Infinera buying Coriant will bring welcome consolidation
Infinera is to purchase privately-held Coriant for $430 million. The deal will effectively double Infinera’s revenues, add 100 new customers and expand the systems vendor’s product portfolio.
Infinera's CEO, Tom FallonBut industry analysts, while welcoming the consolidation among optical systems suppliers, highlight the challenges Infinera faces making the Coriant acquisition a success.
“The low price reflects that this isn't the best asset on the market,” says Sterling Perrin, principal analyst, optical networking and transport at Heavy Reading. “They are buying $1 of revenue for 50 cents; the price reflects the challenges.”
Benefits
According to Perrin, there are still too many vendors facing "brutal price pressures" despite the optical industry being mature. Removing one vendor that has been cutting prices to win business is good news for the rest.
For Infinera, the acquisition of Coriant promises three main benefits, as outlined by its CEO, Tom Fallon, during a briefing addressing the acquisition.
The first is expanding its vertically-integrated business model across a wider portfolio of products. Infinera develops its own optical technology: its indium-phosphide photonic integrated circuits (PICs) and accompanying coherent DSPs that power its platforms. Having its own technology differentiates the optical performance of its platforms and helps it achieve leading gross margins of over 40 percent, said Fallon.
Exploiting the vertical integration model will be a central part of the Coriant acquisition. Indeed, the company mentioned vertical integration 21 times in as many minutes during its briefing outlining the deal. Infinera expects to deliver industry-leading growth and operating margins once it exploits the benefits of vertical integration across an expanded portfolio of platforms, said Fallon.
Having a seat at the table with the largest global service providers to strategise about where their business is going will be invaluable
Buying Coriant also gives Infinera much-needed scale. Not only will Infinera double its revenues - Coriant’s revenues were about $750 million in 2017 while Infinera’s were $741 million for the same period - but it will expand its customer base including key tier-one service providers and webscale players. According to Fallon, the newly combined company will include nine of the top 10 global tier-one service providers and the six leading global internet content providers.
Infinera admits it has struggled to break into the tier-one operators and points out that trying to enter is an expensive and time-consuming process, estimated at between $10 million to $20 million each time. “[Now, with Coriant,] having a seat at the table with the largest global service providers to strategise about where their business is going will be invaluable,” said Fallon.
Sterling Perrin of Heavy Reading The third benefit Infinera gains is an expanded product portfolio. Coriant has expertise in layer 3 networking, in the metro core with its mTera universal transport platform as well as SDN orchestration and white box technologies. Heavy Reading’s Perrin says Coriant has started development of a layer-3 router white box for edge applications.
Combining the two companies also results in a leading player in data centre interconnect.
“Coriant expands our portfolio, particularly in packet and automation where significant network investment is expected over the next decade,” said Fallon. The deal is happening at the right time, he said, as operators ramp spending as they undertake network transformation.
Infinera will pay $230 million in cash - $150 million up front and the rest in increments - and a further $200 million in shares for Coriant. The company expects to achieve cost savings of $250 million between 2019 and 2021 by combining the two firms, $100 million in 2019 alone. The deal is expected to close in the third quarter of 2018.
If a company is going to put that integrated product into their network, it’s a full-blown RFP process which Infinera may or may not win
Challenges
Industry analysts, while seeing positives for Infinera, have concerns regarding the deal.
A much-needed consolidation of weaker vendors is how George Notter, an analyst at the investment bank, Jefferies, describes the deal. For Infinera, however, continuing as before was not an option. Heavy Reading’s Perrin agrees: ”Infinera has been under a lot of pressure; their core business of long-haul has slowed.”
The deal brings benefits to Infinera: scale, complementary product sets, and the promise of being able to invest more in R&D to benefit its PIC technology, says Notter in a research note.
Gaining customers is also a key positive. “Infinera is really excited about getting the new set of customers and that is what they are paying for,” says Vladimir Kozlov, CEO of LightCounting Market Research. “However, these customers were gained by pricing products at steep discounts.”
What is vital for Infinera is that it delivers its upcoming 2.4-terabit Infinite Capacity Engine 5 (ICE5) optical engine on time. The ICE5 is expected to ship in early 2019. In parallel, Infinera is developing its ICE6 due two years later. Infinera is developing two generations of ICE designs in parallel after being late to market with its current 1.2-terabit optical engine.
Infinera is really excited about getting the new set of customers and that is what they are paying for
But even if the ICE5 is delivered on time, upgrading Coriant's platforms will be a major undertaking. “It sounds like they are going to fit their optical engines in all of Coriant’s gear; I don’t see how that is going to happen anytime quickly,” says Perrin.
Customers bought Coriant's equipment for a reason. Once upgraded with Infinera’s PICs, these will be new products that have to undergo extensive lab testing and full evaluations.
