ADVA Eyes Advantages Amid Acquisitions

As the optical networking sector consolidates, midsized packet optical vendor ADVA sees a growing opportunity to beat larger vendors whose focus could stray as they integrate acquisitions.

Echoing similar comments made by Infinera Corp. (Nasdaq: INFN) CEO Tom Fallon after the Nokia Corp. (NYSE: NOK)-Alcatel-Lucent (NYSE: ALU) merger was announced, ADVA Optical Networking CEO Brian Protiva said on his company's first quarter earnings call last week, "There is a period of time where ADVA can definitely focus and win market share and win customers that are questioning long-term commitments to an existing product portfolio. It's really about execution and how those companies integrate their acquisitions to see if it gives them further opportunity, or slows them down and makes things more complicated." (See Infinera Keeps Its Revenue Streak Alive and Nokia & Alcatel-Lucent to Combine.)

Protiva argued that in terms of focus, margin contribution and other factors, optical could become "the least important" of all segments to a fully merged Nokia and Alcatel-Lucent. "That asset [post-acquisition] becomes €2 billion of €26 billion, instead of [pre-acquisition] €2 billion of €13 billion at this point."

However, while Protiva likes Fallon's philosophy about being able to beat the acquirers while they are concentrating on the challenges of integrating acquisitions, he suggested the same argument applies to Infinera itself as that US company looks to complete its pending deal to buy Sweden's Transmode Systems AB . "I'd say it's true of any acquisition," he said, adding moments later, "I guess that's a comment on Infinera and Transmode." (See Infinera Coming Closer to Mastering the Metro.)

Of course, it remains to be seen how sector consolidation might present itself on ADVA's doorstep. The company has some similarities to Transmode -- strength in services and metro and access products, as well as the fact of the majority of its revenue coming from Europe -- that would seem to make it attractive to a larger company looking for a stronger international foothold and a wider array of products to address healthy opportunities in metro and enterprise markets.

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ADVA's positive first quarter report was highlighted by revenue of €95.6 million ($102.2 million), translating to 22.4% revenue growth year-over-year, and more than 10% growth from the previous quarter. The company had strong numbers across the board, and Protiva pointed out that ADVA had more than €73 million gross reserve cash and more than €40 million net cash after the quarter. (See ADVA Quarterly Revenue Up 22% YoY.)

Such numbers don't exactly paint a picture of a firm that needs help from a more deep-pocketed suitor, and ADVA clearly feels it's in a position to grow on its own terms, with the stronger US dollar helping its cost structure, as well as network investment from European carriers and enterprises on the rise and even the growing potential for a better foothold in the US carrier market.

Protiva said ADVA is continuing to plug away at opportunities with two Tier-1 service providers in the US, though he described the potential projects as niche applications. "We feel very good about a footprint in one of the Tier 1 telcos in the US, but it's not a big opportunity -- maybe $4 million or $5 million a year and that's moving forward," he said, adding, "It gives us a contract that enables us to talk to purchasing and technology people in there, gives us awareness and allows us to be on the hunt [for bigger opportunities]."

— Dan O'Shea, Managing Editor, Light Reading

tojofay 4/28/2015 | 5:40:49 PM
Re: the metro market might be an exception Wishful thiniking Mr. P. at your own peril.

Infinera and Transmode will merge on the network equipment palate like grav lax and a fine California sparkling wine!


Skal Dude
gin-drinker 4/28/2015 | 7:43:32 AM
the metro market might be an exception I think Mr Protiva has a good point - most of these M&A deals result in companies taking their eyes off the ball - the Nokia purchase of Alcatel will certainly be chaotic for customers over the next few years.

But I wonder if the metro DWDM market has a different dynamic in play.  This market has a large number of relatively small companies fighting for share, plus a few larger companies (Ciena, Cisco, Huawei) in there too.

In order to compete against those larger players, the smaller companies need to invest and innovate.  But they all have "sub-scale" R&D budgets - including Transmode and ADVA.

Transmode has done a great job in carving out a niche for itself and remaining profitable.  But IMHO, if it wants to grow its revenues and customer base to the next stage, it needs a big cash injection, and this is exactly what Infinera can bring.

Also, these are two pretty small companies - not like the stagnant bureaucracies of Nokia and Alcatel.  Yes, there will be some distraction and political fighting in the short term, but I would see the M&A chaos quickly being offset by the opportunity for greater investment, although I'm curious to see if Infinera will continue to push its PIC technology out to the metro edge.  For me PIC is not an obvious fit in such a low demand segment of the network.

It would not surprise me if, assuming the acquisition is approved, Infinera is happy to allow Transmode's architecture to dominate out at the edge, and use PIC technology to aggregate traffic into the core network.

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