The Weekly Sample - Week Ended 03/06/09

Companies are jumping on the China networking investment train in droves, to the point where it is crowded as a real Chinese train prior to Chinese New Year. Anyone who has been on one before will tell you that you don’t want to ride one of those trains if you don’t have to. Yes, there is massive telecom investment in China, and yes, the 3G rollout will require large amounts of capex. But virtually every vendor can claim some business in China at this point; what must be examined is the degree of exposure and the validity of their claims to this business.

Mindspeed and Netlogic joined a call sponsored by Signal Hill Research which specifically focused on China. What was interesting about the call was the equal focus on the aggressive FTTH rollout underway and not just the 3G rollout, which everyone already knows about.

Mindspeed stressed the value of its VoIP encoders as part of the FTTH portion though it isn’t clear to us they will participate in a material fashion. The FTTH rollouts in China are preserving traditional copper voice service in some structures but most of the traditional copper landlines will migrate to VoIP using small ATA adapters that sit in each apartment. There will not be a need for Mindspeed’s high density encoders in most situations.

Netlogic has a more legitimate story as the leading provider of custom memories for routers and L4+ equipment. This was bolstered last week by the rumor (source ) IDT is exiting the business. IDT made several acquisitions in this area and failed to gain traction so the rumor makes sense. Netlogic also has the Aeluros 10GbE PHYs which are pretty good too. But Netlogic is less leveraged to China capex than it is to the router market in general. In fact, in a perfect market, Netlogic’s stock would move in lockstep with Cisco/Juniper. The story which would contradict this theory is vendors are using more of its product per system going forward, but conversations I have with engineers indicate they are struggling with how to use them less. Netlogic is also one of the few companies in the sector selling at a valuation premium.

Rambus educated its customers 10 years ago about the foolishness of relying on a single vendor for memory technology and people have not forgotten. Netlogic’s business looks similar to us, and there is too much risk there given that theoretically, one can capture equivalent market alpha by just owning Juniper and Cisco, which track the market Netlogic sells into.

Companies that are significantly leveraged to China include PMC-Sierra, Broadcom, Vitesse, Marvell, and even Cisco. It is not a well known fact that while Cisco has about 60% high-end switch/router share worldwide, they are only around 40% in China. Cisco could find a way to bring China in-line, just as Microsoft did years ago, with an aggressive expansion and partnership strategy there. This is simply a massive opportunity for them.

Other interesting happenings:

• Marvell laid off 15% of its workforce after reporting revenue down 40% from the year before. While this sounds terrible, it isn’t hugely out of line with its peers.
• My interview with Fox News aired, edited down to a short 10 sec. sound bite.
• Tomorrow is the first public hearing in Washington on the Broadband Stimulus, and should provide some direction on where and when these funds should flow. It is webcast, should you want to listen.

Links

Hon Hai Says Short-Term Outlook Better Than Expected

Foxconn declares world is not ending. Note Foxconn was early and very negative last year. This is a good sign.

Intel dubs 2009 'The Year of 10Gb Ethernet' • The Register

10GbE per port prices dropping under $500, 10GE LOM (LAN on Motherboard) starting to emerge.

Barron’s Online : Tech Investing: Rules To Live By (Part 1)

This is genius. Great reading for Engineers and Investors alike.

The Broadband Hot Potato - WSJ.com

On the front lines in rural VT, where a well organized effort to wire small towns with fiber fights upstream. I know the area pretty well and the challenges they face but the Vermonters are a tough breed. Fantastic in-depth WSJ article.

Wall Street on the Tundra | vanityfair.com

Michael Lewis goes to Iceland to find out what happened.

IP video startup Verivue integrates storage, switching

The buzz on this Boston based company is red hot.

BT Gets Green Light for Fiber Plans - Light Reading

OFCOM dials back price regulation, BT cleared to charge what they want on new investments. The UK is taking the opposite tack of the rest of Europe which is pursuing more regulated local loop unbundling.

Broadband Boondoggle - Should government pay to expand broadband? - FoxNews.com

Video including clip of interview with Andrew Schmitt

Tech Trader Daily - Barron’s Online : Altera Now Sees Q1 Revs Off 15-20% Sequentially

Grab onto to this like a life preserver ladies and gents. Altera indicates that Q1 is shaping up towards the better side of guidance. First piece of good news seen all day. Update: Xilinx just announced roughly the same thing.

Lightwave - Infonetics: Despite economy, optical network hardware market up 5%

Huawei revenue up 39%, pulling it nearly into #1 market share position.

Light Reading - TXP Is Back - The Philter

We wrote of its demise, but actually it rose from the dead on Fri after The Weekly Sample went to press.

Rural Broadband at a glance - 2009 Edition

Great stats, including broadband usage as a function of household income. Turns out there is a huge price elasticity to Broadband, more than you would expect.

Lightwave - HeavyReading: Cable operators turning to fiber

Interesting… once fiber is in place the cablecos suddenly recognize the limitations in the DOCSIS architecture. Cable companies duplicating Telecom FTTH once fiber is an option for them.

Nyquist Small/Mid Cap Index Performance

Markets declined for a fourth straight week.

The NASDAQ is down 18%, the S&P500 is down 25%, and the Nyquist Index is down 12% since Jan 1. Tech has outperformed the broader market, and the Networking sector is doing well, if one can define 'losing the least' as 'doing well'.

Ciena had an decent trading week after it announced poor results and a large layoff. The company has nearly $3 in cash and no immediate debt maturities. The most important thing to remember about Ciena is the favorite son of casual sector investors looking to get exposure to optical networking. If funds decide to put money to work in the Nyquist Sector, after Cisco and Juniper, Ciena is at the top of the list. Technically the stock looks very solid now and these casual investors read the charts the same way. I expect Ciena will start to see money inflows in March. Remember, this is a stock that sold for 34 less than a year ago.

Cavium was another strong performer, trading up on high volume. Like Ciena, it has performed well in the past few months and is also a well liked stock in the institutional circles. Also. the HI/FN acquisition by Exar is sending customers towards Cavium. Contrary to whatever Exar says, people expect that Exar is will milk the cash cow and shut down R&D.

Infinera closed at a new all-time low and can't shake the trading downtrend that has been in place since the company's IPO nearly two years ago. JDSU is also trading near its post-2000-bubble low.

To learn more about the Nyquist Index, including historical performance and what companies are included, please visit the dedicated page for The Nyquist Small/Mid Cap Index. It identifies the companies that make up the Nyquist Index universe and the methodology behind the calculation of this benchmarking tool.

Thanks for reading.

Andrew Schmitt