INFN 3Q16 Earnings and Analysis

I know it’s been a while since Saul owned Infinera, but I suspect some here are still interested.


For Infinera investors, this quarter offered more tricks than treats, and guidance suggests a wintry mix when 4Q16 results are reported in February.

Earnings Report Highlights

The earnings press release can be found here:…. Seeking Alpha’s transcript of the conference call can be found here:…. (Thanks, Seeking Alpha.) Unless stated otherwise, all italicized quotations are from the Seeking Alpha transcript.

3Q16 Revenue: $185.5 million This is a 20% decline from 3Q15. It looks even worse when you realize that the 3Q15 revenues included only a few weeks of Transmode revenue. That said, it is not as if this result was unexpected – management had guided towards $180-190 million. In terms of Wall Street expectations, I’m seeing very different numbers from Yahoo! Finance and Seeking Alpha. According to Yahoo!, Wall Street was exactly right, estimating $185.5 million. Seeking Alpha, though, describes the result as a $10.9 million miss.

In millions (GAAP).
         1Q       2Q       3Q       4Q     Comments
2012    104.7     93.5    112.2    128.0
2013    124.6    138.4    142.0    139.1
2014    142.8    165.4    173.6    186.3
2015    186.9    207.3    232.5    260.0   3Q15 Transmode acq.
2016    244.8    258.8    185.5

3Q16 Gross Margin: 45.6% GAAP and 49.2% non-GAAP Management had guided for non-GAAP gross margins of 45-49%. At the risk of sounding like a fanboy, I think these margins show that Infinera remained disciplined on selling price despite a difficult sales environment, especially in Metro. Admittedly, though, there were other – more ephemeral – factors such as product mix and some one-time factors.

3Q16 Operating Margin: -5.9% GAAP and 3.6% non-GAAP Guidance had been for non-GAAP operating margin between -2% and +2%, so management beat the top end of guidance.

3Q16 Net Income: GAAP $-11.2 million ($-0.08 per diluted share) and non-GAAP $7.4 million ($0.05 per diluted share) Management’s guidance for non-GAAP earnings per share was a range from $-0.02 to $0.02. Again, Wall Street expectations diverged, depending on source. Yahoo! Finance seemed to imply that Wall Street expected breakeven results for non-GAAP earnings, but Seeking Alpha says results exceeded expectations by $0.12.

Earnings per Share (GAAP)
         1Q      2Q      3Q      4Q    Comments
2012   -0.19   -0.27   -0.17   -0.14
2013   -0.13   -0.09    0.03   -0.08
2014   -0.04    0.04    0.04    0.06
2015    0.09    0.13    0.06    0.08
2016    0.08    0.08   -0.08

Earnings per Share (non-GAAP)
         1Q      2Q      3Q      4Q    Comments
2012                   -0.07   -0.05
2013   -0.06   -0.01    0.10   -0.00
2014    0.03    0.11    0.11    0.13
2015    0.16    0.18    0.22    0.21
2016    0.19    0.22    0.05

3Q16 Cash Flow From Operations (CFFO): $5.2 million; CapEx: $9.6 million. This is a pretty anemic CFFO number, and the larger CapEx number (although a decline from last quarter) means that free cash flow was negative. I’ll examine this briefly in a separate section.

4Q16 Guidance
Revenue: $165-185 million (vs. $260.0 million in 4Q15; a wider range than normal)
Non-GAAP Gross Margin: 40-42% (vs. 48.3% in 4Q15)
Non-GAAP Operating Expenses: $88-92 million (vs. $92.8 million in 4Q15)
Non-GAAP operating margin: -10% at the midpoint (vs. 12.7% in 4Q15)
Non-GAAP earnings per share: $(0.16)-(0.12) (vs. $0.21 in 4Q15)
GAAP earnings per share: $0.13 less than non-GAAP earnings per share
Per Yahoo! Finance, Wall Street had previously expected 4Q16 revenues of $197.5 million and $0.01 in non-GAAP earnings. I described last quarter’s guidance as “an extraordinarily negative surprise”, given an $88 million revenue miss and a $0.22 non-GAAP earnings miss. This quarter’s $22 million revenue miss and $0.15 non-GAAP earnings miss is not quite as bad, but is still quite large and about as unwelcome as teenagers bearing eggs on Halloween.

