Infinera investors remained unimpressed with the optical networking vendor despite it posting a fifth sequential quarter of improved revenues, touting planned benefits of its pending acquisition of rival Coriant, and seeing a return on spending from one of its largest customers.
The company posted a nearly 18-percent year-over-year increase in second quarter revenues at $208 million. But, that fell short of the $209 million that was expected by a consensus of Wall Street firms.
Infinera CFO Brad Feller played up the results, attributing that growth to strong international results, including a 100-percent sequential surge in revenue from the Asia-Pacific region. However, 58 percent of Infinera’s overall revenues still come from its North America operations, which counted an 8-percent increase in year-over-year revenues.
Feller tied that modest North America growth to a rebound in spending from CenturyLink, which is one of its largest in-market customers. Infinera CEO Thomas Fallon explained that CenturyLink spending had “bottomed out” following its acquisition of Level 3, which was also a substantial Infinera customer.
“The good news is every quarter we have become more successful at replacing that,” Fallon said. “Clearly, if that goes back to anywhere close to where it was before, that’s a significant upside. We just aren’t baking that into our near-term planning because we don’t know when that’s going to occur. My suspicion is it will occur.”
Not So Competitive?
Fallon also attempted to moderate his previous comments about growing pricing pressure from larger rivals. He had cautioned during the company’s Q1 investor call about “very, very aggressive pricing from some of the larger guys.”
“You should assume that I communicated very poorly last quarter,” Fallon said in the latest call. “This industry always has price competition. I wasn’t implying that it’s getting worse than that. My indication was that on new footprint that it’s becoming even more intense on new footprint, and that’s no change on that. To me, it was trying to be fully disclosing on what we see.”
Looking ahead, Infinera management said it expects a slight uptick in revenues for the second half of the year compared with the first half. But the structure of some initial contract wins set to begin during the current quarter will compress margins.
“We expect several new customer footprint deployments in the third quarter of 2018,” the company noted in a prepared statement. “We expect these new deployments will drive multi-year revenue growth and strong margins moving forward. However, as is typical with new deployments of network infrastructure, these will have lower margins initially.”
That forecast seemed to dampen investor spirits as Infinera’s stock was trading down more than 6 percent in early Wednesday trading.
Infinera last month announced plans to acquire rival Coriant for $430 million.
The proposed deal would consolidate two nearly equal-sized players from the second rung of vendors in the optical networking space. Infinera and Coriant were both lumped into a group of “challengers” within the optical networking space in a recent IHS Markit report. Others in that group included Fujitsu, ECI, ZTE, and ADVA. Those six vendors were graded as one step below “market leaders” Cisco, Ciena, Huawei, and Nokia.
Fallon told investors on the Q2 conference call that response to the deal from both Infinera and Coriant customers has been “positive or neutral.”
“Some people haven’t been looking at them, and they don’t really care,” Fallon said of customers viewing Coriant’s platforms. “Some people are looking at them and actually buying from them, ones that we didn’t have, and at first, they were pensive about ‘what’s your plan,’ and we told them that we’re going to continue with the product offering.”
The deal will double Infinera’s revenues and expand its customer base to nine of the world’s 10 largest network operators – five of those coming from Coriant – and the six largest internet content providers, including three coming from Coriant. It’s expected to close by the end of Q3.
Photo courtesy of Infinera.