INFN:CX as an integral part of DCI architectures

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This is a crosspost from the Infinera boards… comments are most welcome.

Just putting a one more thing together as I compare notes from the last conference call and look for supporting evidence on what Tom and company said they are seeing. Infinera just may be developing a lock in the market for datacenter build outs amongst the ICP players for its Cloud Xpress and DCI. As of the last conference call, about 20-25% of total revenues came from the ICP players. We’ll find out more on how well that share penetration is going in just two days.

From the last conference call: http://seekingalpha.com/article/3611716-infinera-infn-thomas…

Moving now to Metro data center interconnect. We made excellent progress in Q3, materially growing revenue and starting to ship the 100 GigE version of the Cloud Xpress. We now have 14 customers and see a nice pipeline of opportunities on the horizon. Importantly, our largest Cloud Xpress customers have already placed follow-on orders suggesting that the platform is a strategic element of their data center architectures.

Going forward, we expect revenue acceleration attributable to increasing demand for our 100 GigE client interfaces as machine-to-machine traffic is driving data center operators to upgrade their switching infrastructures to support massive bandwidth demand growth. We intend to leverage our time-to-market advantage and technological differentiation to further establish Infinera as the market leader in data center interconnect.

So, what’s driving this demand, why have they witnessed it so far and why are they seeing more of it in their pipeline?

Datacenters: OIDA report reveals disaggregated datacenter roadmap for photonics

http://www.laserfocusworld.com/articles/print/volume-51/issu…

The OIDA report’s intention was to address the emerging topic of the disaggregation of datacenter networks with regard to photonic components. That is, silicon photonics and other optical components are thought to be capable of converting today’s inflexible datacenter network into a more modular system, where motherboard, processor, network interconnects, and even software modules would be interchangeable and standardized such that multiple vendor options could be “plugged in” as separate devices acting independently and easily upgraded for truly scalable datacenter operation.

From the workshop presentations and discussions, several key findings, proposed disaggregated architectures, and gaps/opportunities in datacenter optics were presented and distilled into the OIDA report.

Key findings

The development of efficient silicon photonics and other hybrid or integrated semiconductor and optical architectures has long been the passion of big players like Intel (Santa Clara, CA) and IBM (Armonk, NY) and numerous photonic integrated circuit (PIC) transceiver manufacturers such as Infinera (Sunnyvale, CA) and Luxtera (Carlsbad, CA), and is now part of Facebook’s trajectory with its Open Compute Project (OCP; www.opencompute.org). While details of a disaggregated datacenter differ among the players, all of them agree that fast optical interconnects enable a modular architecture.

Best,
–Kevin

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Nibbled a bit more today under $13.50. Combined P/E and growth prospects for the business and the trajectory sales appear to be on make this an exciting opportunity I am willing to test out in hopes of a solid return. Anxious to hear company #'s and managements comments after hours this Thursday!

Thanks for your continuing updates on INFN Kevin. Many here appreciate your efforts.

Long INFN

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Thanks for your kind words KM.

In my bones, I anticipate good things. I’m also anticipating some form of M&A announcement relatively soon. Before anyone jumps all over this, I don’t have anything concrete to back that up, only my spidey senses.

Here’s a recap on what is driving my speculation.

From last May:

https://www.arista.com/en/company/news/press-release/21-comp…

Arista Networks Appoints New Chief Financial Officer

Arista Networks, Inc. (NYSE: ANET) today announced the appointment of Ita Brennan to the position of chief financial officer effective immediately. Ita comes to Arista with more than 20 years of financial management expertise in the high technology industry.

Prior to joining Arista, Ita served as CFO of a stealth start up firm in the energy sector from February 2014 to May 2015. Prior to that she had an eight year career at Infinera Corporation (NASDAQ: INFN), an intelligent transport networking company, most recently as CFO from July 2010 to February 2014 and Vice President of Finance and Corporate Controller from July 2006 to July 2010.

From the last conference call:

http://seekingalpha.com/article/3611716-infinera-infn-thomas…

Thomas J. Fallon - Chief Executive Officer & Director

Yeah, I assume two issues, I’m going to start with the consolidating industry view. And I’ve been I think pretty clear on that for a long time. The industry is going to continue to consolidate. I believe that with all of my heart. I think there’s going to be new winners, and there’s going to be a bunch of losers. I think that part of the winner’s ability is having the end-to-end portfolio. It’s one of the reasons we bought Transmode and are extending into new markets. I think one of them is how much R&D can you spend to own vertical IP and making sure you differentiate around that IP. This industry is becoming more expensive to lead in, and there’s only going to be a handful of people I think who have the capacity to do that; we clearly are one of them. And quite frankly, we are investing in the IP before we could afford to, because we knew we had to.

From last November:

http://www.fool.com/investing/general/2015/11/03/the-next-te…

The Next Tech Buyout Wall Street Doesn’t See Coming

Tim Beyers (Cisco acquiring Infinera): The Internet isn’t nearly as fast as it needs to be. No one knows this better than Cisco Systems (NASDAQ:CSCO), which regularly tracks the volume and velocity of growth in data flowing to and through the vast infrastructure that powers the web.

