Edgar Filing: INFINERA CORP

10-Q

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 September 26, 2015



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 October 29, 2015, 139,806,921 shares of the registrant’s Common Stock, $0.001 par value, were issued and outstanding.

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INFINERA CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR THE FISCAL QUARTER ENDED SEPTEMBER 26, 2015

INDEX



		Page
PART I. FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (Unaudited)	3

	Condensed Consolidated Balance Sheets – As of September 26, 2015 and December 27, 2014	3

	Condensed Consolidated Statements of Operations – Three and nine months ended September 26, 2015 and September 27, 2014	4

	Condensed Consolidated Statements of Comprehensive Income – Three and nine months ended September 26, 2015 and September 27, 2014	5

	Condensed Consolidated Statements of Cash Flows – Nine months ended September 26, 2015 and September 27, 2014	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	39

Item 4.	Controls and Procedures	39

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	41

Item 1A.	Risk Factors	42

Item 6.	Exhibits	58

	Signature Page	59

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PART I. FINANCIAL INFORMATION


Item 1.	Condensed Consolidated Financial Statements

INFINERA CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par values)

(Unaudited)



	September 26, 2015			December 27, 2014
ASSETS
Current assets:
Cash and cash equivalents	$	161,103		$	86,495
Short-term investments	126,218			239,628
Accounts receivable, net of allowance for doubtful accounts of $630 in 2015 and $38 in 2014	141,586			154,596
Inventory	169,875			146,500
Prepaid expenses and other current assets	31,780			24,636
Total current assets	630,562			651,855
Property, plant and equipment, net	98,720			81,566
Intangible assets	162,082			—
Goodwill	190,119			—
Long-term investments	51,422			59,233
Cost-method investment	14,500			14,500
Long-term restricted cash	5,319			5,460
Other non-current assets	6,867			5,402
Total assets	$	1,159,591		$	818,016
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	69,983		$	61,533
Accrued expenses	35,704			26,441
Accrued compensation and related benefits	40,586			38,795
Accrued warranty	17,802			12,241
Deferred revenue	31,411			35,321
Total current liabilities	195,486			174,331
Long-term debt, net	123,222			116,894
Accrued warranty, non-current	18,939			14,799
Deferred revenue, non-current	15,368			10,758
Deferred tax liability, non-current	39,374			2,132
Other long-term liabilities	14,287			17,195
Commitments and contingencies (Note 12)
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 September 26, 2015 and December 27, 2014
Issued and outstanding shares – 139,785 as of September 26, 2015 and 126,160 as of December 27, 2014	140			126
Additional paid-in capital	1,289,087			1,077,225
Accumulated other comprehensive income (loss)	360			(4,618		)
Accumulated deficit	(552,044		)	(590,826		)
Total Infinera stockholders’ equity	737,543			481,907
Noncontrolling interest	15,372			—
Total stockholders' equity	752,915			481,907
Total liabilities and stockholders’ equity	$	1,159,591		$	818,016

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

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INFINERA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)



	Three Months Ended						Nine Months Ended
	September 26, 2015			September 27, 2014			September 26, 2015			September 27, 2014
Revenue:
Product	$	202,365		$	147,178		$	542,190		$	413,784
Services	30,107			26,381			84,490			67,989
Total revenue	232,472			173,559			626,680			481,773
Cost of revenue:
Cost of product	117,154			86,703			306,151			251,047
Cost of services	12,513			11,554			32,816			26,765
Total cost of revenue	129,667			98,257			338,967			277,812
Gross profit	102,805			75,302			287,713			203,961
Operating expenses:
Research and development	45,466			35,051			128,144			96,135
Sales and marketing	24,721			20,794			67,298			56,738
General and administrative	18,358			11,977			46,324			36,612
Total operating expenses	88,545			67,822			241,766			189,485
Income from operations	14,260			7,480			45,947			14,476
Other income (expense), net:
Interest income	406			373			1,371			1,046
Interest expense	(3,014		)	(2,781		)	(8,851		)	(8,186		)
Other gain (loss), net	(3,293		)	(24		)	1,788			(1,017		)
Total other income (expense), net	(5,901		)	(2,432		)	(5,692		)	(8,157		)
Income before income taxes	8,359			5,048			40,255			6,319
Provision for (benefit from) income taxes	(151		)	205			1,473			1,070
Net income	$	8,510		$	4,843		$	38,782		$	5,249
Net income per common share:
Basic	$	0.06		$	0.04		$	0.30		$ 0.04
Diluted	$	0.06		$	0.04		$	0.27		$ 0.04
Weighted average shares used in computing net income per common share:
Basic	134,834			124,378			131,007			122,953
Diluted	145,300			128,964			141,082			127,062

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

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INFINERA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)



	Three Months Ended					Nine Months Ended
	September 26, 2015		September 27, 2014			September 26, 2015		September 27, 2014
Net income	$	8,510	$	4,843		$	38,782	$	5,249
Other comprehensive income:
Unrealized gain (loss) on available-for-sale investments	90		(90		)	279		(27		)
Foreign currency translation adjustment	4,729		(473		)	4,699		(142		)
Tax related to available-for-sale investment	—		20			—		—
Net change in accumulated other comprehensive income	4,819		(543		)	4,978		(169		)
Comprehensive income	$	13,329	$	4,300		$	43,760	$	5,080