INFN earnings day share price: $7.935 -14.03% (vs. S&P 500 -0.30%) My tendency is to believe Yahoo!’s version of Wall Street expectations, which indicated basically in-line results. I lay the blame for the share price decline on the weaker-than-expected guidance.

Customer Discussion
Chief Financial Officer (CFO) Brad Feller didn’t speak to the Cloud Xpress customer count. That could mean that the count remains unchanged at 27 or that Infinera no longer looks at CX as a new product and has stopped reporting changes to the customer count.

CEO Fallon disclosed that two customers have purchased the new Xceed Software Suite, which I’ll discuss later. Presumably, these are both pre-existing customers – one certainly is.

There were two 10% customers for the quarter: a Tier-1, and a wholesale and enterprise carrier.

Long-haul (and Subsea)
Early in his prepared remarks, Chief Executive Officer (CEO) Tom Fallon blamed the current challenges the company is facing on “… not yet being a sufficiently diversified business …”. During the Q&A session, he expounded on this point, highlighting both a geographical component (too concentrated in North America), as well as a market component (too concentrated in long-haul). The company has taken steps to improve these concentrations. Cloud Xpress opened the DCI market for Infinera, but it is still too small to overcome the impact of the long-haul slowdown. The acquisition of Transmode simultaneously offered a solid beachfront in Europe and a small market share in the Metro space. Infinera seems to be working with partners in other geographies, rather than trying to establish their own international sales force from scratch. Recent successes in Latin America were specifically cited.

Industry analysts predict a 5% compound annual growth rate (CAGR) in long-haul between 2016 and 2020. One issue with this estimate is that it is across all geographies, and much of this year’s growth has been in China, a market that Infinera doesn’t serve. Infinera may never penetrate China due to government protectionism of local manufacturers.

Further, the year-end dynamic in the long-haul space seems to be tighter than in recent years. According to CEO Fallon, “… several of our largest customers have already ordered up to their annual CapEx allocations, hence we are not planning for any benefit from year-end money in Q4 and are seeing certain opportunities pushed into next year.” In past years, these customers may have been allowed to go over budget when network capacity was strained, but this year it seems that the purse-strings are tightly-held.

Regarding when we can expect a recovery, CEO Fallon says, “Restoring our long-haul business will take some time … we are starting to have visibility into several new footprint opportunities over the next few quarters and expect capacity fill activity, which is currently lower than typical, to also recover in 2017. … my expectation is that current softness in long haul will subside in 2017 and the long haul market will resume growing at a mid single-digit level.

CEO Fallon talks about 2017, but can we expect early relief? I get the impression that there may be some, but not a lot. Q1 for Infinera is typically a time when customers are still finalizing their budgets. Seasonally, it is often the weakest quarter of the year, with the second quarter being the second-weakest. Often, purchases by the cable companies are front-loaded in the calendar year, but CFO Feller cautions that this year could be different due to acquisitions among Infinera’s major cable customers. In cases where network constraints have become unbearable because of spending that didn’t occur in late 2016, there might be some relief in 1Q17.

It would also not surprise me if customers are waiting for Gen4 – the Infinite Capacity Engine (ICE) – to be embedded in Infinera’s long-haul products. We don’t know the precise timetable for that yet, but I’m pretty sure it will be revealed at the Insight Infinera event on November 17. I’m also pretty sure that the subsea market has dried up for Infinera until ICE-enabled products are available.

My impression is that we may have to batten down the hatches for several quarters.

Data Center Interconnect
CEO Fallon described DCI as “… a bright spot and an outstanding growth opportunity …”. Industry analyst ACG describes the whole market as growing at a 29% CAGR through 2020, but they also note that the purpose-built, small form factor subset of the DCI market (where Infinera plays) is likely to grow at a 57% CAGR to become a $2 billion market by the end of the decade.

