Telecom Ramblings

Upstart telecom equipment provider Infinera (INFN) reports earnings Tuesday after the market closes, so let’s size up the situation a bit beforehand.  Back in June, Infinera pre-announced a Q2 shortfall and reduced its Q3 and FY08 guidance.  The company attributed the lowered expectations to reduced demand from carriers who were slowing buildouts, an event that now might belatedly be considered a canary in the coal mine for the sector.

So what now?  First, let’s only look at what the company calls ‘Adjusted GAAP Revenues’ rather than GAAP Revenue, since that is what Infinera focuses on for obscure accounting reasons.  Likewise, we will use their gross margin metric based on adjusted GAAP.  To summarize my thoughts:

	Q1	Q2	Q3
Adj GAAP Revenue	$95.5M	$90.8M	$75-80M
Gross Margins	45%	47%	40-50%?
Earnings Per Share	$0.30	$0.47	-0.10 to 0.10?

The company doesn’t give gross margin guidance, but anything in the 40-50% range is probably normal.  Earnings are much harder to project, if not impossible – in the past analysts have had substantial difficulty with the number and if anything it should be harder this time.  The revenue decline certainly means EPS will suffer, but it isn’t clear whether it will be driven into negative territory.  My own expectations, shown in the table above, fall in a wide range straddling zero.  Given the ugly economic environment and the state of Infinera’s stock price in $7 territory, the market is probably going to be happy with anything other than disaster.

And that’s really the question, isn’t it?  Did Infinera get most of its bad news out back in June, or are more downward revisions forthcoming?  The revenues of equipment providers like Infinera tend to be much more variable than those of the telecoms who buy their products, cutbacks in capex spending can be deadly just as a buildout boom can be explosive – no matter how disruptive the technology might be.  The current financial crisis is expected to impact the internet infrastructure sector by cutting its funding for capex, and I don’t think anyone doubts there will be such an effect.  The question is, how fast and how deep?  Infinera’s results will give us the first of several pieces to that puzzle tomorrow.

Update: Infinera Posts Solid Q3 Numbers