Infinera, The best is yet to come!

Infinera (INFN) just reported their Q2 2015 quarter and here are my thoughts on the quarter.

For those who have not heard of Infinera they are a vertically integrated optical transport company with the only Photonic Integrated Circuit (Pic) in the industry.

 **Revenue** In Thousands
13  $124,625  $138,385  $142,020  $139,092
14  $142,815  $165,399  $173,559  $183,306
15  $186,862  $207,346

Revenue was up 25% this quarter YoY. 86.32% of this was the products that Infinera produces and 13.68% was from Services. This is in line with the 2nd quarter of 2014.

 **Net Income** in Thousands

13  ($15,279)  ($10,009)  $3,347  ($10,178)
14  ($4,374)      $4,780     $4,843   $8,410
15   $12,366     $17,906

Net income on a Gaap Basis was up 275% and on a non-Gaap basis it was up 91%. The reason for the big difference between Gaap and Non-Gaap was twofold. First their Gross Margins for Q2 2015 were up 4.2% YoY. This was due to a combination of factors, cost reductions from leveraging their vertically integrated model, adding blades to more customer’s products and including instant bandwidth licenses as well as a favorable customer mix. Also the stock based compensation was lower as a percentage. But there is a shining light in the discussion of Stock based compensation. While Revenue’s are growing, stock based compensation is coming down. Last year in the same quarter it sat at 4.1% of Revenue. This quarter it sits at 3.9% of Revenue.

 **Earning Per Share**  adjusted (Non-Gaap)

13  ($.06)  ($.01)   $.10  $.01
14   $.03     $.11    $.11  $.13
15   $.16     $.18

Earnings were up 64%. YoY.

 **Free Cash Flow**  in thousands

13  ($26,235)  $13,429    $8,596    $18,322
14  ($21,041)  $5,875      $18,039  ($5,198)
15   $12,475    $46,297

Their free cash flow is up YoY. This year their accounts receivable’s has climbed considerably. That is something that will need to be watched to make sure that it is paid back in a timely manner.

Cash and Debt

Their cash is at $397.2 million, up 22% YoY and debt is at $30.1 million, up 14% Yoy. The balance sheet is improving.

Q2 2015 notes on conference call. I would like to thank for the transcripts.

There were some great information in this quarter’s conference call. Infinera had three customers that were greater than 10% of Revenues. One each from three different verticals. One from cable, a tier one telecommunications company and a wholesale and enterprise carrier verticals. They also saw strength in their Internet Content Provider’s (ICP).

At this time, Long Haul, is still 90% of Infinera’s revenue’s. This shows just how early we are in the Data Center build out. Also they do not plan on having a Metro product ready until the end of 2015. But an interesting point that Mr. Fallon made was that the Long Haul would continue to grow until the end of the decade.

The Cloud Xpress platform is continuing to progress. Equinox is implementing the Cloud Xpress to interconnect data centers in Hong Kong. The cloud Xpress is a smaller unit that takes up 3.5 inches of rack space. The unit provides up to 500 gig’s per second of line side data with client side ports of 10, 40, and 100 gig. It is a simple unit that will allow fast integration into the network. One of the troubling aspects this quarter was that they did not have one new customer this quarter. Infinera claims that the customers were waiting for the new Cloud Xpress with the 100 gig ports. Infinera claimed that they were seeing significantly upward volumes in the second half of the year. We need to start seeing win’s in the data centers because this is an area that will see great growth. Personally I think the Data Center’s will be bigger than the long haul. They could make everyone forget about the Tier One’s. If they were unable to penetrate the Data Center’s (which I think Infinera will do great in the Data Center’s) this could be the difference from Infinera being a great investment to a good investment.

The Metro product, that is supposed to be out by the end of 2015, should really shore up their product line. While I haven’t seen it yet I am hoping that it will be able to fill a need that sits between the DTN-X and the Cloud Xpress. The Cloud Xpress is not as sophisticated, nor does it need to be, as the DTN-X. But some of the Data Centers might want something a little more flexible than a Cloud Xpress. I think the Metro Product will fill that niche. I hope to see it take over the Metro side of the telecommunications and Cable companies. Recently Infinera lost a customer to BTI. This wasn’t just a small customer but a colocation provider called CyrusOne. The reason CyrusOne went with BTI is because of their 7800 cloud connect gear. It is about the size of a DTN-x shelf and does Ethernet and Sonet. This looks more like a Ciena 6500 Roadm. While Sonet is slowly being moved away from, at the metro level, there is still a lot of equipment that uses that transport protocol. So hopefully the Metro Product that Infinera comes out with will compete with the BTI 7800. (I think it will). One other point is Infinera hired BTI’s Senior Vice President of American sales in January 2015.

The Transmode acquisition should close in Q3. 54% of Transmode’s investors have signed up to sell their shares and they have to reach 90% of the investors. Transmode’s management is for the deal and this should help Infinera to close the acquisition. Transmode will provide Infinera with products that are at the edge of the network. Small aggregation transport that will allow data to be passed up into the core of the network. It will be interesting to see how this will help with their Revenue.

This is a statement by Fallon and Feller that I have condensed so it is not verbatim: “The Long Haul market was at $4 billion and they expect the Long Haul, Metro and Cloud and SubSea to be $15 billion dollars. Infinera has 40% of the Long Haul market and they plan on capturing at least the same amount of all the other markets. The Datacenter internconnect projections are for a growth rate of 60%. At this point in time M2M traffic has equated the person to person traffic. Since machine to machine traffic is technically a multiplier of hundred to a thousand times the amount of bandwidth required to handle that. I fully expect that in the coming years the M2M traffic is going to dwarf the person to person traffic as it goes along. And that is Data Center Interonnect traffic. There are approximately 500,000 datacenters today in the world.”

Infinera is really at the early stages of data growth. There is so much data that needs to be moved and the market just keeps growing. I do not think anyone really knows just how large the data is going to grow. One thing that really has me surprised in a good way is that there is an increasing adoption rate of instant bandwidth. They are seeing customers add bandwidth and they are shipping more products with this module installed. (Software module) Also, while Infinera moves into the Metro and Cloud with a new product that is built from the ground up, their competitors are still putting out boxes that have been upgraded. Not designed from the ground up. You can see this in the Ciena product that is based on the Nortel 6500. Now it has been upgraded to the Ciena 6500 Roadm. So Infinera is moving into these markets with a product that could disrupt it. These upgrades do not last forever but I suspect that it will last until at least 2018 now and could possible reach out to 2020. It has to end sometime right? The one thing I did not l like to see from this conference call was that they had not won any new customers. All of the Revenue came from existing customers. They did say on the conference call though that everyone was waiting for the Cloud Xpress with the 100 gig ports.

Long Infn

Thank you for the detailed post, great work.
I started to read about them also over on RB and took a small position this week, Erik
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