Infinera (INFN) just reported their Q3 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 $232,472
Revenue was up 34% this quarter YoY. $15 million dollars of this was from the Transmode acquisition. Transmode accounted for only 5 weeks of revenue. Infinera will no longer break this out because they are one fully integrated company. Last quarter they had Revenue growth of 25% YoY.
**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 $8,510
Net income on a Gaap Basis was up 75% and on a non-Gaap basis it was up 126%. As you can see there is a big difference in Gaap and Non-Gaap numbers and we will walk through them. On a Gaap basis net income was down sequentially by 52% but on a non-Gaap basis it actually increased by 24.5 %.
**Earning Per Share** adjusted (Non-Gaap)
13 ($.06) ($.01) $.10 $.01
14 $.03 $.11 $.11 $.13
15 $.16 $.18 $.22
Earnings were up 100%. YoY. Trailing earnings were up 175%. N-Gaap earning are accelerating this quarter. In the earnings report Infinera reconciles Gaap to Non-Gaap numbers. What they are adding back into the
Non-Gaap numbers are the following. (All in Thousands)
US Gaap as Reported Net Income $8,510
Acquisition-Related deferred revenue adjustment $721
Stock Based Compensation $8,451
Amortization of acquired intangible assets $2,608
Acquisition-related inventory step-up expense $3,620
Acquisition-related costs $3,950
Acquistion-related forward contract (gain) loss $3,728
$2,162
Amortization of debt discount income tax effects ($1,529)
Non-Gaap as adjusted $32,221
As you can see most of these will go away. One thing I want to point out though is the Stock based Compensation is coming down. I believe this is the lowest I have seen it at 3.6% of revenue. I believe with the transmode acquisition that the Revenue’s are going to accelerate and the compensation will only drop further.
One more thing I think needs to be looked at is the Gaap earnings and why in this quarter they were down sequentially. I want to look at this because I find it interesting and to see if there are any problems. First of all on a Gaap basis net income was $8,10 this quarter and last quarter it was $17,906 .
David, Onecandream, A Fool I learned a lot from, that I haven’t seen on the boards for awhile, used to run an exercise to look at how a business was doing on their costs. Let’s see how Infn is doing.
3Q15 2Q15
Gross Margins 44.2% 46.7%
R&D 19.5% 20.9%
Sales/Marketing 10.6% 10.4%
G&A 7.9% 7.4%
So looking at this they slipped 2.5% on the Gross Margins. They are now saying that their goal is 50% gross margins and 15% operating margins. This is the first time I have heard this but they say that was always their goal. The R&D is down a little and on the conference call they actually mentioned this. They plan on keeping it at around 20% so they thought this quarter was a little too low. It surprised me that the Sales and Marketing was actually only up .2% because they are combining the Transmode and Infinera sales teams. And G&A was only up .5%. So when looking at the Income from Operations For the 3rd quarter we have $14,260 and in the 2nd quarter we have $16,530. Those 2.5% points of Gross Margin gave the Second quarter almost 2.25 million more in profits. But looking further down the Income Statement we see another item.
3Q15 2Q15
Other Gain (loss), net (3,293) 4,780
This allowed Infinera last quarter to add an additional $2.4 million onto their income where in this quarter they had a loss of $5.9 million. This is a difference of 8.3 million dollars. So going to the 10q for 2q 15 and looking at other Gain (loss) we find out that this was a hedge that Infinera put on against the Swedish Kroner. So last quarter they made $4.8 million on it and this quarter they lost $3.3 million dollars on it. In my Humble opinion this is all due to the acquisition of transmode and I am going to discount it. These are all one time charges that will be gone once the acquisition is over.
**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
Cash flow is growing nicely this year. Last quarter I was watching Accounts Receivable, for the first 6 months accounts receivable were $45,140 and now three months later it is $28,838. So it has come down in the last 3 months by 55%. Inventory has been cut in half and is now at $6 million coming down from $12.8 million. Accounts payable was at $23.6 million last quarter and is this quarter at $2.3 million.
Cash and Debt
Their cash is at $287.3 million down from $397.2 million. On their conference call this was discussed and most of this went to pay for the Transmode acquisition. The debt is at $35.7 million up from $30.1 million QoQ. I do not consider this a problem since they are going through an acquisition and by 2016 this should all equalize.
