The Weekly Sample - Week Ended 02/27/09

I am struggling to keep a promise to myself that I would write something positive this week but lacking sufficient material I’ll keep it short instead.

The best news I can offer are the upcoming public meetings by the Dept. of Commerce and Agriculture on March 2nd in Washington D.C. We debated a trip to the land of Pork and Barrels to sit in on the meeting but will pass as the signal to noise ratio will likely be well below threshold. Ideologically the intersection of investment research, telecom equipment, and government spending is not a union we don’t look forward to with anticipation, though given the size of the stimulus it represents a trend that cannot be ignored.

Other outlets are picking up on the magnitude and importance of the package and providing coverage. It is interesting to see how rapidly companies like Calix have adjusted marketing efforts to capture the stimulus as witnessed by its dedicated Broadband Stimulus page (http://calix.com/bbs/).

Adtran announced new FTTH ONT’s last week as its previous models are now unavailable due to the demise of TXP, an independent ONT maker Adtran OEM’ed systems from. The announcement mentioned the Broadband stimulus and the opportunity it presents for Adtran. But Adtran’s new ONT part numbers are not listed on the Dept. of Agriculture’s website as approved for Govt. subsidized deployments. We have a question into Adtran on the issue and are expecting a response.

I’ve written significant personal correspondence in the past week lamenting the state of the common shareholder and engaged left-wing cognoscenti at a cocktail party Friday night. A nice couple from Concord, MA was the full recipient of my anger following a frustrating investor conference call I heard the day before.

I lacked the eloquence of the words of the legendary Peter Bernstein, which should give you pause (Full article in the FT here).

… The S&P 500 has underperformed long-term Treasury bonds for the last five-year, 10-year, and 25-year periods, and by substantial amounts… If the long-run expected return on bonds in the future were higher than the expected return on equities, the capitalist system would grind to a halt, because the reward system would be completely out of whack with the risks involved.

This is a serious issue. After 25 years of shareholder dilution, hefty management salaries, volatility, and conference calls where even the smallest, most under-followed companies refuse to take public investor questions during quarterly conference calls (you know who you are), investors are left with less many than if they had given it to the U.S. Federal Government.

The Optical Fiber Conference (OFC) in San Diego is only three weeks away and it will be interesting to take the temperature of vendors. I’m expecting a bevy of 40G announcements, something that rings hollow given we’ve heard AT&T has halted all 40G optical deployments. Last September we wrote that 100G would bypass 40G (see “The Fuzzy Future of 40G”) and it is a conclusion that needs monitoring. It’s tough to make an early call and be right.

Links

Palo Alto Online : Palo Alto hopes for fiber network darken

A perfect example of how municipal fiber projects are hitting the wall. Should federal funds be used for urban projects like this? Are we trying to make water flow uphill?

Seth's Blog: Three things you need if you want more customers

Beautiful in its simplicity.

1. A group of possible customers you can identify and reach.
2. A group with a problem they want to solve using your solution.
3. A group with the desire and ability to spend money to solve that problem.

Fab tool book-to-bill falls to 0.10, says VLSI

Not a typo. Book to bill on semiconductor manufacturing equipment is at record low.

Cisco CEO says M&A deals to be small, none in devices

Chambers say 'no' to buying consumer hardware companies and believes the turnaround will start end of '09, not well into 2010 as others believe. Also says there will be "multiple acquisitions, but most of them will be small."

EETimes.com - Gartner cuts IC forecast, sees 24% drop

Sees worst case scenario of 33% drop in 2009.

Occam Networks: The Future Looks Great — Seeking Alpha

Good article on a small cap company likely to benefit from Broadband stimulus.

OpenCongress - Text of H.R.1 as Enrolled Bill American Recovery and Reinvestment Act of 2009

Full text of the stimulus bill.

Stimulus could revitalize muni Wi-Fi, other stalled projects

The dark underbelly of government spending is rolling into view. Municipalities are eying the $7.5B as a means to perpetuate projects that were economically bankrupt from the start. Muni-Fi? Couldn't even work in San Francisco.

Optical Outlook Cloudy | Optical Market Could Grow or Shrink

Ovum revises 20% worldwide optical networking growth in 2009 to a decline of 5%.

Juniper Networks CEO Faces Dilemma on R&D - WSJ.com

Juniper stunned the market with it's plans to expand R&D over the next 12 months, read why its CEO thinks this is the right course.

The Netbook Effect: How Cheap Little Laptops Hit the Big Time

Wired writes about the rise of the Netbook. If you don't know what one is, this is a great primer. We're pretty close to eliminating all desktop software though Excel and Word and Acrobat are hard to kill. Once you do this, you can work on any computer, anyplace, at anytime.

Recipe for Disaster: The Formula That Killed Wall Street

Human behavior is not Gaussian. Human behavior is not Gaussian. Repeat until you understand.

Tech Trader Daily - PCs: Morgan Stanley Sees '09 Industry Revs Off 24%

11% unit decline and 15% ASP decline… cheap netbooks (they are awesome, I have an MSI Wind) are deflating with ASPs 1/2 that of an average notebook.

Why Global Crossing's not sweating the economic slowdown

Good notes from an executive with perspectives on how the current recession is being navigated.

CenturyTel to target rural broadband customers with LTE

Carriers looking to use wireless to reach rural customers.

Nyquist Small/Mid Cap Index Performance

Carriers drove the outperformance of the Nyquist Index this week. Cogent, Level3, Fibernet, and RCN all did well and Time Warner Telecom  minimized losses in the third week of major index declines.

The fiber carriers with light leverage are attractive to us as hard assets that generate steady cash flow.

We’re becoming more interested in the behemoths (VZ, T, Comcast, etc) particularly if the current deflation morphs into inflation. The government appears hell bent of bailing out the indebted homeowner and the easiest way is to depreciate the dollar denominated debt they owe. We believe the government will choose the easy solution and are struggling to find evidence to the contrary. In this scenario the big piles of long dated debt the big Telcos and Cableco sit on will decompose while the Fed’s printing presses burn the midnight oil.

Other observations:

• Finisar lost ground amid heavy volume and no public news ahead of earnings this week. The company pre-announced revenue results for the quarter on Febraury 4th, three days after the close of it's fiscal 3Q. It is now trading at an all-time low.
• Hi/Fn was bought by Exar. HiFn isn’t a company we followed closely but had unique products that provided real value but couldn’t turn a profit. After pulling out the substantial cash HiFn held Exar paid less than 1x revenue for products with a 65-70% gross margin.
• Ikanos traded heavily on no news. Either some crowd mentality has taken hold or some investors are going to get a friendly visit from the SEC if a transaction is announced shortly. Perhaps the defense will be “Something looked like it was going to happen.”
• Alcatel Lucent hit a new all-time low. We haven’t looked at its debt maturities but others are drawing parallels to Nortel. Very sad.

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