Infinera currently has a 94% market share of this subset of DCI. Furthermore, it is jealously clinging to that market share by making Cloud Express 2 the first product to embed the Gen4 ICE photonic integrated circuits (PICs). Initial shipments are expected in 1Q17. Infinera disclosed record DCI revenues in 1Q16 and then again in 2Q16, but “… DCI revenue was down sequentially in Q3 though we see a strong pipeline building for the rest of the year and into FY 2017.

Metro Core, Aggregation, and Access, and Mobile Front-haul and Back-haul
The news hasn’t changed much for Infinera in the Metro space. Adoption is still “… taking longer than expected…”, although Infinera is closing some smaller deals. Although the opportunity in mobile front-haul and back-haul is enticing, the main target customers for Infinera are the domestic Tier-1 carriers, a group Infinera has not penetrated well in the long-haul space. There were some international Tier-1 front-haul wins touted in Infinera press releases a few months ago, but co-founder and company President, Dave Welch, cautions us that such initial deployments are typically slow to progress into larger revenue volumes. It is possible that Tier-1 carriers may be more receptive to Infinera now that they are capable of providing an end-to-end solution (especially an ICE-enabled one), but it will certainly be the case that entrenched providers to these carriers will fight tooth and nail to keep the business.

Industry analysts continue to expect Metro to grow faster than long-haul in the coming years, predicting 8% growth through 2020. I’m really eager to see how and where Gen4 impacts Infinera’s Metro products when details are unveiled at Insight Infinera.

With the introduction of the Xceed Software Suite, Infinera has taken the leap from having features that support software-defined networking (SDN) to products that support SDN. SDN could be especially potent for both carriers and Infinera, due to automated enabling of slices of Infinera’s Instant Bandwidth as traffic demands and budgets allow.

I mentioned earlier that there are currently two customers who purchased the Xceed software. One of them is using it across both TM (Transmode Metro) and DTN-X (Infinera long-haul) equipment.

Infinera’s Operating Expense Management Revisited
Two quarters ago I did a bit of a deep dive into operating expenses, and I updated the numbers last quarter. I want to make sure that we stay on top of these numbers, especially while revenues are depressed. You may recall that last quarter I suggested that what we might see is a decline in expenses in absolute terms, but an increase in these expenses as a percentage of revenue, due to the precipitous decline in revenue. That prediction has proven accurate for all three operating expense lines between Q2 and Q3. First, CEO Fallon has long talked about reining in R&D at 20% of revenue. This quarter, R&D was 27.4% of revenue. I’m not upset about this right now, although my concern will increase if it continues trending above 25% well into the future. Right now, the company needs to roll out its Gen4 products quickly, and make sure the delay between Gen4 and Gen5 is shorter than between Gen3 and Gen4. Now is not the time to constrain R&D spending. R&D is a technology company’s life blood, so I wouldn’t be opposed to CEO Fallon upping the percentage from 20% to 25%. That said, if R&D stays much above 25% for extended periods, that adds another hurdle to GAAP profitability on top of the already difficult hurdle presented by the company’s vertical integration, of which I’ve spoken at length in past posts. For now, let’s keep watching the trends. Sales and marketing had been around 12.5-13.0% of revenues, and it jumped to 15% this quarter, although the dollar amount declined from Q2. General and administrative had been around 6.5-7.0% of sales. This quarter it rose to 9% of sales, despite declining in absolute terms.

