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Optical/IP

FNC Lands Big Verizon Gig

Fujitsu Network Communications Inc. (FNC) says Verizon Communications Inc. (NYSE: VZ) has picked its gear to upgrade the carrier's Sonet networks.

The three-year deal involves several of FNC's next-generation Sonet add/drop multiplexers, including its Flashwave 4500 core transport system, its Flashwave 4300 aggregation system, and its Flashwave 4100 access system. Besides the usual need to trim operating expenses, the upgrade will help Verizon offer some newer services, such as 10/100 and Gigabit Ethernet connections, according to FNC's product marketing manager Bob Laurent.

FNC's selection isn't really a surprise. The company is an incumbent supplier in Verizon's network with some 85,000 nodes, according to John Stewart, FNC's senior director of marketing and corporate communications.

FNC won't say how large the order is, but Stewart says it will have a "significant business impact" on FNC over the life of the contract.

Though FNC gets a nod toward affirming the company's leadership position in the Sonet market, Verizon isn't done picking vendors just yet, according to sources close to the carrier.

Verizon expects to finalize contracts with two other vendors -- Lucent Technologies Inc. (NYSE: LU) and Nortel Networks Corp. (NYSE/Toronto: NT) -- in the next week or two, according to a source close to the carrier.

According to another source familiar with the situation, FNC, Lucent, and Nortel were the final three selected in a process that began back in October 2001, when it invited six vendors in for consideration. Cisco Systems Inc. (Nasdaq: CSCO), Marconi Corp. plc (Nasdaq/London: MONI), and one other vendor were eliminated between October 2001 and December 2002.

In a note sent to clients this morning, Merrill Lynch & Co. Inc. analyst Simon Leopold confirms our sources' information. "In spite of Fujitsu's announcement, we still expect that Lucent will win Verizon's business... which is meaningful because Verizon is Lucent's largest customer, providing nearly 20 percent of sales," he writes. "We believe that Lucent and Fujitsu will receive about 40 to 45 percent of purchases each and Nortel will get the remaining 10 to 20 percent of Verizon's new Sonet purchases."

In January 2003, FNC announced it had earned Verizon Testing Partner certification, something required of equipment vendors before they can be deployed in Verizon's network. FNC says it signed the equipment contract with Verizon in April.

So maybe FNC isn't all alone in Verizon, but at least it didn't suffer another loss at the hands of Cisco (see Fujitsu Sounds Off and BellSouth Chooses Cisco (and Lucent)). FNC's other next-generation Sonet ADM customers include SBC Communications Inc. (NYSE: SBC), Rogers Communications Inc. (NYSE: RG; Toronto: RCI), Alltel Corp., Cox Communications Inc. (NYSE: COX), and Qwest Communications International Inc. (NYSE: Q) (see Fujitsu's Got a Grip on SBC).

— Phil Harvey, Senior Editor, Light Reading

wlan-101 12/4/2012 | 11:50:58 PM
re: FNC Lands Big Verizon Gig Somebody posted the Merrill Lynch research note on Yahoo message board. I bring it to here for your reading pleasure.
++++++++++++++++++++++++++++++++++++++++++++++++

Event

Fujitsu announced a next generation SONET win with Verizon. Verizon has approved Fujitsu’s Flashwave 4500, 4300 and 4100 products for deployment.

Analysis

We have expected such an award to Fujitsu, Lucent and Nortel for some time. In spite of
Fujitsu’s announcement, we still expect that Lucent will win Verizon’s business as we have anticipated for some time, which is meaningful because 1) Verizon is Lucent’s largest customer providing nearly 20% of sales, 2) Optical Systems provides nearly 10% of Lucent’s revenue. We believe that Lucent and Fujitsu will receive about 40%-45% of purchases each and Nortel will get the remaining 10%-20% of Verizon’s new SONET purchases. The contract term runs for three years beginning April 30, 2003, and we think the Fujitsu and Lucent contracts are worth hundred’s of millions through this period.

We think Fujitsu is the first of the three vendors to have met all requirements including a First Office Application (FOA) within Verizon. We expect that Verizon will primarily deploy Fujitsu products in historical Fujitsu markets (NYNEX and GTE), and Lucent systems will dominate the Bell Atlantic region. Nortel systems are likely to be limited to the GTE territories. However, we believe that once approved, each vendor has a “license to hunt” and can sell into all Verizon territories.

Today’s announcement increases our comfort that Lucent’s optical systems business will
improve each quarter during CY03 from $174 mm in March (flat vs. December) and reach nearly $240 mm by December ‘03. This announcement provides another indication that the next generation SONET market will ramp with the RBOCs’ purchases, and that optical systems sales may have bottomed. We believe Lucent deployed at least 70 systems at BellSouth as of June as part of the award it shares there with Cisco. We think Fujitsu has deployed over 100 Flashwave systems at Verizon, and suspect that Lucent could be one quarter behind, yet on a similar ramp. To put this in context, Fujitsu has deployed about 85,000 legacy SONET systems at Verizon over the last 13 years.

Recommendation

We believe that Lucent’s optical business remains under appreciated by investors. We think Lucent’s wins at BellSouth and Verizon demonstrate that the firm remains a meaningful contender in the tough optical systems market. We still see challenges for Lucent’s other business segments (Switching & Access, Wireless, and Services).

Merrill Lynch Global Securities Research & Economics Group
Global Fundamental Equity Research Department
RC#10117512

Investors should assume that Merrill Lynch is seeking or will seek investment banking or other business relationships with the companies in this report. Refer to important disclosures at the end of this report. Analyst Certification on page 2.

Lucent Technologies, Inc. – 24 June 2003

Investment Thesis

We see Lucent’s stock as offering upside. With solvency concerns dissipated, we see the company on the slow road to recovery. With an Enterprise Value to CY04 Sales ratio of 1.1x we reiterate our Neutral Rating.
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