INFN - January 2015

Another historical INFN post excerpt, this time from Jan. ‘15. Again, I feel as if this analysis is relevant today. I’m still lovin’ the growth projections for the DCI market…


Prospects for Future Growth
I think that this is a critical lens for focusing on Infinera’s future, so I want to study the clues that management has offered during their recent conference calls.

Let’s first focus on the short-term, starting with CFO Feller’s comments about the 1Q15 guidance: “… our guidance is supported by the continued strong demand for DTN-X on both new and existing routes across our diverse customer base, growing momentum from Cloud Xpress[, an] exceptional backlog entering the year, and some benefits related to calendar year [end] money.…

Infinera’s management doesn’t typically disclose backlog during conference calls, so Wall Street analysts jumped on that comment like… well… all of the analogies that I came up with were rather unflattering, so I’ll let you use your imagination. In any case, management indicated the number was greater than $100 million (and I don’t think they’ll let CFO Feller use the word “backlog” in his prepared remarks in the future). The backlog disclosed in last year’s 10-K, for comparison, was $59 million. This year’s 10-K hasn’t been released yet and the quarterly 10-Qs don’t disclose backlog. Infinera frequently talks about using “time as a weapon”, both from the perspective of gaining business for themselves (because they can deploy faster than competitors) and also from the perspective of giving Infinera’s customers the advantage of promising bandwidth quickly to their respective customers because they know Infinera can deliver quickly. The speed of deployment makes me think that virtually all of the backlog will be consumed during 1Q15. That belief is what prompted me earlier to speculate that management is probably sandbagging guidance. So I think the strong backlog plus interest in Cloud Xpress bode well for the short term.

As Fools, though, our focus should be well beyond the upcoming quarter (although for any technology company, there is only so far into the future that it is reasonable to peer).

Let’s look next at DTN-X. During the 1Q14 conference call, CEO Fallon noted that industry analyst Dell’Oro expects the 100 Gb market to trend up until at least 2018. During the 2Q14 conference call, CEO Fallon again cited Dell’Oro analysis that the core optical switching and packet transport category was expected to have a five-year compounded annual growth rate (CAGR) of 16%. Infinera has repeatedly stated a goal of growing faster than the market. How are they doing so far? Full year 2013 revenues were 24% greater than full year 2012 revenues. Full year 2014 revenues were almost 23% above full year 2013 revenue. Since they released DTN-X, it’s a pretty good trend line.

Cloud Xpress also has the potential to be a long-lived, successful product for Infinera. Industry analyst ACG Research predicts that the Metro Cloud market will grow to $3 billion by 2019 – a 79% CAGR for this nascent market! CEO Fallon pointed out last quarter that there are 12-15 competitors currently in this space (although he expects consolidation to yield fewer competitors in conjunction with the migration to 100 Gb). Even if Infinera gets a small chunk, it’s still a pretty big market. But I think that Infinera sees its photonic integrated circuit (PIC) technology as a real competitive advantage in this space too, so I’m sure their ambitions exceed “a small chunk”.

Beyond Cloud Xpress, we can expect another product to be launched either later this year or early next year. That product will address the so-called Metro Aggregator market and I expect we’ll learn more about that market as the year progresses, but CEO Fallon’s comments last quarter imply that its market size is comparable to Metro Cloud, and maybe even a bit bigger.

As I said, I think it is important to keep an eye on Infinera’s growth prospects. At present, though, the opportunities seem plentiful. The likelihood of at least modest success in these new markets seems to be reasonable.

Instant Bandwidth
I mentioned “time as a weapon” earlier. One of the features that Infinera offers on its DTN-X is called “Instant Bandwidth”, and apparently roughly half of Infinera’s DTN-X customers are choosing this option. Infinera can place a 500 Gb super-channel line card in the chassis, but the line card can be activated in 100 Gb increments, basically with the click of a mouse. This is an attractive cost-savings option for customers who can defer the cost of incremental bandwidth until it is truly needed. The chassis can hold multiple line cards, but of course getting another line card requires more lead time than a “mouse click”. Infinera claims to be the only company in the industry with this capability.


Thanks and best wishes,
TMFDatabaseBob (long: INFN)
Peace on Earth