Infinera (INFN) just reported their Q1 2016 quarter and here are my thoughts on the quarter.
Q1 2016 notes on conference call. I would like to thank Seekingalpha.com for the transcripts.
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.
This was not a very good quarter for INFN. Looking back on the last year I see the mistakes I made with this company. The Market was telling us that the company’s earnings were going to come down but I wasn’t listening because I see what is going on in the market. But I should have been looking at the company and what it was going through.
They said they had an outstanding quarter for Cloud Xpress. They added 5 new invoice customers. But obviously it isn’t enough. They need to get Metro growing also. They talked about front haul going from a couple hundred million to a billion dollar market by the end of the decade. Since they are breaking it out I expect they see this as another market. But this isn’t going to move the needle anytime soon. The Transmode Acquisition is taking time to add Revenue. Also their move into the Metro is going to take time. I think the earliest we will see this is Q4 but I expect it will be the first quarter of 2017. While I think that Infinera’s management is really sharp I think they made a mistake. They should have been into the Metro and Data Centers a year earlier. But that is looking backwards.
They also went into SDN. They said they would be software agnostic. While they will have a software package that will supply SDN, they also said they would support anyone else’s software on their nodes. This is important point. If they are willing to work with any software company on SDN then any customer will see this as a plus.
One excuse they did give for not having a better quarter was one metro customer that hasn’t bought for 2 quarters. I am not even sure why they would bring this up. If you can’t close a sale for one customer at this point it seems like a lame excuse. One customer should not be a problem for them now. They have moved into the Metro area and if they can’t sell their product it will be painfully obvious by 2017. The bright spot on this though is that they said the long haul was a 5 billion dollar and they are now moving into a 12 billion to 15 billion dollar market.
They said they had strong bookings in Q1, they said the long-haul market was the best bookings quarter they have had in a couple of years and they had record revenue and booking for the CX product. Yet they are guiding for 255 million in Revenue for Q2 plus or minus 5 million. That is growth of approximately 23% in Revenue. While that is towards one of their top Quarters it still is bringing growth down. I would have thought if they were having their strongest quarter in Long Haul and CX that the Revenue would have jumped more. This gives me pause. First of all they are not getting enough money to the bottom line and their growth in Revenue isn’t showing it. I do think that Metro will give them a boost, and it will take time to show up because the customers want to look at the product and test it before buying it.
With the capacity engine coming on line and supporting 2.4 terabit this puts them significantly in the lead. They can now supply unlimited bandwidth into the future. This is very important because we just do not know when the bandwidth growth will slow. I just installed my first 100 gig circuit to a customer. This is amazing because for 3 years we have been building 100 gig pipes between offices, data centers, and long haul and giving 10 gigs to the customers. But now the 100 gig pipes are going directly to the customer. I am not going to go into great detail about the Ciena product but I think it is useful to understand what is going on. The Ciena product right now has a 100 gig line side ( they are coming out with a 400 gig line side this year) so in their chassis they have 32 slots in their broad band shelf. In order to run a 100 gig to a customer it takes a slot for the line side and a slot for the client side. So a 32 slot shelf now becomes a 16 slot shelf.
What I can’t say is how many customers are going to want 100 gig right now but I can say once one orders it will become more and more. Right now 10 gig is the standard but how soon will 100 gig become the standard. This is why Infinera says time is a weapon. The more data that comes the bigger the pipes will have to be. I just installed last year 10 gig pipes between our aggregators and just last week I am getting orders to upgrade them to 100 gig pipes. The data is going to keep growing as long as people keep wanting to stream more video and data. I just do not see it stopping anytime soon. So with the Data getting bigger how long will it be before everyone will want at least 1 TB pipes? I do not want to sound overly enthusiastic, because after all I did miss this slow down. This is something I should have realized but I am thinking long term. I just bought some more Infinera so I am even longer INFN.
**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 $232,472 $260,600 16 $245,000
Revenue was up 31% this quarter YoY. They are not breaking out what part of this was Transmode. Product Revenue was $216.1 million up 34% and Services Revenue was $28.7 million up 10%. Domestic made up 71% of the Revenue with International making up 29% of the Revenue. This has always fluctuated but with the acquisition of Transmode I would expect this to go up.
**Cost of Revenue** in Thousands Q1 16 Q1 15 Cost of Product 118,062 89,506 Cost of services 10,418 9,244
Cost of product were 54% of product Revenue. Down 2% QoQ and Cost of services were 36% of Cost of services up .6%. Cost of Services were 52.48% of Revenue essentially flat at 52.85%.
Operating Expenses in Thousands
Q1 16 Q1 15 Research and Development 54,145 39,257 Sales and Marketing 30,009 21,042 General and Administrative 17,313 12,656 ----------- ----------- Total Operating Expense 101,467 72,955
R & D were 22% of Revenue up 1% QoQ. Sales and Marketing were 12% of Revenue up 74 basis points QoQ. G & A were .07% of Revenue essentially flat QoQ. Total operating expense was 41.4% of Revenue up 2.4% QoQ.
**Net Income** in Thousands (Gaap) 13 ($15,279) ($10,009) $3,347 ($10,178) 14 ($4,374) $4,780 $4,843 $8,410 15 $12,366 $17,906 $8,510 $32,000 16 $12,015
Net income was down QoQ. While the first Quarter is always week this Quarter net income actually went down QoQ.
**Earning Per Share** adjusted (Non-Gaap) diluted 13 ($.06) ($.01) $.10 $.01 14 $.03 $.11 $.11 $.13 15 $.16 $.18 $.22 $.21 16 $.19
Earnings were up 18.75% on an adjusted basis. I do not care whether you follow a company on a Gaap or Non-Gaap basis as long as you understand the numbers behind them.
Non-Gaap numbers are the following. Net Inc. Attributable to Infinera (All in Thousands)
US Gaap as Reported Net Income 12,015 Acquisition-Related deferred revenue adjustment $226 Stock Based Compensation $7,987 Amortization of acquired intangible assets $6,502 Acquisition-related inventory step-up expense $0 Acquisition-related costs $527 Amortization of debt discount. $2,274 income tax effects ($1,502) Non-Gaap as adjusted $28,029
The Acquisition costs are coming down and should mostly be off the sheets by the end of the year. Stock based compensation is finally down to where I no longer consider it a red flag. It is sitting at 3.3% of revenue now.
**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 $34,353 $10,508 16 $-865
Cash flow is down this quarter, in fact it is negative. What is weighing on Cash Flow? Stock based compensation is flat QoQ. Their inventory is up 4 million and their accrued liabilities and other expenses are up 2 million. A big reason that Cash Flow is down is because account receivables is down $21 million QoQ. This is a great thing though because they are collecting the money due them. They did have Deferred Revenue go up this quarter by $7 Million though. So they accounted for Revenue that they have not yet given the product for.
Cash and Debt
Their cash is at $275 million with 0 debt. This is flat sequentially and QoQ.
1YPEG = .26
On and adjusted basis the P/E is at 14.86. The cheapest I have ever seen it. But the growth has come down to 57% on earnings YoY. So the 1Ypeg is actually up.