Jeff Hustis - Head-Investor Relations Thomas J. Fallon - Chief Executive Officer & Director Brad D. Feller - Chief Financial Officer David F. Welch - Co-Founder, President & Director.

George Charles Notter - Jefferies LLC Sanjiv R. Wadhwani - Stifel, Nicolaus & Co., Inc. Vijay K. Bhagavath - Deutsche Bank Securities, Inc. Alex Henderson - Needham & Co. LLC Michael E. Genovese - MKM Partners LLC Douglas Clark - Goldman Sachs & Co. Ashwin X. Kesireddy - JPMorgan Securities LLC Theodore Joseph Moreau - Barrington Research Associates, Inc.

Timothy J. Quillin - Stephens, Inc. Tim Savageaux - Northland Securities, Inc..

Welcome to the Third Quarter Year 2015 Investment Community Conference Call of Infinera Corporation. All lines will be in listen-only mode until the question-and-answer session. 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 now begin..

Thank you, operator. Welcome to Infinera's third quarter of fiscal 2015 conference call. A copy of today's earnings is available on the Investors 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.

These 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 fourth quarter of fiscal 2015 and integration of Transmode.

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 include certain non-GAAP financial measures.

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 third 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 third quarter 2015 conference call. Joining me today are Chief Financial Officer, Brad Feller, and President Dave Welch.

Today, I will go over financial highlights for Q3, and then provide an update on our business, the market environment, and some of our key initiatives including an update on our integration with Transmode and highlights from Insight Infinera that occurred a few weeks ago.

I will then turn the call over to Brad, who will provide a more detail review of our third quarter results and our outlook for the fourth quarter of 2015. Q3 was another outstanding quarter for Infinera. Revenue in the third quarter was $233 million and non-GAAP gross margin was 47.5%.

Our business model continues to demonstrate excellent leverage as we delivered GAAP earnings of $0.22 per share, the highest in our history. I'm enthusiastic about our ability to continue to grow, not only the top line, but also our profitability as a combined company with Transmode.

While all of financial benefits associated with our enhanced portfolio will not be achieved overnight, the early signs are positive. In Q3, we continued to earn mind and wallet share from customers who are building next-generation networks.

In the quarter, we had two customers that were greater than 10% of revenue, a Tier 1 and a wholesale and enterprise carrier. Additionally, in Q3, we enjoyed a substantive increase in Cloud Xpress sales driven by demand from ICPs.

Growth in cloud services, video and mobile is propelling a steady rise in bandwidth requirements across our customer base and driving the need for 100 Gig in long-haul, data center interconnect and now Metro.

Our long-haul business remained strong, the core of the company, which serves as a technological and operational foundation from which we are expanding our business. I was pleased that both IHS and Dell'Oro recently ranked Infinera number one in North America long-haul market share.

These rankings are consistent with the demand environment and sentiment we are seeing from our customers, as we offer tailored multilayered solutions across the DTN-X platform to build new long-haul routes and to add capacity to existing networks.

Bolstering our DTN-X Family, at Insight Infinera we introduced the XT-500, a long-haul interconnect solution which exemplifies our commitment to deliver purpose built products to meet our customers evolving network requirements.

XT-500 will ship in Q4, providing customers with flexibility to utilize it for long-haul data center interconnect and to build optical mesh networks using our flexible grid ROADM technology.

Similar to the Cloud Xpress design, but enhanced for long-haul and Telco environments the XT-500 will minimize power, space and complexity allowing our customers to build efficient optimized long-haul networks. Moving now to Metro data center interconnect.

We made excellent progress in Q3, materially growing revenue and starting to ship the 100 GigE version of the Cloud Xpress. We now have 14 customers and see a nice pipeline of opportunities on the horizon.

Importantly, our largest Cloud Xpress customers have already placed follow-on orders suggesting that the platform is a strategic element of their data center architectures.

Going forward, we expect revenue acceleration attributable to increasing demand for our 100 GigE client interfaces as machine-to-machine traffic is driving data center operators to upgrade their switching infrastructures to support massive bandwidth demand growth.

We intend to leverage our time-to-market advantage and technological differentiation to further establish Infinera as the market leader in data center interconnect. Now turning to Metro, at Insight Infinera, we shared details around Infinera's new end-to-end unified portfolio highlighted by our entry into the Metro market.

Infinera introduced the XTC-2 and XTC-2E OTN-based solutions for the Metro Core with the same ease-of-use and reliability that Infinera is known for. The XTC series leverages our new 100 Gig oPIC-100 delivering optimized capacity, space and power.

In addition to Metro Core, XTC-2 gives us the right sized solution to expand our long-haul DTN-X footprint to Tier 2 and Tier 3 cities which have smaller capacity requirements.

For the Metro Core, aggregation and access markets, Transmode's TM-Series and TG-Series enabled Infinera to offer complete solutions that deliver rich services on differentiated platforms. At Insight Infinera, we announced that the TM-Series is being enhanced with the PT fabric enabling terabit switching for Ethernet and MPLS services.

We plan to further enhance Transmode's technological differentiation which is similar to Infinera's is focused on minimizing power and latency with our suite of advanced technologies.

In particular, we believe there is significant potential to address technology transitions and offer differentiated applications in mobile backhaul and fronthaul networks, business Ethernet services and cable broadband aggregation. Only a few weeks after the acquisition closed, we're already seeing early tangible benefits from Transmode.

Our recently announced deal with Hanoi Telecom was notable, marking the first customer where we sold Transmode's portfolio into an existing Infinera customer. Furthermore, I'm encouraged that we have already been invited to bid on opportunities that would not have been available to us without an end-to-end solution from long-haul to Metro Access.

On the integration front, our number one focus is to deliver a seamless end-to-end experience to our customers. We are moving quickly on this objective, and at Insight Infinera demonstrated unified network management across the DTN-X family and TM-Series products.

At that event, we also announced availability of new hardware and software features and enabled coherent 100 Gig WDM line-side interoperability between the TM-Series and the DTN-X family.

