Edgar Filing: INFINERA CORP

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 25, 2016



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-33486

Infinera Corporation

(Exact name of registrant as specified in its charter)



Delaware		77-0560433
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

140 Caspian Court

Sunnyvale, CA 94089

(Address of principal executive offices, including zip code)

(408) 572-5200

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer x	Accelerated filer o		Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of July 26, 2016, 143,188,664 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 JUNE 25, 2016

INDEX



		Page
PART I. FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (Unaudited)	3

	Condensed Consolidated Balance Sheets – As of June 25, 2016 and December 26, 2015	3

	Condensed Consolidated Statements of Operations – Three and six months ended June 25, 2016 and June 27, 2015	4

	Condensed Consolidated Statements of Comprehensive Income – Three and six months ended June 25, 2016 and June 27, 2015	5

	Condensed Consolidated Statements of Cash Flows – Six months ended June 25, 2016 and June 27, 2015	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	36

Item 4.	Controls and Procedures	36

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	37

Item 1A.	Risk Factors	38

Item 6.	Exhibits	55

	Signature Page	56

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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)



	June 25, 2016			December 26, 2015
ASSETS
Current assets:
Cash and cash equivalents	$	138,380		$	149,101
Short-term investments	119,370			125,561
Short-term restricted cash	24,942			—
Accounts receivable, net of allowance for doubtful accounts of $630 in 2016 and 2015	193,414			186,243
Inventory	202,280			174,699
Prepaid expenses and other current assets	29,210			29,511
Total current assets	707,596			665,115
Property, plant and equipment, net	120,095			110,861
Intangible assets	142,108			156,319
Goodwill	189,982			191,560
Long-term investments	87,944			76,507
Cost-method investment	14,500			14,500
Long-term restricted cash	5,355			5,310
Other non-current assets	4,194			4,009
Total assets	$	1,271,774		$	1,224,181
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	83,875		$	92,554
Accrued expenses	36,466			33,736
Accrued compensation and related benefits	41,461			49,887
Accrued warranty	17,737			17,889
Deferred revenue	47,277			42,977
Total current liabilities	226,816			237,043
Long-term debt, net	128,328			123,327
Accrued warranty, non-current	23,252			20,955
Deferred revenue, non-current	19,671			13,881
Deferred tax liability	33,264			35,731
Other long-term liabilities	18,182			16,183
Commitments and contingencies (Note 16)
Stockholders’ equity:
Preferred stock, $0.001 par value Authorized shares – 25,000 and no shares issued and outstanding	—			—
Common stock, $0.001 par value Authorized shares – 500,000 as of June 25, 2016 and December 26, 2015
Issued and outstanding shares – 143,131 as of June 25, 2016 and 140,197 as of December 26, 2015	143			140
Additional paid-in capital	1,325,238			1,300,301
Accumulated other comprehensive income (loss)	(1,737		)	1,123
Accumulated deficit	(515,915		)	(539,413		)
Total Infinera Corporation stockholders’ equity	807,729			762,151
Noncontrolling interest	14,532			14,910
Total stockholders' equity	822,261			777,061
Total liabilities and stockholders’ equity	$	1,271,774		$	1,224,181

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						Six Months Ended
	June 25, 2016			June 27, 2015			June 25, 2016			June 27, 2015
Revenue:
Product	$	227,532		$	178,982		$	443,614		$	339,825
Services	31,290			28,364			60,026			54,383
Total revenue	258,822			207,346			503,640			394,208
Cost of revenue:
Cost of product	122,438			99,491			240,500			188,997
Cost of services	12,638			11,059			23,056			20,303
Total cost of revenue	135,076			110,550			263,556			209,300
Gross profit	123,746			96,796			240,084			184,908
Operating expenses:
Research and development	59,541			43,421			113,686			82,678
Sales and marketing	30,465			21,535			60,474			42,577
General and administrative	17,658			15,310			34,971			27,966
Total operating expenses	107,664			80,266			209,131			153,221
Income from operations	16,082			16,530			30,953			31,687
Other income (expense), net:
Interest income	595			551			1,117			965
Interest expense	(3,176		)	(2,947		)	(6,331		)	(5,837		)
Other gain (loss), net	(714		)	4,780			(928		)	5,081
Total other income (expense), net	(3,295		)	2,384			(6,142		)	209
Income before income taxes	12,787			18,914			24,811			31,896
Provision for income taxes	1,475			1,008			1,691			1,624
Net income	11,312			17,906			23,120			30,272
Less: Loss attributable to noncontrolling interest	(171		)	—			(378		)	—
Net income attributable to Infinera Corporation	$	11,483		$	17,906		$	23,498		$	30,272
Net income per common share attributable to Infinera Corporation:
Basic	$	0.08		$	0.14		$	0.17		$	0.23
Diluted	$	0.08		$	0.13		$	0.16		$	0.22
Weighted average shares used in computing net income per common share:
Basic	142,396			130,349			141,600			129,094
Diluted	145,891			140,642			146,385			138,973

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						Six Months Ended
	June 25, 2016			June 27, 2015			June 25, 2016			June 27, 2015
Net income	$	11,312		$	17,906		$	23,120		$	30,272
Other comprehensive income:
Unrealized gain on available-for-sale investments	258			(78		)	639			189
Foreign currency translation adjustment	(6,769		)	129			(3,499		)	(30		)
Net change in accumulated other comprehensive income (loss)	(6,511		)	51			(2,860		)	159
Less: Comprehensive loss attributable to noncontrolling interest	(171		)	—			(378		)	—
Comprehensive income attributable to Infinera Corporation	$	4,972		$	17,957		$	20,638		$	30,431

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)



