Fallout continues among telecom vendors as carriers cut spending

Adtran, CommScope and MasTec are the latest US telecom equipment vendors to report bigger-than-expected declines in spending among their network operator customers.

They join a long and growing list of suppliers that are seeing broad pullbacks in network spending. Companies that have issued similar warnings include Nokia, Ericsson, Corning, Crown Castle and others.

However, vendor executives continue to offer investors some reassurances that sales will improve.

"We are focused on what we can control," said CommScope's new CEO Charles Treadway during his company's recent quarterly conference call, according to Seeking Alpha. "I feel we are making nice progress as we continue to drive improvement in the positioning of our business for success."

He added: "I point to our recent focus on costs that will pay off in the short and long term. Unfortunately, we are dealing with market demand issues that are both more severe than we anticipated and challenging to overcome in the short term."

Some analysts agreed with Treadway's assessment.

"There is still some light at the end of the tunnel," the analysts at Wells Fargo wrote in a note to investors on Sunday.

But it remains unclear exactly how the situation will play out. Officials at AT&T, Verizon and other top network operators have hinted that they will reduce spending this year and next, but the full scale of that reduction remains unclear.

One new factor that might play into a possible spike in demand is generative AI technology such as ChatGPT.

"It's one of the most active areas of engagement at the portfolio level with our customers, particularly in the data center vertical," said DigitalBridge CEO Marc Ganzi during his company's recent quarterly conference call, according to Seeking Alpha.

The latest warnings

But first, the bad news: Adtran, CommScope and MasTec all reported revenue slowdowns or lowered their revenue expectations for the year. The scope of the slowdown is evident across their businesses: Adtran sells fiber components; CommScope sells equipment for wireless and wired networks; and MasTec offers construction and deployment services for all types of networking technologies.

CommScope reported a 29% decline in its core connectivity business and a 41% decline in sales of its outdoor wireless networking equipment. Adtran lowered its 2023 revenue growth outlook in a way that assumes its optical sales in the second half of this year will be 20% lower than in the first half. And MasTec cut its revenue outlook in its communications business by around $150 million, mainly due to sluggish demand among wireless network operators.

"Our customers are moderating their 2023 spend plans," explained Jose Mas, MasTec's CEO, during his company's quarterly conference call, according to Seeking Alpha.

"Several data points ... shed additional light on the carrier spending slowdown underway across both wireless and wireline assets," the analysts at Wells Fargo summarized.

Rays of sunshine

But officials continue to argue that there are reasons to remain positive. For example, cell tower company SBA Communications said its carrier customers are just halfway through their deployment of C-band spectrum for 5G.

CommScope's Treadway echoed those comments: "We think that, as customers are talking to us about the mid and long term, they're positive about what they're seeing and suggesting growth there."

Some executives pointed to the US government's massive $42.5 billion Broadband Equity Access and Deployment (BEAD) program, which promises to ultimately funnel money from taxpayers to telecom companies for networks in rural areas. Others pointed to generative AI.

"Based on the feedback we're getting from our CEOs and their conversations with customers around ramping capacity requirements, we believe this opportunity is going to be at least as big as the public cloud market was over a decade ago," said Ganzi, the CEO of DigitalBridge, a company focused on data centers, cell towers, small cells and fiber.

Ganzi suggested that spending on generative AI could help drive demand for faster and more capable networks, alongside computing functions that are physically closer to users.

Dave Bolan, an analyst at Dell'Oro Group, agreed. "Generative AI is a powerful tool that has the potential to revolutionize several industries," he wrote. "Whether it is creating new content with AI/ML or analyzing data with AI/ML, more compute power will be required, and if this compute power must meet certain latency requirements, AI/ML could drive up the demand for more edge computing."

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— Mike Dano, Editorial Director, 5G & Mobile Strategies, Light Reading | @mikeddano