Everyone has long expected an ugly first quarter from telecom equipment providers, the only question really was whether it was worse than expected. Today we heard from DWDM specialist Infinera (NASDAQ:INFN, news, filings), which basically reported in-line with expectations. Revenue of $66.6M were down from $86.2M in Q4, a hefty drop but one everyone knew was coming since that's what happens in the equipment space when carriers slash capex to the bone in a recession. Adjusted gross margins fell to 31% from 36% in Q4, and the adjusted net loss was $0.19. Some news reports call that a miss by $0.02, but predicting EPS for Q1 was always a dubious prospect at best. Frankly I'm amazed expectations and reality were so closely aligned.
On the bright side, Infinera announced that it has won contracts with two more Tier-1 European carriers, following up on its breakthrough at Deutsche Telecom AG (ETR:DTE, news, filings). They also said they have now won some submarine deals, likely on the shorter intra-continent spans in Europe IMHO. They said that they "continue to experience a robust level of DWDM activity with carriers worldwide", which suggests that while the spending plans of carriers may have been delayed they are still planned. That isn't too surprising. There is no glut in capacity therefore traffic growth will require capacity build-outs sooner or later. Still, it is nice to hear the industry's behavior remains rational, albeit fearful.
Have we seen the worst of the storm yet? For equipment providers it's not clear yet, and Infinera did not give guidance to help out. Analyst estimates seem to suggest the expectations that revenues may head back to the $75M range in Q2, which seems reasonable. The company continues to have some $233M in cash and short term investments, which gives them a solid cushion while they wait for carrier capex to thaw a bit more. I think it is likely we will hear similar reports from the rest of the telecom equipment space.
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