Infinera: What spending slowdown?

Ed Gubbins October 22nd, 2008

Optical equipment vendor Infinera is apparently not seeing the same broad carrier spending slowdown related to economic uncertainty that other vendors are reporting.

“We have not seen any significant changes in spending plans to date among customers that we can attribute directly to the economy,” said Jagdeep Singh, Infinera’s CEO, adding, “This could change.”

In addition to adding a new cable MSO customer in the quarter, giving Infinera all five of the country’s top MSOs, Singh reported seeing “significant activity in large, longhaul buildouts in North America…We’re not aware of carriers stopping these buildouts based on macroeconomic concerns.”

Infinera beat expectations for the third quarter and remains on track to see 10% revenue growth this year.

Singh pointed out that Infinera is not a good weathervane for macroeconomic impact on spending trends because its sales are concentrated on a relatively small number of large customers, and a single win or loss among such customers in a given quarter would likely “dwarf” any spending slowdown related to the economy. However, the same could be said for another equipment vendor, Ciena, which lowered its expectations for the year last month based on a slowdown in carrier customers, particularly in North America. One notable difference between the two vendors that could account for this disparity is that Ciena’s business is much more dependent on Bell carriers, while Infinera is more exposed to CLECs and MSOs.

But are there other reasons why Infinera isn’t feeling the same pain as its peers? What do YOU think? (Post a comment below.)

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4 Comments to “Infinera: What spending slowdown?”

1. Pradeep Kaul Says:
   

   October 22nd, 2008 at 11:33 am

   infinera has a unique offering that fits the fastest growing segment in the telecom sector. Internet traffic is exploding due to video streaming and downloads. This phenomena will accelerate over the next 5 years and should bode well for Infinera. Adding Comcast along with the other top MSOs in the US, along with DT in Europe is an incredible market position. Looks like Nortel has conceeded!

2. Ed Gubbins Says:
   

   October 22nd, 2008 at 11:44 am

   Since you mentioned Nortel, I should add that Infinera declined to answer a question on their earnings call about whether it would make sense for them to acquire Nortel’s Metro Ethernet group, which is currently for sale.

   Infinera has been saying for a while that they want to expand into the metro, and while I believe the jury is still out on Nortel’s PBT story, Verizon, for example, is using Nortel’s metro Ethernet platform. So this business would get Infinera into not only the metro market but also potentially into a Bell account, which I don’t believe they have yet. And I’m guessing Infinera could pick up these assets for a steal, since times are tough all over and Nortel would not be negotiating from a position of strength.

   Still, because that unit also includes most of Nortel’s optical business, there would be lots of overlap with Infinera’s existing portfolio. At the same time, Infinera could wipe out its competition in that sector rather than watch it just change hands.

   Is it worth it for Infinera to buy Nortel’s carrier Ethernet and optical business? What does everybody think?

3. Jim Williams Says:
   

   October 22nd, 2008 at 2:55 pm

   Is Infinera winning at Ciena’s expense? Not familiar enough at the product level with the companies’ offerings, but generally sounds like Infinera is taking market share which accounts for the discrepancy between the two companies’ outlooks.

4. Kevin Pollock Says:
   

   October 23rd, 2008 at 3:41 am

   Ed Gubbins asked if Infinera should buy the Nortel MEN division.

   I would agree that the price for this “asset” would be comparatively low, but I think there are multiple problems with such an acquisition. Broadly speaking while I agree with Ed’s idea that it would be a good way for Infinera to bring a metro product to market quickly, with an built in user base, it’s just not that simple.

   First is the huge amoiunt of baggage that Infinera would inherit with MEN. There are a few good products in MEN, but there are a lot of sub-competitive products too (and actually I think Optera Metro might be on the sub-competitive list). For any potential acquirer the cost of stripping out the dead wood would be significant - a lot of downsizing one-time charges. I guess a good financial team would be able to optimise the way these charges are put onto the books, but it strikes me that it would chew up a huge amount of finance time and cost. And if Infinera was to announce a series of product EoLs, how would that affect Infinera’s reputation with its customers?

   Second is the culture clash. Infinera is a fast-moving, highly responsive startup. MEN is a slow moving limb of a telecom dinosaur. There might be a lot of political in-fighting for any acquirer and that is just counter productive.

   Third is another financial issue. I’ve seen prices for MEN ranging from $700M up to $1.5B. Every number I’ve seen so far is way over any price I would think of as a “bargain”. And somebody might be able to answer this for me, but can Infinera actually afford to pay $700M for MEN without stripping all the value from their business and driving the company into debt? In fact I would go so far as to say that if Infinera was to make an offer for MEN, we should expect to see the stock price tumble. It would be a disaster.

   Finally. Can anyone give me an example from telecom history where a hot, successful startup has acquired a failing division of a telecom dinosaur and turned that business into a success? I know somebody has to be first, but why would anyone think that this acquisition would be successful for either party?

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