Infinera hit a speed bump in the third quarter as Tier 1 long-haul and metro customers tightened their purse strings, impacting revenues.
Tom Fallon, CEO of Infinera, told investors that its third quarter revenue declines were a result of its customers meeting the limits of their capital budgets.
“This is the first time I've seen in a quarter that I'm getting consistent messages from a number of sales people and talking to the customers that they have -- I guess they have hit their capex limit,” Fallon said during the earnings call, according to a Seeking Alpha transcript. “And I think that with the last few years what's happened is people have overspent their capex early in the year and they've come back to the corporation and asked for more based upon the ability to deploy services and they've been getting that.”
Specifically, Fallon noted Infinera saw a number of its long-haul customers halting spending and lower than expected subsea network wins. However, the company expects the market to eventually rebound.
“Despite the current tepid spending environment, particularly with our telecom and wholesale customers, we view long haul as a solid growth opportunity over time and continue to invest in new innovations," Fallon said. He added that Infinera is "starting to have visibility into several new footprint opportunities over the next few quarters." Capacity fill activity should also recover in 2017, he said.
Fallon added that “my expectation is that current softness in long haul will subside in 2017 and the long haul market will resume growing at a mid-single-digit level.”
But long-haul wasn’t the only segment where spending was slow. The vendor also saw a number of its service provider customers conducting more targeted deployments.
Fallon said that despite the short-term weakness it is seeing in the metro market, Infinera is finding opportunities to sell its XTM Series to long-haul customers that see value in an integrated optical solution, for example.
Infinera expects its target customers to eventually ramp up their metro network investments to enable additional bandwidth to support a host of cloud networking, video and mobile data services.
“I anticipate additional Metro wins this year and believe we're on track to begin generating more significant cross-sell revenue synergies in 2017,” Fallon said. The company also sees "promising longer-term opportunities" with providers that traditionally were not Infinera customers. These potential customers could benefit from a variety of "tactical optical solutions around edge applications" including fronthaul and backhaul for mobile services.
From a regional perspective, Infinera noted that it is seeing “soft demand” in the markets it serves, particularly in North America and EMEA.
Recent reports from Dell’Oro and Cignal Al point to a broader slowdown across multiple geographies. The overall DWDM market outside of China in the first half of the year was flat, according to a recent report from Dell’Oro, while Cignal AI estimated that North America DWDM revenue in Q2 came in at its lowest quarterly level since 2014.
Infinera said that North America, which made up 56 percent of the vendor’s total revenue, declined sequentially 38 percent as customers pause spend or shifted it to other portions of the network.
The vendor saw similar weakness in EMEA and Asia Pacific where revenue declined 20 and 26 percent, respectively, on a sequential basis due to challenges in the long-haul and subsea segments.
For the quarter, Infinera reported revenues of $185 million, down 20 percent year-over-year and 28 percent sequentially.
The vendor said that its top five customers in the quarter consisted of two Tier 1 carriers, two cable operators and a wholesale and enterprise carrier. Two of these customers make up greater than 10 percent of revenue -- the wholesale and enterprise carrier and a Tier 1 provider.
Looking toward the fourth quarter, Infinera projected revenue of $175 million, plus or minus $10 million.