Jeff Hustis - Investor Relations Thomas Fallon - Chief Executive Officer Brad Feller - Chief Financial Officer David Welch - Co-Founder, President.

Michael Genovese - MKM Partners Simona Jankowski - Goldman Sachs Rod Hall - JP Morgan Sanjiv Wadhwani - Stifel Nicolaus George Notter - Jefferies & Company Dmitry Netis - William Blair Alex Henderson - Needham & Company Subu Subrahmanyan - The Juda Group Scott Thompson - Wedbush Securities Ted Moreau - Barrington Research Brian Coyne - National Alliance Securities.

Welcome to the Fourth 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 Mr.

Jeff Hustis of Infinera, Investor Relations. Jeff, you may begin..

Thank you, Rodd. Welcome to Infinera’s fourth quarter and full-year 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.

This may include statements regarding Infinera’s overall business strategy, market conditions, market and growth opportunities, Infinera’s results of operations, views on Infinera’s customers and its products, as well as Infinera’s financial outlook for the first quarter of FY 2015.

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 Infinera’s current press releases and SEC filings, including Infinera’s most recently filed quarterly report on Form 10-Q 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 conference call includes 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 a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures in its fourth 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 section.

I would now like to turn the call over to Chief Executive Officer, Tom Fallon..

Good afternoon and thank you for joining us on our fourth quarter and full-year 2014 conference call. With me today, our Chief Financial Officer, Brad Feller; and President, Dave Welch. Today, I will briefly review our Q4 performance, highlight the significant accomplishments of 2014, and share an outline of what to expect in 2015.

I will then turn the call over to Brad, who will provide a more detailed review of our fourth quarter and full-year financial results and our outlook for the first quarter of 2015. Our fourth quarter performance was outstanding and capped off a terrific year.

Fourth quarter revenue was $186 million, which is above our guidance range and 34% higher than last year’s fourth quarter revenue. Non-GAAP gross margin was 46% above the high-end of our guidance range and in line with our mid-term business model objective.

DTN-X platform continue to fire on all cylinders as we added 10 new invoiced customers in the quarter including three customers new to Infinera. Finally, I’m pleased to note that we started shipping our Cloud Xpress for revenue. 2014 was about winning footprint, gaining market-share, strengthening financial results and taking care of our customers.

We believe we executed well on all of these objectives. We grew revenue faster than the market growth rate for long-haul DWDM. Our 23% year-over-year growth as compared to Dell’Oro estimates growth of 11% marks the second consecutive year we have growth at least twice as fast as the overall market.

We started the year with gross margin in the low 40%s, and an expectation of progressing toward a mid-term goal of 45%. We achieved 44% non-GAAP gross margin for the year and the fourth quarter, met that target of our mid-term financial model.

This equates to a gross margin increase of nearly 500 basis points as compared to the fourth quarter of last year, demonstrating the leverage we have achieved from our vertical integration and the value proposition of our intelligent transport network.

In addition to margin expansion, we committed to grow revenue faster than expenses to further increase profitability. In 2014, our OpEx grew at 9% which was well below the 23% revenue growth. The result was a non-GAAP operating margin of 8%, an improvement of almost 700 basis points as compared to last year.

We continued our focus on cash generation adding $26 million to the balance sheet, continuing to position Infinera with the strongest balance sheet of any of our peers. There were also significant operational accomplishments during the year. We ended 2014 with a total 59 invoiced DTN-X customers.

Of these, 19 customers were new to Infinera, demonstrating market expansion and the displacement of competitors. Our Instant Bandwidth technology gained significant traction in 2014 with almost half of our DTN-X customers now choosing this option.

Infinera is the only company in the industry with 500 gig super-channels that can be activated in 100 gig slices with one-click operation, helping providers use time as a weapon to be more competitive.

In 2014, we were especially pleased that Infonetics recognized Infinera as the number one optical vendor world-wide in the field of the top 10 optical vendors based largely on customer survey data. 2014 was another year of continued technology innovation at Infinera.

We successfully leveraged our solutions to influence providers to accelerate architectural shifts in the way they build networks. These innovations continue to enable customers to use time as a weapon while simultaneously deploying new services and lowering operational cost.

We continue to be the only vendor who can build large scale photonic integrated circuits which enables us to deliver single card 500 gig super-channels. We demonstrated our Terabit Super-Channel technology on a production DTN-X network with DANTE, showcasing the forward scale and investment protection design of the DTN-X.

We continue to invest in the DTN-X and expanded its switching capabilities to include the industry’s first color-less, direction-less and contention-less super-channel modem, a packet switching module, and a unified multi-layer control plane.

In September 2014, we hosted Insight Infinera, and we’re pleased to have many of you live with us here in Silicon Valley. At that event, we introduced our newest product, the Cloud Xpress, designed to help Internet content providers solve the challenge of rapid growth in East-West server-to-server traffic.

Cloud Xpress is a rack-and-stack platform with high density, low power, and simple one, two, three activation to accommodate the new traffic pattern and easily plug into the data center operational model.

Cloud Xpress’ introduction marks a watershed event for Infinera, as we begin our transformation from a single market to a multi-market company, which we believe positions us well for TAM expansion and long-term growth.

With strong financial tailwinds we are building the capability to deliver optimized products for different markets with different requirements, long-haul, sub-sea, metro aggregation and metro cloud. Never before have we had the ability to serve more customers and address more opportunities.

As we work across our diverse customer base we are seeing traditional transport needs accelerate due to bandwidth pressure. We are also seeing a significant architectural shift begin in earnest, which will likely have a longer term impact.

As the upper layers of the network including traditional routing platforms become virtualized, the network architecture is simplifying. These virtualized upper layers are beginning to run in the cloud and are being connected via packet optical transport.