1YPEG = .17
Conclusion:
This was a really nice quarter. Two things really made me excited about this quarter. First they said the long haul market remained strong. This is great since they are just starting into the Metro end of the market. Secondly, the transmode acquisition gained $15 million in 5 weeks. If that keeps up I would conservatively state that they should be able to get $150 million out of transmode in the first year. Gross Margin’s came down this quarter to 44.2% from 46.7%, but Infn in the long term is shooting for 50% gross margins with 15% operating margins. When will this happen? I am thinking that once the long haul is built out and they are adding blades and bandwidth we should see those type of margin’s. Transmode’s has historically had 50% gross margins. Infn thinks they can grow those margins.
Another nice point in the quarter was finding out that the ICP market and the DCI market are having fairly long certification processes but Infinera has been in the market for a year now and has passed these certifications.
Europe ended up being weaker than they thought and this is Transmode’s primary ground. So if Europe picks up we could see a nice growth in Transmode making my conservative estimate of $150 million dollars a low ball number. The cable companies rarely buy in the 2nd half of the year but they expect a strong first half from them. But the ICP market continues to be strong. Apac is weak for them but with the Transmode product they think they can win more customers. DTN-X is just a little too large for that region. Europe is doing ok but the competitors seem to be doing better. This is something that the DTN-X should help with the Transmode sales people.
One of the analyst brought up that 100 gig is an inflection point for the PIC. This is something I totally agree with. You can see it with Infinera already at 500 gig Pics and now heading higher. The other competitors will not be able to keep up with them. This is something that I have been touting because the Data is just getting bigger and people are thinking of the old Networks. Where voice was king and data was limited. But now Data is King and the Line side cards are just going to have to grow. I am not sure if this is going to stop because of everything that is going on. From video to M to M it just keeps growing exponentially. Tom Fallon actually said that at some point PIC’s will become mandatory and they got there first. Next year they expect the long haul to finally start slowing their build out and the Metro to accelerate.
The Tier 1 companies and possibly the Tier 2 companies go through a quiet period starting in November through the end of the year. At that time they will not let anyone do work in the core. So while some of them might be building the network they will not let the equipment be deployed into the network until the first of the year. In the edge of the network equipment will still be deployed so this will help Infinera with Transmode’s product.
One thing about the CEO is he just can’t help saying something that makes you say “WHAT”. He stated on the call that a couple of customers push out some deliveries from Q4 to Q1. He said he thought it was appropriate to let people know that. This is one thing I like about this CEO though is that he is completely transparent but sometime it seems to hurt INFN. Later on he tried to walk it back and shrug it off.
Finally, This Quarter was a really good quarter and INFN’s management is very sharp. They really know their business and it shows in how they are growing. This management is top notch and when it comes down to know when to grow into a market, I trust them explicitly.
Q3 2015 notes on conference call. I would like to thank Seekingalpha.com for the transcripts.
In the quarter, they had two customer that were 10% of revenue, a Tier 1 and a wholesale and enterprise carrier. They also had a substantive increase in Cloud Xpress sales driven by demand from ICPs. Growth in video and date is driving the need for 100 Gig in long-haul, data center interconnect and now Metro. The long haul business remained strong and they are ranked number one in long haul in the North American market according to HIS and Dell’Oro.
The now have the XT-500, part of the DTN-X family, which will ship in Q4 and be used for long-haul data center interconnect (dci). In Q3 the 100 GigE version of the Cloud Xpress started shipping. Customers have started placing orders and they now have 14 customer and the largest customers have placed follow-on orders which suggests that the platform is a strategic element of their data center architectures. As machine-to-machine traffic grows the data center operators will need to upgrade their switching infrastructures to support the growth. Infinera plans to be the market leader in data center interconnect.
They have now come out with the XTC-2 and XTC-2E OTN-based solutions for the metro core. It uses the new 100 Gig oPIC-100. This give the right solution for Tier 2 and Tier 3 cities.
The recently announced deal with Hanoi Telecom was the first customer where they sold Transmode equipment into an existing Infinera customer. They have already been asked to bid on jobs because now they have an end to end solution.
The Infinera Core portion of revenue represented 26% YoY growth and 5% sequential growth. The business continues to be diverse with the top five customer coming from four different verticals. With Transmode they added 650 customers and now their total customer count is more than 800. North America accounted for 68% of revenue and they added two new customers to Cloud Xpress.
Infinera projects fourth quarter revenue to be $258 million, plus or minus $5 million. They project non-GAAP gross margin to be 47%, plus or minus 100 basis points. They project non-GAAP EPS to be $.21 per diluted, share plus or minus a couple of pennies.
Andy
Long INFN
