The Weekly Sample - Week of 02/13/09

Stimulus

The final version of the USA stimulus package includes $7.5B for broadband deployment. This is a lot of money, but exactly how much?

Verizon spends roughly $1.2K to wire up a home. $7.5B should be enough money to wire 6M homes for fiber, or roughly 5% of US households. The bill explicitly targets rural and underserved areas and adding 6M rural fiber households would be a dramatic step as there are only 25M rural residences (20%) or so. Let's look at exactly how $7.5B will be spent.

• $350M will be spent to map broadband usage.That's about $3 a home. Seems excessive when all this data is already in the hands of a few people. What we are really getting is a new government agency that won't go away long after the stimulus has been spent.
• $2.5B for the Department of Agriculture (USDA - the guys who certify your milk) Rural Utility Service Broadband program. This is an existing program started in 2002 which to date has loaned out a total of $1.2B. This same agency is now charged with spending twice that, except this time instead of loaning it they'll be giving it away.
• $4B to establish a brand-spanking-new government agency within the Dept. of Commerce's National Telecommunications and Information Administration (NTIA). Not trusting of the farmers in the USDA the Congress decided to create another agency. The $4.5B are for grants, and all of the money must be spent by the Fall of 2010, 18 months from now.
• There are no firm restrictions on speeds though the agency is directed to give priority to more advanced deployments. This is something the cablecos fought to remove.

In our opinion, most of the $7B marked for deployment will be used to roll out ADSL2+ services to areas that lack broadband. This is certainly a noble goal but FTTH is what we should be spending taxpayer dollars on. Our opinion is this money should have been allocated for the specific purpose of installing fiber to rural homes and businesses which would then be leased to service providers. Instead, we will have service providers using the money, matching it with 20% of their own, and then ending up with infrastructure they can operate at their will.

The sheer size of the Broadband stimulus will impact only a handful of companies and result in significant upside. Rural carriers are big winners as these grants will expand capex by 5x. With grant money, a carrier can wire up 50k homes where before only 10k could be reached as they only need to provide 20% of the funding. We are about to witness a 24 month mega-boom in broadband construction with deployment rates running 5x historical trend or higher in rural areas.

We expect that roughly 12-15M homes will be added to the broadband grid, mostly ADSL2+ with some GPON based FTTH as well. The rural carriers will spend this money efficiently. What is unknown is to what degree the large Telcos and Cablecos find a way to tap these funds.

This is a significant event and the source of several solid investment opportunities, something we will explore in future articles.

WiMAX

Alcatel-Lucent, one of the big wireless vendors, is backing away from WiMAX R&D. Clearwire cannot get outside investors to support the needed capex for a nationwide rollout. Whatever slim chances WiMAX had for widespread adoption are now gone. Intel will cite the credit crisis as the cause of death when writing the obituary but the reality is WiMAX never had sufficient technical advantages the 3G wireless roadmap. Sensing failure, Intel has already written off most of its investment in Clearwire.

People who study WiMAX closely tell me that there is still potential in ultra-low cost fixed wireless deployments in areas lacking coverage today- like India and other developing nations. Not sure if Intel had this in mind but if this is their only victory I'm sure they will be happy to take it. Three years from now Intel will be licensing LTE technology and building it into laptop chipsets. WiMAX will be largely forgotten. We’ve decided to pronounce it dead and stop writing about it.

Links

Trade Radar: Why is Cisco moving into servers?

Good overview of Cisco's reasoning. Incremental gross margin is not what they typically want but it makes them a on-stop-shop. Smart companies don't care about gross margin percentages, they care about gross margin dollars, and Cisco is a smart company.

Broadband Tax Credit Cut From Stimulus Bill - NYTimes.com

The broadband portion of the stimulus bill is nearly complete. $6B in funding will flow primarily to rural areas, $2.5B through the USDA and $4B through the NTIA. This is a lot of money that will hit a narrow swath of companies and deserves close attention.

Why Spend $350 Million to Map Broadband? - Bits Blog - NYTimes.com

One word- Boondoggle. Every reader here could imagine a scheme to do this cheaper.

Clearwire Funding Gap May Put Backers’ Plans on Hold : Bloomberg.com

Clearwire can't raise capital. WiMax needs a vote of confidence outside Intel/Google to remain viable.

Cisco’s Cash Hoard Swells Along With Acquisition Rumors - Bits Blog - NYTimes.com

Why does Cisco raise $4B worth of debt? Because most of the $26B it has is overseas, and repatriating it to use it for acquisitions or operating purposes would trigger taxes.

Alcatel-Lucent refocuses WiMAX business to support LTE | MuniWireless

Alcatel-Lucent defocuses from WiMAX, calling it a 'sidekick' solution to LTE. Something tells me Intel didn't fork over billions to be a 'sidekick' technology. Coming on the heels of Nortel's decision to exit, things are looking grim for WiMAX.

VScope™ Engineering Design Challenge 2009

Vitesse is giving away $10k to whomever comes up with the best new application for its data re timing chip. Not just your standard iPod prize - this is real money. Should be interesting.

Source: BLS

Nyquist Small/Mid Cap Index Performance

It wasn't a pleasant week for the markets with all the indices showing significant declines. Last Tuesday was the source of most of the pain as the new Banking rescue plan (or plan for a plan) was unfurled. The Wall St. Journal sums it up nicely:

Something more than this was anticipated, and calls to mind Spaceballs‘ Dark Helmet’s exasperation with the endlessly preparing Col. Sandurz (”Why are you always preparing? Just go!”)

Thursday was another brutal day but losses were reversed based on rumors that the government would start paying your mortgage. I sincerely wish I was kidding.

The Nyquist Small/Mid Cap index outperformed but not due to any identifiable trend. One sub-trend was that all of the optical component makers were whacked with the exception of JDSU. No reason that we can see.

More notable were Time Warner Telecom’s relatively positive earnings which provide evidence that the trend towards enterprises moving their connectivity to dark fiber providers shouldn’t abate during any slowdown. Level3 showed the same strength in this portion of their business but suffered as a result of poor performance within its diversified businesses.

Occam Networks saw a significant number of large block trades as shares moved from weak hands to strong. Occam is one of the companies that should benefit materially from the Broadband Stimulus bill.

Alcatel-Lucent is trading near its all-time low.

Note – JDSU was not the most active stock last week, this is an error in Reuters data that has since been corrected.

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