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 July 1, 2017



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		I.R.S. Employer Identification No.



140 Caspian Court Sunnyvale, CA		94089
Address of principal executive offices		Zip Code

(408) 572-5200

Registrant’s telephone number, including area code

Not Applicable

Former name, former address and former fiscal year, if changed since last report

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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 August 2, 2017, 148,204,671 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 JULY 1, 2017

INDEX



		Page
PART I. FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (Unaudited)	3

	Condensed Consolidated Balance Sheets – As of July 1, 2017 and December 31, 2016	3

	Condensed Consolidated Statements of Operations – Three and six months ended July 1, 2017 and June 25, 2016	4

	Condensed Consolidated Statements of Comprehensive Income (Loss) – Three and six months ended July 1, 2017 and June 25, 2016	5

	Condensed Consolidated Statements of Cash Flows – Six months ended July 1, 2017 and June 25, 2016	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	34

Item 4.	Controls and Procedures	34

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	35

Item 1A.	Risk Factors	36

Item 6.	Exhibits	53

	Signature Page	54

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PART I. FINANCIAL INFORMATION


Item 1.	Condensed Consolidated Financial Statements (Unaudited)

INFINERA CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par values)

(Unaudited)



	July 1, 2017			December 31, 2016
ASSETS
Current assets:
Cash and cash equivalents	$	119,820		$	162,641
Short-term investments	137,929			141,697
Short-term restricted cash	1,423			8,490
Accounts receivable, net of allowance for doubtful accounts of $918 in 2017 and $772 in 2016	123,903			150,370
Inventory	245,976			232,955
Prepaid expenses and other current assets	42,885			34,270
Total current assets	671,936			730,423
Property, plant and equipment, net	142,424			124,800
Intangible assets	102,933			108,475
Goodwill	189,989			176,760
Long-term investments	69,105			40,779
Cost-method investment	7,000			7,000
Long-term restricted cash	5,030			6,449
Other non-current assets	4,201			3,897
Total assets	$	1,192,618		$	1,198,583
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	80,684		$	62,486
Accrued expenses	32,018			31,580
Accrued compensation and related benefits	43,625			46,637
Short-term debt, net	139,115			—
Accrued warranty	14,078			16,930
Deferred revenue	64,723			58,900
Total current liabilities	374,243			216,533
Long-term debt, net	—			133,586
Accrued warranty, non-current	18,322			23,412
Deferred revenue, non-current	23,723			19,362
Deferred tax liability	24,185			25,327
Other long-term liabilities	14,558			18,035
Commitments and contingencies (Note 15)
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 July 01, 2017 and December 31, 2016
Issued and outstanding shares – 148,189 as of July 01, 2017 and 145,021 as of December 31, 2016	148			145
Additional paid-in capital	1,388,045			1,354,082
Accumulated other comprehensive loss	(3,741		)	(28,324		)
Accumulated deficit	(646,865		)	(563,575		)
Total stockholders' equity	737,587			762,328
Total liabilities and stockholders’ equity	$	1,192,618		$	1,198,583

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
	July 1, 2017			June 25, 2016			July 1, 2017			June 25, 2016
Revenue:
Product	$	143,360		$	227,532		$	290,413		$	443,614
Services	33,461			31,290			61,930			60,026
Total revenue	176,821			258,822			352,343			503,640
Cost of revenue:
Cost of product	100,302			122,438			199,634			240,500
Cost of services	11,687			12,638			23,821			23,056
Total cost of revenue	111,989			135,076			223,455			263,556
Gross profit	64,832			123,746			128,888			240,084
Operating expenses:
Research and development	57,377			59,541			112,460			113,686
Sales and marketing	29,397			30,465			58,838			60,474
General and administrative	18,563			17,658			35,922			34,971
Total operating expenses	105,337			107,664			207,220			209,131
Income (loss) from operations	(40,505		)	16,082			(78,332		)	30,953
Other income (expense), net:
Interest income	862			595			1,613			1,117
Interest expense	(3,456		)	(3,176		)	(6,859		)	(6,331		)
Other gain (loss), net	(252		)	(714		)	(382		)	(928		)
Total other income (expense), net	(2,846		)	(3,295		)	(5,628		)	(6,142		)
Income (loss) before income taxes	(43,351		)	12,787			(83,960		)	24,811
Provision for (benefit from) income taxes	(512		)	1,475			(670		)	1,691
Net income (loss)	(42,839		)	11,312			(83,290		)	23,120
Less: Loss attributable to noncontrolling interest	—			(171		)	—			(378		)
Net income (loss) attributable to Infinera Corporation	$	(42,839	)	$	11,483		$	(83,290	)	$	23,498
Net income (loss) per common share attributable to Infinera Corporation:
Basic	$	(0.29	)	$	0.08		$	(0.57	)	$	0.17
Diluted	$	(0.29	)	$	0.08		$	(0.57	)	$	0.16
Weighted average shares used in computing net income (loss) per common share:
Basic	147,538			142,396			146,662			141,600
Diluted	147,538			145,891			146,662			146,385

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 (LOSS)

(In thousands)

(Unaudited)



	Three Months Ended						Six Months Ended
	July 1, 2017			June 25, 2016			July 1, 2017			June 25, 2016
Net income (loss)	$	(42,839	)	$	11,312		$	(83,290	)	$	23,120
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on available-for-sale investments	22			258			(60		)	639
Foreign currency translation adjustment	18,426			(6,769		)	24,643			(3,499		)
Net change in accumulated other comprehensive income (loss)	18,448			(6,511		)	24,583			(2,860		)
Less: Comprehensive loss attributable to noncontrolling interest	—			(171		)	—			(378		)
Comprehensive income (loss) attributable to Infinera Corporation	$	(24,391	)	$	4,972		$	(58,707	)	$	20,638

