Leigh Salvo - Investor Relations Tom Fallon - Chief Executive Officer Brad Feller - Chief Financial Officer Dave Welch - President.

Sanjiv Wadhwani - Stifel Simona Jankowski - Goldman Sachs George Notter - Jefferies Scott Thompson - FBR Rajagopal Raghunathan - JP Morgan Michael Genovese - MKM Partners Alex Henderson - Needham Dmitry Netis - William Blair Subu Subrahmanyan - Juda Group.

Welcome to the First Quarter Year 2014 Investment Community Conference Call of Infinera Corporation. All lines will be in a listen-only mode until the question-and-answer session. (Operator Instructions). Today’s call is being recorded. If anyone has any objections, you may disconnect at this time. I would now like to turn the call over to Ms.

Leigh Salvo of Infinera Investor Relations. Leigh, you may begin..

Thank you Gabrielle and welcome to Infinera’s first quarter 2014 conference call. A copy of today’s earnings release is available on the Investor Relations section of Infinera’s website. Additionally, this call is being recorded and will be available for replay from the website.

Today’s call will include projections and estimates that constitute forward-looking statements within the meaning of the Private Securities and Litigations Reform Act of 1995.

This includes statements regarding Infinera’s overall business, market conditions, Infinera’s results of operations, business strategy and initiatives, views on Infinera’s customers, products and competitors’ products, as well as Infinera’s financial outlook for the second quarter of fiscal year 2014.

These statements are subject to risks and uncertainties that could cause Infinera’s results to differ materially from management’s current expectations.

Please refer to the company’s current press releases and SEC filings, including Infinera’s annual report on Form 10-K filed on February 21, 2014 and subsequent filings for more information on these risks and uncertainties.

Please be reminded that all statements are made as of today and Infinera undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call. Today’s earnings release and today’s conference call also include certain non-GAAP financial measures.

These non-GAAP financial measures include non-cash stock based compensation expenses and amortization of debt discount on our convertible senior notes.

These non-GAAP financial measures are provided to facilitate meaningful year-over-year comparisons and further management does not consider these items to be related to Infinera’s core operating performance.

Pursuant to Regulation G, Infinera has provided reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures in its first quarter earnings release, which has been furnished to the SEC on form 8-K and is available on Infinera’s website in the Investor Relations sections.

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

Good afternoon, and thank you for joining us on our first quarter 2014 conference call. With me on the call are Chief Financial Officer, Brad Feller; and President, Dave Welch. I will touch briefly on the financial highlights for Q1 and then provide an update on the market, our business and an overview of some technology developments.

I will then turn the call over to Brad, who will provide a more detailed review of our first quarter results, and our outlook for the second quarter of 2014. What is typically a soft quarter for our industry, Infinera’s first quarter performance and financial results were strong.

We are benefiting from the continued investment cycle on a 100 gig and network conversions. The favorable economics of our PIC- based architecture and the operational benefits of super channels positions us as the industry recognized leader in the optical market.

Consequently, our financial results were at the high end of our guidance as revenue grew to $143 million, representing a 15% year-over-year increase and 3% growth on a sequential basis.

Gross margin was 41.8%, above of our guidance of approximately 40% as we were able to hold our margins steady, while continuing to build new network footprint in the growing 100-gig market. Operating expenses were slightly lower than anticipated due to the timing of certain R&D investments.

However we’re excited about the new capabilities we are developing not only to the long haul optical transport market, but adjacent markets as well. I therefore anticipate continued engineering spending at approximately 20% of revenue for the foreseeable future.

Our higher revenue levels and lower operating expenses yielded earnings that exceeded our guidance range. From a market perspective, it is clear that a 100-gig is the standard in the long haul optical transport and we expect the market to continue to grow steadily for many years to come.

Dell'Oro recently reported that it expects the 100-gig market to trend up to at least 2018. This is consistent with our view that the 100-gig cycle will be significant and extended. Our opportunity to increase revenue is therefore two-fold.

New network builds today as companies make strategic architectural decisions and a long cycle of capacity fill as traffic continues to grow unabated. We see excellent DTN-X deployment momentum across a broad base of customer verticals in Q1 with particular strength in cable and Tier 1 service provider.

This momentum includes the deployment of new footprint and bandwidth sale as customers build out their DTN-X networks. As a result, I am pleased to announce that we achieved another record quarter of 100-gig ports invoiced. In Q1, we invoiced one new DTN-X customer and now have 42 invoiced DTN-X customers.

We continue to have a strong pipeline of activities in customers that are new to Infinera, with existing customers that desire to expand with the DTN-X. In addition, we continue to see customers choosing our DTN platforms for certain new lower capacity builds.

From a geographic perspective, North America drove the growth in the quarter, the strength across cable operators, as well as continuing strong business with the Tier 1 account and internet content providers.

We also began to see the initial revenue from the new Level 3 opportunity, the large North American bandwidth wholesaler we won has noted in our last earnings call. During the quarter, we announced that Windstream, an advance network communications provider to much of the DTN-X for its 100-gig long haul express network.

