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DWDM

Infinera Revenues, Losses Widen

Executives at Infinera Corp. (Nasdaq: INFN) used their debut earnings call to preach the benefits of measuring "invoiced shipments," instead of revenues, when looking at the company.

The company reported net losses of $26.1 million, or $1.10 per share, on revenues of $58.4 million in the second quarter. That compares with losses of $19.8 million, or $2.62 per share, on revenues of $49.2 million the previous quarter. (See Infinera Reports Q2.)

For its second quarter in 2006, Infinera incurred losses of $18.2 million, or $3.23 per share, on revenues of $4.1 million, according to its SEC filings.

On a pro forma basis, Infinera beat analysts' expectations. It reported a pro forma profit of 4 cents a share. Analysts were expecting a pro forma loss of 11 cents per share, according to Reuters Research .

"Invoiced shipments," which Infinera describes as the revenues it really collected during the quarter, were $69 million, outpacing analysts' expectations of $61.4 million. The trick is that Infinera spreads the revenues of each sale across multiple quarters. So its GAAP revenue number will usually be lower than its "invoiced shipments" -- and that gives analysts an idea of what's to come in the months ahead.

Alongside its earnings, Infinera reported a contract with Cox Communications Inc. to build a nationwide transport network. That's a job separate from some metro DWDM work Infinera said it had previously won with Cox. (See Cox Picks Infinera.)

But despite having grabbed Cox along with some 30 other customers, Infinera so far has taken in the most money from Level 3 Communications Inc. (NYSE: LVLT), one of its investors. And its invoiced shipments, while steady, haven't yet grown past the $70.5 million reported in the fourth quarter of 2006.

For its third quarter, which ends in September, Infinera says it expects invoiced shipments of $68 million to $72 million. Analysts were expecting $64.1 million.

That quarter will include some new deployments, Infinera expects, some of which might not get invoiced until the fourth quarter. Included in the deployment mix will be some metro wins for the 19-inch chassis that Infinera announced in June. (See Infinera Spews News.) All told, Infinera thinks it will report a per share loss of between 0 and 2 cents.

Shares of Infinera rose $1.20 (5.3%) to $24.00 in early after-hours trading.

— Craig Matsumoto, West Coast Editor, Light Reading

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brick&mortar 12/5/2012 | 3:04:23 PM
re: Infinera Revenues, Losses Widen I thought the whole reason for the "funny" financials was centered around software support contracts that [might last as long as five years and] INFN was trying to recognize as revenue now.

Granted I work in this space and compete with INFN occasionally, but in doing so I see the CAPEX for their DWDM hardware to be extremely low, while the OPEX (including fees paid for warrenty or support) to be quite high. They often win or lose deals as a result of either circumstance.

For instance the 12,000 mile network they referenced on their conference call, about which several analysts queried the monetary value -- recieving no answer... this could sell for an initial hardware cost in the $7-15 million range. Not sure if this represents any actual positive margin. The profit is intended to come from annual hardware support and software license fees, and is usually termed for five or more years. Again I think the "soft" part of their financials is the recognition of all or part of this revenue in the current quarter.

This is dangerous accounting for two reasons. One, (credited to an earlier posting) one has no idea of the cost ot provide this kind of support. Two, these contracts are usually discounted later, say in year two or three as a practice of winning other new business. Either scenario would require a restating of past financials (something INFN actually did before their actual IPO).

I am not discounting their different approach to DWDM and how it can be better in some applications of 10G transport. I am concerned about the flexibility of this solution in metro applications when carriers need to transport ITU signals between adjacent routers or other ITU capable devices. Also not much said on the call about 40G...

Again, my opinion is biased. I chose not to work for this company. I just wanted to bring the conversation back to what I thought this was supposed to be about. Questions on accounting, and viability of a new technology.
howsweetitis 12/5/2012 | 3:04:26 PM
re: Infinera Revenues, Losses Widen My first and last message...

