Infinera Minds the GAAP

Optical equipment vendor Infinera Corp. (Nasdaq: INFN) will move from its "invoiced shipments" reporting structure to generally accepted accounting principles (GAAP) beginning in 2009.

On the company's first-quarter earnings call yesterday, Infinera CFO Duston Williams provided an update on the company's financial status and gave a timeline for the upcoming accounting shift.

When Infinera went public, it did so with a reporting structure used more frequently by software companies than by those that peddle hardware. (See Infinera Smooths Out the Lumps.)

When accounting for software, support, and training -- all of which are included in its contracts when hardware is sold -- Infinera booked them separately, spreading revenue for those pieces out over several months or even years.

Because it hadn't yet achieved vendor-specific objective evidence (VSOE) for those aspects of the contracts, the company says it had to defer revenue. In addition to its GAAP numbers, therefore, Infinera issued financials based on "invoiced shipments," which it said was a better measure of how much money it actually received in any given quarter.

Confused yet? Good, because that's all about to change.

"Starting in Q2 of 2008, we will no longer need to ratably recognize revenue for sales transactions where products are sold with these services. Product revenue from these transactions will be recognized upon acceptance, and services revenue will be deferred as appropriate and recognized as services are delivered," Williams says.

In the first quarter, Infinera achieved VSOE in software subscription services, allowing it to account for software sales when invoiced. It also enabled Infinera to book a sizeable chunk of deferred revenue on its top-line GAAP numbers that had previously been deferred. This is why GAAP revenues for the quarter were $40 million above sales based on invoiced shipments. (See Infinera Profits, But Gives Lower Forecast.)

This quarter, Infinera achieved VSOE for the other two pieces, which Williams says will enable it to completely shift to GAAP accounting, beginning in the first quarter of 2009. In the meantime, the company will gradually move deferred revenue for software, support, and training into its GAAP financials while still issuing "invoiced shipment" numbers.

The shift on the company's balance sheet won't change the fundamentals of Infinera's business, but it will make its financial numbers look wonky for the next three quarters as the company prepares to move to GAAP reporting full-time.

In the second quarter, for instance, Infinera will recognize $72.7 million in deferred revenue in addition to whatever it pulls in through invoiced shipments. Based on its sales forecast for the second quarter of $88 million to $90 million, that means it expects to report between $160.7 million and $162.7 million in GAAP revenues.

The company will also recognize deferred adjustment for cost of goods sold. In the second quarter, that will mean an additional $33.5 million moving into its GAAP cost of revenue line. (For a rundown of deferred revenue and cost of goods sold adjustments for the next three quarters, see Table 1.)

— Ryan Lawler, Reporter, Light Reading

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