Things don't appear to be looking too good for optical vendor Infinera and its relationship with wholesale carrier Level 3. A research note by Jefferies analyst George Notter said that Huawei apparently beat out the vendor for Level 3's long haul 40 Gbps WDM network. This news is obviously damaging to Infinera since Level 3 made up 24 percent of the company's revenue for the past year. As a result of this rumored news, Jefferies downgraded Infinera's shares to Underperform from Hold and lowering their target to $6.75.
If it turns out to be true that Level 3 has awarded Huawei a long haul optical contract, Notter plotted out two possible scenarios for Infinera. One is that they could lose Level 3's business altogether, which accounts for about $75 million in annual sales. Notter added that the migration to Huawei's gear would be an evolutionary versus a flash cut process, meaning that Level 3 would continue to equip its "installed base of Infinera DTN chassis with new modules." However, Infinera would see this revenue source decrease as Level 3 transitions to the Huawei optical gear. A loss of Level 3's business could have a rippling effect on Infinera's ability to garner other deals suggests a LightReading article. Although Infinera has gained traction with Level 3 and other large carriers in the long haul optical market due to its patented Photonic Integrated Circuits (PICs), a loss to Huawei could potentially negate that advantage.
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