	Six Months Ended
	June 25, 2016			June 27, 2015
Cash Flows from Operating Activities:
Net income	$	23,120		$	30,272
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	29,891			12,850
Amortization of debt discount and issuance costs	5,001			4,524
Amortization of premium on investments	733			1,792
Stock-based compensation expense	18,980			15,417
Other loss (gain)	84			(4,780		)
Changes in assets and liabilities:
Accounts receivable	(7,404		)	45,140
Inventory	(31,304		)	(12,774		)
Prepaid expenses and other assets	(328		)	(1,080		)
Accounts payable	(7,339		)	(23,597		)
Accrued liabilities and other expenses	(5,528		)	1,491
Deferred revenue	10,129			4,216
Accrued warranty	2,165			1,399
Net cash provided by operating activities	38,200			74,870
Cash Flows from Investing Activities:
Purchase of available-for-sale investments	(97,051		)	(112,940		)
Proceeds from sales of available-for-sale investments	—			9,998
Proceeds from maturities of investments	91,714			143,483
Purchase of property and equipment	(23,278		)	(16,098		)
Change in restricted cash	(60		)	290
Net cash provided by (used in) investing activities	(28,675		)	24,733
Cash Flows from Financing Activities:
Security pledge to acquire noncontrolling interest	(24,942		)	—
Proceeds from issuance of common stock	8,586			16,488
Minimum tax withholding paid on behalf of employees for net share settlement	(3,082		)	(4,561		)
Net cash provided by (used in) financing activities	(19,438		)	11,927
Effect of exchange rate changes on cash	(808		)	(7		)
Net change in cash and cash equivalents	(10,721		)	111,523
Cash and cash equivalents at beginning of period	149,101			86,495
Cash and cash equivalents at end of period	$	138,380		$	198,018
Supplemental disclosures of cash flow information:
Cash paid for income taxes, net of refunds	$	3,237		$	1,481
Cash paid for interest	$	1,410		$	1,313
Supplemental schedule of non-cash investing activities:
Transfer of inventory to fixed assets	$	4,009		$	2,205

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 26, 2015.

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, business combinations, 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 intangible assets, property, plant and equipment, and fair value measurement of the liability component of the Company's $150.0 million of 1.75% convertible senior notes due June 1, 2018 (the "Notes"). 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.

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 26, 2015.

To date, a few of the Company’s customers have accounted for a significant portion of its revenue. For the three months ended June 25, 2016, two customers individually accounted for 15% and 11% of the Company's total revenue, respectively, and for the corresponding period in 2015, three customers individually accounted for 23%, 16% and 11% of the Company's total revenue, respectively. For the six months ended June 25, 2016, three customers individually accounted for 16%, 13% and 12% of the Company's total revenue, respectively, and for the corresponding period in 2015, four customers individually accounted for 14%, 13%, 12%, and 11% of the Company's total revenue, respectively.

There have been no material changes in the Company’s significant accounting policies for the six months ended June 25, 2016 as compared to those disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 26, 2015.


2.	Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"), which requires measurement and recognition of expected credit losses for financial assets held. This guidance is effective for the Company in its first quarter of fiscal 2020 and early adoption is permitted. The Company is currently evaluating the impact the adoption of ASU 2016-13 will have on its condensed consolidated financial statements.

In May 2016, the FASB issued Accounting Standards Update 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients" ("ASU 2016-12"), which provides narrow scope improvements and technical expedients on assessing collectibility, presentation of sales taxes, evaluating contract modifications and completed contracts at transition and the disclosure requirement for the effect

of the accounting change for the period of adoption. This guidance will be effective for the Company’s first quarter of 2018. The Company is currently evaluating the impact the adoption of ASU 2016-12 will have on its consolidated financial statements.

In May 2016, the FASB issued Accounting Standards Update 2016-11, "Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting (SEC Update)" ("ASU 2016-11"), which rescinds various standards codified as part of Topic 605, Revenue Recognition in relation to the future adoption of Topic 606. These rescissions include changes to topics pertaining to revenue and expense recognition for freight services in process, accounting for shipping and handling fees and costs, and accounting for consideration given by a vendor to a customer. This guidance is effective for the Company in its first quarter of fiscal 2018 and early adoption is permitted. The Company is currently evaluating the impact the adoption of ASU 2016-11 will have on its consolidated financial statements.

In April 2016, the FASB issued Accounting Standards Update 2016-10, "Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing" ("ASU 2016-10"), to address the potential diversity in practice at initial application and cost; and the complexity of applying Topic 606, both at transition and on an ongoing basis related to identification of performance obligations and licensing arrangements. This guidance is effective for the Company in its first quarter of fiscal 2018 and early adoption permitted. The Company is currently evaluating the impact the adoption of ASU 2016-10 will have on its consolidated financial statements.

In March 2016, the FASB issued Accounting Standards Update 2016-09, "Improvements to Employee Share-Based Payment Accounting") ("ASU 2016-09"), which includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements, including the income tax effects of share-based payments and accounting for forfeitures. This guidance is effective for the Company in its first quarter of fiscal 2017 and early adoption is permitted. The Company is currently evaluating the impact the adoption of ASU 2016-09 will have on its consolidated financial statements.

In March 2016, the FASB issued Accounting Standards Update 2016-06, "Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments (a consensus of the Emerging Issues Task Force)" ("ASU 2016-06"), which applies to all entities that are issuers of or investors in debt instruments (or hybrid financial instruments that are determined to have a debt host) with embedded call (put) options, and requires that embedded derivatives be separated from the host contract and accounted for separately as derivatives if certain criteria are met. One criterion is that the economic characteristics and risks of the embedded derivatives are not clearly and closely related to the economic characteristics and risks of the host contract. This guidance is effective for the Company in its first quarter of fiscal 2017 and early adoption is permitted. The Company is currently evaluating the impact the adoption of ASU 2016-06 will have on its consolidated financial statements.

In February 2016, the FASB issued Accounting Standards Update 2016-02, "Leases (Topic 842)" ("ASU 2016-02"), which amends the existing accounting standards for leases. The new standard requires lessees to record a right-of-use asset and a corresponding lease liability on the balance sheet (with the exception of short-term leases). For lessees, leases will continue to be classified as either operating or financing in the income statement. This guidance is effective for the Company in its first quarter of fiscal 2019 and early adoption is permitted. ASU 2016-02 is required to be applied with a modified retrospective approach and requires application of the new standard at the beginning of the earliest comparative period presented. The Company is currently evaluating the impact the adoption of ASU 2016-02 will have on its consolidated financial statements.

In September 2015, 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 Company adopted ASU 2015-16 during the first quarter of fiscal 2016. The Company's adoption of ASU 2015-16 had no impact on the Company's financial position, results of operations or cash flow.

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. This guidance is effective for the Company in its first quarter of fiscal

2017 with early adoption permitted. The Company is currently evaluating the impact the adoption of ASU 2015-11 will have 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. The Company adopted ASU 2015-03 during the first quarter of fiscal 2016. The December 26, 2015 balance sheet was retrospectively adjusted to reclassify $2.1 million from other non-current assets to a reduction of the Notes payable liability.

