Discussion on market demand and growth prospects

Folks, this is a repost from the paid-for Infinera message boards. It seemed appropriate to include here for the folks who follow Infinera. Comments are most appreciated and welcome.


A couple of threads ago a few analyst research articles were provided attempting to size up Infinera and making a call on where they were headed. The problem with these articles is they come from the perspective of a sell-side analyst which is someone with a finance degree rather than a true market research analyst who focuses on the the entire industry.

Below are references to two articles that show high level information on growth, size, and anticipated demand in the network equipment space. The articles are written by Infonetics Research. I do not have access to the written market research material myself, but, I do have a registered account with IHS so I can download and review some of the highlights.

The first article was published around mid-August.

IHS forecasts huge growth for 100G optical ports

http://www.lightwaveonline.com/articles/2015/08/ihs-forecast…

Coherent 100G port shipments for metro regional fiber-optic networks grew a whopping 145% last year and are expected to grow 118% more this year, predicts IHS in its report, “IHS Infonetics 100G+ Coherent Optical Equipment Ports.”

"Adoption of 100G coherent technology has surged, first in long-haul networks and now becoming a material part of metro networks,” observes Andrew Schmitt, IHS research director for carrier transport networking. "100G is poised to explode in 2016 as new equipment built specifically for the metro reaches the market, allowing 100G technology to economically reach new portions of the network such as metro edge and metro regional.

In 2014, growth in 100G port shipments was led by massive purchases in China from China Mobile. Most of 100G coherent technology deployed last year was for long-haul applications, but metro regional (<600 km) and metro access (<80 km) applications will start ramping next year. In 2017-2018, 100G coherent will make another quantum jump, displacing 10G in the 80-km or less metro access market, IHS predicts.

A small number of systems houses control the majority of 100G market share: Alcatel-Lucent, Ciena, Huawei, Infinera, and ZTE. The only potential catalyst for shifts will come from deployment in shorter reach metro and data center applications - the next growth vector for 100G.

The IHS report provides granularity for 100G+ coherent and non-coherent port shipments on optical transport equipment, tracking the evolution of 100G as operators increase the flexibility and capacity of their networks. It tracks 100G by application, including metro regional, metro access, and long haul, as well as specific technology derivatives such as flex-coherent and direct-detect 100G.

The second article was recently published earlier in the month.

http://press.ihs.com/press-release/technology/2016-breakout-…

2016 a Breakout Year for 100G Technologies in Network Equipment Markets

“Deployments of 1G and higher networking ports continue unabated by both enterprises and service providers as they seek to bring capacity in line with the demands placed on their networks. In general, the higher the port speed, the higher the growth rate, which means that 40G and 100G are the key growth segments of the market.

“2016 is poised to be a breakout year for 100G technologies as coherent 100G ports ramp in metro networks, and companies such as Google, Microsoft and Amazon introduce 100G Ethernet switching technology into their massive hyperscale data centers.”

NETWORKING PORTS MARKET HIGHLIGHTS
• 1G/2.5G/10G/40G/100G port shipments are anticipated by IHS to exceed 700 million in 2015, totaling $45 billion
• 100G port shipments more than doubled in 2014 from the prior year, reaching 163,000
• IHS forecasts worldwide 100G port revenue to grow at a 137 percent compound annual growth rate (CAGR) from 2014 to 2019

Both articles link to paid-for market research pieces. As I mentioned, I don’t have access to specific information, but with my “guest” account I am able to see some interesting pieces of information, such as the TOC. Below are a few of the TOC highlights:


TOP TAKEAWAYS: 1G/2.5G/10G/40G/100G REVENUE REACHED $___ IN 2014, ON TRACK TO HIT $___ IN 2015

Port shipments and revenue on steady upward path through 2019

40G moving from “old” service provider 40G to “new” enterprise 40GE 

Exhibit 6 40G Growth Spurred by 40G WDM and 40GE Data Center Switches 

100G won, 40G lost in the service provider market

Optical ports moving to coherent 100G

Exhibit 7 Service Provider Equipment Drives 100G Ports in Early Years 

More service provider port revenue than enterprise; 10G and 100G are growth areas

Exhibit 12 Service Provider Port Revenue: 1G Declining, 100G Outgrows 40G 

Geography: Asia Pacific leads, little change ahead

MARKET DRIVERS: TOP DRIVER IS UNRELENTING BANDWIDTH GROWTH 

The numbers in the first line were blanked out in the TOC summary, but they forgot to bleep the second number on an advertising page where it shows the size being at $45B. This is the spend for all network equipment and it is expected to land at $45B for the year. Wow.