Having worked at Lightera in mid 1998 through the Ciena acquisition in March 15th of 1999 through 2001 to then jump over to Infinera in late 2001 (retired about 1 year ago) I can tell you that the Infinera story is indeed compelling. The folks I worked with at Lightera early on were fantastic and incredible co-workers. However the technologists at Infinera have truly cracked the Holy Grail. Core Director was a great product at the time and is probably the thing that saved Ciena from going under in 2001-2003. Infinera however will not be acquired in my opinion and here's why. The brain trust on the PIC side is enormously talented and rare. If they were acquired the brain drain would put Infinera in serious peril. If any one heard the CC call with Infinera last week the lack of questions from the Wall Street community is simple. Infinera is so far out ahead of everyone from a technology side many don't know what to ask. Infinera is a company that was created from the effect of the PEREFECT STORM that was 2001-2002 when thousands of people were laid off from Telecom, available, and hand picked talent that created what is now Infinera. Sort of a once in a lifetime creation. I am just humbled by the fact that the last 8 years of my career were shared with some of the greatest and talented folks in Silicon Valley. GOOD LUCK Infinera.
douggreen 12/5/2012 | 3:04:26 PM
re: Infinera Revenues, Losses Widen First, why did the CIena/Lightera aquisition work:

1.Lightera product was needed due to the adoption of DWDM. Could go into an entire story, but suffice it to say that the product was needed and they were way ahead of the rest on delivery. It represented near term positive earnings for Ciena.
2.Customers were the same customers, and often even the same groups within the customer, as the DWDM products. It was a natural fit for the account management teams. Half of the Lightera management team were defectors from Ciena anyway.
3.Ciena was financially strong enough to swallow Lightera without choking on it.

I can't see this kind of scenario playing out (yet) with Infinera (as the aquirer). Actually, I see this scenario possibly playing out with Infinera being aquired.

Alcalu needs some kind of story to tell Wall Street about how they are going to stop their tailspin. Hmmm... just don't take payment in AlcaLu stock. Trust me on this one.
rahat.hussain 12/5/2012 | 3:04:27 PM
re: Infinera Revenues, Losses Widen Doug -

Good posts, both. Especially the first one where you subtly point out that it is really scenario #2 that is unfolding ;-)

Re: acquisitions, many of the suggestions I had made would give INFN a revenue stream, a customer base, and a "close-to-breakeven" product addition.

Apart from which specific company they should acquire, the question is which area they should move into. For example, CIEN, then a WDM transport vendor, ventured into the world of cross-connect/switching with the Lightera acquisition.

What's INFN's next best step? If they moved into some of the WDM acquisitions, it immediately negates their OEO marketing story. Ethernet play may be too huge for them to gobble right now. But they do need some expansion into service interfaces, and low-bit-rate cost-optimized solutions.

odo

[Another poster from the past, but with a new userid]
douggreen 12/5/2012 | 3:04:27 PM
re: Infinera Revenues, Losses Widen First of all, Infinera needs to be careful to maintain focus on their core business. Aquisitions will not help if they take their eye off the ball with their own products.

IF they consider aquisitions, then they would need to buy near term revenue streams, not development projects or product lines that are cash flow negative and will be for the forseeable future... and especially not ones that require a seperate sales force and overhead structure. Remember, they are trying to grow revenue and improve profitability.

Not to say that I wouldn't have a bus dev team working on strategies for the future if I were in charge, but to swallow another operational entity at this stage would require a LOT of payback for me to take the risk.
douggreen 12/5/2012 | 3:04:27 PM
re: Infinera Revenues, Losses Widen Talk about a poster coming back from the dead :)

So Phil, what questions should you be asking regarding Infinera becoming the next Ciena?

I will take it for granted that they have a technology advantage, and lets assume for a moment that they will continue in the lead for the forseeable future.

Remember, the equipment cost and the specific role of the product is only one aspect of what the customers are looking for. Although they are deeply concerned with capital cost, they spend more on operational expense and support personel. For them to add a new type of equipment, especially from a seperate vendor from whom they buy nothing else and have no experience with, they either need to have one of two situations:

1. A DESPERATE need for the equipment (people lying awake at night worrying about how they are going to solve the problem that ONLY this startup can solve... see Ciena's original product.) 2.Financial considerations that have the carrier make money buy buying the product whether they use it in their network or not... see a long list of products bought by Qwest and L3 from companies where either the execs or company itsself owned stock and made more on stock appreciation than they spend on the equipment.

