted cash
5,171

 
5,460

Other non-current assets
6,150

 
5,402

Total assets
$
863,540

 
$
818,016

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
38,807

 
$
61,533

Accrued expenses
30,114

 
26,441

Accrued compensation and related benefits
33,856

 
38,795

Accrued warranty
12,576

 
12,241

Deferred revenue
37,261

 
35,321

Total current liabilities
152,614

 
174,331

Long-term debt, net
121,059

 
116,894

Accrued warranty, non-current
15,863

 
14,799

Deferred revenue, non-current
13,035

 
10,758

Other long-term liabilities
21,179

 
19,327

Commitments and contingencies (Note 14)

 

Stockholders’ equity:
 
 
 
Preferred stock, $0.001 par value
   Authorized shares – 25,000 and no shares issued and outstanding
—

 
—

Common stock, $0.001 par value
Authorized shares – 500,000 as of June 27, 2015 and December 27, 2014
 
 
 
Issued and outstanding shares – 131,164 as of June 27, 2015 and 126,160 as of December 27, 2014
131

 
126

Additional paid-in capital
1,104,672

 
1,077,225

Accumulated other comprehensive loss
(4,459
)
 
(4,618
)
Accumulated deficit
(560,554
)
 
(590,826
)
Total stockholders’ equity
539,790

 
481,907

Total liabilities and stockholders’ equity
$
863,540

 
$
818,016

The accompanying notes are an integral part of these condensed consolidated financial statements.

3
Table of Contents

INFINERA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
June 27,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
Revenue:
 
 
 
 
 
 
 
Product
$
178,982

 
$
142,364

 
$
339,825

 
$
266,606

Services
28,364

 
23,035

 
54,383

 
41,608

Total revenue
207,346

 
165,399

 
394,208

 
308,214

Cost of revenue:
 
 
 
 
 
 
 
Cost of product
99,491

 
85,906

 
188,997

 
164,344

Cost of services
11,059

 
9,240

 
20,303

 
15,211

Total cost of revenue
110,550

 
95,146

 
209,300

 
179,555

Gross profit
96,796

 
70,253

 
184,908

 
128,659

Operating expenses:
 
 
 
 
 
 
 
Research and development
43,421

 
31,738

 
82,678

 
61,084

Sales and marketing
21,535

 
18,082

 
42,577

 
35,944

General and administrative
15,310

 
12,381

 
27,966

 
24,635

Total operating expenses
80,266

 
62,201

 
153,221

 
121,663

Income from operations
16,530

 
8,052

 
31,687

 
6,996

Other income (expense), net:
 
 
 
 
 
 
 
Interest income
551

 
337

 
965

 
673

Interest expense
(2,947
)
 
(2,728
)
 
(5,837
)
 
(5,405
)
Other gain (loss), net
4,780

 
(264
)
 
5,081

 
(993
)
Total other income (expense), net
2,384

 
(2,655
)
 
209

 
(5,725
)
Income before income taxes
18,914

 
5,397

 
31,896

 
1,271

Provision for income taxes
1,008

 
617

 
1,624

 
865

Net income
$
17,906

 
$
4,780

 
$
30,272

 
$
406

Net income per common share:
 
 
 
 
 
 
 
Basic
$
0.14

 
$
0.04

 
$
0.23

 
$ 0.00
Diluted
$
0.13

 
$
0.04

 
$
0.22

 
$ 0.00
Weighted average shares used in computing net income per common share:
 
 
 
 
 
 
 
Basic
130,349

 
123,128

 
129,094

 
122,240

Diluted
140,642

 
126,758

 
138,973

 
126,112

The accompanying notes are an integral part of these condensed consolidated financial statements.

4
Table of Contents

INFINERA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
June 27,
2015
 
June 28,
2014
 
June 27,
2015
 
June 28,
2014
Net income
$
17,906

 
$
4,780

 
$
30,272

 
$
406

Other comprehensive income:
 
 
 
 
 
 
 
Unrealized gain (loss) on all other available-for-sale investments
(78
)
 
13

 
189

 
62

Foreign currency translation adjustment
129

 
87

 
(30
)
 
331

Tax related to available-for-sale investment
—

 
—

 
—

 
(20
)
Net change in accumulated other comprehensive income
51

 
100

 
159

 
373

Comprehensive income
$
17,957

 
$
4,880

 
$
30,431

 
$
779

The accompanying notes are an integral part of these condensed consolidated financial statements.

5
Table of Contents

INFINERA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Six Months Ended
 
June 27,
2015
 
June 28,
2014
Cash Flows from Operating Activities:
 
 
 
Net income
$
30,272

 
$
406

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
12,850

 
12,813

Amortization of debt discount and issuance costs
4,524

 
4,092

Amortization of premium on investments
1,792

 
1,747

Unrealized gain from forward contract
(4,782
)
 
—

Stock-based compensation expense
15,417

 
13,476

Other loss (gain)
2

 
(22
)
Changes in assets and liabilities:
 
 
 
Accounts receivable
45,140

 
(20,043
)
Inventory
(12,774
)
 
(8,107
)
Prepaid expenses and other assets
(1,080
)
 
(3,389
)
Accounts payable
(23,597
)
 
(6,428
)
Accrued liabilities and other expenses
1,491

 
(3,318
)
Deferred revenue
4,216

 
(1,448
)
Accrued warranty
1,399

 
5,040

Net cash provided by (used in) operating activities
74,870

 
(5,181
)
Cash Flows from Investing Activities:
 
 
 
Purchase of available-for-sale investments
(112,940
)
 
(158,496
)
Proceeds from sale of available-for-sale investments
9,998

 
9,824

Proceeds from maturities and calls of investments
143,483

 
116,290

Purchase of property and equipment
(16,098
)
 
(9,985
)
Change in restricted cash
290

 
(491
)
Net cash provided by (used in) investing activities
24,733

 
(42,858
)
Cash Flows from Financing Activities:
 
 
 
Proceeds from issuance of common stock
16,488

 
8,401

Minimum tax withholding paid on behalf of employees for net share settlement
(4,561
)
 
(1,619
)
Net cash provided by financing activities
11,927

 
6,782

Effect of exchange rate changes on cash
(7
)
 
234

Net change in cash and cash equivalents
111,523

 
(41,023
)
Cash and cash equivalents at beginning of period
86,495

 
124,330

Cash and cash equivalents at end of period
$
198,018

 
$
83,307

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for income taxes, net of refunds
$
1,481

 
$
482

Cash paid for interest
$
1,313

 
$
1,313

Supplemental schedule of non-cash financing activities:
 
 
 
Transfer of inventory to fixed assets
$
2,205

 
$
978

The accompanying notes are an integral part of these condensed consolidated financial statements.

6
Table of Contents

INFINERA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Basis of Presentation and Significant Accounting Policies
Infinera Corporation (the "Company") prepared its interim condensed consolidated financial statements that accompany these notes in conformity with U.S. generally accepted accounting principles ("U.S. GAAP") and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the "SEC"), consistent in all material respects with those applied in the Company’s Annual Report on Form 10-K for the fiscal year ended December 27, 2014.
The Company has made certain estimates, assumptions and judgments that can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Significant estimates, assumptions and judgments made by management include revenue recognition, stock-based compensation, inventory valuation, accrued warranty, fair value measurement of investments and accounting for income taxes. Other estimates, assumptions and judgments made by management include allowances for sales returns, allowances for doubtful accounts, useful life of property, plant and equipment, fair value measurement of the liability component of the convertible senior notes, other-than-temporary impairments and derivative instruments. Management believes that the estimates and judgments upon which they rely are reasonable based upon information available to them at the time that these estimates and judgments are made. To the extent there are material differences between these estimates and actual results, the Company’s consolidated financial statements will be affected.
The interim financial information is unaudited, but reflects all adjustments that are, in management’s opinion, necessary to provide a fair presentation of results for the interim periods presented. All adjustments are of a normal recurring nature. The Company reclassified certain amounts reported in previous periods to conform to the current presentation. This interim information should be read in conjunction with the consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended December 27, 2014.
There have been no material changes in the Company’s significant accounting policies for the six months ended June 27, 2015 as compared to those disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 27, 2014.
To date, a few of the Company’s customers have accounted for a significant portion of its revenue.  For the three months ended June 27, 2015, three customers individually accounted for 23%, 16% and 11% of our total revenue, respectively, and for the corresponding period in 2014, two customers individually accounted for 20% and 13% of our total revenue, respectively. For the six months ended June 27, 2015, four customers individually accounted for 14%, 13%, 12% and 11% of our total revenue, respectively, and for the corresponding period in 2014, two customers individually accounted for 18% and 13% of our total revenue, respectively.
2.
Recent Accounting Pronouncements
In July 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2015-11, “Simplifying the Measurement of Inventory” ("ASU 2015-11") to simplify the guidance on the subsequent measurement of inventory, excluding inventory measured using last-in, first out or the retail inventory method. Under the new standard, inventory should be at the lower of cost and net realizable value. The new accounting guidance is effective for interim and annual periods beginning after December 15, 2016 with early adoption permitted. The Company is currently evaluating the impact of the pending adoption of ASU 2015-11 on the Company's consolidated financial statements.
In April 2015, the FASB issued Accounting Standards Update 2015-03, "Simplifying the Presentation of Debt Issuance Costs" ("ASU 2015-03"), which changes the presentation of debt issuance costs in financial statements. ASU 2015-03 requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. ASU 2015-03 will be effective for the Company in its first quarter of fiscal 2016. Early adoption is permitted. Other than requiring the change in balance sheet presentation, the Company does not anticipate material impacts on its financial statements upon adoption.

