Some telecom vendors see silver lining amid economic woes

On Wall Street there seems to be no end to the doom-and-gloom headlines: "S&P 500 falls into bear market territory"; "Mass COVID testing announced for Beijing district"; and "Inflation sped up again in May." However, one new report out of the telecom sector appears to indicate a slim silver lining amid broader worries of an inflation-driven economic slowdown.

"Macro slowdown in other parts of the economy could help free up semi [conductor] capacity for networking gear," wrote the financial analysts at Rosenblatt Securities in a recent note to investors. The analysts cited recent meetings with executives from network equipment suppliers including Ciena, Adtran, Viavi and others.

"A slowdown in consumer PCs, phones and TV demand could lead to a better supply chain environment for networking companies in 2023 as chip resources are shifted to markets where demand remains strong," the analysts explained. "We take this as a strong sign the [telecom] sector is better positioned than most for this macro environment."

Figure 1: (Source: Contributor: Yuen Man Cheung/Alamy Stock Photo)

That may be just one positive element to emerge from a much broader landscape of economic distress. Indeed, economic worries have already slowed the sale of smartphones. Research firm IDC recently predicted that the smartphone market will decline 3.5% to 1.31 billion units in 2022, a reversal of its previous projection of 1.6% growth.

Meaning, customers aren't buying the new phones that could spark increased demands for new networking services.

A breather

Nonetheless, any prospect of easing the world's supply of economic components would be a welcome development for network equipment vendors. Virtually all suppliers have complained that they would be making far more money today if they could obtain the components they need to build their products.

For example, Ciena just last week exited its fiscal second quarter with an unmet backlog of product orders totaling $4 billion, which CFO Jim Moylan described as "almost beyond the pale."

"Our revenue for this year would have been extremely high if we were able to get the components to manufacture it," he said.

Ciena is not alone.

"Supply chain challenges have stabilized yet will continue for at least a few more quarters," the financial analysts at Raymond James wrote about their discussions with telecom equipment suppliers. However, they argued that troubles along Wall Street, including worries over an inflation-driven slowdown, haven't trickled into the telecom industry.

"The networking suppliers acknowledged these concerns, but asserted they have not seen evidence of slowing," the Raymond James analysts wrote in their recent note to investors.

The analysts also pointed out that Cisco, Nokia, Corning and other vendors have managed to increase their pricing in response to inflation and component shortages. That, coupled with no indications that network operators are slowing their product orders, seems to indicate ongoing strength in the telecom market.

"Time will tell, but we cite the unprecedented price increases and continued growth in backlog as evidence of the market's health," the Raymond James analysts wrote.

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