All you need to know about INFN results

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Allow Monkey to paraphrase the earnings call:

We’re disappointed in our guidance. Our business is lumpy. Sometime in the future we’ll make more money. But not now. Because we’re great, but just not in terms of making monkey. Just wait another quarter. Or another one after that. Or another after that. Or a few more years. Because bandwith is in high demand. But, you know, customers are still thinking about buying stuff from us. Timing is key and we’re not too good with that because our customers don’t like spending money now because they like spending it later. We have lots of customers and we’re great, but for now we’re not selling as much as we no doubt will. In the future. Which means not now.

The business environment is ok. Not bad, not good. But bandwith demand is high! Just, somehow, not now. We have so much potential! The world needs us! Again, just not now. Or in the next quarter which is why we’re disappointed in our guidance. Because we can’t predict when those nutjob network guys will wake up and find out how incredible we are. But we know it won’t be soon.

Pardon Monkey’s snark. But after so many years of being a shareholder, and being told how amazing the technology is and how badly it’s needed, somehow despite how fundamental the growth in bandwith demand, the money made is always just around the corner.

The only stock Monkey can think of in a similar position is ATVI (Activision) which continued to perform well business-wise while the stock languished. And then one day it popped. But when?

“We’re not just there yet.”

Yuck.

Monkey

Long INFN (still)(barely)(holding on by my hairy knuckles)

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Snark is forgiven Monkey, I share your frustration.
As I pointed out in an earlier post, this might have been a good time to focus on cost control at INFN. Revenue up 31 percent from 1st Q last year and General Selling, Admin and Marketing up 41 percent from 1st Q last year. Holding the line on those cost increases by only 3 or 4 percent could have made this quarter look a lot better.
So frustrating to see revenue shooting up and the company totally unable to get it to the bottom line.
Tomorrow is going to be ugly.
Mike

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The business environment is ok. Not bad, not good. But bandwidth demand is high! Just, somehow, not now.

Monkey - I know hearing the guide for Q2 really stings. For the past 3 years they’ve been hitting a growth stride and now it’s been stalled.

Still, all the things around bandwidth and demand from the cloud players are still there for the quarter. The quarter will still be up sequentially and YoY on the heels of that activity.

What is going on in the short term is one of the large metro gigs they were expecting hasn’t landed yet. It stinks. But the customer hasn’t gone away - they just couldn’t reliably put them in the bank for Q2.

I understand you’re feeling fatigue right now, and hearing now that it may be another quarter doesn’t help. They have confidence that the customer will land, so it is a when and not an if situation.

Of course I feel responsible after delivering all the sleuthing and info checking to the group and hope that this blip doesn’t betray confidence in that info. I wish things were different. I am optimistic though that growth will return - and we may be surprised to learn of that customer landing sooner rather than later.

Best,
–Kevin

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And for those of you who voted in the poll, looks like the correct answer was number 2. Congrats to the six of you (10%) who voted for the ever elusive Princess.

What’s your wager?

1) The Good: We’ve been cutting deals left and right and north and south. We got the googles and we got the eye-talians and the europeans, and we got the amazons and the facebooks and all the little and big digital weenies. We got the telcos and the tiers one and two and three and all of them tiers. And we’ve been charging and getting paid, son. We got increasing revenues and increasing margins and the demand ain’t stopping because Internet. While other folks are seeing a drop in demand, we’re seeing more orders than we know what to do with. Because, you, know, Pic technology, etc. Yeehaw!

2) The Bad: See above. But the Princess is in another castle.

3) The Ugly : Gosh darn it, this stuff’s too complex even for us. It’s fun to play with the toys, but there’s no bananas in this here enterprise because the R & D costs won’t ever come down and they won’t ever let up and it’s a good hobby but, folks, stop investing in us. Growth and demand doesn’t matter if the business is not investor friendly. So not only is the Princess in another castle, there is no Princess. Sorry.

Ok, with the sads and the snark out of my system, the question is what now?

So let’s say the stock drops 10-15% tomorrow. The story remains the same, as Led Zeppelin once sang: the technology is there, the theoretical demand is there, and one would think eventually that becomes revenue. But there’s a time cost to waiting. So does it seem prudent to sell INFN now and check back in say six months? Or might there be something to cause the stock to pop betweeen now and then? If so, what could that be? Obviously hearing about them signing deals with so and so, all over the world and in every metro jungle have zero effect on earnings. Kevin could write another post tomorrow about another walloping deal with a new data center client and basically we now know that means almost nothing, earnings-wise, and it might not mean anything the quarter after that and into the cloudy horizon we go. So what could make the stock price appreciate? What reasons do we have to wait, besides developing the virtue of patience and humility?

