Optical provider Infinera (NASDAQ:INFN, news, filings) offered us a glimpse into the telecom equipment sector today as they reported Q4 2008 earnings. Optical equipment companies get hit hard when recessions strike because they are very sensitive to carrier capex levels. Adjusted GAAP revenues of $86.2M was far in excess of analyst estimates of $75.5M, and surprisingly up from Q3's $80.9M. Gross margins, however fell from 40.8% in Q3 to 34.6%, and EPS turned negative to $-0.07. In a separate release, Infinera announced that OTEGlobe, the international arm of the Greek national carrier, has selected them for deployment in their pan-European network.
Infinera's customer composition changed for the better, adding 7 new customers with three from Europe, three from the Americas, and one from Asia Pacific. Infinera's top 10 customers comprised just 72% of their revenues - a high number but falling. This quarter their top customer at 23% was, interestingly, an unnamed content provider. Usually Level 3 Communications (NYSE:LVLT, news, filings) has been their largest customer, this seems to imply that Level 3's capex for Q4 will be lower than usual as expected.
The news of declining gross margins sent the stock down after hours, but I think that is somewhat shortsighted. Infinera's lower gross margins have their roots in higher sales, the company sells its initial gear at very low margins and makes its money back on later sales of TAMs and PICs. In a recession, declining gross margins and cash burn stoke fear in the markets, it's a sell first and ask questions later. But at Infinera such an event can simply herald an influx of new customers. You see, we already know that carriers are cutting capex, and that *should* have brought Infinera's revenue down. But that didn't happen because the company managed to sell gear to more companies despite the troubles but to newer customers, and the first shipments of that gear shifted their margins downward as they always do. Does the market seriously think it would have been better for Infinera to have checked in at expectations of $75M in revenues and 40% gross margins but with fewer customers?
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