Infinera Throws Down the 100G Gauntlet

On Wednesday Infinera (NASDAQ:INFN, news, filings) announced its first quarter results with revenues just below the median of guidance with EPS and guidance at the top of the range.  But the more interesting pieces came in the details of forward guidance.  The company’s 500G PIC DTN-X launch will be at the end of the quarter, and its effects dominated their comments about future performance.  First, here’s a quick tabular summary in context

$ in millions	Q1/11	Q2/11	Q3/11	Q4/11	Q1/12	Guidance
Revenue	92.9	96.0	104	112	105	Q2: 92-100, H2: 230-260
Non-GAAP EPS	(0.04)	(0.11)	(0.09)	(0.06)	(0.10)	(0.14)-(0.18)
Non-GAAP GM%	48%	41%	41%	42%	40%	36-38%

Infinera announced that in addition to its win at C&W Worldwide, three existing customers have also signed on for the DTN-X.  The June DTN-X launch will distort Q2 results downwards due to customers waiting for the new product, a fact already seen in reduced backlog levels at the end of Q1. Indeed, Q2 guidance therefore came in well below analyst projections, which I think have been underestimating the extent of that distortion.  But the company also gave some second half numbers, projecting revenues of $230-260M, suggesting an average of $122.5M per quarter with some wide error bars.  Additionally, the company seems to be preparing for a 100G price war and land grab of sorts.  According to CEO Tom Fallon during the conference call (emphasis added):

This transition result can reduce revenues in Q2 until revenue recognition kicks in for the DTN-X in the second half of the year. As the capabilities and early success of the DTN-X challenged the more traditional approaches, we see competitors aggressively pricing their 100-gig offering as they compete for the same footprint during the optical reboot. Gaining footprint now will advantage Infinera’s gross margin opportunity over time more than others who are using less cost-effective commercially-available optical technology. This footprint will allow us to leverage the scale advantages of our PIC-based vertically integrated model that our customers fill these initial installs with up to 8 terabits of capacity. As a result, we are competing aggressively for these new footprint opportunities.

And CFO Ita Brennan added:

we have seen more aggressive pricing from competitors on a number of new 100-gig footprint opportunities. In most cases, we are responding with increased levels of upfront discounts in order to secure the initial footprint and have access to the future network fill. Each fiber and line system deployment will now support up to 8 terabits of capacity, providing the opportunity to sell additional high-margin network fill in the future.

and:

All things being equal, the initial footprint pricing dynamics described above, when coupled with the higher level of common equipment and the DTN-X ramp up cost we’d already factored into our 2012 model, mean results in gross margin for the year somewhat below our previous guidance of approximately 40%. Importantly, we believe executing on winning this new footprint now will allow us to capture the volume needed to leverage our 500-gig PIC baseline module cost advantage and drive to expanded margins in the future.

A very carefully worded declaration of war?  It certainly sounds as if Infinera is throwing down a pricing gauntlet, pledging to beat competitive offers at some expense to its own margin profile in order to gain future marketshare.  And indeed, the market seems to have taken it as such.

Not that anyone should be terribly surprised, the transition to a new technological framework is a period in which lots of future revenue is up for grabs and hence an opportunity for dramatic marketshare changes.  Infinera entered the 10G market years after it was already fairly mature, and thus its ability to break into the big accounts was impeded.  They’ve been planning for the days of substantial 100G adoption for a long time, and obviously do not plan to miss it.

Of course, it also means that margins are going to take a hit and that guidance is going to stink for a while yet.  The benefits from their aggressive stance are longer term, and of course still quite theoretical.

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Categories: Financials · Telecom Equipment