Converged packet optical is becoming the fabric that connects data center to data center, and data center to user. And massively scalable optics are the foundation of this new network. With our vertical technology ownership across PICs, Coherent DSPs and world-class system design.

We believe the market is moving toward Infinera’s Intelligent Transport Network architecture. Internet content providers are key leaders in this architectural transformation and Infinera is well-positioned with significant deployments in three of the four top ICPs.

In fact, in a recent press release from Ovum, Infinera was named the fastest growing transport supplier for Internet content providers and carrier neutral data centers in North America. This is the segment that is defining the new network architectures and is clearly the segment where it is important to lead.

This inside tract has helped us define Cloud Xpress and similarly is providing tremendous insight as we innovate to take advantage of the long-term transformation caused by this intersection of network virtualization and limitless bandwidth scale.

We started shipping Cloud Xpress for revenue in December and have received eight customer commitments in the form of POs, contracts or field trials to date including three top Internet content providers. We wanted to give you this view into the early traction and starting in Q1 2015 we will start reporting on invoiced customers.

We believe that the 100 gig metro cloud market is starting now and per ACG estimates will grow to $3 billion by 2019, which is a 79% compounded annual growth rate over the next five years.

In addition to ICPs we continue to be well-positioned across key verticals with Tier 1s that are adopters of cutting edge technologies with cable MSOs as they continue to build and expand their own optical backbones, the Tier 2 operators with a variety of government sponsored networks across the globe.

We also have significant relationships with wholesale and enterprise carriers. Moving forward, we’re retiring the category name, bandwidth wholesaler, and will start using the new category of wholesale and enterprise carrier as most of these large providers now have significant enterprise and cloud revenues.

Finally, we see continued consolidation of our customer base. While this is healthy in the long term it has the potential of delaying buying cycles while operations are absorbed. In some cases, both merging customers have Infinera deployed and this makes their integration easier.

When at least one company is familiar with the Infinera experience, we believe it opens up new opportunities as our differentiation becomes obvious. The long-haul competitive landscape in 2014 remained fairly stable with five major players having 80% of the world market share in North America with just two companies sharing 80% of the market.

Within this competitive environment we expect price erosion to be consistent with historic trends. While consolidation has largely run its course in the long-haul market the metro market is still highly fragmented.

We believe that there is a looming wave of consolidation or attrition that will happen in this market as it transitions to 100 gig and will be challenging for vendors without reasonable scale to remain viable.

Ultimately, we believe that companies that are vertically integrated around IP ownership and that have sufficient R&D depth to remain innovators will come out on top.

Infinera intends to leverage our vertically integrated model and the strong position in the long-haul market to accelerate both the adoption of 100 gig in the metro and the rationalization of the metro market.

As we look into 2015, taking into account the expectation of industry analysts, we anticipate the overall market to grow 8% to 9%, comprised of 7% growth in the long-haul DWDM market and 10% growth in the metro DWDM market. Our expectation is that we will beat this forecast in market growth in 2015.

Brad will provide more detail on our Q1 outlook shortly. In long-haul we believe the 100 gig market has a long way to run with both new footprint and added capacity to existing footprint. We are well-positioned with our DTN-X for this growing market. As I mentioned we see mass adoption in the 100 gig metro cloud market beginning now.

We believe our Cloud Xpress is the right product at the right time. We are also targeting the metro aggregation market towards the end of 2015 and thus expect this to be a 2016 event from a revenue perspective. Our job with product introductions is not to be first to market, but first to enable mass adoption.

From a business model perspective, we have executed well on the parameters laid out a few years ago, specifically to grow revenue faster than the market, to achieve 45% gross margin, to grow revenue faster than expenses, and to yield 8% to 10% operating margin.

As we open up new markets and bring new PIC differentiated platforms to these opportunities. We believe we will be able to enhance our already industry leading metrics.

We are not ready to give out specific targets today for that new model but expect to update you during the year as we demonstrate the ability to consistently achieve our mid-term targets and create meaningful traction in the new metro cloud space.

In summary, I believe we have never been better positioned to attack new markets and take share in the overall DWDM market. From a position of strength in the long-haul market, we are leveraging our core technology and reputation for operational excellence to expand our addressable market two to three fold over the next few years.

As we evolve from a single threaded product company to an end-to-end optical networking solutions company, we have the opportunity to accelerate the inevitable consolidation of the industry and emerge as one of the new winners in an era where optical becomes more important and is the foundation of new cloud based architectures.

I want to thank Infinera employees for their outstanding dedication and hard work that led to our achievements in 2014. I also thank our customers for their loyalty and for expecting excellence. Now, I’ll turn the call over to Brad for a more detailed financial review of the quarter and the year, and our guidance for Q1..

Thanks, Tom, and good afternoon, everyone. As Tom mentioned, we reported revenue of $186.3 million, a 34% increase over the fourth quarter of last year, a 7% sequential increase and above our guidance range.

Our strong Q4 results were due to continued fundamental demand across our diverse customer base and to a lesser extent year-end money from certain customers. Demonstrating the momentum in our business we grew revenue in each quarter of fiscal 2014.

Our top five customers in the quarter included a North American Tier 1 and the Internet content provider, a Tier 2 carrier, and two wholesale and enterprise carriers. We had one greater than 10% customer in the quarter, a North American Tier 1 service provider.

Throughout the year we had a steady flow of customers adopting the DTN-X to solve their 100-gig needs. In the fourth quarter we added 10 additional DTN-X invoiced customers, our highest quarterly total in history, including three customers new to Infinera, bringing our total DTN-X customer count to 59.

