Analyst: Infinera Loses VZ Deal to AlcaLu

A telecom industry financial analyst says that Alcatel-Lucent has won a $100 million Verizon optical contract, which would be bad news for Infinera, the company that had been thought to be the front-runner for deal.

Infinera Corp. (Nasdaq: INFN) had been seen as the favorite to join Ciena Corp. (NYSE: CIEN) as a second supplier to Verizon with long-haul WDM optical equipment in what was pegged to be a $100 million contract. Wavelength-division multiplexing (WDM) equipment can help pump up the bandwidth of long-haul fiber optic networks.(See Is Infinera Set for Verizon 100G Deal? and Wavelength Division Multiplexing (WDM).)

George Notter, managing director of equity research for communications infrastructure at Jefferies & Co. Inc. , says he's revising his price target for Infinera's stock down from $12 to $8, based on not winning the long-sought Verizon Communications Inc. (NYSE: VZ) second supplier deal.

Notter also notes his sources are crediting the last-minute involvement of Alcatel-Lucent (NYSE: ALU) Michel Combes and some major price-cutting for the French vendor's victory at Verizon.

"We're told that pricing was exceedingly low -- in fact it was 'well below market pricing' for WDM gear," Notter says in an email note. "The anecdote serves as another reminder that the best technology doesn't always win in the Communications Infrastructure space. We understood that Infinera's DTN-X platform was heavily favored by Verizon’s technology people. Relationships and pricing can go a long way -- particularly for equipment suppliers like Alcatel-Lucent which have the clout to sell their infrastructure within the C-suite at Verizon."

Losing Verizon would have a significant impact on Infinera because of the effort and resources the equipment maker has invested in trying to win the business, Notter notes, as well as the inability to use Verizon as a reference account to win other business.

"These activities include joint product testing/evaluation, trials, and technology analysis," he writes. "Also, we believe that much of its work on integrating Ethernet/MPLS Switching technology was oriented around the RBOC's second source deal. Verizon is somewhat unique among major carriers around the world -- they've been very interested in embedding these capabilities into the Optical Transport network layer."

Alcatel-Lucent and Verizon both declined to comment on the report. Infinera was unavailable for comment.

— Carol Wilson, Editor-at-Large, Light Reading

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DOShea 1/21/2014 | 4:48:07 PM
Re: Fascinating I was really hoping Verizon would publicly confirm all this in its earnings call today, and apparently they didn't. For a long time, many of us have been waiting for comfirmation of Verizon's second supplier, and most of the speculation in recent months pointed to Infinera being the choice.
Peter_74 1/21/2014 | 4:04:32 PM
Re: ALU business model Support service contracts are valid revenue sources for equipment vendors be it ALU, Cisco, Juniper, or Infinera. The pricing of those contracts would also be driven by the market valuations. that is the beauty of market driven economics - customer wins esp. if it's a customer with clout as VZ.
rgrutza600 1/21/2014 | 3:59:30 PM
Re: ALU business model Well, if their model is to sell the equipment at a loss, then rip the customer off on expensive service.  I don't see them winning future business.
Peter_74 1/21/2014 | 3:51:17 PM
Re: ALU business model There is no certainity that ALU is selling equipment to VZ at a LOSS if you consider the long-term benefits of the decision to sell with deeper discounts as I pointed out. I'm sure ALU factored the support contract revenues and future prospects of being part of the eco system @ VZ. Strategic decisions are rarely made with short-term perspectives and vision. Alcatel almost went bust before not because of product discounts as all vendors give product discounts below market price depending on the negotiations and volume of the contract. They were in trouble because their product portfolio was not streamlined.
rgrutza600 1/21/2014 | 3:39:11 PM
Re: ALU business model Selling equipment below its cost is not a business anyone can afford to be in.  Alcalu almost went bust before, and it might happen yet if they don't fix their business model of selling equipment at a LOSS.
Peter_74 1/21/2014 | 2:36:33 PM
Re: ALU business model Some long-term strategic decisons do exacerbate the cash flow in the short-term but may enhance it in the long run as there are other benefits/paybacks associated with this decision e.g. when a large provider as VZ choses a specific vendor it's a shot in the arm for that vendor as many other providers will look at this positively when considering their solution.  Sitting around and letting the competition walk away with a high profile contract as VZ is a bigger risk than undercutting the competitor with losses.
rgrutza600 1/21/2014 | 2:01:59 PM
Re: ALU business model ALU has been burning through $1 billion in cash every three to four quarters.  These kinds of deals exacerbate this CASH BURN issue for them.
Peter_74 1/21/2014 | 1:56:34 PM
Re: ALU business model Offering gear at below market prices is a proven strategy used by many vendors to bag big contracts in this competitive marketplace. There's no guarantee for the long term viability but now ALU has an opportunity to be part of the evolution at VZ and of course not to underestimate the tangible/intangible gains from the positve publicity and long-term support contracts.
rgrutza600 1/21/2014 | 1:28:41 PM
Re: cost/price comment ALU has revealed that their gross margins are already in the neighborhood of 15% on optical equipment, so they already sell equipment in this sector at a loss.  This would have just been AT A MUCH LARGER LOSS.
Carol Wilson 1/21/2014 | 1:01:58 PM
Re: Fascinating I can only assume Notter's sources are folks inside Verizon - I can't say who that might be. 
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