The New Infinera Is Already on Edge
The new Infinera's first day as a bigger, badder company turned out to be a bit of a howler.
As the company closed its acquisition of Coriant today, talk of Infinera Corp. (Nasdaq: INFN) losing a big customer to Ciena has put pressure on the optical networking vendor's stock, sending shares down $1.13 (-15.41%) to $6.18 in normal trading on Monday.
An analyst note sent to clients by MKM Partners ' Mike Genovese contained two items that spooked investors this morning. Genovese wrote that, according to his firm's estimates, Infinera would likely have to issue more shares to pay for the acquisition of Coriant. Infinera issued a statement this afternoon that corrected that claim: "Per terms of the agreement, the number of shares issued upon close is fixed at 20,975,384 million shares."
Infinera then announced it had closed its acquisition of Coriant. In addition to the stock issued, as discussed above, Infinera said it would pay "an aggregate amount of cash consideration consisting of approximately $230 million, of which approximately $154 million was paid upon closing." (See Infinera, Coriant Hear a $430M Siren Song of Synergy .)
The next item referenced in the MKM report, though, was a bit more of a bombshell -- and not as easily dismissed.
"According to checks, Infinera has all but lost its largest customer CenturyLink to Ciena because of concerns with its ability to produce new leading edge DSPs (digital signal processors) every 18-30 months," Genovese wrote. CenturyLink, he said, is vetting vendors for 400G-capable long-haul optical transport gear. "We believe Ciena and Infinera were named finalists earlier this year," he wrote.
CenturyLink is a big deal to Infinera. Genovese noted that CenturyLink was about 12% of Infinera's revenues during the first half of 2018. In 2017, the vendor's top five customers accounted for about 44% of its revenue and, as Infinera notes in its annual report, industry mergers are consolidating that customer base at a rapid clip.
Infinera, as a technology company, has been very focused over the years, concentrating on photonic integrated circuit-based DWDM long-haul equipment. Its technology approach set it apart from competitors in the beginning, but that competitive advantage is up for debate.
"The coherent era -- beginning at 100G -- made the DSP the most important technology in long-haul DWDM transmission, diminishing the role of photonic integration," said Heavy Reading analyst Sterling Perrin, in an email, responding to questions from Light Reading. (See Will Coherent DSP Control Reshape the Optical Vendor Landscape?)
"Infinera brought DSP technology in-house many years ago and so has recognized this shift, but they continue to face a unique challenge in combining their DSPs with their PICs in every iteration," Perrin said. "To date, they have not demonstrated a clear advantage of combining DSP with PICs in systems, and -- if they do fall behind in the DSP race -- you could argue that the combination has become a hindrance."
Perrin didn't comment on Genovese's note or the CenturyLink business bid.
Infinera addressed Genovese's assertion that it was in danger of losing to CenturyLink to Ciena in a statement this afternoon. "In addition, the analyst stated that a pending CenturyLink RFP will likely not be awarded to Infinera," the company wrote. "Subsequent to the publication of this analyst report, Infinera confirmed with CenturyLink executive management that a final decision has not been made."
Indeed, nothing has been awarded yet, by CenturyLink, but even inside the new Infinera, yielding any more ground to Ciena would certainly sting.
With Coriant now part of its empire, Infinera will attempt to build a new story -- one that suggests that Infinera can cover all bases in optical networking equipment, and take advantage of the vertical integration of its photonic integrated circuit and DSP engine to save costs over time. (See Infinera's Integration Situation Needs More Explanation.)
One of the most attractive things about the new Infinera story is that Infinera is now a company with more revenue diversification and global reach. The darker side of that tale is that Coriant only existed because investors rolled up a bunch of other equipment companies that simply weren't able to survive a quickly consolidating market. Infinera's press release today pointed out that the vendor now has gear in nine of the top ten global network operators and the top six global Internet content providers. "Infinera’s acquisition of Coriant adds approximately 2,100 employees, over 1,600 patents and more than 600 customers globally," the company stated.
— Phil Harvey, US News Editor, Light Reading