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Finisar – FY09 Revenue Outlook
Finisar’s Q408 Earnings Call was June 12. Since then the stock has declined nearly 25%, reflecting what we believe is a general dissatisfaction with revenue growth guidance of 10-15%. This guidance appears conservative.
Q208 Earnings Scorecard is Live
Updated for Q208, the Nyquist Earnings scorecard is a concise yet comprehensive snapshot of earnings schedules, results, and subsequent market performance for companies in the Nyquist sector: networking components (silicon and optical), carrier-oriented equipment, and wholesale fiber carriers.
Broadcom Enters FTTH Chipset Market
Broadcom is entering the PON chip market and has secured design wins with a major tier-1 equipment vendor. While this is something predicted here, the timetable was sooner than expected. This will have a substantial impact on FTTH component and equipment suppliers as well as the carrier currently conducting lab trials with the device.
Nyquist Small/Mid Cap Index Rebalancing
The Nyquist Small/Mid Cap Index benchmarks the performance of carrier networking oriented companies under $5B in market capitalization. The construction and re-balancing of the index are based on the rules of the Russell 2000 and other Russell indexes, and as such the index is re-balanced at the end of May. Let’s examine the changes.
Optical Component Consolidation - Part I
Just as the market abandoned hope of consolidation it strikes. The dust has settled from the merger announcement between Finisar and Optium and in plain terms it is a brilliant move. Finisar is already a leader in the industry but this puts them in an even stronger position than before. This series of posts looks at why it is happening, who benefits, who loses, and suggests what is likely to happen next.
Internet Traffic Growth Doesn’t Matter
Andrew Odlyzko, best known for his objective commentary on Internet traffic growth, spoke at the 2008 Gilder/Forbes Telecosm Conference. He helped clarify what really matters in the debate about Internet bandwidth growth. Consider this a survival guide in a time where “Internet traffic growth rates are slowing and Hype is accelerating.”
Vitesse Q208
Vitesse provided a “State of the Company” update, most likely it’s last ad-hoc quarterly call as audited results are expected to be made available by next quarter. We analyze their core business trends, including discussions about Chinese GE-PON, an update on EDC/SFP+ 10GbE, and the impact of removing distributor incentives. While Vitesse is cheap when compared to peers the risk of an unanticipated short-term revenue decline poses an unseen risk.
Fairpoint & Occam Networks
Fairpoint Communications (FRP) plans to spend $781M over the next 5 years maintaining and upgrading the network they purchased from Verizon. Drilling into the details of the network spending suggests Occam Networks (OCNW) is well positioned to materially benefit from this proposed deployment. Details provided by Fairpoint and fundamental metrics of the Broadband Loop Carrier business lead us to believe Occam will recognize up to $125M in revenue, of which $80M will come in the next 18-24 months, provided Fairpoint executes it’s current capex plan.
Nyquist Earnings Scorecard
Looking for up-to-date quarterly results for companies in the Nyquist sector?
The Nyquist Earnings scorecard is a concise yet comprehensive snapshot of earnings schedules, results, and subsequent market performance for companies in the Nyquist sector: networking components (silicon and optical), carrier-oriented equipment, and wholesale fiber carriers.
Continue reading
PMC-Sierra Q108
PMC-Sierra reported revenue at the high end of guidance but what caught investors attention was higher than expected revenue guidance for Q208. Of particular interest to readers should be PMC’s comments on FTTH in China and Japan, which we expand upon based on our in-depth knowledge of the area.
Adtran Q108
Adtran reported surprisingly good numbers and made specific comments that indicate the Great North American capex freeze of 2007 is thawing in a few areas. The company also had interesting things to say relative to access market growth and trends in the Enterprise portion of their business.
Nyquist Small/Mid Cap Index
We’ve struggled to identify a good index to judge the relative performance of equities in our area of expertise: carrier-oriented networking components, equipment and wholesale carriers. Lacking any good alternatives, we built one ourselves - the Nyquist Small/Mid Cap Networking Index.
