INFN: Analyst Dmitry Netis on Web 2.0 demand

Found this one on Barron’s. Analyst Dmitry Netis from William Blair (who covers both Infinera and Ciena) was providing an update on Ciena before earnings tomorrow and and talked about how improved Web 2.0 investments should benefit the company. However, the manner in which he presented this information was through insights gathered from Infinera.…

He [Dmitry Netis] also expects the company [Ciena] to benefit from improved Web 2.0 investments, among other catalysts:

Infinera (INFN) noted resumed strength in order patterns with Web 2.0 customers in the first month of 2016. Facebook (FB) revealed strong capital spending plans for 2016, noting $4 billion-$4.5 billion capital budget for 2016, up from $2.5 billion in 2015 (that’s 69% annual growth taken at the midpoint and substantial acceleration from 38% growth in 2015 over 2014). Most of that spending will go into construction of two new data centers in Texas and Ireland. In addition, Microsoft (MSFT) said it will increase investment in data center and capital equipment in the second half of its fiscal year. In the December quarter (fiscal second quarter), Microsoft spent $2 billion on capital equipment, up sequentially from the $1.5 billion invested in the prior quarter.

Ciena may indeed benefit in certain categories of product. But likely not in DCI given what we know about their WaveServer trial.

As for metro, there are two things to watch for on how it could affect Ciena.

First, Ciena will be constrained based on what they can order and receive from their suppliers. They may not meet all of available demand from their customers. This poses a problem for Ciena in maintaining market share dominance in Metro.

Second, Tom Fallon mentioned they are seeing a huge uptake of new RFQs following their acquisition in Transmode. He also told us that at least one of those RFQs is significant, not for its initial order size, but for its future growth potential. This tells us the RFQ is for a significant customer, perhaps a certain web 2.0 customer going through a massive increase in CapEx spend. If Tom can secure these RFQs and use time as a weapon, they will have the means to satiate the demand overage, win a few strategic customers and gain market share. This poses another problem for Ciena.

The benefits of vertical integration and owning your own supply chain will eventually start to sink in.