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Infinera Profits, But Gives Lower Forecast

Optical vendor Infinera Corp. (Nasdaq: INFN) turned a profit and topped Wall Street estimates for its first quarter of 2008, but forecast lower-than-expected second quarter numbers.

By generally accepted accounting principles (GAAP), the optical equipment vendor earned $27.6 million, or 29 cents a share, on revenues of $138.3 million. That compared with a loss of $3.9 million, or 4 cents a share, on sales of $49.2 million during the same quarter a year ago. (See Infinera Reports Q1.)

Invoiced shipments were up 43 percent, to $95.5 million in the first quarter 2008, from $66.7 million in the first quarter 2007. That figure was slightly above the $91.6 million that Wall Street expected, according to Thomson Financial .

In non-GAAP earnings, Infinera reported net income of $12.6 million, or 13 cents a share, for the first quarter. That beat the consensus estimate of 2 cents per share, and compares with a non-GAAP loss of $5.4 million, or 71 cents a share, in the year-ago quarter.

This quarter's revenue numbers mark the fourth consecutive quarter of top-line growth, which CEO Jagdeep Singh says is a validation of the company's strategy.

In a phone conversation with Light Reading, Singh says, "Obviously we're happy with that because when we started the company, many wondered whether we could be profitable. We've demonstrated that pretty well over the last four quarters and continue to see strong interest around the world."

If Infinera's GAAP numbers look a little out of whack, it's because the company finally reached vendor-specific objective evidence (VSOE) for software subscription services in the first quarter. This allows the company to recognize increased revenue from invoiced shipments in the period in which they occur, meaning Infinera was finally able to book a chunk of deferred revenue from previous software subscription sales. (See Infinera Smooths Out the Lumps.) [Ed. note: So Infinera's not pretending to be a software company anymore?]

While Infinera posted strong earnings for the quarter, its second-quarter guidance was lower than expected. The company forecast revenue on an invoiced shipments basis in the range of $88 million to $90 million, below Wall Street estimates of $95.6 million for the second quarter.

The company expects gross margins of approximately 41 percent to 42 percent, compared with analyst expectations of 42.25 percent. And earnings are forecasted to be below analyst expectations, at 1 cent to 2 cents, compared with Wall Street's forecast of 4 cents a share.

On the company’s earnings call, Infinera CFO Duston Williams said the lower-than-expected forecast was not indicative of an overall slowdown in its business. "We've been lucky to have four quarters in a row with large growth, but we've always said we could see ups and downs in any given quarter," he said.

The company, which makes a highly integrated optical transport system based on photonic integrated circuits, added two new customers in the fourth quarter. However, due to consolidation between two of its existing customers, its total customer count has increased by 1, for a total of 42.

That highlights increased diversification among Infinera's customer base. The company named four 10-percent customers: Level 3 Communications Inc. (NYSE: LVLT), Cox Communications Inc. , Interoute Communications Ltd. , and XO Communications Inc. .

Level 3's share of sales increased over the previous quarter, to 31 percent of sales on an invoiced shipments basis. However, that's down from 57 percent of invoiced shipments a year ago.

Elsewhere in its first-quarter numbers, Infinera said GAAP gross margins rose to 45 percent in the quarter, from 36 percent in the fourth. Gross margins on an invoiced shipments basis were 45 percent in the first quarter, compared with 47 percent in the fourth quarter.

— Ryan Lawler, Reporter, Light Reading

hyperunner 12/5/2012 | 3:42:43 PM
re: Infinera Profits, But Gives Lower Forecast A quick prediction before I hit the sack. At least one reporter/analyst will misinterpret these numbers because they make his/her brain ache.

Infinera is now establishing VSOE for its revenues.

So in the first 4 quarters of its public life, the non-GAAP revenues were a better indicator of the real business. This fact was widely misunderstood by reporters and non-business analysts (Ryan, you didn't fall into this trap - kudos).

These results are a snapshop of the company in transition. A ton of non-GAAP revenue now moves into the GAAP column, and the non-GAAP revenues this quarter are actually lower than GAAP.

In future quarters we'll see that GAAP revenues will be a better, and more conventional indicator of the health of the business.

But for this quarter, and maybe a couple more, you need to look at both GAAP and non-GAAP, and understand the movement of revenue between these columns, or you won't get an accurate picture.

And "Ed." - remember that these are not "software accounting rules". They're just "accounting rules". It's just that software companies tend to be more affected by them than hardware companies. As I recall, a lot of the reason that Nortel had to restate and restate their results a few years back is that they failed to correctly implement these rules.

Just wondering who'll be the first reporter/analyst to compare the last two INFN non-GAAP numbers and say they missed the quarter :-)

Sweet dreams.

hR.
Ryan Lawler 12/5/2012 | 3:42:40 PM
re: Infinera Profits, But Gives Lower Forecast To make things even more complicated, Infinera has now established VSOE for all components of its business and will be shifting to all-GAAP financials by Q109, according to its CFO on the conference call.

I'm looking to do a followup on how the shift will affect the company's GAAP and non-GAAP numbers in the next three quarters as it shifts from invoiced shipments to GAAP financials next year. Stay tuned.
Ryan Lawler 12/5/2012 | 3:42:40 PM
re: Infinera Profits, But Gives Lower Forecast To make things even more complicated, Infinera has now established VSOE for all components of its business and will be shifting to all-GAAP financials by Q109, according to its CFO on the conference call.

I'm looking to do a followup on how the shift will affect the company's GAAP and non-GAAP numbers in the next three quarters as it shifts from invoiced shipments to GAAP financials next year. Stay tuned.
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