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 standard 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, U.S. agency notes, corporate bonds and foreign currency exchange forward contracts within Level 2 of the fair value hierarchy as follows:

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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.

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.

U.S. Agency Notes

The Company reviews trading activity and pricing for its U.S. agency notes as of the measurement date. When sufficient quoted pricing for identical securities is not available, the Company uses market pricing and other observable market inputs for similar securities obtained from a number of industry standard data providers. These inputs represent quoted prices for similar assets in active markets or these inputs have been derived from observable market data.

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.

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The following tables represent the Company’s fair value hierarchy for its assets and liabilities measured at fair value on a recurring basis (in thousands):



	As of June 25, 2016										As of December 26, 2015
	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	$	34,077	$	—		$	—	$	34,077		$	37,829	$	—		$	—	$	37,829
Certificates of deposit	—		2,604			—		2,604			—		5,001			—		5,001
Commercial paper	—		52,433			—		52,433			—		10,997			—		10,997
Corporate bonds	—		108,257			—		108,257			—		163,400			—		163,400
U.S. agency notes	—		10,775			—		10,775			—		10,717			—		10,717
U.S. treasuries	56,332		—			—		56,332			24,851		—			—		24,851
Foreign currency exchange forward contracts	—		346			—		346			—		490			—		490
Total assets	$	90,409	$	174,415		$	—	$	264,824		$	62,680	$	190,605		$	—	$	253,285
Liabilities
Foreign currency exchange forward contracts	$	—	$	(277	)	$	—	$	(277	)	$	—	$	(44	)	$	—	$	(44	)

During the three and six months ended June 25, 2016, there were no transfers of assets or liabilities between Level 1 and Level 2 of the fair value hierarchy.

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



	June 25, 2016
	Adjusted Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Money market funds	$	34,077	$	—	$	—		$	34,077
Certificates of deposit	2,600		4		—			2,604
Commercial paper	52,450		—		(17		)	52,433
Corporate bonds	108,185		97		(25		)	108,257
U.S. agency notes	10,784		—		(9		)	10,775
U.S. treasuries	56,249		83		—			56,332
Total available-for-sale investments	$	264,345	$	184	$	(51	)	$	264,478



	December 26, 2015
	Adjusted Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Money market funds	$	37,829	$	—	$	—		$	37,829
Certificates of deposit	5,000		1		—			5,001
Commercial paper	10,997		—		—			10,997
Corporate bonds	163,797		—		(397		)	163,400
U.S. agency notes	10,786		—		(69		)	10,717
U.S. treasuries	24,894		—		(43		)	24,851
Total available-for-sale investments	$	253,303	$	1	$	(509	)	$	252,795

As of June 25, 2016, the Company’s available-for-sale investments in certificates of deposit, commercial paper, U.S. agency notes and corporate bonds have a contractual maturity term of up to 22 months. Gross realized gains and losses on short-term and long-term investments for the three and six months ended June 25, 2016 and June 27, 2015 were insignificant in all periods. The specific identification method is used to account for gains and losses on available-for-sale investments.

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As of June 25, 2016 and December 26, 2015, the Company held $81.2 million and $98.4 million of cash in banks, respectively, excluding restricted cash.


4.	Cost-method Investment

As of June 25, 2016, the Company had an investment of $14.5 million in a privately-held company. This investment is accounted for as a cost-method investment as the Company owns less than 20% of the voting securities and does not have the ability to exercise significant influence over operating and financial policies of the entity. This investment is carried at historical cost in the Company's condensed consolidated financial statements. The Company regularly evaluates the carrying value of this cost-method investment for impairment. If the Company believes that the carrying value of the cost basis investment is in excess of estimated fair value, the Company’s policy is to record an impairment charge in other income (expense), net, in the accompanying condensed consolidated statements of operations to adjust the carrying value to estimated fair value, when the impairment is deemed other-than-temporary. As of June 25, 2016, 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 transacts business in various foreign currencies and has international sales, cost of sales, and expenses denominated in foreign currencies, and carries foreign-currency-denominated monetary assets and liabilities, subjecting the Company to foreign currency risk. The Company’s primary foreign currency risk management objective is to protect the U.S. dollar value of future cash flows and minimize the volatility of reported earnings. The Company utilizes foreign currency forward contracts, primarily short term in nature.

Historically, the Company and its Swedish subsidiary enter into foreign currency exchange forward contracts to manage its exposure to fluctuation in foreign exchange rates that arise from its euro and British pound denominated receivables and restricted cash balances. 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.

During 2016, the Company also entered into foreign currency exchange contracts to reduce the volatility of cash flows primarily related to forecasted revenues and expenses denominated in euro, British pound and Swedish kronor ("SEK"). The contracts are settled for U.S. dollars and SEK at maturity and at rates agreed to at inception of the contracts. The gains and losses on these foreign currency derivatives are recorded to the condensed consolidated statement of operations line item, in the current period, to which the item that is being economically hedged is recorded.

For the three months ended June 25, 2016 and June 27, 2015, the before-tax effect of the foreign currency exchange forward contracts were a loss of $0.1 million and a loss of $0.9 million, respectively, and for the six months ended June 25, 2016 and June 27, 2015, the before-tax effect of the foreign currency exchange forward contracts were a loss of $0.6 million and a loss of $2.8 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.

As of June 25, 2016, 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 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 June 25, 2016							As of December 26, 2015
	Gross Notional⁽¹⁾		Prepaid Expense and Other Assets		Other Accrued Liabilities			Gross Notional⁽¹⁾		Prepaid Expense and Other Assets		Other Accrued Liabilities
Foreign currency exchange forward contracts
Related to euro denominated receivables	$	35,923	$	312	$	(277	)	$	46,753	$	319	$	(44	)
Related to British pound denominated receivables	$	6,660	34		—			$	6,686	171		—
Related to restricted cash	$	256	—		—			$	252	—		—
			$	346	$	(277	)			$	490	$	(44	)


⁽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 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. With the acquisition of Transmode, the Company now offers an end-to-end product portfolio of packet-optical solutions for metro, data center interconnect, long-haul and subsea networks.