7

In May 2014, the FASB issued Accounting Standards Update 2014-09, "Revenue from Contracts from Customers" ("ASU 2014-09"). ASU 2014-09 provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 will require an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This update creates a five-step model that requires entities to exercise judgment when considering the terms of the contract(s), which include (i) identifying the contract(s) with the customer; (ii) identifying the separate performance obligations in the contract; (iii) determining the transaction price; (iv) allocating the transaction price to the separate performance obligations; and (v) recognizing revenue when each performance obligation is satisfied. In July 2015, the FASB deferred the effective date for annual reporting periods beginning after December 15, 2017 (including interim reporting periods within those periods). Early adoption is permitted to the original effective date of December 15, 2016 (including interim reporting periods within those periods). ASU 2014-09 will be effective for the Company’s first quarter of 2018. The Company has the option to apply the provisions of ASU 2014-09 either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of applying this ASU recognized at the date of initial application. The Company is currently evaluating the method and impact the adoption of ASU 2014-09 will have on the Company's consolidated financial statements.
3.
Fair Value Measurements
Pursuant to the accounting guidance for fair value measurements and its subsequent updates, fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.
Valuation techniques used by the Company are based upon observable and unobservable inputs. Observable or market inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s assumptions about market participant assumptions based on the best information available. Observable inputs are the preferred source of values. These two types of inputs create the following fair value hierarchy:
Level 1
 
–
 
Quoted prices in active markets for identical assets or liabilities.
 
 
 
 
 
Level 2
 
–
 
Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
 
 
 
 
Level 3
 
–
 
Prices or valuations that require management inputs that are both significant to the fair value measurement and unobservable.
The Company measures its cash equivalents, foreign currency exchange forward contracts and debt securities at fair value and classifies its securities in accordance with the fair value hierarchy. The Company’s money market funds and U.S. treasuries are classified within Level 1 of the fair value hierarchy and are valued based on quoted prices in active markets for identical securities.
The Company classifies its certificates of deposit, commercial paper, corporate bonds and foreign currency exchange forward contracts within Level 2 of the fair value hierarchy as follows:
Certificates of Deposit
The Company reviews market pricing and other observable market inputs for the same or similar securities obtained from a number of industry standard data providers. In the event that a transaction is observed for the same or similar security in the marketplace, the price on that transaction reflects the market price and fair value on that day. In the absence of any observable market transactions for a particular security, the fair market value at period end would be equal to the par value. These inputs represent quoted prices for similar assets or these inputs have been derived from observable market data.

8
Table of Contents

Commercial Paper
The Company reviews market pricing and other observable market inputs for the same or similar securities obtained from a number of industry standard data providers. In the event that a transaction is observed for the same or similar security in the marketplace, the price on that transaction reflects the market price and fair value on that day and then follows a revised accretion schedule to determine the fair market value at period end. In the absence of any observable market transactions for a particular security, the fair market value at period end is derived by accreting from the last observable market price. These inputs represent quoted prices for similar assets or these inputs have been derived from observable market data accreted mathematically to par.
Corporate Bonds
The Company reviews trading activity and pricing for each of the corporate bond securities in its portfolio as of the measurement date and determines if pricing data of sufficient frequency and volume in an active market exists in order to support Level 1 classification of these securities. If sufficient quoted pricing for identical securities is not available, the Company obtains market pricing and other observable market inputs for similar securities from a number of industry standard data providers. In instances where multiple prices exist for similar securities, these prices are used as inputs into a distribution-curve to determine the fair market value at period end.
U.S. Agency Notes
The Company reviews trading activity and pricing for its U.S. agency notes as of the measurement date. When sufficient quoted pricing for identical securities is not available, the Company uses market pricing and other observable market inputs for similar securities obtained from a number of industry standard data providers. These inputs represent quoted prices for similar assets in active markets or these inputs have been derived from observable market data.
Foreign Currency Exchange Forward Contracts
As discussed in Note 5, "Derivative Instruments" to the Notes to Condensed Consolidated Financial Statements, the Company mainly holds non-speculative foreign exchange forward contracts to hedge certain foreign currency exchange exposures. The Company estimates the fair values of derivatives based on quoted market prices or pricing models using current market rates. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit risk, foreign exchange rates, and forward and spot prices for currencies.
The following tables represent the Company’s fair value hierarchy for its assets and liabilities measured at fair value on a recurring basis (in thousands): 
 
As of June 27, 2015
 
As of December 27, 2014
 
Fair Value Measured Using
 
Fair Value Measured Using
 
Level 1      
 
Level 2      
 
Level 3      
 
Total        
 
Level 1      
 
Level 2      
 
Level 3      
 
Total        
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
126,672

 
$
—

 
$
—

 
$
126,672

 
$
21,478

 
$
—

 
$
—

 
$
21,478

Certificates of deposit
—

 
8,266

 
—

 
8,266

 
—

 
8,060

 
—

 
8,060

Commercial paper
—

 
10,697

 
—

 
10,697

 
—

 
46,072

 
—

 
46,072

Corporate bonds
—

 
227,232

 
—

 
227,232

 
—

 
235,285

 
—

 
235,285

U.S. agency notes
—

 
7,514

 
—

 
7,514

 
—

 
—

 
—

 
—

U.S. treasuries
8,011

 
—

 
—

 
8,011

 
14,810

 
—

 
—

 
14,810

Foreign currency exchange forward contracts
—

 
4,802

 
—

 
4,802

 
—

 
—

 
—

 
—

Total assets
$
134,683

 
$
258,511

 
$
—

 
$
393,194

 
$
36,288

 
$
289,417

 
$
—

 
$
325,705

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange forward contracts
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
(64
)
 
$
—

 
$
(64
)
During the three and six months ended June 27, 2015, there were no transfers of assets or liabilities between Level 1 and Level 2 of the fair value hierarchy.


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Table of Contents

Investments at fair value were as follows (in thousands): 
 
June 27, 2015
 
Adjusted Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized 
Losses
 
Fair Value    
Money market funds
$
126,672

 
$
—

 
$
—

 
$
126,672

Certificates of deposit
8,260

 
6

 
—

 
8,266

Commercial paper
10,697

 
—

 
—

 
10,697

Corporate bonds
227,502

 
3

 
(273
)
 
227,232

U.S. agency notes
7,505

 
9

 
—

 
7,514

U.S. treasuries
8,012

 
1

 
(2
)
 
8,011

Total available-for-sale investments
$
388,648

 
$
19

 
$
(275
)
 
$
388,392

 
 
December 27, 2014
 
Adjusted Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value    
Money market funds
$
21,478

 
$
—

 
$
—

 
$
21,478

Certificates of deposit
8,060

 
—

 
—

 
8,060

Commercial paper
46,073

 
—

 
(1
)
 
46,072

Corporate bonds
235,713

 
2

 
(430
)
 
235,285

U.S. treasuries
14,825

 
1

 
(16
)
 
14,810

Total available-for-sale investments
$
326,149

 
$
3

 
$
(447
)
 
