On Infinera's margin worries

Perhaps in a response to our recent college grad turned analyst at Goldman, Deutsche Bank reiterates “Buy” and a $28 price target, while Blair reiterates Outperform

September 9, 2015

In a report released today, Dmitry Netis from William Blair reiterated an Outperform rating on INFN. Netis said, “Adjusting the Model Following Acquisition of Transmode and Reiterating Outperform Summary: We are adjusting our model following the acquisition of Sweden-based Transmode, which closed on August 20, and are reiterating our Outperform rating on INFN shares. We believe this deal is highly synergistic from a revenue and cost perspective, resulting in the third consecutive year of 20%-plus growth and $0.13 EPS accretion in 2016. We expect margins to track alongside Infinera’s stand-alone business (at 46%-47%) in the near term and expand into the 50s over the long haul. The metro typically carries better margins than the long haul given greater content of packet and ROADMs. The shift in the market toward network virtualization (SDN/NFV) brings greater software content as well.”

In other news, Infinera signed a deal with NEC to be one of two suppliers for Telenor Group, a telecom operator based in Norway. The other supplier in the deal is Juniper Networks.

http://phx.corporate-ir.net/phoenix.zhtml?c=209747&p=iro…

Seeing how Karl Thedeen (the former CEO of Transmode) is quoted in the release it is likely this deal was in the works before the Infinera acquisition. And if you subscribe to that, the deal would have to be for Transmode’s metro products. Transmode, based in Sweden, was the only optical network supplier with margins higher than Infinera. With the acquisition complete that distinction now belongs to Infinera.

Doing some mental math on scale of this deal and impact it will have on margins, Telenor has 13 network affiliates operating in 12 countries (https://en.wikipedia.org/wiki/Telenor). Telenor has a 10 year research and business line for Machine-to-Machine technology. It appears they have been very forward looking in assessing future demand from the coming internet of things, and seem to be getting ready for the next leg up (where the metro market will start to take off). In this light, I see the large volume of sales in metro product space as a positive contribution to Infinera’s margins. How much impact? Well, Brad Feller told us in the last earnings call that the margin impact from the CX launch as it starts to scale up may cause overall margins to be a “little bit muted” in the short term. But this was before they could factor in knowledge of any deal pending with Transmode as the acquisition status was unknown at the time. At a minimum I believe this news negates our analyst friend’s prior concerns on margins. But then again, I am not a professional analyst and no one pays me the big bucks for my opinion :slight_smile:

Best,
–Kevin
Long Infinera

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Much rather be in Infinera and Ruckus than Arista Networks with that law suit risk!
Ant