By now most of are aware of the catalyst that caused the big drop in stock price for Infinera the other day.
Journalists from Light Reading attended the OFC and wrote back two different pieces on how “Inphi Debuts Data Center Interconnect Gamechanger” and “Microsoft Drops a Data Center Interconnect Bombshell”.
Now that the dust has settled a bit, I think it is important to reflect on the importance of taking a time out to siphon through the details - those precious facts - before jumping to conclusions. We have to recognize that news outlets don’t just sell news, they sell lots of advertising as well. And the biggest way for them to draw those clicks that pay their bills is get you and your eyeballs over to their website. And apparently it’s ok to alter your interpretation by omitting a few precious details. After all, their motivation isn’t to support the interest you have in your stock price, their interest is to sell you the news.
So, from the first article “Microsoft Drops a Data Center Interconnect Bombshell”:
For Inphi, a company that generated revenues of $246.6 million in 2015, the news that it is going to be delivering a new product to an enormous customer, starting during the second half of this year, looks set to move the needle on its share price, which closed Monday down 0.1% at $29.17, and its revenues.
And of course Microsoft might not be the only company that wants this product – it is not exclusive to Microsoft. Light Reading asked Issenhuth if Microsoft had held discussions with the likes of Google (Nasdaq: GOOG) and Facebook about the development: He said they chat about general market developments but that this particular move was one it was leading on its own. But "if it works for us, it should work for them too.”
The implications here are huge. First, by suggesting one particular company’s stock price is about to go up on the news, it strongly suggests some other company’s stock price is about to go down. Click-click-click. Then, it leads the reader over to another easy interpretation. What is good for Microsoft could also be good for Google and Facebook. Click-click-click, and ca-ching-ching-ching.
A reader would ask - which system vendors sell DCI solutions into these three companies? Infinera certainly does. They sell DCI to all three. More so than anyone else. But in case you didn’t follow Infinera, didn’t already know this or didn’t know if they would or could be affected they made sure to point it out:
And then, of course, there’s the impact on the systems vendors such as ADVA Optical Networking (Frankfurt: ADV) , Ciena Corp. (NYSE: CIEN), Coriant ,Fujitsu Network Communications Inc. , Infinera Corp. (Nasdaq: INFN) andJuniper Networks Inc. (NYSE: JNPR) (courtesy of its acquisition of BTI Systems), that have been developing and building dedicated DCI boxes to sell to the likes of Microsoft as well as the telcos. (See Juniper Flies Into DCI With BTI Acquisition.)
“This has potentially huge implications for the purpose-built DCI box vendors,” stated Heavy Reading senior analyst Sterling Perrin. "They have built their products primarily for the Webscale companies, but Microsoft is essentially saying they don’t need them, at least over these distances [80km or less]. And this could mushroom to Google and Facebook – they could do things differently of course but even if this was just Microsoft, that’s still a big hit to the DCI box market, which is still in its infancy. This looks like a big blow," added Perrin.
None of the other system vendors fell as hard as Infinera did the next day. It really was a bad couple of days for the stock. But it was also completely unnecessary, and I implore each of you to reflect on what I write next and if you have feelings about it, express those feelings to Light Reading via email, phone or whatever means you feel appropriate. They did Infinera an extreme disservice this week and I hope to explain to you why.
Ray LeMaistre closes his article: Look out for more details on this development on Tuesday.. This leaves the reader with no more details other than worry if you happen to be an investor who is not in the field. I too was worried and had to review my thoughts and notes to confirm and reassure myself.
On Tuesday we have the next article “Inphi Debuts Data Center Interconnect Gamechanger" from Brian Santo, Senior Editor:
In collaboration with its customer Microsoft, Inphi has released a reference design for a 100G interconnect developed for the specific purpose of stitching together regional data centers so that they can, when necessary, act just like a hyper data center.
The approach enables data centers within 80km of each other to be connected almost directly switch-to-switch, running Ethernet essentially directly on DWDM, with the only equipment between the switches being the necessary amplifiers and multiplexers/demultiplexers.
