2013: Good News for ALU, CSCO,CIEN

Telecom infrastructure spending is projected to bounce back in the year ahead, with investment in North America and Asia driving growth. Infonetics Research is projecting worldwide growth of roughly 4%, as even operators that have been delaying investments finally start spending. “Service providers have no choice but to invest in their networks now; some have been restricting capex for so many years that they are experiencing network outages, unable to handle exploding traffic,” said Infonetics analyst Stéphane Téral.

Infonetics projects that carrier spending on every type of telecom equipment except optical and TDM voice will be up in 2013, and that capital expenditures will focus on fiber-based wireline broadband, 2G mobile network capacity expansion, 2G migration to 3G, and migration to LTE projects through 2015.

2012 has been a year that many infrastructure providers “would rather just forget,” said Daryl Raiford, CFO of Genband. “Now everyone is waiting to see what 2013 has in store for us.” Raiford thinks that small cells and small cell backhaul will be a focus for 2013 infrastructure spending, as will semiconductor solutions that can increase bandwidth. Raiford also noted that late last year infrastructure spending was projected to increase about 4% for 2012, but in reality spending turned out to be down.

The outlook brightened last month when AT&T announced Project Velocity IP, a $14 billion investment in network infrastructure planned for the next 3 years. Then Deutsche Telekom said it would invest almost $40 billion over the next 3 years, with much of that investment slated for its T-Mobile USA unit and for MetroPCS, which is merging with T-Mobile USA. Verizon Wireless has not released a dollar amount for its planned investment next year, but has outlined the areas that it will prioritize.

Competitive carriers should also account for a significant portion of capital investment in the year ahead. Infonetics says that in 2012, independent wireless operators bucked the downward trend, increasing their capital expenditures by 12%.

ALU, CSCO, CIEN: Global capital expenditure (capex) by telecommunications service providers is expected to reach $223.3 billion in 2017

Global capital expenditure (capex) by telecommunications service providers is expected to increase at a compounded rate of 1.5% over the next five years, from $207 billion in 2012 to $223.3 billion in 2017, according to a new market report from The Insight Research Corp.

The new study says capex in the various global regions will be uneven, with North America, Europe, and the Latin American-Caribbean regions showing little or no growth and only Asia-Pacific and Africa continuing to make investments in telecommunications hardware and software to keep up with burgeoning customer demand for new services. Capex among fixed-line operators continues to decline, while capex growth comes mainly from mobile operators in developing countries, who continue increasing  their capital outlays to meet pent-up demand for service.

While demand for telecommunications services may be income-inelastic and industry revenues may actually grow over the forecast period, services in every global region will nonetheless come under heavy pricing pressure as operators fight over the cost-conscious customers who are quite willing to delay new device purchases, the market research report says.

"Customers in every region are pinching pennies and the demand for advanced applications is uncertain," says Insight Research President Robert Rosenberg. "The confluence of these trends means a further erosion of operator margins, which in turn will affect investments into infrastructures and new technologies since funding is now more difficult to obtain."

The difficulty in finding funding now faced by many operators will certainly slow down, if not derail, the rolling out of investments in next-generation networks, WiMAX, LTE, and converged services, he warns.

The report, entitled Telecommunications and Capital Investments: Impacts of the Financial Crisis on Worldwide Telecommunications, 2012-2017, provides capital spending forecasts for the U.S., Canada, UK, Germany, France, Japan, China, and India. On a per country basis, capex spending is subdivided according to fixed lines, mobile, and broadband. 

Ciena (CIEN) an investor darling

Despite missing on earnings per share in its fiscal fourth quarter and entering what management describes as “a quarter in which we typically experience seasonal reductions in order volume and customer deployment activity,” shares in Ciena Corp.  rose on Wall Street yesterday.

Analysts speculated that the growth in order backlog may have led investors to conclude that Ciena is in good shape for a hoped-for future turnaround in fiber-optic network equipment spending.

Ciena reported December 13 results for its fiscal fourth quarter, which ended October 31. Revenues of $465.5 million represented a 1.8% sequential decline but a 2.2% improvement over the year-ago quarter. For the recently concluded fiscal year, Ciena reported $1.8 billion in revenue, up from $1.7 billion for fiscal 2011.

GAAP net loss for the recently concluded quarter was $38.8 million ($0.39 per common share), worse than the GAAP net loss of $22.3 million ($0.23 per common share) suffered in the year-ago fourth quarter. For the fiscal year 2012, Ciena reported a GAAP net loss of $144.0 million ($1.45 per common share) versus a GAAP net loss of $195.5 million ($2.04 per common share) for fiscal year 2011.

“With five percent annual revenue growth and fourth quarter financial performance in line with our expectations, we continued to significantly outpace the market and take share in 2012 despite the challenging environment. That momentum resulted in record order flow and year-end backlog,” said Gary Smith, president and CEO of Ciena, via a press release. “Customers require more network convergence with greater programmability to deliver more services, and we believe our portfolio is leading the transformation to next-generation intelligent networks.”

Investors appeared to buy the story, despite the fact that Ciena guided revenues for the first quarter of fiscal 2013 at $435 to $460 million, with adjusted (non-GAAP) gross margin percentage in the low 40s and non-GAAP operating expense in the high $180s million range. Shares of the company’s stock closed yesterday at $15.80, up from the previous day’s $15.57 on a volume of 15,671,698.

Investor enthusiasm for the stock left several analysts puzzled. “A record $2 billion of orders in FY12 and 25% backlog increase to $900 million along with hope regarding a capital spending cycle seems to have fueled investor optimism,” wrote Raymond James analyst Simon Leopold in a note to investors by way of example. “We note that FY11 ended on a similarly upbeat note with backlog rising ~20%, yet FY12 fell short of expectations.

“The intraday rise in Ciena's shares surprises us and appears as a hope trade (i.e., belief that it generates significant growth and margin improvement eventually),” continued Leopold, who has Ciena’s stock rated as “Market Perform.” “Ciena's return to profitability and achievement of its long term 10% to 12% operating margin target slide out in time again. We remain optimistic regarding demand, but we're surprised and disappointed by the higher expense and lower margin outlook.” 

Weakness in both packet-optical transport and packet-optical switching led to the sequential revenue decline in the fiscal fourth quarter. Packet-optical transport sales shrank $9.1 million sequentially, while packet-optical switching revenue retreated by $17.3 million