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
	July 1, 2017			June 25, 2016
Cash Flows from Operating Activities:
Net income (loss)	$	(83,290	)	$	23,120
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	32,623			29,891
Amortization of debt discount and issuance costs	5,529			5,001
Amortization of premium on investments	234			733
Impairment of intangible assets	252			—
Stock-based compensation expense	23,257			18,980
Other loss	86			84
Changes in assets and liabilities:
Accounts receivable	27,629			(7,404		)
Inventory	(12,700		)	(31,304		)
Prepaid expenses and other assets	(8,127		)	(328		)
Accounts payable	16,927			(7,339		)
Accrued liabilities and other expenses	(4,392		)	(5,528		)
Deferred revenue	10,065			10,129
Accrued warranty	(8,111		)	2,165
Net cash provided by (used in) operating activities	(18		)	38,200
Cash Flows from Investing Activities:
Purchase of available-for-sale investments	(107,854		)	(97,051		)
Proceeds from sales of available-for-sale investments	3,998			—
Proceeds from maturities of investments	79,003			91,714
Purchase of property and equipment	(39,200		)	(23,278		)
Change in restricted cash	2,974			(60		)
Net cash used in investing activities	(61,079		)	(28,675		)
Cash Flows from Financing Activities:
Security pledge to acquire noncontrolling interest	5,596			(24,942		)
Acquisition of noncontrolling interest	(471		)	—
Proceeds from issuance of common stock	11,115			8,586
Minimum tax withholding paid on behalf of employees for net share settlement	(823		)	(3,082		)
Net cash provided by (used in) financing activities	15,417			(19,438		)
Effect of exchange rate changes on cash	2,859			(808		)
Net change in cash and cash equivalents	(42,821		)	(10,721		)
Cash and cash equivalents at beginning of period	162,641			149,101
Cash and cash equivalents at end of period	$	119,820		$	138,380
Supplemental disclosures of cash flow information:
Cash paid for income taxes, net of refunds	$	2,683		$	3,237
Cash paid for interest	$	1,316		$	1,410
Supplemental schedule of non-cash investing activities:
Transfer of inventory to fixed assets	$	2,087		$	4,009

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 31, 2016.

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 in aggregate principal amount 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 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 31, 2016.

To date, a few of the Company’s customers have accounted for a significant portion of its revenue. For the three months ended July 1, 2017, three customers individually accounted for 17%, 10% and 10% of the Company's total revenue and for the corresponding period in 2016, two customers individually accounted for 15% and 11% of the Company's total revenue, respectively. For the six months ended July 1, 2017, one customer individually accounted for 18% of the Company's total revenue and for the corresponding period in 2016, three customers individually accounted for 16%, 13% and 12% 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 July 1, 2017 as compared to those disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.


2.	Recent Accounting Pronouncements

In May 2017, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”), which amends the scope of modification accounting for share-based payment arrangements, and provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. This guidance is effective for the Company in its first quarter of fiscal 2018, with early adoption permitted. The Company does not expect the new guidance to have any material impact on its consolidated financial statements.

In January 2017, the FASB issued Accounting Standards Update 2017-04, “Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). The guidance eliminates Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will

be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. ASU 2017-04 will be effective for the Company's annual or any interim goodwill impairment tests in its first quarter of fiscal 2020. The Company is currently evaluating the impact the adoption of ASU 2017-04 will have on its consolidated financial statements.

In November 2016, the FASB issued Accounting Standards Update 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”), which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. As such, restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and ending-of-period total amounts shown on the statement of cash flows. The Company is required to adopt ASU 2016-18 on a retrospective basis for fiscal years, and for interim periods within those fiscal years, beginning with its first quarter of fiscal 2018. Early adoption is permitted, including adoption in an interim period. Subsequent to the adoption of ASU 2016-18, the change in restricted cash would be excluded from the change in cash flows from investing and financing activities and included in the change in total cash, restricted cash and cash equivalents as reported in the statement of cash flows. The Company is currently evaluating the impact the adoption of ASU 2016-18 will have on its consolidated financial statements.

In August 2016, the FASB issued Accounting Standards Update 2016-15, “Statement of Cash Flows (Topic 320): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”), which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain transactions are presented and classified in the statement of cash flows. This guidance is effective for the Company in its first quarter of fiscal 2018 and will be applied on a retrospective basis. Early adoption is permitted. The Company is currently evaluating the impact the adoption of ASU 2016-15 will have on its consolidated financial statements.

In June 2016, 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 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 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 and expects to have increases in the assets and liabilities of its consolidated balance sheets.

In July 2015, the FASB issued Accounting Standards Update 2015-11, “Simplifying the Measurement of Inventory” (“ASU 2015-11”), to simplify the guidance on the subsequent measurement of inventory, excluding inventory measured using last-in, first-out or the retail inventory method. Under ASU 2015-11, inventory should be at the lower of cost and net realizable value. The Company adopted ASU 2015-11 during the first quarter of fiscal 2017. The Company's adoption of 2015-11 had no impact on the Company's financial position, results of operations or cash flows.

In May 2014, the FASB issued Accounting Standards Update 2014-09, “Revenue from Contracts from Customers (Topic 606)” (“ASU 2014-09”), which creates a single, joint revenue standard that is consistent across all

industries and markets for companies that prepare their financial statements in accordance with U.S. GAAP. Under ASU 2014-09, an entity is required to recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to receive in exchange for those goods or services. In July 2015, the FASB decided to delay the effective date of the new revenue standard by one year. In April 2016, the FASB issued Accounting Standards Update 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing,” which clarifies the implementation guidance on identifying performance obligations and licensing. In May 2016, the FASB issued Accounting Standards Update 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients,” which amends the guidance on collectability, noncash consideration, presentation of sales tax and transition. In December 2016, the FASB issued Accounting Standards Update 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” to increase stakeholders' awareness of the proposals and to expedite improvements to ASU 2014-09. These standards will be effective for the Company's first quarter of 2018. The Company currently anticipates adopting the standard using the modified retrospective method as an adjustment to its opening balance of retained earnings. Prior periods will not be retrospectively adjusted.

