The Weekly Sample

Articles and News

The Weekly Sample is returning from a long hiatus. We had taken on a number of projects and well, the free newsletter was the first to go. I must admit that writing it is a favorite activity of mine and it feels good to return.

The last newsletter was published on 9/19/08 and only hinted at the massive tectonic change that was about to unfold. It is still a good read and worth looking at here. The catastrophe theme I coined in early 2008; “That liquidity would become more important than technology” has been fully realized and only the first few aftershocks (Nortel bankrupt, Avanex/Bookham merger) have been felt.

The last two years have not been kind to this sector and Q4 equity performance was the coup de grace, sending virtually every stock in the sector down to cash value (if they were losing money) or 1x revenue for companies generating minor profits and the 55-65% margins typical in the sector. The Nyquist Small/Mid Cap Index recorded a loss of –55% for 2008 and an annualized loss of 21% for the past 5 years. The NASDAQ was –39% and –4.5% by comparison.

Investors in wireline and optical communication components, equipment, and carriers under $5B in market cap have been destroyed. Their tolerance for excuses and willingness to be led along by a new ruse (the latest is the “video bandwidth explosion”)are non-existent. It would be good if management presented the reality of the situation and how they plan to surmount it:

1. Returns on invested R&D were poor even when the cost of money was at 30-year lows
2. It is increasingly difficult to differentiate our product from our competitors
3. Major carrier capex, as a percentage of revenue, has been in a secular decline for the last decade. Factor in the mix shift from wired/optical to wireless and the picture is more bleak.
4. Major carriers (both cable and traditional) face major threats from landline disconnect, over the top video, and the lack of applications to drive widespread demand for broadband faster than 20Mb/s.

Cisco is tackling the problem by becoming more services and consumer focused. Smaller companies like Transwitch are retooling for new technologies like HDMI. Bookham and Avanex stopped pretending there were any other options. Companies like Broadcom are... doing nothing... as their large size makes them ideally suited for survival in such an environment.

My greatest fear is that the Networking sector, like Railroads in 1890 or Plastics in 1970, remains a large and meaningful industry, but becomes devoid of the innovation that characterized it earlier. As we all know, such an environment favors the big and punishes the small. I bet you cannot name a single small cap plastic or railroad component or equipment company.

It is about the time articles like this are written that we later recall hearing a large thud – the sound of the submarine hull hitting the bottom. What is not yet known is whether like Das Boot, we beat long odds to rise again to the surface to fight again, or we play out the saga of the Russian submarine Kursk, where what narrow chances of success were spoiled by a lack of successful performance by critical personnel.

We continue to fight on.

Links

FT.com - The game changer

George Soros pens an op-ed on the origins of the financial crisis.

By 2012 Koreans Will Get 1Gbps Broadband Connections

Not the news it is cracked up to be as this is already underway. Korea has been actively wiring households with fiber for the past few years and the installed plant is now in place for a massive shift to FTTH, using primarily GEPON/GPON moving to 10G GEPON.

The Adventures of DCXMan

Hands down, the best tech advertising I have seen in a while. CHECK IT OUT.

AT&T Slows U-Verse Build Out

Calls new deployment plan "more elegant", an easy mark considering the software and hardware complexity of the endeavor. The U-Verse FTTN deployment will now hit 30 million homes passed by 2011, a year later than previously planned. Total capex down 10-15%.

Barron’s Online : Verizon: Crumbling Enterprise Business Pressures Revs

Big Telco under attack from virtually every angle now. Cable is sniping broadband, Enterprise revenue is down, wireless margins going down when they are forecasted to increase, and everyone is losing 10-12% of their landlines a year. Results from Level3, Time Warner Telecom, etc. will be enlightening.

Obama’s Broadband Plan Disappoints Telecommunications Companies : Bloomberg.com

The fact that Big Telco doesn't like the bill means it is well structured. They're upset that the money is being funneled through agencies geared towards smaller, rural telcos. This will benefit companies such as Occam, Tellabs, and Adtran.

What Could Have Been: Nortel-Huawei JV | All About Nortel

Somebody lets slip the .ppt slides on a proposed Nortel/Huawei joint venture for routers. Contains such masterful strategic marketing visions as" "JV as a Spunky Canadian Beaver and not a predatory Chinese Tiger" and "Nortelization will allow us to position the products to be as Canadian as an Egg Salad Sandwich". We're not kidding.

AT&T Femtocell Service Website Goes Live - dslreports.com

Femtocells are arriving at a time where consumers are looking for things to cut. Femtos should, if anything, accelerate landline losses.

Chinese New Year - Welcoming the Ox - The Big Picture

Happy New Year to our Chinese readers.

Photos: Japan Optic Fiber Internet

A photo essay of a step by step install of Japanese GE-PON FTTH. Good photos, other than the fact this guy has a serious issue with his Japanese doll fetish.

Poll Says Cost Would Deter Customers Without Broadband - washingtonpost.com

Poor broadband penetration isn't just a result of availability issues. It is a messy problem, one I believe most tied to perceived value by late-adopters. It will take more than money to raise broadband penetration, and we must ask ourselves what the exact goal is that we wish to achieve. Some people took decades to convince they needed electricity. Or they just died off.

China Unicom loses fixed-line and broadband subscribers in December

Little known fact - After peaking a few years ago following strong growth, China is losing 1% of fixed line telephones… A MONTH.

Bloomberg.com: Intel Raises Possibility of Loss in First Quarter

“We are not going to wake up in six months with everything rosy again,” - Chief Executive Officer Paul Otellini. Article details what Intel is doing to avoid its first quarterly loss in 21 years.

Pictures: President Obama’s inauguration, as seen from space

Satellite photography goes real time. Very neat.

One tough Yahoo! | The Economist

Great profile of Carol Bartz, new CEO of Yahoo!.

Huawei: Nortel Ethernet—No, Mobile Phones—Yes

Huawei denies it was bidding for Nortel's business.

Time, Money, and Program Managers as Dumb as a Bag of Rocks : Telecom Straight Shooter

Dave Rusin, Fiber CLEC Telecom Executive, on the process of trying to lease fiber ducts from the big RBOC boys. Dave makes a great case in his blog about the value of owning fiber assets.

Bloomberg.com: Nortel Customers Opt to Stick Around After Bankruptcy

Though they do so out of necessity, not choice.

Nyquist Sector Performance

Volume was average this week despite the number of earnings announcements.

Cisco was the big news of the week, reporting revenue slightly below consensus but delivering worse than expected guidance. The market took the news in stride and Cisco successfully tested some critical technical trading levels. Now that the CNBC–speak is out of the way, the notable thing about Cisco was that this trading move was not accompanied by a significant uptick in volume which fails to qualify it as a reversal. If Cisco breaks the 17-18 range then the rally becomes meaningful. Otherwise, all we learned is the market still thinks Cisco is worth more than 15.

What Cisco’s performance tells us is we’ve entered a stage of the market where really bad news is already factored in. Companies like Nvidia, Netlogic, Atheros, and PMC-Sierra provided dismal guidance yet retain significant market premiums.

There are exceptions. ADC Telecom delivered guidance not unlike the rest of its peers and was punished. We’re taking a look at ADC because of it’s unique debt structure, and the fact it is the #1 most likely beneficiary of any broadband stimulus puked out of Washington. Occam Networks and Adtran are two more.

Next week, Macro issues will trump all (though that could describe virtually every week for the past 4 months) as we will see the stimulus debate wrap up and a new debate on TARP part deux begin.

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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