INFN: SDN is coming, and other thoughts

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This is a crosspost from the Infinera boards. I felt compelled to post it here for the benefit those who still hold Infinera. The upshot: I don’t think all is lost for Infinera yet and the thesis still holds when you cast your eyes toward the horizon. Here is the post:

First, watch this video on Lightreading where Carol Wilson interviews Andrew Dugan at Level 3.

http://www.lightreading.com/services/managed-services/level-…?

If you’ve followed along in this video and paid close attention to everything said by Andrew Dugan (about the technology and the fact that it is already ready) you’ll realize the technology referred to is being made possible by Infinera.

After you’ve watched the video, follow along to another discovery.

Jay Gill of Infinera will be part of a three person panel at upcoming datacenter conference in Virginia.

http://www.tiaonline.org/events/tia-data-center-workshop-oct…

Jay is joined by Bruce Ogden from Level3 and Steve Geffin from Emerson. The topic of discussion: “The Growing Role of SDN in Data Center Operations”.

We know Level3 and Infinera are close partners, so attending a panel discussion together on SDN makes sense. But I didn’t understand Emerson’s role in this, other than one simple observation: heavy industrial companies like Emerson are getting more involved in IoT. These companies are preparing themselves for a new era of revolution and disruption. It is being called the era of the Industrial Internet.

IoT will require massive computational power for machine learning and high volume bandwidth for data transmissions. Looking a bit closer at Steve Geffin, this is what he does for Emerson:

As the Vice President of Strategic Initiatives, Steve Geffin focuses on strategy creation, engagements with key customers and the research of emerging technologies and trends that align with the company’s objectives and future direction.

He is responsible for driving the development of numerous software solutions for the management and control of the physical infrastructure for the data center and telecommunications market.

So, Emerson is driving SDN requirements as well, but from the demands of an industrial IoT platform that sits on top of SDN services perspective (I doubt they are building their own datacenters, but who knows). It’s also likely these three companies have had dealings together to be placed in a panel discussion shoulder to shoulder. Emerson customer of Level3, Level3 customer of Infinera; Working together to define the next generation of networking in the Industrial Internet era.

Thoughts?

Best,
–Kevin

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Thoughts?
So why aren’t they selling like hot cakes and making shareholders money?
A

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Because Ciena is good enough and is coming out with a 400 gig line side card which will be good enough for the metro market. Ciena is the company to beat at the metro level and since Infinera has decided to lower their prices I think this could be a prolonged fight. Also Ciena’s product is very easy to map. I haven’t seen Infineras, but I can’t imagine it being any easier.

Andy

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So why aren’t they selling like hot cakes and making shareholders money?

Hi Ant,

They were selling like hotcakes (pointing to the 20% QoQ rev growth over the past 2-3 years) but your observation is correct: they aren’t right now. As a result they gave a substantially worse than expected revenue guide for the coming quarter.

On top of Andy’s reason already given, they also are losing out on subsea wins and they are seeing a pause of sales in their bread and butter: the long haul market. They have #2 worldwide market share in long haul but spending priorities have moved to the Metro market for now (which is where they are still trying to penetrate and will have a hard time there per Andy).

In the short term it is unlikely you’ll see the needle move much for Infinera, but the long term thesis is still there provided Infinera can establish inroads in Ciena’s territory and continue to execute in DCI, Long Haul, SDN/NFV and Mobile Frontal, and note that these other areas are not at all dead but are growing nicely. The long haul pause is short term only. My notes and links above are evidence that growth is still very much possible and I wouldn’t count them out just yet.

That said, Infinera has reverted back to being a story stock once more. But this story stock has a record of prior success. They were once a story stock in long haul in the earlier part of the decade and they turned that story into a market share gobbling and revenue making machine for the past 2-3 years - right before slamming into a wall last quarter.

Of course prior success is no guarantee of future results and your mileage may vary, etc. It is definitely not a Saul type of stock right now. A resumption of growth and further evidence of market share success will be needed.

Hope that helps.

Best,
–Kevin

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Thanks for the update Kevin.

Given the loss of subsea contrats, the pause in their long haul growth, and significantly the difficulty in penetrating into the metro, are you holding? It seems a story stock with a very long horizon with a technology that

  1. Could be rediscovered at any moment by a competitor
    and
  2. A technology that hasn’t appeared to provide enough differentiation to out-compete competitors.

If you are holding, why? Given that any results seem very far off.
Do you believe that if they succeed in conquering the market, the market will be huge enough and profitable enough to make the risk worth it?

Are we looking at the equivalent or better of an AT&T or Verizon?

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Hi Billy, thank you for asking me those questions and challenging me to defend my thinking.

I am holding for two reasons.

#1) The repeated sell off that brought the stock down at these levels has resulted in a price that assumes 0% growth - indefinitely. I don’t think 0% growth is probable. Infinera’s stock price is currently trading at a discount compared to their peers (in my opinion).

#2) The demand expected from the web scale companies and IoT is staggering. Operators are coming to the realization that they have about 20% of anticipated capacity they’ll need before the end of this decade. Pretty soon deployments are going to skyrocket and technology differentiation is going to matter; those operators will start looking longer term and will look at technology differentiation so they don’t find themselves in such a bandwidth deficit next time around (in my opinion).

Combine #1 with #2 and that is why I am holding. Infinera is one of the few companies trading at a significant discount from their peers compared to the demand that is coming.

To get a feel for that demand, and why I don’t believe Infinera is going away, take a look at a video released today by Andrew Schmitt at Cignal AI:

https://youtu.be/VnIilvG24fQ

Infinera has a very good relationship with the web scale companies, arguably better than any of their competitors. I believe what we’re seeing right now is a rough patch. I’m trying to look further out from the short term, and yes there are still plenty of risks.

Best,
–Kevin

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