Infinera’s Weak Cash Flow This Quarter
I took a look at the statement of cash flows and highlighted a few items for further research. Fortunately, CFO Feller touched on all of them in this comment from his prepared remarks: “… working capital changes negatively impacted cash flows in the quarter, as we increased inventory due to Gen 4 PICs transitioning into production and our taking longer-term positions on certain external components that are in high demand. This use of cash, along with declines in AP and deferred revenue, more than offset our AR decline, which occurred as a result of the lower revenue levels.” Changes in inventory was the biggest component, and it is good to hear that a large portion of them are Gen4 PICs – that’s not the kind of component I’m worried about being written down due to lack of demand. I’ll try to circle back to Infinera to find more details about inventory composition when they eventually file their quarterly report on Form 10Q with the SEC. Back to CFO Feller’s comments, for those less familiar with accounting, AP means accounts payable (bills Infinera have received but haven’t paid yet) and AR means accounts receivable (bills Infinera have sent to customers but for which payments haven’t yet been received). Fluctuations in AR and AP are pretty normal, but it is good to keep an eye on them. Surprise increases in AR could mean customers are unwilling to pay Infinera, while increases in AP could indicate liquidity issues at Infinera. What I see currently looks like normal fluctuations and not anything concerning. Speaking of inventory…

Aggressive Pricing. Temporary?
Aggressive pricing was mentioned many times in the conference call, mostly during the Q&A. Coupled with the prediction of lower gross margins, I started to be a bit concerned. As I studied the conference call transcript – and Infinera’s situation – a bit more deeply, I became less concerned. I suspect that Infinera will have to price its Metro products a little more aggressively than it would like to, in order to gain market share. That is a situation that will probably persist for many quarters. But I do think we have a short-term issue where more broad-based aggressive pricing makes sense. We are currently in a period where Gen4 has been announced, but is not yet shipping. I greatly doubt that Infinera has sold all the Gen3 inventory that it had built to support “Time as a Weapon”. If not sold soon, much of that inventory will likely have to be written down or written off. On the one hand, Infinera doesn’t want to cheapen its brand too much by giving product away. On the other hand, especially in the Metro space, Infinera is hoping new customers will try their product and like it, so they can gain a foothold in that company’s network. Aggressive pricing could persuade some of those potential customers to make a purchase. I doubt any aggressive pricing of this nature will persist past 1Q17 or thereabouts. Once the Gen4 Infinite Capacity Engine is available, I’m pretty sure Infinera believes that its features and capacity will make discounting unnecessary.

Infinera’s Weak Guidance This Quarter
Regarding anticipated 4Q16 revenues, CFO Feller cited some of the same issues raised in my quotes from CEO Fallon earlier: several customers are already over their CapEx budgets. He also noted limited visibility into customer “fills” (i.e., adding additional bandwidth to an existing chassis, or requesting an additional slice be activated in an Instant Bandwidth module). On the expense side, CFO Feller noted attempts to control costs during this time of diminished revenue, specifically mentioning a hiring freeze. But he also explained that Infinera’s 4Q16 has an extra week compared to 3Q16 or 4Q15, allowing more costs to accumulate and making comparisons more difficult.

Other Random Musings
Oops… My Bad…
CEO Fallon indicated that he feels he made a mistake a few years ago, and that is what has delayed the delivery of the Gen4 ICE technology. He didn’t offer any more detail about it, but it is not a point that he necessarily had to disclose to answer the analyst’s question (“… what gets the business back to a recovery mode?”) I’ve said this before, and it remains true: CEO Fallon is transparent to a fault, and took responsibility for his mistake. I talk about “tricks” and “treats” in this post, but I’m just trying to inject seasonal humor. I don’t believe Infinera management is trying to “trick” anyone in any real sense. If anyone got that impression, then “Oops… My bad…”!

Underlying Demand for Capacity – Plus Having a Great Product – Will Win
CEO Fallon summed up his view of the big picture nicely: “… the long haul will continue to grow in the mid-single digit range over the next several years. I don’t see any abatement of fundamental demand, of fundamental traffic. Quarter perturbations, and I do believe that we are being hit in Q4 by CapEx limitations by some of our biggest customers. That doesn’t alter the fact that they need more capacity. And so far, we continue to be their provider of infrastructure and I’m anticipating next year that that recovers. I believe that when we get our next-generation platform out, that will help us tremendously.

