What's with Infinera again?

Infinera is down again, and this time, Infinera is following the optical component suppliers. They actually should have somewhat of a correlation to this basket of companies, because, Infinera makes their own components as part of their vertical integration. However, that is where the similarities should end.

The suppliers are down for one very good reason, and the reason is actually of major benefit to Infinera.

http://seekingalpha.com/news/3165690-suppliers-telecom-equip…

Several suppliers for telecom equipment makers have sold off following news the U.S. Commerce Department has imposed sanctions on ZTE over alleged attempts (using shell companies) by the Chinese telecom equipment maker to re-export items to Iran.

At issue: U.S. suppliers will now have to apply for an export license before shipping any American-made parts or equipment to ZTE. ZTE can appeal the decision, which (naturally) has been criticized by Chinese authorities.

Optical component vendor Oclaro (OCLR -14.4%) is the biggest decliner. Other apparent casualties include component peers Lumentum (LITE -6.3%), NeoPhotonics (NPTN -4.8%), Fabrinet (FN -5%), and Finisar (FNSR -6.1%), and telecom analog/mixed-signal chipmaker Inphi (IPHI -4.6%).

In a brief statement, Oclaro notes ZTE is expected to account for over 10% of its FQ3 (calendar Q1) revenue, and that FQ3 revenue is now expected to be at the low end of the guidance it provided in its Feb. 2 FQ2 report. “Oclaro is currently reviewing the impact of this action by the Department of Commerce on our ability to continue to ship products to ZTE and intends to fully comply with the Department’s final rule.”

These suppliers supply components to ZTE. ZTE is an Infinera competitor. They sell networking equipment and gear all over the world, but primarily serve the Asian markets.

http://seekingalpha.com/news/3165571-zte-curbs-bad-news-u-s-…

China’s ZTE Corp. (OTCPK:ZTCOY) is an unfamiliar name to many American consumers, but it is well known among U.S. technology vendors, who face a sudden roadblock in selling to the big customer.

On Monday, the U.S. imposed export restrictions on the telecoms equipment maker over an alleged scheme to re-export controlled items to Iran.

While ZTE isn’t big enough that its loss would be a major financial blow to U.S. businesses, the big worry is about a possible backlash from China that could squelch demand for foreign components there.

Again, the market is reacting to peer news which is not a great thing for the uninformed.

What the market should be focusing on is the fact that ZTE is facing restrictions and will no longer be able to build certain telecom hardware. Sure, this is bad for the component makers - their component backlog is likely slashed by 10%. But, this is good news for other companies who had a long lead time to get more product delivered. Suddenly there will be more component products available.

So where should the market go to to get this equipment now? Well, Infinera, Ciena and Nokia to name three. The news of a competitor losing their ability to sell equipment and service markets should be a boon to these three.

Just sayin’

Best,
–Kevin

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For reference, according to IHS the top 5 optical hardware market share leaders are, in rank order, Huawei, Ciena, Alcatel-Lucent, ZTE and Infinera.

And below is a graphic showing the % market share taken by each of these companies along with their comparables to the prior year.

As you’ll see in the chart, the biggest relative % gainer is Infinera. Infinera has much more upside left to go, whereas the other 4 will have a much more difficult time moving the needle.

http://press.ihs.com/sites/ihs.newshq.businesswire.com/files…

Best,
–Kevin

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Thanks, Kevin. I find your INFN posts most informative.

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Kevn, thank you (yet again) for your amazing insights into Infinera!

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http://press.ihs.com/sites/ihs.newshq.businesswire.com/files…

now that’s encouraging!

http://press.ihs.com/sites/ihs.newshq.businesswire.com/files…

now that’s encouraging!

Sorry, Paul, I don’t see anything INFN related in the link…what am I missing?

Oh sorry, I tried to quote Kevin’s link to the chart, but I just copied and pasted. Appears it didn’t work. Try this: http://press.ihs.com/sites/ihs.newshq.businesswire.com/files…

I was just pointing out that as Kevin said, this trend is extremely Infinera-friendly.

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But it seems to me that the major suppliers are taking shares from the others. INFN was not taking market shares from its major competitors. Am I interpret the charts right?
Never the less, this ZTE news is good for infinera.

Zangwei

Zangwei:
Looks like it is the ever popular “other” that is loosing out. But one way to look at this chart,(if this chart is correct) would be that the big four increased their market share by about 5 percent, and INFN increased their share by 40 percent.
So “other” is loosing out to everyone but loosing a lot more to INFN than the big four. And, if I understand things correctly the TAM is expanding as well, so this chart indicates to me that INFN has an excellent product and room to grow.
Just my thoughts.
mike

So “other” is loosing out to everyone but loosing a lot more to INFN than the big four. And, if I understand things correctly the TAM is expanding as well, so this chart indicates to me that INFN has an excellent product and room to grow.

Mike, that is my observation as well. One thing to note about the ZTE news is when we look at this pie chart again in 4Q2016, four of the competitor’s pie slices will grow further while the ZTE slice is likely to shrink considerably.

Great news the other big four. Not so good for ZTE.

If the trend in market share gains continue for everyone except ZTE (where they and the “other’s” go negative) the chart will look something like this.

Infinera: 7% + 40% more = 9.8% share
Ciena: 14% + 7.7% more = 15.1% share
Nokia: 15% + flat = 15% share
Huawei: 26% + 4% more = 27% share
ZTE: 11% - 50% less = 5.5% share
Other: 27% - 15% less = 23% share

Note, I calculated the percent gain based on the differences between years. Actual end results may not be similar. We could have another ZTE implosion somewhere, or the ZTE situation could correct itself.

Modeled as it is above, there is another 4.6% of share to spread around the competitors that I’ll call up for grabs.

If the 4.6% is spread evenly, Infinera will be looking at 11%, Ciena 16.3%, Nokia 16.1% and Huawei 28.1%.

Just something to think about.

Best,
–Kevin

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I think we need to be careful with that pie graph. It is saying Japan, India, and China. Huawei and ZTE will be capped in Japan. Infinera, and most likely Ciena will be capped in China. I think it is very hard to get a good reading from the Chart because it doesn’t show how large the market is for China. But Infinera should do well in Japan and India.

Andy

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Confirming what I said earlier today that ZTE’s bad news is actually good news for Infinera:

http://thefly.com/landingPageNews.php?id=2340676&headlin…

Northland analyst Tim Savageaux said he would be an “aggressive buyer” of Oclaro (OCLR) amid its pullback on the potential U.S. trade sanctions on customer ZTE as he see this is as a short term issue and had already modeled a moderation of strength in China. Savageaux also sees the pullbacks in NeoPhotonics (NPTN) and Lumentum (LITE), which he notes have ZTE revenue exposures in the “very low single digits,” as overdone. Additionally, the analyst sees ZTE’s bad news as potentially benefiting its optical systems and components competitors Ciena (CIEN) and Infinera (INFN).

If only the Mr Market would pause for a moment and just read my posts :slight_smile:

Just sayin’

Nuff said.

Best,
–Kevin

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What the market should be focusing on is the fact that ZTE is facing restrictions and will no longer be able to build certain telecom hardware. Sure, this is bad for the component makers - their component backlog is likely slashed by 10%. But, this is good news for other companies who had a long lead time to get more product delivered. Suddenly there will be more component products available.

So if you are building out your Metro or Data Center or planning to, you might start thinking, what if this happens again in 6 months or a year? Are my plans going to be put on hold if ZTE is my supplier? So this could have longer term effects even after the sanctions are lifted. Good news for INFN, but the market refused to see what we see. One is wrong.