What: Investors in Infinera (NASDAQ:INFN), an optical equipment manufacturer, are having a very rough day. The company's stock has collapsed and is currently down more than 33% as of 2:00 p.m. EDT in response to management's projections of tough times ahead.
So what: Infinera just reported second-quarter results and the headline numbers from the period looked great. Revenue jumped 25% to $259 million. Net income rose 20% to $30.9 million. Earnings per share were up 17% to $0.21. Better yet, all of the numbers bested management's prior outlook and were ahead of what analysts were expecting.
However, management shocked everyone when it said it sees soft demand for some of the company's product lines and projected some rough numbers for the quarter ahead.
It predicts that third-quarter revenue will land within $5 million of $185 million, which suggests a 20% decline from the year-ago period. For perspective, prior to this forecast, analysts forecasted quarterly revenue of more than $273 million, so this outlook represents an $88 million delta.
The huge revenue drop is expected to have a significant impact on profitability as well. Gross margins are projected to decline to 47% and operating earnings to be around breakeven. Management is projecting that EPS will be within a few pennies of $0, which is a a sharp reversal from last year's $0.22.
Understandably, this forecast took investors by surprise and led to shares being mauled today.
Now what: According to management, the sharp drop-off in revenue is being caused by a handful of factors, but the big one is that many of its larger customers have recently completed network upgrade projects and haven't yet committed to new spending. Under normal circumstances, Infinera said it can absorb lower spending from a single customer, but it cannot grow if several big customers all cut their spending levels at the same time. In addition, management is seeing a slower increase in its Metro business, which is contributing to the the top-line pressure.
In response to the soft environment, Infinera has committed to cutting spending and has initiated a hiring freeze. However, the company said that it will continue to fully invest in its research and development program so it can bring its next-generation systems to market as quickly as possible.
Infinera CEO Tom Fallon did his best to reassure shareholders that these issues are temporary in nature and remind them that the company is still well positioned for long-term growth, stating:
Our customers continue to tell us that they value our differentiated solutions and experience, and intend to continue investing with Infinera. While we are clearly in a dissatisfactory situation, the Infinera specific issues we're facing are a function of timing and are not structural. Over time, as we incorporate the Infinite Capacity Engine into our products and create traction with the opportunities we see in Metro, I am confident of ongoing success.
Only time will tell if he's right.