The Company continues to evaluate the impact of the new accounting standards on our accounting policies, processes and system requirements, and has assigned internal resources in addition to the engagement of third party service providers to assist in this evaluation. In addition, the Company has made and will continue to make investments in systems and processes to enable timely and accurate reporting under the new standard. The Company is in the process of evaluating whether or not there will be a material impact 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 July 1, 2017						As of December 31, 2016
	Fair Value Measured Using						Fair Value Measured Using
	Level 1		Level 2		Total		Level 1		Level 2			Total
Assets
Money market funds	$	34,179	$	—	$	34,179	$	41,773	$	—		$	41,773
Certificates of deposit	—		240		240		—		1,881			1,881
Commercial paper	—		20,931		20,931		—		39,310			39,310
Corporate bonds	—		137,135		137,135		—		88,324			88,324
U.S. agency notes	—		12,780		12,780		—		11,759			11,759
U.S. treasuries	40,941		—		40,941		52,092		—			52,092
Foreign currency exchange forward contracts			11		11		—		187			187
Total assets	$	75,120	$	171,097	$	246,217	$	93,865	$	141,461		$	235,326
Liabilities
Foreign currency exchange forward contracts	$	—	$	—	$	—	$	—	$	(71	)	$	(71	)

During the three and six months ended July 1, 2017, there were no transfers of assets or liabilities between Level 1 and Level 2 of the fair value hierarchy. As of July 1, 2017 and December 31, 2016, none of the Company’s existing securities were classified as Level 3 securities.

Cash, cash equivalents and investments were as follows (in thousands):



	July 1, 2017
	Adjusted Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Cash	$	80,648	$	—	$	—		$	80,648
Money market funds	34,179		—		—			34,179
Commercial paper	4,993		—		—			4,993
Total cash and cash equivalents	$	119,820	$	—	$	—		$	119,820
Commercial paper	15,945		—		(7		)	15,938
Corporate bonds	84,814		—		(100		)	84,714
U.S. agency notes	7,288		—		(7		)	7,281
U.S. treasuries	30,050		—		(54		)	29,996
Total short-term investments	$	138,097	$	—	$	(168	)	$	137,929
Certificates of deposit	240		—		—			240
Corporate bonds	52,483		7		(69		)	52,421
U.S. agency notes	5,510		—		(11		)	5,499
U.S. treasuries	10,973		—		(28		)	10,945
Total long-term investments	$	69,206	$	7	$	(108	)	$	69,105
Total cash, cash equivalents and investments	$	327,123	$	7	$	(276	)	$	326,854

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	December 31, 2016
	Adjusted Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Cash	$	109,978	$	—	$	—		$	109,978
Money market funds	41,773		—		—			41,773
Commercial paper	8,892		—		(1		)	8,891
U.S. agency notes	1,999		—		—			1,999
Total cash and cash equivalents	$	162,642	$	—	$	(1	)	$	162,641
Certificates of deposit	1,881		—		—			1,881
Commercial paper	30,425		—		(6		)	30,419
Corporate bonds	63,097		1		(59		)	63,039
U.S. agency notes	7,285		—		(8		)	7,277
U.S. treasuries	39,093		9		(21		)	39,081
Total short-term investments	$	141,781	$	10	$	(94	)	$	141,697
Corporate bonds	25,374		—		(89		)	25,285
U.S. agency notes	2,499		—		(16		)	2,483
U.S. treasuries	13,032		2		(23		)	13,011
Total long-term investments	$	40,905	$	2	$	(128	)	$	40,779
Total cash, cash equivalents and investments	$	345,328	$	12	$	(223	)	$	345,117

As of July 1, 2017, the Company’s available-for-sale investments have a contractual maturity term of up to 23 months. Gross realized gains and losses on short-term and long-term investments were insignificant in all periods. The specific identification method is used to account for gains and losses on available-for-sale investments.

As of July 1, 2017, the Company had $257.7 million of cash, cash equivalents and short-term investments, including $49.6 million of cash and cash equivalents held by its foreign subsidiaries. The Company's cash in foreign locations is used for operational and investing activities in those locations, and the Company does not currently have the need or the intent to repatriate those funds to the United States.


4.	Cost-method Investment

In 2016, the Company invested $7.0 million in a privately-held company. In addition to the $7.0 million investment, the transaction included a customer supply agreement and warrants to purchase up to $10.0 million of additional shares of preferred stock. The warrants vest and become exercisable upon certain conditions being met.

As of July 1, 2017 and December 31, 2016, the Company's cost-method investment balance was $7.0 million in both periods. 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. The Company's investment is carried at historical cost in its consolidated financial statements. The Company regularly evaluates the carrying value of its 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 July 1, 2017 and December 31, 2016, no event had occurred that would adversely affect the carrying value of this investment and thus no impairment charges have been recorded.


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 exchange forward contracts, primarily short term in nature.

The Company enters 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.

The Company also enters into foreign currency exchange contracts to reduce the volatility of cash flows primarily related to forecasted revenues and expenses denominated in euros, British pound and Swedish kronor (“SEK”). The contracts are settled 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 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 July 1, 2017 and June 25, 2016, the before-tax effect of the foreign currency exchange forward contracts were a loss of $1.5 million and a loss of $0.1 million, respectively, and for the six months ended July 1, 2017 and June 25, 2016, the before-tax effect of the foreign currency exchange forward contracts were a loss of $1.8 million and a loss of $0.6 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 July 1, 2017, 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 one high-quality institutions and the Company consistently monitors the creditworthiness of the counterparties.

