Infinera’s Long-Term Outlook Still Looks Bright

Infinera's (INFN 2.12%) stock recently retreated from its 52-week high after the optical solutions provider posted its fourth-quarter numbers. Its adjusted revenue rose 15% annually to $386.5 million, beating estimates by $20.8 million.

It generated a non-GAAP net profit of $6.4 million, or $0.03 per share, which cleared expectations by six cents and marked a significant improvement from its loss of $44.3 million, or $0.25 per share, a year earlier.

For the first quarter, Infinera expects its adjusted revenue to rise 7%-13% annually, matching expectations for 10% growth. However, it expects its bottom line to dip into the red again with a non-GAAP net loss of $0.15-$0.21 per share, compared to the consensus forecast for a $0.09 per share loss.

That lower-than-expected earnings forecast spooked Infinera's investors as novel coronavirus concerns consumed the broader market. But if we ignore the short-term noise, we'll realize that Infinera's long-term prospects still look bright.

Image source: Getty Images.

The key facts and figures

Infinera's products help service providers -- which are grappling with the surging use of cloud services and streaming media services -- boost their bandwidth without laying down additional fiber. Current fiber networks operate at 100G to 200G speeds over long distances, and 400G to 600G speeds across shorter distances.

Back in 2018, Infinera's focus on long-distance connections backfired as carriers prioritized shorter-range metro and DCI (data center interconnect) solutions. To increase its exposure to those higher-growth markets, Infinera acquired its rival Coriant in late 2018.

That acquisition boosted Infinera's revenue throughout most of fiscal 2019, but fell short of its original claim that the acquisition would double its annual revenue. Nonetheless, buying Coriant boosted Infinera's scale and gross margins, while cost-cutting synergies improved its operating margins.

Infinera lapped the Coriant acquisition, which closed last October, at the beginning of the fourth quarter. That's why its annual revenue growth decelerated as its gross and operating margins expanded:

YOY = Year-over-year. Source: Infinera quarterly reports.

On a sequential basis, Infinera's revenue rose 18% with robust demand from a "healthy mix" of Tier 1 network operators, internet content providers, and cable operators. Over half of its revenue came from North America.

During the conference call, CEO Tom Fallon noted that Infinera won 10 new Tier 1 customers in 2019 and that its integration of Coriant "met or exceeded" its goals for the first year and paved the way for "improved operational efficiencies." Infinera also shifted its production from Germany to Fabrinet's (FN 1.14%) plant in Thailand to cut costs.

Fallon stated that Infinera was entering 2020 "with a healthy backlog," as its orders exceeded its total shipments for both the fourth quarter and full year. He also declared that Infinera remained "on track" to launch next-gen 800G products in the second half of the year, and expects that revenue to ramp up in 2021.

But what about its first-quarter guidance?

That outlook sounds rosy, but Infinera expects its first-quarter revenue to dip 13%-18% sequentially, its gross margin to decline to 32.5%, and its operating margin to turn negative again.

Image source: Getty Images.

CFO Nancy Erba attributed that softness to the "typical seasonality" of the first quarter and the "potential impact of the coronavirus." Erba expects the coronavirus crisis to reduce Infinera's revenue by roughly $15 million during the quarter.

Erba stated that Infinera was "actively monitoring and assessing the situation" with its global supply chain, but it also expects investments in new technologies like XR optics to boost its operating expenses. In other words, Infinera remains focused on its long-term goals as the seasonal and macro headwinds reduce its near-term revenue and gross margins.

That confidence makes sense since the coronavirus (which causes the disease COVID-19) crisis won't curb long-term demand for higher-bandwidth connections. Instead, the epidemic actually highlights the importance of cloud services and streaming media for remote workers and stay-at-home consumers. That's why Infinera believes demand for its bandwidth-boosting solutions should remain strong.

The bottom line

Analysts currently expect Infinera's revenue to rise 10% this year and 7% next year. Those estimates could be slightly reduced if the coronavirus crisis continues, but Infinera's stock remains dirt cheap at less than one times this year's revenue. Infinera's stock might remain wobbly as the bears batter the market, but investors should buy the dips as its cyclical business profits from rising demand for faster and more cost-efficient connections.