Company Overview

Infinera provides optical transport networking equipment, software and services to telecommunications service providers, Internet content providers (ICPs), cable providers, wholesale and enterprise carriers, research and education institutions, enterprise customers and government entities across the globe. The company’s portfolio consists of the Infinera DTN-X Family, the Infinera DTN platform, the Infinera Cloud Xpress Family, the Infinera XTM Series, the Infinera XTG Series and the Infinera FlexILS platform, addressing longhaul, subsea and metro networks end-to-end. Its technology includes Infinera Intelligent Transport Network Architecture, Infinera Photonic Integrated Circuits, Infinera FlexCoherent Processor, Super-Channels, Sliceable Photonics, Disaggregation, Integrated Digital Switching, Infinera Instant Bandwidth, Infinera Packet-Optical Transport, Multi-layer Switching and Optimization, and Management, Control and Security.

Our Insight

The Opportunities

With COVID-19 changing nearly every business, Infinera has new opportunities that could change its trajectory.

New ICE6 (5th generation, 800G) could be the game changer for Infinera

The ICE6 optical engine gives Infinera a 4x distance reach and reportedly a 25% cost advantage in 800G versus the competition, and the competition is narrowing. With Huawei under immense political pressure, Ciena is the only other U.S. vendor at 800G. As the challenger, Infinera has market share growth opportunities. There were eight or more competitors in the 3rd generation (400G) and 4th generation (600G) markets.

The successful Verizon trial with ICE6 this summer showed ICE6’s Nyquist subcarriers, longcodeword probabilistic constellation shaping (LC-PCS), and significant vertical integration are working. The new technology is estimated to provide network cost savings of 65% vs 400G implementations (3rd generation), 35% vs 600G (4th gen), and 25% vs. other 800G (5th). Management was upbeat on the August call and expects its first customer shipment before the close of 2020. A generation usually provides eight years of significant revenue before the next generation comes along.

Customers moving away from Huawei

Previously, Infinera thought that the push away from Huawei would not be material, however, that view has changed. Displacement of Huawei is real and helping Infinera. In one recent competition between Infinera and Huawei, Huawei was ruled out and the business was awarded to Infinera. Management is citing significant interest in replacing already deployed Huawei technology; however, it expects that process could take years – a multi-year tailwind for Infinera.

Bandwidth growth will likely be driven by 5G, COVID, and global demand growth

The edge and metro markets are seeing growth from COVID today and likely from 5G soon. The high-end optical market (600G+) is expected to grow 25% a year through 2024 to over $2bn annually. The trend to open compact solutions will likely drive customers to Infinera, most likely its new Groove (GX) series. The world is in the early stages of a 600G ramp with its lower price/bit and lower power consumption. Infinera’s 600G to was shipped in an internet cloud provider (ICP) recently. Infinera’s 600G solution is estimated to be approximately 65% cheaper than current 400G competition, and 25% cheaper than competition’s 800G.

The Obstacles

Although there are numerous favorable tailwinds, there are also headwinds that must be navigated and overcome. The company has not had a profitable quarter since mid- 2016, however, expectations are for positive EPS in 4Q20. Some of the obstacles include the following:

  • It is obvious, but external economic factors, election considerations, geopolitical issues, pandemics, etc. can all negatively impact demand for any product or service and Infinera is no different. Despite the variety of factors helping to sell bandwidth, customers are still sensitive to the global economic conditions, though its customers tend to be better insulated as they have significant resources.
  • ICE6, both 600G and 800G, is predicted to be the future of Infinera. Any material issues with performance or manufacturing of ICE6 would be a significant obstacle for Infinera. This will be Infinera’s fifth-generation optical product.
  • The CEO change could provide some near-term headwinds. After 11 years as CEO, Tom Fallon is planning on stepping down and David Heard, the Chief Operating Officer, is expected to take over. We expect the change to occur by the end of 2020.