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Looking Beyond the Bad News
07/17/2008 12:00 am EST
Michael Murphy, editor of New World Investor Radar Report, says a supplier of high-end telecom equipment disappointed Wall Street, but its technology will save the day.
Infinera (Nasdaq: INFN) reaffirmed their guidance for the June quarter, but they forecast their September quarter revenues in a range from $75 million to $80 million, saying that they expect North American demand to be weaker than expected. The consensus forecast was $97.7 million.
The company blamed the shortfall on the timing of new network builds at existing customers, the sales cycle with potential new customer wins, and a product transition.
Infinera [also] cut their 2008 annual revenue growth forecast from 25% to 10%, which would bring them in at $340 million. The Street was looking for $388.5 million, so the $20-million shortfall in the September quarter will be followed by about a $28-million shortfall in the December quarter.
Analysts immediately cut their 2008 estimates from an 11-cent [per share] profit to a 12-cent loss, and cut the 2009 outlook from 30 cents to four cents [a share], with many looking for a loss.
The earnings news completely overshadowed some really amazing news: Deutsche Telekom selected Infinera's deep wave division mulitplexing (DWDM) gear for its pan-European network. This is a very big contract. It marks the company's first win of a Tier One customer and INFN will book $4 million in additional costs in the September and December quarters in connection with it.
Deutsche Telekom is known as one of the toughest buyers in the business, and INFN beat out Alcatel, Ciena, Nortel, and others to win this contract. Deutsche Telekom said the Infinera equipment will carry them into the next decade. I expect substantial orders from several more of the big companies.
[Infinera’s] new ILS2 chip, which they have called their most important product introduction since the original optical chip, can process eight terabits of data per second on a single optical fiber. That is the equivalent of about 1,700 DVD movies per second. They appear to be three to five years ahead of any competitor.
I don't like being surprised any more than the next guy, so when it comes to Infinera I have to question their management's insider selling program and even whether the company's chief executive officer should be replaced. However, their financial model makes sense, as their gross profit margin expanded from last year's June quarter of 28% to 34% in September, 36% in December and 45% in March.
Their market opportunity is huge as 100-gigabit Ethernet goes mainstream, and their technology is so good that we should treat this dip as a [buying] opportunity and wait for the payoff from the Deutsche Telekom contract win. INFN remains a buy up to $15 for a $30 target. (The stock closed above $8 Wednesday—Editor.)Subscribe to the New World Investor here…
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