AlcaLu Lands $6B Deal

Alcatel-Lucent (NYSE: ALU) has scored a mega contract with Verizon Wireless worth $6 billion over three years.

The contract is good news for Alcatel-Lucent because Verizon Wireless has effectively given the new company a vote of confidence by choosing to extend its standing relationship with Lucent to the newly merged entity. Alcatel-Lucent will retain its position as the primary supplier of CDMA2000 equipment at Verizon Wireless.

"We're continuing to build upon and expand our relationship with Verizon Wireless," says Ken Wirth, Alcatel-Lucent's account executive for Verizon Communications Inc. (NYSE: VZ) and Verizon Wireless.

Today's contract covers products from both companies' portfolios. All the wireless network technology is an extension of what Lucent was already providing to Verizon Wireless, which will enable the operator to expand its CDMA2000 1xEV-DO Revision A network to support voice over IP with quality of service. Alcatel-Lucent will also deploy further IP Multimedia Subsystem (IMS) components in Verizon's so-called "A-IMS ecosystem."

Wirth explains that the deal includes Alcatel's microwave transmission products for connecting cell sites as well as Alcatel's 7750 router for Ethernet switching and IP routing. The contract also includes Lucent's LambdaUnite optical switching equipment and Alcatel's 1671 crossconnects for managing traffic and backhaul.

"It is encouraging that Verizon is extending its strong Lucent ties to the merged company," says Inder Singh, analyst at Prudential Financial. "We believe this announcement also reflects... the re-filling of the order pipeline, after several months of disruption from the ongoing merger integration."

Today's contract certainly solidifies Verizon Wireless as one of AlcaLu's most important customers. Dresdner Kleinwort estimates that Verizon Wireless accounts for about 8 percent of the vendor's overall sales and about 25 percent of its wireless business.

According to Dresdner Kleinwort, Lucent supplies 70 percent of Verizon Wireless's CDMA2000 network, while Nortel Networks Ltd. supplies 20 percent and Motorola Inc. (NYSE: MOT) supplies the remaining 10 percent.

In December last year, Verizon also extended its CDMA2000 equipment contract with Nortel in a five-year deal worth $2 billion. (See Nortel's $2B CDMA Bump.)

While the AlcaLu contract amount is massive, Dresdner Kleinwort says that it will be "neutral to growth and margin prospects" because it is the continuation of an existing contract.

Dresdner Kleinwort estimates that Alcatel-Lucent was recently generating $2 billion in revenues from Verizon Wireless and today's contract will contribute the same amount to annual revenues.

Lucent looked to be in the lead for IMS business at Verizon Wireless after it won a contract at BellSouth at the end of 2005. (See Lucent in the Lead at Verizon? and Lucent Lands BellSouth Deal.)

In July last year, Verizon launched an "IMS taskforce" to develop advances to the IMS standard, called A-IMS. The participating companies included Lucent, Motorola, Nortel, Cisco Systems Inc. (Nasdaq: CSCO), and Qualcomm Inc. (Nasdaq: QCOM). (See A-IMS Effort Launched.)

Wirth says that part of today's contract includes developments from this taskforce.

"A-IMS really is an ecosystem to deliver end-to-end service capability," says Wirth. "This approach is an enhancement to existing IMS standards and capabilities."

— Michelle Donegan, European Editor, Light Reading

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