Shortly after the Acquisition Date, 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. During the three months ended June 25, 2016, the Company recorded a security pledge of approximately SEK 210.8 million ($24.9 million as of June 25, 2016) associated with the Squeeze-out Proceedings. The Company expects a significant portion of this security pledge to be paid during 2016, upon award on advance title to acquire the remaining 4.2% of Transmode shares. As a result of this pledge, the Company reclassified this amount from cash and cash equivalents to short-term restricted cash on the condensed consolidated balance sheet as of June 25, 2016.

The Company has accounted for this transaction as a business combination in exchange for total consideration of $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 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 Company prepared an initial determination of the fair value of assets acquired and liabilities assumed as of the acquisition date using preliminary information. In accordance with Accounting Standard Codification 805, "Business Combinations," during the measurement period an acquirer shall retrospectively adjust the provisional amounts recognized at the acquisition date to reflect information obtained about facts and circumstances that existed as of the Acquisition Date that, if known, would have affected the measurement of the amounts recognized as of the Acquisition Date. Accordingly, the Company has recognized measurement period adjustments made during the first quarter of 2016 to the fair value of certain assets acquired and liabilities assumed as a result of

additional information obtained. These adjustments were retrospectively applied to the Acquisition Date balance sheet. None of the adjustments had an impact on the Company’s previously reported results of operations.

The following table summarizes the Company’s preliminary allocation of the purchase consideration based on the fair value of assets acquired and liabilities assumed as of the Acquisition Date (in thousands):



	Amounts Recognized as of Acquisition Date			Measurement Period Adjustments			Total
Cash	$	36,688		$	—		$	36,688
Accounts receivable	16,183			—			16,183
Inventory	19,886			—			19,886
Other assets	8,320			—			8,320
Intangible assets, net	161,845			—			161,845
Goodwill	187,220			669			187,889
Current liabilities	(24,320		)	(800		)	(25,120		)
Deferred tax liabilities	(39,221		)	131			(39,090		)
Long-term liabilities	(589		)	—			(589		)
Noncontrolling interest	(15,372		)	—			(15,372		)
Total net assets	$	350,640		$	—		$	350,640

The Company expects to finalize the allocation of the purchase consideration during the third quarter of 2016, pending finalization of income taxes and any other adjustments related to acquired assets or liabilities.

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.

Noncontrolling interest was as follows (in thousands):



	June 25, 2016			December 26, 2015
Beginning noncontrolling interest	$	14,910		$	—
Noncontrolling interest investment	—			15,373
Loss attributable to noncontrolling interest	(378		)	(463		)
Ending noncontrolling interest	$	14,532		$	14,910


7.	Goodwill and Intangible Assets

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 six months ended June 25, 2016 (in thousands):



Balance as of December 26, 2015	$	191,560
Foreign currency translation adjustments	(1,578		)
Accumulated impairment loss	—
Balance as of June 25, 2016	$	189,982

The gross carrying amount of goodwill may change due to the effects of foreign currency fluctuations as these assets are denominated in SEK. 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.

Intangible Assets

The following tables present details of the Company’s intangible assets as of June 25, 2016 and December 26, 2015 (in thousands):



	June 25, 2016
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted Average Remaining Useful Life (In Years)
Intangible assets with finite lives:
Trade names	$	237	$	(237	)	$	—	—
Customer relationships	49,579		(5,278		)	44,301		7.2
Developed technology	98,471		(16,302		)	82,169		4.2
Other intangible assets	819		(540		)	279		5.1
Total intangible assets with finite lives	$	149,106	$	(22,357	)	$	126,749	5.3
In-process technology	15,359		—			15,359
Total intangible assets	$	164,465	$	(22,357	)	$	142,108



	December 26, 2015
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted Average Remaining Useful Life (In Years)
Intangible assets with finite lives:
Trade names	$	239	$	(168	)	$	71	0.2
Customer relationships	49,991		(2,197		)	47,794		7.7
Developed technology	94,256		(6,629		)	87,627		4.6
Other intangible assets	819		(513		)	306		5.6
Total intangible assets with finite lives	$	145,305	$	(9,507	)	$	135,798	5.7
In-process technology	20,521		—			20,521
Total intangible assets	$	165,826	$	(9,507	)	$	156,319

The gross carrying amount of intangible assets and the related amortization expense of intangible assets may change due to the effects of foreign currency fluctuations as these assets are denominated in SEK. Amortization expense was $6.6 million and $13.1 million for the three and six months ended June 25, 2016 and was not significant for the corresponding periods in 2015.

Intangible assets are carried at cost less accumulated amortization. Amortization expenses are recorded to the appropriate cost and expense categories. During the six months ended June 25, 2016, the Company transferred $5.2 million of its in-process technology to developed technology, which is being amortized over a maximum useful life of 10 years. In-process technology of $15.4 million as of June 25, 2016 is not subject to amortization. As such, the Company excluded it in the future amortization expense table below.

The following table summarizes the Company’s estimated future amortization expense of intangible assets with finite lives as of June 25, 2016 (in thousands):



			Fiscal Years
	Total		Remainder of 2016		2017		2018		2019		2020		2021 and Thereafter
Total future amortization expense	$	126,749	$	12,903	$	25,806	$	25,806	$	25,677	$	19,093	$	17,464


8.	Balance Sheet Details

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



	June 25, 2016			December 26, 2015
Inventory:
Raw materials	$	39,062		$	27,879
Work in process	60,988			52,599
Finished goods	102,230			94,221
Total inventory	$	202,280		$	174,699
Property, plant and equipment, net:
Computer hardware	$	12,388		$	11,097
Computer software⁽¹⁾	25,170			22,548
Laboratory and manufacturing equipment	207,901			189,168
Furniture and fixtures	2,012			1,897
Leasehold improvements	41,924			38,946
Construction in progress	29,930			31,060
Subtotal	$	319,325		$	294,716
Less accumulated depreciation and amortization	(199,230		)	(183,855		)
Total property, plant and equipment, net	$	120,095		$	110,861
Accrued expenses:
Loss contingency related to non-cancelable purchase commitments	$	5,822		$	6,821
Professional and other consulting fees	4,246			5,363
Taxes payable	6,186			3,295
Royalties	5,045			4,290
Other accrued expenses	15,167			13,967
Total accrued expenses	$	36,466		$	33,736


⁽¹⁾	Included in computer software at June 25, 2016 and December 26, 2015 were $7.9 million and $7.9 million, respectively, related to an enterprise resource planning ("ERP") system that the Company implemented during 2012. The unamortized ERP costs at June 25, 2016 and December 26, 2015 were $3.5 million and $4.0 million, respectively.