The Future of the NPU Market - Part 1
Tthere are parts of the NPU market that will do well and others that will not. The edge of the network, with its burgeoning application growth, provides a fertile cradle for the NPU model while the core network is so harsh an environment that even the best managed companies face long odds of generating superior investment returns. Let’s examine why that is.
Live by the Boom, Die the Boom
Emcore was skewered this week by a blog post highlighting the questionable nature of some of it’s solar contracts, and the skittish solar money ran for the exits.
ADVA Q407
We summarize ADVA’s quarterly call and shed light on the issues surrounding a decline in revenue from channel partners as well as the threats they face in 2008.
Fiscal Stimulus Plan in Perspective
John Meynard Keynes is rolling over in his grave. While we’re no fan of Keynesian policies the raw economics is valid. That being said, the latest plan by the US government to pump $146B into the pockets of American consumers is the bluntest type of instrument that a Keynesian can employ. It is a prostitution of Keynes’s intent.
Let’s put this largess into a perspective that readers will understand. $150B would allow every household in the US to be wired with municipal Fiber to the Home (FTTH). Figure 100m American households at an average cost of $1500 (Verizon is doing it for about this number, and that includes equipment) and you hit the $150B number right on the nose.
While this endeavor is not something we would advocate, it illustrates the magnitude of the utter waste of this debt financed federal spending.
If our government must engage in debt financed spending, it is best allocated into long term productive assets. Even Keynes was clear on this manner. FTTH fits this description, dropping $800 laser-guided checks into consumer pockets does not.
Ikanos Buys Centillium DSL Assets
Ikanos reached an agreement to acquire Centillium’s DSL chipset assets for $12M. This is a shockingly low price and it sets a new valuation floor for telecom component revenue streams that most people in the industry, including us, viewed as annuity assets worth much more. It should also force investors to question whether company cash flows are being invested in new products that will generate superior returns.
CES 2008 - Opinion and Perspective
CES 2008 is best remembered as the year when it became fashionable for the media to question the relevance of this uber-convention, and for many to skip attendance altogether. Given the intense and in-depth media coverage of the show, attendance should no longer be considered mandatory unless you’re trying to tease out the trends and make the observations missed by the mainstream media. This is what we took away from the show and what Nyquist readers will find relevant.
Nyquist 2007 Predictions Revisited
It’s time to take a look back at 2007 and see how our predictions fared. (See “Nyquist Predictions for 2007“)
10GbE and SFP+ - This Time It’s Different
One of our more popular theme pieces (see “Five Misconceptions About the 10G Optical Market“) examined the state of the 10GbE market and sought to identify the gaps between market perception and reality. It’s time to publish an update with the facts we have collected and opinions we’ve formed since then.
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Google’s Secret 10GbE Switch
It is our opinion that Google (GOOG) has designed and deployed home-grown 10GbE switches as part of a secret internal initiative that was launched when it realized commercial options couldn’t meet the cost and power consumption targets required for their data centers.
This decision by Google, while small in terms of units purchased, is enormous in terms of the disruptive impact it should have on 10GbE switching equipment providers and their component supply chains. It is as if a MACHO just arrived in the Enterprise networking business and the orbits of the existing satellites have begun to shift without observers knowing why - until now.
Equinix - Proxy for the Internet
Lane Patterson, Chief Technologist of Equinix (EQIX), shared his thoughts on data centers and the challenges facing his industry at the 2007 Gilder Telecosm conference. He coined the term ‘bitmile’ and shed some light on how application providers such as CDN’s are adjusting their optical transport architectures to optimize cost.
LightReading Ethernet Conference Notes
This is a collection of notes and observations gathered during the LightReading Ethernet Conference that didn’t merit a standalone article. Unless noted, these conclusions were from conversations I had while at the conference, and not the opinions of presenters.
The Wireless Backhaul Opportunity
The best session of the Lightreading Ethernet Conference covered Wireless Base Station Backhaul. Patrick Donegan of Heavyreading and the panelists presented cohesive data and their take on which way the market would head. I gained a new perspective on the opportunity wireless backhaul presents.
