Despite its long-term survival being a question mark only a few years ago as principally a long-haul player, Infinera fancies itself as now being positioned to become one of the dominant end-to-end optical vendors. We feel that it is somewhat of a continuation of its periodic brash and inconsistent messaging, which has resulted in credibility problems for the supplier over the years. Concerning its rhetoric involving the metro business, there appears to be conflicting (albeit presently subtle) rhetoric regarding future development, and there might be an excellent chance that the supplier will blow the opportunities and advantages provided by its acquisition of Transmode, especially its very attractive gross margins.
In kind of an open letter to Infinera in June, we urged the vendor to allow Transmode to remain an independent entity. Before the closing of the deal, a Light Reading article posted in August reported that the CEO, of the former, Tom Fallon, was “buying this company for revenue synergies, not cost synergies,” and that “upon [acquisition] completion, Transmode CEO Karl Thedeen will become the managing director of Infinera’s new Metro Business Group, which will include both the Transmode operations and Infinera’s own fledgling metro asset.” Fallon is also quoted in the piece as follows: “Karl will decide what we carry forward, and he will be held accountable to win in the metro….We’re not going to tell him what he can and can’t do to go do that.”
Nevertheless, during last month’s webcast, Insight Infinera 2015, the president of the company, David Welch, followed Thedeen for what turned out to be his second presentation as part of a conspicuous “executive session” (peculiarly, Welch spoke extensively right before Thedeen as well) entitled, “What the Network Will Be,” and we found it to be at least indirectly disparaging to Transmode. The only reasonable interpretation appears to be that Infinera-developed products like the XTC-2/2-E are more than sufficient to support an optimized switched metro 100G network versus the offerings from the Swedish supplier. In addition, during the last quarterly earnings conference, investors were told that moving forward, there would not be specific breakouts regarding the performance of the individual metro businesses making us even more concerned that ego may get in the way of Infinera keeping its word to Transmode – a company with a deep familiarity of the metro environment (sorely lacking at Infinera before the purchase) along with a stellar track record in that portion of the network, which would probably only get better with additional financial resources, especially if coupled with the total freedom to move in its own chosen direction. (In fact, there has evidently been an absence of a public statement after the closing of the deal to reinforce the idea that Thedeen (with the exception of his title) is fully in charge of metro development efforts at the company.)
Six other arguably over-the-top assertions regarding Infinera that can be mainly found in a couple of sources mentioned above or in a recent presentation to a financial institution relating to the metro sector include: 1) the overemphasis on its long-haul installed base facilitating rather easy entry into a more complex space; 2) the stress on a high level of consolidation despite there still being 18 optical system manufacturers internationally (according to our count) targeting metro transport applications, which is still three above the high end of the range provided by Infinera over a year ago (and after two major acquisitions since that time); 3) likely over-optimism on the timing of extensive metro 100G deployment, especially in the public infrastructure; 4) the continuing insistence that Infinera and Transmode are culturally alike, when a nine-year old could tell you otherwise; 5) the statement by a leading analyst that “We strongly believe Web 2.0 companies are not even thinking about cutting back on spending on data center interconnection.” -- while a few of the big hyperscale operators will be certainly investing in a meaningful manner, it is not clear that some of the other prominent players will be substantially growing their networks in the near future; and 6) the comment that there has never been a better time for opportunities in the optical space (of course, there was the pre-bubble environment) when the US is suffering the worst economic recovery since World War II and the European Union is also afflicted with a severe financial crisis.
[written by Mark Lutkowitz]