You can see the company’s many accurate forecasts at its Visual Networking Index (VNI). Its best call dates from 2010, when the company forecast 34% annual growth in Internet Protocol traffic from 2009 to 2014. Cisco’s tracking has since put the actual at 35.6%. That alone should be enough to get investors paying attention when company researchers say that, come 2019, global IP traffic will reach 168 exabytes per month – the equivalent of transporting 58 million DVDs each hour.

Can you imagine today’s Internet infrastructure handling that when a database error can cripple even the most powerful cloud infrastructure, taking with it significant portions of the consumer web? I can’t either, which is why I’d expect Cisco to bid for the technology needed to update the backbone of the Internet. Infinera Corp. (NASDAQ:INFN) has a good chunk of it, and it’s priced within reach at a market value of $2.8 billion as of this writing.

That may not last long, though; demand is soaring. Revenue climbed 33.9%, and cash from operations rose 45.7% year over year in the third quarter as customers paid up for Infinera gear that delivers data at 100 gigabits per second over long distances, uniting metropolitan areas and beefing up carrier networks.

That’s just the sort of technology Cisco needs to handle the data tsunami that its own tracking says is coming in 2019. Expect a bid for Infinera well before the first wave hits.

The interesting thing to note first here is former Infinera CFO Ita Brennan, who still holds a substantial amount of Infinera stock, became CFO for Arista. As someone familiar with Infinera’s books, she’s had the past year to structure Arista’s accounting methods to be in alignment with what she already knows.

And I also believe it is because of this reason, this motivation, that Cisco aggressively went after Arista with lawsuits to try to put a stop to any notion of an M&A deal between these two companies. They’re playing hardball, and why wouldn’t they? They’ve got a lot to lose, especially with bandwidth demand set to explode over the coming years.

We’ll see who exactly wins in the end of course. But these are just a few more things to think about and driving my sense of speculation.

Best,
–Kevin

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Kevin, what are your thoughts about management’s comments about soft patches in the quarter to be reported? In this market, I wonder if there will be even better opportunities to swoop up shares if the quarter is soft like management discussed. It doesn’t seem like people are looking very far ahead right now :wink:

Neil
Long INFN

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Kevin, what would Infinera gain from letting themselves be acquired by either Cisco or Arista?

Thanks again for all of your great work.

Neil

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what are your thoughts about management’s comments about soft patches in the quarter to be reported?

Neil,

The good news here is that it was an off-remark from Tom about two deployments being shifted from Q4 to Q1. When asked about the size of those deals, Tom said he did not have enough accurate information to report as they were not included in the guidance model for Q4.

So, what they guided on does not include those two deals. I expect we’ll see them included in Q1’s guidance.

Brand and Tom also did not include any expectations on year-end budget spend in the guidance view.

This means they guided on what they had on the pipeline for the quarter, and were projecting roughly the last half of the quarter, having issued that guidance with the quarter already half over and knowing what was already on the books.

Would love to hear what everyone else is thinking on the matter, too.

Best,
–Kevin

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what would Infinera gain from letting themselves be acquired by either Cisco or Arista

I don’t think they want to be acquired at all. But, I do think their view of having an end-to-end product portfolio, and being a one-stop shop for networking is part of their goal. With that, I would see a merger with Arista as means to achieve that goal.

This business of massive upgrades is going to end eventually, only to be picked up again later another upgrade cycle. But, there will never be an end for some form of network gear as long as there are people on the planet.

I think the advantage here by combining companies is to be able to sell all forms of products in the marketplace between and during those cycles, and to bring in sufficient volumes to drive higher operational margins. Hence to build a company to last through both up and down periods. Literally, to take the crown over and be the 21st century network provider, and building those networks around their IP.

That’s sort of the way I see it. Tom is a very aggressive fellow and he wants to win. Winning is owning the marketplace and becoming “what the network will be”.

Best,
–Kevin

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The interesting thing to note first here is former Infinera CFO Ita Brennan, who still holds a substantial amount of Infinera stock, became CFO for Arista. As someone familiar with Infinera’s books, she’s had the past year to structure Arista’s accounting methods to be in alignment with what she already knows.

And I also believe it is because of this reason, this motivation, that Cisco aggressively went after Arista with lawsuits to try to put a stop to any notion of an M&A deal between these two companies. They’re playing hardball, and why wouldn’t they? They’ve got a lot to lose, especially with bandwidth demand set to explode over the coming years.

We’ll see who exactly wins in the end of course. But these are just a few more things to think about and driving my sense of speculation.

Thanks Kevin. Interesting. Some questions to ponder:

  1. Since ANET and INFN are already working together and since INFN is not currently joined at the hip to ANET, do you think that INFN is worth more to CSCO separately as opposed to CSCO having to buy a larger and more expensive INFN-ANET combo? How much overlap there between ANET’s and CSCO’s offerings? If there is significant overlap then having to buy ANET as a part into order to get INFN is less attractive.

  2. Do you think that a INFN doesn’t want to sell out to CSCO? I vaguely remember hearing that somewhere. If yes, then would possible reason for a INFN-ANET merger might be to preempt and prevent a CSCO takeover?