The fundamental problem wireless carriers face is the underlying shift from voice dominated to data dominated traffic. Voice is growing linearly, while data is likely to grow exponentially. If leased copper T1’s are used for backhaul, their backhaul costs will scale linearly as capacity is added.
The Real Carrier Ethernet Opportunity
It is amazing how little can change in three years. I spent a great deal of time working on Carrier Ethernet in 2004 and 2005, and the presentations I saw at the Lightreading Ethernet Conference and Expo were no different than the ones I saw in 2004.
Equipment makers such as Ciena (CIEN) sang the praises of Carrier Ethernet (all true) and spoke of the various impediments to deploying it: standardization of inter carrier interfaces, administration & operation, quality of service. It strikes me that the bigger problem is much more basic than the ones being presented.
AT&T Carrier Ethernet Perspectives
Rich Klapman, AT&T Director of Marketing for Ethernet Services, presented yesterday at the Lightreading Ethernet Expo. He provided some perspective on what AT&T is doing in Carrier Ethernet. He was one of several speakers who hit on the scarcity of fiber as a barrier to deploying Ethernet. Here are some raw notes.
Free FTTH in France
Fiber to the Home broadband is not Free in France, but Illiad (Corporate Website) is rolling out FTTH in Paris through it’s broadband ISP Free (note the capitals).
We’ve written about Free before (see “FTTH vs. VDSL in France“) but had a chance to learn more about what Free is doing while having Dinner with Benoit Felten. He consults by day and blogs by night over at Fiberevolution… What an appropriate name for a French Fiber blog.
iPhone Lockup
I’ve found the fracas regarding Apple (AAPL) and the recent release of software for the iPhone rather ironic and worthy of comment.
The iPhone was introduced as a standalone consumer electronic device with little or no modification possible by third parties. In the months since launch, the iPhone attracted hackers by the dozens who bypassed the phones security functions to add many interesting applications, as well as unlock the device for use on any GSM/EDGE network.
DSL Market Consolidation Dynamics
The ongoing consolidation of DSL chip suppliers should create a positive structural effect on pricing and improve the overall health of the remaining players. Dave Burstein of DSL Prime fame points out that Broadcom (BRCM), Infineon (IFX), Conexant (CNXT), and Ikanos (IKAN) now account for 95% of DSL chipset market share. This is extremely positive.
The Bandwidth Explosion Myth
Not a single day passes where we do not hear the mantra of a “Bandwidth Explosion” used to justify aggressive financial forecasts for equipment and component companies, carrier backbone demand models, even regulation or deregulation of the Internet.
Lacking in these sweeping statements is a reference to a crisp and concise quantitative explanation of traffic growth. This lack of hard data supporting this bandwidth explosion has weighed heavily on us, particularly because we have seen the damage that nebulous predictions of traffic growth caused in 1999-2001.
Everyone remembers the claims of Internet traffic doubling (even more prescient here) every 100 days in 1999? This was pure fiction, yet the political and investment communities accepted it because it was a useful tool for justifying the irrational activity underway. History does not repeat, it rhymes, and the “Video Bandwidth Explosion” sounds very similar to what was said in the Telecom bubble.
Using data from the Japanese Ministry of Internal Affairs (MIC) one can draw conclusions about the growth in Japanese Internet traffic on a per subscriber basis. The conclusions are not what you would expect given the advanced nature of broadband in Japan, and are troubling when compared with image created by the market.
Enough about Apple!
The mornings RSS News Feed reader is bursting with news and opinion about Apple (AAPL), the IPhone price cut, and who did what to whom and why. Continue reading
Ikanos Picks Up Alcatel’s Check
Ikanos (IKAN) announced last week that it would pay a ‘leading European OEM’ $1.6M in return for a development agreement, most likely Alcatel. This is a very odd deal and is worthy of closer examination.