This is a significant and growing deployment across the Central and Eastern United States that began in Q1. In the EMEA region we saw a solid range of bookings across a number of Tier 1 customers as they continue to expand their networks utilizing the DTN-X.

In Q1, internet solutions in South Africa, and a vision of dimension data deployed our DTN-X across their network and we’re the first company to deploy 500-gig super channels in Africa, a new market for Infinera. In the APAC region we continue to see good RFQ activity during the quarter, but revenues were softer coming off an exceptionally strong Q4.

The focus on APAC was the deployment of networks sold in Q4 and setting up new opportunities for 2014 and beyond. We did see continued demand from our installed base which included winning new routes, as well as adding capacity within these customers’ existing footprint.

From an overall market perspective, we were recently acknowledged by Infonetics as the top optical vendor in 2013. This distinction is based on an independent analysis of 7 metrics and direct customer feedback on innovation, reliability and customer service.

I believe this is a tremendous proof point for our business as we’re recognized as the number one company in the world based on the attributes that customers care about and that we’ve always made a priority.

We remain committed to providing our customers with the best optical technology, the best optical transport networks and the best optical solution experience. We continue to be optimistic about our short, intermediate and long-term opportunity.

Our positive outlook for the short-term is being driven by the pipeline of activity that is quickly turning in the purchase orders and backlog.

We have consistently described our business as lumpy and we see some exceptional near term opportunity that will likely create growth that is in excess of what we see a sustainable even with our continued commitment to gain market in an expanding market. Brad will describe this during his financial review.

We are also confident about our intermediate term opportunities which are driven by a strong pipeline of activity, improving economic conditions and our continued traction in establishing new channels that have the opportunity to significantly expand our geographic footprint.

We remain confident that we’re on track to grow faster than our view of the long haul market’s 8% growth expectation in 2014. In long term, our optimism stems from three dynamics.

First, the continued stock consolidation of the industry around technology leaders and have fiscal discipline; second, the architectural transformation into shifting CapEx spending away from routing and towards intelligent transport solutions; and third, a continued momentum of video, cloud, and mobility driving requirement for additional capacity and new architectures to support efficient growth.

Turning to technology highlights, we’re continuing to support architectural transformation for our customers by delivering on our vision of providing an infinite pool of intelligent bandwidth and by driving more capabilities into the transport layer.

At OFC this year, we announced the next phase of our intelligent transport network with the introduction of our multi-layer automation solution. This includes the industry’s first super channel FlexROADM, first 500-gig flexible grid super channels and the first unified control plane.

These new capabilities allow full automation of both the OTN and flexible grid optical layer through a single user interface, improving a service provider’s ability to deploy services faster to increase network efficiency to save CapEx and the lower operational cost. These new products and features will be available to our customers this summer.

This completely automated transport layer is designed to provide the necessary foundation to support a powerful carrier SDN implementation. In February, Telefonica demonstrated how they were able to use their own SDN controller to quickly integrate and deliver new services on top of the Infinera SDN enabled solutions.

We along with forward thinking customers believe that the network can be improved in multiple dimensions of scale, convergence and automation to be an Intelligent Transport Network including reducing the amount of router resources required.

In addition, to our recently announced products, we are excited about our product pipeline and plan to continue to build momentum with powerful capabilities that include packet, metro, data center WAN and SDN as we continue to help service providers transform their networks.

You will hear more details on these new product developments later this year. In summary, we are pleased with the performance of the business in Q1, the outlook for Q2 and the prospects for the full year. We continue to have a high level of confidence in our ability to meet our financial objectives based on our short, intermediate and long-term view.

Our focus in 2014 remains on winning footprint, gaining market share and servicing customers. We are pursuing these efforts with a commitment to drive increased profitability, while generating cash over the life of every project.

We believe that the continued growth of our business in long haul combined with our product investments in adjacent market is the best way for us to provide long-term shareholder value. I would like to thank our customers, employees and partners for their ongoing commitment to Infinera.

Now I’ll turn the call over to Brad for a more detailed financial review of the quarter and our guidance for Q2..

Thanks Tom and good afternoon everyone. As Tom mentioned, we reported revenue of $143 million for the first quarter of 2014, an increase of nearly 15% as compared to the first quarter of 2013 and at the high end of our guidance range.

Our revenue increased by 3% on a sequential basis, a strong result in the quarter where the industry has historically been down 10% to 15% based from seasonality. The main driver of our strong results in Q1, ‘14 was solid demand within North America.

In fact our top five customers came from a variety of customer verticals in North America including cable MSO, internet content provider, tier 1 and bandwidth wholesaler. We had two greater than 10% customers in the quarter, a cable MSO in the North American tier 1 service provider.

We recognize DTN-X revenue from one additional customer this quarter bringing our total DTN-X customers to 42. we continue to see strong RFQ activity with additional customers migrating to the DTN-X solutions, which we expect to add to our DTN-X customer account in the near future. International revenue totaled $32 million or 22% of total revenue.