The fair value of derivative instruments not designated as hedging instruments in the Company’s condensed consolidated balance sheets was as follows (in thousands):



	As of July 1, 2017				As of December 31, 2016
	Gross Notional⁽¹⁾		Prepaid Expense and Other Assets		Gross Notional⁽¹⁾		Prepaid Expense and Other Assets		Other Accrued Liabilities
Foreign currency exchange forward contracts
Related to euro denominated receivables	$	16,559	$	11	$	23,887	$	137	$	(71	)
Related to British pound denominated receivables	$	—	—		$	6,353	48		—
Related to euro denominated restricted cash	$	240	—		$	242	2		—
			$	11			$	187	$	(71	)


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


6.	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 July 1, 2017 (in thousands):



Balance as of December 31, 2016	$	176,760
Foreign currency translation adjustments	13,229
Accumulated impairment loss	—
Balance as of July 1, 2017	$	189,989

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

Intangible Assets

The following tables present details of the Company’s intangible assets as of July 1, 2017 and December 31, 2016 (in thousands, except for weighted-average):



	July 1, 2017
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted-Average Remaining Useful Life (In Years)
Intangible assets with finite lives:
Customer relationships	$	49,581	$	(11,476	)	$	38,105	6.1
Developed technology	101,693		(36,865		)	64,828		3.6
Total intangible assets	$	151,274	$	(48,341	)	$	102,933	4.6



	December 31, 2016
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted Average Remaining Useful Life (In Years)
Intangible assets with finite lives:
Trade names	$	220	$	(220	)	$	—	0.0
Customer relationships	46,125		(7,793		)	38,332		6.6
Developed technology	94,320		(24,715		)	69,605		3.7
Other intangible assets	819		(567		)	252		4.6
Total intangible assets with finite lives	$	141,484	$	(33,295	)	$	108,189	4.7
In-process technology	286		—			286
Total intangible assets	$	141,770	$	(33,295	)	$	108,475

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 $12.9 million for the three and six months ended July 1, 2017, respectively, and was $6.6 million and $13.1 million for the three and six months ended, respectively, for the corresponding periods in 2016.

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 July 1, 2017, the Company recorded an impairment charge of $0.3 million related to other intangible assets, which the Company has determined that the carrying value will not be recoverable. During the first quarter of 2017, the Company transferred $0.3 million of its in-process technology to developed technology, which is being amortized over a useful life of five years.

The following table summarizes the Company’s estimated future amortization expense of intangible assets with finite lives as of July 1, 2017 (in thousands):



			Fiscal Years
	Total		Remainder of 2017		2018		2019		2020		2021		2022 and Thereafter
Total future amortization expense	$	102,933	$	13,399	$	26,797	$	26,192	$	19,114	$	6,986	$	10,445

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7.	Balance Sheet Details

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



	July 1, 2017			December 31, 2016
Inventory:
Raw materials	$	36,709		$	33,158
Work in process	91,620			74,533
Finished goods	117,647			125,264
Total inventory	$	245,976		$	232,955
Property, plant and equipment, net:
Computer hardware	$	13,548		$	12,775
Computer software⁽¹⁾	31,928			26,779
Laboratory and manufacturing equipment	236,275			222,311
Land and building	12,347			—
Furniture and fixtures	2,228			2,075
Leasehold improvements	38,235			42,267
Construction in progress	37,794			33,633
Subtotal	$	372,355		$	339,840
Less accumulated depreciation and amortization	(229,931		)	(215,040		)
Total property, plant and equipment, net	$	142,424		$	124,800
Accrued expenses:
Loss contingency related to non-cancelable purchase commitments	$	7,290		$	5,555
Professional and other consulting fees	4,189			4,955
Taxes payable	2,925			2,384
Royalties	5,501			5,375
Other accrued expenses	12,113			13,311
Total accrued expenses	$	32,018		$	31,580


⁽¹⁾	Included in computer software at July 1, 2017 and December 31, 2016 were $11.4 million and $9.1 million, respectively, related to enterprise resource planning (“ERP”) systems that the Company implemented. The unamortized ERP costs at July 1, 2017 and December 31, 2016 were $5.5 million and $4.0 million, respectively.


8.	Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss includes certain changes in equity that are excluded from net income. The following table sets forth the changes in accumulated other comprehensive loss by component for the six months ended July 1, 2017 (in thousands):



	Unrealized Gain (Loss) on Other Available-for-Sale Securities			Foreign Currency Translation			Accumulated Tax Effect			Total
Balance at December 31, 2016	$	(209	)	$	(27,236	)	$	(879	)	$	(28,324	)
Net current-period other comprehensive income (loss)	(60		)	24,643			—			24,583
Balance at July 1, 2017	$	(269	)	$	(2,593	)	$	(879	)	$	(3,741	)

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9.	Basic and Diluted Net Income (Loss) Per Common Share

Basic net income (loss) per common share is computed by dividing net income (loss) attributable to Infinera Corporation by the weighted average number of common shares outstanding during the period. Diluted net income (loss) attributable to Infinera Corporation per common share is computed using net income (loss) 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 the Notes from the conversion spread (as discussed in Note 10, “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 dilutive impact of the Notes (as defined in Note 10, “Convertible Senior 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 unless their effect is anti-dilutive.