These three new customers to Infinera were all from Europe, consisting of a wholesale and enterprise carrier and two government funded entities. While we do not expect to consistently add this many DTN-X invoiced customers on a quarterly basis, we do expect demand to remain high and our customer count to continue to grow.

In the fourth quarter we saw relative strength from the international portion of our business, which comprised 42% of total revenue, up from 30% in Q3. While our business in North America remains robust, growth in the quarter was fueled by EMEA and Latin America.

The EMEA region accounted for $53 million or 29% of total revenue, up from 20% in Q3, as we saw more customers starting to transition to 100 gig in that region. Partner growth in Latin America drove revenue in that region to 9% of total revenue, up from 5% in Q3.

APAC remained a smaller portion of our business contributing 4% of total revenue, down from 5% in Q3. On the metro side, as Tom mentioned on Cloud Xpress. We are in the early stages of this product ramp having just started shipping in December.

We remain very excited about the metro cloud opportunity, and believe the Cloud Xpress is a compelling solution for our customers in this space. We look forward to updating you on our progress throughout 2015. Now looking at services, revenue for Q4 was $28 million or 15% of total revenue, representing an increase of 16% year-over-year.

Services revenue grew by 5% on a sequential basis as a result of higher deployment services in the quarter. Moving next to gross margin and operating expenses. In the fourth quarter our overall non-GAAP gross margin was 46.1%, demonstrating once again our ability to enhance our gross margin levels as we grow revenue.

This result is above our guidance range as we enjoyed continued leverage from our vertically integrated model as well as a growing number of customers adding capacity to their existing footprint, by either purchasing [Technical Difficulty] and client service modules or purchasing follow-on licenses as part of our Instant Bandwidth program.

Within services non-GAAP gross margin was 56% in the quarter, flat sequentially. Our non-GAAP operating expenses came in at $65 million in the fourth quarter, up over $3 million sequentially and at the high end of our guidance.

The expense growth in the quarter was driven by acceleration of R&D spend to ensure we’re able to execute to our product roadmap, and incremental sales headcount to allow us to address new markets and verticals along with commission accelerators triggered due to exceeding our revenue plan for the year.

While making investments in R&D and sales, operating expenses still grew more slowly than revenue in Q4, driving additional flow through to the bottom line. In Q4, we achieved a non-GAAP operating margin of 11%, up from 8.6% in Q3, driven by the higher levels of revenue in gross margin.

Interest and other expense for the quarter was $800,000 and tax expense was $1.7 million. The shares used to compute diluted non-GAAP EPS during the fourth quarter were $133 million, up from $129 million in the prior quarter, as a result of higher diluted shares in connection with the improved stock price during the quarter.

In total, non-GAAP net income for the fourth quarter was $18 million or $0.13 per diluted share, up from $0.11 per share in the prior quarter and at the high end of our guidance. Now summarizing fourth quarter results on a GAAP basis, we had net income of $8 million or $0.06 per diluted share.

The difference between our GAAP and non-GAAP results was attributable to stock-based compensation expense of $8 million and $2 million of amortization of debt discount. Turning now to the balance sheet, cash, cash equivalents and investments, as of the end of the fourth quarter was $391 million, an increase of $13 million from the previous quarter.

We generated cash from operations of nearly $19 million in Q4 as compared to $22 million in Q3. In Q4 CapEx was $9 million or about 5% of revenue. As we continued to make investments to further scale our business. Now summarizing our results for the full-year 2014, by any metric you use, we believe 2014 was a phenomenal year for Infinera.

We grew revenue 23% for the year, achieved gross margin of 44% and operating margin of 8.3%. We continued to demonstrate our ability to grow not only our top-line revenue, but to do it in an increasingly profitable way.

For the second half of the year, our financial results were in line with our mid-term business model, established at the end - at our analyst day at the end of 2012. We achieved this result much earlier than originally anticipated, due primarily to the strong market adoption of our DTN-X platform.

In addition, in line with our commitment to generate cash on a consistent basis. Cash flow from operations in 2014 was $36 million. We are also pleased to have achieved overall GAAP net profitability for the year, with net income of $14 million, a substantial improvement over a net loss of $32 million in 2013.

Now, for our outlook for the first quarter of fiscal 2015, I am very pleased to announce that we currently project revenue in the range of $180 million to $190 million. A tremendous expectation in a quarter where typical seasonality in the industry would be a sequential decline of 15% plus.

We believe our guidance is supported by the continued strong demand for DTN-X on both new and existing routes across our diverse customer base, growing momentum from Cloud Xpress and exceptional backlog entering the year, and some benefits related to calendar year and money.

The midpoint of our projected revenue range year-over-year - represents year-over-year growth of 30% reflecting the market’s strong acceptance of our differentiated products and the superior customer experience we provide. Next, we currently project non-GAAP gross margin in Q1 to be 44% plus or minus 100 basis points.

As we continue to demonstrate our ability to deliver strong margins in line with our mid-term business model. We anticipate non-GAAP operating expenses to be $67 million plus or minus $1 million as we continue to invest in R&D and sales.

We continue to target R&D expenses at 20% of revenue and intend to grow SG&A expenses more slowly than revenues overtime, driving additional financial leverage. The midpoint of our projected guidance for Q1 translates to a non-GAAP operating margin of 8% plus or minus 100 basis points.

The combination of interest and other expense is expected to net out to approximately $500,000. And tax expense should be approximately $1 million. We currently expected diluted share count for Q1 to be approximately 135 million shares and project non-GAAP EPS to be $0.10 per diluted share plus or minus a couple of pennies.

As for GAAP EPS we expect it to be lower than non-GAAP EPS by about $0.07 per share, primarily due to stock-based compensation expense. In summary, for the second year in a row Infinera grew over 20% while significantly improving profitability.