9.	Accumulated Other Comprehensive Income

Accumulated other comprehensive income 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 six months ended June 25, 2016 (in thousands):



	Unrealized Gain (Loss) on Other Available-for-Sale Securities			Foreign Currency Translation			Accumulated Tax Effect			Total
Balance at December 26, 2015	$	(506	)	$	2,389		$	(760	)	$	1,123
Net current-period other comprehensive income	639			(3,499		)	—			(2,860		)
Balance at June 25, 2016	$	133		$	(1,110	)	$	(760	)	$	(1,737	)


10.	Basic and Diluted Net Income Per Common Share

Basic net income per common share is computed by dividing net income attributable to Infinera Corporation by the weighted average number of common shares outstanding during the period. Diluted net income attributable to Infinera Corporation per common share is computed using net income attributable to Infinera Corporation 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"), and assumed issuance of common stock under the Company’s 2007 Employee Stock Purchase Plan ("ESPP") using the treasury stock method. Potentially dilutive common shares also include the assumed conversion of convertible senior notes from the conversion spread (as discussed in Note 11, "Convertible Senior Notes"). 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				Six Months Ended
	June 25, 2016		June 27, 2015		June 25, 2016		June 27, 2015
Numerator:
Net income attributable to Infinera Corporation	$	11,483	$	17,906	$	23,498	$	30,272
Denominator:
Basic weighted average common shares outstanding	142,396		130,349		141,600		129,094
Effect of dilutive securities:
Employee equity plans	2,775		5,766		3,299		6,168
Assumed conversion of convertible senior notes from conversion spread	720		4,527		1,486		3,711
Diluted weighted average common shares outstanding	145,891		140,642		146,385		138,973

Net income per common share attributable to Infinera Corporation
Basic	$	0.08	$	0.14	$	0.17	$	0.23
Diluted	$	0.08	$	0.13	$	0.16	$	0.22

During the three and six months ended June 25, 2016 and June 27, 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. 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.

The effects of certain potentially outstanding shares were not included in the calculation of diluted net income per share for the three and six months ended June 25, 2016 and June 27, 2015 because their effect were anti-dilutive under the treasury stock method or the performance condition of the award had not been met.

The following sets forth the potentially dilutive shares excluded from the computation of the diluted net income per share because their effect was anti-dilutive (in thousands):



	Three Months Ended		Six Months Ended
	June 25, 2016	June 27, 2015	June 25, 2016	June 27, 2015
Stock options	13	10	11	10
RSUs	2,663	73	1,721	789
PSUs	846	129	594	210
ESPP shares	—	—	291	207
Total	3,522	212	2,617	1,216

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11.	Convertible Senior Notes

In May 2013, the Company issued the Notes, which 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. For any remaining conversion obligation, the Company intends to pay cash, shares of common stock or a combination of cash and shares of common stock, at its election. 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 March 28, 2013 (and only during such fiscal quarter) if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day;


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


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


•	at any time on or after December 1, 2017 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Notes at any time, regardless of the foregoing circumstances.

If the Company undergoes a fundamental change as defined in the Indenture governing the Notes, holders may require the Company to repurchase for cash all or any portion of their Notes at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, 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.

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The net carrying amounts of the debt obligation were as follows (in thousands):



	June 25, 2016			December 26, 2015
Principal	$	150,000		$	150,000
Unamortized discount ⁽¹⁾	(19,955		)	(24,560		)
Unamortized issuance cost ⁽¹⁾	(1,717		)	(2,113		)
Net carrying amount	$	128,328		$	123,327


⁽¹⁾	Unamortized debt conversion discount and issuance costs will be amortized over the remaining life of the Notes, which is approximately two years.

As of June 25, 2016 and December 26, 2015, the carrying amount of the equity component of the Notes was $43.3 million.

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.

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 initially recorded as other non-current assets and will be amortized to interest expense over the term of the Notes. 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. The Company adopted ASU 2015-03 during the first quarter of 2016. The December 26, 2015 balance sheet was retrospectively adjusted to reclassify $2.1 million from other non-current assets to a reduction of the Notes payable liability.

The issuance costs attributable to the equity component were netted with the equity component in stockholders’ equity. Additionally, the Company initially recorded a deferred tax liability of $17.0 million in connection with the issuance of the Notes, and a corresponding reduction in valuation allowance. The impact of both was recorded to stockholders’ equity.

The Company determined that the embedded conversion option in the Notes does not require separate accounting treatment as a derivative instrument because it is both indexed to the Company’s own stock and would be classified in stockholder’s equity if freestanding.

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



	Three Months Ended				Six Months Ended
	June 25, 2016		June 27, 2015		June 25, 2016		June 27, 2015
Contractual interest expense	$	656	$	656	$	1,313	$	1,313
Amortization of debt issuance costs	201		182		396		358
Amortization of debt discount	2,331		2,109		4,605		4,166
Total interest expense	$	3,188	$	2,947	$	6,314	$	5,837

The coupon rate is 1.75%. For the three and six months ended June 25, 2016 and June 27, 2015, the debt discount and debt issuance costs are amortized, using an annual effective interest rate of 10.23%, to interest expense over the term of the Notes.

As of June 25, 2016, the fair value of the Notes was $167.1 million. The fair value was determined based on the quoted bid price of the Notes in an over-the-counter market on June 24, 2016. The Notes are classified as Level 2 of the fair value hierarchy.

During the three months ended June 25, 2016, the closing price of the Company's common stock did not meet the conversion criteria; therefore, holders of the Notes may not convert their notes during the third quarter of

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2016. Should the closing price conditions be met during the 30 consecutive trading days prior to the end of the third quarter of 2016 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 $10.96 on June 24, 2016, the if-converted value of the Notes did not exceed their principal amount.


12.	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.

