Communications equipment suppliers are ready to report on the second quarter. Earnings in the next few quarters will be interesting to watch with major shifts occurring in telecom spending, including fear over AT&T’s recent spending slowdown and questions about the impact of Software Defined Networking (SDN).
Despite optimism among some analysts, there are a number of negative trends in networking and telecom gear. in addition to the concern about a slowdown in spending at AT&T, the merger trend among large service providers means the overall pool of customers is shrinking. In addition, the impact of SDN, in which a new crop of software-only technology companies provides networking gear that can run on cheaper, standard server platforms, could put margin pressure on traditional networking companies.
MKM Partners Managing Director and communications analyst Michael Genovese issued a note this morning saying he believes data networking fundamentals are still sound. He expects strong earnings from a number of companies including Juniper (JNPR), Infinera (INFN), and JDSU (JDSU), on a back of a continued optical and core network buildout. MKM also expects good results from Ciena (CIEN), Finisar (FNSR), and Cisco (CSCO).
Genovese’s “top long idea” is Infinera as a pure play on strong 100G optical buildouts. “The strong near-term outlook is underpinned by several large network builds in the U.S., including at CenturyLink, Level3, Windstream, and some of the leading Cable MSOs and Internet Web 2.0s,” he writes. He sees a little upside in revenue and more upside in future guidance. MKM has a “Buy” rating on the stock with $12 12-month price target. The stock was recently trading at $8.73.
Not everything is a slam dunk, of course. Genovese said there is some concern about decelerating growth in F5 Networks (FFIV) as well as companies with wireless exposure.
“It is fairly likely the company [F5] can slightly exceed estimates and raise forecasts compared to expectations,” writes Genovese about F5. “However, we are not pounding the table on the stock here because y/y product revenue growth rate is likely to come in down relative to the prior quarter.”
Wireless is a different story. Genovese wrote that there’s some reason to be more cautious on companies with large wireless exposure such as Alcatel-Lucent (ALU), Nokia (NOK), and Ericsson (ERIC). This is because of a recent slowdown in spending at AT&T and the potential for Sprint (S) merging with T-Mobile, which would result in a consolidated network.
F5 Networks is one of the companies most susceptible to changes in spending patterns as networks shift to SDN and Network Functions Virtualization (NFV), according to our “SDN Revolution” report.
What else will folks we watching during earnings? Investors will be looking to see if there is more news about the potential retirement of Cisco Chairman and CEO John Chambers. As I reported a month ago, there is an increased amount of buzz at the company — as well as among investors — that it may be time for Chambers to accelerate his retirement plans. He turns 65 in August.