The following table sets forth the computation of net income (loss) per common share – basic and diluted (in thousands, except per share amounts):



	Three Months Ended					Six Months Ended
	July 1, 2017			June 25, 2016		July 1, 2017			June 25, 2016
Numerator:
Net income (loss) attributable to Infinera Corporation	$	(42,839	)	$	11,483	$	(83,290	)	$	23,498
Denominator:
Basic weighted average common shares outstanding	147,538			142,396		146,662			141,600
Effect of dilutive securities:
Employee equity plans	—			2,775		—			3,299
Assumed conversion of convertible senior notes from conversion spread	—			720		—			1,486
Diluted weighted average common shares outstanding	147,538			145,891		146,662			146,385

Net income (loss) per common share attributable to Infinera Corporation
Basic	$	(0.29	)	$	0.08	(0.57		)	$	0.17
Diluted	$	(0.29	)	$	0.08	(0.57		)	$	0.16

The Company incurred net losses during the three and six months ended July 1, 2017, and as a result, potential common shares from stock options, RSUs, PSUs, assumed release of outstanding stock under the ESPP and assumed conversion of the Notes from the conversion spread were not included in the diluted shares used to calculate net loss per share, as their inclusion would have been anti-dilutive.

During the three and six months ended June 25, 2016, the Company included the dilutive effects of the Notes in the calculation of diluted net income per common share as the applicable average market price was above the conversion price of the Notes. 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 because their effect were anti-dilutive under the treasury stock method or the performance condition of the award had not been met.

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



	Three Months Ended		Six Months Ended
	July 1, 2017	June 25, 2016	July 1, 2017	June 25, 2016
Stock options	1,407	13	1,521	11
RSUs	6,500	2,663	7,137	1,721
PSUs	1,464	846	1,439	594
ESPP shares	892	—	923	291
Total	10,263	3,522	11,020	2,617


10.	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.

As a result of the Notes maturing on June 1, 2018, the net carrying amount of $139.1 million was reclassified from long-term debt to short-term debt in the Company's condensed consolidated balance sheets during the three months ended July 1, 2017.

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,

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

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



	July 1, 2017			December 31, 2016
Principal	$	150,000		$	150,000
Unamortized discount ⁽¹⁾	(10,023		)	(15,114		)
Unamortized issuance cost ⁽¹⁾	(862		)	(1,300		)
Net carrying amount	$	139,115		$	133,586


⁽¹⁾	Unamortized debt conversion discount and issuance costs will be amortized over the remaining life of the Notes, which is approximately 11 months.

As of July 1, 2017 and December 31, 2016, 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. Accounting Standards Update 2015-03, “Simplifying the Presentation of Debt Issuance Costs” (“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 31, 2016 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
	July 1, 2017		June 25, 2016		July 1, 2017		June 25, 2016
Contractual interest expense	$	656	$	656	$	1,313	$	1,313
Amortization of debt issuance costs	222		201		437		396
Amortization of debt discount	2,577		2,331		5,091		4,605
Total interest expense	$	3,455	$	3,188	$	6,841	$	6,314

The coupon rate is 1.75%. For the three and six months ended July 1, 2017 and June 25, 2016, 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.

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As of July 1, 2017, the fair value of the Notes was $160.9 million. The fair value was determined based on the quoted bid price of the Notes in an over-the-counter market on June 30, 2017. The Notes are classified as Level 2 of the fair value hierarchy.

During the three months ended July 1, 2017, 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 2017. Should the closing price conditions be met during the 30 consecutive trading days prior to the end of the third quarter of 2017 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 $10.67 on June 30, 2017 (the last trading day of the fiscal quarter), the if-converted value of the Notes did not exceed their principal amount.


11.	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. In May 2017, the Company's stockholders approved an amendment to the 2016 Plan to increase the number of shares authorized for issuance under the 2016 Plan by 6.4 million shares. As of July 1, 2017, the Company has reserved a total of 13.9 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 31, 2016	1,655		$	8.30	$	965
Stock options granted	—		$	—
Stock options exercised	(196	)	$	7.78	$	373
Stock options canceled	(52	)	$	12.87
Outstanding at July 1, 2017	1,407		$	8.20	$	3,620
Exercisable at July 1, 2017	1,403		$	8.20	$	3,614



	Number of Restricted Stock Units		Weighted- Average Grant Date Fair Value Per Share		Aggregate Intrinsic Value
Outstanding at December 31, 2016	5,293		$	14.10	$	44,939
RSUs granted	3,191		$	10.51
RSUs released	(1,860	)	$	13.66	$	17,848
RSUs canceled	(124	)	$	14.96
Outstanding at July 1, 2017	6,500		$	12.45	$	69,359

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	Number of Performance Stock Units		Weighted- Average Grant Date Fair Value Per Share		Aggregate Intrinsic Value
Outstanding at December 31, 2016	904		$	14.13	$	7,672
PSUs granted	916		$	16.36
PSUs released	—		$	—	$	—
PSUs canceled	(356	)	$	11.55
Outstanding at July 1, 2017	1,464		$	16.16	$	15,618
Expected to vest at July 1, 2017	997				$	10,642

The aggregate intrinsic value of unexercised stock options is calculated as the difference between the closing price of the Company’s common stock of $10.67 at June 30, 2017 (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 $10.67 at June 30, 2017 (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 July 1, 2017. 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	$	12	0.5
RSUs	$	68,948	2.8
PSUs	$	15,643	1.8

Employee Stock Options

The Company did not grant any stock options during the three and six months ended July 1, 2017. Amortization of stock-based compensation related to stock options in the three and six months ended July 1, 2017 and June 25, 2016 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	July 1, 2017	June 25, 2016	July 1, 2017	June 25, 2016
Volatility	51%	56%	51%	56%
Risk-free interest rate	0.81%	0.52%	0.81%	0.52%
Expected life	0.5 years	0.5 years	0.5 years	0.5 years
Estimated fair value	$3.46	$4.53	$3.46	$4.53
Total stock-based compensation expense	$1,392	$1,247	$3,073	$2,489

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Restricted Stock Units

During the three and six months ended July 1, 2017, the Company granted RSUs to employees to receive 0.3 million shares and 3.2 million 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 July 1, 2017 was approximately $8.4 million and $16.0 million, respectively, and was $7.7 million and $13.8 million in the three and six months ended June 25, 2016, respectively.