EMEA accounted for $26 million or 18% with APAC and the other Americas each representing 2%. While, we expect our revenue mix to fluctuate base on the timing of deployments. Overall we are making good progress in expanding both our North American and international footprint.

Overtime we expect our international business to grow at least as fast as our North American business. Service revenue for the quarter was $19 million an increase of 14% year-over-year and a 23% sequential decline. Services gross margins were 68% in the quarter up from 59% in Q4 and in line with our historical levels.

Our Q4 results included a large amount of international deployments which showed higher revenues and carry a lower margin profile. Moving next to margins and operating expenses. Our non-GAAP gross margin for the first quarter was 41.8% which is slightly above our guidance of approximately 40% due to a better mix of revenue in the quarter.

We are pleased that we have been able to maintain gross margins in the 40% range as we continue to build footprints in the 100-gig market. Our non-GAAP operating expenses came in at $54 million which is below our guidance of approximately $56 million that some R&D spending pushed into Q2.

Although there may be minor fluctuations in our operating expense levels from quarter-to-quarter we remain committed to our target of R&D equal to approximately 20% of revenue on an ongoing basis. Taken all together this resulted in a non-operating margin of just under 4% for the quarter.

As we continued to achieve revenue growth we expect our gross margin levels to expand both from capacity being added to existing footprint and overtime also by the improved utilization of our manufacturing infrastructure.

This along with continued diligence on operating expense management should lead to continued improvements to our operating levels..

In total this resulted in non-net income for the first quarter of $4 million or $0.03 per diluted share. This is about $0.04 higher than the midpoint of our guidance driven by higher revenue and gross margin levels and lower operating expenses.

Now summarizing Q1 results on a GAAP basis, we had a net loss of $4 million or $0.04 per diluted share compared to a net loss of $15 million or $0.13 per diluted share in the year ago period.

The difference between our GAAP and non-GAAP results during the first quarter was due to stock based compensation expense of $7 million and $2 million of amortization of debt discount. Now turning to the balance sheet.

Cash, cash equivalents, and investments as of the end of the first quarter were $349 million, a decrease of $16 million from the prior quarter due to the annual bonus pay out during the quarter. Growth in accounts receivable of $7 million driven by a back-end loaded quarter and growth in inventory of $3 million due to our anticipation of a strong Q2.

This result was in line with our expectations and we remain confident and our ability to generate cash over the course of the year. Moving next to our outlook for the second quarter of fiscal 2014. We currently project revenue to be in the range of $160 million to $170 million.

The midpoint of this range represents a sequential increase of 16% and then 19% increase on a year-over-year basis. We continue to see strong demand across our customer base including both new customers as well as growth with existing customers.

As we have mentioned before, there may be certain quarters where we win large deals that are deployed over a short time period. And our ability to maintain revenue at these levels over future quarters may prove to be challenging. We currently project non-GAAP gross margin of 40% plus or minus 100 basis points.

We have consistently stated that this year is about footprint win in the growing 100 gig market. In periods of large footprint deployments which are higher than our historic levels such as this quarter there maybe some short-term pressure on our gross margin levels.

However, we remain confident in our ability to maintain our gross margin in the low 40s over the full year. This same footprint will allow us to improve our gross margin as we add capacity to these networks in the future.

The 40% gross margin level during these footprint growth quarters is much higher than we have historically earned during previous cycles of significant footprint growth. We currently anticipate non-GAAP operating expenses to be in the range of $59 million plus or minus $1 million.

As we continued to invest in technology for the long-haul market as well as adjacent markets. At the mid-point of our projected guidance this translates to a non-GAAP operating margin of 4% plus or minus 100 basis points.

The combination of interest and other expense is expected to net out to approximately $600,000 and tax expense should be approximately $700,000. We currently expected diluted share count to be approximately 128 million shares and project non-GAAP EPS to be $0.04 per diluted share plus or minus a couple of pennies.

On the balance sheet we currently expect to generate positive cash flow from operations in the quarter. And remain confident that we’ll grow our levels of cash over the course of the full year. We currently expect our GAAP EPS to be lower than our non-GAAP EPS by about $0.08 per share primarily related to stock based compensation expense.

The first quarter was a solid start to 2014, reinforcing our view that the 100-gig market is growing and that we will be able to grow our business faster than the market during 2014. We are excited about the opportunities we continue to see with both new and existing customers.

We are also excited about the additional technologies we're developing for both the long-haul and adjacent markets. With that I’d like to turn the call over to the operator to begin the Q&A portion of the call. Gabrielle..

Thank you. Now we will begin the question-and-answer session. (Operator Instructions). Our first question comes from Sanjiv Wadhwani with Stifel. Your line is now open..

Thanks so much. Sorry, I joined the call little bit later. This question might have been already answered. But if you look at the wholesaler which you talked about in the last earnings call and I think in the last upgrade cycle that went through an investment of I think $450 million or so. Now the cost for bid has come down.

I'm just curious to see in this current 100 gig upgrade cycle.

What are you expectations from them going forward? And then second question I had was lot of investments being made by Web 2.0 guys like Google, if you could talk about the exposure to that market and what are you seeing in that market in terms of growth that would be helpful too? Thanks so much..

