Infinera: Plausibility for Cautious Optimism

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After so many years of a stubborn, false narrative that its PICs provided a true-cost advantage, without acknowledging their technological drawbacks, including that their optimal play was always for point-to-point applications, as opposed to routes with drops, Infinera has finally given in on just heavily favoring its products developed in-house, such as on DCI gear, as well as on orchestration software. Such developments by themselves would not cause a much greater level of confidence in the supplier this late in the game, when it is as hard as ever for optical system houses to differentiate their products. By far, the potentially most significant change for Infinera is the recent appointment to its corporate board, Greg Dougherty, ex-CEO of Oclaro. Of course, he was on the board of Oclaro, before taking over the company, and then was behind the minor miracle of saving it from bankruptcy. It remains to be seen whether Dougherty could be persuaded to take charge of another vendor, which is struggling mightily, and similar to the Oclaro situation, requires a major restructuring effort. He apparently has had a close personal and professional relationship with Infinera’s CEO, Tom Fallon, for a long time, and we doubt the former would want to be part of any direct, purging effort, such as by a group of shareholders. We believe it would be more likely that Fallon would at least appear to resign on his own initiative first, just as what happened to Dougherty’s predecessor at Oclaro. Regardless, Dougherty already seems to be having a major, positive impact on the firm, as only a director.

Given that he is also on the board of Fabrinet, it would be hard to think it is a coincidence that Coriant’s production is being farmed out to the contract manufacturer. Also, it is almost assuredly not happenstance that Oclaro’s former EVP, General Counsel and Corporate Secretary, David Teichmann, is now Infinera’s Chief Legal Officer and Corporate Secretary.

In addition, while we anticipated that David Heard, who was eventually promoted to COO at Infinera, would be in a position to evidently set the stage for starting to move Infinera in a rational direction, the trigger to really sacrifice homegrown solutions was not formally pulled until after Dougherty’s arrival. Regarding Teichmann specifically, it should be remembered that he gained a lot of experience in M&A with the Oclaro purchase by Lumentum.

Naturally, it would be hard to imagine a vendor interested in purchasing Infinera, even given its current, very low valuation, because it has become a hodgepodge of duplicative devices, and arguably, even unnecessary offerings. We guess it cannot be ruled out that Ciena could take it out, simply to remove a player that has been undercutting on price to an incredible extent.

A more reasonable outcome may be for one or more investment firms to acquire Infinera, put Dougherty at the helm to automatically provide it with needed credibility at the top, clean up the huge mess behind closed doors, and enable it to become a more focused supplier from the standpoints of both hardware and software. The incumbent ISPs in the US would desire a domestic, stable, reliable, stand-alone, optical system supplier, with long-term, operational ties, i.e., the former Tellabs.

Separately, we would not be surprised, if Lumentum winds up regretting not putting Dougherty on its board. For example, he would certainly be able to attract a lot of technical talent at the module level to Infinera, such as for building DCOs in an efficient manner.

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[written by Mark Lutkowitz]