Summary
1. There seemed to be little doubt that this last earnings conference call was the most painful to date. 2. The attempted spinning of a bad outlook clearly was not appreciated by some of the industry analysts. 3. Infinera’s credibility is at its most threatened state since starting up because of double talk and contradictory statements.
Analysis
There was the matter of the “one customer using more of a one-time discount than expected.” While it is not clear that Infinera was forced by the customer into extending a reduced price, it may be a reasonable conclusion. And a very practical inquiry was asked about this matter. “[H]ow do you know or what prevents this customer who got the discounts and used them early from asking for more discounts later?”
According to the transcript provided by seekingalpha.com, the analysts asked some penetrating questions that at least indirectly pointed out the intrinsic weaknesses of the company -- that we have been talking about for some time. For example, regarding the new Tier 1 wins, there was this comment: “...it feels like the initial sale, as if you’re kind of giving away the product. I don’t know how else to put it....” And then there was, [W]hat’s different about the business and the new customer opportunities now versus a year or two years ago when you had much better margins?” Later, there was “incumbent customer deployments have weakened, but at the same time new builds are progressing to plan, isn’t that kind of a disconnect here?” Finally, an analyst said the following: “Right now you said you’re shipping about 25% less than a year ago. So that will put you right now at about 1,500. That’s so higher than what you guys were shipping back then and revenues are at above the same level, but yet margins are actually lower. So can you just clarify what’s kind of the main driver of the discrepancy of why despite the higher TAMs margin, they’re still lower?” The answers provided by Infinera were inadequate and unconvincing. The bottom line on all of this back and forth is that there is less demand for equipment from Infinera’s itself (that cannot all be explained by the poor economy) in favor of its competitors and that low-ball pricing continues to be necessary just to get inside the door of major customers.
Some of the analysts were having trouble figuring out how Infinera had “three of the world’s top five carriers” as customers. The supplier was not very helpful in providing additional information. However, one wonders whether it is starting to throw in the ex-MCI win, which is now part of Verizon Communications.