Performance Stock Units

Pursuant to the 2007 Plan and the 2016 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.

PSUs granted to the Company’s executive officers and senior management under the 2007 Plan during the first quarter of 2015 and 2016 are based on the total stockholder return (“TSR”) of the Company's common stock price as compared to the TSR of the S&P North American Technology Multimedia Networking Index (“SPGIIPTR”) 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 zero to two times the target number of PSUs granted depending on the Company’s performance against the SPGIIPTR.

PSUs granted to the Company’s executive officers and senior management under the 2016 Plan during the first quarter of 2017 are based on the TSR of the Company's common stock price relative to the TSR of the individual companies listed in the SPGIIPTR 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 zero to two times the target number of PSUs granted depending on the Company’s performance against the individual companies listed in the SPGIIPTR.

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



	2017	2016	2015
Index	SPGIIPTR	SPGIIPTR	SPGIIPTR
Index volatility	33% - 34%	18%	18% - 19%
Infinera volatility	55% - 56%	55%	48%
Risk-free interest rate	1.41% - 1.63%	0.95% - 1.07%	0.97% - 1.10%
Correlation with index/index component	0.10 - 0.49	0.58 - 0.59	0.52
Estimated fair value	$15.23 - $17.35	$10.31 - $16.62	$18.08 - $19.29

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 July 1, 2017 (in thousands):



			Grant Year
	Total Number of Performance Stock Units		2014		2015		2016		2017
Outstanding at December 31, 2016	904		123		148		633		—
PSUs granted	916		—		—		—		916
PSUs released	—		—		—		—		—
PSUs canceled	(356	)	(102	)	(60	)	(194	)	—
Outstanding at July 1, 2017	1,464		21		88		439		916

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Amortization of stock-based compensation related to PSUs in the three and six months ended July 1, 2017 was approximately $2.8 million and $4.6 million, respectively, and was $2.3 million and $3.2 million in the three and six months ended June 25, 2016, respectively.

Stock-Based Compensation

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



	July 1, 2017		December 31, 2016
Stock-based compensation effects in inventory	$	5,383	$	4,911



	Three Months Ended				Six Months Ended
	July 1, 2017		June 25, 2016		July 1, 2017		June 25, 2016
Stock-based compensation effects included in net income (loss) before income taxes
Cost of revenue	$	834	$	746	$	1,558	$	1,419
Research and development	4,184		3,904		7,964		6,225
Sales and marketing	3,273		2,945		5,999		5,180
General and administration	2,852		2,486		5,392		4,385
	$	11,143	$	10,081	$	20,913	$	17,209
Cost of revenue – amortization from balance sheet ⁽¹⁾	1,237		912		2,344		1,771
Total stock-based compensation expense	$	12,380	$	10,993	$	23,257	$	18,980


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


12.	Income Taxes

Benefit from income taxes for the three and six months ended July 1, 2017 was $0.5 million and $0.7 million, respectively, on pre-tax loss of $43.4 million and $84.0 million, respectively. This compared to a tax provision of $1.5 million and $1.7 million, respectively, on pre-tax income of $12.8 million and $24.8 million for the three and six months ended June 25, 2016, respectively. The results for the three and six months ended July 1, 2017 include approximately $6.6 million and $13.3 million, respectively, of purchase accounting amortization and other charges related to the acquisition of Transmode AB, which occurred in 2015, with a corresponding tax benefit of approximately $1.5 million and $2.9 million, respectively. Exclusive of this tax benefit, provision for income taxes otherwise decreased by approximately $2.1 million and $2.6 million, respectively, during the three and six months ended July 1, 2017 compared to June 25, 2016, as a result of an operating loss in the United States and lower foreign income tax of our Swedish operations, offset by higher foreign taxes related to an increase in spending in certain of the Company's cost-plus foreign subsidiaries.

In all periods, the tax expense and benefit 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 results of our Swedish operations, inclusive of purchase accounting amortization and other charges for the three and six months ended July 1, 2017.

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. The Company must consider all 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 July 1, 2017, the Company does not believe that it is more-likely-than-not that it would 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.


13.	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 as a provider of optical transport networking equipment, software and services. 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
	July 1, 2017		June 25, 2016		July 1, 2017		June 25, 2016
United States	$	112,196	$	166,710	$	211,976	$	341,225
Other Americas	2,971		11,267		9,006		14,526
Europe, Middle East and Africa	47,910		64,570		105,323		124,446
Asia Pacific	13,744		16,275		26,038		23,443
Total revenue	$	176,821	$	258,822	$	352,343	$	503,640

Property, plant and equipment, net



	July 1, 2017		December 31, 2016
United States	$	134,920	$	117,715
Other Americas	307		218
Europe, Middle East and Africa	3,795		3,822
Asia Pacific	3,402		3,045
Total property, plant and equipment, net	$	142,424	$	124,800

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14.	Guarantees

Product Warranties

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



	Three Months Ended						Six Months Ended
	July 1, 2017			June 25, 2016			July 1, 2017			June 25, 2016
Beginning balance	$	35,980		$	39,999		$	40,342		$	38,844
Charges to operations	5,022			7,308			9,681			14,062
Utilization	(3,901		)	(3,702		)	(7,289		)	(8,689		)
Change in estimate⁽¹⁾	(4,701		)	(2,616		)	(10,334		)	(3,228		)
Balance at the end of the period	$	32,400		$	40,989		$	32,400		$	40,989

⁽¹⁾

The Company records product warranty liabilities based on the latest quality and cost information available as of the date the revenue is recorded. 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. In addition, during the first quarter of 2017, due to product quality improvements, the Company revised certain estimates used in calculating its product warranties that resulted in a one-time reduction to the warranty accrual of $2.2 million.