$
325,705

As of June 27, 2015, the Company’s available-for-sale investments in certificates of deposit, commercial paper, corporate bonds, U.S. agency notes and U.S. treasuries have a contractual maturity term of up to 23 months. Gross realized gains (losses) on short-term and long-term investments for the three and six months ended June 27, 2015 and June 28, 2014 were insignificant in all periods. The specific identification method is used to account for gains and losses on available-for-sale investments.
As of June 27, 2015 and December 27, 2014, the Company held $66.3 million and $59.7 million of cash in banks, respectively, excluding restricted cash.
4.
Cost-method Investment
As of June 27, 2015, the Company had an investment of $14.5 million in a privately-held company. This investment is accounted for as a cost-method investment as the Company owns less than 20% of the voting securities and does not have the ability to exercise significant influence over operating and financial policies of the entity. This investment is carried at historical cost in the Company's condensed consolidated financial statements. The Company regularly evaluates the carrying value of this cost-method investment for impairment. If the Company believes that the carrying value of the cost basis investment is in excess of estimated fair value, the Company’s policy is to record an impairment charge in other income (expense), net, in the accompanying condensed consolidated statements of operations to adjust the carrying value to estimated fair value, when the impairment is deemed other-than-temporary. As of June 27, 2015, no event had occurred that would adversely affect the carrying value of this investment and thus no impairment charges have been recorded for this cost-method investment.
5.
Derivative Instruments
Foreign Currency Exchange Forward Contracts
The Company enters into foreign currency exchange forward contracts to manage its exposure to fluctuations in foreign exchange rates that arise primarily from its euro and British pound denominated receivables and euro denominated restricted cash balance amounts that are pledged as collateral for certain stand-by and commercial letters of credit. Gains and losses on these contracts are intended to offset the impact of foreign exchange rate fluctuations on the underlying foreign currency denominated accounts receivables and restricted cash, and therefore, do not subject the Company to material balance sheet risk. These forward contracts entered into during the three and six months ended June 27, 2015 were denominated in euros and British pounds, and had

10

maturities of no more than 35 days. The contracts are settled for U.S. dollars at maturity at rates agreed to at inception of the contracts.
In April 2015, the Company entered into a foreign currency exchange forward contract with a notional amount of Swedish kronor ("SEK") 831 million ($95.3 million) to hedge currency exposures associated with the cash consideration of the Offer (as defined in Note 15, "Subsequent Events") to acquire Transmode AB, a Swedish company ("Transmode"). Changes in the fair value of this forward contract are recognized in the statement of operations for the interim reporting periods prior to the close of the Offer (as defined in Note 15, "Subsequent Events"). For the three and six months ended June 27, 2015, the Company recorded an unrealized gain of $4.8 million, which was included in other gain (loss), net, in the accompanying condensed consolidated statements of operations.
These contracts are with two high-quality institutions and the Company consistently monitors the creditworthiness of the counterparties. As of June 27, 2015, the Company did not designate foreign currency exchange forward contracts as hedges for accounting purposes, and accordingly changes in the fair value of these instruments are included in other gain (loss), net, in the accompanying condensed consolidated statements of operations.
For the three months ended June 27, 2015 and June 28, 2014, the before-tax effect of the foreign currency exchange forward contracts related to the euro and British pound denominated receivables was a loss of $0.9 million and an insignificant loss, respectively, and for the six months ended June 27, 2015 and June 28, 2014, the before-tax effect of the aforementioned foreign currency exchange forward contracts was a loss of $2.8 million and a loss of $0.4 million, respectively. In each of these periods, the impact of the gross gains and losses were offset by foreign exchange rate fluctuations on the underlying foreign currency denominated amounts and the combined effect is recorded in other gain (loss), net, in the accompanying condensed consolidated statements of operations.
The fair value of derivative instruments in the Company’s condensed consolidated balance sheets was as follows (in thousands):
 
As of June 27, 2015
 
As of December 27, 2014
 
Gross Notional(1)
 
Prepaid Expense and Other Assets
 
Gross Notional(1)  
 
Other
Accrued
   Liabilities   
Foreign currency exchange forward contracts
 
 
 
 
 
 
 
Related to euro denominated receivables
$
8,479

 
$
18

 
$
34,445

 
$
(53
)
Related to British pound denominated receivables
—

 
—

 
2,678

 
(9
)
Related to acquisition of Transmode
95,319

 
4,782

 
—

 
—

Related to restricted cash
1,137

 
2

 
1,236

 
(2
)
 
$
104,935

 
$
4,802

 
$
38,359

 
$
(64
)
 
 
 
(1) 
Represents the face amounts of forward contracts that were outstanding as of the period noted.

11
Table of Contents

6.
Balance Sheet Details
The following table provides details of selected balance sheet items (in thousands):
 
June 27, 2015
 
December 27, 2014
Inventory:
 
 
 
Raw materials
$
30,175

 
$
15,169

Work in process
43,913

 
50,046

Finished goods (1)
83,093

 
81,285

Total inventory
$
157,181

 
$
146,500

Property, plant and equipment, net:
 
 
 
Computer hardware
$
10,044

 
$
8,785

Computer software(2)
19,136

 
17,684

Laboratory and manufacturing equipment
171,621

 
162,004

Furniture and fixtures
1,433

 
1,340

Leasehold improvements
38,267

 
37,825

Construction in progress
17,876

 
14,726

Subtotal
$
258,377

 
$
242,364

Less accumulated depreciation and amortization
(171,396
)
 
(160,798
)
Total property, plant and equipment, net
$
86,981

 
$
81,566

Accrued expenses:
 
 
 
Loss contingency related to non-cancelable purchase commitments
$
5,948

 
$
5,390

Professional and other consulting fees
3,864

 
1,831

Taxes payable
1,136

 
3,993

Royalties
3,301

 
2,648

Accrued rebate and customer prepay liability
1,910

 
941

Accrued interest on convertible senior notes
219

 
219

Other accrued expenses
13,736

 
11,419

Total accrued expenses
$
30,114

 
$
26,441

 
 
 
(1) 
Included in finished goods inventory at June 27, 2015 and December 27, 2014 were $10.3 million and $10.2 million, respectively, of inventory at customer locations for which product acceptance had not occurred.
(2) 
Included in computer software at June 27, 2015 and December 27, 2014 were $7.9 million and $7.9 million, respectively, related to an enterprise resource planning ("ERP") system that the Company implemented during 2012. The unamortized ERP costs at June 27, 2015 and December 27, 2014 were $4.6 million and $5.2 million, respectively.
Restricted Cash
The Company’s long-term restricted cash balance is primarily comprised of certificates of deposit, of which the majority is not insured by the Federal Deposit Insurance Corporation. These amounts primarily collateralize the Company’s issuances of stand-by letters of credit. Additionally, the Company’s restricted cash balance includes a leave encashment fund for India employees and a corporate bank card deposit for employees in the United Kingdom.
The following table sets forth the Company's restricted cash (in thousands):
 
June 27, 2015
 
December 27, 2014
Restricted cash related to outstanding standby letters of credit
 
 
 
Value added tax license
$
1,208

 
$
1,309

Customer proposal guarantee
2,858

 
3,074

Property leases
699

 
699

Other restricted cash
406

 
378

Total restricted cash
$
5,171

 
$
5,460

    

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7.
Accumulated Other Comprehensive Loss
Other comprehensive loss includes certain changes in equity that are excluded from net income. The following table sets forth the changes in accumulated other comprehensive loss by component for the six months ended June 27, 2015 (in thousands): 
 
 
Unrealized Gain (Loss)
on Other
Available-for-Sale
Securities
 
Foreign
Currency Translation     
 
     Accumulated     
Tax Effect
 
Total        
Balance at December 27, 2014
 
$
(444
)
 
$
(3,414
)
 
$
(760
)
 
$
(4,618
)
Net current-period other comprehensive income (loss)
 
189

 
(30
)
 
—

 
159

Balance at June 27, 2015
 
$
(255
)
 
$
(3,444
)
 
$
(760
)
 
$
(4,459
)
8.
Basic and Diluted Net Income Per Common Share
Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed using net income and the weighted average number of common shares outstanding plus potentially dilutive common shares outstanding during the period. Potentially dilutive common shares include the assumed exercise of outstanding stock options, assumed release of outstanding restricted stock units ("RSUs") and performance stock units ("PSUs"), assumed conversion of the Company's $150.0 million of 1.75% convertible senior notes (the "Notes") from the conversion spread (as defined in Note 9, "Convertible Senior Notes"), and assumed issuance of common stock under the Company’s employee stock purchase plan ("ESPP") using the treasury stock method. The Company includes the common shares underlying PSUs in the calculation of diluted net income per share only when they become contingently issuable. In net loss periods, these potentially diluted common shares have been anti-dilutive and therefore, excluded from the diluted net loss calculation.
The following table sets forth the computation of net income per common share – basic and diluted (in thousands, except per share amounts):
 
Three Months Ended
 
Six Months Ended
 
June 27, 2015
 
June 28, 2014
 
June 27, 2015
 
June 28, 2014
Numerator:
 
 
 
 
 
 
 
Net income
$
17,906

 
$
4,780

 
$
30,272

 
$
406

Denominator:
 
 
 
 
 
 
 
Basic weighted average common shares outstanding
130,349

 
123,128

 
129,094

 
122,240

Effect of dilutive securities:
 
 
 
 
 
 
 
Employee equity plans
5,766

 
3,630

 
6,168

 
3,872

Assumed conversion of convertible senior notes from conversion spread
4,527

 
—

 
3,711

 
—

Diluted weighted average common shares outstanding
140,642

 
126,758

 
138,973

 
126,112

 
 
 
 
 
 
 
 
Net income per common share
 
 
 
 
 
 
 
Basic
$
0.14

 
$
0.04

 
$
0.23

 
$ 0.00
Diluted
$
0.13

 
$
0.04

 
$
0.22

 
$ 0.00
In the three and six months ended June 27, 2015, the Company included the dilutive effects of the Notes in the calculation of diluted net income per common shares as the average market price was above the conversion price of the Notes. The dilutive impact of the Notes was based on the difference between the Company's average stock price during the period and the conversion price of the Notes. In the three and six months ended June 28, 2014, the Company excluded the potential shares issuable upon conversion of the Notes in the calculation of diluted earnings per share because the market price was below the conversion price. Upon conversion of the Notes, it is the Company’s intention to pay cash equal to the lesser of the aggregate principal amount or the conversion value of the Notes being converted, therefore, only the conversion spread relating to the Notes would be included in the Company’s diluted earnings per share calculation unless their effect is anti-dilutive.