This will enable customers to deliver and administer services across their Infinera Intelligent Transport Network end-to- end, increasing service velocity and reducing operational costs.

In addition to optimizing the customer experience, it will also be important for us to drive increased profitability by incorporating our vertically integrated technologies into the network where applicable. We're off to a good start on technology integration, and we'll provide further updates on our next call.

Spending the past few months with Karl and his team at Transmode has validated my high expectations of this acquisition. We intend to unlock growth opportunities as Infinera's traditional customers migrate to 100 Gig in Metro and do so with the intention of helping our customers minimize the number of vendors in their networks.

Secondarily, we see meaningful opportunities in offering our PIC-based long-haul and high-capacity Metro solutions to Transmode's largest customers. We start in a great position to achieve this growth profitably, combining two of the most profitable companies in the industry.

While we believe the macro growth trends in the industry are sustainable over the medium-term to long-term, and our short-term results are strong. We are also beginning to see some conflicting singles in the market. On one hand we are seeing some pockets of slightly softening demand.

On the other, we're seeing positive indications in the industry, such as lead-times extending for optical components and continued capacity expansion from cloud providers. While we will monitor near-term market developments, on the whole, we remain very confident in our business. It is truly a great time to be an optical for Infinera.

We continue to believe the convergence of the optical, switching and routing layers which we refer to as Layer T result in customers favoring intelligent optical networking platform like Infinera's.

By providing one of the broadest end-to-end portfolios in the industry and having the most vertically integrated business model, I believe Infinera is uniquely positioned to be preferred provider of Layer T solutions while delivering leverage results to the bottom line. We look forward to seizing the unprecedented opportunity we have in front of us.

As always, 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 third quarter and our outlook for the fourth quarter..

Thanks, Tom, and good afternoon everyone. As Tom mentioned, we had another excellent quarter in Q3 with solid growth in revenue and profitability.

In light of our mid-quarter acquisition of Transmode, which closed on August 20, on this call when I refer to consolidated Infinera, this will represent our consolidated results, including the contributions of our new Metro business from Transmode for the five weeks in Q3 that it was part of Infinera.

When I refer to Infinera Core, this will represent the results for the traditional Infinera business to allow comparison to our prior guidance. When I refer to Transmode, this will represent the contributions from the acquired business for the five weeks in Q3, it was part of Infinera.

For the Q3 results we will provide information on each of these components of the business. Going forward, we intend to report our financial results on a consolidated company basis only. In Q3, consolidated Infinera's revenue was $233 million.

The Infinera Core portion of revenue was $218 million representing 26% year-over-year growth and 5% sequential growth.

This marks our seventh consecutive period of sequential revenue growth driven by long-haul customers continuing to build new routes while adding capacity to existing ones, as well as significant acceleration in our Cloud Xpress business.

Across our customer verticals, the Tier 1 in enterprise and wholesale carrier verticals led our growth in the quarter with each contributing a greater than 10% customer.

Our business continues to be diverse as our top five customers in Q3 came from four different verticals, two wholesale and enterprise carriers, a Tier 1 and Internet content provider and a cable operator.

We continue to benefit from the depth and diversity of our customer base, with several customers from each vertical, capable of significant spend in any given quarter.

The addition of Transmode's services-rich Metro portfolio considerably broadens our application base with both existing customers as well as new customers where we can now attack with an end-to-end portfolio. Transmode contributed $15 million of revenue in the quarter, continuing their strong performance in 2015.

In the quarter, we added more than 650 customers in connection with the Transmode acquisition on top of continued customer adds from the core Infinera business, bringing our total customer count to more than 800.

Given our expanded customer base, we will continue to provide customer metrics on new emerging areas such as Cloud Xpress, but we will no longer provide total overall customer count on a quarterly basis. To that end, we now have 14 Cloud Xpress customers having added two customers since our last call.

From a geographic perspective, North America remained our largest region in Q3, accounting for 68% of consolidated Infinera revenue, driven by continued strength from a North American Tier 1, wholesale and enterprise carriers and Internet content providers.

Internationally, EMEA represented 18% of Q3 consolidated revenue; benefiting both from sequential Infinera Core growth and incremental revenue from Transmode which generates most of its revenue in this region.

In Q3 the LatAm region represented 9% of consolidated revenue, up from 5% in Q3 of 2014 and representing an increase of over 120% year-over-year.

This region continues to be a strong growth market for us, having quickly transformed over the past year from a small region with low single digit total revenues to a major region with multiple significant customers.

Our expansion in LatAm is attributable to our continued traction with large carriers based in the region, as well as several global carriers expanding their build with the key focus on LatAm. APAC represented 5% of total revenue in Q3. Consolidated Infinera services revenue in the third quarter was $31 million.

Infinera Core services revenue was nearly $30 million, growing 12% year-over-year. Going forward, we expect strong services opportunities as we continue to focus on helping our existing customers succeed in their markets, as well as capitalizing on new opportunities to extend the Infinera experience into the Metro.

Turning now to gross margin and operating expenses. Consolidated Infinera non-GAAP gross margin for the third quarter was 47.5%. This result demonstrates the ability of the combined company to deliver strong gross margin performance.

The Infinera Core non-GAAP gross margin for the third quarter was 47.1% which is above our guidance range, attributable to continued cost benefits from leveraging our vertically integrated operating model and capacity additions to long-haul networks through both line card adds and Instant bandwidth licenses.

The addition of the Transmode business further enhance our results, as it delivered a non-GAAP gross margin of 52.1% in the quarter. Having an end-to-end portfolio, purpose-built solutions is not only the right approach for our customers, it positions Infinera to continue to grow both revenue and gross margin.

We plan to leverage the business practices that enable Transmode to earn greater than 50% gross margins historically and further enhance them through volume synergies with supply chain partners and over time the incorporation of our vertically owned IP into the Transmode portfolio where applicable.

As we make these improvements, it will allow us to aggressively attack the Metro market while driving gross and operating margins towards our longer term non-GAAP model of 50% gross margin and 15% operating margin.

