| JULY 14-16, 2014

North American Tier 1 customer in Infinera's sights?

Infinera Corp. (NASDAQ: INFN) may finally be about to land the type of big North American Tier 1 customer that has eluded it so far. The company revealed yesterday in announcing its first quarter earnings that such a customer has asked Infinera to complete the OSMINE certification process.

OSMINE – short for “Operations Systems Modifications for the Integration of Network Elements” – is a process through which suppliers certify that their products will operate with the Telcordia operational support systems (OSSs) that former Regional Bell Operating Companies such as Verizon, AT&T, and Qwest (now part of CenturyLink) have traditionally employed. The fact that a North American Tier 1 would request Infinera achieve this certification indicates that the unidentified Tier 1 carrier has enough interest in at least one Infinera product to ensure that it will work with its back office systems. In fact, Tom Fallon, Infinera’s president and CEO, told participants in the analyst call following the earnings announcement that of the four Tier-1 trials of Infinera’s DTN-X packet-optical transport platform planned for the first quarter, two resulted in purchase orders – and the OSMINE request is related to one of them.

The OSMINE process can take as much as three to six months to complete.

Meanwhile, Fallon reported more good news for its DTN-X. The company has six new trials scheduled for the second quarter and is in active contract negotiations with additional service providers, Fallon told those on the call.

“Our new 500G PIC-based DTN-X platform, with super-channels and integrated OTN switching, is generating strong interest among potential and existing customers who now have a choice between our DTN and DTN-X. As planned, we are on track to ship the new platform by the end of the June quarter and to begin revenue recognition in the second half of this calendar year,” Fallon was quoted as saying in the press release announcing the company’s first quarter 2012 performance.

“We are pleased to have announced our first DTN-X win, with Cable&Wireless Worldwide, a new Tier 1 UK-based customer,” Fallon continued in the release. “In total, we have received DTN-X purchase orders from four customers, including Cable&Wireless and three existing customers. We are very pleased with the early traction with this new product as we believe this is the first step toward our ushering in a new era in network optical infrastructure.”

While Fallon awaits the arrival of this new era – and the DTN-X revenue that will come with it – the present isn’t quite as rosy. Infinera reported first-quarter 2012 revenues of $104.7 million, a decrease from the $112.0 million it earned in the fourth quarter of 2011 (albeit an increase versus the $92.9 million it realized in the same quarter of 2011). GAAP gross margin of 39% for the quarter represented a 1% sequential decline and a 7% decline year on year. GAAP net loss for the quarter was $20.6 million ($0.19 per share), versus a net loss of $19.4 million ($0.18 per share) in the fourth quarter of 2011 and net loss of $16.4 million ($0.16 per share) in the first quarter of 2011.

The company also predicted that revenues would continue their decline into the second quarter of 2012, mainly as a result of customers switching from the DTN product line to the DTN-X. Ita M. Brennan, Infinera’s CFO, pegged second quarter revenues at $92 million to $100 million and gross margins of approximately 36% to 38%. However, Brennan expects revenues in the second half of the year will fall between approximately $230 million and $260 million.

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