13

The effects of certain potentially outstanding shares were not included in the calculation of diluted net income per share for the three and six months ended June 27, 2015 and June 28, 2014 because their effect were anti-dilutive under the treasury stock method or the performance condition of the award had not been met.
The following sets forth the potentially dilutive shares excluded from the computation of the diluted net income per share because their effect was anti-dilutive (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 27, 2015
 
June 28, 2014
 
June 27, 2015
 
June 28, 2014
Stock options
10

 
766

 
10

 
914

RSUs
73

 
338

 
789

 
569

PSUs
129

 
—

 
210

 
—

ESPP shares
—

 
697

 
207

 
708

Total
212

 
1,801

 
1,216

 
2,191

9.
Convertible Senior Notes
In May 2013, the Company issued $150.0 million of 1.75% convertible senior notes due June 1, 2018. The Notes will mature on June 1, 2018, unless earlier purchased by the Company or converted. Interest is payable semi-annually in arrears on June 1 and December 1 of each year, commencing December 1, 2013. The net proceeds to the Company were approximately $144.5 million.
The Notes are governed by an indenture dated as of May 30, 2013 (the "Indenture"), between the Company, as issuer, and U.S. Bank National Association, as trustee. The Notes are unsecured and do not contain any financial covenants or any restrictions on the payment of dividends, the incurrence of senior debt or other indebtedness, or the issuance or repurchase of securities by the Company.
Upon conversion, it is the Company’s intention to pay cash equal to the lesser of the aggregate principal amount or the conversion value of the Notes as cash, shares of common stock or a combination of cash and shares of common stock, at the Company’s election, for any remaining conversion obligation. The initial conversion rate is 79.4834 shares of common stock per $1,000 principal amount of Notes, subject to anti-dilution adjustments. The initial conversion price is approximately $12.58 per share of common stock.
Throughout the term of the Notes, the conversion rate may be adjusted upon the occurrence of certain events, including for any cash dividends. Holders of the Notes will not receive any cash payment representing accrued and unpaid interest upon conversion of a Note. Accrued but unpaid interest will be deemed to be paid in full upon conversion rather than canceled, extinguished or forfeited. Holders may convert their Notes under the following circumstances:

•
during any fiscal quarter commencing after the fiscal quarter ended on September 28, 2013 (and only during such fiscal quarter) if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

•
during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day;

•
upon the occurrence of specified corporate events described under the Indenture, such as a consolidation, merger or binding share exchange; or

•
at any time on or after December 1, 2017 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes at any time, regardless of the foregoing circumstances.
If the Company undergoes a fundamental change as defined in the Indenture governing the Notes, holders may require the Company to repurchase for cash all or any portion of their Notes at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding,

14
Table of Contents

the fundamental change repurchase date. In addition, upon the occurrence of a “make-whole fundamental change” (as defined in the Indenture), the Company may, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its Notes in connection with such make-whole fundamental change.

The net carrying amounts of the debt obligation were as follows (in thousands):
 
June 27, 2015
 
December 27, 2014
Principal
$
150,000

 
$
150,000

Unamortized discount (1)
(28,940
)
 
(33,106
)
Unamortized issuance cost (1)
(2,490
)
 
(2,848
)
Net carrying amount
118,570

 
114,046

 
 
 
(1) 
Unamortized debt conversion discount and issuance costs will be amortized over the remaining life of the Notes, which is approximately three years.
In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. As of June 27, 2015 and December 27, 2014, the carrying amount of the equity component was $43.3 million, which represents the equity component of the debt discount related to the value of the conversion option of $45.0 million, net of the debt issuance costs attributable to the equity component of $1.7 million. The excess of the principal amount of the liability component over its carrying amount ("debt discount") is amortized to interest expense over the term of the Notes.
In accounting for the issuance costs of $5.5 million related to the Notes, the Company allocated the total amount incurred to the liability and equity components of the Notes based on their relative values. Issuance costs attributable to the liability component were recorded as other non-current assets and will be amortized to interest expense over the term of the Notes. The issuance costs attributable to the equity component were netted with the equity component in stockholders’ equity. Additionally, the Company initially recorded a deferred tax liability of $17.0 million in connection with the issuance of the Notes, and a corresponding reduction in valuation allowance. The impact of both was recorded to stockholders’ equity.
The Company determined that the embedded conversion option in the Notes does not require separate accounting treatment as a derivative instrument because it is both indexed to the Company’s own stock and would be classified in stockholder’s equity if freestanding.
The following table sets forth total interest expense recognized related to the Notes (in thousands): 
 
Three Months Ended
 
Six Months Ended
 
June 27, 2015
 
June 28, 2014
 
June 27, 2015
 
June 28, 2014
Contractual interest expense
$
656

 
$
656

 
$
1,313

 
$
1,313

Amortization of debt issuance costs
182

 
164

 
358

 
324

Amortization of debt discount
2,109

 
1,908

 
4,166

 
3,768

Total interest expense
$
2,947

 
$
2,728

 
$
5,837

 
$
5,405

The coupon rate was 1.75%. For the three and six months ended June 27, 2015 and June 28, 2014, the debt discount and debt issuance costs are amortized, using an annual effective interest rate of 10.23%, to interest expense over the term of the Notes.
As of June 27, 2015, the fair value of the Notes was $253.2 million. The fair value was determined based on the quoted bid price of the Notes in an over-the-counter market on June 26, 2015. The Notes are classified as Level 2 of the fair value hierarchy.
During the three months ended June 27, 2015, the closing price of the Company's common stock exceeded 130% of the applicable conversion price of the Notes on at least 20 of the last 30 consecutive trading days of the

15
Table of Contents

quarter; therefore, holders of the Notes may convert their notes during the three months ended September 26, 2015. Should the closing price conditions be met during the 30 consecutive trading days prior to the end of the third quarter of 2015 or a future quarter, the Notes will be convertible at their holders’ option during the immediately following quarter. Based on the closing price of the Company’s common stock of $21.24 on June 26, 2015, the if-converted value of the Notes exceeded their principal amount by approximately $103.2 million.
10.
Stockholders’ Equity
Stock-based Compensation Plans
The Company has stock-based compensation plans pursuant to which the Company has granted stock options, RSUs and PSUs. The Company also has an ESPP for all eligible employees. As of June 27, 2015, there were a total of 15.7 million shares of common stock available for grant under the Company’s 2007 Equity Incentive Plan ("2007 Plan"). The following tables summarize the Company’s equity award activity and related information (in thousands, except per share data): 
 
Number of Stock
Options
 
Weighted-Average
Exercise
Price
  Per Share  
 
  Aggregate  
Intrinsic
Value
Outstanding at December 27, 2014
4,298

 
$
7.29

 
$
32,833

Stock options granted
—

 
$
—

 
 
Stock options exercised
(1,335
)
 
$
7.53

 
$
14,914

Stock options canceled
—

 
$
—

 


Outstanding at June 27, 2015
2,963

 
$
7.18

 
$
41,675

Vested and expected to vest as of June 27, 2015
2,962

 
 
 
$
41,660

Exercisable at June 27, 2015
2,930

 
$
7.17

 
$
41,234

 
The aggregate intrinsic value of unexercised stock options is calculated as the difference between the closing price of the Company’s common stock of $21.24 at June 26, 2015 and the exercise prices of the underlying stock options. The aggregate intrinsic value of the stock options that have been exercised is calculated as the difference between the fair market value of the common stock at the date of exercise and the exercise price of the underlying stock options.
 
