Why Infinera Shares Dropped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of digital optical networking company Infinera (Nasdaq: INFN  ) slumped as much as 10% after the company reported disappointing first-quarter results.

So what: For the quarter, Infinera recorded a loss of $0.10 (excluding one-time items) on a 13% rise in revenue to $104.7 million. Although the loss was $0.02 smaller than Wall Street had expected, revenue came in $1.1 million lighter than the consensus. Non-GAAP gross margins also dipped during the quarter to 40% from 48% in the year-ago period.

Now what: What's really disconcerting about today's report is how little was said regarding the drop in margins outside of CEO Tom Fallon's comment: "Activity in our first quarter reflected demand from our customers for both our existing and next generation platforms." That doesn't help much and it's definitely not giving investors any confidence in the stock. As losses continue to mount, I'd suggest avoiding Infinera altogether.

Craving more input? Start by adding Infinera to your free and personalized watchlist so you can keep up on the latest news with the company.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Infinera. Motley Fool newsletter services have recommended buying shares of Infinera. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 26, 2012, at 5:42 PM, glta wrote:

    I thought they said margins dropped because they are rolling out a new product called DTN-X and it will take time to streamline the fabrication process. Also setting up the initial footprint has the lowest margins. Also they are discounting their DTN-X to get an initial footprint, and then margins should return to normal since usually the first time you make something is the usually the most expensive until mass production efforts drive down initial costs. And once customers have the core installed the margins improve drastically. I thought all of these things were addressed in the conference call that I listened to and read. Maybe I misunderstood everything and got side tracked that they have 8 trials scheduled for this quarter, are currently in contract negotiations for another DTN-X purchase, and have revenue projections for 230-260 millioin for the second half of this year. Also they have started OSMINE with a N. American Tier 1 customer that they are pretty confident they can close. OSMINE is pretty expensive, but they are well worth the cost in previous cases, especially for a Tier 1 customer. Last quarter they had 4 trials, 2 resulted in orders, 1 got broken into phases and is still on going, and 1 got rescheduled at the customers request for this current quarter.

  • Report this Comment On April 26, 2012, at 5:56 PM, glta wrote:

    PS Sean what is your investment thesis for INFN?? You stated "Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis." Just curious if DTN-X is part of your "investment thesis" Or is your "investment thesis" based on margins one quarter since you recommended staying away from the stock altogether. Cause DTN-X is a part of my investment thesis and that is still intact since they shipping this year and streamlining to improve margins for future quarters. If I didn't believe in DTN-X being a success I would sell ASAP, but it looks like everything is on track, and I am excited for the future come 2013-2014

  • Report this Comment On April 27, 2012, at 2:40 AM, TrackUltraLong wrote:

    glta,

    My investment thesis revolves around Infinera turning a profit... something the company has done only once annually since inception. Let it get a few profits under its belt and I'll reevaluate it. Until then I'm an innocent bystander.

    TMFUltraLong

  • Report this Comment On April 27, 2012, at 12:56 PM, glta wrote:

    doesn't every investment thesis revolve around a company turning a profit? they are expected to turn a profit next year

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