Through the first nine months of fiscal 2015, we've been able to improve our non-GAAP gross margin by 440 basis points from 43.2% in the first nine months of fiscal 2014 to 47.6% in the same period of fiscal 2015. We firmly believe that Infinera with the addition of Transmode is well-positioned to continue this trend.

Consolidated Infinera services gross margin was 59% in the quarter in line with historic levels. Within Infinera's core business we continue to be more efficient on insulations and enhance our offerings to the expanding install base.

Consolidated results also benefited from Transmode services which are higher margin as they largely represent ongoing maintenance services. Consolidated Infinera non-GAAP operating expenses came in at $77 million in the third quarter.

Infinera Core OpEx was $71 million, which is below the guidance range due to R&D spend not keeping pace with revenue growth. While R&D as a percentage of revenue has been trending lower than our target of 20% of revenue, we intend to ramp our R&D spend back towards this target to ensure we can support a robust future product roadmap.

Sales and marketing was below our expectations due to a favorable commissions mix in the quarter. We plan to continue to invest in key personnel across sales and marketing to support our expansion into adjacent markets while continuing to achieve operating leverage in SG&A as we do so.

Putting it all together, I'm very excited that consolidated Infinera achieved non-GAAP operating margin in Q3 of 14.4%. This is a clear demonstration of the excellent profitability profile of the combined business. The Infinera core business delivered a 14.7% non-GAAP operating margin, a result that came in well above our guidance range.

While consistently achieving this level of quarterly operating margins is not yet sustainable. Q3's results demonstrate that we are capable of generating operating margins in line with our long-term non-GAAP operating margin of 15%.

We are invigorated by the significant opportunity to expand our addressable market and to do so in a very profitable way. Consolidated Infinera interest and other expense for the quarter essentially netted to zero and tax expenses approximately $1.4 million.

The shares used to compute diluted non-GAAP EPS during the third quarter were 145 million, up from 141 million in the second quarter, primarily due to the addition of the weighted portion of shares issued for the Transmode acquisition that closed on August 20.

In summary, consolidated non-GAAP net income for the third quarter was $32 million or $0.22 per diluted share, up from $0.18 per diluted share in the prior quarter and above our guidance range. On a GAAP basis in Q3, consolidated Infinera had net income of $8 million or $0.06 per diluted share.

The difference between our GAAP and non-GAAP results was due to approximate $13 million of intangible amortization and other acquisition-related costs, $8 million in stock-based compensation and $2 million in amortization of debt discount. Now turning to the balance sheet.

Cash, cash equivalents and investments as of the end of the third quarter was $344 million, down from $460 million at the end of Q2, as we utilized approximately $144 million of net cash as part of the Transmode acquisition.

We had another excellent quarter of cash generation in Q3 with cash flow from operations of $33 million driven by excellent operating results and positive working capital returns. In Q3, CapEx was $11 million or 4.6% of revenue and we generated $6 million in net proceeds from employee stock activities.

Through the first nine months of fiscal 2015 we have generated $107 million in cash flow from operations, and $81 million in free cash flow, which equates to an exceptional free cash flow margin of 13%. Now we'll move onto our outlook for the fourth quarter of 2015.

I am pleased to announce we currently project revenue for the fourth quarter to be $258 million, plus or minus $5 million. We currently project non-GAAP gross margin to be 47%, plus or minus 100 basis points as we continue to execute on our operating model plus enjoy a full quarter of margin contributions from the Metro business.

We currently anticipate non-GAAP operating expenses to be $88 million, plus or minus $2 million.

Our estimate is up sequentially from $77 million in Q3 primarily due to the inclusion of a full quarter of both expenses from the acquired Transmode business and integration costs as we work to combine the two companies operationally to ensure we realize all of the benefits from the combination.

The midpoint of our projected guidance translates to a non-GAAP operating margin of 13%, plus or minus 100 basis points. The combination of interest and other expenses is expected to net out to approximately $400,000, and we project tax expense to be approximately $1.5 million.

We currently expect diluted share count to be approximately 151 million shares as the remainder of the shares used to acquire Transmode are included in the count. We currently project non-GAAP EPS to be $0.21 per diluted, share plus or minus a couple of pennies.

As for GAAP EPS, we are projected to be lower than non-GAAP EPS by about $0.13 per share primarily related to amortization of intangibles and other acquisition-related costs along with stock-based compensation expense.

In the fourth quarter, we anticipate another reasonably strong quarter of cash flow generation albeit likely at a lower level than last quarter's generation. In summary, I am very pleased with our overall financial performance in Q3.

Now on with an end-to-end portfolio, we are in an excellent position to continue to grow both revenue and profitability by building world-class networks for our broad base of customers.

We believe our unique business model including our vertical integration will continue to enable us to deliver the best technology and solutions and to increase profitability as we do so.

By investing prudently and executing on our long-term model of top line and bottom line growth, we look forward to continuing to deliver differentiated financial results. With that, I would like to turn the call over to the operator to begin the Q&A portion of the call..

Thank you. We will now begin the question-and-answer session. All right. Our first question comes from the line of George from Jefferies. Your line is now open..

Hi guys.

Can you hear me?.

Yeah, George..

Yeah..

Great. Hey, thanks very much. All right. So I guess I have a few questions here. So if memory serves, the 50% gross margin and 15% operating margin target was never an official target, I think you guys were going to hold back on that and kind of wait until the Transmode math was, I guess, sort of well-understood within Infinera.

So is that a new set of targets for you guys and what timeframe are we talking about for that target?.

Yeah. So George that's always been the longer term target as we've talked about before, we'll formally update the model in terms of when that will happen probably sometime mid next year. But that's been the target all along and we still feel very good about our ability to achieve that overtime..

Got it. Okay. And then I also wanted to ask about Cloud Xpress this quarter. So there was a range that was out there think you guys had talked about $30 million to $60 million for the full year, I think more recently you were talking about like lower end of that range.

I guess, I was curious how much incremental revenue you got from Cloud Xpress this quarter, and how do you feel about that full year range at this point?.

Yeah. So George we're not going to break out the number specifically, but we feel very good about our ability to be inside that range, as Tom and I both noted in our prepared remarks. We had a great quarter with Cloud Xpress, revenues were up significantly.

