Infinera Dips After Downgrade
And as part of the revised outlook, Jefferies reduced its price target for Infinera's stock from $10.50 to $9.00. Investors, freaked out bunch that they are these days, responded by sending the stock down $1.49 (16.04%) to $7.80 in late afternoon trading on Monday.
The analyst believes Infinera is facing a particularly hard 2009, because its sales are likely to be hit by the current carrier capex squeeze that's hitting the majority of vendors and by the impact of the credit crunch on some of its main operator customers. (See Ciena: This Ain't No 2001!, Verwaayen Unveils AlcaLu's New Plan , Nokia Siemens Braced for Tough 2009, Sizing Up AT&T's Cuts (and Chops) , Capex Watch: Telecom Italia Plans Cuts, and Capex Watch: Expect Shrinkage in 2009.)
In a research note issued today, Notter writes that "any bullish investment thesis on Infinera requires the company to win new Tier 1 customers. The environment, however, isn’t conducive to winning new deals." The vendor won its first big Tier 1 customer earlier this year. (See Infinera Wins DT, Loses the Day.)
It's also not conducive to carriers, especially Tier 1 operators, deploying gear from new vendors either, notes Notter. "For Tier 1 operators in particular, it costs a tremendous amount of money to add a new vendor. The OSS integration alone can cost many millions of dollars. Hence, it’s tougher for an operator to commit to a vendor like Infinera when capex dollars are in tight supply."
And while Infinera noted on its third-quarter conference call that it wasn't seeing many changes in customer spending habits, "a lot has changed since late October." (See Infinera Numbers and Infinera Reports Q3.)
In particular, the analyst notes that Level 3 Communications Inc. (NYSE: LVLT), Infinera's biggest customer (it generated 27 percent of third-quarter invoiced shipments) with deployments in North America and Europe, is having to work hard to refinance its debt, which currently stands at about $6.75 billion. "Level 3’s financial position isn’t great," observes Notter. (See Level 3 Cuts 8%, Level 3 Reports Q3, and Infinera Reaches Level 3.)
And he cites the financial challenges faced by another Infinera customer, XO Communications Inc. . (See XO, Infinera Demo 100 GigE and XO Sweats Its Optical Assets .)
Notter also wonders whether Infinera will "see a slowdown for new capacity additions on existing long haul WDM networks" as users of wholesale capacity (potentially) think harder and longer about new orders. The Jefferies man notes that, on average, analysts currently believe Infinera can pull in revenues (in Infinera's case, this equates to invoiced shipments; see Infinera Smooths Out the Lumps) in 2009 of $391 million, up 13 percent on 2008's full-year forecast of $343 million.
But he doesn't believe that's realistic, so Notter has revised his 2009 revenue and earnings per share (EPS) forecast for Infinera from "$410 million and $0.33 to $345 million and $0.10, respectively" (excluding stock option compensation of $0.29 and $0.33, respectively).
Longer term, though, Notter believes Infinera "can be very successful. Bandwidth growth continues unabated. We remain confident in the advantages inherent in Infinera’s PIC [photonic integrated chip] technology, including the price/performance benefits relative to competitive solutions. Likewise, we expect Tier 1 carriers to increasingly view the company as a short list supplier and believe that the organization will ultimately have success winning in these accounts."
Infinera declined to comment on Notter's research note or its own share price movements.
— Ray Le Maistre, International News Editor, Light Reading