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Cable/Video

Rough Week for AFC

Opinions are like FTTP RFPs: Everybody seems to have one. But the opinions appear to be especially strong when it comes down to the ongoing soap opera involving Advanced Fibre Communications Inc. (AFC) (Nasdaq: AFCI), Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA), and Verizon Communications Inc. (NYSE: VZ).

This week all sorts of speculation emerged as to whether AFC's difficulties in deploying its FTTP (fiber-to-the-premises) equipment for Verizon's big FTTP rollout could jeopardize its pending merger deal with Tellabs.

Early in the week, analyst research reports put pressure on AFC shares. Then the rumor mill fired up with reports of the FTTP rollout going poorly. And now, Verizon has confirmed it will add a second source to its FTTP project in 2005.

"It's crazy -- there are all sorts of rumors out there driving AFC down," says a hedge-fund manager who spoke on the condition of anonymity [ed. note: we'll call him "Raimundo"]. He owned AFC stock on the premise that the deal with Tellabs would be approved, but noted he'd "already lost a lot of money" on AFC's decline.

AFC’s stock on Friday was trading at $14.90, down 9 percent for the week and 12 percent below the proposed merger price with Tellabs of $16.60. When a merger deal is pending, the difference between the merger price and the acquiree's share price usually shrinks as the deal nears completion, a sign of confidence the deal can get done. The widening spread between the deal price and AFC's stock indicates significant skepticism that the deal will go through.

"AFC is really in big trouble," says Ravi Bhagavan, managing partner with The Merton Group LLC, a broadband service provider based in Florham Park, N.J. "They have not been able to satisfy some of the preliminary standards [at Verizon]. Verizon is looking at penalizing them or potentially moving to a different vendor."

Sources close to the carrier say there continue to be a number of technical problems with the rollout of AFC's FTTP platform, which includes a combination of its AccessMax Digital Loop Carrier and a new Optical Line Terminal (OLT) card, which gives it passive optical networking (PON) capabilities. In addition, the sources say there is growing interest in Verizon using Motorola Inc.'s (NYSE: MOT) PON product (gotten with its acquisition of Quantum Bridge) to fill in parts of its FTTP network. Whether this would entirely replace AFC product or just become a second source isn’t clear.

AFC has been plagued with delays in the rollout of its equipment for Verizon's FTTP projects, and it incurred at least $3 million in fines from Verizon for missing deadlines (see Tellabs Calm Over AFC Hiccup and AFC Fesses Up, Defenders Pipe Up).

Meanwhile, the plot thickens, as Verizon says it's definitely going to add a second source for the project. "Because of the size and scope of the project, we plan to add another provider in 2005," says Verizon spokesman Mark Marchand. He adds that Verizon "continues to work with AFC" and notes that past problems, including AFC's missed deadline and fine, have been disclosed by both companies. AFC did not return calls at press time. A Tellabs spokeswoman says her company isn't worried: "We still are looking to close the deal."

All and all, the speculation and negative chatter have concluded a rough week for AFC.

A negative research note issued by Lehman Brothers' Steven Levy earlier in the week could have started the ball (well, AFC's stock) rolling downhill. In that note, Levy told investors to avoid the stock. He also said there are indications that AFC's business prospects are weakening.

“We believe that the company’s core business has likely continued to weaken and while its outlook for fiber-to-the-premise (FTTP) equipment sales to Verizon appears to have improved some, the mix of FTTP products has shifted more towards the unprofitable Optical Network Terminal (ONT) segment and away from the profitable, central office-based, Optical Line Terminal (OLT),” wrote Levy.

Levy lowered his 2004 and 2005 revenue and earnings estimates. He now expects $461 million in revenue and $0.18 in per-share earnings for 2004 and $523 million in revenue and $0.20 per share in profit in 2005. He also lowered his price target to $15.25 from $27.

Other analysts were jumping on the bash-AFC bandwagon. In a research note on Tellabs titled "TLAB; Buyer’s Remorse Awaits?", Jeffries & Co. analyst George Notter noted that sources were citing continuing technical problems with AFC’s FTTP deployment at Verizon, but he didn’t believe it would end up killing the deal with Tellabs.

