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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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hyperunner 12/5/2012 | 3:04:43 PM
re: Infinera Revenues, Losses Widen Hi lcdfbr,
I'm not an accounting expert, so take this with a pinch of salt (and a dash of pepper too if you like) :-)

GAAP regulations have tightened up since Enron and Worldcom. Auditors are getting pretty finicky about what really counts as revenue, and the gap (pun intedned) between GAAP and pro forma has increased.

In the case of a product shipment, you need to ship the product, invoice the customer, and get paid by that customer before you can recognise revenue.

HOWEVER. If the product has a warranty associated with it, then you need to be able to provide some kind of evidence that the thing isn't going to break down, and the customer just throws it back at you, demanding their money back.

Most hardware warranties are pretty short. Anything from 90 days to a year. From the presentation that Infinera gave to my company back in March it seems they've been shipping product since 2004, and so they have good evidence (VSOE) that the boxes don't catch fire or explode within the hardware warranty period.

But I think the catch with Infinera is that some of their warranties apply to the system software, and for some reason these are much longer - somebody mentioned 5 years (this is REALLY unusual by the way)?

Infinera does not have VSOE established for a 5 year warranty, and because it's system software it means that the customer could potentially throw the whole thing (hardware AND software) back if they prove there is a fault in the software.

So Infinera is only allowsd to report some percentage of the money they have received from customers as GAAP revenue.

OK, so the Wikipedia article you quoted implies that pro forma revenues have been overly optimistic in the past. I think that's a fair judgement. Historically, software companies sold at very high margins and through a long value chain (ie. through distributors, retailers, etc.). And software goes out of date real quick - look how cheap you can buy Windows XP these days.

The supply chain partners are allowed to claim back some of the revenue they give to the manufacturer in these cases (under stock rotation agreements). But the manufacturer may have already declared this revenue. You see the problem?

I guess what you have to ask is how likely it is that this would happen to a company like Infinera? My guess is zero. All the folks I know who are using this gear absolutely love it.

hR.

hyperunner 12/5/2012 | 3:04:43 PM
re: Infinera Revenues, Losses Widen Stevery,
I wouldn't have fired Craig at all, I would have just told him to stick to technology topics.

Just curious as to what part of the accounting you feel is in need of ridicule?

Maybe I can simplify it a bit...

- The GAAP accounting numbers don't look very good

- Pro forma numbers look a lot better, but they're not allowed to use those as GAAP because they don't have VSOE established yet

- Infinera has reported GAAP numbers, and completely separately has reported pro forma numbers. They spent a bunch of time on the conf call explaining the difference between the two, and why they feel the pro forma number give a more accurate representation of the true state of the business.


Let me ask you this. If Infinera had only reported GAAP numbers yesterday, and then at some point next year (or whenever they establish VSOE), they suddenly take a huge pile of previously pro forma revenue and report it as GAAP revenue, I suppose you'd be one of the first people to criticise them for sandbagging?

And the VSOE isn't for hardware. It's because their software warranties are so long.

Oh, and by the way - wake up!

hR.
hyperunner 12/5/2012 | 3:04:43 PM
re: Infinera Revenues, Losses Widen Gosh dujac2006, I'm feeling really bad about about that earlier post. OK, OK, I'll tell you who I am, my real name is Aden...but wait! Craig has posted a new article on Infinera. Let's see if this is a bit less slanted...

"Infinera's making more money than you think..."

Hmmm. No, it was pretty clear the first time I think. According to GAAP (where they're not allowed to recognise a whole bunch of revenue they already invoiced and have been paid for) they're making a loss. But they were pretty clear in pointing out the difference on the conf call. Did you bother listening to the conf call Craig? Or did that pesky deadline get in the way? Just read the press release maybe? Soooo much easier that way.

"So much else about Infinera Corp. (Nasdaq: INFN - message board) was a mystery for so long -- why not its accounting methods, too?"

Gosh, that DOES sound scary! Oh wait, you mean that you don't understand what pro forma accounting means compared to GAAP accounting? OK, now I see what the mystery is. It's like the mystery of why you're allowed to report on stuff like this.

"It all comes down to a bit of magic known as Vendor Specific Objective Evidence (VSOE) -- an agreed-upon value for goods and services."

OK, so if it's agreed upon, why do you refer to it as magic? VSOE is accounting practice, it's not something that Infinera management has dreamed up you know.

"There's nothing wrong with Infinera doing things this way, but it does look funny considering hardware peers like Ciena Corp. (Nasdaq: CIEN - message board) don't go through the same kind of accounting calisthenics."

Well, I guess that's probably something (I'm just guessing here, but I'm feeling good about it) to do with the fact that they've been in business long enough to establish VSOE. Gosh, not quite so mysterious now eh? Do you really think the Infinera beancounters WANT to do "accounting calisthenics"? OK, they're beancounters so maybe they do. And they're Californian beancounters so maybe they even enjoy calisthenics.

Maybe Infinera management should use simpler words in the next conf call for all the technology reporters who decide to write articles about financial results :-)

hR.

DCITDave 12/5/2012 | 3:04:42 PM
re: Infinera Revenues, Losses Widen re: "That means the company can just load gear onto a delivery truck, put a bill in the mail and call it revenue. That approach is very susceptible to channel stuffing, especially when the company's largest customer is a related party (Level 3 is a shareholder)."

Excellent points. Next thing you know they'll start doing vendor financing for cash-poor carriers, too.
Stevery 12/5/2012 | 3:04:42 PM
re: Infinera Revenues, Losses Widen Does anyone know what their current cash balance is and how it is trending?

Cash balance = $197M
In the past six months, they've burned $21M.

(They started the year @28M, sold $190M worth of stock, and presently have $197M.)
twill009 12/5/2012 | 3:04:42 PM
re: Infinera Revenues, Losses Widen Those are my principles, and if you don't like them... well, I have others.
-- Groucho Marx
tmc1 12/5/2012 | 3:04:42 PM
re: Infinera Revenues, Losses Widen No one is talking about why they might want to recognize revenue over a longer period the way a SW company might and not like any other HW company in their space. I am guessing it might help smooth out the numbers and allow them to maintain the stock price until all of the insiders are able to sell (6 month lockout, etc.). It could just be that I don't trust VCs and others of their ilk. It would be interesting to see if other HW startup companies start to do this.
lcdfbr 12/5/2012 | 3:04:42 PM
re: Infinera Revenues, Losses Widen Since they are nearly cash-flow positive, what are the major concern about the GAAP loss? To what degree does the GAAP (or pro forma) numbers physically affect the company compared to the cash flow? Does anyone know what their current cash balance is and how it is trending?
Thanks for all the replies.
twill009 12/5/2012 | 3:04:42 PM
re: Infinera Revenues, Losses Widen INFN was slightly cash flow negative during the June quarter, as you can see here:
http://www.infinera.com/pdfs/p...
twill009 12/5/2012 | 3:04:42 PM
re: Infinera Revenues, Losses Widen What is the definition of pro forma? It is essentially this: "we pick and choose what to include and what to exclude according to whatever we feel is right". No standard. Arbitrary. The rules can even change quarter to quarter, if the company so chooses.
It is especially suspect in this case, where pro forma uses "invoiced shipments" for revenue. That means the company can just load gear onto a delivery truck, put a bill in the mail and call it revenue. That approach is very susceptible to channel stuffing, especially when the company's largest customer is a related party (Level 3 is a shareholder).
If you have a deep understanding of the company's business and an even deeper trust of management, fine. After all of the lessons of the last bubble, just don't ask the rest of us to accept things without some healthy skepticism.
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