On days like this it is easy to forget all the great things Infinera just told us on their earnings call, and what they keep telling us in subsequent investor conferences - just a few days ago.
Why does Infinera follow Ciena lower? The answer is they shouldn’t. And all we have to do is look back at the notes from the last conference call. These notes were from just 3 weeks ago. They were repeated again in the conferences this week. Absolutely nothing has changed.
Infinera will grow faster than their peers THIS VERY QUARTER - the quarter we’re in - the quarter everyone is fretting about with Ciena. That means either 1) demand is really quite good for Infinera’s products or 2) they are taking market share or 3) both.
Here are the notes for those with foggy memories - organized by concern - and followed by the Q&A response.
On the macroeconomic condition:
George Notter, Jefferies LLC - Analyst
I guess I’d maybe just start by the economic environment that we’re in. I mean going through the earnings season lots of commentary from a variety of IP infrastructure companies about softness in emerging markets and customer slowing at quarter and. Are you seeing any of that from your customer base? What’s the perspective there?
Tom Fallon, Infinera Corporation - CEO
I’ll give you my perspective, George, I think – I am not an economic I don’t understand a lot of the things that some of these people are talking about that’s driving behaviors. I’m sure they’re real and they’re creating concerns, but what I see are a couple dynamics. I see a permanent move to the Cloud architectures that’s not slowing down and that’s going to be good for our industry and our Company. I see a non-slow down in the requirements that our customers see on bandwidth.
Regardless of what’s happening in China, regardless of who is going to be president, regardless of what the dollar does strengthening or weakening, if there is demand for bandwidth we’re going to go do well. And I was just in PTC, a conference at happens every year in our industry, I meet a dozen customers or so, and usually you meet with there and there’s a smattering of issues. Your price is too high or I want this feature.
There was one consistent theme from every single customer this time and it’s never happened before. Whether it was from Europe customer, America A-PAC customer, they see demand. And that’s what they were interested in talking about. Happily help them win deals because the demand environment for bandwidth is exceptionally good. That to me trumps everything else that’s happening on the world stage.
On taking advantage of the macroeconomic condition:
Tom Fallon, Infinera Corporation - CEO
And I think we are excited about that which is why were trying to make sure we have short lead times. The one dynamic we are seeing this quarter, which is a little different, a lot of our customers build based upon plans. They methodically build out capacity, but we’re seeing some set of customers starting to do buy on win. Meaning, if they win the deal, they’re buying from us. They’re doing less structured Internet build outs, but they are aggressively going after bandwidth demand opportunities and then they’re coming to us with quick lead times.
Does that give us a little bit less visibility, it does. But it’s a great advantage for us because we use time as a weapon. And I think it’s a great thing that our customers are seeing demand and whether they’re building structurally, or building opportunistically, as long as they’re going to Infinera, I don’t care.
On taking DCI market share - and what to expect in Q1:
George Notter, Jefferies LLC
I was curious about Cloud Xpress in Q4. I guess if we go back you guys at one point said $ 30 million to $60 million was the range for Cloud Xpress and I think you were kind of pointing to the lower end of that range. I would love to get an update on where Cloud Xpress shook out for the year and what kind of momentum you’re seeing in terms of traction with revenue?
Tom Fallon, Infinera Corporation
It played out in the range that we had said. As we said got off to a slower start than we thought because of certifications, which I still believe are architecturally important and put us in a great position. I’ll give a little comment on Q1. The momentum that was building near the end of the year has actually accelerated in Q1 for the Cloud Xpress product.
It’s actually in Q1 so far exceeding our expectations. That’s what we thought would happen. It’s an architectural win, it’s a proof point in the industry and even though a number of competitors have announced competing products, we are really not seeing them impact the market yet. We feel like we got a real winner with the CX family.
On maintaining competitive advantage:
Vijay Bhagavath, Deutsche Bank
The space could get quite crowded honestly heading into next year. So the question is how do you maintain your competitive advantage, your differentiation, your mode, and also your pricing power in a crowded market heading into next year?
Tom Fallon, Infinera Corporation
I’m going to comment and then I’m going to let Dave, which is much more astute on the technology than I am answer. First of all, it’s important that you talk to people about this crowded market. There is a huge difference of people announcing products for sale and actually selling products that solve problems.
Over half a dozen people have announced products for sale and we’re fundamentally seeing almost nobody actually delivering those products. They know it’s sexy, they know it’s important, but there’s a technology a barrier to getting in there that’s non-trivial.
It is important that the optics that make this differentiation, it’s vertically owned IP from both an intellectual property perspective and a manufacturing perspective. And we believe that is mandatory and we do not see people going after that to disrupt our leadership there. And in fact as I said we announced our next generation terabit technology this year our gap is widening on our capabilities versus the industry’s capabilities.