Sure. First in regard to the bandwidth wholesaler, you missed that, that I did say it was level three. We have got permission to…..

Okay. Sorry..

I don’t think it was a big surprise for anybody..

No, no but I don't want to take the name and get (inaudible) want to talk about it in terms of names..

Yes. So they have been a very substantive part of our business in the past, they have been a long-term partner of ours and they now reselected to go to market with a 100 gig. That revenue started in Q1 and we anticipate it ramping over the next several years. I'm not going to quantify the size of the deal, I think they -- and appreciate that.

But, if you look at level 3's business model, they drive to be the largest provider of ways in the world and provide them at the lowest dollar per bit. So they put in substantive amount of capacity and they are making very large investment decisions. And I think we're in a very good position to take advantage of a lot of that capital expenditure.

In regard to Web 2.0 we have, we are in three of the top four, it's been a market that we have long been in, we have a very good relationship with most of the major providers. And they generally are making fairly substantive investments currently and we are participating in a good part of that.

And I do think as I commented here for many number of quarters now, I still believe that the industry focus is too much on the top two Tier 1s in the country, which is where CapEx was historically and doesn’t focus on that front, internet content or ICP are Web 2.0 people which is where I think most of CapEx is going to be in the future and I think we are extraordinarily well placed in that fair market..

Got it. Thanks so much. And great quarter guys..

Thank you..

Thanks..

Our next question comes from Simona Jankowski with Goldman Sachs. Your line is now open..

Hi, thank you. I just wanted to ask you about your 21% customer, if I heard that correctly. I don’t think you’ve had customer over 20% for quite a few quarters or it’s in years. Could you just comment a little bit and (inaudible) as you mentioned the Tier 1 in the U.S.

and then the cable operator, could you just give a little more color on the lumpiness of that.

Is that kind of big one time lump for some reason or what is the sustainability of that kind of revenue with that one customer?.

Yes. So Simona, I don’t think we said 21%, we said we had two customers that represented over 10% of our revenues for the quarter; one of those being a cable operator and the other being a North American Tier 1 service provider. We have strong business with them; historically we expect to continue that strong business with them.

So it’s not a one-time kind of phenomenon..

So just to be clear, so in the press release where it says that the largest customer percent is 21% was that supposed to say largest customers combined?.

(Inaudible)..

Okay.

So, the 21% is combined for those two together?.

You can look at the press release and see what we did..

Okay. Thank you very much..

Our next question comes from George Notter with Jefferies. Your line is now open..

Hey, thanks very much guys. I guess I wanted to ask about the guidance for Q2, the $160 million to $170 million in sales that’s a fair amount higher than certainly we were expecting. Can you talk about what’s driving that, it sounds like it’s one single customer opportunity.

Can you tell us any more about that deployment, is it indeed a one quarter build, is it multiple quarters. I guess it kind of puts us in a tough spot in terms of kind of modeling out the company beyond Q2.

So, I’d love to get any more kind of sense for how that build rolls out that would be great? And then also on Q2, why wouldn’t the gross margin be lower in Q2 just given what seems to be a really big footprint build here? Thanks a lot..

So George, two comments. One, it is not driven by one order. We are seeing really good demand in general, a lot skewed towards North America, but we are seeing strong demand from cable, we are seeing strong demand from internet content or Web 2.0 people, we are seeing demand from Tier 1s around the world.

And on top of that, we did have a large opportunity that came in, but the base fundamental business is very strong. And on top of that, we have this very large opportunity.

That opportunity, one of the things that we’ve talked about all the time, we believe time is a weapon that means customers can deploy with us I think uniquely in the world very large networks, very, very rapidly. They value that, they want to deploy this one order across the next two quarters.

So you will see that not all hit in Q1, but when you have that order partially shipping in Q1 on top of our base business are being very strong. We’re seeing good solid demand and growth that; one, is clearly above Wall Street expectations, but as we highlighted that kind of growth rate guidance it was rifted if not sustainable..

Yes. And George to touch on your question about margin, we’ve talked about in the past anytime we have periods of large footprint deployment that’s going to put some downward pressure on our margins.

You take the large opportunity we won at the end of the quarter, as well as certain other customers ramping a lot of new footprint that’s going to put some downward pressure on our margins in Q2. But as you know, laying out that tremendous amount of footprint will benefit us significantly in the future..

Yes. As I’ve always said George, any quarters that our margin is too high we run the risk that we’re not expanding our footprint and our market share fast enough during this phase right now.

So, I am not uncomfortable at all with the guidance of our margin because we are putting out so much footprint and that will allow us to monetize that for the long time..

Got it. Okay. And then just as a quick follow-up, so if I look at the delta above where expectations were let’s say for Q2 up to $160 million to $170 million.

Is that delta alone just this one particular project that came in and will deploy over two quarters or are you also seeing sort of above expectation strength from your customer base at large?.

Yes. So George, it’s a combination of things. The large deal we talked about is driving part of it, but it’s broad strength across several different customers..

Got it, okay. Thank you very much..