I believe we have done an excellent job of balancing investing for growth with prudent expense management and are consistently generating cash from the business. While we do not provide guidance beyond one quarter, we expect our next target business model will include higher gross and operating margins.

We will unveil a new target model later this year once we demonstrate our ability to consistently achieve current targets and better understand the impact of our increasing cloud traction. With that, I would like to turn the call over to the operator begin the Q&A portion of the call.

Rodd?.

All right, thank you. [Operator Instructions] All right, our first question comes from Michael Genovese from MKM Partners. Sir you have an open line..

Great, thanks very much. And congratulations on a great quarter as well as a very nice prepared remarks.

I guess my first question is, it sounds like there was no Cloud Xpress revenue in the quarter so is that right? And can you help us think about how much revenue there might be in the first quarter from that product like would it be bigger than a bread basket?.

Yeah, so Mike the revenue in Q4 was relatively small. There was some revenue but it was relatively small. We just launched it in December, so there was a couple of shipments in Q4. We expect that to ramp up in Q1, but we’re not going to break out that specific number on Q1..

Okay..

Thank you. And our next question comes from George Notter from Jefferies. Sir, I’m sorry. Our next question comes from Simona Jankowski from Goldman Sachs. Ma’am, you have an open line..

Hi, thank you. I think you mentioned that you have an exceptional backlog into the New Year.

Can you share with us what that is in order to reportable number?.

Yes, it’s north of $100, Simona..

Okay. Thank you.

And for cloud, well, for your first quarter guidance, is the strength driven more by DTN-X or by Cloud Xpress?.

Yes, the reality, Simona, it’s across the board. So we are seeing strength in several of the different verticals. We do expect Cloud Xpress to start to ramp in Q1 as well, so it’s a combination of both..

Thank you. Our next question comes from Rod Hall from JP Morgan. Sir, you have an open line..

Yes. Hi, guys, thanks for taking my question. First, I wanted to ask you on the services revenue, it sounds like the installation services mainly.

Could you helps us understand what the gross margin impact of that increase was, is that a negative gross margin impact then it’s more than offset by the scaling on the vertical model, or is it actually helping gross margin as well? And then I also - I don’t know quite how to cover this question, but there is a lot of press around about a major metro deal, I’m sure, you guys anticipated questions on the call here.

What I would like to get you to do, Tom, maybe is, you talked a lot about your metro position and yet up to this point, some of the new Tier 1 deals that are out there, you guys have not managed to win even know it seems like you’ve got a really good product offering.

So can you talk to us a little bit about what you think you need to do to position yourself or maybe the next one of those coming down the pike? Thanks..

Let me address the first part of the question, Rod, and then I will let, Tom, address the second part. So the services margins were relatively flat order-over-quarter. They don’t necessarily get the benefit from the vertical integration.

The team has done a good job of continuing to be more efficient with those installations, but the overall services margins were flat quarter-over-quarter..

Okay, thanks, Brad..

So in regard, Rod, to a large metro RFQ, I’m going to start by saying first of all, there are a lot of large metro RFQs right now, and I know which one you are referring to, but I think it’s important to put in context. We are seeing a tremendous opportunities in metro, metro cloud in particular right now, and they are of a tremendous scale.

And I think, the industry continues to still focus too much on a couple of Tier 1s and what they are doing as the proxy for the industry. And I continue to remind people that that is an antiquated view, they still spend a lot of money, but there are huge architectural shifts and shifts in who is building large networks, both long-haul and metro.

In regard to the Tier 1, one, I’m sure you are referring to, we are actually not participating in that RFQ. We have an outstanding portfolio, we are bringing our metro aggregation product to market as we talked about later this year, but it is not one that is going to be in time for what they’re looking for now..

Do you feel, Tom, do you feel like, you’ve got the distribution logistics capability to support these guys just one of the big tick boxes for them, I mean, is there any issue from a scale point of view, you feel like, you need that to add to be in a good position on some of those RFQs?.

No, I would be as candid as I usually am. I think our operational execution are on manufacturing, distribution, service and support is as good or better than anybody in the industry. We have never had a customer of any scale. We had $100 million a year accounts, including last year, and they think we are the best planet - a vendor on the planet.

So I don’t think that there is anybody that will challenge or make us not participate because of issues around scalability, service support, or distribution..

I think it’s worth reiterating and pointing out from a long haul capability, we are the leader, in that context, we are - as recognized by our customers as the leader for optical transport gear..

Great. Okay, thanks, guys..

You bet, Rod..

Thank you. Our next question comes from Sanjiv Wadhwani from Stifel. Sir, you may - sir, you have an open line..

Thanks.

Two questions; first on the Cloud Xpress, obviously understanding that revenues in Q4 were very small, and I’m trying to gauge whether as you’ve gone through some of the trials and some of the orders have started to come through, if you can give us a flavor of how large some of these deals are compared to sort of, what you would call traditional long-haul deals? And then second, Tom, just a broad industry question.

Any comments around net neutrality title two [ph], any discussions with your customers around that that leads you to believe that spending could be quote unquote volatile as the year progresses? Thank you..

Yes. So regard to Cloud Xpress, we are seeing demand from a number of different customers, certainly the large ICPs, we are seeing demand from. We are also experiencing demand international customers, small-scale to-date, but we are very excited that early on. We are already seeing orders coming in from Asia.

We also have picked up, at least one, maybe two enterprise customers through a new channel for us, a company quite frankly that I was unaware of it before as an end-user, and they are building networks to support the education market.

So one of our expectations with this product was that, it would be broadly adopted by, both large-scale, very small people deploying cloud architectures and so far early in, I believe our intuition was correct.

