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DWDM

Infinera Builds in Q1

If nothing else, you can say Infinera Corp. (Nasdaq: INFN) wasn't a one-quarter wonder.

A Securities and Exchange Commission (SEC) filing last week for the DWDM superstartup, which is in the throes of going public, shows revenues climbed 12 percent to $49.2 million in the first quarter of 2007 -- just its second quarter of heavy-duty sales.

More precisely: For its first quarter, which ended March 31, Infinera reported losses of $19.8 million, or $2.62 per share, on revenues of $49.2 million, compared with losses of $25 million, or $3.55 per share, on revenues of $43.8 million the previous quarter.

For its first quarter in 2006, Infinera reported losses of $18.2 million, or $3.63 per share, on a paltry $2.7 million in revenues.

The numbers come from Infinera's latest S-1, filed with the SEC on May 10.

The latest S-1 says Infinera has 28 customers that have bought the company's DTN system for deployment in optical networks; 19 of those customers were picked up during the 12 months ended March 31. Level 3 Communications Inc. (NYSE: LVLT) and Broadwing Communications LLC (which Level 3 acquired in January) represented 75 percent of Infinera's revenues in 2006 and the first quarter of 2007.

The initial S-1 was highly anticipated from those who wanted to see whether Infinera's buzz was translating into cash. As it turns out, the company had very low revenues until late 2006, when the design wins it racked up paid off big. (See IPO Alert: Infinera Files Its S-1.)

Table 1: Infinera's Rising Revenues
Quarter Ending Revenues
March 2006 $2.7 M
June 2006 $4.1 M
Sept. 2006 $7.7 M
Dec. 2006 $43.8 M
March 2007 $49.2 M
Source: Infinera Corp.




But the news isn't all sunny. Infinera is going public amid continued deep losses, and the company's already had to restate some of its earnings data.

After filing its S-1 in February, Infinera came back in April with some recalculated numbers for 2005 and 2006, bringing revenues down and/or losses up in amounts less than $1 million.

Table 2: Infinera's Restatements
Original Restated
FY 2005 revenues $4,127 $4,127
FY 2005 net losses ($64,649) ($64,826)
FY 2006 revenues $58,742 $58,236
FY 2006 net losses ($89,119) ($89,935)
Source: Infinera Corp. S-1 filings
All figures in thousands




The newer S-1s say the restatements are related to "non-routine manual accounting and reporting processes," which sounds like stuff the SEC wouldn't be too happy about. One problem Infinera notes is a tweak to the start date of "ratable revenue" for a certain customer, leading to a small drop in 2006 revenues.

Infinera also found it also had to recalculate the number of common shares for each fiscal year back to 2002, creating a bigger loss per share in every case.

Table 3: Infinera EPS Changes
Original Restated
FY 2002 losses per share ($17.05) ($21.27)
FY 2003 losses per share ($16.10) ($19.61)
FY 2004 losses per share ($15.30) ($17.94)
FY 2005 losses per share ($13.76) ($14.08)
FY 2006 losses per share ($14.55) ($14.90)
Source: Infinera Corp. S-1 filings




It's unclear whether these nips and tucks relate to CFO William Zerella's unexpected departure last June. Zerella resurfaced in September as CFO of Turin Networks Inc. (See Infinera's CFO Quits and Turin Wins, Adds CFO.)

Do-overs and white-out marks aside, Infinera seems to have reached a level of respectability. In a recent poll concerning the Light Reading Top 10 Movers & Shakers, Infinera's success was enough for readers to vote CEO Jagdeep Singh into second place -- albeit a distant second place. (See AlcaLu Exec Wins Popularity Contest.)

— Craig Matsumoto, West Coast Editor, Light Reading

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dujac2006 12/5/2012 | 3:08:36 PM
re: Infinera Builds in Q1 So with all these "positive" results, what is the estimated market cap for those of you who have the crystal bal to tell? Are we looking at the next GOOG or yet another $5/share optical company?
BlueButtMonkey 12/5/2012 | 3:08:35 PM
re: Infinera Builds in Q1
Craig...aside from possible double counting of Level3's M&A binge, any idea on how many of those 28 customers might have shares in the company? Either as a direct investor like Level3 or the 'PO to play' plan?
Pete Baldwin 12/5/2012 | 3:08:35 PM
re: Infinera Builds in Q1 I think a lot depends on how much you believe in those 26 or 27 other customers (are they counting Level 3 and Broadwing as two or one?)

If they're all doing Level 3 sized buildouts, then Infinera's revenues will go sky high. Which brings up the question - would a company this vertically integrated run into capacity contraints? And if they add capacity, doesn't that mean they'll be making big cuts when this first surge of business ends?

I guess one challenge for Infinera will be to handle the inherent lumpiness in sales, as other CEOs put it.

