Is Huawei in at Level 3?
The damage can already be seen: Infinera's stock is down by $1.40, more than 15.5 percent, to $7.60 per share, in early trading on the Nasdaq exchange.
In his research note, issued Monday morning, Notter states that Level 3 has been running a long-haul WDM request for proposal (RFP) process that, according to his industry contacts, has resulted in Huawei winning the business.
"Obviously, this has negative implications for Infinera... the sole supplier of long-haul WDM gear to Level 3," writes the analyst, adding that Level 3 accounted for 24 percent of Infinera's revenues during the past year. (See Infinera Dampens Q2 Expectations and Infinera Dips After Downgrade .)
Notter says the worst-case scenario for Infinera is that, in time, it would lose $75 million in annual revenues. The analyst, as a result, has downgraded Infinera's stock to Underperform, with a new price target of $6.75.
The implications for Infinera are broader than just losing out to a key rival at one of its main accounts. Infinera is regarded as having a technology advantage over its long-haul optical competitors because of its unique photonic integrated circuits (PICs): If it loses out to Huawei in this deal, that perceived advantage could be undermined.
Notter believes Huawei could have landed the Level 3 deal through a combination of technology prowess and attractive pricing. The analyst writes that Huawei has a proven track record in delivering 40-Gbit/s WDM technology, and that, to win what would be a landmark deal in North America for the Chinese vendor, it offered its gear at very low prices -- something that would be attractive to Level 3, which, says the analyst, has a "focus on ultra low cost solutions." Notter doesn't believe Infinera would be willing to drop its prices to match Huawei.
In addition, Notter notes that Huawei has a "native 40 Gbit/s solution," while Infinera, though it supports 40 Gbit/s through 4x10-Gbit/s inverse multiplexing, "does not have a native 40G wavelength solution." A native 40-bit/s solution is more spectrally efficient than Infinera's approach, writes the analyst. (See Who Makes What: 40- & 100-Gbit/s Systems.)
As for the potential security concerns about Level 3 running U.S. federal government traffic over a network built with equipment from a Chinese vendor, Notter states that "Level 3 could get around the national security issue by guaranteeing that government traffic stays on Infinera equipment while new, non-governmental traffic rides on the Huawei gear."
Level 3 has not yet responded to Light Reading requests for comment.
Infinera reports its second-quarter earnings tomorrow (Tuesday, July 21) after the Nasdaq closes.
If Huawei gets its foot in the door at Level 3 it won't come as a major surprise to some: Heavy Reading analyst Sterling Perrin stated recently that, having already landed a few small optical deals in North America, "it is not difficult to imagine Huawei working its way into bigger networks over time." (See Huawei Gains Optical Ground in North America.)
— Ray Le Maistre, International News Editor, Light Reading