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Optical/IP

Ciena CEO: Watching Infinera

Optical equipment vendor Ciena Corp. (NYSE: CIEN) is taking the emergence of new rival Infinera Corp. (Nasdaq: INFN) "very seriously," CEO Gary Smith told analysts at a recent London briefing.

Smith, pictured here giving his address, didn't say whether Infinera's rapid rise and notoriety had prompted any change in his company's development program, saying only that Ciena would "continue to innovate," and that the company is "spending a lot on R&D" in optical developments.



Infinera has shaken up the optical sector with its photonic integrated circuit-based DTN system, picked up some big name customers, and claims to have built a $100 million-plus business. It is also believed to be planning an IPO. (See Infinera Intros PIC, Infinera Claims 10G Lead, Global Crossing Picks Infinera, XO Selects Infinera, Infinera Wins Flag Deal, and Infinera: $1B IPO Imminent?.)

In addition, Matt Bross, CTO at BT Group plc (NYSE: BT; London: BTA), told Light Reading earlier this year that he's monitoring Infinera's developments closely as he builds out the carrier's next-generation network, the 21CN. That's particularly relevant to Ciena and Huawei Technologies Co. Ltd. , as they are the lead long-haul optical suppliers for the £10 billion ($18.2 billion) 21CN project. (See Infinera Numerates Its Numbers and BT's 21CN Deals: Booty or Bloody? )

Bross's statement even led one analyst, Citigroup 's Michael Genovese, to write in a research note: "We believe Infinera has a unique and highly valuable approach and has the potential to be disruptive in the market in terms of competition and pricing… BT's comments regarding Infinera and the prices it's willing to pay in the 21CN buildout are worrisome for Ciena."

But while Smith might be glancing over his shoulder at the competition, he's also looking toward his own firm's next move in the growing optical market. Ciena has achieved critical and business success, mostly in Europe, with its multiservice CN 4200 product that is based on the vendor's programmable optical platform, FlexSelect. Revenues from the product reached $12 million in Ciena's second quarter, and Smith expects that figure to reach $40 million per quarter by mid-2007. (See Ericsson Gives Ciena a Boost.)

Having recently launched a mini version of the 4200, Ciena is now gearing up to launch more FlexSelect-based products that can capitalize on the platform's ability to push multiple services, whether Ethernet or legacy Sonet/SDH, to any port. And there's significant business to be won with the right technology: Smith says that, based on average analyst estimates, the total market for converged transport systems is set to grow from $3 billion in 2006 to $5 billion in 2008.

So what's next in the pipeline? Smith and his colleagues didn't provide any specifics, but Jefferies & Co. Inc. analyst George Notter reckons the next Ciena product to be "FlexSelected" will be its multiservice edge switch. "We expect that Ciena will rework the DN 7000 product to incorporate additional data/IP functionality as well as other elements of FlexSelect architecture" such as "software definable interfaces," writes Notter in a recent research note.

That's part of a general strategy across the vendor's product portfolio, "to more fully support Ethernet traffic as well as its FlexSelect architecture," notes the analyst, citing the recent update to the CoreDirector product. (See Ciena Enhances CoreDirector .)

That strategy will see further advances in Ciena's $80 million-a-year-plus broadband access division, too, reckons Notter. The vendor has just started shipping its CNX-5Plus, an ATM DSLAM that sits alongside a digital loop carrier (DLC). That product can have a gigabit Ethernet interface added with a simple linecard upgrade. (See Ciena Backs Off BLCs.)

Now Ciena is "working on an upgraded version of the CNX-5. The new system, under development for a year now, is IP-based and designed to handle larger traffic volumes [and] bit rates. We're not sure when this version of the product becomes available," writes Notter.

Ciena hadn't responded to questions about CNX-5 developments as this article was published.

Ciena's share price is trading down 14 cents, about 3 percent, today at $4.46, giving it a market capitalization of $2.63 billion.

— Ray Le Maistre, International News Editor, Light Reading

longshort 12/5/2012 | 3:38:23 AM
re: Ciena CEO: Watching Infinera Was Vinod Khosla refering to Infinera in this article:

http://www.businessweek.com/sm...


excerpt:
"What are the areas that are ripest for entrepreneurs to get into?
I find the very notion of "hot areas" counterproductive, because hot to me means an over-invested area. In 2001, I made a brand new, very expensive, optical telecom investment when it was the worst area. In some sense, I did that because it was the worst area. And guess what? The company is doing very well. In the first six months of shipping, it did $25 million, and this year, they'll probably do $100 million. That's explosive growth in an area that wasn't very hot."
whyiswhy 12/5/2012 | 3:49:00 AM
re: Ciena CEO: Watching Infinera "If it doesn't go public it will likely be sold."

Just curious as to what you think Infinera can be sold for, rationally speaking of course.

-Why
ninjaturtle 12/5/2012 | 3:49:01 AM
re: Ciena CEO: Watching Infinera Thus: IPO or die. But IMHO, IPO for Inf is not going to happen.