On concerns over margin erosion:
Vijay Bhagavath, Deutsche Bank
Just a quick follow-up on for Brad. The [barriers] Brad argues there could be gross margin distraction as you sell a more diverse set of products, [night, DCI,] long-haul so help us understand from your lens how would you manage gross margins as your product portfolio and SKU diversifies? Thanks.
Brad Feller, Infinera Corporation
Yes so Vijay obviously our guidance continues to show margin continuing to expand so I know that there’s people that don’t necessarily don’t think that’s going to happen. But we do have a differentiated approach to the market. We are very selective in the deals we take. We have the leverage of the vertical integration.
There’s multiple dynamics to our business that will continue to allow us to expand margin. We’ve said over time we can get to 50% gross margin. I still believe that is the case and I’m confident we will get there over time.
On comparing Infinera with Ciena:
Alex Henderson, Needham & Company
There’s a lot of concern about the 6% growth rate guidance that Ciena gave, but it sounds like a lot of that 6% had more to do with revenue recognition timing associated with some large contract deployments that have deferred rev acceptance criteria on them.
There is an assumption that you would also see that, but on the other hand you tend to be putting line extensions in existing – to existing customers where you’ve already got the DTN-X certified in their network. Do you think the deferred revenue acceptance would so down the timing of Metro core recognition for you or do think it would be less than Ciena at least?
Tom Fallon, Infinera Corporation
I’ve got no commentary on Ciena’s business. You need to ask them on their questions, I can tell you what I think. I think that the long-haul market is going to grow 6% to 8%, we’re going to grow our market share. I think Metro’s going to grow, we’re going to grow our market share. DCIs going to grow, we’re going to grow our market share. And I don’t think rev rec is going to materially alter how we have an ability to build this business over the next couple of years. It just doesn’t bother me.
We’ve got three weeks of four weeks worth of backlog they’ve got a half a year. It’s a different model. I don’t understand there’s, they probably don’t understand ours, but you need to not lump us together.
Operator
The next question comes from Tim Savageaux, Northland Capital Markets.
Tom Fallon, Infinera Corporation
Hey Tim how are you?
Tim Savageaux, Northland Securities, Inc.
I’m good. Maybe who knows six or eight more quarters like this and the notion that you and Ciena are different companies might sink in.
Tom Fallon, Infinera Corporation
I think you are extraordinarily optimistic my friend.
Tim Savageaux, Northland Securities, Inc.
Hope springs eternal.
On the revenue guide for Q1:
Doug Clark, Goldman Sachs
And then my follow-up was more first quarter guidance you talked about the impact of timing of budget releases and the finalization of that. A month and a half into the quarter halfway through, are those budgets actually being released, are you spending come unlocked or is it still the anticipation of that to come?
Tom Fallon, Infinera Corporation
I’m going to add a little clarity. Budgets are being release et cetera, but we wouldn’t have guided to 245 if we couldn’t touch in the field of 245. So I don’t want you to read that there’s – we take the guide very seriously. So we’re not depending upon budgets being released that we’re not aware of yet.
On Europe and International Growth:
Stanley Kovler, Citi Research
I had a clarification question just on the international organic growth if you can confirm the math there. It looks like when we back out Transmode you had something like 17% year-over-year growth, international markets. If you can just help us understand some of the drivers there with your web customers building out a lot of the data centers in Europe how much are you seeing of that versus true European base customers grown there?
Brad Feller, Infinera Corporation
So Stan, it’s a combination of things that’s driving the international growth. Obviously you mentioned the Transmode side, but we do have a very good base of customers throughout Europe who are building. We also see the ICPs whether it’s the phenomenon that Tom talked about where the enterprise and wholesale carriers are building for the ICPs in Europe. Or the ICPs building themselves in Europe, there has been relative strength around each of those different areas.
And if you broader internationally, we’ve talked for several quarters now about the LatAm market being one that we’re getting traction not only with the bigger carriers down there but seeing bigger global customers wanting to build more footprint in that region.
On increasing their market share this quarter vs peers:
Tim Savageaux, Northland Securities, Inc.
That’s kind of where my question is focus which is obviously there is not just several of your peers Nokia this morning talking about more pronounced seasonal weakness or just general double-digit down sequential guides. And I’d say what’s notable about your performance is you’re much better than that.
I would imagine given the CX commentary that you’re going to see sequential growth through seasonality from Cloud Xpress.
Tom Fallon, Infinera Corporation
Our whole business is growing very rapidly. The CX product line obviously is growing faster than our overall business. But I want to make sure you understand we are going to grow in long-haul, we are going to grow and Metro, we’re going to grow in data center interconnect.
And do I forecast that business [Cloud Xpress] being 10% of our Company at some point certainly I do, but I think it’s more important than any one product offering is are we taking market share in a market that is growing. We are doing that in all areas.
If we can continue to do that it doesn’t get better than that, unless you’re vertically integrated and can scale that the profit, which we can. So I’m really excited about where we’re at and I’m less excited about which product are we going to sell.
Best,
–Kevin