Think Twice About Infinera

By Hans el - September 14, 2012 | Tickers: ALU, T, CIEN, INFN, S, VZ | 0 Comments

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I have been in the telecom industry now for 12 years starting back in 2000 with Lucent Technologies. My work has taken me across Europe, Africa, Latin America, and the USA. These experiences I hope will help you decide if Infinera (NASDAQ: INFN) is the right investment for you.

There has been a lot of buzz for a long time about INFN driven by great expectations of their new flagship DTN-X 100G product line. I will be the first to admit that this is the best 100G technology available supported by a very competitive Total Cost of Ownership.  As carriers across the world have to increase capacity of their transport and networks to handle the explosive data growth driven especially by mobile data usage they have no choice to invest in 100G.  INFN’s DTN-X seems to be the logical choice.

Or is It?

With INFN’s price under $6 a share near a 52 week low, it seems to be a bet worth making with a small position in your portfolio.  However, despite the raving reviews of INFN’s technology, I question whether that is enough to win the 100G battle over established players who are existing optical partners to the biggest service providers across the world, especially Alcatel-Lucent (NYSE: ALU), Huawei, and Ciena (NASDAQ: CIEN).

Being technically the best is rarely enough to win contracts.  It just does not work that way.  I have experienced this first hand.  You really don’t have to have the best technology.  What wins contracts is the right balance between price, organization, relationships, the ability to implement flawlessly, and security that your vendor will be around for the next decade to maintain the tens and hundreds of millions of dollars you will invest with them. 

Decision makers ask themselves which vendor it really needs to survive and which ones they could do without.  Decision makers ask themselves another question as well: which vendor selection is the safest for my career….. will I get fired for selecting one vendor over the other when things go wrong?  That seems unfair, but it is human.  Especially today.

I will go through what I believe are the key decision factors that INFN will have to deal with:

1.  Price

Telecom equipment vendors are under heavy pressure. They have been struggling to keep their budgets under control and often that forces their hand not to select their preferred technical solution, but an alternative that strikes a better balance.

Key for INFN is to quickly ramp up the contracts in order to create a head start and build scale that allows them drive down costs and be competitive. Despite their solution’s competitive TCO, I believe that still they need to undercut the ALUs and the Huawei’s to displace them. And this will be tough.  Unlike ALU and Huawei, INFN does not have a wide solutions portfolio that can provide resolutions across network domains, while the trend with service providers are to resolve business problems rather than network problems. 

A network problem is looking at a specific component of the network that requires resolution.  This approach plays to the advantage of the specialists, the niche players.  A business problem typically transcends network domains and requires an end to end integrated multi-technology solution.  That is exactly why you see vendors with wider portfolios consolidating, for example, their IP and Optical business units so that they are completely integrated with each other all the way to the management systems.

INFN is a niche player who cannot offer that immediate seamless integration.  I question if in the end, when taking a wider network view, INFN can really be competitive enough going head to head with incumbents. 

2.  Organization

Telco sales have long sales cycles. 12 months, 24 months, and sometimes even longer. Does INFN have the organization in place to truly give the level of attention to their customers over an extended period of time across a wide set of potential customers in the same way as their bigger competitors can? ALU has 70,000 staff, Huawei 22,000 outside of China.  INFN has about 1000.

For the largest opportunities that will make the headlines and will drive market share momentum, the customers want continuous and dedicated support.   Is that sales and engineering force large enough to really develop their business and turn opportunity into revenue?  I am not so sure.

3.  Implementation Capability

Great technology is one thing, the ability to deploy it flawlessly is another. With 1000 people working for INFN, what does their delivery organization look like? And what happens to the quality of the delivery organization when it gets stretched if INFN’s 100G does take off? It could cause a collapse after initial success. 

I have seen it happen so often that delivery cannot keep up with sales, resulting in poor delivery and subsequently a bad reputation which can kill the momentum just built.  Recovering from damage to your reputation takes a long time, especially in a small world like telecom. 

For a company like INFN who is really "all in" on their 100G horse, this is a risk that cannot be underestimated.  This is an all or nothing game.  They cannot afford to trip.

4.  INFN Longevity

INFN has done some decent business in the past.  It has always shown potential. It has not been the success that the company had hoped for. Now they are all in on the 100G DTN-X.

The first vendors that will buy INFN 100G will run a big risk.  This means the first 25 or so.  Will INFN be around in 5 years or 10 when the carriers still need support for their networks and still have new business critical feature needs that must be developed? What about software upgrades for big fixes? 

Look at the carriers who had Marconi optical networks 5 years ago?  Or Nortel?  Or Motorola?  They ended up forklifting their Marconi, Motorola, and Nortel equipment out of their network and spending new CAPEX often sooner than planned because patching these networks constructed with equipment from vendors that went broke just did not meet the business needs anymore.

You think that is not lingering in service provider’s minds when they make a vendor selection?

5.  Politics

This may be my #1 concern.

Taking all of the other concerns out of the equation, will INFN really be able to land enough large contracts for their 100G product line? Will they be able to convince CTOs and CEOs and COOs that INFN is a safe choice, which will NOT get them fired, and damage their personal career over the longer term?

I am not so sure. The reason? Well, look at the condition of ALU today, or Ericsson, or NSN? They are hurting due to their own mistakes, due to market/economic environment, and due to the Huawei and ZTE who have pressured the margins in the telco business. BUT……….Verizon, AT&T, Vodafone, British Telecom, Bharti, China Mobile, Telefonica, etc, etc, etc....all the service providers around the world who will be investing millions on 100G networks, already have billions of dollars invested in these incumbent equipment vendors. Think about how much Sprint, Verizon (NYSE: VZ), and AT&T (NYSE: T) must have spent on the wireless 3G and 4G LTE networks with Ericsson, Nokia Siemens Networks (NSN), and ALU in the USA, for example.  In North America these deployments are slowing down creating revenue holes for these incumbent vendors. 

Sprint, Verizon, and AT&T cannot afford ALU and Ericsson to go down.  There are similar examples in other countries, which is why I fear for INFN chances to win BIG, which is why you would invest in this company in the first place. 

My heart wants to buy INFN. Much of the logic behind the investment thesis is valid. Based on the above however, I just do not see the investment thesis pan out as many are hoping for.

All I am saying is be careful.  And if you go in, go in slowly.

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