In February 2016, the Company's board of directors adopted the 2016 Equity Incentive Plan ("2016 Plan") and the Company's stockholders approved the 2016 Plan in May 2016. As of June 25, 2016, the Company reserved a total of 7.4 million shares of common stock for issuance of stock options, RSUs and PSUs to employees, non-employees, consultants and members of the Company's board of directors, pursuant to the 2016 Plan, plus any shares subject to awards granted under the Company’s 2007 Equity Incentive Plan (the “2007 Plan”) that, after the effective date of the 2016 Plan, expire, are forfeited or otherwise terminate without having been exercised in full to the extent such awards were exercisable, and shares issued pursuant to awards granted under the 2007 Plan that, after the effective date of the 2016 Plan, are forfeited to or repurchased by the Company due to failure to vest. The 2016 Plan has a maximum term of 10 years from the date of adoption, or it can be earlier terminated by the Company's board of directors. The 2007 Plan was canceled, however, it continues to govern outstanding grants under the 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 26, 2015	2,511		$	7.26	$	28,288
Stock options granted	—		$	—
Stock options exercised	(259	)	$	4.24	$	2,334
Stock options canceled	—		$	—
Outstanding at June 25, 2016	2,252		$	7.60	$	7,853
Vested and expected to vest as of June 25, 2016	2,252				$	7,852
Exercisable at June 25, 2016	2,243		$	7.60	$	7,834



	Number of Restricted Stock Units		Weighted- Average Grant Date Fair Value Per Share		Aggregate Intrinsic Value
Outstanding at December 26, 2015	4,932		$	12.76	$	91,285
RSUs granted	2,418		$	15.08
RSUs released	(1,838	)	$	10.50	$	22,584
RSUs canceled	(186	)	$	13.06
Outstanding at June 25, 2016	5,326		$	14.59	$	58,371
Expected to vest at June 25, 2016	4,995				$	54,748

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	Number of Performance Stock Units		Weighted- Average Grant Date Fair Value Per Share		Aggregate Intrinsic Value
Outstanding at December 26, 2015	731		$	12.35	$	13,540
PSUs granted	647		$	15.28
PSUs performance earned⁽¹⁾	154		$	9.43
PSUs released	(462	)	$	9.43	$	6,650
PSUs canceled	(71	)	$	15.65
Outstanding at June 25, 2016	999		$	14.23	$	10,946
Expected to vest at June 25, 2016	962				$	10,543


⁽¹⁾	Represents the additional PSUs awarded resulting from the achievement of performance goals above the performance targets established at grant since the original grants were at 100% of target amounts.

The aggregate intrinsic value of unexercised stock options is calculated as the difference between the closing price of the Company’s common stock of $10.96 at June 24, 2016 (the last trading day of the fiscal quarter) 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.

The aggregate intrinsic value of unreleased RSUs and unreleased PSUs is calculated using the closing price of the Company's common stock of $10.96 at June 24, 2016 (the last trading day of the fiscal quarter). The aggregate intrinsic value of RSUs and PSUs released is calculated using the fair market value of the common stock at the date of release.

The following table presents total stock-based compensation cost for instruments granted but not yet amortized, net of estimated forfeitures, of the Company’s equity compensation plans as of June 25, 2016. 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	$	35	1.6
RSUs	$	58,826	2.7
PSUs	$	8,676	1.7

Employee Stock Options

The Company did not grant any stock options during the three and six months ended June 25, 2016. Amortization of stock-based compensation related to stock options in the three and six months ended June 25, 2016 and June 27, 2015 was insignificant in both periods.

Employee Stock Purchase Plan

The fair value of the shares was estimated at the date of grant using the following assumptions (expense amounts in thousands):



	Three Months Ended		Six Months Ended
Employee Stock Purchase Plan	June 25, 2016	June 27, 2015	June 25, 2016	June 27, 2015
Volatility	56%	53%	56%	53%
Risk-free interest rate	0.52%	0.13%	0.52%	0.13%
Expected life	0.5 years	0.5 years	0.5 years	0.5 years
Estimated fair value	$4.53	$5.15	4.53	$5.15
Total stock-based compensation expense	$1,247	$1,077	$2,489	$2,128

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Restricted Stock Units

The Company granted RSUs to employees and members of the Company’s board of directors to receive shares of the Company’s common stock. 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 six months ended June 25, 2016 and June 27, 2015 was approximately $7.7 million and $13.8 million, respectively, and $5.9 million and $11.1 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 2.0 times the target number of PSUs granted depending on the Company’s performance against the index.

The ranges of estimated values of the PSUs granted that are compared to an index, as well as the assumptions used in calculating these values were based on estimates as follows:



	2016	2015	2014
Index	SPGIIPTR	SPGIIPTR	SPGIIPTR
Index volatility	18%	18% - 19%	25%
Infinera volatility	55%	48%	49% - 50%
Risk-free interest rate	0.95% - 1.07%	0.97% - 1.10%	0.66% - 0.71%
Correlation with index	0.58 - 0.59	0.52	0.60
Estimated fair value	$10.31 - $16.62	$18.08 - $19.29	$6.59 - $7.60

In addition, certain other PSUs granted to the Company’s executive officers, senior management and certain employees will only vest upon the achievement of specific financial or operational performance criteria.

The following table summarizes by grant year, the Company’s PSU activity for the six months ended June 25, 2016 (in thousands):



	Total Number of Performance Stock Units		2013		2014		2015		2016
Outstanding at December 26, 2015	731		147		260		324		—
PSUs granted	647		—		—		—		647
PSUs performance earned⁽¹⁾	154		70		53		31		—
PSUs released	(462	)	(211	)	(158	)	(93	)	—
PSUs canceled	(71	)	(6	)	(8	)	(57	)	—
Outstanding at June 25, 2016	999		—		147		205		647


⁽¹⁾	Represents the additional PSUs awarded resulting from the achievement of performance goals above the performance targets established at grant since the original grants were at 100% of target amounts.

Amortization of stock-based compensation related to PSUs in the three and six months ended June 25, 2016 and June 27, 2015 was approximately $2.3 million and $3.2 million, respectively, and $1.3 million and $2.2 million, respectively.