I'll assume for the time being that you are looking into situation number one... is there a real growing market. Back to the questions to ask:

1. Who is lying awake at night worrying about the problem that only Infinera can solve? Even if they are not willing to talk about Infinera, they should be talking about the problem.
2. If they do desperately need Infineras product, how much of it do they need before the problem is solved? How much is in the budget for this year and next?
3. Can they solve the problem, even at greater expsense, with a traditional vendors product? Better to spend twice or even three times as much with a solution with less overhead and risk. However, if function, space, power, etc. constrain the solution to ONLY Infinera, thats a story.

As far as expanding market, Ciena had the luxury of a huge market for their original product, one that could generate literally billions in revenue per year at the time. It took well over 5 years for them to break into any new product areas with any level of success, and that was through the aquisition of Lightera...but they had the deep pockets to afford a few screwups.

One more point... early at Ciena the CFO spent a lot of time "explaining" to the market analysts how you couldn't measure Cienas lumpy revenue like you could a traditional company's revenue. Didn't work then, won't work now. Right or wrong, managing revenue streams is part of what it means to be a PUBLIC company.
DCITDave 12/5/2012 | 3:04:30 PM
re: Infinera Revenues, Losses Widen re: "Rather than write articles about finance because you have a deadline to make, why not tell us all how Infinera is going to achieve that particular feat of business vision without crashing and burning?"

Excellent assignment (and a great post in general). We had to cover the finance side stuff (if only because it's so odd), but rest assured we'll get back to figuring out where Infinera's catching on fire in the market.

ph
rahat.hussain 12/5/2012 | 3:04:30 PM
re: Infinera Revenues, Losses Widen So let the dialogue begin - who would INFN acquire?

- Ethernet play: ATRICA, ANDA, HATTERAS?
- Metro WDM: BTI, MERITON, ADVA (why not?)?
- Others (aggregation): TURIN?

odo
hyperunner 12/5/2012 | 3:04:31 PM
re: Infinera Revenues, Losses Widen Hi Phil,
Wow, has it been that long? Yup, that tends to tie in with when I moved back here from the UK. Not that there's been much to post about in that time other than "X lays off another Y employees".

My opinion of Infinera?

They give a damn good presentation. Their customers seem to love them, and that comes from a mixture of what I've seen in the press and comments by friends in those companies.

They are genuinely different. They called it "a contrarian approach" in the slideware, and that appeals to the old fart in me who likes a bit of variety in his life. So I can see why Tier 1's havn't bought yet - they make sheep look like independent thinkers! And I don't see Infinera claiming OSMINE compliance, do they? But I'm not a fan of Tier-1s. I can see why it's important to sell to them, but they are a bitch to deal with - we are both suppliers and customers for Tier-1s.

Do they have a sustainable business? Gosh, I have no idea. And despite the "authoritative" opinions expressed on this board I suspect nobody here or in Light Reading can really give an "informed" opinion. This is a technology publication. What I do think is that this "ratable revenue" issue will continue to dog them because some people (naming no names) get confused when they aren't "like Ciena".

Technology edge. Yes. They are years ahead. And nobody is close to catching them as far as I can see. And by the way, the opposition is very, very scared of them. Their sales guys have trotted through our place in recent months, and it's clear that all the old established boys in suits are looking to Infinera as the one to beat.

Next Ciena? Heck, I hope they do better than that :-) Seriously, this is a very complex question. If you want a worthless opinion, here goes...

Infinera is kicking ass in a limited market right now, and that's long haul transmission. They have no metro or CWDM capability, and no packet switching on their switches. To keep up the rate of revenue growth they've shown to date, they need to increase their addressable market size. That means EITHER internal development OR acquisition. Both of those choices have risks associated with them, and that sounds like a job for investigative journalism!

Now we're on to more familiar Light Reading territory. Rather than write articles about finance because you have a deadline to make, why not tell us all how Infinera is going to achieve that particular feat of business vision without crashing and burning?

hR.
DCITDave 12/5/2012 | 3:04:33 PM
re: Infinera Revenues, Losses Widen re: "Gee, standards have sure dropped."

Back to topic for a sec, hyperunner.

I note that Infinera's IPO prompted you to end a two-year posting hiatus, which is pretty cool.

But I've yet to get a sense of your opinion of the company. Do you think they have a sustainable business? Big technology edge? Is this the next CIEN or something even bigger?

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