Number of
Restricted
Stock Units
 
Weighted-
Average
 Grant Date 
Fair Value
Per Share
 
  Aggregate  
Intrinsic
Value
Outstanding at December 27, 2014
6,042

 
$
8.14

 
$
90,085

RSUs granted
1,738

 
$
18.16

 


RSUs released
(2,722
)
 
$
7.73

 
$
46,883

RSUs canceled
(123
)
 
$
9.07

 


Outstanding at June 27, 2015
4,935

 
$
11.87

 
$
104,821

Expected to vest at June 27, 2015
4,683

 


 
$
99,463

 

16
Table of Contents

 
Number of
Performance
Stock Units
 
Weighted-
Average
 Grant Date 
Fair Value
Per Share
 
  Aggregate  
Intrinsic
Value
Outstanding at December 27, 2014
876

 
$
7.49

 
$
13,067

PSUs granted
309

 
$
18.15

 

PSUs performance earned(1)
129

 
$
7.32

 
 
PSUs released
(386
)
 
$
6.67

 
$
6,585

PSUs canceled
(191
)
 
$
7.88

 

Outstanding at June 27, 2015
737

 
$
12.14

 
$
15,661

Expected to vest at June 27, 2015
708

 

 
$
15,044

 
 
 
(1) 
Represents the additional PSUs awarded resulting from the achievement of performance goals above the performance targets established at grant.
The aggregate intrinsic value of unreleased RSUs and unreleased PSUs is calculated using the closing price of the Company's common stock of $21.24 at June 26, 2015. The aggregate intrinsic value of RSUs and PSUs released is calculated using the fair market value of the common stock at the date of release.

The following table presents total stock-based compensation cost for instruments granted but not yet amortized, net of estimated forfeitures, of the Company’s equity compensation plans as of June 27, 2015. These costs are expected to be amortized on a straight-line basis over the following weighted-average periods (in thousands, except for weighted-average period):
 
Unrecognized
Compensation
Expense, Net
 
Weighted-
Average Period
(in years)
Stock options
$
119

 
1.5
RSUs
$
45,485

 
2.5
PSUs
$
5,634

 
1.4
Employee Stock Options
The estimated values of stock options, as well as assumptions used in calculating these values were based on estimates as follows (expense amounts in thousands):
 
Three Months Ended
 
Six Months Ended
Employee and Director Stock Options
June 27, 2015
 
June 28, 2014
 
June 27, 2015
 
June 28, 2014
Volatility
N/A
 
N/A
 
N/A
 
52%
Risk-free interest rate
N/A
 
N/A
 
N/A
 
1.3%
Expected life
N/A
 
N/A
 
N/A
 
4.3 years
Estimated fair value
N/A
 
N/A
 
N/A
 
$3.85
Total stock-based compensation expense
$53
 
$127
 
$123
 
$515
_________________
N/A
Not applicable because the Company did not grant any stock options during the period.

17
Table of Contents


Employee Stock Purchase Plan

The fair value of the ESPP shares was estimated at the date of grant using the following assumptions (expense amounts in thousands):
 
Three Months Ended
 
Six Months Ended
Employee Stock Purchase Plan
June 27, 2015
 
June 28, 2014
 
June 27, 2015
 
June 28, 2014
Volatility
53%
 
49%
 
53%
 
49% - 51%
Risk-free interest rate
0.13%
 
0.02%
 
0.13%
 
0.02% - 0.11%
Expected life
0.5 years
 
0.3 years
 
0.5 years
 
0.3 - 0.5 years
Estimated fair value
$5.15
 
$2.05
 
$5.15
 
$2.05 - $2.57
Total stock-based compensation expense
$1,077
 
$843
 
$2,128
 
$1,634
Restricted Stock Units
During the three and six months ended June 27, 2015, the Company granted RSUs to employees and members of the Company’s board of directors to receive an aggregate of 0.2 million shares and 1.7 million shares of the Company’s common stock, respectively. The Company accounted for the fair value of the RSUs using the closing market price of the Company’s common stock on the date of grant. Amortization of stock-based compensation related to RSUs in the three and six months ended June 27, 2015 and June 28, 2014 was approximately $5.9 million and $11.1 million, respectively, and $5.3 million and $10.3 million, respectively.
Performance Stock Units
Pursuant to the 2007 Plan, the Company has granted PSUs to certain of the Company’s executive officers, senior management and employees. All PSUs awarded are subject to each individual's continued service to the Company through each applicable vesting date and if the performance metrics are not met within the time limits specified in the award agreements, the PSUs will be canceled.
A number of PSUs granted to the Company’s executive officers and senior management are based on the total shareholder return of the Company's common stock price as compared to the total shareholder return of a designated index over the span of one year, two years and three years. The number of shares to be issued upon vesting of these PSUs range from 0 to 1.5 times the target number of PSUs granted depending on the Company’s performance against the index.
The ranges of estimated values of the PSUs granted that are compared to an index, as well as the assumptions used in calculating these values were based on estimates as follows:
 
 
2015
 
2014
 
2013
Index
 
SPGIIPTR
 
SPGIIPTR
 
NASDAQ Telecom Composite
Index volatility
 
18% - 19%
 
25%
 
23%
Infinera volatility
 
48%
 
49% - 50%
 
55%
Risk-free interest rate
 
0.97% - 1.10%
 
0.66% - 0.71%
 
0.42%
Correlation with index
 
0.52
 
0.60
 
0.56
Estimated fair value
 
$18.08 - $19.29
 
$6.59 - $7.60
 
$6.27 - $7.06

18
Table of Contents

In addition, certain other PSUs granted to the Company’s executive officers, senior management and certain employees will only vest upon the achievement of specific financial or operational performance criteria.
The following table summarizes by grant year, the Company’s PSU activity for the six months ended June 27, 2015 (in thousands):
 
 
Number of Performance Stock Units
 
2012
 
2013
 
2014
 
2015
Outstanding at December 27, 2014
 
876

 
191

 
296

 
389

 
—

PSUs granted
 
309

 
—

 
—

 
—

 
309

PSUs performance earned(1)
 
129

 
—

 
74

 
55

 
—

PSUs released
 
(386
)
 
—

 
(222
)
 
(164
)
 
—

PSUs canceled
 
(191
)
 
(191
)
 
—

 
—

 
—

Outstanding at June 27, 2015
 
737

 
—

 
148

 
280

 
309

 
 
 
(1) 
Represents the additional PSUs awarded resulting from the achievement of performance goals above the performance targets established at grant.
Amortization of stock-based compensation related to PSUs in the three and six months ended June 27, 2015 and June 28, 2014 was approximately $1.3 million and $2.2 million, respectively, and $0.6 million and $1.0 million, respectively.
Stock-Based Compensation
The following tables summarize the effects of stock-based compensation on the Company’s condensed consolidated balance sheets and statements of operations for the periods presented (in thousands):
 
June 27, 2015
 
December 27, 2014
Stock-based compensation effects in inventory
$
3,199

 
$
3,088

Stock-based compensation effects in deferred inventory cost
$
13

 
$
13

Stock-based compensation effects in fixed assets
$
106

 
$
119

 
 
Three Months Ended
 
Six Months Ended
 
June 27, 2015
 
June 28, 2014
 
June 27, 2015
 
June 28, 2014
Stock-based compensation effects included in net income before income taxes
 
 
 
 
 
 
 
Cost of revenue
$
613

 
$
477

 
$
1,095

 
$
929

Research and development
2,817

 
2,080

 
5,395

 
4,218

Sales and marketing
2,070

 
1,815

 
3,791

 
3,535

General and administration
1,829

 
1,549

 
3,495

 
3,079

 
7,329

 
5,921

 
13,776

 
11,761

Cost of revenue – amortization from balance sheet (1)
880

 
883

 
1,641

 
1,715

Total stock-based compensation expense
$
8,209

 
$
6,804

 
$
15,417

 
$
13,476

 
 
 
(1) 
Stock-based compensation expense deferred to inventory and deferred inventory costs in prior periods and recognized in the current period.


