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IPO Alert: Infinera Files Its S-1

Craig Matsumoto
2/26/2007

Infinera Corp. (Nasdaq: INFN) filed its S-1 with the Securities and Exchange Commission (SEC) today, and no, it's not profitable yet.

But the filing itself is a landmark for the Silicon Valley superstartup that intends to change the way DWDM networks are built.

Infinera's IPO has been anticipated for about a year, and strong signs of an S-1 filing were cropping up in January. (See Is Infinera Ready for an IPO?)

The company, now with 605 employees, has raised $315 million since its inception in 2000 as Zepton Networks. Its most recent round, a whopping $110 million, came in July. (See Infinera Raises Another $110M.)

But Infinera has only started to get meaningful revenues. Its true sales have rocketed -- to $58.7 million in 2006, according to the S-1 -- but $44.3 million of that came in the quarter ended Dec. 31. Revenues for 2005 totaled just $4.1 million.

As for the losses, they're hard to ignore: $89.1 million, or $14.55 per share, for calendar 2006, and another $215 million during the four previous years, according to the S-1.

Table 1: Infinera in the Red

    2002   2003   2004   2005   2006 
Revenues ($M) 0 0 0.6 4.1 58.7
Net loss ($M) (34.1) (50.2) (66.5) (64.6) (89.1)
Net loss per share ($17.05) ($16.10) ($15.30) ($13.76) ($14.55)
Cash & equivalents ($M) 50 54.2 40 37.1 29.6
Source: Infinera Corp.; figures as of Dec. 31 of each year




Despite a burst of customer wins recently, Infinera got 60 percent of its 2006 revenues from Level 3 Communications Inc. (NYSE: LVLT), a deal announced in May 2005. That situation should pass eventually; Infinera's S-1 says the company has scored 25 customer wins as of Feb. 15. (See Infinera Reaches Level 3, XO Selects Infinera, and Infinera Muscles Into Interoute.)

Details such as the number of shares to be offered, or the price, haven't been penciled in yet. For the purposes of calculating a registration fee, the company's paperwork lists its "maximum proposed aggregate offering price" of $150 million.

Goldman Sachs & Co. is Infinera's lead underwriter, joined by Citigroup , JPMorgan Partners , Lehman Brothers , and Thomas Weisel Partners .

Aside from the numbers, the S-1 reveals a bit of Sarbanes-Oxley trouble, in the form of a "material weakness" in the way Infinera valued its inventory. The S-1 says the weakness has been corrected. Separately, and perhaps unrelated, Infinera swapped out its CFO in June, around the time it was presumed to be planning an IPO. (See Infinera's CFO Quits.)

Another interesting tidbit: The S-1 says Infinera got sued last year by Cheetah Omni LLC of Ann Arbor, Mich., over two patents -- Nos. 6,795,605 ("Micromechanical Optical Switch") and 7,142,347 ("Method and system for processing photonic systems using semiconductor devices").

Both patents are credited to Mohammed Islam, a professor at the University of Michigan whose research group has spun out startups including Xtera Communications Inc. (Nasdaq: XCOM)

Infinera's largest shareholders are Advanced Equities Inc. and Kleiner Perkins Caufield & Byers , the S-1 says. Each holds roughly 6.4 million shares, for a 9.3 percent stake. Mobius Venture Capital and RWI Ventures , respectively holding 7.8 and 5 percent, are the next largest shareholders.

The largest employee/director shareholder is chairman and CEO Jagdeep Singh, with 3.2 million shares, or 4.5 percent.

— Craig Matsumoto, West Coast Editor, Light Reading

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Pete Baldwin
Pete Baldwin
12/5/2012 | 3:13:53 PM
re: IPO Alert: Infinera Files Its S-1
So, what's the over/under on when Infinera breaks even?
trict
trict
12/5/2012 | 3:13:52 PM
re: IPO Alert: Infinera Files Its S-1
Craig, I am no expert but I looked at that S1 for a few minutes and I think they are cash flow positive as of Q4 - 06. Or I could be all wet.
OSXman
OSXman
12/5/2012 | 3:13:51 PM
re: IPO Alert: Infinera Files Its S-1
These are very tricky financials and will take a lot of time to understand.

There are considerable deferred revenues and deferred expenses, and net income becomes very much a function of the assumptions used. The large incremental revenue growth in Q4 was due at least partly to a shortening of the assumed contract life or something like that.

trict
trict
12/5/2012 | 3:13:51 PM
re: IPO Alert: Infinera Files Its S-1
Complex for sure. It does seem like they have a viable product and the sales appear very strong. Now if thay can make some margins...
trict
trict
12/5/2012 | 3:13:51 PM
re: IPO Alert: Infinera Files Its S-1
That may be correct, what is the business on page 36 about? (deferred revenue 110M)
Stevery
Stevery
12/5/2012 | 3:13:51 PM
re: IPO Alert: Infinera Files Its S-1
Craig, I am no expert but I looked at that S1 for a few minutes and I think they are cash flow positive as of Q4 - 06. Or I could be all wet.

Let me offer you a towel. :)

It's only positive on a gross basis. Once you include operating expenses, they lost $24M in Q4-06. (I'm looking at the table on pg 45.) But the good news is that they cut the loss down from $28M in the previous quarter. What a business!

Is wall street really taking massively unprofitable companies to IPO again?

The question investors might like answered is why they have 2 outstanding gagging contracts. But of course, no one would answer that without violating them. :)
trict
trict
12/5/2012 | 3:13:50 PM
re: IPO Alert: Infinera Files Its S-1
The cash burn rate is indeed high at Infinera, but so is the growth rate. It may be the IPO is required to pay for growth. Also, it may be the case that revenue deferred may be due to the SEC disallowing those sales to be posted as revenue because of warrenty requirements in force. (I am aware of that happening elsewhere.)
This I know, they have grown larger in terms of people and space then anyone not in that neighborhood is aware of. (also, expensive and not what you would do if you were struggling)


fiber_r_us
fiber_r_us
12/5/2012 | 3:13:50 PM
re: IPO Alert: Infinera Files Its S-1
Are unprofitable companies really going out to IPO?

Its the only choice. They will run out of money in a few months otherwise, and no one will by them with those financials.
Stevery
Stevery
12/5/2012 | 3:13:50 PM
re: IPO Alert: Infinera Files Its S-1
That may be correct, what is the business on page 36 about? (deferred revenue 110M)

They have contracts with time components to them. Rather than recognize the revenue (and stick a whopping big entry under accounts receivable) they recognize the revenue gradually.

Given that their DWDM contract is probably not that different than any other, why the obfuscatory detail on ratable revenue? (Do other DWDM companies do this?) Also, how renegotiable is that revenue?

It looks like an attempt to say: We're not profitable, but look what we have in the pipeline! Buy our stock!

These are very tricky financials and will take a lot of time to understand.

I disagree. The financials are very straightforward. They're losing money hand over fist.

They had 67M in cash at the end of 05 and have about 30M now. They have another 20M in a credit line. So at the current rate of burn, they have 6 months to do the deal.

Again I wonder: Are unprofitable companies really going out to IPO?
whyiswhy
whyiswhy
12/5/2012 | 3:13:50 PM
re: IPO Alert: Infinera Files Its S-1
I can't imagine anyone who would buy this but someone who owes KPCB a lot for past gains...

KPCB might be able to reach out and strong arm / guilt their Kieretsu aka pawn it off, but I for one will cease doing business with same.

Infinera = Avanex, lack of net-wise

JMHO

-Why
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