Indeed, although many had expected AFC to get a large piece of the action, it now appears that it has all of it. Verizon on Monday announced it has signed a "letter of intent" with AFC, cutting Alcatel out of the loop (see AFC Signs Verizon FTTP Letter). The letter of intent sketches out a rough set of terms that will comprise the final contract.
"I see this whole announcement as being a big, big stake through the heart of Alcatel's Litespan [digital loop carrier] product in the Verizon account," says Kermit Ross, founder of Millennium Marketing. Ross says now that Verizon has gone on record with its AFC pick, Verizon's network planners -- even those not involved with the FTTP deployments -- may be loath to buy more Litespan DLCs.
Alcatel didn't officially react to the news. "We're still working out what we're going to say," says one director-level Alcatel official, who pointed out that Alcatel is still bound by Verizon's non-disclosure agreement relating to the FTTP request for proposal (RFP).
Now the big question remains: How big is this contract, and what will it do for AFC's numbers?
A lot depends on how fast Verizon moves. In the past few months, Verizon has signaled that it is indeed serious about FTTP. Now it is spelling out its plans more clearly. The carrier says its initial deployment plans involve passing about a million homes with the new technology in 2004, with the deployment pace possibly doubling in 2005.
Some perspective: There are about 180,300 homes passed with fiber services today and only about 64,700 of those are subscribing to fiber services, according to Render Vanderslice & Associates. In just one year, Verizon alone is saying, it will blow the doors off of what's previously been accomplished by FTTP deployments.
Verizon is talking of homes passed, which indicates homes that could potentially subscribe to fiber services. The fiber could be running along the poles nearby or underground, but it won't be hooked up to anything at the customer end until some kind of service is ordered. "Until they hook up customers, it's a financial drain," says Ross.
The financial payoff for AFC is a tough call for several reasons (see FTTP Booty Tough to Peg). First off all, Verizon says it isn't spending any more than usual on its networks because of its FTTP plans. The company lays out about $7 billion a year on capital expenditures, a figure that will likely remain flat next year, according to Eric Rabe, Verizon's VP of media relations.
What will happen is that Verizon is shifting capital from other places, such as spending on DSL. Rabe says Verizon will reach 80 percent of the homes in its coverage areas by the end of this year, so that presents an opportunity to move some dollars into FTTP. Other areas FTTP will pull dollars from include mostly completed projects such as its long-distance network and its high-speed enterprise network, Rabe says.
AFC's take-home loot is also tough to guess because it's still not clear what Verizon is actually paying for its gear (see FTTP Bidders Slashing Prices?). "Cost and pricing obviously play a significant factor during the decision-making," says AFC spokesman Chris Heinemann, apparently daring us to use a quote that states the obvious.
Merrill Lynch & Co. Inc. took a conservative guess, assuming that Verizon's FTTP penetration would reach between 100,000 and 150,000 homes using $300 to $400 worth of AFC gear per home. As a result, analyst Simon Leopold raised his 2004 revenue estimates for AFC to $397 million from $358 million. Analysts surveyed by Multex.com Inc. predict that AFC will hit $334 million in revenues this year.
It is true that carriers view AFC as price-competitive. One survey of 770 service provider and carrier employees shows that AFC is recognized as a market leader in price for third-generation digital loop carriers -- the platforms that are upgraded to provide FTTP service (see Heavy Reading Surveys Telecom Vendors). In the survey, incumbent carrier respondents said that AFC bested market leader Alcatel in market perception for price leadership, and it finished second to Lucent Technologies Inc. (NYSE: LU) in both performance and quality/reliability.
Table 1: 3G DLC Results From Incumbent Carriers
|VENDOR||RECOGNITION||PRICE||PERFORMANCE||QUALITY AND RELIABILITY||SERVICE AND SUPPORT|
|(number of responses)||(33)||(21)||(23)||(23)||(21)|
|Advanced Fibre Communications||66.7%||42.9%||17.4%||21.7%||19.0%|
|Source: Next-Generation DSL Equipment: The Path to Profitability, a Heavy Reading report|
Verizon says it will keep testing AFC's FTTP systems for the remainder of this year and will begin initial test deployments in at least two communities during 2004. By the end of the year, Verizon expects to deploy FTTP systems in more than 100 central offices in nine states.
After gaining more than 4 percent on Monday, AFC's stock fell $1.87 (7.49%) to $23.09 in trading on Tuesday.
Along with AFC, Verizon picked Sumitomo Electric Lightwave, Pirelli Cables and Systems North America, and Fiber Optic Network Solutions Corp. (FONS) to provide the cabling and other outside plant equipment for its FTTP plans.
— Phil Harvey, Senior Editor, Light Reading
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