In other words, the technology will, over distances of 80km or less, obviate the need for the kind of dedicated data center interconnect systems that have been developed by the likes of Ciena, Infinera and others. The approach will, of course, also eliminate the extra interconnect otherwise needed to integrate those systems. Furthermore, data center operators will save on the energy they will no longer have to draw to power those systems.
So, naturally Infinera’s stock price falls. And it falls a lot. Why? Because of what is not represented. Completely missing is 1) just how much of this market represents 80km or less 2) just exactly how accurate is that 80km proclamation and 3) just exactly when will this product be available on the market. Also not mentioned is a fact that Infinera (and others) already HAD direct connect solutions years ago but evolved their portfolio as customer needs changed. Those same customers who wanted the flexibility and agility gained from coherent solutions. Having this information to go along with the alarming proclamations would provide some very important context to those who don’t understand the history of the network much less speak optical transport every day - and thus allow the reader to process the information appropriately.
Turns out that 80km reach is a theoretical limit, not the one the market will see anytime soon. And it also turns out they’re just coming to a 40km trial and they “hope it will work”. In reality, from experts at the OFC who know about direct connect solutions, the practical application for this is likely around 20km or less. Guess what? The solution vendors already know this and some of them even have solutions, too. Hence the quote from Alex Henderson “We are completely surprised. Not by the announcement, but by the reaction.” The shorter reach DCI application was largely anticipated - by everyone in the network space - however, the “the vast majority of the DCI and Metro markets require coherent, not Data Comm modulation technologies, and these are the link lengths targeted by Ciena and Infinera." Turns out this smaller reach market is a known element - and it also turns out it’s an area Infinera really isn’t interested in.
A few angered and better informed individuals posted comments to the articles challenging the implications. And buried within these comments we have Brian Santo - responding, clarifying, and walking back his tone from the fire and alarm. This time writing with equal balance and consideration for Infinera, and presents factual information for the reader to processes. In other words, proper journalism.
User Rank: Light Sabre
3/24/2016 | 2:53:31 AM
More on this
Keep in mind that this is for a specific distance segment. The technology for interconnect within the data center – <2km – is more or less settled for now. The technology for >100km is more or less settled for now. Inphi’s tech is for distances in between, and the applications for those distances are specific and (at least at the moment) limited: the big one for Microsoft is connecting regional data centers. Microsoft will still need to connect it’s mega datacenters, and not much is going to change there. The new Inphi tech is less important to companies that rarely do anything but mega datacenters (or hyper datacenters, pick your terminology), such as Facebook and Google, for example.
We mentioned Infinera, but they say they actually don’t sell a lot of DCI boxes in this particular application, but the companies that do sell boxes in just this applications will see diminishing sales, but DCI boxes will be obviated in just this application. DCI boxes will continue to be required in other applications.
Not a commercialized product yet? Yes, true. But I cannot imagine why Microsoft would tell me they are definitely deploying this technology at scale in the second half of this year unless they were already fully convinced it will work.
User Rank: Light Sabre
3/24/2016 | 9:50:36 AM
Re: More on this
OK – but the claim in big letters is that this is a GAMECHANGER. Is it that? The qualifiers suggest maybe not so much.
User Rank: Light Sabre
3/24/2016 | 11:50:04 AM
Re: More on this
When you see the revenues that Inphi is expected to realize from this, it looks even less spectacular. This is an excerpt from Barron’s:
Douglas Freedman with Sterne Agee CRT, who rates Inphi his “top pick” among small-cap names, writes today that the partnership is "a positive both financially and strategically” and that it "could represent an incremental revenue of $8M and $25M in F2016 and F2017, respectively.”
User Rank: Light Sabre
3/24/2016 | 12:20:21 PM
Re: More on this
"In other words, the technology will, over distances of 80km or less, obviate the need for the kind of dedicated data center interconnect systems that have been developed by the likes of Ciena, Infinera and others.” So now it’s Inphi’s design “obviates” very little if any Infinera gear. Thanks for the correction Mr. Santo.
And there you have it. Journalism at it’s finest. Everything implied fully walked back, but buried in a comment section. I hope you hung onto your Infinera shares these past few days. If you didn’t I suppose you’re about ready to be pretty darn angry. I don’t blame you. I would, too. Please, go do something about it.