The Weekly Sample

Articles and News

Ciena triggered a firestorm in the Nyquist sector Thursday with the news its coming quarter would be down 20% in revenue. We look at how this may understate the slowdown of the WDM transport business and what this means for Ciena. See “Ciena Detonates the Market”.

Thursday was a bad day for all stocks but Ciena and Nokia really got the ball rolling in this sector. With the Fannie/Freddie bailout (McCain should be saying “We are all Socialists now”) it is hard to see how this doesn’t mark a bottom in the near term. My personal opinion is that more pain is coming. Figuring out where and when will be tough if the government continues to write $150B stimulus checks without batting an eye. (See Fiscal Stimulus Plan in Perspective)

The optical sector is a classic example of how too much liquidity is a bad thing in a crisis. Large stocks of cash allowed companies to survive longer than they should have without combinations or rationalizations. One CEO I know calls it “The Curse of Cash”. Hopefully the same thing does not take place in the Housing sector, a sector that has broad economic impact. (unlike the optical sector which we all like to pretend does)

Alcatel is sliding into pole position as the next company that will champion the “Spend our way out of this mess” strategy. Details from the new CEO are yet sparse on his plans for a turnaround but the money quote from last week tells all one needs to know. Alcatel will “Focus on developing new technologies as a way to fight competition from low-cost rivals”. Exactly how Alcatel will perform better than the 50 other companies that tried the same strategy in the last 6 years is unclear.

The only way this works (if you can call it that) is if the EADS/Airbus model is employed, where Alcatel is designated a '”National Champion” and migrated to the socialist sector like the other 50% of European business activity, and subsidized as such. Does anyone really think it is a coincidence that the new Chairman of Alcatel is the ex-CEO of Airbus?

Alcatel should look more like an HP or IBM in 5 years. It should be BUYING equipment from it’s low cost rivals rather than COMPETING with them. Alcatel is too bloated to MAKE things but Huawei is too immature to SELL things. Sounds like a partnership, not a rivalry.

And exactly who made the decision that Huawei (their “low-cost rival”) equipment is inferior to Alcatel. I’m not sure that is the case anymore.

Links

Ciena reports tier-one spending slowdown - Telephony Online

The best summary of Ciena's revenue disaster, a spark that ignited a massive flash-fire in the Networking sector today. Nyquist index down nearly 6% today.

Interesting data from Credit Suisse on global carrier capex:

The aggregate CY08 carrier capex growth outlook increased to 12.3% from 10.7% … most of the improved CY08 outlook is driven by the Chinese carriers.

It should be noted that the average capex growth for the last 5 years (and the last 20 years) is 15%, so even with upward revisions, 2008 is a slow year for capex. The game, of course, is figuring out what fires the capex firehose is pointed at. While year to year growth fluctuates +/-5-10%, specific segments change much more. This is what yields the volatility and investment opportunities for what is really a sleepy sector at a macro level.

YouTube - Jean Reno - Nettoyeur "The Cleaner"

This is who they should have picked for the new Alcatel CEO. Somewhat NSFW.

Residential User Traffic - Japan

Updated version of a report first issued 2 years ago showing trends in bandwidth consumption in Japan. Conclusion - bandwidth growth is slowing down because P2P growth is slowing down.

NeoPhotonics is top optical component supplier to Huawei for the first half of 2008

A respectable claim, but in the end it's profit, not revenue that matters. But contrary to popular belief, you can make good money selling to Huawei.

Internet traffic is growing fast — but capacity is keeping pace |TeleGeography Research

Traffic growth is down across the board. East Asia, North America, and Europe all saw a reduction in traffic growth rates. I'll repeat it again. There is no Exaflood, there is no 'bandwidth explosion'. Telecom is steady boring growth.

How the 'Net works: an introduction to peering and transit: Page 1

Excellent overview of the economics behind Internet traffic and the differences between peering and transit traffic. It is important to understand these fundamental concepts yet few people do. Read and learn - it's a great article.

Alcatel CEO Covets New Technology To Ward Off Rivals - WSJ.com

Will "focus on developing new technologies as a way to fight competition from low-cost rivals." Disaster. Assuming that Huawei and others are focusing solely on cost will be fatal. Au revoir Alcatel.

Deal Journal - WSJ.com : Private-Equity Spotlight: Revisiting KKR-Silver Lake's Avago Buyout

Avago's potential return to the public markets is profiled. "The journey from the late 2005 buyout to possible IPO provides a window into the alchemy by which private-equity firms try to turn undervalued businesses into more-profitable companies"

Nyquist Sector Performance

Summer is over and when everyone arrived back in the office and started talking, they decided to sell. And sell some more. Volume was in line for the week though Thursday sure didn’t feel that way with a 6% drop in the Nyquist Index (the 14th largest ever) and a new 52 week low. Almost everything went down, with only 5 out of 55 stocks showing a gain. The top 5 losses don’t itemize the carnage effectively. 14 stocks were down over 10% last week. Cisco lost 7.5% The most emotionally damaging was Nokia which lost nearly $20B in market cap.

From last week:

In a bad market the so-called ‘quality’ stocks are the last to go, and it appears we are witnessing that now in CAVM, CIEN, BRCM, and MRVL. Notice the Nasdaq was off 2% last week, but the small/mid cap Russell and the Nyquist index were not. Is this because the small/mid cap tech sectors have been absolutely torched in the past 9 months (Nyquist Index –33% in last year) and now its time for the larger stocks? Time will tell.

Ciena now sells for less than  $1B if you look at EV plus cash. Based on my examination of valuation levels in this market I think Ciena will hold these levels unless it appears it will lose money in a consistent fashion. As discussed in our article this hinges on Coredirector.

I wrote about PMC-Sierra’s trading strength last week and it continued. It lost only 1% last week. Along with NETL, CAVM it is now a good market hedge.

Opnext and Finisar (-13%) performed poorly; Opnext due to its ties to optical transport, Finisar because its growth is dependent on it. This is just my rationalization of the decline. The reality is that everything gets sold in a market like this. The good goes with the bad.

Those January 2010 $7.50 Alcatel calls I mentioned last week at a $1 are now $0.55. I must admit that the choice for CEO doesn’t match what I wanted.

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.

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