Most Amusing Quotes from the Conference Call
Dmitry G. Netis - William Blair & Co. LLC
… I’ll ask a simple one on the Gen 4 first. I think you guys said Q1, can we expect that in January, March, February, month? Any more quality on that would be good.

David F. Welch - Infinera Corp.
Are you placing a purchase order? What’s the…

Dmitry G. Netis - William Blair & Co. LLC
Let’s assume I am.

Thomas J. Fallon - Infinera Corp.
How many do you want, Dmitry?

David F. Welch - Infinera Corp.
Yeah, how many do you want? We’ll move you up in line.

Concluding Remarks
Last quarter, I described it as “a very frustrating time to be an Infinera shareholder”. Although this quarter’s post-earnings share price action pales in comparison with the 33% drop we were “treated” to last quarter, I think the frustrating times remain with us, and the forecast is for more of the same in the near term. Last quarter, I knew that the Gen4 release schedule would be unveiled at Insight Infinera, so I held out some hope for the fourth quarter based on an assumption that Insight Infinera would be held in September, as it always had been since I started to cover the company (not THAT long ago). I made a bad assumption, but it sounds as if many customers wouldn’t have been able to react to fourth quarter availability anyway due to CapEx budget constraints. At this point, I think all we can really do is wait a few weeks for Insight Infinera and hope that the announcements offered there make us as thankful as we should be in late November.

Fool on!
Thanks and best wishes,
TMFDatabaseBob (long: INFN)
See my holdings here:
Peace on Earth

Please note: I am not a member of any newsletter team. My opinions are my own. I want to share my research with you since we’re all part of the larger TMF Community.


Hi Bob, Thanks for your post on INFN. I’m just wondering whether you still have kept a position in the stock. If so, for God’s sake, Why?

I remember when we got involved with this stock, how we entered it with glorious expectations and hopes — which have all turned to ashes. With promises of explosive growth just around the corner, which has turned into a company and a stock which is just exploding into little pieces instead of explosive. All of our initial reasons for investing in the company are gone. Why continue in a “growth” stock whose revenue was down 20% this quarter and, at the mid-point, is guided to down 33% next quarter. Whose earnings per share are guided to down 167% next quarter, to a loss greater than any on that table going back five years. To an operating margin of negative 10%, to a gross margin down 12% from the year before. When the beginning of “recovery” is so far off they just have to guess at a number of quarters, and even then it’s a hope and a prayer. Again, Why would anyone hang on?

Just wondering…



Hi Saul.

I do still hold INFN and would consider buying more at these prices. Perhaps your “expectations and hopes” have turned to ashes; mine have not. I just think their gratification will be delayed and I’m willing to wait. You are not. That’s OK with me.

Saul, I watch what you’re doing and I try to learn from you, but I have zero intention of investing the way you do. It wouldn’t work for me because my strengths and temperament are different than yours. The best I can do is figure out the parts of what you do that would fit my strengths and temperament and then evaluate whether that part of what you do adds value to what I do.

“…explosive growth around the corner…” They are having success in DCI, but that market is currently less than one-tenth the size of long-haul, but growing MUCH faster. Their Metro prospects are certainly unproven, and I don’t think I’m counting too much on that.

“…just exploding into little pieces…” That’s beautiful imagery, Saul, but it is an exaggeration. I think you know that.

“…down 20% this quarter … down 33% next quarter … they just have to guess at a number of quarters …” You’re completely right, Saul, but I’m thinking years in the future, not quarters.

“… hope and a prayer …” You’re partially right, but I also think that it is my faith in a management team that seems to have very good vision for where the industry is going, and the technical chops to deliver a differentiated product that (most of the time) is technically superior to alternatives. They were leap-frogged recently, but they’re on the cusp of delivering a new generation of product.

I did lighten my family’s position a bit to create a tax loss. I’m looking to refill that position now that prices have declined. I absolutely do recognize that they’re going through a rough spell at present that is likely to be multi-quarter. I’m OK with that.