Okay..

Our next question comes from Scott Thompson with FBR. Your line is now open..

Hey guys just wanted to go back to the question Simona started with, I think what we’re looking at is invoice shipment composition of the largest customer rather than revenues, does that make a difference? On top of that maybe you can talk a little bit about DTN-X customers, we showed 42 in the quarter and I think we're talking somewhere 45 last quarter if I’m not mistaken.

So just wanted to get a think there? And then maybe if you could comment on the Metro opportunities out there; we're hearing a lot from others in the optical space that Metro is heating up. Can you give us an update on that? Thanks..

Yes. So I’ll take the first couple of parts of that Scott and then I’ll let Tom comment on the Metro piece. So the 21% we said is the largest. We mentioned that there is two that are over 10%. We can’t really say which one is 21 and which one is the smaller one greater than 10%.

They are existing customers we’ve had that we have very strong relationships with. Your question on the 42 versus 45, you’ll remember historically, we’ve commented on new customer commitments, so this is activity that we had with customers that was early on where we hadn’t actually shifted invoice to recognize revenue with those customers.

Given now that the DTN-X is more mature, we actually shifted that metric to actual invoice revenues, invoice customers that we’ve actually recognized revenue with. So, that’s the difference between the two. We did actually have one new invoice customer for DTN-X this quarter..

We did not have a 45 number before. Last time we said 42 customer commitments, this time it’s 42 invoiced customers and we're no longer talking about customer commitments..

Okay, got it. Thank you..

Dave, can you talk about Metro?.

Sure. As we’ve indicated before, some portion of what we shift today gets into high capacity Metro. And we have a number of -- we see that as a great opportunity to continue expand our presence in 100-gig technologies. We will continue to compete in high capacity aspects of the Metro market over coming quarters.

So, we see this as a growth area for ourselves. However we'll be primarily centered around initially centered around high capacity types of Metro applications..

As we've said last year or last quarter, while we did deliver a pick that was designed for our Metro platform that would compliment what we’re currently doing in the Metro. And we have not put a timeline on that system and I encourage people not to over speculate on that.

We anticipate we will be bringing out by Metro based for lower capacity as the market, the economics of the 100-gig for that market make it the primary capacity vehicle and we don't believe that is the case today. If you think back to the long haul market, the 100-gig long haul market started basically in very late 2009 or early 2010.

And we delivered our first platform in the middle of ‘12 when we felt that the economics and the volume for market receptivity was there. And we have done extraordinarily well in taking significant market share. I would expect to have the same type of model for the Metro..

Got it. Thank you..

Our next question comes from Rod Hall with JP Morgan. Your line is now open..

Hi, this is Rajagopal Raghunathan calling on behalf of Rod Hall. Thanks for taking my question. I've got one question and one follow-up.

Sir you mentioned that you are strong on Tier 1, what's the status of Tier 2 and Tier 3, are you seeing any weakness on that?.

We mentioned good business with tier 1 and you are asking the tier 2 and tier 3 business has been relatively healthy I believe, is that correct?.

Yes..

Yes, I am seeing relatively good demand in that market, nothing exceptional, certainly no weakness, we continue that’s been one of our primary markets. It’s not certainly a huge portion of our business but it is a solid part of our business and I continue to see doing relatively well.

Okay, can you also tell us about the status on the metro optical compatible gear, I mean will it be in a position to bid for Verizon metro projects when that RFP comes out?.

As I indicated earlier, our focus and early entry into metro is going to be on high capacity metro applications. We already -- some of our products its way in there today. And we got a number of enhancements that allow us to create greater market share in metro area coming out over the coming quarters.

And you should look for us to play over time in high capacity metros..

Okay, thanks..

Our next question will come from Michael Genovese with MKM Partners. Your line is now open..

Thanks very much. And congratulations on a good set of numbers.

I may have missed this, excuse me if I did but on this large opportunity that you are talking about that’s driving some of this very good second quarter revenue guidance, can you talk about what vertical that customer is in and just talk more about the specifics of that to extent possible.

It sounds like these orders came in at the end of 1Q and the revenues going to be recognized in 2Q and 3Q is that the right way to think about this?.

Yes. So, we won the business at the end of Q1 we were awarded the business. The actual POs will come in -- have started to come in now, come in throughout Q2 and the customers expectation is that it will be deployed over the course of Q2 and Q3..

And can you identify the kind of vertical what this company is in?.

No, unfortunately we can’t..

Okay. But is it a U.S.

customer?.

Yes..

And can we say that it’s not the Level 3, I mean can we say who it isn’t?.

Yes it’s a different opportunity than the Level 3 when we have talked about..

Okay, great.

And then last question for me is just on the international, I mean those recognized revenue basis international was down pretty big quarter-over-quarter, were the order trends any different than that and what’s the confidence level and where is the visibility in the pipeline on international business coming back in 2Q and 3Q?.

Yes, so we continue to have a strong pipeline of activity in the international region and in APAC specifically as well as EMEA. Sometimes with new customers, it takes time for those new initial deployments to come out.