Monkey
(long INFN, short feeling bewildered by the gap in perception and reality)

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What is going on in the short term is one of the large metro gigs they were expecting hasn’t landed yet. It stinks. But the customer hasn’t gone away - they just couldn’t reliably put them in the bank for Q2.

Kevin, you know Monkey loves you. Honestly, truly, fully and unconditionally.

But let’s talk business.

On the one hand, we have the kazillion deals Infinera was (and is?) making. We have all the work you’ve done about them expanding to this market here and that market there and, like Brain and Pinky, taking over the world.

On the other hand, we have one customer who is delaying a purchase.

Why oh why oh why does that lead to management saying themselves they’re disappointed in guidance? How does one deal overshadow a kazillion? I’m honestly trying to think straight here: if the deals are so uneven in terms of size and impact, then what does all the info you’ve been sharing with us matter if there’s always the possibility that for every bazillion deals, there’s one that can totally overwhelm an entire quarter of business? Is this a business that will ever become steady or will the princess always be, in fact, in another quarter? Despite the steady increase in bandwith demand? It seems to defy logic, but it’s hard arguing with reality, right? Because reality tends to win.

Thoughts?

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I think bailing on this at $13 seems to be the wrong thing to do. The 11 million shorts have to cover at some point. They might as well use this opportunity to do so.

http://www.nasdaq.com/symbol/infn/short-interest

After the last earnings report SWIR crashed below $10 from $15. Now without another earnings report since then, it has steadily risen to $16. I think the future for INFN is far brighter than SWIR.

Who knows, we could see it go back to 17-18 on just the future prospects and on short covering before the next earnings call.

I might be buying 2017/2018 leap calls on any drop near $13

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additionally, he said in regards to revenue growth in the upcoming quarters, loose quote, “don’t forget we will need to spend on R&D”.

We pay as we go for R&D.

I think Monkey as gotten it right

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Still, all the things around bandwidth and demand from the cloud players are still there for the quarter. The quarter will still be up sequentially and YoY on the heels of that activity.

Kevin,

YoY EPS will be down. Last year they had 18 cents. Midpoint guidance is 17 cents. That will be down 6%.

Revenue will be up to to $255M (guidance) up from $207M, but I think the results this will include Transmode which I don’t think (correct me if I’m wrong here) was included in last year’s Q2.

Their enduser markets look so good for the long run (due to bandwidth growth) and the technology seems to be the best, but the company should be able to keep growing earnings along the way otherwise it is just a story stock.

Let’s contrast this with SWKS. SWKS will also have a weak quarter (according to their guidance and we will find out tomorrow how they actually did). The difference is that SWKS management is (and can be) disciplined in curtaining their spending when they will have a weak revenue quarter; this allows their earnings to keep growing. Is INFN undisciplined or will they lose too much opportunity in terms of long term marketshare grab if they cut back during weaker than expected times?

Chris

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Is INFN undisciplined or will they lose too much opportunity in terms of long term marketshare grab if they cut back during weaker than expected times?

I think they had a plan they put together - on ramping up, investing further in their technology, etc, so they can continue to take market share - and they felt the risk in changing that part of the plan would cost more in opportunity than losing out on earnings for a quarter.

I also think they fully expected to see that large contract mentioned “come through in time” when the plan was put together (hence the inventory build) - and it very well may still come together - but this group also tells you straight about what’s going on. They didn’t want to bank on having the contract land in Q2 even if they thought it could, and they told us. That’s my read on it.

So, will they cut back and do they have the discipline? I think they are in a different place right now and the need is more immediate. They need to make inroads into a new market and capitalize on their lead in technology. I trust these guys, I do, but I also understand that there is a limited amount of patience in seeing them through the quarter in light of the earnings guide. Personally, I would defer the question to a time when they are not entering a new market, and then I would say yes.

In my opinion this is a blip - an issue on timing. Think of it this way. The contract could have been signed and awarded for the quarter. We wouldn’t know otherwise and we’d be talking about something else right now. Whenever it happens it will go with that quarter’s revenue - I don’t necessarily care about the timing, I just want to make sure to have it. That one and many more.

Best,
–Kevin

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So the question is what to do now?

