Jefferies reports AT&T (T -0.1%) significantly cut its wireline capex starting last month.
It thinks many companies could be affected, including equipment vendors Alcatel-Lucent (ALU -2.2%), Ciena (CIEN -3.9%), Juniper (JNPR +0.2%), and Adtran (ADTN -5.1%), and component vendors JDS Uniphase (JDSU -2%) and Finisar (FNSR -0.7%).
As its is, AT&T's 2014 capex budget ($21B) is down $200M from 2013's spending level. Moreover, the carrier's huge mobile infrastructure needs and the DirecTV deal could be motivating it to cut wireline spend.
In addition to beating Q1 estimates, Infinera (INFN +5.9%) guided on its CC (transcript) for Q2 revenue of $160M-$170M and EPS of $0.02-$0.06 vs. a consensus of $156.3M and $0.05. As is its custom, rival Ciena (CIEN +5.8%) is following Infinera higher.
Thanks to a favorable mix, Q1 gross margin was 41.8%, +40 bps Q/Q and +590 bps Y/Y, and above guidance of 40%. Infinera only forecasts a GM of 39%-41% for Q2 due to the margin pressure caused by new large-footprint deployments, but still expects a low-40s GM for the full year and future margin gains as it fulfills capacity expansion orders for major deployments.
Strong North American demand allowed revenue to grow 3% Q/Q in seasonally weak Q1. Infinera had two 10%+ customers - a cable MSO and a tier-1 North American carrier, and added one more client for its dense/high-capacity DTN-X optical transmission platform, raising the total to 42.
Not surprisingly, a positive outlook was provided for the 100G optical market, where the company and Ciena have leading positions. Infinera says it's confident it can outgrow the broader 100G market in 2014.
Ciena (CIEN -8%) guided during its investor day for its FY14 (ends Oct. '14) op. margin to be at the low end of the company's 7%-10% target range.
Citi (Neutral) thinks the forecast suggests ~10% op. margins are still a ways off. "While we have become believers in the sustainability of Ciena’s product cycle, op margin expansion seems to still be coming in fits and starts challenging the earnings power of the company and making it difficult to currently argue for more than a 20x P/E on our CY14 $1.24 est."
William Blair (Outperform) notes the forecast implies a fiscal 1H op. margin of 5%, but also a fiscal 2H margin near 10%. The firm is slightly upping its FY14 and FY15 EPS estimates.
Ciena also guided for FY14 opex to total $820M, up just slightly from an FY13 level of $810M (exc. restructuring/amortization costs). Revenue growth is expected to exceed mid-to-high single digit market growth; Ciena's rev. growth consensus already stands at 10.4%.
Stifel's Sanjiv Wadhwani has upgraded Infinera (INFN +5.5%) to Buy. Following meetings at last week's OFC 2014 optical networking industry conference, Wadhwani believes demand for 100G systems "is now on a much more global scale versus a year ago," with activity having picked up in Europe and parts of Asia.
Ciena (CIEN +3.8%), also a major player in the 100G optical transport space, is following Infinera higher. Both companies (as well as several peers) rallied last week after Goldman upgraded Infinera and Calix, while estimating 100G systems have a 15% gross margin edge relative to 10G systems.
Component makers Finisar (FNSR +2.3%), Oclaro (OCLR +2.6%), and Alliance Fiber (AFOP +3.8%), each of which also have 100G exposure, are rallying as well.
Goldman's upgrades of Infinera (INFN +14.9%) and Calix (CALX +2.8%) wound up sparking a broader rally telecom equipment and optical component makers. Notable gainers: FNSR +6.2%. UBNT +6.7%. CYNI +5.1%. CIEN +3.8%. JDSU +5.4%. AFOP +3.4%. NPTN +3.4%. ADTN +2.8%. FN +2.2%.
Goldman's Simona Jankowski believes Infinera, which recently lost a major Verizon deal to Alcatel-Lucent, has regained Level 3 as a client. She also estimates 100G optical system shipments "have approximately a 15% point gross margin advantage" relative to 10G counterparts, and sees this delta boosting Infinera's margins as 100G "increases from mid-50% of total product revenue in 2013 to mid-70% in 2014."
Regarding Calix, Jankowski reports seeing better spending trends among the tier 2/3 carriers the company leans heavily on, and thinks 2014/2015 estimates now "more accurately reflect" Calix's growth trajectory.
Today's gains come as the optical networking industry's OFC 2014 conference continues. As usual, the conference has seen a slew of product launches. Ciena has followed Infinera (previous) in launching software tools for intelligently controlling a network's optical layers, and JDS Uniphase is showing off several new components and modules.
Though Ciena's (CIEN +2.1%) FQ1 revenue was only in-line, its gross margin (43.4%, +260 bps Q/Q and -120 bps Y/Y) and opex ($199.8M, -5% Q/Q and +13% Y/Y) were favorable to guidance for a low-40s GM and $205M in opex. That, in turn, helped EPS beat by $0.07.