  3. The CSCO lawsuit against ANET is creating a cloud over ANET. What do you think about this lawsuit as a risk? Perhaps this is why a merger between INFN and ANET hasn’t happened already. Perhaps this cloud is better isolated to ANET rather than to an INFN-ANET combo???

Chris

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Chris,

1) Since ANET and INFN are already working together and since INFN is not currently joined at the hip to ANET, do you think that INFN is worth more to CSCO separately as opposed to CSCO having to buy a larger and more expensive INFN-ANET combo? How much overlap there between ANET’s and CSCO’s offerings? If there is significant overlap then having to buy ANET as a part into order to get INFN is less attractive.

Arista and Cisco manufacture ethernet switches that compete directly with one another. Cisco is not interested in acquiring Arista for anything. In fact, they claim Arista stole their CLI software interface from them, where Arista asserts CLI has become a programming standard that all switch manufacturers need to support in order to be taken seriously. Cisco is already feeling threatened by Arista. If they weren’t they wouldn’t have waited 10 years to discover this “lawsuit”, they would have gone after them immediately. (see: https://www.arista.com/blogs/?p=1301)

A combined INFN and ANET is an even bigger threat. If that were allowed to happen Cisco would find themselves with depleting market share on first their bread and butter (against Arista) and then on the future of networking (with Infinera).

http://www.barrons.com/articles/be-cautious-on-cisco-juniper…

Here in early 2016 we see three Telecom Equipment industry trends worth discussing.

These are: 1) The backdrop for U.S. wireline-access demand is surprisingly strong; 2) the 100G optical supply chain has been heating up; and 3) we remain cautious on data networking companies like Cisco Systems (ticker: CSCO ) (rated at Neutral, $29 fair-value estimate) and Juniper Networks ( JNPR ) (rated at Neutral, $31 fair-value estimate) in 2016 as software-defined networking (SDN) and network functions virtualization (NFV) have another year to mature and to begin to make an impact on the $6 billion-plus edge router market.

For Juniper, specifically, we are not worried about fourth-/first-quarter estimates, but we think the risks increase later in the year. For Cisco, we see downside to consensus revenue estimates as soon as fiscal third quarter (ending April), which is the quarter management will be giving guidance for on the next earnings report in February.

Since that article was published, Juniper acquired BTI. With it, they hope they can participate in the next coming wave of 100G, DCI and metro demand. Cisco needs a catalyst.

2) Do you think that a INFN doesn’t want to sell out to CSCO? I vaguely remember hearing that somewhere. If yes, then would possible reason for a INFN-ANET merger might be to preempt and prevent a CSCO takeover?

From what I inferred through conference calls and various publicized interviews/events, Infinera does not want to be gobbled up by anyone. They want to be the market. So, yes, a INFN-ANET merger would thwart those plans, however Cisco fired a pre-emptive strike as you’ve noted:

3) The CSCO lawsuit against ANET is creating a cloud over ANET. What do you think about this lawsuit as a risk? Perhaps this is why a merger between INFN and ANET hasn’t happened already. Perhaps this cloud is better isolated to ANET rather than to an INFN-ANET combo???

I think that is why they are waiting - to see what pans out from the lawsuit determination. If 100% successful, Arista could suffer an exclusion order that bans import of their products into the US from equipment manufacturers. However, if Arista can create and demonstrate workarounds to the IP in question, then the previously offending CLI-supported units would be retooled and would have to be allowed entry. And that is one of the things Arista has been working on over the past year.

http://www.investors.com/research/the-new-america/arista-may…

Arista May Still Thrive Even If Cisco Wins Lawsuit

Regardless of how the legal battle ultimately plays out, a growing number of analysts sound confident that Arista’s strong technology and customer relationships will ensure robust financial growth over the long-term.

“We’re convinced that, while Cisco will likely win in some of its patent claims, it will not disrupt Arista’s business,” Oppenheimer analyst Ittai Kidron noted in a Jan. 4 report upgrading the stock to outperform.

Guggenheim Securities analyst Ryan Hutchinson offers a similar view, saying that even if Arista is found to have infringed on certain patents, any short-term weakness in the company’s stock price would be “a buying opportunity” thanks to its core strengths.

“We believe that a full injunction against Arista’s products is unlikely,” Hutchinson noted in a report. “In the event of partial injunction, manufacturing and/or R&D workarounds would not be overly difficult. As such, we would focus less on the near-term twists in the legal saga than Arista’s strong momentum, share gains and successful expansion efforts.”

Its latest product update came on Jan. 19, when it announced the next phase of Arista EOS, a Linux-based network operating system that gives customers real-time migration from legacy enterprise silos to private, public and hybrid cloud networking. The new phase features NetDBTM, a network-wide state repository designed to increase network scalability and efficiency.

Best,
–Kevin

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Kevin,

Have you seen the option activity in INFN? The call volume is 60,000+ contracts over the next 2 months while the put volume is 1/3 of that.

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Rizzz,

Does that mean people are bullish?

Brian