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Stock-Based Compensation

The following tables summarize the effects of stock-based compensation on the Company’s condensed consolidated balance sheets and statements of operations for the periods presented (in thousands):



	June 25, 2016		December 26, 2015
Stock-based compensation effects in inventory	$	3,579	$	3,129
Stock-based compensation effects in deferred inventory cost	$	13	$	13
Stock-based compensation effects in property, plant and equipment, net	$	80	$	93



	Three Months Ended				Six Months Ended
	June 25, 2016		June 27, 2015		June 25, 2016		June 27, 2015
Stock-based compensation effects included in net income before income taxes
Cost of revenue	$	746	$	613	$	1,419	$	1,095
Research and development	3,904		2,817		6,225		5,395
Sales and marketing	2,945		2,070		5,180		3,791
General and administration	2,486		1,829		4,385		3,495
	$	10,081	$	7,329	$	17,209	$	13,776
Cost of revenue – amortization from balance sheet ⁽¹⁾	912		880		1,771		1,641
Total stock-based compensation expense	$	10,993	$	8,209	$	18,980	$	15,417


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


13.	Income Taxes

Provision for income taxes during the three and six months ended June 25, 2016 was $1.5 million and $1.7 million, respectively, on pre-tax income of $12.8 million and $24.8 million, respectively. This compared to a tax provision of $1.0 million and $1.6 million, respectively, on a pre-tax income of $18.9 million and $31.9 million, respectively, for the three and six months ended June 27, 2015. The results for the three months ended June 25, 2016 reflect approximately $7.0 million of purchase accounting amortization and other charges related to the acquisition of Transmode, with a corresponding tax benefit of approximately $1.6 million. Exclusive of this tax benefit, provision for income taxes otherwise increased by approximately $2.0 million in the three months ended June 25, 2016 compared to June 27, 2015, which relates to a higher effective tax rate applied to a higher pre-tax income. The results for the six months ended June 25, 2016 reflected approximately $14.1 million of purchase accounting amortization and other charges related to the acquisition of Transmode, with a corresponding tax benefit of approximately $3.1 million. Exclusive of this tax benefit, provision for income taxes otherwise increased by approximately $3.2 million in the six months ended June 25, 2016 compared to June 27, 2015, which relates to a higher effective tax rate applied to a higher pre-tax income. The increase in effective tax rate is attributed to higher state income taxes provided in those states where loss carryforwards are now exhausted as well as higher foreign income taxes related to the Transmode operations and increased spending in certain of the Company's cost-plus foreign subsidiaries.

In all periods, the tax expense projected in the Company's effective tax rate assumptions 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 and six months ended June 25, 2016. 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. 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. In the past, the Company established a

valuation allowance against its deferred tax assets as it determined that its ability to recover the value of these assets did not meet the “more-likely-than-not” standard. 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 on an on-going basis to determine whether it needs to maintain the valuation allowance recorded against its net deferred tax assets. At June 25, 2016, the Company has been profitable for nine consecutive quarters beginning with the second quarter of 2014. Despite this trend, the Company must consider other positive and negative evidence, including its 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 valuation allowance against its net U.S. deferred tax assets. At June 25, 2016, the Company believes that it is more-likely-than-not, that it would not be able to utilize its deferred tax assets in the foreseeable future. Accordingly, the domestic net deferred tax assets continued to be 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 record a corresponding benefit to earnings.


14.	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				Six Months Ended
	June 25, 2016		June 27, 2015		June 25, 2016		June 27, 2015
Americas:
United States	$	166,710	$	154,762	$	341,225	$	281,765
Other Americas	11,267		11,984		14,526		19,070
	177,977		166,746		355,751		300,835
Europe, Middle East and Africa	64,570		26,629		124,446		72,508
Asia Pacific and Japan	16,275		13,971		23,443		20,865
Total revenue	$	258,822	$	207,346	$	503,640	$	394,208

Property, plant and equipment, net



	June 25, 2016		December 26, 2015
United States	$	112,289	$	102,702
Other Americas	278		173
	112,567		102,875
Europe, Middle East and Africa	5,001		5,417
Asia Pacific and Japan	2,527		2,569
Total property, plant and equipment, net	$	120,095	$	110,861


15.	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 generally 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						Six Months Ended
	June 25, 2016			June 27, 2015			June 25, 2016			June 27, 2015
Beginning balance	$	39,999		$	25,539		$	38,844		$	27,040
Charges to operations	7,308			6,019			14,062			11,367
Utilization	(3,702		)	(3,003		)	(8,689		)	(4,821		)
Change in estimate⁽¹⁾	(2,616		)	(116		)	(3,228		)	(5,147		)
Balance at the end of the period	$	40,989		$	28,439		$	40,989		$	28,439

⁽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.

Letters of Credit and Bank Guarantees

The Company had $5.4 million of standby letters of credit and bank guarantees outstanding as of June 25, 2016 that consisted of $3.5 million related to customer performance guarantees, $1.2 million related to a value added tax and customs' licenses, and $0.7 million related to property leases. The Company had $5.2 million of standby letters of credit and bank guarantees outstanding as of December 26, 2015, respectively. These consisted of $3.1 million related to customer performance guarantees, $1.2 million related to a value added tax and customs' licenses, and $0.9 million related to property leases.

As of June 25, 2016 and December 26, 2015, the Company had a line of credit for approximately $1.3 million and $1.5 million, respectively, to support the issuance of letters of credit, of which $0.3 million had been issued and outstanding. The Company has pledged approximately $4.7 million of assets of a subsidiary to secure this line of credit and other obligations as of June 25, 2016 and December 26, 2015.


16.	Litigation and Contingencies

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.

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 June 25, 2016, the Company has accrued the estimated liabilities associated with the Company's potential loss contingencies.

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Intellectual Property Indemnification

The Company has agreed to indemnify certain customers for claims made against the Company’s products, where such claims allege infringement of third party intellectual property rights, including, but not limited to, patents, registered trademarks, and/or copyrights. Under the aforementioned indemnification clauses, the Company may be obligated to defend the customer and pay for the damages awarded against the customer under an infringement claim as well as the customer’s attorneys’ fees and costs. The Company’s indemnification obligations generally do not expire after termination or expiration of the agreement containing the indemnification obligation. In certain cases, there are limits on and exceptions to the Company’s potential liability for indemnification. Although historically the Company has not made significant payments under these indemnification obligations, the Company cannot estimate the amount of potential future payments, if any, that it might be required to make as a result of these agreements. The maximum potential amount of any future payments that the Company could be required to make under these indemnification obligations could be significant.