Perrin questions how moving customers off legacy platforms to the new will not result in the service providers triggering a new request-for-proposal (RFP). “If a company is going to put that integrated product into their network, it’s a full-blown RFP process which Infinera may or may not win,” says Perrin. “Infinera talked a lot about the benefits of vertical integration but they didn’t really address the challenges and the specific steps they would take to make that work.”
LightCounting's Vladimir KozlovLightCounting’s Kozlov also questions how this will work.
“The story about vertical integration and scaling up PIC production is compelling, but how will they support Coriant products with the PIC?” he says. “Will they start making pluggable modules internally? Will Coriant’s customers be willing to move away from the pluggables and get locked into Infinera’s PICs? Do they know something that we don’t?”
While Infinera is a top five optical platform supplier globally it hasn’t dominated the market with its PIC technologies, says Perrin. “Even if they technically pull off the vertical integration with the Coriant products, how much is that going to win business for them?” he says. “It is one architecture in a mix that has largely gone to pluggables.”
Transmode
Infinera already has experience acquiring a systems vendor when it bought in 2015 metro-access player, Transmode. Strategically, this was a very solid acquisition, says Perrin, but the jury is still out as to its success.
“The integration, making it work, how Transmode has performed within Infinera hasn’t gone as well as they wanted,” says Perrin. “That said, there are some good opportunities going forward for the Transmode group.”
Infinera also had planned to integrate its PIC technology within Transmode’s products but it didn't make economic sense for the metro market. There may also have been pushback from customers that liked the Transmode products, says Perrin: “With Coriant it looks like they really are going to force the vertical integration.”
Infinera acknowledges the challenges ahead and the importance of overcoming them if it is to secure its future.
“Given the comparable sizes of each company’s revenues and workforce, we recognise that integration will be challenging and is vital for our ultimate success,” said Fallon.
Ovum Q&A: Infinera as an end-to-end systems vendor
Infinera hosted an Insight analyst day on October 6th to highlight its plans now that it has acquired metro equipment player, Transmode. Gazettabyte interviewed Ron Kline, principal analyst, intelligent networks at market research firm, Ovum, who attended the event.
Q. Infinera’s CEO Tom Fallon referred to this period as a once-in-a-decade transition as metro moves from 10 Gig to 100 Gig. The growth is attributed mainly to the uptake of cloud services and he expects this transition to last for a while. Is this Ovum’s take?
Ron Kline, OvumRK: It is a transition but it is more about coherent technology rather than 10 Gig to 100 Gig. Coherent enables that higher-speed change which is required because of the level of bandwidth going on in the metro.
We are going to see metro change from 10 Gig to 100 Gig, much like we saw it change from 2.5 Gig to 10 Gig. Economically, it is going to be more feasible for operators to deploy 100 Gig and get more bang for their buck.
Ten years is always a good number from any transition. If you look at SONET/SDH, it began in the early 1990s and by 2000 was mainstream.
If you look at transitions, you had a ten-year time lag to get from 2.5 Gig to 10 Gig and you had another ten years for the development of 40 Gig, although that was impacted by the optical bubble and the [2008] financial crisis. But when coherent came around, you had a three-year cycle for 100 gigabit. Now you are in the same three-year cycle for 200 and 400 gigabit.
Is 100 Gig the unit of currency? I think all logic tells us it is. But I’m not sure that ends up being the story here.
If you get line systems that are truly open then optical networking becomes commodity-based transponders - the white box phenomenon - then where is the differentiation? It moves into the software realm and that becomes a much more important differentiator.
Infinera’s CEO asserted that technology differentiation has never been more important in this industry. Is this true or only for certain platforms such as for optical networking and core routers?
If you look at Infinera, you would say their chief differentiator is the PIC (photonic integrated circuit) as it has enabled them to do very well. But other players really have not tried it. Huawei does a little but only in the metro and access.
It is true that you need differentiation, particularly for something as specialised as optical networking. The edge has always gone to the company that can innovate quickest. That is how Nortel did it; they were first with 10 gigabit for long haul and dominated the market.
When you look at coherent, the edge has gone to the quickest: Ciena, Alcatel-Lucent, Huawei and to a certain extent Infinera. Then you throw in the PIC and that gives Infinera an edge.
But then, on the flip side, there is this notion of disaggregation. Nobody likes to say it but it is the commoditisation of the technology; that is certainly the way the content providers are going.
If you get line systems that are truly open then optical networking becomes commodity-based transponders - the white box phenomenon - then where is the differentiation? It moves into the software realm and that becomes a much more important differentiator.
I do think differentiation is important; it always is. But I’m not sure how long your advantage is these days.
Infinera argues that the acquisition of Transmode will triple the total available market it can address.