We launched the 100 GigE version of the product and we feel great about the opportunity for that product..

Okay.

What do you see as the barriers to driving additional top line there? Is it manufacturing capacity? Is it just customer adoption? Is it readiness for 100 Gig in your data center networks, so how do you think about gating factors on growth?.

I don't think there's really not of gating factors, it's an absorption into an industry, as the industry puts in these new data center architectures.

I think that overtime 100 Gig will probably be the dominant technology interconnecting those, but there is still a lot of 10 Gig and 40 Gig out there today and there is a little bit of people who are transitioning to 100 Gig, they're not going to go an upgrade to a 10 Gig or 40 Gig, if right around the corner, they are going to go to a 100 Gig.

Now we have 100 Gig out there, and we have to go dance with them around, well, I got 40 Gig today, and I'm going to be upgrading slowly how do I go deal with that and we are working with them on that.

I think I am as optimistic as I have ever been on the opportunity for both the CX, Cloud Xpress and the XT-500 to support the Internet content provider market, the data center market, and I think that by having – we've now been in the market for coming up to a year, I think that's a substitute advantage for us, as there was as I said before, fairly long certification processes, the nine months we've been working with these guys, we've grown more intimate with them.

They have become more familiar with our technology and our roadmap. So I do not think that there is any impediment. I think it is a natural absorption as technologies evolved in the data center..

Great. Thank you..

Thanks George..

Thanks George..

Our next question comes from Sanjiv from Stifel. Your line is now open..

Thanks. So I wanted to ask you in the prepared commentary you talked about some mix signals on demand. I was wondering if you could kind of elaborate on that a little bit? And then looking out into 2016, what is the assessment of the growth of the overall long-haul market? And then I have one follow-up question..

Sure. As you know I tried to be as transparent as I can possibly be. Clearly, we had a great Q3. Clearly we are guiding to a great Q4, so the fundamentals I see are very solid.

I still believe that in the long-term all of the demand drivers for the industry, particularly for people like Infinera, who are building intelligent optical networks are very positive as positive as they have ever been.

But for the first time in a while, we've seen a couple of customers push out some deliveries, not cancel any orders, but push some orders out from Q4 to Q1. We are not seeing what I would – and maybe it's just too early really opportunities for year-end money.

We never count on year end money, but usually in an up-growth of environment there is usually some that does happen. We're not seeing it yet. And we're seeing Europe not being quite as stronger recovery. It's doing all right, but I had anticipated more in Europe. So clearly, the short-term, our guidance says a lot.

There have been a couple of indications that a couple of customers at least are pushing things out, and I think it's just appropriate to let people know that. The other side of the coin is, lead times on optical components have not been this long for years. So there are networks to the best of my knowledge being built.

Sometimes those orders get canceled if things change in the industry. But right now, lead times have extended, so I am still optimistic that the overall industry is solid, and we might be seeing nothing more than a couple of customers with year-end budget crunches affecting us. For next year, it's too early to call.

We will really have a good view of next year probably until sometime in the first quarter when all of our customers get their budgets set and start having the dialogues with us. I know that there is still a lot of network that is being planned to be built.

The fundamental demand when I talk to internet content providers, there is nothing in my mind that's slowing that demand down, but it's too early to call on what the budget is going to be. If you listen to the industry analyst, their forecast is that long-haul is going to slow down a little bit on a growth perspective, probably the 6% range or so.

Metro is going to increase its growth perspective probably 8% to 10%. I don't know if it is right or wrong, but 8% to 10%, the industry has been growing for the last couple of years. I would assume it is going to grow that much in the next couple of years. And then our job is to take market share..

That's helpful actually. Brad, just one follow-up, you guys obviously did well on the gross margin front for Q3, guided well for Q4. As you look out into next year, what are the puts and takes around gross margins that we should be thinking about as we kind of model out next year? Thanks..

Sure. Yeah, obviously as you know Sanjiv, there's a lot of moving parts with our gross margin and as you know as well, many of them are going in the advancing direction.

If I break those down and you look at the continuing ongoing benefits we've had, the vertical integration advantage we have is volumes continue to grow, the long-haul markets are starting to shift to more capacity adds versus new networks being built which obviously enhances margin, we've put out a lot of first-in modules for instant bandwidth that those licenses when they come, will come in at full 100% margin.

We are now purpose building products for different markets whether it's Cloud Xpress, whether it's the XTC-2, whether it's the XT-500 or the Transmode Metro portfolio, those are making sure that we optimize cost for all applications in the network.

And then if you think about the addition of the Transmode business, they've historically been greater than 50% gross margin. Under our umbrella we'll have the ability to improve their cost structure through volume synergies with the supply chain guys; we'll be able to integrate our vertical IP over time, so those are all positive things.

The take side of things, as we've said, we plan to be aggressive to go take share in the Metro market, but within our corporate profitability objectives, including gross margins at 50% over time. I think the thing people forget is those things do not have to be at odds.

We've done a great job of balancing those things historically and shown an ability to maintain a balance and continue to improve our gross margins. We don't plan to change anything there.

Obviously, our customers continue to put price pressure on us, but having control of our cost structure, we can still give them at an attractive price and still enhance our gross margin. So we still feel great about our opportunity to grow margin over time..

Got it. That's helpful. Thanks guys..

Sure..

Our next question comes from Vijay of Deutsche Bank. Sir, your line is now open..

Yeah, hi. Yeah, hi Tom..

How are you?.

Yeah hi, doing fine. So the question is a follow-up, if I may. The question is around demand commentary. You give us commentary on the Web 2.0 cloud segment, U.S. cable customers, overseas customers, ISDs so that they get kind of a good snapshot on end market demand near-term? Thanks..

Well, I think you ask about various verticals. In Internet content space continues to be very strong both from a results perspective and also I anticipate them continuing to build a substantive amount of capacity for the foreseeable future.

