Light Reading

Analyst: Infinera Loses VZ Deal to AlcaLu

Carol Wilson
1/21/2014
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A telecom industry financial analyst says that Alcatel-Lucent has won a $100 million Verizon optical contract, which would be bad news for Infinera, the company that had been thought to be the front-runner for deal.

Infinera Corp. (Nasdaq: INFN) had been seen as the favorite to join Ciena Corp. (NYSE: CIEN) as a second supplier to Verizon with long-haul WDM optical equipment in what was pegged to be a $100 million contract. Wavelength-division multiplexing (WDM) equipment can help pump up the bandwidth of long-haul fiber optic networks.(See Is Infinera Set for Verizon 100G Deal? and Wavelength Division Multiplexing (WDM).)

George Notter, managing director of equity research for communications infrastructure at Jefferies & Co. Inc. , says he's revising his price target for Infinera's stock down from $12 to $8, based on not winning the long-sought Verizon Communications Inc. (NYSE: VZ) second supplier deal.

Notter also notes his sources are crediting the last-minute involvement of Alcatel-Lucent (NYSE: ALU) Michel Combes and some major price-cutting for the French vendor's victory at Verizon.

"We're told that pricing was exceedingly low -- in fact it was 'well below market pricing' for WDM gear," Notter says in an email note. "The anecdote serves as another reminder that the best technology doesn't always win in the Communications Infrastructure space. We understood that Infinera's DTN-X platform was heavily favored by Verizon’s technology people. Relationships and pricing can go a long way -- particularly for equipment suppliers like Alcatel-Lucent which have the clout to sell their infrastructure within the C-suite at Verizon."

Losing Verizon would have a significant impact on Infinera because of the effort and resources the equipment maker has invested in trying to win the business, Notter notes, as well as the inability to use Verizon as a reference account to win other business.

"These activities include joint product testing/evaluation, trials, and technology analysis," he writes. "Also, we believe that much of its work on integrating Ethernet/MPLS Switching technology was oriented around the RBOC's second source deal. Verizon is somewhat unique among major carriers around the world -- they've been very interested in embedding these capabilities into the Optical Transport network layer."

Alcatel-Lucent and Verizon both declined to comment on the report. Infinera was unavailable for comment.

— Carol Wilson, Editor-at-Large, Light Reading

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tojofay
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tojofay,
User Rank: Light Sabre
1/30/2014 | 11:27:34 AM
Re: ALU business model
Indeed. Where did Simona of GS go? 
rgrutza600
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rgrutza600,
User Rank: Lightning
1/29/2014 | 6:22:24 PM
Re: ALU business model
Infinera has 15 Tier One customers globally.
rgrutza600
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rgrutza600,
User Rank: Lightning
1/29/2014 | 6:18:35 PM
Re: ALU business model
Infinera acknowledged winning Level 3 business in their CC today although they did not say their name.  Highly interesting conference call.
TGIR2
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TGIR2,
User Rank: Light Beer
1/24/2014 | 1:40:05 PM
Re: ALU business model
Sterling,  There is quite a difference in their current product vs the DTN however.  The DTN-X is a big iron solution which looks like it was developed for the Tier 1 customers.  You add bandwidth in 500G chunks.  ( I realize they have a pay as you go option but still ).  The DTN actually looked like a box developed for the other category.  They sold it to a rural cooperative in Georgia (a 4 county network) for example.  It's hard to see how they can be successful with the DTN-X without capturing some of the Tier 1s.  It certainly puts more pressure on them to get Level 3.
sterlingperrin
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sterlingperrin,
User Rank: Lightning
1/23/2014 | 2:48:32 PM
Re: ALU business model
As a back of the envelope analysis:

NA LH DWDM was about $900 million in 2012, of which $550 million (at most) would have gone to AT&T + Verizon. AT&T and Verizon capex combined in 2012 was about $35 billion which puts their LH DWDM spend at about 1.6% of capex (or lower). If you include regional DWDM spend as well, then the % ticks up a little.

Sterling
rgrutza600
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rgrutza600,
User Rank: Lightning
1/22/2014 | 6:52:04 PM
Re: ALU business model
RE:When you think about the percentage of North American capex contributed from AT&T and Verizon

 

It would be nice to have a breakout for how much of that cap ex goes towards long-haul.  It seems like it is an almost insignificant portion of their cap ex compared to wireless.  Level 3 spends $200 million/quarter with zero towards wireless, but their fiber network dwarfs VZ or T.
rgrutza600
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rgrutza600,
User Rank: Lightning
1/22/2014 | 6:46:14 PM
Re: ALU business model
Other people's money is always the best source of funding.  Thank you President Hollande and Karl Marx. <G>
peebee1
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50%
peebee1,
User Rank: Light Beer
1/22/2014 | 9:35:40 AM
Re: ALU business model
Surely ALU wouldnt be selling below cost, its far more likely Ciena has been ripping Verizon off for way too long!
sterlingperrin
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50%
sterlingperrin,
User Rank: Lightning
1/22/2014 | 9:34:52 AM
Re: ALU business model
I can't confirm whether this is true or not, so just posting based on the published report. My first read was that this is a horrendous development for the future of Infinera. But then I started thinking about Infinera's history in the 10G market.

They actually rose to become the leading North American supplier of long haul DWDM equipment (very quickly) without ever having AT&T or Verizon as their customers. When you think about the percentage of North American capex contributed from AT&T and Verizon, it's pretty amazing that a supplier can go anywhere without these two. But Infinera did that.

On the ALU win itself (again, based on the published report), I am also surprised. Infinera has been courting Verizon for a long time and there was a history of collaboration between the Infinera and VZ technical teams. I did not see that collaboration occurring between ALU and VZ.

Sterling
chuckj
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chuckj,
User Rank: Light Sabre
1/22/2014 | 1:25:09 AM
Re: ALU business model
French subsidizing US infrastructure, that can't be a bad thing.
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