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

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INFINERA CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Nine Months Ended
	September 26, 2015			September 27, 2014
Cash Flows from Operating Activities:
Net income	$	38,782		$	5,249
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	22,094			19,340
Amortization of debt discount and issuance costs	6,873			6,217
Amortization of premium on investments	2,405			2,720
Stock-based compensation expense	23,868			20,847
Other (gain) loss	(448		)	15
Changes in assets and liabilities:
Accounts receivable	28,838			(35,463		)
Inventory	(8,901		)	(9,015		)
Prepaid expenses and other assets	(6,058		)	(4,965		)
Accounts payable	(2,339		)	11,009
Accrued liabilities and other expenses	(7,196		)	657
Deferred revenue	700			(4,272		)
Accrued warranty	8,742			4,898
Net cash provided by operating activities	107,360			17,237
Cash Flows from Investing Activities:
Purchase of available-for-sale investments	(126,940		)	(214,272		)
Proceeds from sale of available-for-sale investments	67,303			17,876
Proceeds from maturities and calls of investments	178,717			168,137
Acquisition of business, net of cash acquired	(144,445		)	—
Realized gain from forward contract for business acquisition	1,053			—
Purchase of cost-method investment	—			(5,500		)
Purchase of property and equipment	(26,710		)	(14,364		)
Change in restricted cash	127			(320		)
Net cash used in investing activities	(50,895		)	(48,443		)
Cash Flows from Financing Activities:
Proceeds from issuance of common stock	23,433			19,683
Minimum tax withholding paid on behalf of employees for net share settlement	(5,043		)	(1,846		)
Net cash provided by financing activities	18,390			17,837
Effect of exchange rate changes on cash	(247		)	(97		)
Net change in cash and cash equivalents	74,608			(13,466		)
Cash and cash equivalents at beginning of period	86,495			124,330
Cash and cash equivalents at end of period	$	161,103		$	110,864
Supplemental disclosures of cash flow information:
Cash paid for income taxes, net of refunds	$	2,552		$	1,056
Cash paid for interest	$	1,317		$	1,313
Supplemental schedule of non-cash investing and financing activities:
Transfer of inventory to fixed assets	$	5,861		$	1,838
Common stock issued in connection with acquisition	$	169,507		$	—

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

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INFINERA CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


1.	Basis of Presentation and Significant Accounting Policies

Basis of Presentation

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 Company's $150.0 million of 1.75% convertible senior notes (the "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 condensed 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 condensed consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. All intercompany balances and transactions have been eliminated.

During the third quarter of 2015, the Company completed its public offer to the shareholders of Transmode AB (“Transmode”), acquiring 95.8% of the outstanding common shares and voting interest in Transmode. This acquisition was accounted for as a business combination, and accordingly, the Company has consolidated the financial results of Transmode with its financial results for the period from August 20, 2015, the date the acquisition closed. The noncontrolling interest position is reported as a separate component of consolidated equity attributable to Transmode's shareholders for the periods presented. The noncontrolling interest in the Transmode entity's net loss was not significant to the consolidated results for the periods presented and therefore has been included in net income in the Company's condensed consolidated statements of operations.

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.

To date, a few of the Company’s customers have accounted for a significant portion of its revenue. For the three months ended September 26, 2015, two customers individually accounted for 26% and 16% of the Company's total revenue, respectively, and for the corresponding period in 2014, one customer individually accounted for 25% of the Company's total revenue. For the nine months ended September 26, 2015, two customers individually accounted for 18%, and 15% of the Company's total revenue, respectively, and for the corresponding period in 2014, one customer individually accounted for 20% of the Company's total revenue.

Significant Accounting Policies

There have been no material changes in the Company’s significant accounting policies for the nine months ended September 26, 2015 as compared to those disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 27, 2014, except for the inclusion of policies related to business combinations, amortization of intangible assets, and impairment of intangible assets and goodwill.

Business Combinations

The Company includes the results of operations of the businesses that it acquires as of the respective dates of acquisition. The Company allocates the fair value of the purchase price of its acquisitions to the tangible assets acquired, liabilities assumed and intangible assets acquired, based on their estimated fair values. The excess of the purchase price over the fair values of these identifiable assets and liabilities is recorded as goodwill. Additional information existing as of the acquisition date but unknown to the Company may become known during the remainder of the measurement period, not to exceed 12 months from the acquisition date, which may result in changes to the amounts and allocations recorded.

Amortization of Intangible Assets

Intangible assets with finite lives are carried at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets. In-process research and development represents the fair value of incomplete research and development projects that have not reached technological feasibility as of the date of acquisition. Initially, these assets are not subject to amortization. Once projects have been completed they are transferred to developed technology, which are subject to amortization, while assets related to projects that have been abandoned are impaired and expensed to research and development.

Impairment of Intangible Assets and Goodwill

Goodwill is evaluated for impairment on an annual basis, in the fourth quarter of the Company's fiscal year, and whenever events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable. The Company has elected to first assess qualitative factors to determine whether it is more likely than not that the fair value of its single reporting unit is less than its carrying amount. If the Company determines that it is more likely than not that the fair value of its single reporting unit is less than its carrying amount, then the two-step goodwill impairment test will be performed. The first step, identifying a potential impairment, compares the fair value of its single reporting unit with its carrying amount. If the carrying amount exceeds its fair value, the second step will be performed; otherwise, no further step is required. The second step, measuring the impairment loss, compares the implied fair value of the goodwill with the carrying amount of the goodwill. Any excess of the goodwill carrying amount over the implied fair value is recognized as an impairment loss. The Company evaluates events and changes in circumstances that could indicate carrying amounts of purchased intangible assets may not be recoverable. When such events or changes in circumstances occur, the Company assesses the recoverability of these assets by determining whether or not the carrying amount will be recovered through undiscounted expected future cash flows. If the total of the future undiscounted cash flows is less than the carrying amount of an asset, the Company records an impairment loss for the amount by which the carrying amount of the asset exceeds the fair value of the asset.