Cable, almost never buys much in the second half of the year, so this is kind of a typical low for the whole cable industry. We did have some cable business in Q3 which is unusual, quite frankly. So I'm not concerned about the cable space at this point, but clearly in the cable space there is ongoing acquisitions, ongoing consolidation.

I think that is – I view it as an opportunity. These companies being acquired, we have a very large installed base at these companies, so the thought of being displaced to me really is I can't imagine it, so I am looking forward to these acquisitions getting completed, so that we can go on to helping them build their businesses.

We probably won't know what it means until sometime next year, but I anticipate a strong first half build cycle with the cable guys. The international markets, to Brad's comment, LatAm is doing extremely well for us. It continues to grow. We continue to invest there. We continue to have more opportunities.

And I believe overtime it represents a bigger portion of our company's revenue. APAC, I think we have an opportunity, both us and Transmode, quite frankly, we're not very strong in APAC, but I think the combined portfolio will help us win some business particularly with our new Metro offerings.

The DTN-X was a little bit big for a lot of the APAC regions, I think with Transmode we can help foster better growth within the Metro by having a comprehensive portfolio. Europe's doing okay for us. But I think some of our competitors have particularly as they sell to enterprises in DWDM, have done very well.

I keep hoping that ours is going to continue to accelerate growth. So far that hasn't really happened, but I'm, I guess, optimistic – cautiously optimistic that they are going to start investing and now that we have a broad Metro portfolio, we're probably better positioned to leverage our long-haul relationships in that market with a portfolio.

And I do see some traction there. It's just not paying off yet. Russia continues obviously to be kind of on hold for us. So overall I think it's a good business environment. The wholesale – we didn't talk about wholesale and enterprise carrier, that's doing extremely well.

We're obviously extremely well-positioned there, and we're doing very well across a number of customers in that specific space, both domestically and internationally..

Excellent. And sorry for asking that question it's.....

No..

...very long, but very helpful answer. A quick follow-on if I may. One of the bigger service providers I spoke with recently was mentioning to me that 100 Gig is an inflection point for PIC-100 and above is when PIC starts getting interesting to them.

So I'd like to get kind of your side of the fence Tom on the relevance of PIC-100 Gig and plus? Thanks..

Yeah let me, this is Dave Welch I will chime in here. The PIC offers a density benefit to be able to put more bandwidth on the network quicker, faster and easier to operate. And so 100 Gig, a transition of the network from 10 Gig to 100 Gig per wave we're going from 500 gigabits per PIC today to a higher number in 2016. That just adds to our advantage.

The higher the bandwidth goes, the more differentiated our products become..

It's interesting that you say Tier 1, I'd said that the PIC becomes interesting above 100 Gig for them. Clearly, the PIC's been very interesting to the industry for a long time.

We became number one market share in 10 Gig wavelengths during that period of time when 10 Gig was the dominant technology, we become number one in 100 Gig outside of China, when that was the predominant technology.

And as Dave said, as the densities and speeds get higher it actually becomes more important, more relevant not only to Tier 1s, but to the market in general. And I would say even more than the Tier 1s the internet content guys are going to drive the value proposition for our high-capacity PICs. They will be the first people to deploy it.

So I am more convinced than ever that over time just as our competitors point out, at some point photonic integration becomes mandatory. We just got there before the rest of the industry..

Excellent. Thank you again..

Thanks Vijay..

All right. Our next question comes from Michael of MKM Partners. Sir, your line is now open..

Michael? We can't hear you..

Okay. Sir, I think we lost him..

Okay..

Next question comes from Alex of Needham. Your line is now open..

I am always slipping in there behind Mike..

Not this time. Not this time..

Yeah, no, no, no, that's true So there seems to be two basic themes that are playing out in terms of people having bearish positions on both, you and for that matter Ciena which is that, the idea that you are going to be an attacker, and the Metro is going to cause margin pressure and the idea that the market for this technology is extremely competitive and getting more competitive, and the pricing pressure is going to drive margins down.

Those two points relate to two different issues. And I was wondering if you could address a couple of either side of that.

The first one is, are you seeing an environment where there is more surety on terms of who is winning and who is establishing the dominant position in the marketplace going forward, and somewhat lessening of the viability of some of your competitors as ALU gets bought by Nokia as people like Fujitsu maybe getting pushed out of major networks and become more regional, as Tellabs and Coriant struggle under the ownership of a private company.

Is the market starting to become less competitive? And then second, the idea that you are going to have to be more aggressive on price, and Metro impacting 2016 numbers, strikes me as a little odd in the sense that the vast majority of the new customers you would get in Metro would have a longer timeline to realizing sales.

And I would think that most of your Metro sales in 2016 would come where you're already the incumbent and that there is a real advantage taking your 100 Gig connections from long-haul into the Metro at your existing customers.

Can you address that issue please?.

Yeah, I assume two issues, I'm going to start with the consolidating industry view. And I've been I think pretty clear on that for a long time. The industry is going to continue to consolidate. I believe that with all of my heart. I think there's going to be new winners, and there's going to be a bunch of losers.

I think that part of the winner's ability is having the end-to-end portfolio. It's one of the reasons we bought Transmode and are extending into new markets. I think one of them is how much R&D can you spend to own vertical IP and making sure you differentiate around that IP.

This industry is becoming more expensive to lead in, and there's only going to be a handful of people I think who have the capacity to do that; we clearly are one of them. And quite frankly, we are investing in the IP before we could afford to, because we knew we had to. I think that the number of people that will go away is pretty broad.

Sometimes it's going to be subscale players. If you look in the Metro space there are a number of subscale players. They might be able to survive as very niche participants. But they're going to have to restructure themselves down to niche size.

I think a lot of them just go away, and that's going to yield an opportunity for us and other people who are going to be the winners.

I also think there are some of the larger ones you mentioned, Fujitsu I think personally has to reposition themselves, an untrivial portion of their revenue, at some point it's going to be deprived, because they lost the Verizon opportunity and they're going to have to repurpose themselves.

I think Coriant, personally I believe is challenged; I think that they're going to have a significant challenge to support the breadth of the portfolio they have on shrinking market share. So I think that all those are good signs for us and a couple of other winners, there are going to be other winners besides us, but not a lot.

