Infinera expects a strong start to 2014

Fresh off a banner 2013, management at Infinera (NASDAQ: INFN) is bucking conventional wisdom about first quarter seasonality and forecasting that the first three months of 2014 – and likely beyond – could see greater revenue than the company accrued in the fourth quarter of last year.

The first quarter of each year generally represents a slow period for most optical transport systems vendors, particularly compared to the last quarter of each year. Carriers frequently spend whatever money they’ve been holding onto all year in the fourth quarter. They then turn fiscally cautious in the succeeding first quarter, particularly if their budgets aren’t set or if the fourth quarter “budget flush” has fulfilled their short-term needs.

The fact that the usual fourth quarter market bump wasn’t as pronounced as in other years may have something to do with Infinera’s comparative optimism about 1Q14. Nevertheless, Infinera CFO Ita Brennan said yesterday during a conference call with analysts held to discuss fourth quarter and year-end results that “this year we are seeing increased urgency from customers to complete deployments in Q1 and to order gear to enable Q2 network turn up.” As a result, she and the rest of Infinera’s senior management team expect revenues for the current quarter to come in somewhere between $137 million and $143 million. The midpoint of that range is slightly above the $139.1 million the company earned in the fourth quarter of 2013 – a figure which was at the high end of Infinera’s guidance of $130 million to $140 million.

The encouraging outlook comes despite the fact that company CEO Tom Fallon confirmed reports that Verizon would not purchase Infinera’s DTN-X packet-optical transport system as part of its current RFP for a second source of 100-Gbps long-haul optical transport gear (see “Did Infinera lose Verizon 100G contract to Alcatel-Lucent?”). The sting of that setback was mitigated somewhat by the fact that Level 3 has signed up to install the platform in its fiber-optic network, Fallon revealed. Overall, Fallon said that he expects Infinera’s revenue growth in 2014 to match or exceed that of the long-haul DWDM market in general, which he said would be about 8%.

Meanwhile, the company continues to work on a 100G-capable metro-specific platform. Fallon reported that a working prototype PIC for this system had reached the company’s systems engineering team in the fourth quarter of 2013. He declined to provide a timeline for development of the metro product, but Infinera Co-Founder and President David Welch told the analysts that he didn’t expect 100G to reach mass deployments in metro applications until late 2015 or sometime in 2016.

Overall for the quarter, the $139.1 million in sales represented a sequential decline from the $142 million garnered in 3Q13, but an improvement of $11 million year on year. The quarter’s GAAP gross margins were 40%, down sequentially (versus 48% in 3Q13) but up annually over the 34% of 4Q12. GAAP net loss for the quarter was $10.2 million ($0.08 per share) versus net income of $3.3 million ($0.03 per diluted share) in the previous three months and a net loss of $16.1 million ($0.14 per share) in the year-ago quarter.

For the year, Infinera reported income of $544.1 million, an increase from the $438.4 million earned in 2012. GAAP gross margins for 2013 were 40%, up from the 36% seen in 2012. The company still saw a GAAP net loss in 2013 of $32.1 million ($0.27 per share). This was an improvement over 2012, however, when Infinera suffered a GAAP net loss of $85.3 million ($0.77 per share).

In addition to the revenue guidance of $137 million and $143 million for 1Q14, Infinera executives forecasted non-GAAP gross margins of approximately 40%. They expect non-GAAP operating income of approximately plus $1 million to minus $1 million, leading to net income of breakeven to an approximately $2 million loss.

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