2.	Recent Accounting Pronouncements

In September 2015, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update 2015-16, "Business Combinations and Simplifying the Accounting for Measurement-Period Adjustments" ("ASU 2015-16"), which eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Instead, an acquirer will recognize a measurement-period adjustment during the period in which it determines the amount of the adjustment. The guidance is effective for the Company in its first quarter of fiscal 2016. The Company is currently evaluating the impact of the pending adoption of ASU 2015-16 on its consolidated financial statements.

In July 2015, the 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 ASU 2015-11, inventory should be at the lower of cost and net realizable value. The new accounting guidance is effective for the Company in its first quarter of fiscal 2017 with early adoption permitted. The Company is currently evaluating the impact of the pending adoption of ASU 2015-11 on its 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 consolidated financial statements upon adoption.

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 its 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 marketable debt securities at fair value and classifies its investments 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.

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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.

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 September 26, 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	$	29,694	$	—		$	—	$	29,694		$	21,478	$	—		$	—	$	21,478
Certificates of deposit	—		7,305			—		7,305			—		8,060			—		8,060
Commercial paper	—		13,662			—		13,662			—		46,072			—		46,072
Corporate bonds	—		170,335			—		170,335			—		235,285			—		235,285
U.S. treasuries	—		—			—		—			14,810		—			—		14,810
Foreign currency exchange forward contracts	—		29			—		29			—		—			—		—
Total assets	$	29,694	$	191,331		$	—	$	221,025		$	36,288	$	289,417		$	—	$	325,705
Liabilities
Foreign currency exchange forward contracts	$	—	$	(74	)	$	—	$	(74	)	$	—	$	(64	)	$	—	$	(64	)

During the three and nine months ended September 26, 2015, there were no transfers of assets or liabilities between Level 1 and Level 2 of the fair value hierarchy.

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Investments at fair value were as follows (in thousands):



	September 26, 2015
	Adjusted Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Money market funds	$	29,694	$	—	$	—		$	29,694
Certificates of deposit	7,300		5		—			7,305
Commercial paper	13,661		1		—			13,662
Corporate bonds	170,506		6		(177		)	170,335
Total available-for-sale investments	$	221,161	$	12	$	(177	)	$	220,996



	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 September 26, 2015, the Company’s available-for-sale investments in certificates of deposit, commercial paper and corporate bonds have a contractual maturity term of up to 23 months. Gross realized gains and losses on short-term and long-term investments for the three and nine months ended September 26, 2015 and September 27, 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 September 26, 2015 and December 27, 2014, the Company held $117.7 million and $59.7 million of cash in banks, respectively, excluding restricted cash.


4.	Cost-method Investment

As of September 26, 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 September 26, 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 nine months ended September 26, 2015 were denominated in euros and British pounds, and had maturities of no more than 1 year. The contracts are settled for U.S. dollars and Swedish kronor ("SEK") at maturity and 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 SEK 831 million ($95.3 million) to hedge currency exposures associated with the cash consideration of the offer to acquire Transmode. In July 2015, the Company entered into a series of additional foreign currency exchange option contracts to purchase up to an additional SEK 1.3 billion ($153.8 million) and to sell up to 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. As these contracts are not formally designated as hedges, the gains and losses were recognized in the statement of operations. For the three and nine months ended September 26, 2015, the Company recorded a loss of $3.2 million and a realized gain of $1.6 million, respectively, which was included in other gain (loss), net, in the accompanying condensed consolidated statements of operations.

For the three months ended September 26, 2015 and September 27, 2014, the before-tax effect of the foreign currency exchange forward contracts related to the euro and British pound denominated receivables were gains of $0.3 million and $1.2 million, respectively, and for the nine months ended September 26, 2015 and September 27, 2014, losses of $3.1 million and $0.8 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. The Company did not designate foreign currency exchange forward contracts as hedges for accounting purposes and accordingly, changes in the fair value are recorded in other gain (loss), net, in the accompanying condensed consolidated statements of operations. These contracts were with two high-quality institutions and the Company consistently monitors the creditworthiness of the counterparties.

The fair value of derivative instruments in the Company’s condensed consolidated balance sheets was as follows (in thousands):



	As of September 26, 2015							As of December 27, 2014
	Gross Notional⁽¹⁾		Prepaid Expense and Other Assets		Other Accrued Liabilities			Gross Notional⁽¹⁾		Other Accrued Liabilities
Foreign currency exchange forward contracts
Related to euro denominated receivables	$	33,919	$	16	$	(74	)	$	34,445	$	(53	)
Related to British pound denominated receivables	7,340		10		—			2,678		(9		)
Related to restricted cash	258		3		—			1,236		(2		)
	$	41,517	$	29	$	(74	)	$	38,359	$	(64	)


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

6.Business Combination

On August 20, 2015 (the "Acquisition Date”), the Company completed its public offer to the shareholders of Transmode, acquiring 95.8% of the outstanding common shares and voting interest in Transmode. Transmode is a metro packet-optical networking company based in Stockholm, Sweden.

