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Infinera Leaps on Year-End Respite

Ray Le Maistre
2/10/2017
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After a tough year, optical transport specialist Infinera ended 2016 on a brighter note than expected, giving its share price a much needed lift.

At first glance, though, the numbers look shocking.

The vendor reported fourth quarter revenues of $181 million, down an eye-watering 30% from a year earlier, and it sank to a net loss of $36.3 million compared with a profit of $12.6 million a year earlier. And its margins took a hefty hit. (See Infinera Reports Q4, Full Year Financials.)

The full year numbers weren't quite as grim: Revenues of $870.1 million compared with $886.7 million in 2015, so down only slightly. But Infinera Corp. (Nasdaq: INFN) had been growing aggressively previously, so even a small reverse is significant: Operator consolidation, changes in capex trends and a portfolio in transition away from traditional long-haul optical products all hit the company's top and bottom line. And the pain isn't over yet. (See CenturyLink's Capex Axe to Fall on Infinera, Ciena – Analyst.)

But the numbers were better than expected and CEO Tom Fallon had some encouraging news for 2017 and beyond. He noted that there is a new portfolio of products entering the market that will drive new sales and added on the company's earnings call that a major North American cable operator had placed an order for metro transport equipment and that the deal would likely develop into a "sizeable opportunity." (See Infinera Intros the 'Meshponder', Infinera Ups the DCI Ante and Infinera Unveils Transport SDN Tools, Slams Rivals .)

The company expects sales of about $172 million (plus or minus $5 million) for the first quarter of 2017 and to grow from there, while gross margins (after one-time costs) are expected to come in at about 40% and remain steady for a few quarters before climbing.

That was enough to light a fire under a depressed share price as Infinera's stock jumped by $2.50, almost 27%, to $11.90 by early afternoon Friday.

That's a welcome boost but the company's stock is down by almost 20% compared with a year ago.

Analysts are on the cautious side of optimistic for Infinera, believing the company is well positioned with its product set and should recover during 2017, though there's still plenty to prove.

George Notter at Jefferies & Company Inc. believes the company is "a long-term winner in both the Long Haul and Metro WDM markets" as it's the "only company that can innovate on three dimensions (coherent technology, baud rate, and photonic integration)." But in a post-earnings research note he added that Infinera is "emerging from a perfect storm of M&A-induced spending slowdowns affecting their largest customers," while it has "a lot of R&D execution" ahead of it with upcoming new products.

Mike Genovese at MKM Partners notes that Infinera's challenge is to "roll out multiple new products in 2017, and to win large new Metro deals in 2H17 and 2018." He's waiting on the proof points, noting that his firm is "still evaluating the company's chances of eventual success."

And Simon Leopold at Raymond James Financial Inc. (NYSE: RJF) notes that the consolidation of CenturyLink and Level 3, plus M&A deals that have impacted the plans of other customers such as XO Communications, Time Warner Cable and Charter have hit the company hard. But he expects Infinera to return to growth and profitability during the second half of this year and that its competitive advantages should make its recovery "inevitable," though the degree of that recovery is yet to be determined.

Infinera got caught in 2016 with a combination of market factors that hit it hard. But the fact remains that its technology is well regarded, it's seen as a good place to work (increasingly important) and as operators invest in their transport networks ahead of the mammoth data and video storm that will come with the 5G era -- and that's something they will have to do -- Infinera looks set to be one of a handful of companies that's likely to be in the pack of preferred suppliers.

— Ray Le Maistre, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, Editor-in-Chief, Light Reading

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danielcawrey
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danielcawrey,
User Rank: Light Sabre
2/11/2017 | 8:20:52 PM
Preparation
Preparing for the onslaught of 5G is not a bad move. I think some providers are going to be caught running behind because they are too focused on today. Good move. 

Another good move: Making the company a good place to work. People are capable of moving positions so easily these days this is a huge factor. 
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