Letters of Credit and Bank Guarantees

The Company had $5.8 million of standby letters of credit and bank guarantees outstanding as of July 1, 2017 that consisted of $2.7 million related to customer performance guarantees, $1.9 million related to property leases, and $1.2 million related to value added tax and customs' licenses. The Company had $8.7 million of standby letters of credit and bank guarantees outstanding as of December 31, 2016 that consisted of $4.5 million related to property leases, $3.1 million related to customer performance guarantees and $1.1 million related to a value added tax license.

As of July 1, 2017 and December 31, 2016, the Company had a line of credit for approximately $1.6 million and $1.1 million, respectively, to support the issuance of letters of credit, of which zero and $0.3 million had been issued and outstanding, respectively. The Company has pledged approximately $4.9 million and $4.5 million of assets of a subsidiary to secure this line of credit and other obligations as of July 1, 2017 and December 31, 2016, respectively.


15.	Litigation and Contingencies

Legal Matters

On November 23, 2016, Oyster Optics, LLC (“Oyster Optics”) filed a complaint against the Company in the United States District Court for the Eastern District of Texas. The complaint asserts U.S. Patent Nos. 6,469,816, 6,476,952, 6,594,055, 7,099,592, 7,620,327, 8,374,511 and 8,913,898 (collectively, the “Oyster Optics patents in suit”). The complaint seeks unspecified damages and a permanent injunction. The Company believes that it does not infringe any valid and enforceable claim of the Oyster Optics patents in suit, and intends to defend this action vigorously. The Company filed its answer to Oyster Optics on February 3, 2017. The Court has set a trial date for June 2018. The Company is currently unable to predict the outcome of this litigation and therefore cannot reasonably estimate the possible loss or range of loss, if any, arising from this matter.

On March 24, 2017, Core Optical Technologies, LLC (“Core Optical”) filed a complaint against the Company in the United States District Court for the Central District of California. The complaint asserts U.S. Patent No. 6,782,211 (the “Core Optical patent in suit”). The complaint seeks unspecified damages and a permanent injunction. The Company believes that it does not infringe any valid and enforceable claim of the Core Optical patent in suit, and intends to defend this action vigorously. Because this action is in the early stages, the Company is unable to predict the outcome of this litigation at this time and therefore cannot reasonably estimate the possible loss or range of loss, if any, arising from this matter.

In addition to the matters described above, 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

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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.

Loss Contingencies

The Company is subject to the possibility of various losses arising in the ordinary course of business. These may relate to disputes, litigation and other legal actions. In the preparation of its quarterly and annual financial statements, the Company considers the likelihood of loss or the incurrence of a liability, including whether it is probable, reasonably possible or remote that a liability has been incurred, as well as the Company’s ability to reasonably estimate the amount of loss, in determining loss contingencies. In accordance with U.S. GAAP, an estimated loss contingency is accrued when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. The Company regularly evaluates current information to determine whether any accruals should be adjusted and whether new accruals are required. As of July 1, 2017, the Company has accrued the estimated liabilities associated with certain loss contingencies.

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, expenses, cash flows and other financial items; any statements of the plans, strategies and objectives of management for future operations and personnel; factors that may affect our operating results; anticipated customer activity; statements concerning new products or services, including new product features and delivery dates; 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 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 in Part II, Item 1A. of this Quarterly Report on Form 10-Q and in our other SEC filings, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 filed on February 23, 2017. 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. You should review these risk factors for more a complete understanding of the risks associated with an investment in our securities. 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, enterprise customers, and government entities across the globe. Optical transport networks are deployed by customers facing significant demand for optical bandwidth prompted by increased use of high-speed internet access, mobile broadband, cloud-based services, high-definition video streaming services, virtual and augmented reality, the Internet of Things (IoT) and business Ethernet services. Our end-to-end packet-optical portfolio is designed to be managed with a single network management system.

Historically, we had focused on the long-haul portion of the optical transport market and a large portion of our revenue continues to be derived from long-haul customers. Over the past few years, we have evolved from focusing entirely on the long-haul and subsea markets with the DTN-X Family of products to offering an end-to-end suite of solutions that spans long-haul, subsea, data center interconnect (“DCI”) and metro.

In late 2014, we increased our addressable markets by introducing the Cloud Xpress platform for the DCI market to address a growing need for optical interconnections between data centers. Since its initial introduction, we have steadily increased our revenue contribution from Cloud Xpress, in particular with ICPs. During the second quarter of 2017, we released the follow-on to our initial Cloud Xpress with the Cloud Xpress 2, offering 1.2 terabits per second of line-side capacity in a single unit form factor. Going forward, we anticipate many of our large customers will transition to this new platform.

In the second half of 2015, we entered the metro market with the acquisition of Transmode AB, a leader in metro packet-optical applications. Entering into the metro market expanded our addressable market, in particular with existing long-haul customers that also invest in metro networks. This enabled us to deliver to our customers an end-to-end portfolio of solutions. We continue to expand our suite of metro solutions by both enhancing our XTM-Series solutions and utilizing our optical engines to deliver XT and XTC solutions.

In the second half of 2016, we announced our next-generation suite of technologies, the Infinite Capacity Engine (“ICE”), which delivers a family of multi-terabit opto-electronic subsystems powered by our fourth-generation photonic integrated circuits (“PIC”) and next-generation FlexCoherent DSP. ICE is a family of different subsystems that can be customized for different network applications across our end-to-end product portfolio.

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Our goal is to be the preeminent provider of optical transport networking systems to telecommunications service providers, ICPs, cable providers, wholesale and enterprise carriers, research and education institutions, enterprise customers, and government entities across the globe. Our financial success in 2017 will be largely dependent on the timing of delivery and customer adoption of our next-generation products in each of our end markets. Success will also depend on the continued acceptance of our existing products, growth of communications traffic and the proliferation of next-generation bandwidth-intensive services, which are expected to drive the need for increased levels of bandwidth.

