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Very often costs will be accounted for in the quarter they occur. Generally, this is not a big deal because only a small portion of revenue is deferred. But in Infinera's case, it seems over 50% of revenue is deferred.
my 2 cents.
The deferred income is not blades. That would become revenue (and cost) in the quarter in which it is booked.
The deferred income is contracted support (plus training, which is probably small $$). This is of course the part of the contract that is most easily renegotiated with a company that has few telco customers.
The reason for it being deferred is that it is not tangible, and the price is easily renegotiated, so in honor of past accounting scams there are GAAP rules on its recognition.
Any analyst who believes that the quoted deferred numbers will be collected is probably on the take.
The net-net is that this company is not making money on its technology, but claims its going to make money supporting it.
PS. The discussion under the rev table on pg 33 is illuminating regarding their deferred revenue, if you read between the lines.
You also need to then explain the positive margin in Q4 when $40M of deferred revenue recognize drove positive margin and then see if what I said makes sense. In your mind, the entire product is negative margin, thus the situation should get worse as more revenue comes in. Which is not supported by the S-1.
So, lets use an example. Infinera seeds its customers by selling chassis below cost. Whoops cost taken. The revenue with blades (above cost is defered). Get it now? This is a absolutely typical sales strategy.
The reason for it being deferred is that it is not tangible, and the price is easily renegotiated, so in honor of past accounting scams there are GAAP rules on its recognition."
While I agree with your characterization of what is likely deferred your rationale for why this type of revenue is deferred is wrong. It has nothing to do with "tangibility" or potential for re-negotiation but has to do with matching revenue and cost. If a company signs a 4 year service and software upgrade contract they cannot recognize all the revenue up front but must apportion it over the 4 years.
It is unlike to be re-negotiated... this is just more anti-Infinera spin.
Of course prices for all components of a system are negotiated up front but, without exception in my experience, line cards ALWAYS have higher margin than chassis/commons. Infinera is no exception. This is true for access systems, cross-connects, transport systems, etc. Listen to a conference calls for Ciena, Tellabs or any other major gear supplier and you will always hear discussion of product mix and its impact on margin and the mix of chassis to line cards is a significant factor in GM.
> customers by selling chassis below cost. Whoops
> cost taken. The revenue with blades (above cost
> is defered). Get it now? This is a absolutely
> typical sales strategy.
You, sir, are no accountant. While the strategy you describe is a common sales strategy (sell the commons cheap to reduce start-up cost, make additional margins later as more line cards are added), this has nothing to do with deferred revenue. Revenue is deferred if the sale has been made but there are revenue recognition issues. As previously described, this could be because the product sold is service, which must be recognized as it is consumed. Also, it could be because Infinera promised some future features as a contingency of the sale. When this occurs, the revenue cannot be recognized until those features are delivered. Revenue deferral is not an optional thing, and it is not something that companies enjoy at all.