One of the things that we are seeing on this and it was a little bit of a surprise to me is the certification process that we are seeing is a little bit longer than I had anticipated. I assumed most people would take this and pretty much throw holy water on it and put it in a network.

What we are seeing actually is some pretty rigorous testing by the large guys, and I actually take this as good news. It might delay a little bit of the ramp, but I believe they are doing this testing, because they are not viewing this as a tactical solution to a today cloud probable, but in architectural solution to a future network architecture.

And that means that that when they deploy and scale, it will be large-scale and it will be for a long time. The third thing to remember is that, we’ve introduced our 40 gig interface to-date.

We are introducing and that was driven by a specific ICPs who had a specific problem that they wanted to solve and they are actually buying it, and we are deploying that. The second generation or the second product will be coming out this quarter, that’s a 10 gig interface, which will open up a whole lot of a larger market for us.

And then we have a third product coming out this summer, which is a 100 gig interface. And we see lots and lots of demand starting to build up for people wanting to deploy this architecture with a 100 gig later this year, matter of fact, they are putting pressure on us to deliver it earlier.

So I’m actually very delighted with the progress to-date on the cloud. It has been shipping for just over 30 days, and we continue to see a pipeline of activity that is growing across multiple verticals and down to customers that historically we’ve never been able to touch. I think, we do have some continued work to do to expand our partner program.

We’ve always had kind of a sell with model and with this type of product we have to have a sell-through model, and we are winding up those partners today and training them. And I think that that will start having impact over the next few quarters. On net neutrality finally. I’m - we certainly poke [ph] at this.

I think that I’m a fundamental opponent as Infinera of government coming in and trying to regulate something that quite frankly in my mind isn’t broken. And second of all telling people who are putting at risk capital to work how they can earn a fair return on that.

As I’ve talked to our customers most of them are in the same position that we are, and one of the things that we all agree on, it’s not going to stop bandwidth demand.

I think, some large-scale people who are worried about how they get paid might delay some of their capital expenditure and expansion until there are some resolution, I think getting a resolution is very important.

But the customers I have talked to to-date do not believe regulation is a good answer, but they are not stopping deployment as bandwidth demands continue to increase.

Does that answer your question Sanjiv?.

All right. Our next question comes from Mr. George Notter from Jefferies. Sir, you have an open line..

Hi, thanks very much, guys, and congratulations again on the quarter in the guidance and the strength of the business. I guess, I wanted to kind of dig in some more on Cloud Xpress. So, I think you said earlier, you still have to deliver 100 gig interface in Cloud Xpress, there is a 40 gig interface as well.

I mean, can you just help me understand kind of where you are in terms of the feature set? It sounds like there still are some important features you guys need to deliver and so if I’m going to see the ramp in that product. And then I also would like to know, kind of what you are selling against in terms of Cloud Xpress.

I see most of the applications here are intra-datacenter. Are you selling against single mode fiber or multimode fiber? Single wavelength applications or are there other competitors in the WDM space you’re seeing? Kind of walk us through what you’re competing against here competitively. Thanks..

So yes, the - George, let me take a shot at that. First off, you got to understand where market demand is to start with. The market demand is - the largest market demand as we indicated, as we chose the release sequence of our product is for 40 gig interfaces. And that’s the largest part of the market that’s running on.

It’s a 40 gig - it’s driven by the interfaces that have intra inside the data center to interface to that. The second product which will be coming out basically right on its heels will have a 10 gigabit interface to it.

Those two interfaces are chosen because that is by far the lion’s share of interfaces that you need to couple to into - in looking back into the data center.

100 gigabit Ethernet interfaces aren’t anywhere near the norm inside a data center at this point, and - but we do expect that to be a second half of 2015, 2016 momentum trend for these types of boxes. So I don’t believe we are missing out on any businesses because of having our 100 gigabit Ethernet interface not available till summer-ish time.

That was driven - so there is not a - there is a normal release cycle for - to get the features out when the customers need it. We think we’re well timed and I’m not aware of any business that we are losing because of that sequence of product.

Relative to what do we compete against, for the two high-capacity links between data centers, it is a DWDM market. It is a single mode market. They need terabits of capacity interconnecting data centers. That is something that on the whiteboard. You might be able to solve with lots of fibers but operationally and logistically it is a nightmare.

If they can solve it with single mode fiber and with WDM solutions, they absolutely will. And so it’s - I don’t find ourselves competing against non-DWDM solutions in that.

There are certainly other competitors that have positioned their product in there, but one of the key things that our customers are interested in is density, power consumption, quality, simplicity.

They want to be able to take just like they do with the rest of their data centers, to be able to take a rack-and-stack approach, get high density interfaces within a rack, have a very simple, very fast turn-up and let the virtual machines run away. And we have a distinct advantage over other competitive product in that space..

In almost all those attributes, space, power, scalability, the whole thing, ease of use, all of it..

Yes, great. Thanks very much guys..

Sure..

Thank you. And our next question comes from Mr. Dmitry Netis from William Blair. Sir, you have an open line..

Thank you, guys. Clean quarter, thank you very much for that. Couple of questions on the geo kind of breakdowns and some of the foreign-exchange issues we are seeing across-the-board. Can you - it’s about 30% of the business, any impact that you foresee coming into the 2015 from foreign exchange? That is number one.

Number two, you won a Tier 1 in Russia I believe, I think it was Rostelecom that you announced last year.

Is there any traction there? Are you seeing any progress on that front? And then the Tier 1 that you had, the 10% Tier 1 you have here in North America, is that coming back meaningfully in Q1 as well? And then maybe last one if I may, just if you can give us an update on Level 3 and XO which you have announced last year, how do you foresee them tracking throughout 2015? Thank you..

