Why Infinera Shares Imploded

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 Infinera (NASDAQ: INFN  ) , which bottomed out at a nearly 14% loss earlier today, are sitting on a nearly 8% loss as of this writing after the company failed to impress Wall Street with improved guidance despite a double beat on its earnings report last evening.

So what: Infinera reported revenue of $138.4 million and a $0.01 loss per share for the second quarter. Its top line was a 48% year-over-year improvement, and also bested the $133.6 million consensus. Its narrow loss also surpassed the $0.02 loss per share Wall Street was looking for. However, Infinera noted that its "visibility" into bookings for the upcoming quarter is less than usual, and executive caution regarding third-quarter guidance was a major reason why the stock dropped. Guidance for a revenue range of $135 million to $145 million for the third quarter does beat the consensus of $135 million, and a $0.01 to $0.07 range for EPS also comes in ahead of Wall Street's expectation for zero earnings.

Now what: Despite caution, Infinera did provide guidance that surpassed analyst expectations. This drop seems rather unfounded, but with a near-double in the year to date, some large shareholders may have simply been looking for an ideally profitable exit point. There's nothing in this report that indicates weakness to come, and a cautious executive is better than a reckless one. Don't get too tripped up by the drop -- keep your eye on this one.

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  • Report this Comment On July 25, 2013, at 8:22 PM, OceanJackson wrote:

    I know the reason the stock dropped - it's because I invested in it pre-earnings after having fully researched it and determined a bullish outlook. So of course, shares plummet.

    Actually - thank you for writing something on Infinera here at the Fool. I've been feverishly looking for others opinions on the drop. I too agree that there's no tangible reason for it, at all.

    I'd just like to add that I too listened to the earnings conference call hosted by Infinera Executives, primarily CEO Tom Fallon.

    A couple things to note: Fallon doesn't host a good conference call, at all. So much so that I felt inclined to write him a letter this morning to express my dismay. After an astoundingly good quarter, crushing estimates - Tom Fallon sounded outright down during the call. For god's sake, show some excitement about what your company just did!!

    Then during the call Fallon noted that (I'm paraphrasing here), "We are not going to provide guidance for what we cannot see, and so we are not going to put a firm upper number on our revenue guidance." Ok - so here's what's important about this. 1) The network infrastructure industry to anyone who knows it, is its own beast, there are peculiarities to it - like cyclicality, difficulty prognosticating about the future due to slowness of deals & implementations, etc., that your average Analyst & Investor just aren't going to understand on the surface. They're going to treat Earnings Reports & Calls like most other Technology companies. So Fallon and Infinera SHOULD have just given POSITIVE GUIDANCE. As in, we're extremely optimistic, our optimism comes with the standard industry uncertainty but we're going to GUIDE higher. Guidance can be modified on the fly, if it's truly necessary. Basically, by being truthful about the idiosyncracies of their industry, Fallon & co. gave the Analysts & Shorts a reason to sell - because they're too lazy & stupid to know that Infinera's Q2 was very, very good, and their raised guidance for Q3 was very, very good as well.

    It's also apparent to anyone following the industry that there's an enormous amount of Op-Ex spend, increased TelCo spend, a beginning of a new cycle, increased amounts of deals to go after - so really, there should be little to no pessimism at this point.

    But still, Bears will simply point to the last 5 years of INFN's stock, and to the fact they've never turned a profit. These while true, also express a lack of appreciation for the Network Infrastructure world generally, and Infinera's strategic decision to jump to DTN-X 100 & 500g, skating to where the puck would be, for today. This strategy is proving to pay off in spades, as they've received nothing but glowing industry wide praise & accolades for their products & service.

  • Report this Comment On July 29, 2013, at 3:22 PM, OceanJackson wrote:

    Just want to add a correction to your article, Tom Fallon did not say that visibility into Q3 earnings was "less than usual." Go back and read the earnings call transcript, or re-listen to the call.

    He said that Q2 was an unusually strong quarter, that RFI's & RFP's were up substantially, that he agrees with the roughly %10 growth of the market forecast, and that Infinera is picking up ahead of that rate.

    What he and CFO Ita Brennan said, was that visibility as it stands is less than they had in Q2, but that it is back to what is typical historically for their business. So, the Q2 visibility was higher than normal, Q3 visibility is normal.

    Remember also they guided significantly higher both on revenue and gross margin for the whole Q3 visibility thing is a non-issue, much ado about nothing.

  • Report this Comment On July 29, 2013, at 3:34 PM, OceanJackson wrote:

    Lastly want to add - that in the earnings call, during the Analyst Q&A session, they harped on Infinera not raising guidance for the full year, which implies a revenue drop in Q4. This is why the stock dropped, in my opinion.

    But CEO Tom Fallon & CFO Ita Brennan clarified: The fact that they didn't raise fully year revenue & gross margin guidance was because a) it doesn't imply that they think there will be any drop-off, in fact, they see big opportunity and upside cash for the remainder of the year and for Q4, and their outlook remains very bullish. Their guess essentially is that the numbers will be higher, but b) they are directionally moving away from giving full year guidance, and moving forward are going back to quarterly guidance only, and not revising higher at this time is a move in that general direction, because moving forward guidance is being more aligned with visibility.

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