For telecom vendors, the waiting continues

Telecom vendors across the world continue to wait for network operators to resume spending. But it's not clear when that spending will pick back up.

The latest: Viavi Solutions and Clearfield both reported sluggish results last week, and both suggested that network operators continue to hold off on new projects while they make use of exciting equipment supplies while waiting for US government subsidies to hit the market. Viavi sells network testing and measurement equipment, while Clearfield sells fiber equipment and management offerings.

"The reality is, I don't know what the second half [of 2024] is going to look like from service providers," Oleg Khaykin, Viavi's CEO, said during his company's quarterly conference call, according to Seeking Alpha. "We know the demand will be somewhat stronger in the June quarter. It's always stronger. Beyond ... it's not getting any worse, it's getting a little better. But I would still prefer to think of it as flat to slightly recovering ... because I think they're still pretty weak."

Clearfield CEO Cheri Beranek offered similar commentary. "So, there has been less revenue, less activity than one might expect," she noted during her company's quarterly conference call, according to Seeking Alpha. "While the near term industry dynamics remain challenging, we also remain confident that the future growth in fiber is absolute and the value proposition that Clearfield brings to the market is as strong as ever."

Clearfield CFO Dan Herzog said the company anticipates an "uptick in demand" starting in the second half of this year.

"Telecom demand is at the bottom of the 'U' and may begin to slowly recover in the second half of 2024 before a more normal 2025," wrote the financial analysts at Rosenblatt Securities in a note to investors following the release of Viavi's latest quarterly results. "Based off of management commentary, our belief from last quarter that this tough spending environment will persist ... has been re-affirmed."

The analysts noted that Viavi, which sells equipment for testing and measuring network performance, ought to be among the first to see any improvement in telecom network operator demand.

"We continue to be on the sidelines until there is stronger evidence of a sustained recovery," agreed the financial analysts at B. Riley Securities in a research note issued after Viavi's results.

All eyes on BEAD and inventories

At issue are several factors, including the ongoing rollout of $42 billion in US government subsidies through the Biden administration's BEAD (Broadband Equity Access and Deployment) program. Although that money has started trickling down to the US states that will ultimately award funding to telecom networks for new networks in rural areas, the allocation process has been slower than some expected. 

"The BEAD awards are expected to translate to initial deployments near the end of this calendar year," said Clearfield's Beranek.

Another factor affecting network operators: "inventory overhang." After network operators spent heavily on network equipment amid the COVID-19 pandemic to address spikes in traffic, they're now deploying that existing inventory before buying more.

Viavi's Khaykin suggested those inventory overhangs are starting to wither. 

"You start seeing a lot of unforecasted spot orders popping up, like hurry up and ship as soon as you can," he said. "So we are starting to see more and more of these types of things popping up. They're not big orders, but it's telling us the inventory is starting to deplete itself in the channel."

Vendors ranging from Ericsson to Calix to Viavi to Clearfield are hoping that the combination of increased BEAD grants and diminished inventory will spark a renewed round of equipment purchases among network operators. But it's not clear when that might happen. Last year, vendors hoped 2024 would be the year demand kicked back in. Now it's looking more like 2025.