Dmitry, so on the FX side of things, we do have some impact from currency but it’s nothing that’s material to the results. So we continue to watch it and there are some challenges more with the timing of payments and getting cash out of certain countries, but nothing that is materially impacting the results.

From a Russia perspective there is a - we still see a lot of opportunity there. Obviously the events of the past several months have caused us to be even more cautious but we think longer-term there is still a good opportunity for us there inside of Russia..

Yes, in regard to level - and I agree. Yes, I think we see a lot of opportunity in Russia and we are quoting a number of things, but we are walking cautiously as I think they and we are experiencing a world that nobody anticipated and we have to make sure that there is an ability to get paid. And we are going to be careful on that.

On Level 3 and XO both of them are significant customers this last year. Both of them continued to have robust business with us. I think we are exceptionally well-positioned with both of them and we anticipate that they will have strong years with us. Obviously they don’t forecast beyond kind of current POs and a little bit into the next quarter.

But so far it looks like it will start out with them strong. In regard to our North America Tier 1 it was an exceptional year with them last year and we anticipate that we are going to continue to have good opportunity with them this year.

What the whole year will look like? I don’t know, but I do anticipate that they will continue to build a reasonable amount of network with us..

Thank you..

Yeah..

Thank you. Our next question comes from Alex Henderson with Needham. Sir, you have an open line..

Great. Thank you very much. Wish I had stayed a little longer on this one..

I’m glad you said it to keep me from saying it, Alex..

Yes, well, sometimes you get them right; sometimes you get them wrong, [indiscernible]. So maybe you can address a couple of the issues that got me nervous, so that I could get un-nervous on those issues. So the first one was, you had a big spike in the demand conditions in 2Q and 3Q of 2014.

Should we be considering that a tough compare as we go into that window? Or do you view that as more of a kind of a normal backdrop that was just robust and it stayed so robust subsequently that we should just ignore that as a compare? Can I smooth that out in my mind or should I be worried about it?.

Well, I never look at any one quarter to get kind of a sense. Our lumpy - our business from the outside in looks pretty smooth. We have done a good job I think of working with customers and linearizing [ph] our revenue growth, but the bookings come-in in a fairly lumpy fashion.

And I think Q2 in our business is usually a strong bookings quarter and it’s too early to say that it will be a strong bookings quarter this year. Q1 looks robust. We’re carrying as Brad said a very big backlog into Q1.

Q2 is, like I said, historically a good bookings quarter and Q3 is historically not a strong bookings quarter, as a lot of Europe shuts down and even in North America there’s a lot of holiday I think that attributes to slowdowns, plus with strong Q1 in - or Q2 sometimes you have to digest that inventory before you make your next purchase order, so I always kind of look at it as a Q2 plus Q3.

It’s way too early to talk about even Q2 but certainly Q3. But I do see fairly robust demand cycles in the short and intermediate term for this year. I am very optimistic that our business with all the verticals we’re in looks pretty strong right now.

We clearly ended the year with strong international business which was different than the first half of last year and a number of analysts are starting to forecast a recovery in Europe or in Asia.

And eventually, candidly they will be right eventually because it is just an under-spend that occurred and I think we are well-positioned in those markets assuming they don’t have tragic economic issues there.

So I am pretty optimistic on the year and I would encourage you not to focus on any one quarter as a tell [ph] of the overall business direction. I view kind of the rolling two quarter average as the right kind of sense for how the business is going..

Great. And the second question is, I know you are targeting about 20% of revenues to R&D, but you usually have spikes in prototyping costs.

Can you talk about whether there would be individual prototyping events around some of these new interfaces which I hadn’t been expecting but more importantly around the MetroCor product as we get to the back of the year?.

Well, in any quarter something can happen in R&D that either pushes out or accelerates a little bit. But we have been pretty consistent, Alex, on hitting kind of the number. And actually if you look at last year we ran more like 19% or little under in R&D because as our revenue ramped we had a hard time scaling R&D expenses to that level.

Obviously with us going into this New Year, we’re ramping up R&D again, and our expectation is it might be a challenge to get to that 20% number, but if we exceed in any quarter.

I am kind of philosophically bent, it’s not going to be over 20%, and it will be a small overage that we would explain as a one-time and then we would make it up, because I don’t think we should spend more than 20% in R&D..

Got it. And the last question, could you talk about the capacity availability in your plan, obviously getting a nice leverage of the spectacular growth you are producing. I had thought, you guys have done a fabulous job.

But where are we on capacity availability and cost needed to build capacity or incremental testing or what have you around that?.

Dave will answer this question, but I want to assure you, Alex, if you want some, I’ll make them available for you..

All right. I mean, the capacity model that we have is very resilient to this - the growth of the business be it in the PIC fab, there is lots of space to continue to both gain leverage, as well as increase the capacity of the system, the economics of expanding capacity or more of a tool by tool there.

So we are way short of any type of major factory redo on that. The rest of our supply chain is very well-managed - multisource managed that we can be able to accommodate any anticipated demand changes there..

Yes, the other thing I would add is, the guys that run our facilities internally do a great job of driving down test times and cost of the fab, increasing yields, just kind of stuff. So we continue to add capacity through that mechanism every quarter as well..

If you look at last year we ran, our model for CapEx is about 5% of revenue except every five or six years we have to bump that up to 7% or so. Last year we ran it 4%, so even with that relatively phenomenal growth over the last two years, we ran it 4% last year. And as Brad and Dave both said, we don’t anticipate going over 5% again this year..

Knockabout guys, good job. Thanks..

Thank you. Our next question comes from Subu Subrahmanyan from The Juda Group. Sir, you have an open line..

Thank you. I have two questions. First on the year, Tom, you mentioned growing faster than the market, growing 8% to 9%, obviously, you would be growing significantly faster than that.

