Infinera Corp. has announced a restructuring initiative that will see layoffs, product and program "rationalization," and the close of an R&D facility. The announcement came as the company reported its third quarter 2017 numbers that showed both GAAP and non-GAAP net losses.
"In recent years we have made significant investments to become a multi-market company, deliver a fully refreshed product portfolio, and establish a faster technology cadence. Reflecting on the internal expansion associated with these investments, we have identified areas where we can be more efficient going forward," said Tom Fallon, Infinera's CEO, via a press release. "While difficult, my expectation is taking action at this time will result in a more cost-efficient structure that enables us to focus on our strengths and return to profitability as we grow. I believe these are the right steps for our shareholders, our company, and our customers."
In an analyst call with financial analysts November 8, Fallon said that revenue pressure driven in part by customer consolidation, particularly CenturyLink's acquisition of Level 3 Communications, as well as overall price declines and fears that capex could shrink in 2018 presented near-term challenges the company must address. The slippage of completion of the company's XT-3600 platform, a 1.2-Tbps line card for the DTN-X, and the last of its Infinite Capacity Engine 4 (ICE4) products to the first quarter of next year also is expected to affect Infinera's business, Fallon added. He implied as well that Microsoft's adoption of the ColorZ pluggable module was impeding sales to that customer (without mentioning Microsoft by name).
Brad Feller, Infinera's CFO, told attendees on the call that management plans to trim its workforce by approximately 10% and reduce its use of contractors. The company also will close its Beijing design center. The majority of the restructuring should take place in the fourth quarter of this year. The company estimates restructuring costs will range from $21.0 million to $27.0 million, but create annual savings of $40 million.
The restructuring will include title changes for David Welch, who will now become chief strategy and technology officer with responsibility for creating differentiated products as well as an increase in customer interface, as well as for David Heard, who is now an officer of the company and will be responsible for product realization.
Fallon predicted the restructuring will return Infinera to profitability and cash generation during its fiscal year 2018. This compares to a GAAP net loss for the quarter ended September 30, 2017, of -$37.2 million (-$0.25 per share) on revenues of $192.6 million.
The 2Q18 numbers marked a sequential improvement over the -$42.8 million (-$0.29 per share) GAAP net loss suffered in the second quarter of 2017, but were worse than the GAAP net loss of -$11.2 million (-$0.08 per share) experienced in the third quarter of 2016.
GAAP gross margin for 3Q17 was 35.2%, down from 36.7% in the second quarter of 2017 and 45.6% in the third quarter of 2016.
Non-GAAP net loss for the just concluded quarter came in at -$17.0 million (-$0.11 per share), an improvement over a net loss of -$22.8 million (-$0.15 per share) in the previous quarter, yet well off the net income of $7.4 million ($0.05 per diluted share) in the year-ago quarter.
Looking ahead, Feller predicted revenues for the fourth quarter of 2017 will range between $185 million and $195 million; the midpoint of this range would be down sequentially but up 5% year-over-year. He also pegged non-GAAP gross margin at 38%, plus or minus 200 basis points. The midpoint of the guidance would equate to a non-GAAP operating loss of 10% and non-GAAP earnings per share (EPS) of -$0.14, Feller said. He predicted GAAP EPS would come in $0.29 below that figure.
ANALYSIS: According to the Management Overview of Infinera’s financial results for 3Q17, the company has in recent years broadened its addressable market with products designed to address data center interconnect (“DCI”) and metro. However, long-haul and subsea segments continue to contribute the largest proportion of Infinera’s revenue. In the past twelve months, Infinera has performed a major upgrade for Telefonica to the legacy system, SAm-1, a subsea ring around South America and has seen its new XTS-3300 Meshponders deployed on Seaborn Networks’ Seabras-1 (USA-Brazil) system.
Apart from the increased R&D cost associated with developing these new products, it appears that Infinera have been caught out by the speed with which customers’ requirements are changing and delays in bringing new products to market.
Another significant factor is that between 25% and 30% of Infinera’s revenue each quarter comes from just two customers. The CenturyLink takeover of Level3 led to a slow down in procurement of Infinera equipment and services which clearly hurt the top line and the bottom line.
Looking forward to 2018, Management also expects “gross margins to remain suppressed for the remainder of 2017 and into 2018 as we bring our next-generation ICE-based products to market and experience initially low manufacturing PIC yields that improve as we ramp product yields and production volumes.”
Under these circumstances, it is a prudent move to initiate a cost-cutting strategy. However, Management is determined to stick to its long-term strategy of broadening its addressable market despite the fact that this has so far had only a negative impact on earnings per share. This being the case, the scope for cost-cutting and “right-sizing” will be limited. However, in Infinera’s traditional subsea market, installation of new systems continues unabated. With the trend towards “open systems”, there should be plenty of opportunities for Infinera if they can keep up with the technology curve.
Julian Rawle, Author
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