We did have a exceptionally strong 2013 and specifically Q4 in APAC so it’s really just the timing thing Mike, nothing else to read into it. We have ramped our activity with channel partners which we think we will continue to help the international revenues. Those are relatively early relationships as well.

So, we are still very confident about our ability to grow internationally, it’s really just the timing thing in Q1..

Okay, alright. Congrats again..

Thank you..

Our next question will come from Alex Henderson with Needham. Your line is now open..

I got behind Mike this time instead of one in front of him. We’re dueling for a position here. A couple of questions.

One, could you talk a little bit about any exposure you might have to what’s going on in Russia and Ukraine and if that might impact any revenues or receivables over time? Second, can you talk a little bit about if you’re seeing any change in pricing environment? It seems like the industry is accelerating and price might be getting a little less pressured as a result of the acceleration.

So, can you give us a little bit of feedback on these two points?.

One in regard to Russia, we are watching it probably like everybody else is. We’re continuing to extend sales efforts there. We’re continuing to make progress with our customers there. It has not disrupted anything to-date but it’s a pretty small number as part of our base to begin with. I don’t think there is risk or payment problems at this point.

And we’re watching it guardedly. We’re not going to certainly give up on a selling into Russia and we’re going to account on anything until it happens, so we’ll see. In regard to pricing….

So, you can match that with the hedging, so that you’re protected against any exchange rate swings?.

Yes. It’s just, Alex, it’s not really a big enough number to really move the needle. So, we’re watching it, but it hasn’t become a problem yet..

Yes. I think in Russia I see a over a longer period of time, a lot of opportunity. We’ve made some tractions with customers there already. We have other opportunities that are coming. And my suspicion is the anxiety that everybody is feeling today will abate itself over some period of time. And I still see a lot of investment happen there.

And assuming that our countries allow free trade to occur, we anticipate participating in that. And I don’t think there is a risk of capital there. Right now. In regard to pricing, I’m going to -- the thing we said through last period of time, pricing has gone to a relatively normal model in the industry.

Don’t confuse yourself, there is always pricing pressure in this industry, because the industry continues to be over served, but the pricing pressure today is distinctly different than it was couple of years ago and the dollar per bit, I see reducing as much more on classical historic terms..

Two last really quick questions, I didn’t catch up book to bill and then second, relative to the metro, are you seeing metro deployments coming in sooner than you would have expected the activity around that or do you still think that it’s same longer timeline? Some people talked about coming in earlier, some people saying no, no, no that’s not happening, it’s really ‘15 and ’16.

What’s your view on that? Thank you..

Yes. So the book to bill is fairly flat quarter-to-quarter. Yes. And then I’ll let Tom address the other piece of the question..

Yes. And Alex on the book to bill, we don’t comment on book to bill. So, you didn’t miss it. In regard to metro, we’ve been pretty clear. It’s an area we’re investing in, we think it’s an area that’s important to us.

We believe and as I keep abreast of everything that’s happening, there is always going to be some early adaptors in certain verticals that adopt certain technology, regardless of the economics of that technology.

I think that in the metro 100-gig right now is the most cost effective solution, if you have fiber exhaust you might have to do it, if you want to invest to getting explored technologies, you might need what to do then. I think the mass market, everything I see still says the ‘15, ‘16 timeframe and that’s what I continue to believe..

Yes, I think I’d add a little bit on to that. If you go back and look at the 10 gig market and you look at 10 gig first penetrated long haul than there is a delayed time between 10 gig, between the metro transition from 2.5 gig to 10 gig, it’s the same process here.

Understand the vast majority of the wavelengths that are in the metro today are 10 gig. They will start converting over time, it will be at least a couple of maybe even a few years, before you have reached that peak transition in the wavelengths and the complete metro network..

Thank you very much..

You bet..

Our next question will come from Dmitry Netis with William Blair. Your line is now open. .

Thank you very much. Nice quarter guys and outlook..

Thanks Dmitry..

Couple of questions, on the large deal, I hate to beat the dead horse to death here, but can you say that’s not from CenturyLink? I think you mentioned that as a customer last quarter..

Yes. So, Dmitry, unfortunately we can’t get into who specifically the customer is. We’d love to, but unfortunately we can’t..

Okay, alright, good. And on the growth and operating, like gross margin operating expense lines, I think George had asked the question on gross margin, but I wanted to follow-up on the OpEx, that’s moving up by about $5 million next quarter or this quarter.

Is that just truly a function of higher revenues, as you expect? And do you expect that to return sort of a mid 50 levels that it’s been tracking and I am certainly mindful of that 20% R&D target that you put out, so just kind of get some color on that?.

I mention there is a little bit of stand that pushed out from Q1. So that’s a little bit of it, but the reality is we have talked about several other adjacent markets that we want to go address, and we have talked about maintaining inside the 20% of R&D.

So we will continue to balance inside those parameters, but you should expect the R&D and overall OpEx to be at similar levels for the next several quarters..

Our commitment is to grow operating expenses less rapidly than we are growing revenue and we are going to do that. The good news in my mind, we have a whole deck of things that we know we want to go up and build.

