Infinera's results highlight hyperscale growth amid telecom stagnation

Infinera officials this week cheered one of the company's largest ever deals, for 800G 3-nm ZR+ pluggables to an unnamed hyperscale company. The company's optical products will be used to improve connectivity just outside that hyperscale company's data centers (the financial analysts at Rosenblatt believe Infinera's unnamed hyperscale customer is Facebook owner Meta).

However, Infinera's successes in the hyperscale sector are helping to hide its ongoing struggles to sell its optical goodies to telecom companies like AT&T, Verizon and Vodafone.

Infinera is not the only telecom vendor to feel the pinch. A number of other telecom and cable equipment vendors – from CommScope to Casa Systems, Vecima Networks, Harmonic and Lumentum – have offered decidedly mixed commentary about demand from network operators. The story, generally, is that service providers hoarded telecom equipment during pandemic-era traffic spikes, and are now slowly putting that equipment to use. As a result, they've dramatically cut back on orders for new equipment.

"We believe that the spend and the inventory situation frees up in the back half [of 2024]. And that's been consistent industry commentary, I believe, if you talk through the value chain in the industry," David Heard, Infinera's CEO, said on the company's earnings call this week, according to Seeking Alpha.

In the meantime, Infinera is working to plug that telecom shortfall with optical sales to hyperscalers like Meta. Specifically, the company is eying the data center interconnect (DCI) market, which involves forming high-speed connections between data centers. According to Heard, those sales are catching fire, with fully 40% of the company's revenues coming from hyperscale customers.

"The growth rates we see are pretty tremendous," he said. He said data center investments into equipment for AI and ML are driving that demand.

Infinera isn't alone. "AI (artificial intelligence) opportunities continue to surface," wrote the financial analysts at BofA Global Research in a note to investors this week. They said demand for high-performance, AI-based computing is creating opportunities for large data center operators like Digital Realty and Equinix.

The BofA analysts also noted that "domestic wireless carrier activity remains muted." But they too pointed to "green shoots" indicating renewed demand among network operators starting in the second half of this year and carrying through to 2025.

That's roughly the same timeframe that Infinera expects demand to resume among its network operator customers.

In preliminary results issued this week, Infinera expects Q4 2023 revenues of between $435 million and $452 million. Infinera also expects revenues in 2024 to grow 2% to 3%, which is lower than the 4.4% expected by a consensus of financial analysts. The company said much of its revenue growth will occur in the second half of 2024.

Infinera officials remained optimistic. "These strategic wins, combined with our design win funnel, position us well to deliver a stronger second half and place us on a path to achieve our seventh consecutive year of revenue growth with continued margin and earnings per share expansion," Heard said in a statement.