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Tellabs Vacuums Up Vinci

Light Reading
News Analysis
Light Reading
12/30/2004

Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) today bought Vinci Systems, a privately held developer of optical networking terminals (ONTs) for fiber-to-the-home (FTTH) access systems for up to $52.5 million in cash and restricted Tellabs stock. The price, of course, depends on some yet undisclosed milestones, Tellabs says.

Like many a Christmas toy, Tellabs took recent acquisition Advanced Fibre Communications Inc. (AFC) home, unwrapped it, and only then did it realize that the package didn't contain all the pieces it needed.

The part Tellabs was lacking was a cost-effective ONT, the device deployed at a residence as a network-interface device used to connect fiber to the home. Here are a few snapshots of AFC's ONT, as deployed at a residence in Keller, Texas:

AFC has been making its own ONT, but it was unprepared for just how quickly Verizon was going to move ahead with its fiber deployments, sources close to Tellabs say. This fact came up for discussion several times during Light Reading's recent Telecom Investment Conference (see Letter From TIC and From MeBay to Quadruple Play).

In AFC's recent SEC filings, the company revealed it had to find a way to make a cheaper ONT or else things were going to get hairy:

One component of the FTTP systems, the Single Family ONT, or ONT, will be sold at a negative gross profit margin until volume increases and unit costs decline… We anticipate an operating loss during the fourth quarter of 2004 as a result of the ONT negative margins, coupled with increasing operating expenses, primarily due to research and development initiatives and planned year end employee hiring, and Tellabs merger-related transaction costs… Failure to achieve adequate positive gross profit margins on the ONT component will have an adverse affect on overall gross profit margins, operating in come and net income.


Vinci Systems, a 30-person startup in Vienna, Va., was founded in 2002 and has demonstrated interoperability with several of Tellabs' competitors in the fiber access market, including Calix and Entrisphere. In fact, Vinci "has existing contracts with [fiber equipment vendor] customers and, at this point, we're unsure what those customers will do as a result of the acquisition," says a Tellabs spokeswoman.

AFC had a lower-cost ONT in the works, but it was expecting Verizon to move much more slowly than it has. "Vinci was about six months ahead of AFC in building this cost reduced ONT," a source familiar with the matter says. "In many ways it was cheaper to buy them than to do our cost reduction."

"AFC's ONT was a first-generation product and the Vinci product is a next-generation ONT," says a Tellabs spokeswoman. The difference? Obviously the newer ones are cheaper to make. But the spokeswoman adds that the Vinci models also "provide enhanced capabilities for VOIP and streaming video."

Tellabs says it can't provide specific numbers on what the cost savings are between Vinci's and AFCs ONTs.

— Phil Harvey, News Editor, Light Reading

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pmartinez
pmartinez
12/5/2012 | 3:31:18 AM
re: Tellabs Vacuums Up Vinci
Excellent analysis. Great pictures. Thank you.

I really needed clarification on this deal as I thought AFC had a pretty good ONT and just didn't get it. I see now that 6 months ahead in development make all the difference in the world...

The thing that's sticking in my mind is the fact that Tellabs is dead serious about keeping and enhancing their AFC acquisition and will continue to support and further develop AccessMax platform (is it 'Tellabs 1000' now?).

Good news for investors, and also for customers that already have the product installed and will be able to upgrade it with the new features. This is an important market for Tellabs: Selling plugins for their huge base of installed DLC systems.
fiberkid
fiberkid
12/5/2012 | 3:31:17 AM
re: Tellabs Vacuums Up Vinci
Does anyone know how closely Alcatel's ONT price/cost compares to AFC's?
optical Mike
optical Mike
12/5/2012 | 3:31:14 AM
re: Tellabs Vacuums Up Vinci
Imagine that....
ACF can't build the working cost effective ONT that they claimed in the RFP
Maybe the next time an RBOC gets an RFP response that seems too good to be true they will to some actual due diligence and check some facts before falling for the smoke and mirrors
Sometimes you get just what you pay for
opsguy
opsguy
12/5/2012 | 3:31:13 AM
re: Tellabs Vacuums Up Vinci
This article is interesting in that I had a chance meeting with the persons (2) who were tasked in reducing the cost of this unit. These guys were completely clueless as to how to reduce costs along the entire supply-chain rather then in their small sphere.

Not quite the same working at an OEM as it is working at a CM, ehh boys? There is good news: I hear Solectron is hiring?!
bitdropper
bitdropper
12/5/2012 | 3:31:12 AM
re: Tellabs Vacuums Up Vinci
"Imagine that....
ACF can't build the working cost effective ONT that they claimed in the RFP
Maybe the next time an RBOC gets an RFP response that seems too good to be true they will to some actual due diligence and check some facts before falling for the smoke and mirrors
Sometimes you get just what you pay for"

-------------------------------------------

That's an excellent point.

And furthermore, when did RBOCs suddenly start deploying boxes from a 30 person start-up into their networks [bypassing their entire acceptance process], just because one of their RFP selected vendors bought it out of desperation and declared it their "next generation" product?
Truelight1
Truelight1
12/5/2012 | 3:31:10 AM
re: Tellabs Vacuums Up Vinci
Sadly, this is a sign of the idiotic times in our industry. it jsut goes to show you how really really stupid Tellabs is in assesing technology from another space.

Furthermore AFC built the ONT to the Verizon specifications - which if know is the one of the most mornic designs in the industry. Verizon technocrates put everything including the kitchen sink - hence the high cost.

The Vinci systems ONU lets get real this is designed by a bunch of ASC folks - who if you remember failed at ASC in the public market ;-)
Probably some kick backs to Verizon execs.


Curious George
Curious George
12/5/2012 | 3:31:05 AM
re: Tellabs Vacuums Up Vinci
Having met a number of times with the Vinci folks I have a different opinion. Their thinking is quite likely more than 6 mos ahead of AFC and they consistently seemed focussed on total cost, not just BOM but also installation/maitainability/etc. Interoperability was also a major element of their thinking given the vision of an ONT-only vendor. It will be interesting to see how this will play out under the Tellabs umbrella. Perhaps the compromises made for commonality will be relaxed in favor of even lower cost and enhanced performance, maybe some tradeoff room here.

bitdropper
bitdropper
12/5/2012 | 3:31:04 AM
re: Tellabs Vacuums Up Vinci
What's a "vaccum"? Is that something built by Hovver?
Curious George
Curious George
12/5/2012 | 3:31:02 AM
re: Tellabs Vacuums Up Vinci
British spelling variant of what we in the Colonies call a vacuum....

MrLight
MrLight
12/5/2012 | 3:29:06 AM
re: Tellabs Vacuums Up Vinci
AFC knew what they were getting into, just as Alcatel did with DSL. It's a classic business strategy , that has been used time and again - subsidize some of the more expenses pieces of hardware in the early stages of deployment and then push hard to get the costs down of these pieces, both in the design and via volume purchasing agreements, before the customer you are selling to orders in volume. The trick is to get the cost-reduction done before the volumes go too high or you lose your shirt.

In this case the cost reduction of AFC's ONT didn't happen fast enough it seems, and an external design had to be procured.


Not all companies can afford the above approach. So some PON companies stayed with their FTTB business to get revenue with good margins and worked the FTTH technology in the background until they have products that will have sustainable margins.

Time will tell of course who took the better path.

MrLight...works in this area, but not for Tellabs, AFC or Vinci
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