Below is part 3 of my "progress report” on Infinera’s first quarter. Part 3 focuses on the Metro market. Much of the detail behind this summary was taken from various former posts and explorations. There is one new detail, however, that I did not talk about before and have included it in this write up for your consideration.
Metro
Key metrics for the product segment:
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Infinera agrees with the prevailing market research on the Metro market growing at 9-10% in 2016.
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Their estimated TAM in this segment is approximately $6.5B for 2016. Their TAM in 2015 was $5.9B. They estimate a CAGR of 7.5% from 2015 through 2019 - or $8.2B in TAM by the end of 2019.
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This segment currently accounts for less than 20% of their business (I rough it at around 15-17%) with sales of about $30M-$33M last quarter.
Key observations:
- Infinera gained their Metro portfolio largely through their Transmode acquisition. Transmode was the #1 packet optical supplier in EMEA.
- It will probably be a second half update before Infinera breaks out specifics on what to expect for their new metro business
- The metro market is currently a stronghold of Ciena. Infinera has everything to gain, but Ciena has a lot to lose. Competition will be fierce.
- Infinera saw opportunities open up in metro with a strong number of TM-Series RFPs relative to Transmode’s historical levels. They also saw a “solid" uptick of end-to-end RFPs that include both long haul and metro platforms. Tom reminded us that these are opportunities that neither company would have been able to compete for prior to the acquisition.
- Recent quarterly guides from other system vendors, notably Ciena, have not been stellar. This means either the market demand isn’t as strong, or another competitor is taking share. Please see the prior point above if you believe the market demand is still strong.
- Infinera has a plan to place PICs inside their new metro products to drive down space and power, and to take advantage of Instant Bandwidth (This is likely where those investment dollars are going - to add disruption to the metro market by adding Instant Bandwidth. You heard it here first.)
- On the timing of Metro acceleration, here is what Brad had to say on the last earnings call: “The majority of services out there in the Metro right now are still 10G but they [their customers] are making decisions based on your capability of supplying of 100G to the market and we are seeing a pickup in interest and a pickup in deployment but it’s going to be later in ’16 before you see that starting to accelerate.”
Expectations for Q1:
As far as what to expect from Metro contributions in Q1, here are their public updates since the last earnings call:
PCS Deploys Mobile Fronthaul in Malaysia: “After evaluating the mobile fronthaul solutions on the market, we selected the Infinera solution as it best enables PCS to support the needs of our customers,” said Ahmad Zaki Astaman, managing director at PCS. “By combining the Infinera Mobile Fronthaul Solution with the previously deployed Mobile Backhaul Solution from Infinera, PCS now offers mobile operators a full range of mobile optimized services.”
Hutchinson Global Deploys Mobile Fronthaul in Hong Kong: “We considered the mobile fronthaul solutions in the market and concluded that the Infinera TM-Series solution best enables HGC to deliver massive bandwidth with low latency, while being adaptive to the evolution of mobile technology,” said Byron Chiang, Chief Technology Officer of HGC. “The Infinera team was highly responsive, able to deliver quickly and implement services required by us.”
Note that both of these are early wins in a new emerging market, Mobile Fronthaul. These deployments look like they went to decently sized metro markets. Not huge, but we should see a pickup in contribution from them than what Transmode has seen in the past. We’re in early innings on metro, but just like the early wins in DCI with Cloud Xpress these early wins in Fronthaul (a market no one was really looking at) is really nice to see.
Here is the last in the set of PRs from earlier in the year:
Norrksen Expands Network Services in Sweden: “Upgrading Norrsken’s network with the Infinera TM-Series was a natural choice for us,” said Björn Jonsson, CEO at Norrsken. “Norrsken already has TM-Series in our network and with the new metro 100G solution, we are now able to also provide 100G services to our customers, providing an even more scalable high capacity network.”
A note on component suppliers, and a clue dig for your consideration
Optical component suppliers make the components needed by system vendors to assemble their finished products and devices. Every one of the component manufactures have been seeing a steady stream of orders. Most are booked through the year. This tells me this not a market demand problem. The demand for such things do exist and are being consumed by someone. In other words, someone out there must be looking at strong demand (and perhaps even some signed RFPs if you’re a system vendor) to keep that component pipeline filled.
