BLOG

Infinera: Doubling Down on Lost Cause

February, 2018

After bringing in an executive, who promotes to companies he will “lead a transformational charge to growth, profitability and long-term value,” in our opinion, the last earnings call at Infinera was in general just more of the same strategy, only the messaging was more convoluted than ever. While it would be very difficult at this point to figure out a way to put the vendor on a healthier path, just being confined to the literal, cosmetic, and superficial goal of “enhancing internal alignment between our engineering, product management, and marketing teams, and ensuring efficiency in our overall development process” is barely sufficient. If Infinera has any chance for survival, it needs to drastically cut back to a minimum number of products, which have the best chance for success, and give up considerably on its planned aggressive R&D expenditures. Last November, it is quite probable that we gave the CEO, Tom Fallon, way too much credit for “be[ing] open to radical changes,” which is absolutely necessary. In addition, Ciena’s move to provide a detailed three-year outlook on its expected performance, evidently compelled Infinera to at least attempt to provide insight into the full year, which we believe backfired on the struggling supplier. Moreover, if it turns out there is not a substantial amount of business from CenturyLink-Level 3 going forward, it would have a devastating impact on the optical system house.

fibeReality would not be surprised if Infinera’s Senior Vice President and General Manager, David Heard, who came aboard in June, had advocated a plan, which substantially would have taken the company away from what we would characterize as throwing an assortment of solutions against the wall, and seeing which ones will stick, to one that would ultimately be closer to a barebones outfit, which could potentially survive indefinitely. It appears very possible now that Fallon would not have been able to accept such a dramatic alteration of the firm.

Continuing with this hypothesis, Fallon would have had no other choice but to bring back ex-President, Dave Welch, into the fold, as he may be the only optics engineer on the planet, who stills fully believes in the utility of Infinera’s PICs. Irrespective of the actual events, the future of a public company should certainly not be based on the occurrence of a miracle.

After listening to Infinera’s last earnings call, it is hard for us to remember a company’s presentation that we found to be filled with so much obfuscation, incoherence as well as overly lengthy explanations. If there was truly a light at the end of the tunnel, the narrative could have been stated very simply and concisely.

The worst aspect involved the future of the entire product line, which had the appearance of a hodgepodge in making changes on the fly, based mainly on bringing in the most revenue in the short term, rather than a comprehensive plan to deal with overlap between platforms. The limited prescription of a greater amount of elegance being required came off as shallow.

On the one hand, Infinera tried to assert there is not a “product proliferation problem.” On the other, “we're converging and killing some products that don't offer a differentiated value.” Such confusion will not provide a high level of confidence to potential customers with a roadmap in such a state of flux.

Infinera also talked about aggressive trialing of its new solutions, but such activities are no guarantee of future business. As we have noted in the past, the real selling occurs even after the contracts themselves are signed.

Moreover, while “cable operators' Fiber-Deep strategies represent a major incremental revenue opportunity,” as Infinera indicates, other vendors will be going after this business as well, including Arris, by far the dominant optical transport equipment vendor in the MSO space. Naturally Arris will be a formidable competitor as well with Remote PHY, and if Infinera’s plan “to foster some partnerships with some of the more traditional cable equipment providers who have not really historically solutioned around DWDM and transmission” involves an OEM arrangement, it would obviously eat into its margins. Regardless, given the vendor’s present hardships, it would be reasonable to assume that a partner providing access to the sector would be in a position to demand a significant piece of the action.

Turning to the Open ICE concept, it is one thing for a medium-sized optical system vendor to sell transponders, it is an act of desperation to make it a leading portion of one’s marketing game plan. We have been outspoken about our belief that there is no evidence that Infinera’s PIC technology provides any cost advantage, and any edge that comes with “higher capacities…lead[ing] to a lower cost per bit” would apply equally to all existing competitors.

Regarding ICE5, we have expressed our opinion we would not necessarily expect it to see the light of day. Nevertheless, when Infinera talks about the next-generation “optical engines remain[ing] on track, when does the two-year clock begin? Is it after the final ICE4 products becomes entirely available? When would another “low point on gross margins” begin?

On the projected outlook for the full year, Infinera initially tries to express something resembling confidence in a higher margin for the entire year, but then almost immediately has to pull back, hedging with qualifications. At best, such a result would put it in the same expected ballpark as Ciena anyway, which like every other player in the market, has not felt the need to resort to PICs.

Once again, the only time Infinera was in the 50 percent range on gross margins was right around the acquisition of Transmode, which inherently had the advantage of going after sales in which the competition was less fierce. On the previous earnings call, we thought that Fallon finally realized the full benefits of the XTM. Now it is Welch seemingly trying to progress with his fixation of messing with the technology as much as possible in talking about “continued further integration of the XTM product line.”

