Infinera Apparently Won’t Neutralize XTM

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After the purchase of Transmode, Infinera threatened to incorporate its PICs into those systems from the Swedish firm, which never seemed to make any sense given any reasonable analysis of the economics. Without saying it directly on its last quarterly conference, it appears fairly clear that the idea has been officially abandoned (although the CFO perhaps did not receive the memo as he continued to talk about the “XTM upgrade” at a later J.P. Morgan Technology, Media and Telecom Conference). From the time the leadership at Infinera initially bent over backwards to make it seem insultingly clear to Transmode that the XTM was going to take a backseat to its internally developed metro products, to the present in which it cannot directly state its intentions with the PICs, are all, in our opinion, part of the ever-growing list of examples demonstrating a lack of self-awareness by the top-level executives.

On the last earnings call, when asked about “if there’s anything new…in terms of PIC integration” on the “TM portfolio,” the President of the firm responded with the following vague statement: “…I’ll try to comment on that. We’re actually doing very well from 100-gig wave perspective in the cumulative metro market inclusive of metro data center business. So, the vast majority of our 100-gig waves in the metro space are PICs. We will continue to complement that with wavelengths on the XTM and the aggregation markets. And then as we move towards our next generation platform that will create a common operating system across our metro/long-haul activities, we’ll start bringing in unified optical engines across our portfolio.” That is a far cry from his emphatic comment of integration of the PIC technology onto the TM-Series platform a little over a year ago.

As we have noted previously, Transmode’s inherent gross margin advantage was in mainly catering to tier two and tier 3 service providers, as it did not tend to go head-to-head with the biggest players in the market, and avoided a lot of price pressure. Putting aside what we believe is the lack of very compelling evidence that Infinera’s PICs have provided cost benefits, the many millions of dollars in investment that would have been required to retrofit an already fully designed product, without the promise of any explosion in the growth of sales of these systems, would have been illogical. Yet, it may never be known how much business has been lost because of past apprehension on the part of customers over uncertainty regarding both the future commitment level as well as the potential redesign ramifications with the XTM.

Another recent example of a fundamental problem at Infinera with self-awareness is the CEO stating the following: “We must maintain at least 50% market share in this DCI space. Anything less, we have quite frankly failed.” With the supplier acknowledging that the level of competition in that section is getting increasingly fierce, we believe that publicly focusing on an arbitrary percentage of share is unwise. It could be the case that eventually maintaining even a third of the overall market (especially with the unclear meaning of what exactly is included under this type of interconnection) may turn out to be quite an achievement.

We suspect that Infinera’s SG&A expenses will increase noticeably with the pressure to remain a major player in the DCI game, as there will be a rather frantic search for new enterprise customers. In comparison to the big four hyperscale operators, the mentioning of new business with “a large sports apparel company” could easily be interpreted as having reached a level of great despair.

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[written by Mark Lutkowitz]