Cable suppliers hit with operator spending slowdown

Energy at last month's Cable-Tec Expo in Denver was high. Attendance was up and booths were buzzing amid the introduction of amplifiers and nodes, the emergence of DOCSIS 4.0-based silicon and chipsets and the general promise of future hybrid fiber/coax (HFC) upgrades alongside deployments of fiber-to-the-premises technologies in rural areas and other greenfields.

That excitement dimmed a bit in the following weeks as suppliers across the cable technology landscape lamented a temporary slowdown in operator spending and a delay in some network upgrade and buildout activity due to a mix of reasons.

Several operators bulked up on network gear and capacity during the earlier phases of the pandemic and are now trying to pare down their oversized inventories. Meanwhile, some operators are dialing back some upgrades and network builds as they continue to grapple with supply chain issues and plow through pesky permitting processes and labor shortages.

Still others are shifting their spending priorities. As one example, Charter Communications expects to push out the completion date of its HFC upgrade plan by about six months as it gets more aggressive with lucrative rural fiber buildouts. A push out to mid-2026 isn't a material change for Charter and its suppliers, but the announcement raised eyebrows around the industry, leaving some to wonder if it puts Charter in position to delay the completion of its HFC upgrades further if the operator decides to become a major participant in the $42.45 billion Broadband Equity Access and Deployment (BEAD) program.

Related:Demand remains decidedly lumpy for telecom gear

The silver lining is that most suppliers expect this pause in the action to be temporary, believing that spending activity for new access gear and software will pick up in the second half of 2024.

Here's a snapshot of how several publicly traded cable tech companies fared in their most recent quarters.

CommScope

CommScope set the tone late last month, when it announced that the company expected to miss Q3 sales targets due to a blend of low order rates, high customer product inventories and sluggish service provider capital spending.

Net sales at Access Network Solutions (ANS), the unit focused on cable access gear, dropped to $218 million, down 36% year-over-year. That was well off the $292 million expected by Raymond James. Weakness in CommScope's cable business "was the biggest surprise" in the quarter, Raymond James analyst Simon Leopold explained in a research note.

CommScope sees softer-than-expected sales at ANS for the rest of 2023 and into the first half of 2024. The company has pushed ahead with cost-cutting moves that will save about $150 million in 2023 and an incremental $100 million in Q1 2024. Speaking on the company's Q3 call, CommScope CEO Chuck Treadway said the actions include "direct material savings, automation and further efficiency projects," but did not say how those moves will impact CommScope's workforce.

Related:CommScope shares plummet on earnings miss

Update: Some savings might be derived from CommScope's recent move to a different headquarters building. According to this SEC filing, CommScope relocated its corporate headquarters from Hickory, North Carolina, to a facility based in nearby Claremont on October 25. Soma Church purchased CommScope's former headquarters, according to The Hickory Record.

A CommScope official told the paper that the majority of the company's employees in the area now work at home. "Given the site was underutilized, it was in the company's best interest to sell the facility," the official said. The property's tax value is $7.5 million, the paper said, citing country records.

Treadway also did not volunteer any new information regarding reports that the company is looking to sell select assets, including potentially its cable access business, to help drive down debt. CommScope has already struck a deal to sell its struggling Home Networks business to Vantiva.

Related:Harmonic might unload its video business

Treadway also noted that some cable operator customers "are experiencing slower-than-expected ramps" in their DOCSIS 4.0 upgrades. However, he is bullish on CommScope's long-term position on HFC upgrades, citing the company's mix of DOCSIS 4.0-capable amps and nodes and the recent launch of a virtual cable modem termination system (vCMTS) that is now in multiple lab trials.

Harmonic

Harmonic's broadband business saw revenues drop 17.5%, to $75.8 million, in Q3. Harmonic's story was similar to its peers, as the decline in the quarter was due primarily to a "bleeding down" of inventory established during the early phases of the pandemic, President and CEO Patrick Harshman said.

But Harmonic expects a quicker rebound than some others in the sector, predicting that Q4 revenues of $105 million to $120 million in the broadband segment could set a record.

Harmonic's business remains highly dependent on Comcast, which represented 41% of Harmonic's total revenues in Q3. Charter has also selected Harmonic for its virtual CMTS upgrades, but there's no indication on when those revenues will start to ramp up.

Applied Optoelectronics

Applied Optoelectronics' (AOI's) cable tech unit is in the midst of a strategy shift. Rather than only building cable network gear for vendor partners such as ATX Networks, AOI is starting to sell amps and nodes directly to cable operators via a new organization led by former Cisco and Scientific Atlanta exec Todd McCrum.

AOI is backing that plan with a new distribution deal with Digicomm International, which will distribute the supplier's new line of "Quantum12" cable amps exclusively.

AOI cable-related Q3 sales of $10.3 million dropped 67% year-over-year, but grew 10% quarter-over-quarter. Raymond James' Leopold doesn't expect D4.0-related activity to become a tailwind for the company until mid-2024.

"As you've seen from the other companies that have reported already, the situation in cable right now across the board is muted compared to where it was a year or two ago," Stefan Murry, AOI's CFO and chief strategy officer, said on the company's Q3 call. "But we're encouraged by the sequential uptick in revenue there."

Casa Systems

Cable-related spending was sluggish at Casa Systems. Total Q3 cable revenues of $17.44 million ($8.22 million for cable product, and $9.22 million for cable services) were down from a year-ago total of $30.24 million ($20.57 million for cable product, and $9.67 million for cable services).

Casa expects "to see similar dynamics in the fourth quarter of this year," Michael Glickman, Casa's new CEO, said on the company's Q3 call.

Echoing others in the sector, he attributed the shortfall in revenue to spending slowdowns and general delays in cable network transitions rather than competitive market share losses.

Casa, which is facing a possible delisting from the Nasdaq as its stock remains below the $1 per share threshold, also moved ahead on a sale/leaseback agreement of its corporate headquarters in Andover, Massachusetts, that closed in October. Casa received about $6 million of net proceeds from the transaction, which will be used to pay down its critical loan B debt.

Tied into a broader financial strategy, Casa is also evaluating the sale of other noncore assets to further deleverage its business, but didn't say which pieces of the business are linked to that evaluation.

Vecima Networks

The speed bump Vecima Networks warned of in September took shape in the company's fiscal Q1 2024 results.

Vecima, which had been seeing a sales surge amid activity in distributed access architecture (DAA) upgrades and new fiber builds, saw sales slide in the period. Q1 2024 sales for its next-gen "Entra" line of $38.8 million Canadian dollars (US$28.29 million) were in line, but were down from C$53 million ($38.65 million) in the year-ago quarter, and down from C$50.7 million ($36.97 million) in the prior quarter.

Sales are down as some customers manage their DAA rollout logistics and work through existing inventories, Vecima President and CEO Sumit Kumar said on the company's earnings call. He expects Entra sales growth to return in the second half of fiscal 2024.

"Our customers are now busy catching up and wrapping project rollouts that have been delayed by various lagging labor, permitting, utility make-ready and other project requirements that are typical in very large scale network buildouts along with supply chain challenges outside of Vecima's product line," Kumar said.

Vecima, he said, expects its products to be used for a "substantial" portion of Charter's footprint-wide cable access upgrade to DAA. As for Charter's small push out on the HFC upgrade completion date, Kumar said the adjustment is "very normal and immaterial in terms of timing."