Just wondering, if you could talk about some of the puts and takes, which allowed you to grow at double-digit pace of the market and whether those kinds of growth rates are in excess of the market are sustainable. The other you did comment on consolidation potentially causing near-term issues.

We know in the cable space, there is a large one and despite that you’ve had strong first quarter guidance.

Could you talk about what you are seeing in the cable M&A in terms of the impact on your business?.

So in regard to growth why are we growing, I think, it’s for a number of reasons. One, it goes back to a little bit of the Infonetics Research when they query customers on who is the best supplier. And it’s a plethora of things like technology, it’s lead time, it’s quality, it’s ease-of-use.

I truly believe our system solution is significantly and demonstrably better than our customer - our competitors.

The second part I think is, we have done a good job of focusing on customers who are building the biggest networks in the future, whether it’s Internet content providers or people that we used to refer to as wholesalers, international Tier 1s, who are building competitive businesses in the international markets.

We are building very substantial networks and they operate at a much faster cadence than the traditional Tier 1s. So I think that, those are some of the things that are driving our historic growth.

I think that moving forward, as I mentioned in the call, as we go into the metro cloud and we go into metro aggregation, we are going to between double and triple the size of the market that we are serving over the next several years. And I think we are going to do that with the customers that we already have.

We are going to add to that new customers and go into markets that we have historically not provided solutions. And we are going to use the same differentiated technology that we’ve used to win in the long-haul in those markets. So I think, is it sustainable? I’m not going to say that 20% is our target for any given year.

But I think our growth of outpacing the market growth is sustainable for a long time. And I’m committed to doing that, and I don’t believe if there is any reason, we can’t outgrow the market for the next several years as we enter into these new markets. In regard to consolidation and the specific one in the cable space, it’s too early to call.

As you know, we have one customer that’s a significant Infinera customer and the other one is not an Infinera customer. That can certainly cause a delay, but I think that all the right things are happening to create an opportunity for us in this merged network - this merged company.

But those companies are still independent entities and they’re operating that way until a merger is approved and done. And the best I can tell that is, that continues to slip out a little. So right now, we are doing the appropriate things with the current customer of satisfying their network needs as they build new network.

And we are working with the other customer to explain our value proposition and we are making reasonable progress there. But it’s too early to have an insight into what it’s going to mean after it’s done..

Got it. Thank you..

Thank you. Our next question comes from Scott Thompson with Wedbush Securities. Sir, you have an open line..

Thank you. Hey, guys, it’s great quarter, wanted to ask a couple of questions.

Over the last couple of quarters, we’ve been talking a bit about growing channels, sales channels into other geographies, it looks like that’s starting to pay off especially in Europe this quarter, with the economy is still kind of sputtering over there, what do you attribute the growth in Europe, and the demand over there too? I would say, people building out in country networks, or is that other growth drivers? And then I’ve got a follow-up or two after that..

So I think in Europe it’s driven by a couple of things. One, it’s just like the rest of the world, there is just fundamental demand for bandwidth. Now, second of all a lot of our demand is coming from two aspects.

One is international carriers who are building competitive networks, pan-European competitive networks, and that’s a competitive business and you have to put the capacity in place to be able to attract and grow customers. The second part is, we’ve been very successful with some government-sponsored networks in Europe, education and research networks.

I think part of it is, because they view us as both very easy to use, but also cutting-edge technology, which appeals to them for the scalability of the networks. We are also experiencing very good growth in Latin America and that’s through some new channel partners that have global reach.

And I anticipate that this new channel is going to allow us to continue to have good success in Latin America, I think with the areas where we need to continue to develop more depth of partnership is in APAC. We are very successful there with submarine customers, but most of those are direct.

I think with our new Cloud Xpress, we see early indications that our partners there are going to have this as a product that they can sell well into that market. We’ve already gotten some attraction there with some commitments, but we have a lot of opportunity still to grow through partners there..

All right. And then can you compare and contrast the 100 gig long-haul market in the U.S. versus Europe.

Are we in earlier stages in Europe, or is it somewhere, can you kind of give us an idea where we are at in that upgrade cycle and with your customer base in those Europe and the U.S.?.

Sure, maybe I can add into that. I would say, one of the areas that certainly the ICP market has grown preferentially in North America - initially in North America, and we have gone through and seen a significant growth phase there. It hasn’t growth at same rate in Europe where we anticipated that it will.

The data center utilization, the movement of the - due to cloud et cetera is going to become stronger and stronger, but it’s initiated first in North America then it’s going to move over to Europe. So we - I think, there is a lot of growth left and bandwidth growth in Europe going forward..

One of the things I agree, the ICP architecture is probably six months or a year ahead in North America, maybe a little more. I also see a 100 gig services, so 100 gig waves carrying a transmission in Europe, I think, it has become the standard.

And we are just now seeing them starting to have the inflection point of a 100 gig services coming of that, it’s been vastly 10 gig, and that’s probably six months or so after we started seeing that in North America.

But we do see a lot of opportunity for 100 gig interfaces moving forward both in APAC and Europe in the next year, and that’s relatively new..

And a lot of that data center interconnect is going to cross country boundaries in that, and so it’s going to depend a lot on the international carriers for that interconnection..

Okay.

And then any comments on service provider carrier over there?.

We are doing well there. I mean, the international part of our business with those guys is strong. We have some very good partnerships. They’ve been both long-term partnerships and some relatively new ones. But we’re seeing good demand and they like us a lot..

Okay.

So we’ll pull all this back together, sales and marketing, there it sounds like there are some accelerators in there, does that drop back in first quarter, was that mostly end of your stuff, or do these new channels and developments internationally push those numbers a little bit higher moving forward?.