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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 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 needs and activity; statements concerning new or existing products or services; statements related to our integration efforts in connection with our acquisition of Transmode and the squeeze-out proceedings; statements related to capital expenditures; statements related to future economic conditions, performance, market growth or our sales cycle; statements related to our convertible senior notes; statements related to the effects of litigation on our financial position, results of operations or cash flows; statements related to the timing and impact of transfer pricing reserves; statements related to deferred tax assets; 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 26, 2015 filed on February 23, 2016. 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 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 optical bandwidth prompted by increased use of high-speed Internet access, mobile broadband, high-definition video streaming services, business Ethernet services and cloud-based services.

We manufacture large-scale Indium Phosphide photonic integrated circuits ("PICs"), which, when combined with our coherent digital signal processor branded as the FlexCoherent Processor, are used as key differentiating subsystems inside most of our Intelligent Transport Network platforms. We believe that our vertical integration of PICs, DSPs, ASICs and software, incorporated in the Infinera Intelligent Transport Network architecture, gives us a structural technology advantage over competing offerings. This advantage enables Service Providers to scale network bandwidth, accelerate service innovation and simplify optical network operations to reduce cost of ownership, and ultimately, create rich end-user experiences for their customers.

Our PIC-based approach has enabled us to build significant market share in long-haul and sub-sea networks with Service Providers around the world. Building on our leadership in long-haul and sub-sea, our Cloud Xpress platform also utilizes the PIC and targets the data center interconnect ("DCI") market, which we believe is a rapidly growing market as cloud infrastructures continue to evolve to address the massive ongoing demand of server-to-server traffic.

We also offer a suite of metro-focused solutions. 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, a metro packet-optical networking company based in Stockholm, Sweden. Shortly after the acquisition, we initiated compulsory acquisition proceedings in accordance with Swedish law (the "Squeeze-out Proceedings") in order to acquire the remaining 4.2% of Transmode shares not tendered. During the three months ended June 25, 2016, we recorded a security pledge of approximately 210.8 million in Swedish kronor ("SEK") ($24.9 million as of June 25, 2016) associated with the Squeeze-out Proceedings. We expect a significant portion of this security pledge to be paid during 2016, upon award on advance title to acquire the remaining 4.2% of Transmode shares. The combination of the two companies brings together a complementary set of customers,

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products and technologies into one company. With the acquisition of Transmode and the introduction of the Infinera DTN-X XTC-2/2E during 2015, we now provide an end-to-end portfolio of packet-optical solutions for metro, DCI, long-haul and subsea networks. With the TM-Series products from Transmode and our product portfolio, we believe we are well positioned to address the evolving requirements of our growing customer base.

We expect revenue to fluctuate in the short-term, in particular due to lighter current demand for new long-haul footprint and subsea opportunities. We continue to be well positioned to continue to generate revenue from capacity additions to previously deployed 100G long-haul footprint and increasing market adoption of the Cloud Xpress. Over time, we also expect to achieve cross-sell synergies from selling metro solutions into the traditional Infinera customer base and for sales of long-haul footprint to increase as we release products enabled by our Infinite Capacity Engine, a new optical engine subsystem that will be built with our 4^th generation PIC technology and our next generation FlexCoherent Processor. In light of expecting a softer demand environment in the short-term, we are balancing aggressive cost management while ensuring that we invest sufficiently to take advantage of our significant market opportunities across the long-haul, metro and DCI markets. Looking further out, our expectation is that with sustained revenue growth, we can further leverage our vertically-integrated manufacturing model, which combined with our expanding portfolio of purpose built products, continued long-haul capacity adds into deployed networks and expense management, can result in improved profitability and cash flow.

Our goal is to be the preeminent provider of optical transport networking systems to Service Providers around the world. Our long-term revenue growth will depend on the timely introduction of next-generation technology into our product portfolio, continued acceptance of our products, growth of communications traffic and the continued proliferation of bandwidth-intensive services, which are expected to drive the need for increased levels of bandwidth.

Our near-term quarter-over-quarter revenue may be impacted by several factors including general economic and market conditions, time-to-market development and market acceptance of new products, customer spending cycles and technology requirements, timing of large product deployments, and customer consolidation.

We maintain a diverse customer base across customer verticals and geographies, with several customers capable of spending significantly in a given quarter. However, in a period where multiple key customers slow spend, our business may be harmed if our customers do not generate as much revenue as we forecast, stop purchasing from us, or substantially reduce their orders to us. For the three months ended June 25, 2016, two customers individually accounted for 15% and 11% of our total revenue, respectively, and for the corresponding period in 2015, three customers individually accounted for 23%, 16% and 11% of our total revenue, respectively. For the six months ended June 25, 2016, three customers individually accounted for 16%, 13% and 12% of our total revenue, respectively, and four customers individually accounted for 14%, 13%, 12% and 11% of our total revenue for the corresponding period in 2015.

We are headquartered in Sunnyvale, California, with employees located throughout the Americas, Europe and the Asia Pacific region. We primarily sell our products through our direct sales force but also sell indirectly through resellers. We derived 96% of our revenue from direct sales to customers during each of the three and six months ended June 25, 2016, respectively, and 95% of our revenue for each of the three and six months ended June 27, 2015, respectively. We are working to expand our indirect sales programs in the future to allow us to address a broader pool of customers with more channel friendly products such as the Cloud Xpress platform and TM-Series products. We expect to continue generating a substantial majority of our revenue from direct sales in the near 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

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estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements. Management believes that there have been no significant changes during the six months ended June 25, 2016 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 26, 2015.

Results of Operations

The results of operations for the three and six months ended June 25, 2016 reflects the inclusion of the Transmode business, which was acquired on August 20, 2015. The following sets forth, for the periods presented, certain unaudited condensed consolidated statements of operations information (in thousands, except percentages):



	Three Months Ended
	June 25, 2016				June 27, 2015
	Amount		% of total revenue		Amount		% of total revenue		Change		% Change
Revenue:
Product	$	227,532	88	%	$	178,982	86	%	$	48,550	27	%
Services	31,290		12	%	28,364		14	%	2,926		10	%
Total revenue	$	258,822	100	%	$	207,346	100	%	$	51,476	25	%
Cost of revenue:
Product	$	122,438	47	%	$	99,491	48	%	$	22,947	23	%
Services	12,638		5	%	11,059		5	%	1,579		14	%
Total cost of revenue	$	135,076	52	%	$	110,550	53	%	$	24,526	22	%
Gross profit	$	123,746	47.8	%	$	96,796	46.7	%	$	26,950	28	%

Six Months Ended