Finally, although Infinera argues that it can do quite well without substantial sales from CenturyLink even for a little while, how can it say it is a leading optical equipment supplier with relatively little to no business from any of the three largest incumbent ISPs in a country, which protects domestic vendors from Chinese competitors?

As always fibeReality does not recommend any securities, and this writer does not invest in any companies being analyzed by us.

To follow us on our separate, daily company blog, which is exclusively on fibeReality’s LinkedIn page, please click here.

[written by Mark Lutkowitz]

 

 

Share Article

Add Comment

 

Back

 

Read Comments

  • S Reddy  
    February 13, 2018 at 23:40 PM Reply
    Mr Lutkowitz, you sound like a you ran a successful optical business and know it all expert, Can you name a business you ran or turned it around in your life. You sound like CNN clueless analysts already biased spewing garbage all day. You are already assuming Century link will not buy from Infinera that is utter nonsense they will be back buying in a big way. How do you know that their PIC is not the best and low cost transponder out there bunch of hogwash superficial analysis. Just like CNN you can say what you want on your blog, Get ready eat your own words just like the Fake news of CNN. This piece you wrote is utter baseless nonsense. Regards,
    • Mark Lutkowitz  
      February 14, 2018 at 00:20 AM Reply
      I have been following Infinera since its beginning. On this blog alone, there are several articles on the company going back to 2014. Can you point to anything that we were incorrect about concerning the firm? Where did I say that CenturyLink would definitely not buy from Infinera? I guess you can say the vendor has the best PIC because it is the only supplier that chose to go in this direction. Your comment about transponders is indecipherable.
  • S Reddy  
    February 14, 2018 at 00:16 AM Reply
    I forgot to add, you might have approached Infinera to get some consulting business and they turned you down, that will easily explain your obviously vicious blogs about anything Infinera does, I have not seen anything about Infinera that is accurate. Looking at all the superfluous research and your personal unqualified opinions on technologies you have no idea who in their right state of mind wants to pay for your nonsense. Good luck.
    • Mark Lutkowitz  
      February 14, 2018 at 00:26 AM Reply
      I suspect you could not afford my hourly rates. You are a waste of my time. Get off my blog.
      • Sreddy  
        February 15, 2018 at 02:11 AM Reply
        Your analysis is not worth any more than toilet paper. Only reason I am even responding to your nonsensical blog is to let others know that you are using free Internet to spread your biased propaganda against Infinera and pro Ciena (garbage products) probably paying you to spread this false information as a propaganda machine. As long as you are posting these blogs on Internet that is there for everyone you need to take the critic. Give one example of your appreciation of Infinera technology. For example Infinera is the first one to get DCI product others followed. You have no clue on their PIC technology advantage in next phase of Terabit Internet, that will be their advantage everyone can do a DSP for 30 million R&D no big deal but not catch up in large scale PIC of Infinera. Ciena uses off the shelf garbage and tout DSP, Ciena will be left in the dust in next phase of 5G and IOT requiring massive bandwidth. Just watch and wait. How much is Ciena paying you anyway for writing this garbage. regards
        • Mark Lutkowitz  
          February 15, 2018 at 02:30 AM Reply
          I thought I told you to get off my blog. If you were not such a lazy ignoramus, you would see that I have been very critical of Ciena over the years, especially its top-level management. I have complimented Infinera's system in the past -- ease of turn-up -- because of all of the functionality on the PIC. Why don't you go harass the bulk of the market research analysts in this space that have actually sold out?
          • sreddy  
            February 16, 2018 at 01:38 AM Reply
            I don't care about your stupid blog, just making you accountable for using Internet to spread your bs. Anyone who reads your thoughtless biased opinions knows it, You need to be fair when you write one sided persistently , consistently vicious negative articles go back and read all the Infinera articles you wrote. Why don't actually do real job instead of pretending to be a know nothing expert . regards
            • Mark Lutkowitz  
              February 16, 2018 at 02:21 AM Reply
              Sometimes there is not really another side when one strives to be objective and provide an analysis. When a company continues to more or less stay the course, and expects a significantly different result, that is called insanity. You have been in attack mode right from the beginning on me personally, while remaining an anonymous coward. Please don't bother responding anymore, because I will take it down as quickly as possible. I have obviously let you get more attention than you deserve, and you are starting to bore me and my readers. You do not have the slightest idea of the sacrifice involved in being brutally frank about an industry and its players.
  • thomas fay  
    March 12, 2018 at 12:13 PM Reply
    https://www.infinera.com/new-infinite-capacity-engine-data-center-interconnect-fiber-deep-architectures/ Ice 5---- not ICE 9 - with all due respect to Mr. Vonnegut- still impressive
  • Mark  
    April 24, 2018 at 10:07 AM Reply
    For additional commentary on this article, please see: https://www.linkedin.com/pulse/infinera-doubling-down-lost-cause-mark-lutkowitz/