Infn Q1 2016

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 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.



Great post Andy, thanks.
I have been beating the drum lately about operating expenses so I was wondering what you are thinking there. R & D needs to stay up, I understand that, and management has said often they will keep the investment up there, but what about the rest of it? Ostensibly this money is for gearing up staff and infrastructure to meet demand, I have no experience following a start up like INFN, so I don’t know when we should start getting nervous about that 20 percent that is going for marketing and general admin. I would really like to hear management talk a little more about controlling some of those costs.
Like you, I am happy to see the stock based comp. coming down, that is a big plus, and now if we could get a drop of even 2 or 3 percent in some of those other cost things would be looking pretty good.
What do you think, am I obsessing over this needlessly?
Again thanks for the great informative post.

1 Like


Not Andy here, but thought I would comment on the opex. As you say they have been adamant about the 20% r & d expense. They have also reiterated that they will get to 15% operating profit in the near future. I believe that this means that marketing and g & a will come down as a percentage, but by revenues going up faster than they do.

They are growing strongly in long-haul and CX is exhibiting strong traction. As they go through the long sales cycle for the new products introduced in 2H of last year and the Infinite Capacity Engine is in production, there should be an acceleration of growth. The big question mark is when or, if, the metro initiative will show growth. IMO, management deserves credibility and they have indicated that the large Transmode customer is within one to two quarters from generating meaningful revenues. This alone would put Metro in a growth phase (albeit small). Without the drag from the Metro component, the company should demonstrate good revenue growth and IF their Metro aspirations are realized they would be a big winner from here. At current price, I perceive little downside and a runway above 20 over the next 6-9 months.

Best regards,

(also) Mike


Thanks Mike for the reply, much appreciated.

Thanks Mike,

I think Creelon (The other Mike) has a good handle on Infinera. But as far as you obsessing over operating expenses, I think it is great that you want them to control costs, but the telecommunications equipment business does have a lot of op ex built into it. For instance Infinera is vertically integrated so they have their own manufacturing plants. They also need to ship their equipment to where it is being installed and then pay for 2 installers time, about 2 weeks, to install the equipment. So it is capital intensive but not as bad as the old days. The equipment is smaller and goes in a lot faster now.

I do not think it is helpful to compare Infinera to a software company because they are two very different business models. But I do think it is helpful to compare them to other people in their business. So Ciena would be a good company to compare them to.…’ target=

Looks like Infinera is eating their lunch.…

And then there was Alcatel Lucent which has now been bought out by Nokia. You can still look at their financials up to Q3 2015 and they were operating at a loss.

So Mike I think it is important to look at costs but to compare them across the industry. Telecommunications has been a very cyclical type of business and you have to be careful not to be in it when the cycle runs out. With all the data right now, though, I do not see the cycle ending any time in the next two years.

I hope that is helpful,



Very helpful Andy and gives me a clearer understanding of the op ex. I was just lumping INFN in with virtually every company I follow and you are right I should compare it only to others in the same industry.
Eight years and counting, and I know you should not get attached to companies, but INFN is starting to feel like family member. LOL
Thanks again


You have been in it longer than I have then Mike. I bought my first shares in 2009. I am starting to think this would be the perfect stock to row in.


Hello All,

I have a few things to clear up on my report on INFN. First of all I made some math errors on my FCF calculations. I believe these were due to my being in a hurry. These do not bother me because everyone makes math errors but they do need to be corrected. So I posted these numbers.

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

In reality they should be these numbers.

Free Cash Flow in thousands

13 ($26,235) $13,429 $8,596 $18,322
14 ($21,041) $5,875 $18,039 $9,968
15 $12,475 $46,297 $21,878 $10,508
16 $-865

So as you can see my 4q14 was incorrect and also my 3q15 was incorrect. I would like to thank Databasebob for pointing these out to me.

Now there is one more thing that is incorrect in my report. This is a more serious problem that I have been struggling with since Databasebob brought it up. Initially I was inclined to continue doing it the way I have always done it and just putting a bold statement telling everyone how I did my reports. I have been following all my companies using only the short term cash and debt. I ignored the long term as long as it didn’t fall into the short term. Short term cash and debt is only looking a year ahead. Now this might not have been a problem if I had explained in all my reports how I looked at everything. But by not putting a disclaimer on my reports it could be considered deceptive. Now this was not my intent but I can see how it might be considered that way because by only following the short term, it is not Generally accepted so I should have pointed that out. I apologize for my mistake.

Going forward I was going to still only follow the short term but put a disclaimer on my reports, while this could have been acceptable to me, the more I looked at it, and the more I talked it over with other people, I realized it might not be the correct way to do this. For example, Infinera has some convertible debt coming due in June 1, 2018. Databasebob is the one that pointed this out to me. In fact I missed this altogether. But in reality the investors in the debt could convert it by the first quarter of 2016, although it looks like they have not yet. The following is from the 10k.

During the three months ended December 26, 2015, the closing price of our common stock exceeded 130% of the applicable conversion price of the Notes on at least 20 of the last 30 consecutive trading days of the quarter; therefore, holders of the Notes may convert their notes during the first quarter of 2016. Any conversion of the Notes prior to their maturity or acceleration of the repayment of the Notes could have a material adverse effect on our cash flows, business, results of operations and financial condition. Should the closing price conditions be met during the 30 consecutive trading days prior to the end of the first quarter of 2016 or a future quarter, the Notes will be convertible at their holders’ option during the immediately following quarter. Under current market conditions, we do not expect the Notes will be converted in the short-term.

So going forward, all reports I do will have all cash and debt calculated. This has been a very good lesson, out of many that I have had while investing. I want to thank Databasebob for bringing this up. Without his help I would have continued with my mistake. I also want to apologize to everyone for my ignorance.



Hey Andy.

Thanks for the call out and thanks for the great analysis you contribute to the boards.

I happy to have been able to help, but I must say that you’re being far, far too harsh on yourself. Please keep up the good work! We appreciate it!

BTW, I gave the 10-Q a quick perusal, and I don’t think any of the convertible debt was actually converted in the first quarter. I think that the range of prices in February and March are such that the debt will not be eligible for conversion during the second quarter. But it will be a quarter-by-quarter thing through 2016 as to whether the debt is currently convertible or not.

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


Hey Bob,

You have been the best about this. Please do not stop helping people understand the financials better. I really am ok with this because without people like you I wouldn’t understand company’s at all. I really count you as one of the good guys out there trying to help people like me and I do appreciate it. You could have confronted me on the boards and let me work this out, but like a true Gentleman you emailed me and let me work through this on my own. I really thank you for the guidance and the lesson. I do not want to embarrass you Bob, but you really are one of the people I look up to on these boards for your posts and your help.



Andy, thank you so much for your kind words. I am touched, humbled, and grateful.

Thanks and best wishes,
Peace on Earth