Saul, one of the aspects that sets you apart from others is that you’re very nimble. If you see Infinera returning to glory, you’ll get back in. I am not nearly so nimble. Buy and hold with a long time horizon works better for me. If I tried your style, I’d botch it up because it doesn’t play to my strengths.

I would never ask you to convert to my style because my style wouldn’t play to your strengths and heavens knows you’ve found a style that does work for you. Better than my style works for me, no doubt.

“… If so, for God’s sake, Why? … Why would anyone hang on? …” Because it makes sense for someone whose strengths, temperament, and style are different than yours, Saul. I feel as if these questions you are asking me are saying, “Every instinct in my (Saul’s) body says that holding Infinera is the wrong thing to do. Yet you persist. Are you crazy?” No, I’m not crazy. I’m not stupid. I AM wired differently than you and I DO have different strengths and temperament. It is OK with me for you not to emulate me. Is it OK with you for me not to emulate you?

From your “month end” post, you indicate it is a difficult, frustrating time to invest. For my style too, Saul, for my style too. Best of luck to both of us.

Thanks and best wishes,
TMFDatabaseBob (long: INFN)
Peace on Earth


Thanks Bob for a great explanation!


PS - And I hope that it works out for you and the others who are still in.


“…down 20% this quarter … down 33% next quarter … they just have to guess at a number of quarters …” You’re completely right, Saul, but I’m thinking years in the future, not quarters.

Hi again, Bob. I’m really sorry, but the more I thought about this, the more I thought that I just have to disagree with your point. It seems to me that you are staying in INFN only because you are already in it.

If someone were to present you with this company de novo, and you didn’t already have a position in it, you would laugh out loud at someone who suggested you buy stock in a company which has had one sinking quarter after another, after another, after another, until revenue is dropping by 20% year-over-year, then 33% year-over-year, with large losses. And they can’t even say that next quarter will start to be better. They admit that they don’t have a clue when it will start to get better.

What exactly would you be buying? Faith in management? They have no control over their business environment. They are trapped in it themselves.

I think that staying in a company just because you are already in it, if you wouldn’t really buy it now (except perhaps, hoping someone will acquire it and give you a little bump), is not a good idea, to put it mildly. Out of all the companies out there, is this the one you would choose to put your money in? No way!

But that’s just my opinion and I’ve been wrong about lots of things.




Interesting point. I had to really think about it.

It seems to me that you are staying in INFN only because you are already in it.

I don’t think it is the only reason or even the main reason, but it is a factor. The vast majority of my INFN holdings are in a taxable account and I have a gain on them, believe it or not.

I think the primary reason for holding today is twofold: (1) I don’t see it going much lower (absent general market decline); and (2) Insight Infinera on 11/17 is a near-term potential catalyst.

I will also admit that the fact that I have a gain on Infinera probably colors my perceptions in a way that my rational self realizes it shouldn’t.

I’ll also say that my depth of knowledge about Infinera makes me comfortable with the holding and keeps it “top of mind” for me. I will grant you that there are probably more important things for me to buy right now than Infinera - some on your list and some not. I don’t want to mention names today to preserve my trading ability. I can’t trade Infinera right now because I’ve posted about it. Fool’s Rules.

But I like your hypothetical question. If I had never heard of Infinera and a newsletter recommended it today, would I rush to buy it? Probably not. I might put it on my watch list. I probably would because I think growth in network bandwidth is a powerful trend, and this is a way to play it. I’m pretty sure you have some exposure, Saul, but through a different player, sort of in the same industry but not really a competitor. You see the potential too.

But I think the critical difference between my real-life scenario and your hypothetical one is that I know the company really well. That’s why I’d consider buying when Fool’s Rules allow.

They have no control over their business environment.” Saul, they CREATED the small form-factor, purpose-built data center interconnect market. They were first to market, currently have a 94% market share (two years after the initial launch), and their next gen product will ship in the first quarter (it’s rumored that Dmitry Netis is getting an early prototype). They have less control - to be sure - in the long-haul and Metro spaces. In long-haul, they have 40% domestic market share, so gains are tough. In Metro, they’re a recent entrant and it is tough to displace competition. But they’re done it before. The burst onto the scene in the middle of the prior decade and took market share quickly with a superior product (based on more integrated chips than any one else had; they still have a lead in that). If their next gen product is really good (remains to be seen), then they will be able to exert a bit of control on their environment. They’ve done it before, arguably twice.