Why,

What do base this opinion on? Elaborate please.

optiplayer 12/5/2012 | 3:49:02 AM
re: Ciena CEO: Watching Infinera Why.

I understand what an LP is and it is nearly impossible to become one in a fund at any of the aforementioned VCs because their results have been stellar so they get enough $$ from existing, long time investors. Have they taken write-offs... of course. Every VC does. But they also have huge winners. Infinera will not be a write-off. If it doesn't go public it will likely be sold. The IPO option looks tougher now given that public telecom companies have pulled back hard in the last month or so which makes comparable less compelling.

"That means costs have to be a lot less than sales" In my world this is a good thing. Apparently not in yours.

Your IPO or die comment is baloney.
whyiswhy 12/5/2012 | 3:49:02 AM
re: Ciena CEO: Watching Infinera "Yes, KP, Accel, Benchmark are all horrible funds with terrible track records of losing investors money which is why its so easy to become an LP there."

Uhumm, first, I think you mean hard to become a partner (not an LP) in a VC firm.

Limited partners (LP) are investors that partners in VC firms raise money from and have to pay back (with interest) at some point.

Third, I am sure their last round was their last round, that was my point. That round was about a year ago and was for $52M. At their rumored burn rate, that cash is about gone.

Meaning the cash on hand is sales revenue. Sales revenue from material purchased with VC money. That means costs have to be a lot less than sales, otherwise the cash will run out quickly.

And that is not the position 99.99% of companies going public are in. Most companies going public are in the position of having reached cash flow breakeven or better.

Thus: IPO or die. But IMHO, IPO for Inf is not going to happen.

And this will not be the first time KP, Accel, Benchmark, etc took a writeoff on an investment. I do not cry for VCs.

Which is why I was referring to certain individuals, not to Infineras investors.

-Why
optiplayer 12/5/2012 | 3:49:15 AM
re: Ciena CEO: Watching Infinera "Because it means you can't get a loan or arrange for bridge financing."

They just raised a round of funding which is expected to be the last.

"...but I am not sure the same can be said for their investors."

Yes, KP, Accel, Benchmark are all horrible funds with terrible track records of losing investors money which is why its so easy to become an LP there.
deauxfaux 12/5/2012 | 3:49:16 AM
re: Ciena CEO: Watching Infinera Personally, I hope they make it too, even though I have my doubts.

I think that "Why" is trying to say that he doesn't think that there is any way that they can be profitable today. I also don't think that he believes that they are anywhere close to cash break even, and that they've exhausted any and all reasonable sources of private capital. Furthermore, given the likely post-money value on the last round, and expectations of a profitable exit for the VCs, the depressed valuations of the equipment segment. It seems to be extremely unlikely that Infinera could get taken out by a public company: IPO or perish.

The capital markets are a heckuva lot tougher than they used to be. No matter how top-tier VCs try to twist arms these days, the underwriters are still smarting over the pain of huge settlements from the last go-around. The top tier banks do not have the guts to try to take a second rate offering out. If Morgan Stanley or Goldman takes them out, it means a lot. If they have a second rate bank engaged, that is a huge signal that this is a distressed deal.

Good luck Infinera. I am looking forward to reading your S-1
ninjaturtle 12/5/2012 | 3:49:16 AM
re: Ciena CEO: Watching Infinera Uhhhh?
corvo 12/5/2012 | 3:49:16 AM
re: Ciena CEO: Watching Infinera infinera is yesterdays technology wrapped in futuristic technobabble.
advice to cien: keep watching - but do not touch.
whyiswhy 12/5/2012 | 3:49:17 AM
re: Ciena CEO: Watching Infinera Ninja:

Going public is NOT generally something you can do if you have to. It is very rare in such cases. Because it means you can't get a loan or arrange for bridge financing. And it also means another company does not want to buy you, which is another way to go.

All of which means high risk .

I know a lot of people over there, and most of the founders. I have a lot of respect for their technical capabilities. They have done well by themselves in business, but I am not sure the same can be said for their investors.

-Why

deauxfaux 12/5/2012 | 3:49:18 AM
re: Ciena CEO: Watching Infinera I'm pretty sure that "Why" is not a competitor of Infinera's, and I really doubt that he would ever want to work there either.

I know all of the principals there, and I think that they are really smart guys. Nevertheless, even the smartest guys in the world bite off more than they can chew from time to time.

The architecture and the device technology go hand in hand. The fundamental thesis at Infinera is that they can make EOE so cheap that they can dramatically change the cost equation. The architectural benefits are clear if they can dramatically lower the costs by integrating everything together.

CMOS is a lot cheaper than InP (pennies per mm^2, vs. $) and keeps getting cheaper every year. Wire bonds are cheap too, so I doubt that they are trying to integrate much circuitry onto their device: probably just the TIA and Laser driver circuits. But even those are likely to be more expensive than their CMOS equivalents.