I think that's good signs for us to be able to pick up market share. A part of the challenge in my mind, when companies are struggling, they don't die gracefully, they don't die elegantly, they don't throw in the white flag and give up. What they typically do is lower prices to buy market share and survive.

That is going to happen in certain places in this market without question. And I think that leads into your second question which is what am I going to do in the Metro? And I have commented that we're going to be aggressive in the Metro, and I think people have taken that to an illogical extreme.

As Brad pointed out, the Transmode product we acquired has margins greater than 50% and our corporate margin structure that we have not committed a timeframe to is 50 points. We have the opportunity to be aggressive in the Metro. It's still less than 20% of our corporate business, without tanking our corporate business model.

And I don't know why people had drawn an illogical conclusion that me saying we're going to be aggressive in the Metro, says we're going to go tank our goals about creating a 50-point margin company. There are not orthogonal to one another. And it's proven over time. Our market share and margin are correlated.

If you burn market share, you will over time enhance your corporate margin. We are in this for the long-term. We are going to go aggressively into the Metro. We're not going to go by business, that is dumb business. We're going to grow market share, and we're going to create a company with 50 points of gross margin.

Those are things we are going to go do. It's going to take us a while and people need to – I think investors need to think about the long-term and think less about next week. And we bought Transmode not to be a niche player in Metro, but to be a leading company end-to-end in optical transport.

As optical transport becomes more strategic in the industry, as more intelligence is put into the transport layer, and as the industry consolidates, it is a excellent time for us to be doing this..

Yeah. And just to add to that Alex, I mean, the comment about us being aggressive in Metro, we're aggressive wherever we do business, right? We like to win and we have the business structure that we can be aggressive and still deliver a very profitable business.

We do it today by balancing our book of business, right? We have different margin profiles across different customers, and we're committed to continuing to balance that and make sure that we continue to enhance the corporate margins..

If I could just follow-up two last questions and I'll cede the floor.

One, just trivial before I forget that, can you give us the guidance on 2016 tax rate? But the second one back to the original question I just asked, the shift of ALU into Nokia, who has already exited the optical market once, and I believe ALU has been the price leader in the marketplace for the last 18 months plus.

Do you see any signs of them altering courses, Nokia brings them under and tries to make them stop losing money and stop being irrational on pricing? Do you see that transition happening at all yet and do you think it will?.

I'll let Tom address the second one, and then I'll address the tax one after..

Yeah, we do see them as being price leaders in the industry; I still don't understand the rationale, but we consistently see that, particularly in Europe, and they might have an advantage in Europe there with the dollar exchange rate stuff, but they've been price leaders before that. I guess, I can't speak to why that's their strategy.

In regard to Nokia buying them and altering that strategy, I don't have any inside information on that, but my suspicion is they are not buying pieces of businesses, they are buying a business and they're going to let Basil run that organization the best way he sees fit.

I think the bigger question in my mind is, Nokia sold a optical group to Coriant two years or three years ago, because it wasn't strategic to them. They now have another optical group. Is this one strategic to them or not? I don't know.

But if I was a customer, I'd certainly be asking them that question, why wasn't it strategic, and why is it now?.

Yeah. And to address the first part of your question Alex, the reality is as we continue to make more and more money us being a actual tax payer becomes more of an issue which is a good thing for the business. Obviously, the Transmode business is a taxpayer today. Their tax rate is north of 20%.

We're not ready for 2016 to model a formal tax rate, but we can update you on that overtime..

Is it reasonable to think that's in the teens kind of number, I mean just generally, well we need to get in the ballpark at least?.

Yeah, we can help you model that offline..

Okay. Thank you. Thank you for the great answers by the way..

Thanks..

Operator, go to the next question please..

Okay. Our next question comes from the line of Michael from MKM Partners. Your line is now open..

Hey, can you hear me?.

Yes. We can Michael (45:10)..

(45:09)..

Okay. It's fine. All right. Don't mind that. So Tom, I'm trying to reconcile the comment about the push-outs with the solid guidance.

So first of all, are you saying the guidance would have been materially higher if you hadn't seen these push-outs recently? And just help me understand a little bit better again, was this more of a Metro push-outs, long-haul push-outs, like you said Europe, and telecom, what vertical specifically or types of carriers were these, push-outs being seen in?.

And so I'm going to be dissatisfying to you on this. I tried to be very transparent on what we're seeing. And it wasn't big push-outs. I have no idea what the guidance would have been, because the push-outs occurred before Brad and I and Dave sat down and said what's our guidance going to be.

The only reason I bring it up is because it's the first time we've seen this in a little while and it is orthogonal to what we see happening from the component business, it's orthogonal to what we see happening with a lot of our verticals, and I may be overly transparent on this, and I think people are going to overly worry about it.

So I wouldn't make more of it than it is, which is a couple of customers pushed some stuff from Q4 into Q1..

Okay. It sounds a really good answer. And then Brad I wanted to ask you, it sounds like you don't want to give revenue breakouts anymore going forward between core and Transmode.

So I'm wondering what are you going to provide? Are we going to be able to track long-haul versus Metro versus data center interconnect's performance and what about on gross margins, will you continue to give Transmode gross margins versus core gross margins for at least several more quarters?.

Yeah. So Mike, the reality is it's run as an integrated business. So we plan to run it as an integrated business going forward. It's not a separate business that we're going to be able to easily break out. We will give you color on different things, but we plan to run them as a combined business.

So it's not a – I'm trying to be cagey on things, it's just a reality of – our goal is to run a combined business that has opportunities across both with traditional Transmode customers, traditional Infinera customers, and we don't want to run a separate set of books on the two sets just to give updates like that..

Okay. Well, I'm still thinking about how I feel about that answer, but I appreciate you giving it. So thanks a lot guys and congratulations and good luck..

Thank you..

Thanks..

Operator, next question..

Okay. Our next question comes from the line of Doug from Goldman Sachs. Your line is now open..