Saul, I really have to get to other projects I’m working on. Your questions are really making me think. That’s a good thing, in general, but not when I have so much on my mind already. I may need to take a bit of a break from this discussion, but I appreciate how you’re challenging me and making me think. Please feel free to reply and challenge me further, but you may not get the satisfaction of a quick response.

Oh. One quick last point. I see a possibility that Infinera could be acquired, but that is not an outcome I would relish; it would just be a bigger player taking advantage of an opportunity. Acquisition is absolutely not at the core of my thesis. I want Infinera to remain independent. I agree wholeheartedly with you that hoping for acquisition is not a good reason for investment.

I hope what I’ve written here makes sense. I tried to get it out quickly so I could get back to my other projects.

Thanks and best wishes,
TMFDatabaseBob (long: INFN)
See my holdings here:
Peace on Earth


Great discussion Bob and Saul. Reading this discussion too really made me think. I currently hold INFN but not nearly as much as I once had.

I know it sounds like all things are heading south for Infinera, but I have to side with Bob on after following the company for as long as we both have. They really did get themselves into bind having not progressed fast enough in tangential markets (Metro is one, and Software-based control, e.g. SDN is arguably other). They thought Long Haul would get them through and post strong enough revenues while they ramped up the other areas (including DCI which they have ramped up nicely). Unfortunately a perfect storm was created where their long haul business dried up almost over night.

Today we’re treated to some additional insight on why that happened. Two of Infinera’s largest customers are about to become one CenturyLink and Level 3 - a tier 1 and an enterprise wholesaler.

If these M&A talks have been going on for a while I think we have some additional light shed on what else contributed to their perfect storm. While both companies share a common infrastructure (Infinera’s) it is likely both paused their spending plans while talks were proceeding. Of course Infinera could say nothing about these developments even if they knew.

Full article linked below on the merger linked below.…

Some highlights and of particular note:

  • New Company will be the Second Largest Domestic Communications Provider Serving Global Enterprise Customers
  • Combined Company Will Deliver Comprehensive Services and Solutions Over an Owned Network that Connects More Than 350 Metropolitan Areas with Approximately 75,000 On-Net Buildings
  • Transaction Valued at Approximately $34 Billion
  • Expect to Achieve $975 Million in Annual Run-Rate Cash Synergies that will Enhance Ability to Invest in Advanced Networks
  • Transaction Expected to be Accretive to Free Cash Flow in First Year Following Close and Significantly Accretive on an Annual Run-Rate Basis



Unfortunately a perfect storm was created where their long haul business dried up almost over night.

…down 20% this quarter … down 33% next quarter … they just have to guess at a number of quarters …" You’re completely right, Saul, but I’m thinking years in the future, not quarters.

Just to take a couple of quotes…

I don’t really follow this company though I did own them in the past probably for a couple of years. It didn’t really go anywhere. Five years ago you could have been thinking about years in the future, not quarters, nothing came of it. Maybe you are even. Go back a few more years and you would be down a lot.

As far as the perfect storm on long haul business, what happened before? I am not doubting their technology, I just am not sure there is that large of a market for it given the history of the company


Great find Kevin.

Bob and Saul, I’ll agree with Kevin that this has been a great discussion.

I have a fair sized chunk of INFN (4%) and intend to hold on to it. It’s tempting to buy more at this price but I have no plans to do that. I added to my shares this past quarter after the price drop last time. That hasn’t worked out so far so that could be an indicator that it would be a really bad idea to repeat that failure. But, I didn’t buy those extra shares for this quarter, I bought them for at least the middle of next year. They had already said this quarter would probably not be good, but they did say by next year things should be back to where they were before at the highs…and they bought a bunch of shares themselves to back up that conviction (at least Fallon, I think others). That gave me extra confidence beyond just the belief that the market for bandwidth is still growing and they have competed well. I could certainly be wrong, as could they, but I have confidence that the price will be better next year. That’s why I’m holding on here.

