CenturyLink's Level 3 acquisition kills jobs at Infinera

Technology abstract background
Despite the near-term uncertainty, Fallon says the spending delays do not mean that Infinera is losing market share within the CenturyLink or Level 3 footprint.

CenturyLink’s completion of its Level 3 acquisition is affecting Infinera, which is going to reduce its workforce by 10% as capex spending remains in limbo.

Tom Fallon, CEO of Infinera, told investors during its third-quarter earnings call that the overall consolidation of the service provider market, including CenturyLink acquiring Level 3, is posing near-term challenges for the optical networking company.

“Our revenue has been under extreme pressure over the past year, largely attributable to customer consolidation,” Fallon said during the earnings call, according to a Seeking Alpha transcript. “While you're now seeing business gradually improve for most of our consolidated customers, our expectation is spending from recently combined CenturyLink and Level 3 will remain suppressed for an undetermined period.”

RELATED: From AT&T to Zayo: Tracking wireline telecom earnings in Q3 2017

Despite the near-term uncertainty, Fallon says the spending delays do not mean that Infinera is losing market share within the CenturyLink or Level 3 footprint.

“I think they're waiting to get, quite frankly, the contract signed,” Fallon said. “They're working now to get a contract that reflects the new opportunity of the joint business. So, it's an opportunity for them to achieve part of their stated goal of a CapEx reduction and price reduction.”

The vendor noted that the combined spending patterns from CenturyLink and Level 3 in the third quarter was down nearly 10% sequentially and represented less than 20% of its revenue for the quarter.

“Excluding these two customers, wholesale was up more than 10% sequentially, and telco was essentially flat, with spending largely subdued aside from a couple of new builds in APAC,” said Brad Feller, CFO of Infinera. “Offsetting strong growth from North American cable in Q3 were decreases in combined CenturyLink/Level 3 spending and weakness from one of our large ICP customers.”

As part of its restructuring plan, Infinera plans to consolidate its development sites, including closing its Beijing design center. The company also plans to leverage its engineering resources across regions and product line development, prioritize R&D initiatives—including decisions about what development will be performed in-house versus externally—and more effectively optimize its use of prototypes.

Besides engineering, Infinera is reducing its facility's footprint and writing off certain equipment and licenses, which will not be utilized. The company said it expects this plan will save approximately $40 million annually and will incur restructuring charges of about $25 million attributable to severance benefits, facility closures and other restructuring-related costs.

Fallon said that the plan reflects the broader trend of service providers overall either cutting or delaying capital spending on new network equipment.

“When you look across the industry and look at the industry forecast, there's a consistent theme: carriers have slowed spending, and ICPs have been erratic,” Fallon said. “You see it in the component guys, you see it in the module guys, and you see it in the systems guys. So, I think that this restructuring, quite frankly, is disappointing to have to do, but I think it's imperative, considering the macro landscape in the environment.”

The company has also made changes to its executive ranks as well.

Dave Welch will assume the role of chief strategy and technology officer. In this new role, Welch will actively engage with customers to align Infinera’s product roadmap and technology strategies. Additionally, David Heard, who joined Infinera in June, has been named an officer of the company and will be responsible for product realization.

From an overall financial perspective, Infinera reported $192.6 million in revenues, up sequentially from $176.8 million in the second quarter of 2017.