The Weekly Sample

Articles and News

After a two week hiatus the Nyquist Weekly Sample returns.

Nobody, and I mean no one likes the telecom component and equipment business anymore. The meteor hit in 2001, and the market feels it is pointless to identify the strongest dinosaurs because they’re all going to die anyway.

JDS Uniphase and Avanex reported poor earnings this week and the market reaction was violent. Both companies are now selling near all-time lows. Putting aside the various reasons and excuses du jour, the bottom line is that most of the companies in this sector have sized themselves in such a way that significant profitability is contingent on a rise in revenue and gross profits, which never happens.

The result is an industry where companies skip like stones along the surface of profitability, squeezing out marginal non-GAAP profits one quarter and small losses the next. Profitable operating models are contingent on future increases in revenue, which never seem to materialize. The situation has been the same for many years following the collapse of the bubble. Management refuses to size the business in such a way that it can be profitable in the existing environment.

One exception, Vitesse Semiconductor, was faced with such dire cash circumstances that a major re-alignment of the business was made. There simply was no other option, and as a result Vitesse has opex/revenue ratios 30-40% less than it’s peers. Rationalizations like this are painful but force companies to identify what is critical, and most importantly at least attempt to acknowledge the importance of providing shareholder returns.

Vitesse will be an interesting one to watch as we discover what impact strong financial medicine has on the patient. Arguments that they crippled future revenue streams are valid. But at Vitesse tried something.

And in this environment, Avago, a large diversified component supplier that is a major optics supplier, announces it’s intention to go public. I noticed something odd while at NXTComm in June. Many people cited Avago as “Doing Well” but when pressed to provide a reason why, could not. Now I know what was going on – the company was clearly passing the word of it’s success in order to help create expectations for a liquidity event. The financials of the company are laid bare in their S-1 (Full copy can be found here), and I’ll reserve further judgment until I’ve read it. But KKR and Silver Lake must want out if they have decided to exit in an environment like this.

In three years of the 14th century, 1 in 3 European citizens (and possibly Asian/Middle Eastern – records are scarce) succumbed to the plague. It was history’s most terrifying moment. But at least it was quick. Six years after the optical market financial nadir of 2002, even with all of the pain experienced by participants and investors alike, we find ourselves at that low financial point again.

Two weeks off puts everything in perspective.

Links

Light Reading - Chips, Components & Subsystems - Avago IPO's a Go - Telecom News Analysis

Now I know why everyone has been talking about how well Avago is doing. They need/want a liquidity event, so they talk their own book.

The S-1 is fresh and should make for some good weekend reading.

Silk, Spices and Destiny: William J. Bernstein’s Book ‘A Splendid Exchange: How Trade Shaped the World - NYTimes.com

An excellent book that I am enjoying now, reviewed by one of my favorite authors. Many readers have common reading tastes - those of you who liked my previous suggestions should not miss this book. Buy it here.

Delusions of Net Neutrality - Andrew Odlyzko

Excellent essay by the master contrarian.

On Video as a driver of the Net: "Two centuries ago, newspapers so dominated the traffic carried by postal services, accounting for about 95% of the weight. But at the same , newspapers provided only about 15% of the postal revenues."

On the real issue: "Communications service providers do have a problem. But it is not that of a flood of video. Instead, it is … the erosion of their main revenue and profit source … voice."

Zayo: CLEC woes mean buyer’s market for fiber

Fiber assets are like oil circa 1994. They are in the ground, hard to duplicate, in the hands of fewer people, and have increasing structural demand.

Chinese vendor Accelink ready to IPO - fibresystems.org

48M Euro Annual revenue. Listing on Shenzhen exchange. First native Chinese component company to go public..

Cable Captured 80% of Q2 08 New Broadband Subs

I am still struggling to make sense of the disparity between Telco and Cable adds. More importantly, overall new subscribers were very low- either a result of saturation or the housing market.

MINTS - Minnesota Internet Traffic Studies

Andrew Odlyzko updates the MINTS Internet Traffic Database, which measures worldwide bandwidth growth. His 2008 update shows "there is not a single sign of an unmanageable flood of traffic. If anything, a slowdown is visible more than a speedup."

Lightwave - CIR: Telecom transponder/transceiver market to net $4.8 billion in 2013

As wonderful as it would be if it were true there is no way the market will grow this fast.

Nyquist Sector Performance

The dog days of August are upon us and with them comes exceptionally light trading volume. Trading volume for the week was running at 65% of normal levels. Markets had a poor week following good performance during the first half of August, though many of the losses were reversed on Friday. Thursday evening, the Nyquist index was down –4%.

JDS Uniphase and Avanex were shellacked for poor earnings performance this week. Avanex provided guidance for the current quarter that was 20% lower than expected. This follows the forced departure of the CEO. The company cited price declines in legacy business as well as weakening Asian sales. AMCC and PMC-Sierra, which sell the chips that accompany optical components, haven’t reported weakness in China. So while the horse may be out of the barn on Avanex, it is clear the company is facing some very serious problems.

Finisar/Optium (Merger should close in next few months) traded down after a sharp rally the previous week. There was no correlation with the declines posted by Avanex or JDSU.

Mindspeed had an active week (it doesn’t take much in August) as a result of a few large block trades. After a big decline in Q4/Q1 the company has found support, and as other block trades in previous weeks show, some new investment inflows.

Fibernet Telecom, a co-location and fiber provider, hit a new multi-year high with a strong trading move.

Entropic and Ikanos clawed back gains on little news. Bigband hit a new low following their earnings report.

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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