Saul, I was a bit surprised by the strength of your conviction that it was crazy to hold/buy INFN now when you have strongly defended SKX, which seems to be similar to me in that they have disappointed the last couple of quarters and also suffered a drop in price. I happened to have acted differently and sold out of SKX because I thought it likely to be dead money for a while and I wanted to put that money in other things for now. It certainly makes me wonder about my decisions on these two companies since I respect your views. I get the impression that you doubt the promise of their technology in a way you famously doubted WPRT, but INFN has been profitable and competed strongly. Are you feeling it could be another WPRT? Where do you see the differences between INFN and SKX right now? I can see why INFN has had a problem lately and why there seems to be a good opportunity for them looking out a few quarters, but I’m less clear on what’s happening with SKX. To me both seemed to be on good tracks and ready to take off higher but instead have floundered unexpectedly.


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I was a bit surprised by the strength of your conviction that it was crazy to hold/buy INFN now when you have strongly defended SKX, which seems to be similar to me in that they have disappointed the last couple of quarters and also suffered a drop in price.

Hi Steve, I don’t see any relation between the two.

Last quarter INFN’s revenue dropped a little over 20%, which is an enormous drop in revenue for any company. SKX’s revenue was “only” up 10%.

Last quarter INFN’s GAAP earnings dropped to a loss of 8 cents, from a gain of 6 cents the year before (which itself was down from a gain of 13 cents sequentially). SKX’s earnings were positive 42 cents, all the way down from 43 cents.

Last quarter INFN’s non-GAAP earnings dropped to 5 cents, from 22 cents the year before.

INFN’s revenue guidance for next quarter at the midpoint is dropping 33%! 33%! SKX’ guidance for next quarter is flat at the midpoint.

INFN’s non-GAAP earnings guidance for next quarter is a LOSS of 14 cents at the midpoint, down from a GAIN of 21 cents the year before. And GAAP earnings with a 13 cents larger loss.

Do you see any equivalence?



INFN’s revenue guidance for next quarter at the midpoint is dropping 33%! 33%!

Not to pile on, but I have to agree with Saul. This just seems like the definition of a broken thesis. The only way INFN ever deserved their multiple was if sales were growing – at 20 or 30%! After the huge drops, they’d need to grow at like 50%+ for a year or two to get back to where we thought they’d be. And then there are the margins.

I hope for a bright future for the company, but I just don’t see how the math works out.




Do you see any equivalence? - Saul


I understand that INFN’s current numbers are worse than SKX’s, but I guess I’m looking beyond those to the opportunity. Yes, INFN was sucked into a black hole that is likely to last another quarter or two, but unless unforeseen events prevent a resumption of bandwidth expansion as predicted next year INFN seems likely to bounce back just as fast as it fell. Other than the mentioned change in how shoes are marketed in one or more countries that may be shifting some revenue I’m wondering what will drive new growth for SKX. I think the SKX stock price will recover somewhat, it’s just that INFN seems to me to have the better opportunity over the next year. It wouldn’t be the first (or last) time I was wrong, but it’s how I see it. I guess we’ll all see next year.

Thanks for your response and your contribution to this discussion…and many others.




…resumption of bandwidth expansion as predicted next year INFN seems likely to bounce back just as fast as it fell.

One thing that is concerning to me about INFN…
I don’t believe their poor results over the past two quarters are market driven. They have lost due to competition leap frogging their capabilities. Now, the new Infinite Capacity Engine is supposed to solve that problem; but we are taking a leap of faith with management who has obviously been wrong before.

Fallon is obviously a very sharp guy. He talks a good game and has also put his money where his mouth is. While I like that, we need to start seeing this play out in the company’s results.

I guess we wait a bit longer.


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