”Our contacts at Verizon indicate that AFC is still working to alleviate a number of performance issues on both the OLT and ONT platforms -- at this point, none of these issues appear to be showstoppers,” wrote Notter.

Notter also wrote that Verizon has started to shift in its affections for PON. While at one time it was committed to broadband PON (BPON), Notter said Verizon is now increasingly interested in Gigabit PON, because it can provide higher levels of bandwidth that would be more compatible with delivering HDTV. Notter noted that the new GPON standard allows for downstream transmission rates of 1.25 Gbit/s or 2.5 Gbit/s (versus 622 Mbit/s for BPON).

— R. Scott Raynovich, US Editor, Light Reading

optical Mike 12/5/2012 | 1:15:55 AM
re: Rough Week for AFC
http://telephonyonline.com/ar/...


As Verizon Communications and others continue their drive to deploy broadband passive optical networking technology, perceptions surrounding BPON and its higher-bandwidth sequel, GPON, often echo the title of a recent Alcatel press release: GǣBPON today, GPON tomorrow.Gǥ But American carriers are deploying GPON (or gigabit PON) today, allowing one equipment vendor G Optical Solutions G to corner the market.

The last standards for GPON G which cranks up the downstream speeds of fiber-to-the-premises networks to 1.25 Gb/s and 2.5 Gb/s, twice the bandwidth of BPON networks G weren't finalized until February, which is one reason most access vendors haven't rushed to launch GPON products. Hitachi Telecom USA is one such vendor. Hitachi Chief Technology Officer David Foote told Telephony in February that although the company was developing GPON gear, a true industrywide GPON push Gǣhasn't really started yet.Gǥ While several major vendors plan to introduce GPON gear next year, Optical Solutions has already shipped almost 16,000 units and 100,000 optical line terminal ports of GPON gear in the U.S., the company said.

Optical Solutions submitted GPON gear to the requests for proposal issued jointly by three Bell companies in the summer of 2003. It was rejected because, according to CEO Mike Dagenais, GǣVerizon felt that the only mature multi-vendor environment was BPON.Gǥ Dagenais replaced the previous CEO shortly after the company fell out of the running for the Bell RFP.

Today, Optical Solutions' unique commitment to GPON has given it a clear edge in the marketplace. With 20 to 30 customers for its GPON-based FiberPath 500 FTTP platform, Dagenais claimed Optical Solutions owns about 98% of the domestic market for GPON gear, conceding the other 2% to Flexlight Networks. (Flexlight CEO Bill Lee said the market is too young to estimate market-share numbers; his company, which has been shipping GPON gear to Europe and Asia since late last year, also claims one of the top ten U.S. cable companies as a customer.) Nearly half of Optical Solutions' customers are deploying GPON only.

GǣOur revenue has grown over 100% since the beginning of the year, and almost all of that is from GPON,Gǥ Dagenais said. Carriers are picking GPON for triple-play services and for business clients that wouldn't be content with BPON's 155 Mb/s upstream speed. GPON is not as widely adopted as Ethernet FTTP, but Dagenais insisted GPON is preferable to Ethernet for voice, video, security and distances more than five kilometers (about three miles). A spokesman for WorldWide Packets disagreed, saying Ethernet uses VLANs for security, handles voice and video just fine, and can be used with a range of multi-mode optics, matching cost with distance, to reach 120 km.

A GPON deployment might cost 10% to 15% more than the BPON version, but for many service providers making a long-term investment, the price is worth it G especially for those companies that want to leave the door open for a potential IP video deployment in the future.

GǣIf you're going to invest in a new subdivision, you might as well spend a little bit more, knowing that you're not going to have to replace it in a couple years,Gǥ said Mike East, CEO of Molalla Communications, a small Oregon telco that began turning up FTTP service to a 144-home subdivision using the FiberPath 500 in August. GǣIf and when we decide to get into video, we'll use an IP headend. GPON better facilitates that.Gǥ

The cost gap between BPON and GPON should shrink as more vendors release their own GPON gear next year. By then, Dagenais said, GǣWe'll have almost a year-and-a-half head start and a tremendous installed base.Gǥ
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