Is telco the new housing? While no one outside the investing world would get particularly excited by that question, it is a subject of real relevance to us. I make the parallel because housing related stocks did very well in 2012 as they quietly priced in better conditions while climbing a wall of worry over the industry. I think telco could do the same this year. The early signs are good and looking at Ciena Corporation (NASDAQ:CIEN)’s numbers and other recent earnings in the industry, it appears that conditions are getting better.
What the Industry is Saying
Just as with housing last year, I am determined to prove an obsessive compulsive. Plenty of commentators have been looking for better signs from telco spending and the obvious place to start would be with the Tier 1 carriers. To be fair, a quick appraisal of their spending plans would not reveal any significant hike with their overall spending patterns. But the devil is in the details, there are clear that signs that areas like 4G/LTE, wireless, high speed Ethernet, Voice over LTE (VoLTE), network convergence and next generation networking will be strong from the Tier 1 market.
Initiatives like AT&T Inc. (NYSE:T)’s Project VIP are intended to expand LTE coverage to hundreds of millions of people by 2014. AT&T currently feels that it doesn’t need to ramp up LTE spending us much as it had previously intended but with its smart phone sales expanding rapidly there will be no option but to increase network spending. It is a slightly different story with Verizon Communications Inc. (NYSE:VZ), which has already aggressively rolled out its LTE network. Indeed, it sees spending as flat without any addition to its 3G network. However, it too is seeing much better than expected smart phone sales. The pressure to spend is building up.
Indeed, Cisco Systems, Inc. (NASDAQ:CSCO) recent results were testimony to improving trends, at least within the corporate side. It saw US enterprise spending up strongly and investors should appreciate that Cisco has a large part of its revenues within the Government sector. Indeed, it is forecasting switching revenues to be flat for the next two quarters. I suspect this is a combination of weak Government revenues and its exposure to legacy technologies.
Looking outside the Tier 1 North American carriers there is a lot of evidence to suggest that 2012 was a weak spending environment in legacy technologies for global carriers. My sense of what is going on is that a number of carriers have reacted to uncertain macro-conditions by slowing capital expenditures, but that consumer trends will force them to start spending on next generation technologies.
Ciena Corporation (NASDAQ:CIEN) is Well Placed
All of which leads me back to Ciena. The company is well placed in 100G networking and network convergence, so if the theory is correct than it should be seeing some early signs of a pick-up in demand.