Infinera definitely increases its total available market. They only had an addressable market related to long haul and submarine line terminating equipment. Now this [acquisition of Transmode] really opens the door. They can do metro, access, mobile backhaul; they can do a lot of different things.
We don’t necessarily agree with the numbers, though, it more a doubling of the addressable market.
The rolling annual long-haul backbone global market (3Q 2014 to 2Q 2015) and the submarine line terminating equipment market where they play [pre-Transmode] was $5.2 billion. If you assume the total market of $14.2 billion is addressable then yes it is nearly a tripling but that includes the legacy SONET/SDH and Bandwidth Management segments which are rapidly declining. Nevertheless, Tom’s point is well-taken, adding a further $5.8 billion for the metro and access WDM markets to their total addressable market is significant.
Tom Fallon also said vendor consolidation will continue, and companies will need to have scale because of the very large amounts of R&D needed to drive differentiation. Is scale needed for a greater R&D spend to stay ahead of the competition?
When you respond to an operator’s request-for-proposal, that is where having end-to-end scale helps Infinera; being able to be a one-stop shop for the metro and long haul.
If I’m an operator, I don’t have to get products from several vendors and be the systems integrator.
Infinera announced a new platform for long haul, the XT-500, which is described as a telecom version of its data centre interconnect Cloud Xpress platform. Why do service providers want such a platform, and how does it differ from cloud Xpress?
Infinera’s DTN-X long haul platform is very high capacity and there are applications where you don’t need a such a large platform. That is one application.
The other is where you lease space [to house your equipment]. If I am going to lease space, if I have a box that is 2 RU (rack unit) high and can do 500 gigabit point-to-point and I don’t need any cross-connect, then this smaller shelf size makes a lot of sense. I’m just transporting bandwidth.
Cloud Xpress is a scaled-down product for the metro. The XT-500 is carrier-class, e.g. NEBS [Network Equipment-Building System] compliant and can span long-haul distances.
Infinera has also announced the XTC-2. What is the main purpose of this platform?
The platform is a smaller DTN-X variant to serve smaller regions. For example you can take a 500 gigabit PIC super-channel and slice it up. That enables you to do a hub-and-spoke virtual ring and drop 100 Gig wavelengths at appropriate places. The system uses the new metro PICs introduced in March. At the hub location you use an ePIC that slices up the 500G into individually routable 100G channels and at the hub location, where the XTC-2 is, you use an oPIC-100.
Does the oPIC-100 offer any advantage compared to existing100 Gig optics?
I don’t think it has a huge edge other than the differentiation you get from a PIC. In fact it might be a deterrent: you have to buy it from Infinera. It is also anti-trend, where the trend is pluggables.
But the hub and spoke architecture is innovative and it will be interesting to see what they do with the integration of PIC technology in Transmode’s gear.
Acquiring Transmode provides Infinera with an end-to-end networking portfolio? Does it still lack important elements? For example, Ciena acquired Cyan and gained its Blue Planet SDN software.
Transmode has a lot of different technologies required in the metro: mobile back-haul, synchronisation, they are also working on mobile front-hauling, and their hardware is low power.
Transmode has pretty much everything you need in these smaller platforms. But it is the software piece that they don’t have. Infinera has a strategy that says: we are not going to do this; we are going to be open and others can come in through an interface essentially and run our equipment.
That will certainly work.
But if you take a long view that says that in future technology will be commoditised, then you are in a bad spot because all the value moves to the software and you, as a company, are not investing and driving that software. So, this could be a huge problem going forward.
What are the main challenges Infinera faces?
One challenge, as mentioned, is hardware commoditisation and the issue of software.
Hardware commodity can play in Infinera’s favour. Infinera should have the lowest-cost solution given its integrated solution, so large hardware volumes is good for them. But if pluggable optics is a requirement, then they could be in trouble with this strategy
The other is keeping up with the Joneses.
I think the 500 Gig in 100 Gig channels is now not that exciting. The 500 Gig PIC is not creating as much advantage as it did before. Where is the 1.2 terabit PIC? Where is the next version that drives Infinera forward?
And is it still going to be 100 Gig? They are leading me to believe it won’t just be. Are they going to have a PIC that is 12 channels that are tunable in modulation formats to go from 100 to 200 to 400 Gig.
They need to if they want to stay competitive with everyone else because the market is moving to 200 Gig and 400 Gig. Our figures show that over 2,000 multi-rate (QPSK and 16-QAM) ports have been shipped in the last year (3Q 2014 to 2Q 2015). And now you have 8-QAM coming. Infinera’s PIC is going to have to support this.
Infinera’s edge is the PIC but if you don’t keep progressing the PIC, it is no longer an edge.
These are the challenges facing Infinera and it is not that easy to do these things.