We think that there is a massive opportunity for us and right now, if I were to unleash the R&D budget, we could go and attack these much more rapidly, but I committed to the shareholders and I am going to be mindful that we are here to make money and we are going to do it at a reasonable rates, but as revenues go up, I plan on spending R&D dollars at 20%.

And if we have opportunities to increase that we are going to do that because we see the opportunities ahead of us over the next few years as being pretty magnificent..

Okay.

So if I missed it is which I said it’s 59 over the next couple of quarters is basically sort of the run rate that we should be expecting, is that correct?.

Yes. I would model a 20% of revenues but 59 set of numbers, 59, 60 is a good number to model long-term..

Okay, great, thank you. Appreciate that color. And then the last question would be on the submarine market one of the key stakeholders reported this morning and I think they sighted diminished demand in the submarine sector, they also lowered the 2014 target by about a $100 million.

So my question is have you seen any slowdown and weakness in this market given you had fair amount of success there and how does that factored into your guidance? Thank you..

Submarine is a smaller, but an important sector for us, we have focused on identifying and working with customers that we think are strong players in that space we do not see our customers as becoming weak in that perspective as a matter of fact our technologies over the last six months have increased or improved our differentiated position within that, to the extent we talk about a variety of technology to be soft decision fact or we have talked about recently our fast shared mesh protection that is also applicable within some of the submarine networks.

So we see that as being a good-good market for us going forward..

Okay, great. Thank you. Keep up the good work gentlemen..

Thank you..

(Operator Instructions). Our next question will come from Subu Subrahmanyan with Juda Group. Your line is now open..

Thank you. I have two questions. First Tom you mentioned a couple of times that there could be some lumpiness there how to shift the revenue levels with some large contracts coming in now.

So if you look at 2014 from a bigger picture level how are you thinking about year-over-year growth for the market and the opportunities for Infinera exceed? Is it fair to say that given this large opportunities working out over the next couple of quarters any lumpiness is likely in the fourth quarter? And then the second question is on adjacent opportunities clearly metro is one that you have talked about integration more packets switching capability? And then other one, can you just talk about when you talk about increase investments in adjacent opportunities, what some of those are and what the timeline of some of those could be?.

Sure. So the rapid as you know, we’ve said for a long time this is a lumpy business. Sometimes we say that because it’s a down quarter, this time we’re saying it because it’s an exceptionally a strong quarter. And we did see it spending the next couple of quarters. So, if there is any risk it probably would be around in the Q4 timeframe.

That part of that is we anticipate shipping this one big opportunity in the next two quarters and just candidly because of our rapid lead times, Q4 is a long way away, we don’t see what we don’t see. I have no belief that demand falls off. But I can’t see it, yes so I just want to be disclosing what we see and what we don’t see.

So hopefully that answers your question. In regard to new opportunities, certainly the Metro is an opportunity; certainly you mentioned packet is an opportunity. We’ve shown and demonstrated the packet capability. And you can anticipate we’ll be launching a product before 2Q along.

We see and you’ve seen a lot of demonstrations around SDN, we continue to make reasonable investments in SDN. And we think that’s an important technology for us because quite frankly our Infinera architecture is perfect for an SDN environment, an infinite pool of intelligent capacity.

What we’ve done from day one leverages what SDN is trying to do perfectly. So you will see us making investments there. And you will see us invest more in products focused on LAN, data center WAN interconnect that’s going to be an important market for us too.

Partly kind of a Metro application, but we do see some specific requirements for the Web 2.0 people that we think with our pick capability we’re uniquely able to address. So, lots and lots of opportunities more than we can afford to do.

If time was the measurement stick, but we think we can do it successfully and build good market acceptance for our technologies of architectures..

And Tom do you think some of these will start contributing other than revenue perspective, we are seeing today the bases long haul focus.

When do they start to become important adjacent revenue opportunities as well?.

Right, this is Dave again. The new technologies come out on a regular basis and you understand especially in the long haul market that the people need to deploy networks in the ground that are anticipating future capabilities, such as SDN, such as MPLS or mutli-layered intelligence structure in the transport capability.

I think we’re benefiting from it now.

The reason why we are taking, winning the large opportunities on a regular basis is because I appreciate that our platform is differentiated in the ability to offer a multi-layered management to be able to manage whether it’s an OTN service or a packet service across the network more efficiently than alternative systems.

As we bring out the capabilities and we’ve talked about things like fast shared mesh protection, which takes some of the protection mechanisms out of the layer three structure moves it into an intelligent transport structure, makes our networks more efficient, it helps us to deliver better packet serve and packet services across the network.

And so, we're benefiting now. And as we continue to roll out, the market is definitely motivated to move from a mid-network layer three infrastructure to an intelligent transport network in an OTN centric network in the long haul..

Got it. Thank you..

Our next question will come from Brian Cline with National Alliance. Your line is now open..

Hey guys, long time. Let's say first time caller. So, thanks for taking my questions..

Nice to meet you Brian..

Yes. Thank you, thank you. Real quick, I want to go back to gross margin for just a moment.

