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Infinera's Financial Woes Cause Management to Take Action

By Brian Feroldi - Nov 9, 2017 at 5:58PM

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Management announces a companywide restructuring plan after posting yet another quarterly loss.

Infinera (INFN -0.73%), a manufacturer of optical equipment used by telecommunications carriers, reported its third-quarter results on Nov. 8. Management had previously telegraphed to investors results were going to remain weak. Thankfully, easy year-over-year comparisons allowed the company to finally show revenue growth. However, profitability still remains elusive.

To jump-start the company's return to profitability, management announced a companywide restructuring plan. Let's dig into the details.

Fiber optic cable split open and glowing

Image source: Getty Images.

Infinera Q3: The raw numbers

Metric

Q3 2017

Q3 2016

Year-Over-Year Change

Revenue

$193 million

$186 million

4%

Non-GAAP net income

($17 million)

$7 million

N/A

Non-GAAP EPS

($0.11)

$0.05

N/A

Data source: Infinera. GAAP = generally accepted accounting principles. EPS = earnings per share.

What happened with Infinera this quarter?

  • Product revenue rose 3% to $160 million and services revenue rose 12% to $33 million. Total revenue of $193 million came in at the high end of guidance.
  • Non-GAAP gross margin was 39.1%, a massive drop from the 49.2% margin that was recorded in the year-ago period. However, management had indicated that this figure was going to decline significantly.
  • Non-GAAP net loss was $17 million, or $0.11 per share. This was ahead of guidance.
  • Cash usage during the quarter was $24 million. Cash balance at quarter's end was $309 million.

In an effort to return to profitability as soon as possible, management announced a companywide cost-cutting plan. Here are the key details:

  • Infinera is reducing headcount, cutting some products and programs, and closing a remote research facility.
  • Annual cost savings are expected to be $40 million.
  • Costs to implement this plan will be in the range of $21 million to $27 million.
  • The majority of this plan will be implemented in the fourth quarter of 2017.

What management had to say

Here are CEO Tom Fallon's comments on the progress that was made in the third quarter:

We continued to bring new products to market and delivered financial results that exceeded our guidance. Our ICE4 [optical subsystem] products are delivering the technology differentiation we expected and are gaining traction across multiple customer verticals.

At quarter's end, the company counted 10 customers on its new ICE4 platform, which is a nice jump from just three as of the end of June. Management was especially proud to announce that Netflix is now a customer. 

Turning to the company's restructuring plan, Fallon offered investors the following commentary:

In recent years we have made significant investments to become a multi-market company, deliver a fully refreshed product portfolio and establish a faster technology cadence. Reflecting on the internal expansion associated with these investments, we have identified areas where we can be more efficient going forward. While difficult, my expectation is taking action at this time will result in a more cost-efficient structure that enables us to focus on our strengths and return to profitability as we grow. I believe these are the right steps for our shareholders, our company and our customers.

Looking ahead

While Fallon did his best to project optimism over the long term, he also stated that the company will continue to experience "near-term challenges." In particular, he stated that customer consolidation, competitive pressures, and customers' weaker-than-expected capital spending plans will continue to be headwinds to financial success. These realities were a major driving force behind the company's decision to focus on cost reduction.

In response to those headwinds, CFO Brad Feller offered investors the following guidance for the fourth quarter:

Metric

Q4 2017 Guidance

Q4 2016 Actual

Revenue

$185 million to $195 million

$181 million

Non-GAAP gross margin income

36% to 40%

41.8%

Non-GAAP EPS

($0.12) to ($0.16)

($0.12)

Data source: Infinera.

Feller also provided investors with brief commentary on his expectations for full-year 2018. While he believes that Infinera's top line will grow faster than the overall market, he doesn't think that double-digit growth is achievable. However, he said that the company's cost-cutting measures should allow the business to achieve profitability in the second half of 2018.

At the end of his prepared remarks, Fallon once again did his best to convey optimism about the company's long-term potential:

We are taking decisive actions to ensure we return to profitability in 2018 and are more profitable as we grow in the future. Our long-term opportunity is unchanged. With the significant investments we have made in [research and development] to establish an end-to-end portfolio, I am optimistic we will be successful winning opportunities around impending architectural inflections. Ultimately, by leading in optical technology and delivering solutions that enable our customers to win in their markets, we will be in a strong position to grow market share and return to achieving our stated business model.

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