Back after the March quarter results, I wrote up why I was exiting INFN. I was maybe overly excusing about Skyworks but I sure nailed INFN! They looked like about as clear a sell as I’ve seen. A lot of people on the board were unhappy with what I wrote and decided to stay with Infinera. Great story, hard to change your mind. Here we are a quarter later>
Here are excerpts from what I wrote back then. I’m not italicizing so it will be easier to read.
Now let’s look at Infinera. Their gross margin was also 50.2%. However, while Skyworks kept 36.8% of their revenue as operating margin, Infinera kept only 12.3%. That means they spent 37.9% of their revenue on operating expenses, while Skyworks spent just 14%. They spent 2.7 times as much as Skyworks! Two-point-seven TIMES!
To put it another way, Infinera took the money they had left after cost of goods sold, and they spent over 75% of it on SG&A expenses and R&D.
Skyworks, on the other hand, took the money they had left after cost of goods sold, and they spent less than 28% of it on SG&A expenses and R&D.
As Foolish Erik said a year and a half ago:
Infinera has so far been pouring far more money out the door than they are making through sales, with all of it going into the quest to grow the company’s sales and profitability. After 15 years of operations they are now $590M in the hole. Yes, that’s half a billion dollars. They achieved positive cash flow from operations two years ago, and were bottom-line profitable only last year.
(Now Saul back again). In a way, Infinera still has the attitude of a start-up company:
“We have a great future! Let’s just spend all the money we want to, and take lots of stock-based compensation, and simply raise more money if we need to. Operating margins aren’t really important. Earnings are okay if we make them but we’re here to have fun. Stockholders don’t matter.”
However, it’s no longer the story stock with such a great story and “a great future” that it doesn’t have to worry about earnings. Now it’s a regular company and is being evaluated according to its real earnings.
the Infinera speaker seemed like a deer caught in the headlights. It was all “if” and “maybe” and “we hope” and “uncertain” and “difficult to predict” and “will depend on whether” and “lumpiness” and ……
He didn’t know when business would pick up again.
He wasn’t sure when Metro would kick in.
He had no idea why the large Transmode customer wasn’t ordering.
He didn’t know when that customer would start to reorder again.
It sounded as if he didn’t even know whether that customer had switched to another supplier, and was gone for good.
I continue to be optimistic in regard to the Transmode acquisition.
Optimistic? What does that mean!? At this stage?
He was predicting only 11% Operating Margins next quarter.
The midpoint of our projected guidance translates to a non-GAAP operating margin of 11% plus or minus…
11% for non-GAAP operating margin is terrible! And GAAP operating margin will be even less!
In closing, I remain very optimistic about the state of our business. Our customer base is healthy and broadening. Success in the short term will largely be dependent on the timing of our customers making investments in network upgrades particularly in metro and data center. While there is some uncertainty on this timing, we consider our customers making these investments a when rather than an if decision…
…among certain customers we are seeing signs of spending lumpiness, driven by uncertainty around the timing of their investments. While it is difficult to predict how long these dynamics could affect our results over the short term, the strong bandwidth demand environment… gives us confidence in our medium- and long-term outlook.
As we have stated in recent quarters, while we expect to continue to outgrow the long-haul market, our ability to continue to significantly outgrow the overall market will depend on the success of the new products we released late last year and synergies associated with selling Transmode’s products into the historic Infinera customer base.
They released the products last year, and here it is the first of May and they don’t know if they will be successful yet?
The level of trial and eval activity, along with some early customer wins, suggest that we are on the right track with these new products, though it inevitably takes time to translate these positive signals into significant revenues.
… while we are experiencing a convergence of local and macro issues that we do not see as indicative of any longer-term trends, it is challenging to predict the timing of customer spending in our industry and to determine whether this is a one quarter dynamic or one that might persist further into 2016.
We currently project non-GAAP gross margin in Q2 to be 48% …
We currently anticipate non-GAAP operating expenses to be $95 million …as we balance the need to invest in key areas that will allow us to maximize our market share opportunity with ongoing profitability. (They are worried about maintaining profitability???)
Yet people said “Let’s give them a chance.”