In the short-term, our quarterly revenue results may be volatile and could be impacted by several factors, including delivery and market acceptance of our next-generation products, customer consolidation, competitive solutions and pricing strategies, general economic and market conditions, and the timing of customer network deployments. We continue to expect variability with our gross margins in 2017 as we make strategic investments to win and preserve business in advance of bringing our new products to market. Gross margins could also remain suppressed for the remainder of 2017 as we bring our next-generation ICE products to market, attributable to manufacturing PIC yields being lower initially and increasing as we ramp production. Additionally, given our current revenue levels and the necessity to invest in current and future opportunities, we anticipate that research and development expenses will remain at elevated levels as a percentage of revenue throughout 2017.

Over a longer period of time, we believe that our efforts and investments in expanding the markets we serve, delivering new products and technologies on a faster cadence, and diversifying our customer base will enable us to grow revenue and improve profitability. Moreover, we plan to further leverage our vertically-integrated manufacturing model, which combined with the introduction of additional purpose-built products, selling incremental bandwidth capacity into deployed networks, and prudent expense management, can result in improved profitability and cash flow.

Over time, we have broadened our customer base across multiple 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 make an acquisition or are acquired, do not generate as much revenue as we forecast, stop purchasing from us or substantially reduce their orders to us. In particular, over the past several quarters, we have been impacted by the consolidation of several key customers. Such consolidation could reduce the number of customers that generate a significant percentage of revenue and may increase the risks relating to dependence on a small number of customers. For the three months ended July 1, 2017, three customers individually accounted for 17%, 10% and 10% of our total revenue and for the corresponding period in 2016, two customers individually accounted for 15% and 11% of our total revenue, respectively. For the six months ended July 1, 2017, one customer individually accounted for 18% of our total revenue and for the corresponding period in 2016, three customers individually accounted for 16%, 13% and 12% of our total revenue, respectively.

We are headquartered in Sunnyvale, California, with employees located throughout the Americas, Europe, Middle East and Africa, and the Asia Pacific region. We primarily sell our products through our direct sales force but also sell indirectly through channel partners. We derived 94% of our revenue from direct sales to customers during each of the three and six months ended July 1, 2017, respectively, and 96% of our revenue for each of the three and six months ended June 25, 2016, respectively, with the remainder attributable to channel-driven sales.

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our condensed consolidated financial statements, which we have prepared in accordance with the U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of these financial statements requires management to make estimates, assumptions and judgments that can affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

An accounting policy is deemed to be critical if it requires a significant accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements. Management believes that there have been no significant changes during the three months ended July 1, 2017 to the items that we disclosed as our critical accounting policies and

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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 31, 2016.

Results of Operations

The following sets forth, for the periods presented, certain unaudited condensed consolidated statements of operations information (in thousands, except percentages):



	Three Months Ended
	July 1, 2017				June 25, 2016
	Amount		% of total revenue		Amount		% of total revenue		Change			% Change
Revenue:
Product	$	143,360	81	%	$	227,532	88	%	$	(84,172	)	(37	)%
Services	33,461		19	%	31,290		12	%	2,171			7	%
Total revenue	$	176,821	100	%	$	258,822	100	%	$	(82,001	)	(32	)%
Cost of revenue:
Product	$	100,302	57	%	$	122,438	47	%	$	(22,136	)	(18	)%
Services	11,687		6	%	12,638		5	%	(951		)	(8	)%
Total cost of revenue	$	111,989	63	%	$	135,076	52	%	$	(23,087	)	(17	)%
Gross profit	$	64,832	36.7	%	$	123,746	47.8	%	$	(58,914	)	(48	)%



	Six Months Ended
	July 1, 2017				June 25, 2016
	Amount		% of total revenue		Amount		% of total revenue		Change			% Change
Revenue:
Product	$	290,413	82	%	$	443,614	88	%	$	(153,201	)	(35	)%
Services	61,930		18	%	60,026		12	%	1,904			3	%
Total revenue	$	352,343	100	%	$	503,640	100	%	$	(151,297	)	(30	)%
Cost of revenue:
Product	$	199,634	56	%	$	240,500	48	%	$	(40,866	)	(17	)%
Services	23,821		7	%	23,056		4	%	765			3	%
Total cost of revenue	$	223,455	63	%	$	263,556	52	%	$	(40,101	)	(15	)%
Gross profit	$	128,888	36.6	%	$	240,084	47.7	%	$	(111,196	)	(46	)%

Revenue

Total product revenue decreased by $84.2 million, or 37%, during the three months ended July 1, 2017 compared to the corresponding period in 2016. Total product revenue decreased by $153.2 million, or 35%, during the six months ended July 1, 2017 compared to the corresponding period in 2016. These decreases were primarily attributable to effects of customer consolidation on pricing and demand, changes in certain large customers' buying patterns, and a slowdown in customer spend as we begin to transition to our next-generation of products.

Total services revenue increased by $2.2 million, or 7%, during the three months ended July 1, 2017 compared to the corresponding period in 2016. Total service revenue increased by $1.9 million, or 3%, during the six months ended July 1, 2017 compared to the corresponding period in 2016. The increases during the three and six month periods were attributable to continued growth in on-going support services as a result of a larger installed base of customer networks.

We currently expect that total revenue will grow marginally in the third quarter of 2017, as compared to the second quarter of 2017, driven by opportunities with traditional service providers, cable operators and ICPs, as we begin to bring new products to market. Growth opportunities over the next few quarters will be largely dependent on the introduction and acceptance of our new products.

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The following table summarizes our revenue by geography and sales channel for the periods presented (in thousands, except percentages):