I think I’ll be in the “hold” camp, it’s kind of what I do. I won’t be eager to jump in tomorrow when it will probably be trading in the 13’s. I think over the next 3 months it will drift even lower toward $10-$11.

I was very tempted to buy more before the announcement and thank goodness I refrained from doing so. Long term, I still believe it will do well, but looks like it could take more quarters (possibly many more, if it ever gets there).

Most of my purchases are under $10 (so at least I’m not under water), purchased a few years ago, but after riding it up over $20 (and not selling any), when it fell back under $20, I bought a bunch at $19 thinking I wouldn’t get another opportunity to get it under $20. So much for that theory! Bought some more at $15 a month or two ago, too.

Yep, I’ll be holding for now, until we actually see good news translated to the bottom line. Then I might buy some more, if it looks sustainable.

One question for someone who may know, how was their stock based compensation this quarter? I know in the past they’ve been dinged for being overly generous and shareholder unfriendly with that, I didn’t hear anything about how much that was this quarter.

At least the drop tomorrow in this one should be compensated by my Facebook holdings! They are firing on all cylinders, earnings up almost 200% and PE getting more reasonable, may add to them.

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Just finished reading the transcript and this from Brad Feller is what I was hoping to hear. Near the end of the call he said:

It’s critical that we get out the next generation technology so as I mentioned, we’ll stick to the 20% of revenue on R&D to make sure we get the next generation technologies out. We continue to invest in the sales side of things to make sure we got the right resources to attract the broader markets. That being said, right, we will look at certain spend to make sure that we’re spending on the most important things, and make some – put some restrictions but let me be clear, we will continue to invest.

“put some restrictions” that sounds good to me.

I wish they had had a few restrictions in place for this quarter, but I understand that it is natural when a company is growing and gearing up to address a growing market that spending controls can get a little loose. I am glad they are looking at this from the top.
Just my thoughts
Mike

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This is starting to feel more and more like a “story” stock.

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This is starting to feel more and more like a “story” stock.

I’m a relative novice, most of the folks who post here know WAY more than me about these things, so please read the following as sincere questions.

Revenue is up 33% YOY, earnings are up 57% YOY. The PE is 14 at the current stock price. Mr. Market apparently doesn’t care about the growth because of…why? Because it was overvalued for so long when they weren’t making money?

So we’re at fair value now? If we look at 1YPEG it’s at .26. I would think that particular metric needs to be closer to 1 to get to fair value.

I don’t see how this is a story stock.

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Hello,

This is starting to feel more and more like a “story” stock.

Not by my understanding of “story”. INFN is profitable and growing. The expectations of greater growth are not being met but there are rational
explanations;

INFN made a large investment in Transmode to begin to provide end-end
solutions to their customers and to significantly expand the addressable
market. In this industry it takes time to engage prospects, design solutions, test results, and begin installations. Many of the new prospects are non-Infinera customers, thus requiring a replacement of someone else’s functioning equipment. INFN has always stated that it would be 2nd half of this year before meaningful revenues from these
efforts would begin to appear and that some of the costs to prepare for that would appear earlier.

Then Transmode’s largest customer went into a period of non-spend for at least a couple of quarters. I estimate that this customer historically accounted for about 9 million of quarterly revenue. This would have impacted the Q1 results by about 2.5 cents of eps. Thus, the
eps would have been around 21.5 cents rather than 19 cents and the annual percentage increase around 34% rather than 19%. Further, the Q2 guidance would have come in as expected on revenue and nearly so on eps.

If the story was that revenues and earnings would resume their growth trajectory in the second half, it does not appear that the company has been impacted by the slippage of one customer (temporarily) to the extent of the market sell-off. Surely, there is now a bigger question about the TM acquisition, but that was never going to be answered until the 2h results. I am adding here to maintain the percentage of my
portfolio in INFN.

Best regards,

Mike

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creelon I see it the same way, I don’t see this as a story stock. This company is increasing revenue, increasing cash flow, and increasing cash.
They are growing market share. My only complaint is that the seem to have very high operating expenses as a percent of revenue. If they can get those costs down, then I think things will be fine.
Mike

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Motley Fool article posted this afternoon on Yahoo/Finance:

http://www.fool.com/investing/general/2016/04/28/infinera-co…

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All I really need to know is that my investment in INFN is costing me money.
INFN is down. A lot. That is a fact. Whether it will go back up is a speculation.

Bummer.

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