In August 2015, the Company initiated compulsory acquisition proceedings in accordance with Swedish law (the "Squeeze-out Proceedings") in order to acquire the remaining 4.2% or 1.2 million Transmode shares not tendered through the end of the offer period. As of the Acquisition Date, the fair value of the noncontrolling interest was approximately $15.4 million, which was based on the implied enterprise value of Transmode at the Acquisition Date. The Squeeze-out Proceedings are expected to be completed during 2016.

The Company has accounted for this transaction as a business combination in exchange for total consideration of approximately $350.6 million, which consisted of the following (in thousands, except shares):



Cash	$	181,133
Common stock (7,873,055 shares)	169,507
Total	$	350,640

The fair value of the 7.9 million shares of common stock issued was determined based on the closing market price of the Company’s common stock on the acquisition date.

The Company expensed acquisition-related costs in the amount of $3.9 million and $6.7 million in operating expenses for the three and nine months ended September 26, 2015, respectively.

The Company allocated the fair value of the purchase price of the acquisition to the tangible and intangible assets acquired as well as liabilities assumed, based on their estimated fair values. The excess of the purchase price over the fair values of these identifiable assets and liabilities was recorded as goodwill. The following table summarizes the Company’s allocation of the purchase consideration based on the fair value of assets acquired and liabilities assumed at the Acquisition Date (in thousands):



Cash	$	36,688
Accounts receivable	16,183
Inventory	19,886
Other assets	8,320
Intangible assets, net	161,845
Goodwill	187,220
Current liabilities	(24,320		)
Long-term liabilities	(39,810		)
Noncontrolling interest	(15,372		)
Total net assets	$	350,640

Long-term liabilities include $39.2 million of long-term deferred tax liabilities recorded in connection with the acquisition.

The following table presents details of the identified intangible assets acquired at the Acquisition Date (in thousands):



	Fair Value		Estimated Useful Life (Years)
Trade name	$	234	0.5
Customer relationships	49,033		8
Developed technology	92,450		5
In-process technology	20,128		N/A
Total	$	161,845

Goodwill generated from this business combination is primarily attributable to the synergies from combining the operations of Transmode with that of the Company, which resulted in expanded selling opportunities of both metro and long-haul solutions. The goodwill recognized is not tax deductible for Swedish income tax purposes.

The amounts of revenue and net loss of Transmode included in the Company’s condensed consolidated statement of operations from the Acquisition Date to September 26, 2015 were $14.2 million and $4.0 million, respectively.

The following table presents the unaudited pro forma financial information for the three and nine months ended September 26, 2015 and September 27, 2014, as though the companies were combined as of December 29, 2013 (in thousands):



	Three Months Ended					Nine Months Ended
	September 26, 2015		September 27, 2014			September 26, 2015		September 27, 2014
Revenue	$	250,811	$	201,406		$	716,783	$	582,978
Net income (loss)	$	13,872	$	(1,200	)	$	44,633	$	(24,388	)

The pro forma financial information for the three and nine months ended September 26, 2015 and September 27, 2014 has been calculated after applying the Company’s accounting policies and adjusting the results of Transmode to reflect the acquisition costs incurred and the additional amortization that would have been charged assuming the fair value adjustments to tangible and intangible assets had been applied on December 29,

2013, together with the consequential tax effects. The pro forma financial information is for informational purposes only and is not indicative of the results of the operations that would have been achieved if the acquisition had taken place at the beginning of the Company's fiscal year 2014.


7.	Goodwill and Intangible Assets

The gross carrying amount of goodwill and intangible assets and the related amortization expense of intangible assets may change due to the effects of foreign currency fluctuations as a result of acquiring an international business. Additional information existing as of the Acquisition Date but unknown to the Company may become known during the remainder of the measurement period, not to exceed 12 months from the Acquisition Date, which may result in changes to the amounts and allocations recorded.

Goodwill

Goodwill is recorded when the purchase price of an acquisition exceeds the fair value of the net tangible and identified intangible assets acquired.

The following table presents details of the Company’s goodwill during the nine months ended September 26, 2015 (in thousands):



Balance as of December 27, 2014	$	—
Goodwill acquired, including translation adjustment	190,119
Accumulated impairment loss	—
Balance as of September 26, 2015	$	190,119

Intangible Assets

The following tables present details of the Company’s intangible assets as of September 26, 2015 (in thousands):



	September 26, 2015
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Intangible assets with finite lives:
Trade names	$	238	$	(48	)	$	190
Customer relationships	49,793		(633		)	49,160
Developed technology	93,881		(1,909		)	91,972
Other intangible assets	819		(499		)	320
Total intangible assets with finite lives	$	144,731	$	(3,089	)	$	141,642
In-process technology	20,440		—			20,440
Total intangible assets	$	165,171	$	(3,089	)	$	162,082

Other intangible assets in the above table relate an acquisition completed in a previous year. Amortization expense was $2.6 million for the three and nine months ended September 26, 2015.

Intangible assets are carried at cost less accumulated amortization. Amortization expenses are recorded to the appropriate cost and expense categories.

