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Minyan Mailbag: Infinera, Avici and the Battle of the Alphabet Soups

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Avici continues to trade like an open-ended option on Soapstone success...

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Prof. Zucchi,

Hope all is well! Just wondered if you were still positively disposed to Infinera (INFN)?

Regards,
Minyan B

MB,

Yep, little has changed since its 3Q report except for the price (which is lower). The whole networking group has been punished on the heels of Cisco's (CSCO) view that the U.S. enterprise market is sluggish. I heard lots of folks suggesting that there was nothing wrong with CSCO's biz, but I am not inclined to dismiss off-hand their commentary.

With that background, and wanting to stay involved in the sector, I prefer leaning toward companies more exposed to the telecom network than the enterprise network, and INFN fits that bill. The risks for INFN remain a not-inexpensive valuation, and the uncertainty over the adoption of all-optical networks (bad for INFN) versus continued improvements of analog-optical architectures.

On the latter point Minyans should be aware of a major ongoing geek-battle between proponents of a new platform called Provider Backbone Transport (PBT), and those pushing improvements to the incumbent Multiprotocol Label Switching (MPLS) Network. It's not so important to understand the difference between the two as it is to know who is playing in which sandbox.

PBT is being pushed by Nortel Networks (NT) in conjunction with BT Group (BT), while Juniper Networks (JNPR) has all but snubbed the PBT concept and remains the flag carrier for MPLS. Straddling the fence we find Ciena (CIEN) (although recent comments by its CEO is showing it tilting toward MPLS), and of course the omni-present CSCO. Within this alphabet soup, INFN is rather squarely in the MPLS camp.

Being long INFN and CIEN I find myself without much, if any, exposure to the PBT market, just in case it were to gain traction. Since I won't be caught dead owning shares of NT, I've circled back to a tiny company I mentioned several months ago, Avici Systems (AVCI).

AVCI's old router business is now pretty much history, and its future rides on the success of its Soapstone Networks division. Soapstone is about to introduce a software suite to manage, provision, and monitor IP networks, a not-insignificant task which for now seems to lack a stable and comprehensive solution. While Soapstone should be able to be deployed in both MPLS and PBT networks, for now the marketing push seems to be more heavily on the PBT side. This is admittedly a somewhat "removed" way to play PBT.

On the other hand, AVCI continues to trade like an open-ended option on Soapstone success (the stock closed Friday at $7.50 and the company has $4.10/sh in net cash), and in case PBT totally tanks, AVCI should still be able to peddle Soapstone into the MPLS space.

-Fil
Positions in CIEN, INFN
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