A progress report on Infinera for Q1 - part 3

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.


Key metrics for the product segment:

  • Infinera agrees with the prevailing market research on the Metro market growing at 9-10% in 2016.

  • 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.

  • 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.



Hi Kevin.

Thanks for this great three-part distillation of your recent analyses. I will miss your board posts, but I completely respect your decision and actually empathize with it. I’ve been marveling at the research behind your posts, having an inkling myself of what it must take. Beyond just the research, you’ve an obvious talent for connecting the data points. My hat is off to you, sir.

I have one question, if you don’t mind, in case you can answer it without further research. I’ve been wondering if front-haul is different enough from metro that it should be considered a separate market. I see you included it with metro in your three-part write-up. Certainly front-haul is more like metro than it is like either long-haul or DCI. But it sits at a pretty different place in the network. Has your existing research told you that front-haul is a subset of metro, or have you had the same thoughts that I have about whether it should be separate? Unless it’s been touched on in an Infinera blog (I gotta start reading those…), I’m not aware that management has drawn a distinction, but they really haven’t talked a lot about front-haul at all. Yet.

Thanks, best wishes and, again, hat’s off!
TMFDatabaseBob (long: INFN)
Peace on Earth


Bob, first, thank you. Your nice note means a lot.

Second, well, you just piqued my interest on that topic and I did a quick search. I didn’t think anyone was looking at this market as a revenue source before, and it looks like it really does belong to a different TAM.


Wells Fargo Securities analysts see C-RAN as a trend that is in the very early innings. SNS Research estimates that global investments on C-RAN architecture networks will reach more than $7 billion by the end of 2016, with investments in RRHs, BBUs and fronthaul transport networking gear. Even if not all operators are on board, C-RAN is likely to play a role in future networks.

I don’t know how much of that $7B market belongs with the actual gear, but I think it deserves some looking into. This is likely a new opportunity for their gear that hasn’t been put into anyone’s model yet.

Best of luck!


Hi Kevin and Bob,

While wireless is not my expertise, I have had a lot of experience with the back haul portion of the network. Just 7 years ago the backhaul was done with T1’s. Then we went to Ethernet and ran 1 gig circuits into the wireless towers. These were all back haul. Some Cell companies did it differently but they have all went to fiber now.

With front haul they are trying to get as much equipment out of the cell towers as possible. There are a lot of ways to do front haul but the primary reason for it is to get some of the equipment back to the Central Office. One way of doing this is to run fiber directly into the Radio Head (RH). Now realize I haven’t seen this set up yet but have read up a little on it. Some Cell companies will put in their own fiber so once they do this I probably will not be involved with their circuits anymore, but some Cell companies will not be able to do it because of the cost of the last mile.

Now here are my thoughts on this and this is what I think will happen in the near future. If the company has their own fiber they will shoot a 1 to 10 gig circuit directly to the RH. There will not be any need for any transport equipment at the Cell Tower. But they will need a Transport equipment at the CO. Now if they do not use the Local Companies for their last mile fiber they will need to build nodes around any cell areas that they are located in. Most cell companies that use front haul will most likely use the local companies for their last mile.

So with that being said I would put front haul into a subset of the metro area unless the cell companies decide to run their own fiber into their huts. Also it is possible that the cell companies could position a node into the local companies central office and pay for dark fiber going out to their sites. If that was to happen I would consider front haul a new market. But as you can see there is many different ways that they could do it, but in the end their Transmode Acquisition is perfect for this.

It just isn’t clear how they will implement it yet but it is clear they want to take more expense out of the towers.


You’re quite welcome, Kevin. In fact more than just welcome. Quite deserving - your efforts have been superhuman, and you deserve a rest. I know that you have a large position, so I can understand the imperative of your research. But the magnitude of your sharing - above and beyond the research - has been intense.

I’ll try to step up my efforts a bit but, frankly, it won’t match what you’ve done recently. But hopefully (with a little help from our mutual friends) it’ll be enough.

My understanding is that C-RAN is the analog (i.e., over-the-airwaves) part of the network located between connection points (like cell towers) and smart-phones or other Internet of Things distributed communicating devices. Infinera’s equipment typically processes data that has already been converted from analog to digital (although I suppose that converting it back to light returns it to analog, in some sense).

Front-haul (as I’m understanding it, and anyone please correct me if I’m wrong) seems to be the equipment between cell towers (and other aggregators of RF signals) and the centralized equipment of telecom providers (and others) that feeds more directly into long-haul equipment. I get the impression that there is an effort to upgrade this part of the network, but I’ve seen little in the way of statistics as to who wants to do this or how much they’re interested in spending. I think it is mostly Tier-1 U.S. telecoms that hang equipment on these (domestic) towers, and that’s a customer group that Infinera has had trouble penetrating. So when I hear about front-haul wins, I get a little excited.

Thanks and best wishes,
TMFDatabaseBob (long:INFN)
Peace on Earth

P.S. I’ve recently added to my (and my family’s) INFN holding mostly because I think Kevin’s analysis of the Inphi-Microsoft threat - and the weak guidance by competitors versus the strong guidance by suppliers - is spot-on. But I accept 100% responsibility for those changes, and I’m not advising you to follow my (or anyone’s) lead without doing your own due diligence. Front-haul strikes me as a interesting wild-card, but it’s difficult to call it much more than that for now.


Thanks, Andy. That is very helpful input on front-haul.

Thanks again and best wishes,
TMFDatabaseBob (long: INFN)
Peace on Earth

This is fantastic work Kevin, thank you again for sharing your efforts! I recently read an industry interview that discussed the massive (and by massive I mean MASSIVE) growth of component usage by Hauwei to build out infra in China. Do you (or anybody else on the board) know which suppliers are getting a boost from that demand (which is closed to INFN)?

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