Infinera's 4Q14 guidance offers pleasant surprise

Countering a wave of negative forecasts from its competitors, management at optical transport systems vendor Infinera Corp. (NASDAQ: INFN) forecasted that they would continue in the year’s final quarter the growth the company has enjoyed throughout 2014. The forecast came yesterday in a call with analysts to discuss results of the third quarter of 2014 ended September 27, 2014, during which the company said it set a quarterly revenue record.

Countering a wave of negative forecasts from its competitors, management at optical transport systems vendor Infinera Corp. (NASDAQ: INFN) forecasted that the company would continue in the year's final quarter the growth it has enjoyed throughout 2014. The forecast came yesterday in a call with analysts to discuss results of the third quarter of 2014 ended September 27, 2014, during which the company said it set a quarterly revenue record.

Infinera reported GAAP revenue of $173.6 million for 3Q14, in the upper portion of its guidance. The figure exceeded the $165.4 million it accrued in the previous quarter and the $142.0 million from the year-ago quarter. The most recent quarter's GAAP gross margin was 43.4%, versus 42.5% in the second quarter of this year and 48.1% in 3Q13. GAAP operating margin for the quarter was 4.3%, slightly lower than the second quarter’s 4.9% and the 4.5% seen in the third quarter of 2013.

GAAP net income was $4.8 million ($0.04 per diluted share), exactly the same as 2Q14. Net income in the year-ago quarter was $3.3 million ($0.03 per diluted share).

On a non-GAAP basis, gross margin was 44.2%, better than the second quarter's 43.3% but lower than the year-ago quarter's 49.2%. Non-GAAP operating margin was 8.6% compared, down from the 9.0% of the second quarter of 2014 and the 9.9% of the third quarter of 2013.

Non-GAAP net income for the quarter was $14.2 million ($0.11 per diluted share), compared to net income of $13.5 million ($0.11 per diluted share) in 2Q14 and $12.8 million ($0.10 per diluted share) in the 3Q13.

CFO Brad D. Feller said the company had achieve GAAP profitability for the first ninth months of the year, a significant improvement over the loss of $22 million the company had seen over the same timeframe last year. Helping the most recent quarter's success were the addition of three DTN-X customers, including one new to Infinera; the other two were DTN customers who deployed the DTN-X. The three new DTN-X customers included a European bandwidth wholesaler, a Tier 1 service provider in Asia-Pacific, and a large enterprise company in North America that CEO Tom Fallon described as being in the industrial sector. The new wins brought the company’s DTN-X customer tally to 49.

As impressive as the company's performance in the quarter proved, it was its guidance for the rest of the year that surprised analysts. Feller predicted revenue for the quarter will range from $175 million to $185 million, well above consensus $160 million. The midpoint of this range would represent year-over-year growth in the of nearly 30% and would ensure that the company’s revenues for the year would have grown more than 20% for the second consecutive year.

Fallon said the upbeat forecast was based on expected strength across Infinera's customer range. The fact that the company also expects to receive its first revenues from the recently introduced Cloud Xpress metro platform will help (see "Infinera tackles metro on two fronts"). Feller predicted that the Cloud Xpress would generate revenues in the low to mid single-digit millions during the quarter.

Fallon also said, contrary to some analyst expectations, that he sensed that carriers might have some extra cash to spend during the quarter. The market typically enjoys a "budget flush" during the fourth quarter, as carriers spend whatever excess cash they may have been holding in reserve. Many observers have believed such cash reserves were minimal this year. Fallon noted that if he’s right, the unexpected spend would benefit not only Infinera but the optical transport market as a whole.

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