Infinera stock drops 33% on soft 3Q16 guidance

Investors punished Infinera (NASDAQ:INFN) yesterday for predicting late Wednesday at least a 26% sequential reduction in revenue for the third quarter of 2016. The company's stock dropped 33.57% and influenced price declines in the stock prices of other companies associated with optical communications.

Investors punished Infinera (NASDAQ:INFN) yesterday for predicting late Wednesday at least a 26% sequential reduction in revenue for the third quarter of 2016. The company's stock dropped 33.57% and influenced price declines in the stock prices of other companies associated with optical communications.

After reporting revenues of $259 million for the second quarter of the year, at the upper end of its guidance of $250 million to $260 million, Infinera management said that the upcoming quarter would likely see revenues of between $180 million and $190 million. The forecast significantly undershot consensus estimates of $273 million.

Speaking to attendees on an earnings call Wednesday afternoon, Infinera CEO Thomas Fallon blamed a softening demand among "certain customers" in North America (where Infinera customers Time Warner Cable, Cablevision, and XO Communications are in the process of being acquired) and Europe for the weakened outlook. He also noted that while analysts predict that the DWDM market will grow 6% to 9% this year, much of that will come from spending in China, a market where Infinera isn't active.

Fallon also said that some customers have finished major network deployments, while others have delayed purchases until the company's recently announced Infinite Capacity Engine becomes available (see "Infinera moves terabit optical networks closer to commercialization with Infinite Capacity Engine"). The fact that the company was in the midst of upgrading its submarine line terminal equipment offering reduced its business in that niche as well, he added.

Finally, he offered that the metro opportunity so far this year hasn't been as large as many analysts predicted.

To add to investor worries, Fallon said that his market visibility is limited, meaning that he didn't have a good estimate for how long the upcoming revenue depression might last, other than to say, "Do I think it's going to be a long recovery? I don't."

In a note to investors in which he downgraded Infinera's stock to "Market Perform," Raymond James Equity Research Analyst and Managing Director Simon Leopold wrote, "We like the optical market, and 100G, but see increased competition and aggressive pricing challenging Infinera." Leopold suggested that Infinera might not see positive effects from the Infinite Capacity Engine until the second quarter of this year. He lowered 2016 sales estimates to $891 million from $1.06 billion and pro forma earnings per share to $0.44 from $0.85.

Infinera's stock closed yesterday at $8.31 following the beating administered on Thursday. Investors appear more forgiving so far today; the stock was up nearly 3% to $8.55 in early afternoon trading Friday. [Ed. note: The stock finished the day up 5.42%.]

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