19

11.
Income Taxes
Provision for income taxes for three and six months ended June 27, 2015 was $1.0 million and $1.6 million, respectively, on pre-tax income of $18.9 million and $31.9 million, respectively. This compared to a tax provision of $0.6 million and $0.9 million, respectively, on a pre-tax income of $5.4 million and $1.3 million, respectively, for the three and six months ended June 28, 2014. The increase in tax provision for the three and six months ended June 27, 2015 compared to the corresponding periods in 2014 was attributed to strong profitability in the first half of 2015 and accordingly, taxes being accrued in proportion to quarterly profit as it relates to expected earnings for the year, as well as higher foreign taxes due to an increase in cost-plus taxable profits. In all periods, the tax expense projected in the Company's effective tax rate primarily represents foreign taxes of the Company's overseas subsidiaries compensated on a cost-plus basis regardless of the level of consolidated earnings. Because of the Company's significant loss carryforward position and corresponding full valuation allowance, the Company has not been subject to federal or state tax on its U.S. income because of the availability of loss carryforwards, with the exception of some state taxes for which the losses are limited by statute. The release of transfer pricing reserves in the future will have a beneficial impact to tax expense, but the timing of the impact depends on factors such as expiration of the statute of limitations or settlements with tax authorities. No significant releases are expected in the near future based on information available at this time.
The Company must assess the likelihood that some portion or all of our deferred tax assets will be recovered from future taxable income within the respective jurisdictions, and to the extent the Company believes that recovery does not meet the “more-likely-than-not” standard, it must establish a valuation allowance. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management judgment is required in determining the Company's provision for income taxes, its deferred tax assets and liabilities, and any valuation allowance recorded against its net deferred tax assets. At June 27, 2015 and December 27, 2014, the Company's domestic net deferred tax assets were fully reserved with a valuation allowance because, based on the available evidence, management believed at that time it was more likely than not that the Company would not be able to utilize those deferred tax assets in the future.
Notwithstanding the above, the Company has been profitable for five consecutive quarters beginning with the second quarter of 2014. If this trend continues and the Company is no longer in a cumulative loss position, it may consider the extent to which it can rely on forecasts of future income to support the realization of its net U.S. deferred tax assets. These income forecasts would be considered with other positive and negative evidence, including the Company's forecasts of taxable income over the applicable carryforward periods, its current financial performance, its market environment, and other factors in evaluating the need for a full or partial valuation allowance against its net U.S. deferred tax assets. To the extent that the Company determines that deferred tax assets are realizable on a more likely than not basis, and adjustment is needed, that adjustment will be recorded in the period that the determination is made and would generally decrease the valuation allowance and record a corresponding benefit to earnings.
12.
Segment Information
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the Company’s Chief Executive Officer ("CEO"). The Company’s CEO reviews financial information presented on a consolidated basis, accompanied by information about revenue by geographic region for purposes of allocating resources and evaluating financial performance. The Company has one business activity. Accordingly, the Company is considered to be in a single reporting segment and operating unit structure.

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Revenue by geographic region is based on the shipping address of the customer. The following tables set forth revenue and long-lived assets by geographic region (in thousands):
Revenue 
 
Three Months Ended
 
Six Months Ended
 
June 27, 2015
 
June 28, 2014
 
June 27, 2015
 
June 28, 2014
Americas:
 
 
 
 
 
 
 
United States
$
154,762

 
$
136,342

 
$
281,765

 
$
247,033

Other Americas
11,984

 
4,760

 
19,070

 
8,296

 
166,746

 
141,102

 
300,835

 
255,329

Europe, Middle East and Africa
26,629

 
19,234

 
72,508

 
44,847

Asia Pacific and Japan
13,971

 
5,063

 
20,865

 
8,038

Total revenue
$
207,346

 
$
165,399

 
$
394,208

 
$
308,214


Property, plant and equipment, net 
 
June 27, 2015
 
December 27, 2014
United States
$
83,938

 
$
79,025

Other Americas
128

 
196

Europe, Middle East and Africa
810

 
1,477

Asia Pacific and Japan
2,105

 
868

Total property, plant and equipment, net
$
86,981

 
$
81,566

13.
Guarantees
Product Warranties
The Company warrants that its products will operate substantially in conformity with product specifications. Hardware warranties provide the purchaser with protection in the event that the product does not perform to product specifications. During the warranty period, the purchaser’s sole and exclusive remedy in the event of such defect or failure to perform is limited to the correction of the defect or failure by repair, refurbishment or replacement, at the Company’s sole option and expense. The Company's hardware warranty periods range from one to five years from date of acceptance for hardware and the Company's software warranty is 90 days. Upon delivery of the Company's products, the Company provides for the estimated cost to repair or replace products that may be returned under warranty. The hardware warranty accrual is based on actual historical returns and cost of repair experience and the application of those historical rates to the Company's in-warranty installed base. The provision for warranty claims fluctuates depending upon the installed base of products and the failure rates and costs of repair associated with these products under warranty. Furthermore, the Company's costs of repair vary based on repair volume and its ability to repair, rather than replace, defective units. In the event that actual product failure rates and costs to repair differ from the Company's estimates, revisions to the warranty provision are required. In addition, from time to time, specific hardware warranty accruals may be made if unforeseen technical problems arise with specific products. The Company regularly assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.

21

Activity related to product warranty was as follows (in thousands): 
 
Three Months Ended
 
Six Months Ended
 
June 27, 2015
 
June 28, 2014
 
June 27, 2015
 
June 28, 2014
Beginning balance
$
25,539

 
$
26,385

 
$
27,040

 
$
22,908

Charges to operations
6,019

 
6,800

 
11,367

 
12,360

Utilization
(3,003
)
 
(2,370
)
 
(4,821
)
 
(5,612
)
Change in estimate(1)
(116
)
 
(2,867
)
 
(5,147
)
 
(1,708
)
Balance at the end of the period
$
28,439

 
$
27,948

 
$
28,439

 
$
27,948

 
 
 
(1) 
The Company records hardware warranty liabilities based on the latest quality and cost information available as of that date. The changes in estimate shown here are due to changes in overall actual failure rates, the mix of new versus used units related to replacement of failed units, and changes in the estimated cost of repair and new parts. As the Company's products mature over time, failure rates and repair costs generally decline leading to favorable changes in warranty reserves.
14.
Litigation and Contingencies
Legal Matters
From time to time, the Company is subject to various legal proceedings, claims and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, the Company does not expect that the ultimate costs to resolve these matters will have a material effect on its consolidated financial position, results of operations, or cash flows.
Cambrian Science Patent Infringement Litigation
On July 12, 2011, the Company was notified by Level 3 that Cambrian Science Corporation ("Cambrian") filed suit against Level 3 and six other defendants, including Cox Communications, Inc., XO Communications, LLC, Global Crossing Limited, 360Networks (USA), Inc., Integra Telecom, Inc. and IXC, Inc. dba Telekenex (collectively, the "Defendants") in the U.S. District Court for the Central District of California alleging infringement of patent no. 6,775,312 (the "'312 Patent") and requesting damages for such alleged infringement (the "Cambrian Claim"). The nature of the Cambrian Claim involves allegations of infringement of the '312 Patent resulting from the Defendants’ use of certain products and systems in the Defendants’ networks, including the Infinera DTN platform. On August 24, 2011, Cambrian amended the complaint to name the Company as a defendant. The Company assumed the defense of the Cambrian Claim and filed an answer to Cambrian’s complaint on September 21, 2011, in which the Company denied infringement of the '312 Patent and raised other defenses. Cambrian filed a second amended complaint on October 6, 2011, which included many of the same allegations as in the original complaint. The Company filed its answer to the second amended complaint on October 21, 2011, in which the Company maintained the same denials and defenses as in the Company’s initial answer. On December 23, 2011, the Company filed a motion requesting that the court stay the case with respect to each of the above-noted customer Defendants. Cambrian filed its opposition to the Company’s motion on December 30, 2011. The Company’s request was denied in the court’s decision on March 7, 2012. The Company presented evidence on the appropriate meanings of relevant key words used in the patent claims during a claim construction hearing on November 20, 2012.
On June 17, 2013, the court issued an order regarding claim construction, in which the court agreed with almost all of the Company’s proposed claim constructions. On October 17, 2013, the parties met for a court-mandated mediation. On April 24, 2014, the Company filed two motions for summary judgment relating to non-infringement and Cambrian’s claim to an earlier date of invention. The court held a hearing on the summary judgment motions on June 9, 2014. On July 2, 2014, the court granted the Company's motion for summary judgment on non-infringement and entered a final judgment of non-infringement of the '312 Patent. After the court had granted summary judgment, the Company sought to recover certain costs and attorney's fees from Cambrian.
On August 1, 2014, Cambrian filed a notice of appeal regarding the ruling of non-infringement to the Court of Appeals for the Federal Circuit (“CAFC”), and Cambrian’s appeal brief was filed on November 6, 2014. The Company filed its responsive brief on January 5, 2015, arguing that the CAFC should affirm the lower court’s finding of non-infringement, and on February 2, 2015, Cambrian filed their reply brief. Oral argument of this appeal took place on May 5, 2015. On June 29, 2015, the CAFC affirmed the court’s claim construction and grant of summary judgment of non-infringement.