Last point to note, the report summary also highlights changes since the last report (these are quarterly reports). In the list of vendors Infinera shows up along with their list of products, and CX is the product with the highlight, meaning, something new and interesting about CX is included in this quarter’s report which is different from the prior quarter’s report. None of Infinera’s other products have an update to their projection. Infinera’s Transmode products are still listed under Transmode. None of their products had a highlighted change.

I will refrain from drawing conclusions directly, but leave it for you to decide how well Infinera is positioned and what their prospects are with respect to their current market share and their TAM for the future.

Best,
—Kevin

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Also, the TOC for the first article and link to where it lives on IHS:

http://press.ihs.com/press-release/technology/ihs-forecasts-…


TOP TAKAWAYS: 100G IS THE NEW 10G

COHERENT OPTICAL EQUIPMENT - TRIGGERING THE OPTICAL REBOOT

Vertical Integration and the Impact on the Supply Chain

Notes on 100G+ WDM Coherent Optical Equipment Port Market Share

Huawei the Market Share Leader; **Close Race in the West**

Market Share Shifts - 2012 to 2014

COHERENT 100G+ OPTICAL EQUIPMENT PORTS - FORECAST

Metro Market Surges -- 16-QAM and CFP2-ACO

The 100G Metro Access Opportunity

100G Deployment Forecast Model Assumptions

Best,
–Kevin

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Finally, just to show that Infinera is paying attention to reports like these:

http://www.infinera.com/ihs-forecasts-huge-growth-for-100g-o…

Best,
–Kevin

Sorry, I cannot resist.

Here are some conclusions.

Huawei is the Market Share Leader, but the report tells us it is a close race in the West.

A small number of systems houses control the majority of 100G market share: Alcatel-Lucent, Ciena, Huawei, Infinera, and ZTE.

ZTE is also based in China, so that leaves Alcatel-Lucent, Ciena and Infinera as the firms addressing this space from the West.

Here’s what else we know from back in late June:

http://press.ihs.com/press-release/technology/ciena-cisco-an…

Ciena, Cisco and Infinera Lead 2015 IHS Infonetics Optical Network Hardware Scorecard

IHS (NYSE: IHS) today released excerpts from its 2015 IHS Infonetics Optical Network Hardware Vendor Scorecard, which profiles and analyzes the 10 top revenue producers of optical hardware: Adva, Alcatel-Lucent, Ciena, Cisco, Coriant, ECI, Fujitsu, Huawei, Infinera and ZTE.

The only report of its kind, IHS Infonetics’ scorecard evaluates the leading optical hardware vendors on criteria using actual data and metrics, including market presence (market share, financials and buyer feedback on product reliability and service/support) and market momentum (market share momentum, software intensity, buyer feedback on vendors’ technology innovation). The report includes a Leadership Landscape Graph that classifies vendors as “Leader,” “Established” or “Challenger” based on their scores in these criteria. This approach eliminates subjectivity and ensures vendors are assessed accurately and fairly.

“The optical equipment market is fracturing into one of traditional service providers and another of competitive service providers and internet content providers. The leaders in our 2015 optical scorecard—Ciena, Cisco and Infinera—are focusing on one of these markets or have the necessary scale to address both with independent solutions,” said Andrew Schmitt, research director for carrier transport networking at IHS.

OPTICAL SCORECARD HIGHLIGHTS

Ciena is hitting on all cylinders as the second-largest WDM optical equipment provider, seizing market share in 2014 while also making progress in the packet-optical transport domain

A bulletproof balance sheet and excellent customer perceptions put Cisco in the driver’s seat; Cisco has first-mover advantage in integration of the IP and optical layers

Infinera is the ne plus ultra of the rapidly-growing internet content provider and data center interconnect market, leading with outstanding customer perceptions, large market share gains and tight finances

Here we have some more data points on how well these three are leading or are positioned. Here, Alcatel-Lucent is mentioned as poised to reverse a multi-year decline, but not in the top three for this particular list. In addition, Cisco is not in the 100G space, so that leaves us to compare Ciena with Infinera as “the leaders from the West” best positioned to address the emerging needs in 100G.

