Infinera (NASDAQ:INFN) reported its first-quarter results on April 27 after the market closed. While the results came in a bit ahead of its own guidance, traders were selling off shares in Thursday's trading as the company projected that growth is going to slow in the coming quarter. At 3:40 p.m., shares were down nearly 24% from the previous close.

Let's dig into the results to see how the company performed in the three areas that I suggested investors should pay attention to.

Infinera's first quarter: The raw numbers

 MetricQ1 2016Q1 2015Change
Non-GAAP revenue $245 million $186.9 million


Non-GAAP net income $28 million $22.1 million 27%
Non-GAAP EPS $0.19 $0.16 19%


Infinera's top line grew 31% and landed smack in the middle of management's guidance range of $240 million to $250 million. Earnings grew a strong 19% during the period and came in at $0.19, which was ahead of the company's $0.17 forecast.

Management believes that the rapid adoption of 4K video and cloud computing are driving an enormous increase in consumer demand for bandwidth, which in turn is forcing service providers to invest heavily in their networks to keep up. That's greatly increasing the demand for Infinera's equipment and is a major reason the company continues to grow quickly.

That fast growth rate also suggests that Infinera continues to gobble up market share from players like Ciena (NYSE:CIEN). For perspective, analysts are projecting that Ciena's revenue will grow by 1% in the coming quarter and by slightly more than 6% for the full year. 

Margin checkup
Infinera showed a strong non-GAAP gross margin of 50.2% for the period, which is well ahead of the 47.8% it reported in the year-ago quarter. That result also exceeded the high end of management's guidance range and it is the first time that the company has produced a gross margin above its long-term target of 50%.

A higher-than-expected gross margin allowed the company to post a non-GAAP operating margin of 12.3%, up slightly from 12.2% last year. That's a solid result, especially when you consider that management warned that quarterly profit growth would suffer this quarter as it continued to invest heavily in its growth.

While these results were impressive, CFO Brad Feller stated that he does not believe that record gross margins are here to stay just yet:

While 50% gross margin in Q1 was a fantastic result, Q1 tends to be a stronger margin quarter as a result of the mix of revenues. While it will take some time for us to go to a point where we can generate margins of this level on a consistent basis, we are confident that the combination of our operating model and the underlying strength of our business will enable us to consistently achieve 50% gross margins in the not-too-distant future.

Is the integration work complete yet?
On its conference call, management reaffirmed that the Transmode integration work remains on track and that consumers are responding positively to its ability to now offer a suite of product solutions.

However, management did state that a "significant" Transmode customer has not purchased any products from the company in two quarters. While it believes that the relationship remains healthy, management admitted that it is having a tough time making up for the revenue shortfall with this customer sitting on the sidelines.

Looking ahead
While the overall report looked solid, Wall Street was less than thrilled to hear management's guidance for the second quarter. The company is forecasting that revenue will land within $5 million of $255 million, representing year-over-year growth of 23%. That's quite a bit below the $272 million that analysts were expecting and represents a significant growth deceleration from the 31% it showed this quarter.

CFO Feller did his best to put the slowdown in perspective:

While we are disappointed with this outlook, we have had a very strong run of quarters, exceeding not only Wall Street's but our own expectations, in what can be a lumpy underlying demand environment. We remain very confident in our ability to maintain strong growth levels and to do so in an evermore profitable way over time.

The company also projects that margins will decline slightly during the period -- it is calling for gross margins around 48% and an operating margin of about 11%. Earnings per share are predicted to be $0.17 per diluted share, which is also quite a bit below analyst expectations of $0.22.

When pressed on the call for more details, management admitted that the downbeat guidance is primarily owed to the absence of the large legacy Transmode customer.

Still, CEO Tom Fallon did his best to remind investors that Infinera's growth story is on track:

Responding to ongoing growth in bandwidth demand, customers are increasingly turning to Infinera to address the advanced scalability and efficiency required to operate their networks. By continuing to deliver the most innovative solutions and the Infinera Experience to our customers, I am confident that we will continue to gain market share across the end-to-end optical transport market and generate outstanding bottom line results.


This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.