Please ensure Javascript is enabled for purposes of website accessibility

Why Infinera Is Being Obliterated Today

By Brian Feroldi – Jul 28, 2016 at 2:47PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Shares plunge in response to management's forecast of a steep drop in revenue.

Image source: Getty Images.

What: Investors in Infinera (INFN 13.15%), 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.

Brian Feroldi has no position in any stocks mentioned. Like this article? Follow him on Twitter where he goes by the handle @Longtermmindset or connect with him on LinkedIn to see more articles like this.

The Motley Fool owns shares of and recommends Infinera. We Fools may not 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.

Stocks Mentioned

Infinera Stock Quote
$7.23 (13.15%) $0.84

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.