Who's Winning in the Rebound?

The telecom market is back, but there's more work to do.

Recent research, both within these pages and from outside sources, indicates that stabilized levels of capital spending by the big telecom carriers has helped put a floor to the market for telecom equipment (see Packets Key to Capex Comeback, Carrier Capex Set for 2004 Rebound, and Capex Is Back).

But that doesn't mean everybody is happy. According to a new Light Reading Insider, "Telecom Recovery Leaders and Laggards," the market leaders are now sitting in the catbird seat, positioned to consolidate their leads, while laggards continue to struggle to find a way to gain market share in a less robust market.

That means the coast isn't clear -- and more consolidation is on the way for all of the telecom suppliers involved. A new round of price competition and cutthroat competition is likely to narrow the field to only the strongest players.

This month’s Insider, Light Reading's monthly paid research newsletter, presents a 31-page qualitative and quantitative analysis of 27 prominent telecom equipment and components suppliers and ranks the most likely leaders in the recovery to come. The report updates the Insider issued in September 2002, "Leading Recovery Candidates," which reported that the market was stabilizing and looked for leaders such as Cisco Systems Inc. (Nasdaq: CSCO) and QLogic Corp. (Nasdaq: QLGC) to strengthen their positions in the rebound (see Cisco, QLogic Top Optical Oracle Charts and Optical Oracle's Bottom Feeders).

After applying a full suite of market and financial analysis techniques, the Insider scored the 27 North American telecom equipment and component suppliers based on market positioning, branding, and a number of financial metrics. The Insider’s financial rating system put a heavy weight on the rate of improvment in financial results in 2003, hypothesizing that those that rebounded most rapidly were also gaining market share in the recovery.

The winner? Cisco Systems, trailed closely by Juniper Networks Inc. (Nasdaq: JNPR). These two routing leaders rose to the top of the charts largely because their financials improved quickly -- and because the rebound in telecom equipment gear has so far favored suppliers of packet-based routing and switching gear, rather than legacy technologies. The third-place finisher was Nortel Networks Corp. (NYSE/Toronto: NT), which also received the “most improved” award for it's quick return to profitability in 2003. However, these results were tabulated before more accounting uncertainties were recently announced by Nortel’s management (see Nortel CFO Out ).

The top five finishers in the Insider analysis are outlined in the chart below.

Table 2: The Top Five
Company Financial Rank Light Reading Panel Final Score*
Cisco 1 1 3
Juniper 6 2 10
Nortel 2 4 10
QLogic 7 3 13
Xilinx 3 6 15
* Lower is better. The final score includes a double weighting for the LR ranking. Where results are equal, the vendor with the best LR score was placed higher.
Source: Light Reading Insider

The last-place finisher was Corvis Corp. (Nasdaq: CORV), followed closely by Ciena Corp. (Nasdaq: CIEN) and Lucent Technologies Inc. (NYSE: LU).

The Insider also took a look at some of the larger international players. Although the varied methods of financial reporting in international markets prevented a full ranking of global players, Light Reading did rank some of the largest incumbents, rating ADVA AG Optical Networking (Frankfurt: ADAG.F), Alcatel SA (NYSE: ALA; Paris: CGEP:PA), and Siemens Information and Communications Networks Inc. as the best.

Whether companies got ranked at the top or the bottom of the Insider chart, the 2003 rebound in the stock market gave most companies a big boost, with some companies gaining over 500 percent in the last 12 months. The table below shows share-price results over the last 12 months.

Table 1: Share Price Rebound Leaders
Company Market Cap ($M) Price-to-Sales Ratio (for 12 Months) Price-to-Book Ratio Share Price (02/13/04) 12-Month High 12-Month Low 12-Month Share Price Change (%)
Avanex 694 12.46 3.86 5.45 7.57 0.71 590
Avici 210 5.74 2.02 17.42 20.29 3.45 370
PMC-Sierra 3,680 15.11 4.87 21.8 24.91 5.16 345
Vitesse 1,790 10.82 6.34 8.59 8.98 1.94 327
Nortel 34,090 3.47 15.93 8.16 8.43 1.82 256
Corvis 1,003 6.3 4.31 2.36 3.07 0.47 252
Harmonic 883 4.72 4.35 12.32 12.7 2.75 223
Juniper 10,360 14.76 1.84 26.6 31.25 7.45 211
Agilent 17,600 2.9 5.3 36.92 38.08 12.11 197
Broadcom 11,730 7.47 7.88 39.69 45 11.86 195
Agere 6,530 3.44 13.25 3.5 4.14 1.29 171
Foundry 2,950 7.33 6.3 22.44 33.75 7.32 167
Lucent 18,530 2.16 9.02 4.39 5 1.35 160
Corning 16,730 5.5 2.99 12.65 13.89 4.54 156
AMCC 2,230 22.07 2.02 7.32 9.2 3.2 120
Xilinx 14,190 11.26 2.37 42.46 45.4 20.86 114
Net.com 320 2.48 2.72 13.01 14.49 5.54 112
Extreme 980 2.82 4.99 8.27 10.6 3.58 106
Altera 8,420 10.4 7.64 22.72 26.82 11.5 91
Cisco 165,750 8.38 5.99 24.05 29.39 12.33 81
JDSU 6,970 11.24 6.62 4.94 5.88 2.6 81
Brocade 1,720 3.2 1.49 6.76 8.28 3.7 77
Sycamore 1,320 36 1.84 4.87 6.52 2.89 57
Tellabs 4,080 4.28 4.62 10.11 11.37 5.07 48
AFC 2,070 6.19 2.14 23.74 27.5 13.9 39
QLogic 4,190 8.2 1.36 44.67 58.72 33.07 34
Ciena 2,830 2.16 2.23 6.08 8.14 4.19 13
Source: Light Reading Insider