The following table summarizes the Company’s estimated future amortization expense of intangible assets with finite lives by type as of September 26, 2015 (in thousands):



	Fiscal Years
	Remainder of 2015		2016		2017		2018		2019		2020 and Thereafter
Total future amortization expense	$	6,428	$	25,302	$	25,233	$	25,233	$	25,233	$	34,213

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8.	Balance Sheet Details

The following table provides details of selected balance sheet items (in thousands):



	September 26, 2015			December 27, 2014
Inventory:
Raw materials	$	24,234		$	15,169
Work in process	48,464			50,046
Finished goods ⁽¹⁾	97,177			81,285
Total inventory	$	169,875		$	146,500
Property, plant and equipment, net:
Computer hardware	$	10,632		$	8,785
Computer software⁽²⁾	20,200			17,684
Laboratory and manufacturing equipment	182,363			162,004
Furniture and fixtures	1,741			1,340
Leasehold improvements	38,505			37,825
Construction in progress	22,201			14,726
Subtotal	$	275,642		$	242,364
Less accumulated depreciation and amortization	(176,922		)	(160,798		)
Total property, plant and equipment, net	$	98,720		$	81,566
Accrued expenses:
Loss contingency related to non-cancelable purchase commitments	$	6,437		$	5,390
Professional and other consulting fees	4,446			1,831
Taxes payable	3,085			3,993
Royalties	3,716			2,648
Accrued rebate and customer prepay liability	1,973			941
Accrued interest on convertible senior notes	901			219
Other accrued expenses	15,146			11,419
Total accrued expenses	$	35,704		$	26,441


⁽¹⁾	Included in finished goods inventory at September 26, 2015 and December 27, 2014 were $8.0 million and $10.2 million, respectively, of inventory at customer locations for which product acceptance had not occurred.


⁽²⁾	Included in computer software at September 26, 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 September 26, 2015 and December 27, 2014 were $4.3 million and $5.2 million, respectively.

Restricted Cash

The Company’s long-term restricted cash balance is primarily comprised of certificates of deposit and money market funds, 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.

The following table sets forth the Company's restricted cash (in thousands):



	September 26, 2015		December 27, 2014
Restricted cash related to outstanding stand-by letters of credit
Value added tax license	$	1,372	$	1,309
Customer proposal guarantee	2,858		3,074
Property leases	699		699
Other restricted cash	390		378
Total restricted cash	$	5,319	$	5,460

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9.	Accumulated Other Comprehensive Income (Loss)

Other comprehensive income (loss) includes certain changes in equity that are excluded from net income. The following table sets forth the changes in accumulated other comprehensive income by component for the nine months ended September 26, 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	279			4,699			—			4,978
Balance at September 26, 2015	$	(165	)	$	1,285		$	(760	)	$	360


10.	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 Notes from the conversion spread (as discussed in Note 11, "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 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				Nine Months Ended
	September 26, 2015		September 27, 2014		September 26, 2015		September 27, 2014
Numerator:
Net income	$	8,510	$	4,843	$	38,782	$	5,249
Denominator:
Basic weighted average common shares outstanding	134,834		124,378		131,007		122,953
Effect of dilutive securities:
Employee equity plans	5,397		4,586		5,911		4,109
Assumed conversion of convertible senior notes from conversion spread	5,069		—		4,164		—
Diluted weighted average common shares outstanding	145,300		128,964		141,082		127,062

Net income per common share
Basic	$	0.06	$	0.04	$	0.30	$ 0.04
Diluted	$	0.06	$	0.04	$	0.27	$ 0.04

During the three and nine months ended September 26, 2015, the Company included the dilutive effects of the Notes in the calculation of diluted net income per common share 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 nine months ended September 27, 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.

The effects of certain potentially outstanding shares were not included in the calculation of diluted net income per share for the three and nine months ended September 26, 2015 and September 27, 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		Nine Months Ended
	September 26, 2015	September 27, 2014	September 26, 2015	September 27, 2014
Stock options	1	447	7	706
RSUs	26	68	535	250
PSUs	—	185	97	185
ESPP shares	484	801	300	921
Total	511	1,501	939	2,062


11.	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

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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, 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):



	September 26, 2015			December 27, 2014
Principal	$	150,000		$	150,000
Unamortized discount ⁽¹⁾	(26,778		)	(33,106		)
Total long-term debt, net	$	123,222		$	116,894
Unamortized issuance cost ⁽¹⁾	(2,304		)	(2,848		)
Net carrying amount	$	120,918		$	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. 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. As of September 26, 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.

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.

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The following table sets forth total interest expense recognized related to the Notes (in thousands):



	Three Months Ended				Nine Months Ended
	September 26, 2015		September 27, 2014		September 26, 2015		September 27, 2014
Contractual interest expense	$	656	$	656	$	1,969	$	1,969
Amortization of debt issuance costs	186		169		544		493
Amortization of debt discount	2,162		1,956		6,328		5,724
Total interest expense	$	3,004	$	2,781	$	8,841	$	8,186

The coupon rate was 1.75%. For the three and nine months ended September 26, 2015 and September 27, 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 September 26, 2015, the fair value of the Notes was $250.5 million. The fair value was determined based on the quoted bid price of the Notes in an over-the-counter market on September 25, 2015. The Notes are classified as Level 2 of the fair value hierarchy.

During the three months ended September 26, 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 quarter; therefore, holders of the Notes may convert their notes during the three months ending December 26, 2015. Should the closing price conditions be met during the 30 consecutive trading days prior to the end of the fourth 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 $20.11 on September 25, 2015, the if-converted value of the Notes exceeded their principal amount by approximately $89.8 million.