What's the over/under on when their first profitable quarter will be?
ahwnn 12/5/2012 | 3:08:35 PM
re: Infinera Builds in Q1 Another question is which individuals at Level 3 have been given option grants.
fiber_r_us 12/5/2012 | 3:08:35 PM
re: Infinera Builds in Q1 There just aren't that many "Level 3 sized buildouts" in the world that aren't already accounted for. To be "Level 3 sized" you need both a large geographical footprint (like 20,000 to 30,000 route-miles of fiber network) and you need a large-scale bandwidth demand that motivates you to buy large-scale DWDM systems (100s to 1000s of Gb/s of capacity - i.e. you are a major Internet/data provider - voice need not apply). That combination simply doesn't exist too many places in the world. Let's see:

ATT - nope, went with Siemens
Sprint - uhhh, aren't they a wireless company now?
Verizon - nope, went with Lucent(?)
Qwest - ?
Research & Education - went with Cisco/Nortel (on Level 3 fiber mostly)
DISA - went with Ciena (on Level 3 fiber)

Broadwing - well, that is Level 3 now (and they are probably "double counting")
Wiltel - that is Level 3 too, and they were an Infinera customer, so maybe that is "triple counting"


Maybe someone in Europe (even though there is limited geographical footprint)?
Flag - Got some metro business - nothing the scale of Level 3
Colt - ?
BT - went with Alcatel?
FT - Alcatel?
DT - ?
Others?

Hardly anyone in Central/South America or Africa needs anything this "big", though there are some great geographical distances to cover.

None of the Pacific Rim countries are geographically large enough to lead to really large overlays.

Russia? China?

The fact the Level 3 accounts for ~75% of their business, means the other 25 customers combined are not likely a third the size of Level 3 buildout.

So, "Level 3" (and its acquisitions) amount to ~75% of Infinera business. Level 3 invested in Infinera and Level 3 got a sweetheart deal on Infinera gear. Where is the profit? Does Infinera expect to become profitable by sticking it to the other ~25% of their customers since Level 3 got such a good deal?
[email protected] 12/5/2012 | 3:08:34 PM
re: Infinera Builds in Q1 With Level 3 being such a hugh portion of Infinera's revenue I would love to know what portion of their total network has already been built out by Infinera. When will it be complete?

Because unless things change dramatically it means that they could experience reverse hockey sticks, otherwise know as falling off a cliff!!

With a fab, and engineers etc a lot of their cost is fixed and if they dont have revenue from L3 it looks like they could have losses of $30 million a QTR

That probably means they must IPO immediately before they are close enough to L3's build out being complete that they have to forcast the decline in revenue.

Thoughts anyone.
Pete Baldwin 12/5/2012 | 3:08:33 PM
re: Infinera Builds in Q1 BlueButt -- Don't know, but it's definitely worth finding out.
fiber_r_us 12/5/2012 | 3:08:33 PM
re: Infinera Builds in Q1 Current LH/ULH DWDM systems will run about $3,000 to $5,000 per route-mile for a fully loaded 80-channel system. Depends on a number of factors (number of add/drops, ILA site spacing, etc). Level(3) advertizes 47,000 route-miles of fiber (post-acquisition). If Level(3) were to overlay ALL of this with a fully-loaded system, one might expect ~$150M to ~$250M in revenue from Level(3) for a given overlay (once the overlay is full). But, neither is likely (i.e. Level(3) won't overlay all routes, nor will many routes be fully-loaded in the near future). So, these numbers must be discounted to reflect expected deployments.

Multiple overlays could occur on specific highly utlized routes (NYC-WDC), and minimal (or no) systems could be deployed on lightly utilized routes.

Over many years, if you believe traffic will continue to rapidly grow on Level(3)'s backbone, they will fill-up systems and deploy new overlays. At that time, they will choose whoever is cheapest then.
fiber_r_us 12/5/2012 | 3:08:32 PM
re: Infinera Builds in Q1 Craig, why would you guess the other customers would even be capable of picking-up the slack? Most of these other customers are small-scale deployments (small revenue) because the customer has small-scale needs (metro and/or lower capacity). It is not like any of those smaller players is suddenly going to become an ATT, Verizon, Level(3), etc overnight. It is questionable, even if combined, that all of the other customers have requirements that make them appear as even one of the large guys from a revenue perspective.

Since the carriers that have large-scale national/international long-haul fiber foot prints is limited, one need only look at that available pool to determine the majority of Infinera's potential revenue source. All of the smaller metro deployments (which is what most of the other customers represent) can't make up for the scale required to do even one massive LH deployment such as the Level(3) deployment.

So, you are asking the right basic question: Since the Level(3) (low-margin) revenue could easily peter-out, where are the other major revenue sources going to come from in the future? My guess is that it can't be the little guys (the other existing customers) as they neither have the LH fiber foot-print, nor the demand for bandwidth growth that would drive the large revenue stream that Level(3) has delivered.

Thus, to have another "large customer" it must come from one of the carriers I listed in an earlier message. Yet, most of those entities already have solutions in place. And, newer DWDM products from other vendors have driven costs out of those solutions. It is doubtful that Infinera is the low-cost provider any more. It is not clear they ever were (discounting the "special" deal Level(3) received).
Pete Baldwin 12/5/2012 | 3:08:32 PM
re: Infinera Builds in Q1 Dave -- Great points. That's kind of what I was trying to get at, but you said it a lot better.

My guess is that the other customers will be enough to cover any falloff in Level 3 revenue. That will actually be applauded as a sign of customer diversity, as Level 3 drops from a 75% customer to something more reasonable.

But if other customers' timing lines up wrong, or they don't have the same scale of buildouts -- then yes, Infinera could hit an embarrassing pothole in their growth chart.
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