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Table of Contents

As of June 27, 2015, the Company concluded that the likelihood of a loss with respect to this suit was remote and the amount of any loss would be insignificant. The Company does not believe the outcome of this matter will have a material adverse effect on the Company's business, consolidated financial position, results of operations, or cash flows. Factors that the Company considered in the determination of the likelihood of a loss and the estimate of that loss in respect to this matter included the merits of the case, the district court granting the Company's motion for summary judgment for non-infringement, the entry of final judgment of non-infringement and the current stage of the litigation. However, the outcome of such legal matters is inherently unpredictable and subject to uncertainty.
Loss Contingencies
The Company is subject to the possibility of various losses arising in the ordinary course of business. These may relate to disputes, litigation and other legal actions. In the preparation of its quarterly and annual financial statements, the Company considers the likelihood of loss or the incurrence of a liability, including whether it is probable, reasonably possible or remote that a liability has been incurred, as well as the Company’s ability to reasonably estimate the amount of loss, in determining loss contingencies. In accordance with U.S. GAAP, an estimated loss contingency is accrued when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. The Company regularly evaluates current information to determine whether any accruals should be adjusted and whether new accruals are required.
15.
Subsequent Events
On April 8, 2015, the Company issued a press release announcing the Company’s intent to acquire Transmode, pursuant to a public offer to acquire all outstanding shares of Transmode (the “Offer”) in exchange for a combination of cash and the Company's common stock (the "Original Consideration Alternative"). On June 29, 2015, the Company announced that the Offer had been enhanced by providing a potential all cash consideration alternative, subject to certain conditions (the "Capped Cash Alternative"). Pursuant to the revised Offer, Transmode's shareholders may tender their shares for either of the following two consideration alternatives (or a combination thereof):
•
The Original Consideration Alternative consists of: (i) with respect to approximately 73.8 percent of the Transmode shares tendered by each shareholder, approximately 0.6376 shares of the Company's common stock per Transmode share; and (ii) with respect to the remaining approximately 26.2 percent of the Transmode shares tendered by such shareholder, SEK 107.05 in cash per Transmode share.
•
The Capped Cash Alternative consists of: cash consideration of SEK 110.00 per Transmode share, subject to a maximum total cash consideration in the Offer of SEK 2,133,611,172 ($257.8 million based on an SEK/U.S. dollar exchange rate of 8.2766 on June 27, 2015) (the "Aggregate Cash Cap").
The foregoing reflects the payment by Transmode to its shareholders of a dividend of 1.95 per share on April 23, 2015. If Transmode pays another dividend or makes any other distributions to its shareholders, with a record date occurring prior to the settlement of the Offer, the value of the Offer consideration will be reduced accordingly.
The total cash consideration to be paid by the Company under the Original Consideration Alternative and the Capped Cash Alternative in aggregate is limited to the Aggregate Cash Cap, corresponding to 70% percent of the outstanding shares in Transmode (calculated based on a consideration of SEK 110.00 per Transmode share). In the event the Offer acceptance levels in the Original Consideration Alternative and the Capped Cash Alternative in aggregate would cause the total cash consideration to be paid by the Company in the Offer to exceed the Aggregate Cash Cap, a pro rata reduction of the number of Transmode shares to be acquired for cash consideration under the Capped Cash Alternative will be made. The reduction will be made such that the cash consideration to be paid by the Company totals not more than the Aggregate Cash Cap and any surplus shares tendered under the Capped Cash Alternative in the Offer shall instead be deemed tendered for consideration of approximately 0.6376 shares of the Company’s common stock per Transmode share (i.e., equivalent to the share consideration under the Original Consideration Alternative). No pro rata reduction will be made with respect to the Transmode shares tendered under the Original Consideration Alternative.
In July 2015, Infinera entered into a series of foreign currency exchange option contracts to purchase SEK 1.3 billion ($153.8 million) and to sell SEK 650 million ($76.9 million), which achieves the economic equivalent of a “participating forward” in order to hedge the anticipated foreign currency cash outflows associated with the additional cash consideration related to the enhanced Offer to acquire the shares of Transmode. These option contracts are in addition to the existing foreign currency exchange forward contract with a notional amount of SEK

23
Table of Contents

831 million ($95.3 million). As these contracts are not formally designated as hedges, the gain or loss will be recognized in the statement of operations.

24
Table of Contents

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains "forward-looking statements" that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements include our expectations regarding earnings, revenue, gross margin, expenses, cash flows and other financial items; any statements of the plans, strategies and objectives of management for future operations and personnel; factors that may affect our operating results; anticipated customer activity; statements concerning new products or services; statements related to our intent to acquire the shares of Transmode AB; statements related to capital expenditures; statements related to future economic conditions, performance, market growth or our sales cycle; statements related to our convertible senior notes; statements related to the effects of litigation on our financial position, results of operations or cash flows; statements related to the timing and impact of transfer pricing reserves; statements as to industry trends and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. These statements are often identified by the use of words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," or "will," and similar expressions or variations. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk Factors" included elsewhere in this Form 10-Q and in our other SEC filings, including our Annual Report on Form 10-K for the fiscal year ended December 27, 2014 filed on February 18, 2015. Such forward-looking statements speak only as of the date of this report. We disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.
Overview
We provide optical transport networking equipment, software and services to Tier 1 and Tier 2 telecommunications service providers, Internet content providers ("ICPs"), cable providers, wholesale and enterprise carriers, research and education institutions, and government entities (collectively, "Service Providers") across the globe. Optical transport networks are deployed by Service Providers facing significant demands for transmission capacity prompted by increased use of high-speed Internet access, mobile broadband, high-definition video streaming services, business Ethernet services and cloud-based services.
Our technologies and platforms enable Service Providers to deliver vast amounts of bandwidth with greater ease. We leverage our unique large-scale photonic integrated circuits ("PICs") to deliver innovative optical networking solutions for the most demanding network environments. The Infinera Intelligent Transport Network is an architecture that enables Service Providers to automate, converge and scale their data center, metro, long-haul and subsea optical networks. This architectural approach helps Service Providers to rapidly deploy reliable, differentiated services while reducing their operating costs through scale, multi-layer convergence and automation.
We manufacture large-scale Indium Phosphide PICs, which are used as a key differentiating component inside our Intelligent Transport Network platforms. Our first and second generation PICs transmit and receive 100 Gigabits per second ("Gbps") of wavelength division multiplexing ("WDM") transmission capacity and incorporate the functionality of over 60 discrete optical functions into a pair of PICs approximately the size of a fingernail. Our third generation PICs, commercially available since 2012, transmit and receive 500 Gbps, incorporating over 600 discrete optical functions into a pair of PICs. Our PICs are combined with the FlexCoherent Processors to deliver coherent optical transmission and with high-performance Optical Transport Network ("OTN") switching capabilities to offer Service Providers a unique combination of highly-scalable transmission capacity and easy to use bandwidth management tools to simplify transport network operations.
The Infinera DTN-X platform supports 100 Gbps WDM transmission capacity with 500 Gbps super-channels and also integrates 5 Terabits per second of OTN switching in a single bay. The Infinera DTN-X platform leverages the unique capabilities of our 500 Gbps PICs to deliver our high-capacity Intelligent Transport Networks that reduce power, cooling and space requirements while simplifying transport network operations. The Infinera DTN platform currently supports 10 Gbps WDM transmission capacity combined with integrated switching capabilities.