12.	Commitments and Contingencies

Operating Leases

The Company leases facilities under non-cancelable operating lease agreements. These leases have varying terms that range from one to ten years, predominantly no longer than ten years each and contain leasehold improvement incentives, rent holidays and escalation clauses. In addition, some of these leases have renewal options for up to five years. The Company has contractual commitments to remove leasehold improvements and return certain properties to a specified condition when the leases terminate. At the inception of a lease with such conditions, the Company records an asset retirement obligation liability and a corresponding capital asset in an amount equal to the estimated fair value of the obligation. Asset retirement obligations were $2.8 million and $2.7 million as of September 26, 2015 and December 27, 2014, respectively. These obligations are classified as other long-term liabilities on the accompanying condensed consolidated balance sheets.

The Company recognizes rent expense on a straight-line basis over the lease period factoring in leasehold improvement incentives, rent holidays and escalation clauses. Rent expense for all leases was $2.3 million and $6.0 million, respectively, for the three and nine months ended September 26, 2015 and $1.8 million and $5.4 million, respectively, for the three and nine months ended September 27, 2014. The Company did not have any sublease rental income for the three and nine months ended September 26, 2015 and September 27, 2014.

Future annual minimum operating lease payments at September 26, 2015 were as follows (in thousands):



	2015		2016		2017		2018		2019		Thereafter		Total
Operating lease payments	$	2,492	$	10,628	$	10,277	$	9,783	$	8,871	$	10,857	$	52,908

Purchase Commitments

The Company has service agreements with its major production suppliers, where the Company is committed to purchase certain parts. These obligations are typically less than the Company’s purchase needs. As of September 26, 2015 and December 27, 2014, these non-cancelable purchase commitments were $107.6 million and $128.3 million, respectively.

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Future purchase commitments at September 26, 2015 were as follows (in thousands):



	2015		2016		2017		2018		2019		Thereafter		Total
Purchase commitments	$	103,834	$	3,750	$	—	$	—	$	—	$	—	$	107,584

The contractual obligation tables above exclude tax liabilities of $2.6 million related to uncertain tax positions because the Company is unable to determine the timing of settlement, if any, of these future payments with a reasonably reliable estimate.

Indemnification Obligations

From time to time, the Company enters into certain types of contracts that contingently require it to indemnify parties against third party claims. These contracts primarily relate to: (i) certain real estate leases under which the Company may be required to indemnify property owners for environmental and other liabilities, and other claims arising from the Company’s use of the applicable premises; (ii) certain agreements with the Company’s officers, directors and certain key employees, under which the Company may be required to indemnify such persons for liabilities; and (iii) certain provisions in the Company’s customer agreements that may require the Company to indemnify their customers and their affiliated parties against certain liabilities, including if the Company’s products infringe a third party’s intellectual property rights.

The terms of such indemnification obligations vary. Because the maximum obligated amounts under these agreements generally are not explicitly stated, the maximum potential amount of future payments the Company could be required to make under these indemnification agreements is generally unlimited.

To date, the Company has not incurred any material costs as a result of the indemnification obligations and has not accrued any liabilities related to such obligations in the Company’s consolidated financial statements.

As permitted under Delaware law and the Company’s charter and bylaws, the Company has agreements whereby it indemnifies certain of its officers and each of its directors. The term of the indemnification period is for the officer’s or director’s lifetime for certain events or occurrences while the officer or director is, or was, serving at the Company’s request in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a Director and Officer insurance policy that may reduce its exposure and enable it to recover all or a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal.


13.	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 September 26, 2015, there were a total of 15.6 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	(1,518	)	$	7.36	$	18,013
Stock options canceled	—		$	—
Outstanding at September 26, 2015	2,780		$	7.25	$	35,768
Vested and expected to vest as of September 26, 2015	2,779				$	35,758
Exercisable at September 26, 2015	2,756		$	7.24	$	35,485

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The aggregate intrinsic value of unexercised stock options is calculated as the difference between the closing price of the Company’s common stock of $20.11 at September 25, 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	1,899		$	18.41
RSUs released	(2,883	)	$	7.78	$	50,734
RSUs canceled	(227	)	$	10.55
Outstanding at September 26, 2015	4,831		$	12.28	$	97,155
Expected to vest at September 26, 2015	4,608				$	92,675



	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	(413	)	$	7.00	$	7,231
PSUs canceled	(193	)	$	8.03
Outstanding at September 26, 2015	708		$	12.12	$	14,244
Expected to vest at September 26, 2015	686				$	13,794


⁽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 $20.11 at September 25, 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 September 26, 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	$	83	1.5
RSUs	$	42,314	2.4
PSUs	$	4,720	1.3

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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		Nine Months Ended
Employee and Director Stock Options	September 26, 2015	September 27, 2014	September 26, 2015	September 27, 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	$37	$108	$160	$623

_________________



N/A	Not applicable because the Company did not grant any stock options during the period.

