DWDM specialist Infinera (NASDAQ:INFN, news, filings) issued its second quarter earnings today after the bell. Revenues of $68.9M and earnings per share of $0.19 seem essentially inline with expectations going in. Of course, the stock tumbled prior to earnings after an analyst report indicated that the company may have lost some part of its Level 3 business to Huawei. Guidance was therefore critical: would the company's revenue recovery be hurt by this news?
As it turns out, guidance issued during the conference call was pretty good. Projected Q3 revenues of $80-82M and a loss per share of $0.12-0.13 are pretty strong, and gross margins of 35-36% are showing improvement. The key to understanding Infinera's results is that they sell the chassis at low margins, and the modules that fit into it at high margins. Therefore, the expansion of their customer base comes at an early cost and the reward comes later. At the moment, Wall Street doesn't care much about later (you could hear the skepticism during the CC), and will probably make them prove it.
In other details, the company will shut down its Maryland fab in the second half and move the capabilities to California with 50 positions being eliminated. If I recall correctly, at least some of the facilities in question came from the Corvis acquisition from Broadwing and helped Infinera with its ultra longhaul product last year. According to the company, this ULH product also helped win another submarine contract this year. Infinera will take $8M in charges for the move, and save a few million a quarter afterwards from the restructuring. Not fun for the folks in Maryland, but par for the course these days as everyone looks to squeeze that last drop of blood out of their opex stone.
Regarding the Level 3 contract, we should remember that it's not an on/off thing here. If Level 3 is going with Huawei for 40G for some part of its network, they aren't likely to be pulling out the existing gear. To the contrary, Level 3 will be buying TAMs and services for its installed Infinera footprint for some time under virtually all scenarios. Additionally, Infinera's penetration into Tier 1 carriers and other large providers mean that a recovery in sector capex should bring greater growth from those than they might lose in a shift of some Level 3 business to Huawei.
NTT contract win - In parallel with its earnings announcement, Infinera announced NTT Communications (NYSE:NTT, news, filings) as a new Tier 1 customer. NTT Communications will be deploying Infinera PICs in its metro Tokyo network. If there's anybody in the world that needs 100G PICs to handle a metro network, it's NTT in Tokyo where fiber to the home is the rule and the bandwidth is not capped.
Singh to step down - In a parallel announcement, Infinera CEO Jagdeep Singh intends to step down at the end of the year but remain actively involved in the role of executive chairman. The current COO Tom Fallon will take over the CEO role. Fallon's role has been increasing steadily at the company, and this move doesn't strike me as anything terribly surprising.
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