Huawei Partnership Boosts Avici
Avici's share price jumped by $1.59, or 12 percent, to $14.76 on the news.
The deal struck by Huawei is for 10 NE5000 routers, the name used by Huawei for Avici's SSR. The routers are being deployed in two "supernodes" of the carrier's national backbone in the Guangdong province.
While Huawei didn't put a value on the deal, analysts at Lehman Brothers believe it will be worth between $3 million and $5 million during the next 12 months, with likely additional opportunities from future expansion.
In a research note issued today, analyst Jiong Shao states that "we consider the joint-win a major breakthrough for Avici... Huawei and Avici may be working on other core router backbone projects in China and we expect more contracts to follow later this year."
As a result, Lehman is confident that Avici will report higher revenues in the second half of 2004, upgrading the firm to equal weighting status (performing in line with the industry). It has put a target price for the stock of $16.
The Chinese deal is significant for a number of reasons. It's the first announced deal to come from the relationship forged last June between the two vendors (see Avici Joins Huawei for China Push); and it makes China Telecom the second major carrier to have Avici routers at its core. The other is AT&T Corp. (NYSE: T), which has been generating revenues for the vendor for three years (see AT&T Makes Avici's Quarter).
The Lehman analysts also believe the deal may be "viewed as incrementally negative on sentiment" for China Telecom's incumbent router supplier Cisco Systems Inc. (Nasdaq: CSCO) and possibly Juniper Networks Inc. (Nasdaq: JNPR) as well, though they don't expect any impact on those companies' revenues.
While China Telecom is the first announced deployment of Avici routers in China, it may not be the first such deal. An Avici spokeswoman notes that Huawei was a 10 percent customer in its fourth quarter of 2003, when it recorded total revenues of $11.5 million (see Avici Narrows Losses in Q4). While Avici says it can't comment on any deals won by Huawei, the Lehman team believes Huawei has previously "deployed three units of Avici's SSR routers in the China leading education network CerNet."
Avici has another major vendor partner in Nortel Networks Corp. (NYSE/Toronto: NT), a relationship that recently bore fruit with a deployment at European research network SURFnet (see SURFnet Picks Nortel, Avici, Telindus and Nortel, Avici Announce Partnership).
— Ray Le Maistre, International Editor, Boardwatch