Google: Now With Just A Little Evil
A magician is successful by making the audience focus on one hand while the other engages in hidden behavior. Google’s (GOOG) proclamations that it is not evil are corporate PR sleight of hand, and should raise, not lower, the awareness of users of the ways it might indeed be evil. This weeks Economist leads with a cover story and editorial that eloquently frames our concerns.
The Proving Ground of NTT
The Japanese Ministry of Internal Affairs and Communications is a great source for data on Japanese communication infrastructure and usage. A recent document provides a state-of-the-network update and lays out the goals for the next 3 years.
Vitesse Sells Storage
After dropping hints in an earlier conference call (see Vitesse Q207 Conference Call Notes) Vitesse announced the sale of a portion of their storage products to Maxim (MXIM). The $63M transaction has a provision for an additional $12M if certain milestones are hit. The company will use the proceeds from Maxim and $30M in new convertible debt to repay the junk debt to Tennenbaum Capital. (see Tennenbaum and Vitesse).
Three months ago I expected the sale of the entire storage unit to fetch 3.5x revenue. Subsequent research and discussions led me to believe this estimate was inaccurate, something reflected in comments I made (see here).
Cisco’s Fear of a Broadcom Planet
There are few franchises in the silicon business where one vendor so completely dominates the market. Everyone can name Intel’s CPU business as one. But can you name another?
Infineon/TI (IFX) in DSL is a contender. Conexant (CNXT) in PC modems (but little profit to show for it). Netlogic (NETL) in exotic CAM’s (but beholden to one sugar daddy customer - Cisco).
But nothing approaches the complete and total dominance of Broadcom’s (BRCM) grip on Ethernet switching silicon.
Gilder Telecosm 2007
I came away from my visit to last years Telecosm (see articles here) pleasantly surprised by the quality of the debate. I had a chance to share a few beers with George Gilder and talk about the future of NPU’s and of the industry in general. I found the conference superior to standard investment conferences as it has real debate and hard audience questions.
You can imagine my pleasant surprise when I was invited back this year as a panelist. I’ll be participating in a panel debating flexible vs. fixed silicon solutions in the network (agenda here).
Presenting companies that fall under the Nyquist market model: LNOP, ANAD, QCOM, Luxtera, INFN, EQNX, and several more TBD. More information including registration can be found here.
The conference is being held in upstate New York this fall and always draws a very interesting speaker list - last year Steve Forbes, Michael Milken, Carver Mead and John Rutledge all delivered stellar presentations. I went in last year with a slightly negative bias of Gilder and the ‘Gilder Priesthood’ and came away with a positive impression. You might change your mind too. Hope to see you there.
MRV Communications- Vitesse Redux?
The consolidation of MRV (MRVC) & Fiberxon is a healthy force for the industry but one made at the near term expense of shareholders (see MRV, Luminent, and Fiberxon). The rest of the optical component industry will see the benefits of consolidation, but MRV shareholders have lost nearly 30% of their investment since the merger was approved.
Consumer Tech Spending Visualization
Fantastic infoporn from Wired (the guys who really invented the genre). Note that tech spending is only 5% of total consumer spending, and cable, telco, and mobile spending account for 70% of that. It seems inevitable that the amount spent on these areas will fall, and the amount paid directly to content owners will rise. The pie may or may not grow, but the distribution will almost certainly change.
Quote of the Week
… Derivatives are a two-edged sword. Yes, they diversify risk and direct it away from the banking system into the eventual hands of unknown buyers, but they multiply leverage like the Andromeda strain. When interest rates go up, the Petri dish turns from a benign experiment in financial engineering to a destructive virus because the cost of that leverage ultimately reduces the price of assets.
Many companies in Networking/Communications survived the past years because they were sitting on tons of cheap money or had easy access to more cheap money. This could be ending.
Companies with healthy balance sheets will be better positioned for the coming endgame. I’m sure more than one company out there is staring wistfully at their FY2004 10-K balance sheet and wishes it hadn’t frittered away that equity.
The Andromeda Strain was a good movie and a good analogy in every way.