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Table of Contents

In addition to Service Providers that are looking for network architectures to respond to continued demand for bandwidth across their long-haul and subsea networks, Service Providers are now starting to build networks to support data center interconnections across metro cloud and campus environments. Our recently introduced Cloud Xpress platform is optimized to help Service Providers build cloud networks with hyper-scale density, simplified operations and low power.
As of June 27, 2015, we have sold our products for deployment in the optical networks of 145 customers worldwide. Since the commencement of shipping our DTN-X platform in the second quarter of 2012, we have 62 customers who have purchased our DTN-X platform. We do not have long-term sales commitments from our customers. To date, a few of our customers have accounted for a significant portion of our revenue. For the three months ended June 27, 2015, three customers individually accounted for 23%, 16% and 11% of our total revenue, respectively, and two customers individually accounted for 20% and 13% of our total revenue, respectively, for the corresponding period in 2014. For the six months ended June 27, 2015, four customers individually accounted for 14%, 13%, 12% and 11% of our total revenue, respectively, and two customers individually accounted for 18% and 13% of our total revenue, respectively, for the corresponding period in 2014.
We are headquartered in Sunnyvale, California, with employees located throughout the Americas, Europe and the Asia Pacific region. We expect to continue to add personnel in the United States and internationally to develop our products and provide additional geographic sales and technical support coverage. We primarily sell our products through our direct sales force, with a small portion sold indirectly through resellers. We derived 95% and 95% of our revenue from direct sales to customers during the three and six months ended June 27, 2015, respectively, and 97% and 98% of our revenue for the three and six months ended June 28, 2014, respectively. We expect to continue generating a substantial majority of our revenue from direct sales in the future.
We intend to continue to leverage the Infinera DTN-X platform to increase revenue and expand our market share as customers continue to deploy 100 Gbps transport solutions in their networks. In addition, to the DTN-X platform for the long-haul market, we are also optimistic about opportunities in the metro market with the introduction of our Cloud Xpress platform for the metro cloud in early 2015 and the planned introduction of a metro product for the high capacity metro core by the end of 2015. This focus on revenue growth will be complemented with overall prudent financial management and continued efforts to drive cost improvements across all of our products and services. We believe that with sustained revenue growth, we can leverage our vertically-integrated manufacturing model, which combined with selling bandwidth capacity into deployed networks, can result in improved future profitability and cash flow. We will continue to make significant investments in the business, and management currently believes that research and development expenses, excluding stock-based compensation expenses, will be approximately 20% of our total revenue. Furthermore, we plan to continue to tightly manage other operating expenses.
On April 8, 2015, we announced our intent to acquire Transmode AB, a Swedish company ("Transmode"), pursuant to a public offer to acquire all outstanding shares of Transmode in exchange for a combination of cash and the Company's common stock (the “Offer”). On June 29, 2015, we announced that the Offer had been enhanced by providing a potential all cash consideration alternative. We are now offering the Transmode shareholders the choice between tendering their shares for Swedish kronor ("SEK") 110.00 per Transmode share in cash consideration, subject to a maximum total cash consideration in the Offer of SEK 2,133,611,172 ($257.8 million based on an SEK/U.S. dollar exchange rate of 8.2766 on June 27, 2015) (the “Capped Cash Alternative”) or the original Offer consideration in the form of a mix of cash and shares of our common stock as previously announced (the “Original Consideration Alternative”). On July 9, 2015, the Company announced that the Offer document relating to the Offer has been approved by the Swedish Financial Supervisory Authority. The acceptance period for the Offer runs from and including July 10, 2015 up to and including August 7, 2015. The Company reserves the right to extend the acceptance period, as well as to defer payment of considerations if the acceptance period is extended. For more information on the Offer, see Note 15, "Subsequent Events" to the Notes to Consolidated Financial Statements. Complementing our strength in the long-haul optical transport market and our early traction in the metro cloud market, we believe Transmode’s suite of metro core, edge and access solutions along with the planned introduction of our metro product for the core will allow us to address the entire end-to-end WDM market and to capitalize on the transition of major 100G metro product deployments expected by industry analysts to commence in 2016.
Our goal is to be the preeminent provider of optical transport networking systems to Service Providers around the world. In the remainder of 2015 and beyond, we intend to increase our footprint with new and existing customers while leveraging our long-haul and metro products. Our revenue growth will depend on the continued

26
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acceptance of our products, growth of communications traffic and the proliferation of next-generation bandwidth-intensive services, which are expected to drive the need for increased levels of bandwidth.
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our condensed consolidated financial statements, which we have prepared in accordance with the U.S. generally accepted accounting principles ("U.S. GAAP"). The preparation of these financial statements requires management to make estimates, assumptions and judgments that can affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements. Management believes that there have been no significant changes during the six months ended June 27, 2015 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 27, 2014.

Results of Operations
The following sets forth, for the periods presented, certain unaudited condensed consolidated statements of operations information (in thousands, except percentages):
 
 
Three Months Ended
 
 
 
 
 
June 27, 2015
 
June 28, 2014
 
 
 
 
 
Amount    
 
  % of total  
revenue
 
Amount    
 
  % of total  
revenue
 
Change    
 
% Change 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Product
$
178,982

 
86
%
 
$
142,364

 
86
%
 
$
36,618

 
26
%
Services
28,364

 
14
%
 
23,035

 
14
%
 
5,329

 
23
%
Total revenue
$
207,346

 
100
%
 
$
165,399

 
100
%
 
$
41,947

 
25
%
Cost of revenue:
 
 
 
 
 
 
 
 
 
 
 
Product
$
99,491

 
48
%
 
$
85,906

 
52
%
 
$
13,585

 
16
%
Services
11,059

 
5
%
 
9,240

 
6
%
 
1,819

 
20
%
Total cost of revenue
$
110,550

 
53
%
 
$
95,146

 
58
%
 
$
15,404

 
16
%
Gross profit
$
96,796

 
47
%
 
$
70,253

 
42
%
 
$
26,543

 
38
%
 
 
Six Months Ended
 
 
 
 
 
June 27, 2015
 
June 28, 2014
 
 
 
 
 
Amount    
 
  % of total  
revenue
 
Amount    
 
  % of total  
revenue
 
Change    
 
% Change 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Product
$
339,825

 
86
%
 
$
266,606

 
87
%
 
$
73,219

 
27
%
Services
54,383

 
14
%
 
41,608

 
13
%
 
12,775

 
31
%
Total revenue
$
394,208

 
100
%
 
$
308,214

 
100
%
 
$
85,994

 
28
%
Cost of revenue:
 
 
 
 
 
 
 
 
 
 
 
Product
$
188,997

 
48
%
 
$
164,344

 
53
%
 
$
24,653

 
15
%
Services
20,303

 
5
%
 
15,211

 
5
%
 
5,092

 
33
%
Total cost of revenue
$
209,300

 
53
%
 
$
179,555

 
58
%
 
$
29,745

 
17
%
Gross profit
$
184,908

 
47
%
 
$
128,659

 
42
%
 
$
56,249

 
44
%

27
Table of Contents

Revenue
Total revenue increased by $41.9 million, or 25%, during the three months ended June 27, 2015 compared to the corresponding period in 2014 and increased $86.0 million, or 28%, during the six months ended June 27, 2015 compared to the corresponding period in 2014.
Total product revenue increased by $36.6 million, or 26%, during the three months ended June 27, 2015 compared to the corresponding period in 2014. Total product revenue increased by $73.2 million, or 27%, during the six months ended June 27, 2015 compared to the corresponding period in 2014. These increases were primarily driven by continued strong market adoption of the Infinera DTN-X platform through both new network builds and capacity adds to existing networks.
During the three and six months ended June 27, 215, we began to ramp up shipments of our Cloud Xpress platform with both the 40 Gigabit Ethernet ("GbE") version, which was launched in late 2014, and the 10 GbE version, which was launched during the three months ended March 28, 2015.
Total services revenue increased by $5.3 million, or 23%, during the three months ended June 27, 2015 compared to the corresponding period in 2014. Total services revenue increased $12.8 million, or 31%, during the six months ended June 27, 2015 compared to the corresponding period in 2014. The increase in both the quarter and year-to-date periods of 2015 was primarily due to higher on-going support services as we continued to grow our installed base. Additionally, we experienced higher levels of deployment services as customers built new networks utilizing our teams’ expertise.

The following table summarizes our revenue by geography and sales channel for the periods presented (in thousands, except percentages):
 
 
Three Months Ended
 
 
 
 
 
June 27, 2015
 
June 28, 2014
 
 
 
 
 
Amount
 
% of total revenue
 
Amount
 
% of total revenue
 
Change
 
% Change
Total revenue by geography:
 
 
 
 
 
 
 
 
 
 
 
Domestic
$
154,762

 
75
%
 
$
136,342

 
82
%
 
$
18,420

 
14
%
International
52,584

 
25
%
 
29,057

 
18
%
 
23,527

 
81
%
 
$
207,346

 
100
%
 
$
165,399

 
100
%
 
$
41,947

 
25
%
Total revenue by sales channel:
 
 
 
 
 
 
 
 
 
 
 
Direct
$
196,385

 
95
%
 
$
160,310

 
97
%
 
$
36,075

 
23
%
Indirect
10,961

 
5
%
 
5,089

 
3
%
 
5,872

 
115
%
 
$
207,346

 
100
%
 
$
165,399

 
100
%
 
$
41,947

 
25
%

 
Six Months Ended
 
 
 
 
 
June 27, 2015
 
June 28, 2014
 
 
 
 
 
Amount
 
% of total revenue
 
Amount
 
% of total revenue
 
Change
 
% Change
Total revenue by geography:
 
 
 
 
 
 
 
 
 
 
 
Domestic
$
281,766

 
71
%
 
$
247,033

 
80
%
 
$
34,733

 
14
%
International
112,442

 
29
%
 
61,181

 
20
%
 
51,261

 
84
%
 
$
394,208

 
100
%
 
$
308,214

 
100
%
 
$
85,994

 
28
%
Total revenue by sales channel:
 
 
 
 
 
 
 
 
 
 
 
Direct
$
374,378

 
95
%
 
$
300,784

 
98
%
 
$
73,594

 
24
%
Indirect
19,830

 
5
%
 
7,430

 
2
%
 
12,400

 
167
%
 
$
394,208

 
100
%
 
$
308,214

 
100
%
 
$
85,994

 
28