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		Nine Months Ended
Employee Stock Purchase Plan	September 26, 2015	September 27, 2014	September 26, 2015	September 27, 2014
Volatility	39%	46%	39% - 53%	46% - 51%
Risk-free interest rate	0.26%	0.06%	0.13% - 0.26%	0.02% - 0.11%
Expected life	0.5 years	0.5 years	0.5 years	0.3 - 0.5 years
Estimated fair value	$6.43	$2.54	$5.15 - $6.43	$2.05 - $2.57
Total stock-based compensation expense	$1,147	$1,092	$3,275	$2,726

Restricted Stock Units

During the three and nine months ended September 26, 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 1.9 million shares of the Company’s common stock, respectively. All RSUs awarded are subject to each individual's continued service to the Company through each applicable vesting date. 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 nine months ended September 26, 2015 and September 27, 2014 was approximately $5.6 million and $16.7 million, respectively, and $5.6 million and $15.9 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.

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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

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 nine months ended September 26, 2015 (in thousands):



	Total 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	(413	)	—		(223	)	(184	)	(6	)
PSUs canceled	(193	)	(191	)	—		—		(2	)
Outstanding at September 26, 2015	708		—		147		260		301


⁽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 nine months ended September 26, 2015 and September 27, 2014 was approximately $1.6 million and $3.8 million, respectively, and $0.6 million and $1.5 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):



	September 26, 2015		December 27, 2014
Stock-based compensation effects in inventory	$	3,202	$	3,088
Stock-based compensation effects in deferred inventory cost	$	13	$	13
Stock-based compensation effects in fixed assets	$	100	$	119

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	Three Months Ended				Nine Months Ended
	September 26, 2015		September 27, 2014		September 26, 2015		September 27, 2014
Stock-based compensation effects included in net income before income taxes
Cost of revenue	$	645	$	492	$	1,740	$	1,421
Research and development	2,788		2,270		8,183		6,488
Sales and marketing	2,131		1,982		5,922		5,517
General and administration	1,911		1,628		5,406		4,707
	$	7,475	$	6,372	$	21,251	$	18,133
Cost of revenue – amortization from balance sheet ⁽¹⁾	976		999		2,617		2,714
Total stock-based compensation expense	$	8,451	$	7,371	$	23,868	$	20,847


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


14.	Income Taxes

Provision for (benefit from) income taxes for the three and nine months ended September 26, 2015 was $(0.2) million and $1.5 million, respectively, on pre-tax income of $8.4 million and $40.3 million, respectively. This compares to a tax provision of $0.2 million and $1.1 million, respectively, on a pre-tax income of $5.0 million and $6.3 million, respectively, for the three and nine months ended September 27, 2014. The results for the three months and nine months ended September 26, 2015 reflect purchase accounting amortization and other charges related to the acquisition of Transmode during the quarter. The amortization resulted in a decrease in pre-tax income on a consolidated basis of $6.4 million with a corresponding benefit to the tax provision of $1.4 million.

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, as well as the operating results of Transmode, inclusive of purchase accounting charges and amortization for the three months ended September 26, 2015. Due to the Company's significant U.S. 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 its 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.

The Company has been profitable for six consecutive quarters beginning with the second quarter of fiscal 2014. Despite this trend, the Company must consider 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. Management believes that it was more likely than not, that the Company would be unable to utilize those deferred tax assets in the future. Accordingly, the domestic net deferred tax assets were fully reserved with a valuation allowance. 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 result in recording a corresponding benefit to earnings.

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15.	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.

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				Nine Months Ended
	September 26, 2015		September 27, 2014		September 26, 2015		September 27, 2014
Americas:
United States	$	158,845	$	120,769	$	440,610	$	367,802
Other Americas	20,874		9,230		39,944		17,526
	179,719		129,999		480,554		385,328
Europe, Middle East and Africa	41,655		34,131		114,163		78,978
Asia Pacific and Japan	11,098		9,429		31,963		17,467
Total revenue	$	232,472	$	173,559	$	626,680	$	481,773

Property, plant and equipment, net



	September 26, 2015		December 27, 2014
United States	$	91,052	$	79,025
Other Americas	135		196
Europe, Middle East and Africa	5,485		1,477
Asia Pacific and Japan	2,048		868
Total property, plant and equipment, net	$	98,720	$	81,566


16.	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.

Activity related to product warranty was as follows (in thousands):



	Three Months Ended						Nine Months Ended
	September 26, 2015			September 27, 2014			September 26, 2015			September 27, 2014
Beginning balance	$	28,439		$	27,948		$	27,040		$	22,908
Charges to operations	10,791			5,820			22,158			18,181
Utilization	(3,515		)	(2,312		)	(8,336		)	(7,924		)
Change in estimate⁽¹⁾	1,026			(3,650		)	(4,121		)	(5,359		)
Balance at the end of the period	$	36,741		$	27,806		$	36,741		$	27,806

⁽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. As the Company's products mature over time, failure rates and repair costs generally decline leading to favorable changes in warranty reserves.


17.	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.

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. The Company has not received notice of any further filings since the CAFC affirmation and believes the judgment of non-infringement to be final.

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After the court had granted summary judgment in July 2014, the Company sought to recover certain costs and attorney's fees from Cambrian. The Court has taken the matter under submission and has yet to issue a final ruling on the amount of fees to be awarded to the Company.

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. As of September 26, 2015, the Company has accrued the estimated liabilities associated with these potential loss contingencies.

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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, operating 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 integration efforts in connection with our acquisition of Transmode and our ability to achieve significant synergies through the combination of the two companies; statements related to capital expenditures; statements related to future economic conditions, performance, market growth or our sales cycle, including the anticipated transition of major 100G deployments and opportunities in the metro market; 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 datacenter, 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, manufactured 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 high-capacity Intelligent Transport Networks that

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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.

