Infinera’s Fallon says Verizon, CenturyLink consolidation moves dampen optical spending

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Infinera, an established optical vendor in the long-haul and metro markets, will see an impact on its sales due to the current M&A climate, its CEO said Thursday.

As its largest customers, CenturyLink and XO Communications, move ahead on their respective M&A actions, both are delaying near-term optical spending decisions.

Tom Fallon, CEO and president of Infinera, told investors during the vendor’s fourth-quarter earnings call that despite the consolidation among service providers, he’s confident Infinera will be able to get a large piece of these carriers’ optical business—eventually.

“I think we end up in a good spot, probably with stronger customers,” Fallon said during the earnings call, according to a Seeking Alpha transcript. “But I think that during this process, whether you're preparing to go through the merger or acquisition or have just done it, there's a period of slowdown of spending.”

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XO, which was recently acquired by Verizon, was a key Infinera customer. In 2012, Infinera was named as one of XO’s two 100G network suppliers along with Nokia Siemens Networks, now Coriant.

Fallon said that while it has a large part of XO’s business, but it will take time to determine how they will work with Verizon.

“The business with XO has been reasonably good, but the dance with Verizon is still to be had with us,” Fallon said. “We're certainly engaging with them and I think there will be opportunity, but I'm certainly not forecasting anything at this point until we get further down that pipeline.”

Infinera is also a large supplier to CenturyLink and Level 3, which are on track to complete their merger in the third quarter.

“We still see a consistent demand from both of them, but when people are going through large-scale integration, typically things slow down,” Fallon said. “You're not in an invest phase of network because you don't want to ignore what network assets you're picking up. I anticipate we'll get a better picture from that over the next couple of quarters as things get closer to the end.”

Long-haul slowness

Following a number of years of 8%-9% growth, Infinera noted that the long-haul market slowed in 2016.

Fallon attributes the decline in long-haul spending to service providers switching their priorities, concentrating instead on building out and enhancing their networks and providing connectivity to data centers.

“I do think that long-haul over a number of years is going to represent a very good growth opportunity,” Fallon said. “But as people have finite capex, they probably spent disproportionately on long-haul during the last few years and now they're moving that in some cases to IP, metro, and to [the] data center.”

Despite the near-term weakness in long-haul, Fallon said that the company anticipates the segment “will start growing again this year, probably low to single or mid-single digit, and that should help us, in general.”

Metro market in transition

Although Infinera forecast solid growth outside of China for metro services, Infinera only saw low-single digit to flat year-over-year growth.

Regardless of the slower than anticipated growth, Infinera did make progress in the metro market.

For one, it completed the integration of Transmode, progressing on SDN control across the portfolio and winning new customer deals with both XTM and XTC solutions.

Fallon said growth in the metro will rise as service providers look to upgrade facilities to address business services and data center interconnection (DCI).

“There are too many applications that are going to require more and more capacity in the metros, all the way through the metro from access through aggregation and that positions us well for when we enter the market with our upgraded TM-Series platform,” Fallon said. “We anticipate this year metro will start in the mid-single digits, maybe up to 8%—5%-8%.”

From an overall financial perspective, Infinera reported GAAP revenue for the quarter was $181 million compared to $185.5 million in the third quarter of 2016 and $260 million in the fourth quarter of 2015.

GAAP revenue for the year was $870.1 million compared to $886.7 million in 2015.

During the quarter, Infinera had mixed results across its verticals with wholesale and enterprise carriers and integrated communications provider (ICPs) collectively up nearly 50%, while telcos and MSOs collectively declined over 25% sequentially.

In the quarter, Infinera’s top five customers consisted of two wholesale and enterprise carriers, two Tier 1s and an ICP. Infinera said two of these customers make up greater than 10% of its revenue: a wholesale and enterprise carrier and an ICP.

Fallon said he is cautious about his outlook for the upcoming quarters. 

“Overall, while I see challenges over the next couple of quarters, my expectation is that as we introduce our next-generation products and continue to deliver the Infinera experience to our customers, we are well positioned to begin improving our financial results over the course of 2017,” Fallon said.

For the first quarter of fiscal 2017, Infinera forecast revenue of $172 million, plus or minus $5 million.