Ciena expects FQ2 revenue of $540M-$570M, in-line with a $561.1M consensus. GM is again expected to be in the low-40s range, and opex is expected to rise to $210M.
Sales of integrated Ethernet switching/optical networking gear rose 39% Y/Y in FQ1 to $333.4M (62.5% of revenue). Software/services sales -1% to $108.5M; Ethernet switching +13% to $51.7M; optical transport -30% to $40.1M.
Optical networking rival Infinera (INFN +4.5%) is also higher. The company recently launched a solution it claims can automate/control both the digital switching and optical transport layers of an optical network. The solution, part of a broader trend towards building networks that offer more optical layer intelligence and flexibility, is expected to ship in September.
Ciena (CIEN +4.7%) is now up 13% since announcing a major reseller deal/product partnership with mobile infrastructure leader Ericsson on Friday morning. PT hikes from Nomura, Evercore, and MKM are contributing to today's gains.
Nomura's Stuary Jeffrey has upped his Ciena FY16 (ends Oct. '16) EPS forecast to $2.33 from $1.92, and predicts the Ericsson deal will lift Ciena's EMEA/Asia-Pac share by 2%. He expects the gross margin for Ericsson-related revenue to be 500 bps lower than for other sales, but (given Ericsson is handling much of the sales burden) also thinks the opex-to-sales ratio will be half that for other business.
Citi's Ehud Gelblum sees the deal improving Ciena's reach in emerging markets and Asia-Pac, where its presence has historically been limited. He also expects Ericsson to boost sales of Ciena's carrier Ethernet gear for wireless backhaul deployments.
Ciena (CIEN) is partnering with mobile infrastructure giant Ericsson (ERIC) to jointly develop integrated Ethernet/optical networking solutions (i.e. packet-optical), as well as carrier software-defined networking (SDN) offerings.
As part of the deal, Ericsson, which counts most of the world's top mobile carriers among its clients, will resell Ciena's 6500 packet-optical systems and 5400 reconfigurable optical switches. The companies are looking to address carrier needs for more powerful/intelligent back-end infrastructures as mobile data traffic continues soaring.
Ciena's packet-optical sales rose 16% Y/Y in the October quarter, and accounted for 60% of revenue. Its SDN business is still in its early stages - though many see tremendous long-term potential for the technology, large-scale carrier SDN adoption isn't expected before 2016.
Jefferies' Geroge Notter reports Infinera (INFN -11.5%) has lost a $100M Verizon contract for long-haul optical transmission hardware to Alcatel-Lucent (ALU +0.5%). Infinera was considered the favorite to win the deal, which will make Alcatel Verizon's second long-haul supplier. Ciena (CIEN +3.9%) is the other.
Notter reports hearing "pricing was exceedingly low" for the deal, and that this, along with an intervention by Alcatel CEO Michel Combes, helped Alcatel win out even though Verizon's tech people are partial to Infinera's innovative DTN-X transmission platform (previous).
Notter: "The anecdote serves as another reminder that the best technology doesn't always win in the Communications Infrastructure space ... Relationships and pricing can go a long way." Infinera is said to have invested heavily in trying to win over Verizon, which would have acted as a major reference account.
Possibly motivating Alcatel to price aggressively: The company's optical transport sales fell 1.8% YY in Q3, and have been under pressure for a while. Alcatel reports on Feb. 6, and Infinera on Jan. 29.
Calix's Q4 warning, which has come in the wake of warnings (I, II) from fellow telecom equipment suppliers Cyan (CYNI -2.4%) and Procera (PKT -2.6%), has sparked a general selloff in telecom equipment and component/chip names. A Deutsche downgrade of Alcatel-Lucent, one of the best-performing names in the space in 2013, could also be playing a role.
Calix, Cyan, and Procera all have considerable exposure to U.S. carriers not named AT&T or Verizon. While Calix didn't mention which region(s) are responsible for its warning, Cyan blamed an 88% Q/Q drop in sales to U.S. telco/top customer Windstream, and Procera blamed soft demand from U.S. cable providers.
FBR's Scott Thompson has started coverage on Infinera (INFN +1.6%) with an Outperform and $12.50 PT. He expects the optical networking space to "experience stronger performance in 2014 versus 2013" thanks to several catalysts he expects will "one of the strongest optical cycles the industry has seen in more than two decades."
Thompson also reiterates an argument he made in a Dec. 4 note on Ciena (CIEN +2.3%): That telecom networks are migrating towards architectures that offer greater optical layer intelligence/flexibility, and in doing so require less money to be spent on switches/routers.
Thompson thinks this architecture shift is partly responsible for the recent weakness seen in Cisco's (CSCO +0.6%) service provider sales.
As for Infinera, a major player in the 100G optical transmission space, Thompson declares the company to have the strongest exposure to the optical segments where "the shift will be the most pronounced."
In addition to Infinera and Ciena, a couple other optical networking hardware vendors are doing well on a good day for tech, as are some component suppliers. CYNI +4.3%. AFOP +5.9%. OPLK +2.8%. OCLR +2.4%. ADTN +1.9%.