The Madness of the Carrier Chipset Market
There is an excellent editorial today by Lee Goldberg that explores the lack of new R&D in SONET/SDH and PDH chip sets. While I don’t agree with the conclusion it is a worthy topic of exploration and he highlights something missed by the mainstream tech media.
The networking industry may be about to hit a hidden speed bump as the number of semiconductor companies actively involved with developing products to support SONET/SDH, PDH, and other TDM-based technologies can now be counted on one hand.
Lee thinks this is a big problem. This is not a problem at all. It is the only logical solution to the madness of the past 6 years.
PMC-Sierra Q207 Conference Call Notes
Here’s a quick snapshot of the PMC-Sierra (PMCS) FQ207 conference call.
- Revenue up slightly based on the strength of storage and FTTH chips
- Headcount down from 1182 to 1057 with a corresponding reduction in opex.
- “Market Conditions Improving”, with Video being cited as the big driver I still would like to see someone somewhere step up to the plate and quantify this effect. Without data this is another “internet traffic doubling every 9 months” type of proclamation
PMC-Sierra Adjusts Channel Accounting
In a trend I expect to snowball, PMC-Sierra (PMCS) announced they will begin using sell-through accounting as opposed to sell-in accounting with distributors. This is a trend which traces it’s origins back to the accounting issues at Vitesse Semiconductor (VTSS.PK). (see “The Trickle Down Economics of Channel Stuffing“)
AMCC - Further Down the Spiral
AMCC (AMCC) held a conference call last Friday to review preliminary FQ108 results. The company indicated in April that FQ108 would be $60M down from $70M in the previous quarter (see “AMCC Kicks the Distribution Habit“). The final tally now puts it closer to $50M, a quarter over quarter decline of nearly 30%. This is worthy of detailed examination.
MRV, Luminent, and Fiberxon
MRV (MRVC) completed a merger with component maker Fiberxon without having audited financials and released an 8-K outlining events that do not point towards rapid resolution. In my personal opinion, the company has willingly placed itself in a situation where they face imminent delisting, violation of Bond covenants, and virtually certain attack from shareholder lawsuits and activists. It defies explanation.
Ciena and The Future of Carrier Ethernet
Ciena (CIEN) shares have been on a bit of a tear recently, rising 20% in June. Unfortunately we haven’t participated in this gain and I believe it is worth explaining the historical thinking behind this decision.
iPhone Pr0n
It was only hours after the Apple (AAPL) iPhone went on sale that the first device teardowns appeared. The shortest but most comprehensive can be found here.
Telecom, Meet Web 2.0
Google (GOOG) appears to be buying GrandCentral, a company that merges VoIP and advanced calling features. They provide you with a single phone number and web/mobile interfaces to manage call redirection, voicemail, address books, etc. Think of it as VoIP on steroids and EPO, simultaneously. Click over to their Features page for a better description and familiarize yourself with how outdated a plain landline has become.
Whales, Crude, and Plants
While a little off topic I thought the following was worth sharing. I read a WSJ book review written by one of my favorite authors, John Steele Gordon. He reviewed “Leviathan“, a comprehensive account of the history of Whaling. Here’s an excerpt from the review:
American whalers ranged farther and farther across the world’s oceans as their prey grew scarce in home waters … But as the price of whale oil ratcheted up in the face of increasing demand and decreasing supply, competition from other sources began to increase. When Edwin Drake demonstrated the practicality of drilling for petroleum in 1859, the glory days of American whaling were over.
One cannot avoid drawing parallels between this significant black swan event that single handedly destroyed America’s largest pre-industrial age business and the recent announcements regarding cellulose ethanol.
I am certain readers of this blog would greatly enjoy both ”Empire of Wealth” and “A Thread Across the Ocean“.
FTTH Silicon Market Share
The latest Linley Group report on Networking Silicon Market Share provides a breakout of PON FTTH silicon market share for the second year running.. It includes both market size and market share information for all Networking markets, including PON. The key takeaway is that Linley believes the market grew only 20% in dollar size, though I estimate deployments grew worldwide over 50% year over year. Such is life as a semiconductor vendor.
They shared the following data with me.