Cable Tech

Verizon's FTTP Demo Helps AFC

The town of Keller, Texas, got its name in 1882 when its citizens agreed to name their hamlet after a foreman of the Texas and Pacific Railroad, which had just bought a right-of-way through the town for $25. In exchange, the railroad made Keller a stop on its line, though judging from the town’s current size -- just over 19,000 -- a commercial explosion failed to ensue. (The previous name of the place was "Athol," however, so the townsfolk probably made a good choice.)

Let’s hope better fortunes befall Keller as it prepares to let another big business exercise its right of way. Verizon Communications Inc. (NYSE: VZ) today will host a press conference in the town to report the progress of its fiber-to-the-premises (FTTP) deployment in Keller. In addition, the company is expected to announce eight other states where it plans to roll out FTTP this year as it pursues its much-touted goal of running fiber past 1 million U.S. homes by year’s end.

The event could bolster confidence in Verizon’s FTTP rollout among investors and industry watchers -- a positive, if intangible, result. But the carrier’s FTTP equipment vendor, Advanced Fibre Communications Inc. (AFC) (Nasdaq: AFCI), stands to gain a more concrete benefit: a goose to its stock price. During the past three months, doubts about Verizon’s FTTP deployment and its relationship with AFC have driven the equipment makers’ stock down 44 percent, from $27.50 to $15.50 (see AFC/Verizon Glitch Alleged). Investors got particularly spooked in February when AFC had to pay a $2 million penalty for late delivery of software to Verizon. But yesterday, after Verizon announced its upcoming press conference in Keller, AFC’s shares closed at $17.50, up 11 percent from the previous day’s close.

“To me, this [press conference] is just confirmation that AFC has received this contract, and it isn’t like early DSL, where you got a contract and nothing happened -- this is actually taking place,” says Joe Noel, an analyst at Pacific Growth Equities Inc. “I think Verizon is going to stick their neck out tomorrow and say all of this is happening, we’re committing a lot of capital to it -- and it’s such a public statement that I don’t think Verizon is going to be able to back off from this and next month say, ‘Oh, we were just kidding.’ ”

Verizon has already shown that it is putting its money where its mouth is. In a conference call with analysts on April 27, the company’s management said that more than half of the $2.6 billion that the carrier spent in the first quarter of this year went into three areas: Enterprise Advance (its network services for businesses), Evolution-Data Optimized (its wireless broadband Internet service), and FTTP (see Verizon Excels With DSL). “It certainly sounds like they’re going to be spending money on FTTP,” Noel says.

To date, fiber to the home has been a nonstarter in the U.S. A recent report by Deutsche Bank AG estimates that fewer than 200,000 U.S. homes are passed by fiber. Yet the bank’s analysts argue that there is “simply no alternative” for Baby Bells than to deploy FTTP if they hope to compete against voice, data, and video services from cable, satellite, wireless, and voice-over-IP carriers. The question is whether enough subscribers will sign up for the Bells' video and data services to cover the carriers’ costs. Deutsche Bank estimates that if a Bell company can penetrate 15 percent of the residential video market and receive $40 in average revenue per user, it can recoup its investment in FTTP in 10 to 15 years.

Of all the Bells, Verizon has made the strongest commitment to FTTP, pledging to spend $1 billion on its deployment this year. Its rollout in Keller should reassure shareholders of AFC, which has a contract to supply FTTP equipment to Verizon through 2008 (see AFC Finalizes Verizon FTTP Contract). The equipment maker expects to generate $20 million to $30 million in FTTP revenue this year, the bulk of it coming from Verizon. Next year, Verizon plans to run fiber past 2 million additional homes, and as a result, AFC’s FTTP revenues in 2005 will more than double to $89 million, according to the estimate of Simon Leopold, an analyst at Morgan Keegan & Company Inc.

Any rise in stock price that AFC gets out of today’s Verizon news will be a “double-edged sword” for the equipment maker, Leopold says. AFC’s chairman and CEO, John Schofield, recently explained to Leopold why a sale of the company might make sense (see AFC Chief Says Sale Makes Sense). “Positive news on FTTP makes the company more attractive as an acquisition because that’s a growth engine, but it also raises the stock price, making an acquisition more expensive,” Leopold says. With AFC’s stock at $17.30, its market capitalization stands at $1.5 billion. Its likeliest acquirer, Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA), has $1.2 billion in cash and would have to acquire AFC with a combination of cash and stock.

— Justin Hibbard, Senior Editor, Light Reading

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