Infinera’s stock price plunged more than 19 percent this morning as investors zeroed in on forward-looking comments about competitive pressure and overlooked the company’s robust quarterly performance. One analyst pointed to Infinera rival Ciena as the source of the pricing concern.
During its first quarter conference call with analysts, Infinera CEO Thomas Fallon lauded the company’s latest results and full-year potential. But, he also cautioned about “very, very aggressive pricing from some of the larger guys.”
“This is always a very competitive market. It’s been over-served for a decade or more,” Fallon said, according to transcipts. “And I think what’s a little bit different this time – and we’re putting it out – is we’re continuing to see normal type of pricing pressures in general, but we’re seeing some of the larger, more traditional optical people, I would say, being hyper-aggressive on some of the, I would call it, more important deals that are in the world.”
A report from MarketWatch cited William Blair financial analyst Dmitry Netis as stating Ciena was the source of the pricing pressure mentioned by Infinera’s management. A recent IHS Markit survey named Ciena as one of largest players in the optical networking space alongside Nokia and Huawei.
Fallon did attempt to temper those competitive pricing concerns.
“I don’t raise it up because it scares us to death. I raise it up because it is a little bit of a new dynamic, and I think that there’s a little bit of a land-grab mentality going on,” Fallon said. “The good news is there’s a ton of bandwidth demand out there. So, there’s lots of opportunities. But it’s a bit of a hyper-competitive place right now with more traditionally larger competitors.”
Outside of pricing competition, Fallon also touched on other possible headwinds through the rest of the year.
Those concerns included possible consolidation of European customers, including Liberty Global, that “could be somewhat impactful on our business.” Fallon also said Infinera still expects an uptick in business from CenturyLink, its largest domestic customer, “though it continues to be hard to predict the extent of any improvement and which quarter it might occur in,” he added.
“As this customer works through its process of driving synergies and emerging as a larger, healthier company, we believe we’ll be an integral part of their long-term plans,” Fallon noted.
Investors seemed to latch onto the headwind sentiment, sending Infinera’s stock price tumbling to around $9.50 per share early Thursday. The plunge came on the heels of that stock price hitting a new 52-week high of $12.39 per share just this past Monday.
Despite the forward-looking concern, Infinera posted rather strong first-quarter results. Total revenues increased 15.5 percent year over year to $202.7 million. Net expenses increased a more modest 4.9 percent, helping to trim net losses from $40.5 million in 2017 to $26.3 million this year.
Infinera management had previously noted it was expecting positive revenue growth for the first quarter that it predicts will last through the first half of this year. The company expects between $203 million and $213 million in second-quarter revenues, which would handily outpace previous year results, and a further reduction in net losses.
China Concerns Remain Tepid
Fallon also downplayed any potential impact from the current political challenges surrounding its Chinese-based competitors being able to sell equipment to U.S. operators. Along with Huawei, ZTE is also a player in the optical networking space.
“Chinese suppliers haven’t been and still can’t sell telecom gear in North America, and we can’t sell gear in China,” Fallon explained. “So, net-net, not much has changed.”
Huawei is reportedly under investigation by the U.S. Justice Department for possibly selling equipment to Iran in violation of U.S. sanctions. ZTE this week shuttered its manufacturing facilities in response to a seven-year ban from using components made in the U.S.
“That really doesn’t impact us a lot either,” Fallon said of the more recent ZTE news. “ZTE mostly sells to China. They certainly sell around the world. But we haven’t considered them much of a direct competitor.”