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litereading 12/5/2012 | 3:13:33 PM
re: IPO Alert: Infinera Files Its S-1 Brook,

My sense is initially, INFN sold chassis, CE, and perhaps blades below costs, with the expectation of future lower cost on the blades due to volume and design CR. Yes, this is a typical strategy. INFN is not unique.

I never said the entire product is negative margin. Q4 positive GM makes me think they've achieved considerable success in reducing costs, and blades are very likely positive margin. Are margins on new blade sales at levels to make INFN EBT positive going forward? Don't know. All the while competition isn't standing still.

The release of Q4 deferred revenue was most likely because they renogiated a large contract (probably L(3)) ending or reducing the term of free sw upgrade and support. 5 years free support was killing them rev rec. Can't do that under 97-2 (probably why they have a new CFO).

$110 deferred rev is product and service - it is being recognized ratably over the balance of the term of the service arrangement. Still cash is in on 2/3rds of this revenue.

The fundamental point that I have been making is not about profitability, but about cash flow. Engineers struggle understanding this point. INFN is not cash positive - if/when they achieve that point goes a long way in determining if/when they are a success.
fiber_r_us 12/5/2012 | 3:13:32 PM
re: IPO Alert: Infinera Files Its S-1 Some analysis on Infinera and Level(3) relationship...

Stevery 12/5/2012 | 3:13:31 PM
re: IPO Alert: Infinera Files Its S-1 Some analysis on Infinera and Level(3) relationship...


interesting. I had not appreciated that infinera had to give away more than 5% of the company to L-3 in order to get a PO out of them.

Wasn't this the Wilcom/Sycamore/MattBross M.O.?
paolo.franzoi 12/5/2012 | 3:13:30 PM
re: IPO Alert: Infinera Files Its S-1

You are clearly not up on the latest revenue recognition rules. You can ship, receive acceptance letters for, and get payment for items that can not be included as revenue. It all has to do with whether there is functionality promised but not yet delivered.

paolo.franzoi 12/5/2012 | 3:13:30 PM
re: IPO Alert: Infinera Files Its S-1
And to all of you,

Since all of this negative margin gear has shipped, you best go explain the positive gross margin in Q4.

Seems that the product itself IS being sold at a total positive gross margin and that there is some reason that cost is being taken when the product is being made. Whether this is 100% of the system or for what reason, I do not know.

You all have a very incorrect view of revenue recognition under Sarbanes-Oxley. My view would be (if I were a CFO) to put a roadmap on every box I shipped. Then I would declare that revenue will ALWAYS be 0 and that one can figure it out from cash flow and the balance sheet. The income statement is the biggest bunch of voodoo in accounting. Not a single number on it is black or white. Accruals, Warranty Reserves, Inventory Buydowns, Revenue Recognitions - all of it. If you invest in any business based on this bullcrap, you are a victim of financial engineering. Go ye to the Cash Flow Statement.


paolo.franzoi 12/5/2012 | 3:13:25 PM
re: IPO Alert: Infinera Files Its S-1

Ah, the beauty of SOX-404 shines on you my friend.

deauxfaux 12/5/2012 | 3:13:25 PM
re: IPO Alert: Infinera Files Its S-1 As one poster pointed out, the objective of cost accounting are to match expenses and revenue in the periods in which they occur. Unfortunately, this is much less easier said than done, especially in a wafer fab where allocations of cost can have any interpretation that is convenient. How much of the fab is "R&D" or period costed independent of production output? If you made the argument that 90% of the fab had some sort of experimental work going on that impaired the value of the output for the purposes of valuing WIP and FGI, you could reach a very low COGS. Reverse the allocation, and the opposite is true.

The simple truth is that all accounting methods are biased, even Activity Based Costing. The only defense you have in evaluating financial results is an understanding of the biases inherent in the accounting methods being used. But because this true of ANY measurement system to some degree or another, we all know the importance of careful measurements and estimation of experimental error. The same is true of accounting

Revenue recognition is governed by a pretty vague rule: "revenue is to recognized when the substantial burden of collection is relieved."

This implies that revenue is recognized when a company is nearly 100% sure that it is going to get paid. In the simplest case, a new, working product is shipped to a customer that has a historical track record of accepting the same product without modification, and paying for it 30 or so days later. Revenue is recognized at shipment

In the worst case, the customer is buying a new product, which has never been proven to work in its intended application (has not been proven its "implied merchantability and fitness") for which the customer is allowed to withold payment and/or have return priveleges. For this case, revenue could not be recognized until payment had been received, and all of the contingencies had been cleared....quite possibly long after payment had been received.

Anything can happen in between these two scenarios, but I would ask you this; would a startup hungry to go public look to push the edge of the revenue recognition envelope or be ultra conservative? My guess is that they are recognizing revenue as aggressively as possible.

My advice? Forget about the cost accounting, and follow the cash....it is always closest to the truth.
FTTHsoon 12/5/2012 | 3:13:15 PM
re: IPO Alert: Infinera Files Its S-1 According to all the Engineers turned CPA on this thread Infinera is doomed. I think the best way to approach this issue is to see how they do over the next 2 years. That will reveal where they stand within the transport space and the financial world. An S-1 is a snapshot of where they are today. Goodness knows I haven't been able to predict the future. If you can you are a fool to wasting your time discussing anything on Lightreading's website.

Let's see how they roll. I am sure a lot of people have worked extremely hard at Infinera over the past 6 years. I simply wish them good luck. Their technology seems extremely promising and sounds revolutionary at a time when everyone else is selling the same old DWDM product using off the shelf components.
OSXman 12/5/2012 | 3:13:15 PM
re: IPO Alert: Infinera Files Its S-1 You're right, the p.33 discussion is illuminating.

I believe that this may be what is happening. The company agrees to a relatively indeterminate period of unspecified support for a fixed price. This revenue is recognized ratably over the LONGEST POSSIBLE DELIVERY PERIOD. That is what is called GAAP conservatism. This period was an average of 3.7 years. In Q4:06 they SHORTENED this period to 1.3 years. This meant they could ACCELERATE the revenue recognition period from 3.7 years to 1.3 years. In essence, they are taking the same amount of revenue and recognizing it almost three times as fast. Hence, the big revenue pop. Gee, do you think it might be related to showing better numbers for a pending IPO? Nah...

Note that the company says "Product support services consist of software warranty, updates and unspecified upgrades and product support." I think a lot of these ESTIMATED COSTS are in deferred inventories. If not, then it's even worse because they aren't accruing for estimated costs.
OSXman 12/5/2012 | 3:13:15 PM
re: IPO Alert: Infinera Files Its S-1 Seven,

To the extent that expenses can be associated with revenues, I believe they must be.

In the case of Infinera you will see a large deferred revenue line item of $100mm. You will also see a deferred inventory asset of $63mm. I haven't done the work here, but my guess is that as the deferred revenue is recognized as actual revenue, the deferred inventory will be recognized as cost of goods sold. Theoretically, there is $40mm of deferred gross margin, but it isn't at all clear if there will be more expenses as the revenue is recognized which would eat into that margin.

These are complex financials and it is not at all clear to me why they cannot recognize the revenue. I suspect it relates to software requirements but I am not sure. One can simplify, as one poster did, to say they are losing money hand over fist, but to figure out exactly how much money they are losing is complex.

In my mind, the key accounts will the the inventory and particularly the deferred inventory accounts. Deferred inventory can have also sorts of estimates in there which, if they turn out to be wrong, could dramatically effect profitability.
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