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 datacenter 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.

On August 20, 2015, we successfully completed our public offer to the shareholders of Transmode AB (“Transmode”), acquiring 95.8% of the outstanding common shares and voting interest in Transmode. Transmode is a metro packet-optical networking company based in Stockholm, Sweden. The combination of the two companies brings together a complementary set of customers, products, and technologies into one company. Transmode's strength in metro packet-optical applications complements our industry leading long-haul and metro datacenter interconnect solutions. The combination enables us to offer a comprehensive portfolio addressing the metro market with solutions optimized for fast growing applications including mobile fronthaul and backhaul, triple-play and cable broadband aggregation, and business Ethernet services with Metro Ethernet Forum certification. We expect to achieve significant synergies by leveraging Transmode’s services-rich metro platforms, broad European customer base, and profitable business in order to provide a unified end-to-end portfolio of world class optical transport products.

For more information on the acquisition, see Note 6, "Business Combination" to the Notes to Condensed Consolidated Financial Statements. We believe our strength in the long-haul optical transport market, our early traction in the metro datacenter interconnect market, our leadership in the metro packet-optical market, and our introduction of metro core solutions 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.

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. Our XT platform, the newest addition to the Infinera DTN-X product family, provides another tool for customers to meet their long-haul data center interconnect needs and also functions as a component in their traditional networks where only optical switching is required. 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 datacenter interconnect in early 2015 and the introduction of a portfolio of metro products for metro access, metro aggregation and metro core market segments by the end of 2015. This focus on revenue growth will be complemented with 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.

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 by leveraging our long-haul and metro products. Our revenue growth will depend on the continued 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.

To date, a few of our customers have accounted for a significant portion of our revenue. For the three months ended September 26, 2015, two customers individually accounted for 26% and 16% of our total revenue, respectively, and for the corresponding period in 2014, one customer individually accounted for 25% of our total revenue. For the nine months ended September 26, 2015, two customers individually accounted for 18%, and 15% of our total revenue, respectively, and for the corresponding period in 2014, one customer individually accounted for 20% of our total revenue. We do not have any long-term sales commitments with our customers.

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 93% and 94% of our revenue from direct sales to customers during the three and nine months ended September 26, 2015,

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respectively, and 97% of our revenue for each of the three and nine months ended September 27, 2014, respectively. We expect to continue generating a substantial majority of our revenue from direct sales in the future.

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 a significant 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 nine months ended September 26, 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, except for the inclusion of policies related to business combinations, amortization of intangible assets, and impairment of intangible assets and goodwill.

Business Combinations

We include the results of operations of the businesses that we acquire as of the respective dates of acquisition. We allocate the fair value of the purchase price of our acquisitions to the tangible assets acquired, liabilities assumed and intangible assets acquired, based on their estimated fair values. The excess of the purchase price over the fair values of these identifiable assets and liabilities is recorded as goodwill. Additional information existing as of the acquisition date but unknown to us may become known during the remainder of the measurement period, not to exceed 12 months from the acquisition date, which may result in changes to the amounts and allocations recorded.

Amortization of Intangible Assets

Impairment of Intangible Assets and Goodwill

Goodwill is evaluated for impairment on an annual basis, in the fourth quarter of our fiscal year, and whenever events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable. We have elected to first assess qualitative factors to determine whether it is more likely than not that the fair value of our single reporting unit is less than its carrying amount. If we determine that it is more likely than not that the fair value of our single reporting unit is less than its carrying amount, then the two-step goodwill impairment test will be performed. The first step, identifying a potential impairment, compares the fair value of our single reporting unit with its carrying amount. If the carrying amount exceeds its fair value, the second step will be performed; otherwise, no further step is required. The second step, measuring the impairment loss, compares the implied fair value of the goodwill with the carrying amount of the goodwill. Any excess of the goodwill carrying amount over the implied fair value is recognized as an impairment loss. We evaluate events and changes in circumstances that could indicate carrying amounts of purchased intangible assets may not be recoverable. When such events or changes in circumstances occur, we assess the recoverability of these assets by determining whether or not the carrying amount will be recovered through undiscounted expected future cash flows. If the total of the future undiscounted cash flows is less than the carrying amount of an asset, we record an impairment loss for the amount by which the carrying amount of the asset exceeds the fair value of the asset.

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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
	September 26, 2015				September 27, 2014
	Amount		% of total revenue		Amount		% of total revenue		Change		% Change
Revenue:
Product	$	202,365	87	%	$	147,178	85	%	$	55,187	37	%
Services	30,107		13	%	26,381		15	%	3,726		14	%
Total revenue	$	232,472	100	%	$	173,559	100	%	$	58,913	34	%
Cost of revenue:
Product	$	117,154	51	%	$	86,703	50	%	$	30,451	35	%
Services	12,513		5	%	11,554		7	%	959		8	%
Total cost of revenue	$	129,667	56	%	$	98,257	57	%	$	31,410	32	%
Gross profit	$	102,805	44	%	$	75,302	43	%	$	27,503	37	%



	Nine Months Ended
	September 26, 2015				September 27, 2014
	Amount		% of total revenue		Amount		% of total revenue		Change		% Change
Revenue:
Product	$	542,190	87	%	$	413,784	86	%	$	128,406	31	%
Services	84,490