It is clear that Infinera believes that they can integrate the lasers, MPD, mux, (ditto for Rx, demux, etc) in a 10 channel block less expensively than competitors do it with discretes. This eliminates temperature tuning as an option (monolithic, remember) and makes for a pretty darned big TEC, package, with lots of pins. This would all have to be custom stuff and might cost 2-3X the cost of a single channel, so best case, they might be at 20-30% of the cost of a discrete solution, if yields were equal

But the problem is that they can't be

Anyone that has ever built DFBs can tell you that there are enormous challenges to fill in the entire channel plan. If you are off by one or two atomic layers in MOCVD...POOF...a different LSE, gratings a little bit off...POOF....a different wavelenghth. Infinera has the y^n yield problem to deal with and the simple truth is that NO-ONE out side of a very few people inside the company know whether it is a HUGE problem or a small problem.

My bet is that yields are a HUGE problem. But I don't know. If I did, I couldn't post.

But I know that Why is right that these guys have to go IPO or die. I heard that they were burning $4-5M per month 2 years ago....given the amount of cash they've taken in investment and the time that they've been at this (remarkably short, given the difficulty), I think that this is about right. If this burn rate was about right, my guess would be that they would have to be at a $150M run rate to have a shot at profitablity, and if they had a huge yield problem, they would never be profitable.

So what would I do if I wanted to know?

Drive over to Infinera and watch the fab production personnel come and go on 2nd and 3rd shifts (weekends too). If they are running the fab flat out, they have a HUGE yield problem at this point. If they are coasting along on one shift, they are doing great.
ninjaturtle 12/5/2012 | 3:49:18 AM
re: Ciena CEO: Watching Infinera Good points. Yields will always be an issue with InP. However, make no mistake Infinera must go IPO. There is too much at stake within and externally (VCs). I would give it a high probability to go public in the next 6-9 months. JMHO.
photon2 12/5/2012 | 3:49:18 AM
re: Ciena CEO: Watching Infinera Bross is always interested in disruptive technology...things must be very middle of the road over at BT these days...Infinera is just what he needs to spice things up.

BTW, IDC did a cool report on Infinera..

http://idc.com/getdoc.jsp?cont...
lietreading 12/5/2012 | 3:49:19 AM
re: Ciena CEO: Watching Infinera What trouble???????
He made millions, kept it, got a new job, went from low to high on lightreading's movers and shakers, stayed out of jail, positioned himself to do it again, and hasn't had a heart attack.
He also seems to be enjoying life.
What have you done lately?
Stevery 12/5/2012 | 3:49:21 AM
re: Ciena CEO: Watching Infinera Is someone able to do a little research and see if Matt Bross received options in Infinera?

I think a better guess might be that he is a limited partner in one of the VCs. Much less conspicuous.
longshort 12/5/2012 | 3:49:23 AM
re: Ciena CEO: Watching Infinera Given the attention given to this kind of practice, I would speculate that this will be banned in most major player, especially one like BT. I think Infinera does have a compelling technology and a good story to go with it.
Biffy Diggler 12/5/2012 | 3:49:24 AM
re: Ciena CEO: Watching Infinera Is someone able to do a little research and see if Matt Bross received options in Infinera?

The past formula which made him hundreds of millions of dollars when he was at William Communications:

1. CTO of large operator granted options by VC in start-up (for example - Kleiner Perkins extends options in ONI, Corvis and others to Matt Bross.)

2. CTO pushes equipment into his company's lab, races them through testing, and issues major PO's.

3. Contracts from said operator provide enough momentum for start-up to do IPO.

4. Said CTO pockets major riches in IPO.

This pattern of behavior drew SEC scrutiny in some cases - sell-side analysts writing favorable reports of start-ups in which they held options, etc. Wondering whether we'll see another round of this.
longshort 12/5/2012 | 3:49:25 AM
re: Ciena CEO: Watching Infinera It sounds like there is a good product mix and match. Cien bought Lightera from Jag before right? Will history be repeated?
Biffy Diggler 12/5/2012 | 3:49:26 AM
re: Ciena CEO: Watching Infinera Why of all people in the world is Matt Bross coming out and endorsing this one single company, Infinera?!!! He got into major trouble doing similar things when he was at Williams Communications (getting shares in ONI, Corvis, etc., and then giving them contracts)

Does he once again have options in Infinera?
flam 12/5/2012 | 3:49:26 AM
re: Ciena CEO: Watching Infinera You forgot:

7. Had an offer from Infinera, didn't join, kicking himself senseless.
ninjaturtle 12/5/2012 | 3:49:28 AM
re: Ciena CEO: Watching Infinera Why,

Highlight correct statement:

1. Wish you worked at Infinera
2. Interviewed at Infinera; didn't make the cut
3. Hate someone at Infinera
4. Jealous because your start-up impolded
5. You are stupid
6. All the above

Now be honest what's your beef with Infinera. Sort of curious.
whyiswhy 12/5/2012 | 3:49:28 AM
re: Ciena CEO: Watching Infinera Guess Ciena hasn't bought enough ad space lately, whereas Infinera is spending like their world is about to end.

Because it is. IPO or die.

-Why
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