Speculations Boost AFC

Shares of Advanced Fibre Communications Inc. (AFC) (Nasdaq: AFCI) today rose over 11 percent to $26.50 (up $2.65) on speculation by Wall Street analysts that the company has won a coveted RFP with Verizon Communications Inc. (NYSE: VZ).

The analyst predictions follow news that AFC is a finalist in the RFP, which was sent out by Verizon as part of a fiber-to-the-premises (FTTP) project undertaken with BellSouth Corp. (NYSE: BLS) and SBC Communications Inc. (NYSE: SBC). The carriers stated yesterday that they're nearing the lab-trial stage (see Carriers Give FTTP Update).

It seems Verizon could be the first RBOC to sign a deal. AFC appears to have won a single-source contract of 12 months to 18 months duration to help Verizon with its part of the initiative, according to notes from Lehman Brothers, UBS Investment Research, and Wachovia Securities Inc. today.

Neither AFC nor Verizon will comment on or confirm the news, but if the rumor proves true, the deal could be significant -- and surprising. For one thing, analysts had not anticipated a single-source contract. Instead, they've been talking about deals including at least two vendors and extending for long periods of time.

What's more, AFC wasn't expected to win any principal work; Alcatel SA (NYSE: ALA; Paris: CGEP:PA) was the favorite (see Analysts Narrow RFP Odds). UBS senior analyst Nikos Theodosopoulos and colleagues attribute AFC's "likely success" to "aggressive pricing" as well as experience and support with Verizon systems.

While AFC isn't talking, press releases and information on its website indicate that it's supplied Verizon with equipment in the past and continues to be active in lab trials with the carrier.

Another surprise is that AFC has been something of a dark horse, not choosing to release information on its fiber-access gear until last month (see AFC Comes Clean on FTTP ). And even though info is out on the product, dubbed FiberDirect, AFC's keeping future development plans well hidden. The company won't address speculation, for instance, that it's on track to offer a multimedia gateway, or that it's working on video support for its gear via a joint effort with Harmonic Inc. (Nasdaq: HLIT).

Harmonic spokesman Michael Newman says the company hasn't announced any partnership with AFC. Also, he says Harmonic's chief customers are cable and satellite operators. Just a small amount of business is done with telcos.

Well, there's always a first time, eh?

An AFC win would also signal that Verizon is really serious about FTTP. Verizon spokesman Mark Marchand, while keeping mum about the potential suppliers, says the carrier plans to begin massive fiber deployment in 2004, passing at least 1 million homes. Steven Levy and colleagues from Lehman Brothers think that even if Verizon uses AFC for up to 400,000 lines, that could bring the supplier "roughly 10% to perhaps more than 40% of our current 2004 sales projections of $380 million."

This counters a growing body of opinion that sees this RFP as an exercise in marketing and regulatory tweaking (see A Closer Look at PON Econ and SBC Ratchets Up PON Politics).

Still, there are skeptics, such as Sterling Perrin, senior research analyst at IDC, who maintains that the RBOCs are still too in love with DSL to get involved in extending fiber to premises with any aggression. What's missing is the "killer application" that will raise the heat on the back burner of FTTP. Video looks like that application, he says.

Perrin concedes that of all the RBOCs, Verizon looks the most serious about FTTP. If that's true, and the AFC deal pans out, it could put the RBOC and its supplier at center stage for fiber access in the U.S.

— Mary Jander, Senior Editor, Light Reading

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