Was the stock market’s powerful rally in 2003 rational and fair? Markets usually aren't fair -- or rational. The Insider shows that it was mostly low-priced, volatile stocks that had the biggest gains. For example, Avanex Corp. (Nasdaq: AVNX) has experienced the largest share-price gain in the last 12 months, with a gain of 576 percent, according to Light Reading’s research. However, Avanex also finished 24th in the Insider’s market ranking system, indicating that its gains may have been a bit too exuberant.

A full analysis of the market and a ranking of the 27 companies is available in the report, which can be purchased here.

— R. Scott Raynovich, US Editor, Light Reading

Want a special deal on an Insider subscription? On April 13, analysts from both the Light Reading Insider financial research service, and Light Reading's Heavy Reading market research division will examine technology investment questions like those addressed above at a unique event hosted at the W Hotel New York Union Square in Manhattan.

The conference –
The Telecom Recovery: Opportunity Amid the Chaos – will examine the investment potential of a wide variety of technologies including triple play, 802.11 WiFi, FTTP, hosted SIP applications, SSL VPNs, IP video, MPLS-based convergence, and carrier-class Ethernet. It also will feature keynote speeches by Hossein Eslambolchi, President of AT&T Global Network Services, Pradeep Sindhu, CTO of Juniper Networks Inc., and Steven D. Levy, Managing Director of Lehman Brothers.

If you register for the conference now, you will receive a complimentary subscription to Light Reading Insider, a $1,250 value. That means you get both an Insider subscription and admission to the conference for $850.

Register here.

An annual single-user subscription to the Insider, which includes access to the complete archives, the current report, and each of the monthly reports issued over the next 12 months, is available for a limited time only for $1,250 per year. It's available here.

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wass 12/5/2012 | 2:11:45 AM
re: Who's Winning in the Rebound? Interesting that Xilinx makes the list of top 5. I think you will find that even though Xilinx is the traditional leader, Altera's newest products beat Xilinx on both price and functionality.

We have moved away from Xilinx and are using Altera more and more.
Scott Raynovich 12/5/2012 | 2:11:44 AM
re: Who's Winning in the Rebound? Interesting feedback... thank you.
Lion 12/5/2012 | 2:11:37 AM
re: Who's Winning in the Rebound? How does Bookham fit into this picture? After all the top 3 players in components and subsystems are JDSU,Bookham and Avanex.

technonerd 12/5/2012 | 2:11:37 AM
re: Who's Winning in the Rebound? I notice you didn't list:

1. Stock price compared to all-time high

2. Sales in 2003 compared to sales in 1999.

3. Price-Earnings ratio

4. Price-Operating Cash Flow ratio

But that's o.k., the last thing [i]Light Reading[/i] wants to do is show how, even in their current tepid recoveries, these companies are hideously overvalued.
joeice 12/5/2012 | 2:11:36 AM
re: Who's Winning in the Rebound? I think you are making a big mistake going with Altera. Altera has nothing that Xilinx already has. The CEO projected a certain sales figure for Stratix and that has not happened.
alchemy 12/5/2012 | 2:11:35 AM
re: Who's Winning in the Rebound? wass writes:
We have moved away from Xilinx and are using Altera more and more.

What he said. We're a 100% Altera shop. The big problem with Altera is that you can't easily hire people who have worked with their environment before. Just like any other vendor of complex technology, their product offering has quirks you stumble on the first time. Designs go much smoother if you already know where the issues are in their libraries and tools chain.
newbee2002 12/5/2012 | 2:11:34 AM
re: Who's Winning in the Rebound? Revenue grows 33%+ quarter over quarter and the ONLY US optical component company that was unhurt financially by the telecom collapse.
Scott Raynovich 12/5/2012 | 2:11:34 AM
re: Who's Winning in the Rebound? There is more data in the report. But I may add the report does not focuson valuations, it focuses on who is winning and losing.

Also P/book or P/sales are probably a better measure in this environment.
newbee2002 12/5/2012 | 2:11:33 AM
re: Who's Winning in the Rebound? It's Lucent :)
BTW, Corvis isn't the same company as it used to be anymore.
echo2 12/5/2012 | 2:11:32 AM
re: Who's Winning in the Rebound? My options are going to make me rich!

I think I will get a new Volkswagen...

- Bugatti Veyron 16.4 coupe

and of course I will opt for the diamonds on the speedometer needle.

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