Here is something else to think about. Unlike the legacy PIC-based products from Infinera, the TM-series absolutely relies on component manufacturers to assemble their final product. They’ve been able to do this at 50% margins in the past, so not all is lost, but, Infinera doesn’t own the entire supply chain with respect to the TM gear. Those parts come from component suppliers just like everyone else.
I’d like to follow this thought process one step further. All the component manufacturers are seeing strong demand. Lumentum (LITE) is one of those optical component manufacturer. Here is what they said on their last conference call with respect to demand and orders, and where they brought up the topic of a new 10% customer: http://seekingalpha.com/article/3868036-lumentums-lite-ceo-a…
Doug Clark, Analyst Goldman Sachs
And then just kind of a third, very quick question, the third 10% customer, is that the one that we’ve seen historically? Or is it perhaps kind of a new customer that’s never popped up at that 10% level?
Alan Lowe, CEO Lumentum
As far as the third 10% customer, I think you’ll probably have to wait until we file our 10-Q – 10-K before you see that, but I think it’s a new one.
Aaron Tachibana, CFO Lumentum
Yeah, it’s not the one that historically had been disclosed in our 10-K.
Doug Clark, Analyst Goldman Sachs
Okay, that’s helpful. Thanks a lot.
For the past 3 years JDSU (now Lumentum’s) 10% customers of the past have been Ciena (every year), Google (one time) and Cisco (two times). The third 10% customer is not one that has been disclosed in the past. It is “a new one”. Someone out there is ramping up orders based on their anticipated demand (signed RFPs?), and it is a new customer. And I think Doug Clark understands the implications. Doug Clark, if you recall, recently changed his conviction sell rating on Infinera and changed it to neutral. Why and what for? Is Infinera that new customer? No one outside of Lumentum really knows for sure, but Doug Clark may have updated his rating, just in case.
Infinera has been holding their cards very closely to their chest on the Metro market front. There are few hints from last quarter’s conference call, which I’ll share, and leave it to you to connect the dots if you believe something is there. Regardless, the component manufacturers are all seeing strong demand - and something just has to give.
A note on Infinera’s Metro RFP prospects - from the last quarter’s conference call
To recap what we have as far as Metro prospects are concerned, here’s what we learned from Tom Fallon in last quarter’s conference call:
There is a wholesale tier 1 that we do in Europe that we have had a very good relationship with in their wholesale business. And we have never been invited into their domestic network because one of their rules is you have to have end to end.
Not long after we did the Transmode deal, we were invited to quote on an end to end within that PTT’s domestic network. We have not won yet, but we have now been invited in for the first time. I think that is a very good opportunity.
There’s another customers that we have that has been a long-term customer mostly in subsea, and we’re now talking with them around Transmode product that they are very interested in. They weren’t interested in Transmode before not because the technology wasn’t good, but they did not need another vendor. So I think that is a good opportunity.
We have a large PTT or tier 1 in Mexico where both of us were independently selling to them, but more opportunistically versus strategically. I think we had the opportunity and the conversations are occurring of maybe we can move this into a strategic relationship.
Concluding remarks:
I will close with a repeat of the remarks queued up from part 2. Metro is the biggest area of risk for Infinera and is likely the biggest area of concern for investors. Until there is evidence of large Metro deployments - which is needed to take appreciable market share - Infinera’s stock will likely just keep pace along with its revenue gains. In other words we won’t see a raise in P/E. However, if evidence of rising market share starts to accumulate (for DCI and Metro alike) I firmly believe we’ll get a boost to the P/E multiple again. This won’t happen overnight and it could take two more quarters of info. Keep in mind, too, the size of the metro market is about to rival the size of long haul, and it starts this year.
Hopefully we’ll get an update on their RFP front on the call tomorrow to tide us investors over while waiting for the second half of Infinera’s growth plan to start.
Best,
–Kevin