On Infinera’s last quarterly earnings call, a financial analyst asked: “Does Infinera make sense as a stand-alone business?” The response was somewhat contradictory in that R&D expenditures could lead to “pressure on this industry consolidating,” while also stating, “I don’t see people wanting to buy optical companies right now.” Our own view is that we find it unlikely that any other vendor would be interested in purchasing a company, which has a fairly bleak future. The one bright spot was the admission that the vendor dropped the ball with the TM series. While it may be too late, Infinera’s only prospect for survival may be dependent on finally devoting greater resources to the ex-Transmode operation, as well as a leadership shakeup that puts the Swedes at the top executive level (even if that requires outright replacements of existing execs), in order to ensure their total independence in developing products in a way that is most suitable to them.
It is difficult to know to what extent Transmode can be put fully back together after all of this time. Nevertheless, while there has never been any cost advantage proven with the use of PICs, other than operationally with an inherently faster turn-up, Infinera may attempt to save face by asserting (albeit disingenuously) that it discovered that the larger number of competitors in the metro space resulted in such a high level of price pressures that these circuits are just not as ideal in gaining an edge as in the long-haul sector. There is no doubt that the analysts on the Street to this day incredibly tend to still believe the story put out by Infinera about its PICs.
With a sufficient number of acquisitions of firms similar to Transmode, it would be in by far the best position ever to achieve margins significantly higher than the larger vendors, especially in going after tier 2 and 3 accounts. Bigger profits and revenues would allow Infinera to dramatically slow down the expensive (and ultimately debilitating) development of its future generations of ICE, which are better suited in terms of capacity for much greater distances than metro anyway. In fact, the latest rhetoric out of Infinera, such as at the Instinet Media Telecom Conference earlier this month, is that these later engines may not necessarily be applied across its entire product line anyway.
In our opinion, there is hardly any guarantee that such a scheme by Infinera would work, as it would not totally eliminate questions over its credibility, or any apprehension that it could change it mind about totally moving forward with its TM product line. It may also fail to lessen the fear by some purchasers around the world that they could lose their job by not choosing perceived safer bets such as Ciena, Huawei Technologies, Nokia, ADVA Optical Networking, or Coriant.
Moreover, as we discussed in the past, there is the added cost of committing to two different platforms. Conversely, the positive result would be the potential of Transmode to devote some of its R&D efforts to new solutions, which could lead to favorable market diversification efforts for Infinera.
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[written by Mark Lutkowitz]