Stealing Photonic Market Share Will Require Savvy Leadership

Internet backbone companies have begun spending on the next major equipment upgrade cycle; however, they favor well-heeled suppliers with whom they are familiar, making it hard for others to break into the market. Despite this headwind, Infinera (INFN 2.21%) is attempting to disrupt and capture the optical transport portion of that market with technology that is superior to competitors such as Ciena (CIEN 2.48%) and Alcatel-Lucent. Even more audaciously, it is attempting to diminish the role of the expensive router network that is one of Cisco Systems' (CSCO -0.29%) mainstay product lines. But technology alone is seldom enough to succeed.

Leadership's critical value
Infinera must also have superior leadership to successfully market its value proposition to customers, to ensure it provides the full service support they require, and to convince them it will remain a major player in the industry over the long haul. The stakes are nothing less than dominant market share of the photonic equipment underlying global telecommunications and Internet traffic. The winners will prosper today, and be in an ideal position to prosper again when the next upgrade cycle begins. Each company's leadership has its strengths, but each also has vulnerabilities that will affect its success in this generational equipment upgrade cycle.

Leadership begins with the people in the executive suite and the boardroom. Who is running the company you (the investor) are part owner of? The most immediately accessible indicators of good leadership include involvement of a founder, an independent chairman of the board, enduring tenureship, and good Glassdoor ratings demonstrating happy and motivated employees. These indicators provide a fascinating initial insight into which competitors have the leadership chops to win this high-stakes poker game.

Founder and chairman
Both Infinera and Ciena get plus marks for the continued participation of a founder, or at least the next best thing. Though Patrick Nettles isn't strictly a founder of Ciena, he was brought in as CEO when the start-up transitioned from an idea seeking its niche and funding, into a viable company. That's close enough for me.

Ciena and Infinera receive additional plus marks for having independent board chairmen who are not employees of the respective companies. I strongly prefer independent chairmen, unless the founder-led company is taking the world by storm (think Amazon.com or Facebook). Independence helps ensure that the executive leaders remain good stewards of the company's long-term future.

Cisco misses on both counts. Its founders departed early on and under duress, and the company's CEO also serves as chairman.

Leadership tenure: a problem surfaces
All three companies have impressive leadership tenure in both the CEO and chairman positions, though Infinera has several new faces below them. Infinera's top leadership, however, is still fairly young (in their early 50s), so these executives could remain stewards with a long-term view for many years to come. Ciena's founder/chairman, in contrast, is 70, while Cisco's CEO/chairman is 64. Both may have retirement on their minds within a few years.

Uncertainty began to cloud Infinera's executive suite with the hiring of three new senior executives from outside the company within the past year (the chief financial officer, the vice president of sales, and the vice president of legal). This raises a yellow flag, especially since it's a company that is trying to disrupt its market. Another concern is how frequently the new VP of sales has moved around: seven companies since 2000.

The VP of sales, however, has some experience leading global sales, while the VP of legal is a solicitor of the Supreme Court of England & Wales. Infinera's customers have primarily been domestic, so these hires may be a bid to supercharge the company's global initiatives. Time will tell how this plays out.

Founder and leader tenure

Source: Company annual reports available on their websites.

Glassdoor
Glassdoor is a fascinating online tool that gives investors unprecedented insight into a company's culture and its prognosis for achieving ambitious goals. It is illuminating to read the current and past employee reviews of a company, but I'll distill it down to two metrics for our purposes: the CEO's approval rating and the employee satisfaction rating. Infinera has a clear edge here.

Glassdoor Ratings

Source: Glassdoor.com.

Final thoughts
Infinera has the founder, tenured CEO, independent chairman, and strong employee approval it requires to achieve its ambition of capturing dominant market share. I am concerned, however, that the company in one year brought on three new external executive leaders who are now squared off against competitors with exceptional tenure. Keep your eye especially on Infinera's new VP of sales. If you see a growing stream of big wins, especially internationally, then it will have been worth the risk of bringing in so many outsiders at once.