Great. Thanks a lot. I was just curious on the Transmode impact; when you initially announced the deal you talked about it being neutral to slightly dilutive in the first half of – excuse me, in the second half of 2015. It appears that gross margins expanded relative to what they had been guiding and was probably accretive to your results.

So I was just wondering what came in kind of better than expected, was it just lower expenses recognized in the third quarter?.

Yeah. So their gross margins were actually in line with what they have done historically. From an overall bottom line perspective, it was roughly neutral for the quarter. But obviously, that's only five weeks of the quarter, so..

Okay. Got it. Got it. Thanks for clarifying that. And then on the Cloud Xpress, it sounds like there was a pretty nice sequential uptick in Cloud Xpress-related revenues.

Is that driven primarily by the 100 Gig variant being available, or was it broad based across the board? And similarly related to that, can you just help us, I think we've asked this in the past but, size, how large your end customer exposure to ICPs are in general?.

Yeah. So Doug the 100 GigE version launch right at the end of the quarter, so that's not what's driving the upside in the revenue. It's the existing product. It's very strong within the ICP space. So those are the guys that are driving the incremental revenue.

Obviously, 100 Gig, as we go forward or the 100 GigE version, we think will be more and more of the volume and should continue to drive upside for us. The ICP portion of the revenue obviously changes from quarter-to-quarter. What we said is, it's roughly 20% to 25%-ish of our overall revenues based on what we sell to them directly..

And just to clarify that because I've gotten the question as well, that includes DTN-X related revenues as well not just Cloud Xpress, correct?.

Correct..

Okay. Great.

And then if I can sneak one more quick one in, since this maybe last time you'll give it to us, can you talk about how many customers the Infinera business added during the quarter?.

Yeah, I think it's – Jeff you have to help me on this one, I think it's three new customers for Infinera..

Great. Thank you..

That is the last time we're going to go bring it in, you're right..

Well, I appreciate it. Thanks..

All right..

All right. Thanks Doug. Operator next question please..

Our next question comes from James (50:28) of Morgan Stanley. Your line is now open..

Hi, Mita (50:32) in for James (50:33). I understand that you're not going to break out Q4 guidance between Transmode and core Infinera, but can you give a sense of whether the strength is coming in from Metro or long-haul or data center? And then I have a follow-up question..

Yeah, so Mita (50:49) we see strength across the portfolio quite frankly. There's areas within our long-haul business that continue to grow. The Metro business obviously is there for the full quarter, but continues to be strong, and obviously we expect Cloud Xpress to grow. So it's not any one area. We see good growth across the board..

And then just kind of a question on integration of the sales forces of Infinera and Transmode.

How is the training kind of going on; is Infinera's selling Transmode products; is Transmode selling Infinera – how is that portfolio going in especially in products like XTC which might be kind of a fusion of those product lines, like is everybody selling everything so far?.

Yes, everybody is selling everything. I mean, the first thing as we said, what we want to do is create a unified company picture to our customers first. So the first thing we did was create training programs for consolidated field for both companies.

We did one in North America, we did one in Europe, we did one in a APAC and we had both teams together for that. We've reorganized the sales force already under Bob Jandro, so there is no longer a separate Transmode sales team and Infinera sales team.

There is one sales team and that's been mixed with people around accounts and markets and technologies. Clearly, it's going to take a little while for the Infinera people to get up to speed on the Transmode portfolio, and vice versa.

But they are jointly selling products now and they are commissioned which is always important across what they sell, regardless of what they sell. And good sales guys, what they're very best at is figuring out how they can make money, and that's by selling a whole portfolio of our gear and Transmode's gear and everything else.

So I'm actually very happy with how that's gone so far..

Okay. Great. Thank you guys..

Thanks..

Thanks Mita (52:43). Next question..

Our next question comes from Mr. Rod Hall of JPMorgan. Your line is now open..

Yeah hi, this is Ashwin on behalf of Rod. Thanks for taking my question. Sorry to continue to beat a dead horse here.

But, Tom I don't think you mentioned any customer vertical where you saw these push-outs?.

No, we didn't, and we're not going to – and I don't want to make – have you guys make it a bigger deal than it is..

All right, fair enough.

And as you were talking to your existing customer about Transmode products, can you give us a sense of whether you're seeing any pricing pressure, are customers asking for more discounts, is there something else which could probably accelerate the penetration of Transmode products into your customer base?.

Yeah, this is Dave Welch. Almost all of our customers have Metro applications within the networks that we supply to them. They love the experience they've had with Infinera products and they are looking for an opportunity to extend that experience from them.

In the Transmode product as well as the XTC-2 product line enables us to offer different solutions depending on what their OTN or packet fabric requirements are..

But the interesting thing is we are being invited to some pretty good RFQ's with this extended portfolio, so sometimes on these, the price bands hasn't started yet, but these are request for quotes that we would not have had an opportunity to participate in before, and I think that what people are looking for are vendors who can provide end-to-end solutions, a great quality experience, excellent customer support, superior technology today and into the future and aren't at risk of being consolidated out of the industry.

So I think that all of these things are very positive, and I think that as Dave said, we will offer good value, but as people look for end-to-end networks, it is not really about how low can I go on this one box..

I think it's worth reiterating on the number of a questions here. We sell a differentiated product. We sell a product that the customers value and they see that value and they're willing to give us a price to represent that value.

We have a vertically integrated product line that allows us to make more targeted products, and it also allows us to do it in a structure that can generate differentiated gross margins for that. So our differentiated product and that experience, that continues to encourage them to take our product deeper and deeper into their networks..

Okay. Great. Thanks, guys..

Thanks..

Thanks.

Next question?.

Next question comes from Ted of Barrington Research. Your line is now open..

Thank you for taking my questions. Tom, you had indicated there was a market study over the last several years, the Metro market was growing about 8% to 10% annually and seeing the same thing for next year. I was under the impression, and I think the markets under the impression that the Metro market is going to start accelerating with the 100 Gig.

So are we thinking wrong there? I mean is the market just going to continue to grow steady state or are you actually seeing an inflection down the road where the Metro market is going to actually start to accelerate?.