Yes, it’s - you will see the actual accelerators obviously come off from the first quarter. That’s said we are investing in new channels we announced the government team, we’re going to invest in that team, continue to invest in the cloud and content team.

So you got two things going either way, but it shouldn’t necessarily grow significantly quarter-to-quarter..

Appreciate it. Thank you, guys..

All right. Thank you. [Operator Instructions] And our next question comes from Ted Moreau with Barrington Research. Sir, you have an open line..

Thank you and congrats guys on another great quarter. Just a couple of very quick questions here, DSOs didn’t come down in the quarter. I was kind of anticipating that they might have after, I thought last quarter or at the beginning of Q4 you are supposed to collect on a pretty big accounts-receivable so just wondering what is going on there.

Is that a result of more international bend to the sales mix or can you comment there?.

Yeah, no, it’s really just the timing of things. So you are right, there was a big item hanging out there at theend of last quarter. But with the pressure to get things in the quarter some of it was towards the last 45 days to 60 days of the quarter which ends up in AR at the end of the quarter.

The aging is very solid though so nothing to be concerned about from that perspective..

Okay. And then, I mean historically we talked about the line card sale mix and the impact on the gross margin.

Can you just kind of walk us through maybe how you’re seeing that play out throughout the course of 2015 as - I mean I thought 2015 was likely to be a pretty high line card year, but it sounds like you’ve got a lot of opportunities to continue to expand market share, so could you walk us through that?.

Yeah, so we do expect 2015 to have more and more customers come back to take additional capacity through the traditional line card model, but also through in some bandwidth. That said, we do expect to continue to grow a lot of footprint this year. There is still a tremendous amount of new networks being built.

So it’s going to be a combo of those different things throughout the year is our expectation..

We do expect 2015 to start having any higher percentage of fill, and but the longer that we can sell more footprint the better off we are long-term, particularly as we’re doing this while enhancing margin and creating more cash.

So I am hoping that quite frankly, the fill percentage remains roughly the same as we put out lot of new footprint out, but we’re expecting a little bit more fill..

Okay. And then, one final one, share count continues to go up pretty quickly and then now you commented on that related to the share price.

But should we expect the share count to continue to grow at a pretty substantial clip year-over-year throughout the year?.

Yeah, I mean the thing that is really driving it up is just the higher stock price, so more things being dilutive. We do watch the share count all the time in terms of what we give out. So it’s just the aspect of having the higher share price puts more options in the money..

Okay, thanks. Congrats again, guys..

Thank you very much, Ted..

Thank you. And our next question comes from Brian Coyne with National Alliance Capital Markets. Sir, you have an open line..

Hi, guys. Thanks very much for taking my questions..

You bet..

First one, real quick, if you could perhaps help me understand a little bit more about your history in the government vertical. I know you obviously had the recent announcement of the sales team and you just said that two of the international new customers were both [indiscernible].

Can you just help me understand a little bit better about sort of what those deals look like, are they currently different from a size and margin standpoint and perhaps a little bit of the outlook into 2015? And then I have a follow-up for Dave, if I could..

Yeah, we’ve often sold into government-sponsored networks around the world. We’ve got them in England. We’ve got them in Australia, I believe. We’ve got them in North America, and Europe. These are networks that have historically been sold by our current sales team, and that’s been a good growing business for us.

It’s one that we see a lot of opportunity particularly in North America. Moving forward we had a large win last year into a government network in North America.

And I think it’s been one that we have underserved and I think that by focusing on it, I am a big believer in creating vertical focus like we have historically done with cable and now with ICP and government, and I think this is an area where Infinera, I probably should have done this a year ago, but I think it’s where we can grow a strong base of business over a long period of time and create - I think incremental competition to people who have been selling in there probably too easily.

And we’re going to kind of fix that for them. And I think this is one where we have to have some patience. The government can buy a lot. They are very, I think, loyal customers, but it should be considered a slow sale.

And I think we will have success there this year but we’re mostly going to be building a foundation for long-term success and I am excited about what we can do there..

It’s very helpful. Thanks. And then, Just for Dave real quick.

Going back through some of the - my notes from the slides from the Insight Infinera day back last September, I am just wondering if you could also put in perspective sort of the opportunity within the mega data centers, just I’m - sort of based upon my understanding of it so far it seems like for Cloud Xpress it’s really about high volumes, lower ASPs than DTN-X and how that works.

And this is again something that goes on to most or all of the racks and as a two RU unit it sort of stood on top of every rack inside a data center. And I guess, it kind of goes little bit back to an earlier question about just - I mean, it’s Alex’s question about the scalability just in terms of addressing the market and your production..

Yes, so the primary application we satisfy at this point in the data center interconnect, be the CO [ph] oriented data centers or mega data center, it’s really the last box to leave the building.

There are two optical interconnects that are on this, an Intra-datacenter which are top of the rack all connected through crossbar - effective crossbar switches, and then there is the aggregation of the traffic that needs to leave the building off on to the WDM line.

What we are satisfying with this current product is the exit of the building product. And in very, very generic forms it is 70/30, 80/20 type of scenario that a lot of traffic stays inside, some traffic goes outside type of scenario.

As the virtual machines expand beyond the capacity of individual data centers, and as the cloud moves in there further into or as your IT infrastructure moves further into the cloud, the more need for these virtual machines to reach across buildings, then that ratio is going to go up and more bandwidth will be required to interconnect the data centers.

Hopefully that is helpful..

Yeah, it is. Thanks a lot..

Guys, thanks for you joining us this afternoon and for all you questions. We look forward to updating you on our progress through the rest of the year. Have a great day..

And that concludes today’s conference. Thank you all for participating. You may now disconnect..