Infinera restructures as it seeks path back to profitability
Following a tough third quarter, optical transport provider Infinera has announced a restructuring plan that it hopes will return the company to profitability next year.
Although revenue grew four per cent quarter over quarter, to reach $193 million in the third quarter of 2017 – compared to $176.8 million in the second quarter of 2017 and $185.5 million in the third quarter of 2016 – that wasn’t enough to avert the company’s fourth consecutive quarter of loss. On a non-GAAP basis, net loss for the period was $17 million, compared to a net income of $7.4 million in the third quarter of 2016.
On a conference call with analysts, Infinera CEO Thomas Fallon attributed revenue pressure over the past year to customer consolidation, especially major deals like CenturyLink and Level 3, which completed on 1 November (see CenturyLink and Level 3 confirm $34B megamerger). Price erosion and reduced capex among customers also played a part, he said (see Cignal AI: Cloud/colo spending drops unexpectedly in 2017).
In addition, technology transformations in the industry are creating challenges. “While this transition [to disaggregated architectures] is a positive development for Infinera and our new portfolio, it comes with the challenge of having to sell multiple units to achieve the same level of revenue an integrated chassis-based sale would have historically achieved,” he said.
However, the greatest challenges appear to be operational, with Infinera expanding into metro markets with the acquisition of Transmode, and speeding up the refresh cycles – or cadence – of its flagship optical transmission technology, the Infinite Capacity Engine (ICE).
“In recent years we have made significant investments to become a multi-market company, deliver a fully refreshed product portfolio and establish a faster technology cadence. Reflecting on the internal expansion associated with these investments, we have identified areas where we can be more efficient going forward,” said Infinera CEO Thomas Fallon via a press release. “While difficult, my expectation is taking action at this time will result in a more cost-efficient structure that enables us to focus on our strengths and return to profitability as we grow. I believe these are the right steps for our shareholders, our company and our customers.”
On the earnings call, Brad Feller, Infinera CFO, explained that the company intends to consolidate development sites, including closing the company’s Beijing design centre, and instead share its engineering resources more broadly across regions and product line development. The company will also re-examine its R&D initiatives, including decisions about what development will be performed in-house versus externally, and how prototypes can be used more effectively.
To implement these changes, Infinera will share strategy and commercialisation across two new roles. Co-founder Dave Welch will assume the role of chief strategy and technology officer, charged with “creating differentiated capabilities that will drive our strategy”. He will also spend more time with customers to help the company align its product roadmap and technology strategies with the challenges on the horizon.
David Heard, who joined Infinera in June, will be responsible for product realisation. “David has a strong track record around building businesses and driving operational efficiencies. He has been tasked with enhancing internal alignment between our engineering, product management, and marketing teams, and ensuring efficiency in our overall development process,” explained Feller.
The plan is expected to save about $40.0 million annually; while restructuring costs will be about $25.0 million, the company said. Infinera anticipates that the plan will be mostly complete during the current quarter.
“We are taking decisive actions to ensure we return to profitability in 2018 and are more profitable as we grow in the future. Our long-term opportunity is unchanged,” said Fallon. With the significant investments we have made in R&D to establish an end-to-end portfolio, I am optimistic we will be successful winning opportunities around impending architectural inflections.
Infinera also announced Netflix as a customer, though it wouldn’t reveal details. “The point to me is Netflix will have recently done a complete and exhaustive review of all products in that form factor that are available in the market, and they picked us,” said Fallon.