Yeah, I think – and this is Dave Welch again, I'll let Tom add on here. First let me clarify what these numbers that Tom referred to are total markets, we're talking about $5 billion rough markets between long-haul and Metro. The 100 Gig front portion of that market is growing at a subsequently faster rate in both the long-haul and in the Metro.

We are targeting our – our technologies are greater differentiated for the 100 Gig aspect in the market and we expect that to grow faster and that's the aspect of the market that we're going to go after..

Yeah I think that at least what the data I've seen and Dave is absolutely correct that Metro will grow 8% to 10% next year off a slower rate this year. This year long-haul grew faster than Metro. The forecast is that next year Metro will grow aggregate faster than long-haul. And 100 Gig will grow substantively in Metro..

Okay. Thanks for clarifying. And then other question is, as you sell to the Web 2.0 guys over the next year, if you can look out may be six months or so, how do think your product mix to those guys shakes out among Cloud Xpress versus the new XTC-500 versus DTN-X.

I mean, how do you see that shift or that mix breaking out?.

Yeah, that market's – actually ICP market sector and related, they have network needs that range from subsea application to transcontinental application to across the street applications. The CX is designed for within the Metro distances.

The XTC, although, satisfied some Metro applications, it's predominantly designed for high capacity long-haul, and then obviously our subsea solutions. The total bandwidth growth either directly through the ICPs or indirectly through the wholesalers or other market sectors is substantial across all of the applications..

And I think the important thing to us isn't whether they buy Cloud or XT or DTN-X, we don't care as long as they are buying one of them. Now, what we're trying to do is create a portfolio of tools that is right for whatever application they might have. As Dave pointed out, they have a breadth of applications.

I mean, they are the new Tier 1s of transport in my absolute convicted opinion. And what we want to do is make sure that we're providing the superior solution for whatever one application they need, and I just want to beat the other guy. I don't care which product of ours we sell..

Makes sense. Thanks a lot guys. Good luck..

Thank you..

Thanks.

Next question?.

Thank you. Our next question comes from Tim Quillin of Stephens Incorporation. Your line is now open..

Hi, thank you for taking my questions.

Just two quick ones, one as you look at the Transmode portfolio, is there a set of products or a portion of your existing customers, Infinera customers networks where you think you might have a Trojan horse that kind of gets your foot in the door on those cross-selling opportunities? And then second question, just today I think there has been some questions around the notion of some of those hyper scale data center operators maybe introducing White Box optical transport into their networks and whether that's from your perspective viable or not? Thanks..

Well, certainly on the White Box transport I haven't heard that yet. I have not; and I talk to these guys, we talk to them a lot. We certainly see White Box switching, White Box and other things. But I think the Internet content guys are pretty savvy around optical; they've hired a number of our guys. So we talk to them a lot.

And I have not seen or heard anything around White Box transport. I've certainly heard of White Box switches that they're looking to incorporate transport into, but that's more conceptual roadmap and I think there are a number of challenges in that arena.

I still don't believe that the Internet content guys are going to go and re-create what they tried to do round switching around transport. We'll see, but I don't feel threatened by about at all.

In regard to other Trojan horse applications, with our Transmode buying, yeah, we do think that there are some opportunities in specific applications that they bring to the market that we think that if we can get a first application; I mean Transmode has been extraordinarily good in their history of creating niche applications, designing very well for those, for margin, power, space, getting in the door and then leveraging those up.

We plan on continuing to do that. We do see, I'm not going to talk about which ones specifically, some very good opportunities to potentially get into some customers that we have not been in with some of their capabilities, and we will try to do the same thing.

Be very successful at this niche opportunity, and then leverage it into a great big opportunity over time. Transmode was very successful at that, and quite frankly, Infinera was very successful at that. That's why we think the Infinera experience sell so well, because once customers get a taste of it, they typically come back for more..

Great. Thank you..

Thanks Tim. We'll take one final question, operator..

Okay. Our next question comes from Tim Savageaux of Northland Capital Markets. Your line is now open..

Hi, glad I was able to make it on there and congratulations on a strong quarter..

Thanks Tim..

I hesitate to ask a question related to somehow the misconstrued, but I see you've taken care of that for me to some degree with the pockets of weakness. But I did want to address another item that you mentioned about new opportunities arising as a result of the end-to-end portfolio that you've put together here.

And specifically, whether that might also apply to – versus the new Tier 1s you mentioned, opportunities kind of at the old traditional Tier 1s, even perhaps opportunities at Tier 1s where you've substantially already won business in the past..

Yeah..

And I wonder if these type of conversations can be refreshed, or you continue to target those larger traditional carriers or....

Sure..

...you've turned your focus more towards the new guys..

No. We're targeting anybody who's spending any money and that's my preferred customer.

We have been invited, for instance to, there's a wholesale Tier 1 that we do in Europe that we've had a very, very good relationship with, in their wholesale business, and we've never been invited into – quote, into their domestic network, because one of their rules is you have to have end-to-end.

Not long after we did the Transmode deal, we were invited to, quote, on an end-to-end, within the PTT's domestic network. We haven't won yet, but we've now been invited in for the first time. I think that's a very good opportunity.

There's another customer that we have that has been a long-term customer, mostly in subsea, and we are now talking with them around Transmode product that they are very interested in. They weren't interested in Transmode before, not because the technology wasn't good, but they just didn't need another vendor. So I think that that's a good opportunity.

We have a large PTT, or Tier 1 in Mexico where both of us were independently selling to them, but more opportunistically versus strategically. I think we have the opportunity and the conversations are occurring of maybe we can move this into a strategic relationship. The exciting part to me is, this is, what, six weeks after the deal closed.

This isn't six months or six years after it, its six weeks. So if this is any kind of indication, I think, like I said, we're going to look back and say, this was really a superb buy for us..

Great. Thanks very much, and congrats once again..

Thanks Tim..

Thank you guys for joining us and for all your questions. Before I sign out, I want to give a little shout out to Charlie Strong and the Longhorns on their new winning streak. Hook 'em Horns until the next time. Have a great day..

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