Infinera down today after Ciena reports

Infinera is lower in sympathy with Ciena’s Q1 guidance released today. Ciena reported revenues and earnings above street expectations, but, they issued guidance under the street expectations. They guided for $555-$590M and the street was expecting $637M.

They claimed it was a timing issue with their customers and that the conditions should resume/improve after the next quarter. I’ve heard from Andy (buyandholdisdead) that January is notoriously slow and service providers are reluctant to make major changes during the holidays.

That said, Infinera makes their plans based on the same information about their backlog of orders and their customer demands, yet Infinera (who also guides conservatively) guided for $253-$263M, which was OVER consensus estimates of $250M.

The difference in the reporting schedule is about a month, but a majority of orders for both companies have been locked down, planned and understood for the upcoming quarter horizon. The companies Infinera and Ciena sell to plan way well in advance of anticipated needs. Infinera said there was a chance one or two minor orders could be pushed to the following quarter, yet, they still felt comfortable issuing their guidance above the street. If those customers do end up sneaking into Q1, it would mean yet another blowout quarter. But if they don’t, Infinera’s numbers will still likely be above estimates.

My suggestion is to ignore this short term noise / distraction from Ciena and focus on what Infinera already told us. This is a great time to buy the dip.

Best,
—Kevin

16 Likes

Thanks Kevin. I’m still learning about Infinera. Do they compete directly with Ciena? Could Ciena have guided down because Infinera is taking share away?

Thanks,

Brian

Brian,

Infinera and Ciena are direct competitors and offer products to the same sets of customers.

Historically, Ciena has made larger inroads into the traditional customers of optical equipment, the Telecom companies, while Infinera is making inroads into those historically non-traditional purchasers of optical equipment, the Internet Content Providers. Common to both companies are the cable providers, whom Infinera and Ciena both serve.

Your Telecom companies consist of AT&T, Verizon, CenturyLink and others. Those are the traditional customers of Ciena, although Infinera provides their long haul solution to CenturyLink. More on Infinera’s long haul solution later.

Your Internet Content Providers (ICPs) consist of Google, Amazon, Microsoft, Amazon and others. These are the customers that have more to risk from an unsatisfying user experience. As a result, they have been picking up the slack where the Telecoms have stopped short by building out large data centers across the world with local POPs (point of presence) in various metro regions to make the user experience even better. These are the companies that have the faster growth demands for the optical equipment manufacturers, and demands from the ICPs are expected to outpace the Telecoms expenditures in a very short order. These are the customers of Infinera, although again there is some crossover here with Ciena and others selling into the ICPs. Infinera has a good mix of customer types coming from every industry, but the ones with the highest growth impact for them will be the ICPs, and also datacenter companies like Equinix and Rackspace, not the telecoms or cable customers.

The optical equipment market growth coming from traditional telecom and cable will flatten to steady state soon, and their sales are very lumpy having a seasonal component to them (they tend to buy/build in the first half of the year). Because Infinera has a such a diverse mix of customers, any given share of lumpiness tends to smooth out over the year for them.

Infinera has the largest market share of long haul equipment in North America. They grew their share by offering a superior solution and carved out this piece by taking a huge risk - by forgoing an entire upgrade cycle (from 10G to 40G) and instead decided to tackle the 100G cycle coming ahead, thus leapfrogging the competition when 100G demands came faster than anyone expected. Infinera is viewed as having the premier solution in this space. Fast speeds with zero down time and unheard of reliability.

ICPs are very interested in what Infinera has to say and what they are building next - and what they are building next was specially designed just for them. Their new datacenter and metro aggregation products were purpose-built for the ICPs. They know this customer profile well and this particular customer has a lot of dollars to spend and they are not afraid to spend it, unlike the Telecom and cable companies who have traditionally been very price sensitive and will go with the cheapest solution available (not the best solution available). ICPs are not price sensitive, they are value sensitive. If their users perceive any form of glitch or gotcha, it’s their reputation on the line. Think of your AT&Ts, Comcasts and Verizons and their customer experience support and compare that with your Apples, Netflixs and Amazons.

Hopefully this provides a little bit of context on both companies, and I will conclude with this: if you look at Infinera’s track record and what they did in the long haul market, and the share they took from their competitors, then yes, Infinera is likely to do a three-peet with their metro and datacenter products. Whether we are seeing this effect so soon I don’t know. We’ll have to wait until January 28 when Infinera reports earnings and their version of next quarter’s guidance to find out.

Best,
–Kevin

15 Likes

Hello Kevin,

Many thanks for keeping us up-to-date on INFN. As you say they are very solid in long haul. At this point, IMO, the market is giving them little to no credit for their recent foray into Metro. With the acquisition of Transmode they now offer an end to end solution. With the increased emphasis on security and network efficiency, more customers are attempting to limit the number of vendors in the network.
INFN believes that their long haul leadership position will help them ramp the Metro products. Today, the market says “wait and see”. Big upside if they do.

Best regards,

Mike

3 Likes