lt cap,

Perhaps I'm just still dazed by the overwhelmingly bad hit INFN's price took in reaction to the CC. The Jeffries note you cited (thank you) appears to say that while the cross-selling of eqiupment with their acquisition of Transmode is weak so far, the longer term story is intact. I sure hope so. Because one of the things Fallon said at the time of acquisition was that, essentially,  it was a perfect 'hand in glove' fit, much like what ALU will (we hope) be with NOK, and that it would be a sizeable plus to synergy and sales. Whilst keeping in mind that any talk surrounding an acquisition has to be positive (what else could they say?), to me it becomes another point of credibility. While even CEO's don't exactly know the future, I am praying that in the end Fallon's predictions on everything will prove to be true, more or less, and it really is things like 'lumpiness', having a solid customer become tentative (with Transmode), and other non-controllable factors. (I think it would've helped if they didn't kind of dodge the question, IIRC, whether that formerly solid Tmode customer had flown the coop, was in an unexpected slowdown, or was just delying purchases. Their kind of 'being all over the map' while at the same time 'being nowhere on the map' in terms of specificity on a number of issues must've lead the market to assume that there's a good deal of bad news, and they just didn't want to name it. As you've suggested - they either ought to come clean or reinforce claims made previously, if they can.)

The CC was indeed all over the place, a worrisome sign, IMO.  I also did not like the research note and downgrade from MKM Partners, they essentially do not believe management regarding the customer that stopped ordering the Transmode equipment. So, did Fallon omit information? i.e. technically not lying but lying nonetheless?

This was also a trade for me that has become a long term hold, my bad.  I was nervous going into the CC, I also thought that the several PRs released seemed curious, I should have listened to my gut.

I now have had time to get over the shock and beating from the INFN quarterly miss.

Fundamentally the company's main products are sound.  They continue to grab market share.  The problem is with one customer which from the noise made by MKM has simply turned off the spigot and judgning from their research note, this customer is not likely to come back.  Since no other firm has disputed MKM's research, I must assume it is so.

So, we have the DTN-X,  Cloud Xpress (sp?), the Transmode Metro product and the older DTN. With the exception of the momentary hicup from the Transmode product, these products are still generating very healthy revenue growth for INFN  The company is guiding for "$255M plus or minus $5M" (as stated in CC).  This represents a revenue growth of 23% YoY.  The company is still on track to achieve a Yearly revenue run rate of $1B, even with the loss of the Transmode customer.

I too believe that even though the Transmode is off to a very slow start outside of the customer that walked away, it is positioned for a market segment that is growing.  INFN may have dropped the ball here, but they have a healthy roster of customers globally. It should be a player in this segment and will up its game to ensure that it can cross sell it into existing customer geographies.  The Infinite Engine product announced recently will deliver multi-terabyte per line card. This product will future proof Infinera company for several more years.

INFN is now trading at a forward PE of ~14 even if I assume a lower growth rate than this next quarter (at 23%) and bring it down to 17% it is still undervalued, IMO.  Its Price to Sales is below 2 and Price to Book at 2.18. It is acquisition bate.

lt cap,

Thanks for the INFN analysis. 

I have my own personal 'gut feelings' on INFN, and thus they aren't backed up especially with data. But....I think the Transmode 'hiccup' (and I think you called that right) was quite out of whack with the synergies, and augmentation of areas/products INFN can offer, which Fallon confidently expressed when INFN announced acquiring them. Feels to me like INFN has been accorded 'show me' status - and the fact that their growth rate is a really good story has been eclipsed by not only the info in the CC, but how non-transparent and fumbling around mgmt seemed.  I can imagine an analyst thinking they're hiding something, let's wait and see if'/what that is before we endorse (or continue to do so) them.

But the whole sector really feels 'squishy', as though the secular growth thesis no longer exists. A 15% price drop after the CC is pretty astounding, given that they were alreadywell off the 52 wk high ~$24. CIEN's beaten up, CSCO has fallen about 3 points (I still wished I had grabbed some when it was 23 for the 4%+ dividend), and JNPR is off today by 2.11% - a larger percentage drop from its peers. (Delayed CC reaction? Who knows.) Regardless, the sector as a whole seems to have behaved miserably, for the most part.

And the dilemma with INFN which we're facing is that (at least my) buy in price is even above the bullish analyst's PT's (mine is $19.XX/avg. sh.), do we dump INFN and wait for them to fulfill their promises, or do we bag-hold it, waiting for them to fulfill their promises? It's funny, but a buy-out here would probably still leave me in the red, unless someone wants to pay somewhere above 50% of its current trading price.

Personally, at the moment I'm inclined to hold it, as it seemed to have found a home around $11.75 - give or take - and I think it's possible it may just be range bound until there is some instigating event to move it.

One thing I wanted to ask you if you know: Initially, the thesis on INFN was that they had the best product, and could not be matched in performance with its competitors. Does that disparity still exist, or have they caught up to INFN, or at least closed some of the gap, since those days? TIA.

 

 

 

Agree with your assessment that INFN is now a show me company.  I plan to hold it, even though I think it will take at least two quarters to regain some altitude, and that assumes there are no more roaches in the house, which we both agree may be too optimistic.

So why would I hold it?  I believe the company will get its ducks in a row and execute on the TM product.  Clearly Fallon and company have fallen short in regards to selling the TM product. I would expect that fixing this issue would be priority one for Fallon. Management may have had a lapse with regards to the lost customer account, but I believe that the company's overall portfolio makes the story still very relevant and any blemishes are fixable. 

Even with this fiasco, the management team is quite capable; they have successfully become the leading Optical Equipment outfit and competed effectively against entrenched and much bigger players.  The stock has fallen this much mainly because the level of Institutional ownership had reached 75%, so it is not surprising that it has fallen this hard.