I think just putting sort of a longer term perspective on it, it’s at least the reason historically you talked about that roughly 40% level being as I think Tom as you said, is the level you sort of want to target if in the land grab or sort of the footprint acquisition mode that you're in.

So I mean, I think if you take the commentary qualitatively, which you said I’d probably get back down and said were you looking to probably 36% to 38% gross margin.

So, I guess I'm just wondering, if you look, you had a crystal ball looking a little bit further ahead, if you wanted to kind of come out or exit out of sort of this big lump of demand that's coming up here in Q2 and looks to extend in Q3.

I mean would you sort of reset that kind of expectation for a baseline gross margin as you continue to deploy common equipment and gain footprint..

Yes. So, I think we've talked about being low 40s for the year, I don't think that has changed. We’ve talked about getting into 2015 and starting to see more fill from some of the DTN-X deployments, which obviously has the phenomenon on pushing up our overall gross margins.

As Tom mentioned earlier, when you see us having lower gross margins in periods where we have significant growth that is a great thing for us over the long-term, because we do see this as a great opportunity to go build that footprint and to be able to leverage that for many years to come in the future..

One thing Brad teased at in his commentary was if you look back over time and look back to when we are doing kind of the similar thing with 10 gig with the DTN, our current margin is many points higher than it was during our last kind of land grab in 10 gig.

And that’s a good sign that the cost structure of the company has improved, and we can more effectively earn this footprint at a higher margin.

And typically when we were going through that phase on the DTN with the 10 gig, about six quarters later, we started seeing sustentative fill to those chasses we deployed enhancing our margin structure of a company. I would anticipate the same type of cycle here..

Yes, I was actually and my follow up just to try to figure out, you talked about timing being a weapon for guys, and if that else just sort of extends the fill aspect, as you see customers making demand I guess sort of making store decisions based on how rapidly they can deploy a few versus let’s competitor, does that also sort of extend into, how quickly they want to fill those [wild cards]?.

A lot of it depends quite frankly on what demand they see, they can create in their markets. So once they have the infrastructure in place, what services are they bring into market, what price point are they bringing to market, what customers are they attracting that are going to be able to bring users to their network.

And typically what we are seeing is people with an Infinera infrastructure are able to respond much more rapidly to those opportunities than other people.

If a large Web 2.0 company comes to a wholesaler or somebody, a tier 2, and they have an Infinera infrastructure, our customers can respond, we commit days or less, you could have built from us in your network. And that is I think a competitive weapon for our customers.

They value that and quite frankly that enhances our ability to fill our chasses faster..

That’s great. Very helpful..

Down to internet demand right, as long as there is internet demand, there is going to be growth opportunities; if that were to abate, there would be a problem, not just for us but for the internet suppliers..

Okay. Makes sense.

And then a couple of quick housekeeping ones, did you give your headcount number anywhere? And then secondly, Just maybe I have misheard, I don’t know if you’ve confirmed that neither of your two 10% customers in Q1 were new customers if they are both existing customers?.

Yes, so the headcount is in the press release, so we added 28 people over the course of the quarter. And then in terms of your question on the new customer, we added one new customer on DTN-X it is an existing customer. Top two or both existing customers..

Got it, great. Thanks guys..

Okay..

We have another additional question from Alex Henderson with Needham. Your line is open..

Yes thanks, just a couple of quick housekeeping questions.

The R&D swing from 1Q to 2Q, it sounds like that’s pushing R&D up a little faster than it would go on a normal glide path, should we anticipate that that flattens it out or even edges it down as we go into the 3Q, is that the right way to think about that Q-to-Q, take the average of the two, is it more of the base rate?.

No, you should probably model the year at that similar rate and your parameters for the year is that 20% of R&D..

Okay, I see.

And the second question I wanted to ask you is on the tax rate and interest line, any kind of guidance of how we should be seeing that going over the course of the year? It’s obviously got a lot of NOLs but I would think that some local taxes would increase if it goes back to the international mix, is that right way to think about it?.

Yes I mean Alex I would model it similar for the rest of the year. Things move around in there, but no big drivers in those numbers..

And then finally, the last question I have for you is the service line dipped somewhat sequentially that’s a little unusual for service.

I assume that was driven by installation services predominantly in the prior quarter falling off a little bit and hence the margin improvement, is that right? And then second, should we anticipate that the service mix trends back towards a more installation mix as a result of this large installation program around this large order over the next couple of quarters?.

Yes. So it’s a couple of things why Q4 is stronger, there was a very strong deployment quarter. It tends to be the renewal quarter for a lot of the ongoing software and warranty type of items. Those are the things that move it. Like I said Q4 was exceptionally strong. Going forward from quarter-to-quarter the levels installed can vary.

So, it’s a little bit of a tough one to predict going forward. But you should see the deployment, obviously there is large opportunity, we expect services to be with that. So over time it should drift up..

Thank you for joining us this afternoon and for your questions. We look forward to updating you on our continued progress. Have a great day..

And with that we conclude today’s conference. Thank you for your participation. You may disconnect at this time..