We also have this interview with Tom Fallon, back in April before the Transmode acquisition:

http://blogs.barrons.com/techtraderdaily/2015/04/22/infinera…

The key, he tells me, is that the fiber optics market has consolidated, where there are just a handful of prominent vendors, including Infinera and Ciena (CIEN), with outfits such as Nortel and Marconi having slipped by the wayside, similar to the way the disk drive industry consolidated around Seagate Technology (STX), Western Digital (WDC), and Toshiba (6502JP):

This is a new era where there are winners. Survival means I can never return money to shareholders; we are demonstrating an ability to make free cash flow and profit at a $700 million-a-year run rate [revenue]. Our largest competitors are at a couple billion dollars of run rate. We can make tremendous profit. It is no longer about, Will there be survivors? it is now about, Will there be winners. My belief is, there will be winners, and we will be, without question, a new winner. We are going to earn at least 50 points of gross margin in future. We announced 47.8% this last quarter. Our interim milestone was set at 45%, and we beat that the last two quarters, and we will update that soon. At that margin level, you can build a really, really nice business. Look at storage and disk drive industry back in the ‘80s. They never made any money. There are two or three guys left now, and they make money. We’re going through that industry consolidation, and it’s being driven by those who have the wherewithal to make significant bets.

I point out that Ciena already has a capital returns program in place, but Fallon sees them as no model for winners:

Ciena, they do okay, I don’t want to badmouth Ciena. But at their run rate, they should be making a lot more on the bottom line; I will be, when we’re there. They’re not a model for what we want to be. Our market cap is higher than Ciena’s because we are growing 20%-plus per year, making 10% operating profit on the bottom line. If you look at our revenue growth versus our operating income, our operating income is growing faster, and it’s because of vertical integration. We make more stuff ourselves, such as the PIC [photonic integrated circuits]. There was a lot of skepticism for a period of time because we weren’t creating money, but to have a fab, as you start growing your volume, the incremental cost isn’t that much greater. We’ve demonstrated that over the last few years, without our gross margin going up from about 40% two years ago.

We also talked about Infinera’s move from its home turf in long-haul transport communications pipes to the metropolitan access market, where individual customer accounts are connected to the backbone. Toward that end, Infinera announced on April 9th its intent to acquire Transmode of Sweden.

Says Fallon, “They are a metro aggregation services company, and that is a compliment to our portfolio; they deliver services at the edge that are carried across the long haul.”

Finally, we have slides from the recent Insight Infinera 2015 event. These slides are extremely dense and packed with really useful information about their products, their markets and their addressable potential. They are really quite good:

https://www.infinera.com/wp-content/uploads/2015/10/Insight-…

If you read nothing else, skip to slide 10. On the page it will show how well Infinera has been trending since June of 2012 (when their DTN-X for 100G was introduced). Their revenue growth clocks in at 2.6x the revenue growth of their nearest competitor, and that competitor is Ciena.

Ciena reports earlier than Infinera. They reported about a month ago. Nothing shocking happened and are trading pretty much at the same level as when they last reported.

If we draw that into perspective, looking at the trend line on TTM Revenue growth, Infinera should continue to outpace their competitors if that trend continues, which I have no reason not to believe if we are paying attention to what Tom Fallon is telling us. Which means we should have a higher revenue growth rate than what Ciena just reported.

Another point to ponder as we look to compare Ciena and Infinera. You cannot compare Ciena’s P/E with Infinera’s P/E. That is because Ciena has a negative EPS. That’s right, negative.

Eventually, maybe in a few years or maybe sooner, the market is going to start to show appreciation for the “winners” vs those just “surviving”. Negative earnings just aren’t going to cut it.

Best,
–Kevin

15 Likes

Kevin that is a lot of great information and I really appreciate the post.
Only a few times in decades of investing have I managed to “catch the wave” as it were. And I think I managed that with INFN, though it took a lot of years buying at the lows and trusting that the team at INFN was on the right track. I am really excited to here the next quarterly report and your take on it as well.
Mike

1 Like

Kevin, What an incredible collection of information. Thanks ver, very much for all the hard work!

Saul