Corning, a major global supplier of fiber, earlier this week lowered its revenue expectations from the sale of fiber cabling to telecom service providers and enterprises.
It marked the company's third consecutive reduction in guidance for fiber revenues over the past few months. And this slowdown in fiber spending, which also includes fiber used in cable HFC (hybrid fiber coax) networks, is raising concerns about the implications for 5G.
Corning now forecasts sales in its "optical communications" fiber business will decline by 3% to 5% for full-year 2019, versus its prior expectation of "a low-to-mid-single digit percentage increase." The company added that it expects both carrier and enterprise network sales "to decline year-over-year in the second half of 2019." Last year, Corning's fiber business grew 13% organically year-over-year.
Why this matters
Fiber cabling is at the heart of just about every part of the nation's telecommunications network. Whether its for WiFi, 4G or DSL, most of the Internet traffic around the world eventually makes its way onto a fiber cable -- and Corning makes a substantial amount of those cables.
Moreover, fiber is playing a starring role in the development of 5G globally. Although 5G connections are wireless, they're almost exclusively backhauled to a fiber network. As a result, operators such as Verizon and AT&T are deploying thousands of miles of new fiber cables to 5G base stations in order to handle all of the network traffic expected from 5G. Indeed, in 2017 Verizon announced it would buy 12.5 million miles of fiber per year through 2020 from Corning for a whopping $1 billion, largely for 5G.
So, if one of the world's biggest suppliers of fiber cable is suddenly seeing a dramatic slowdown in sales of fiber cabling to telecom operators, does that mean 5G operators are quietly pulling back from the market?
Not necessarily, at least according to a handful of Wall Street analysts.
Emerging markets viewed as big culprit for the slowdown
"While there's certainly weakness in areas of the market such as Cable MSOs and some larger customers such as AT&T, we'd be surprised if the overall telecoms market is deteriorating at the same pace that Corning's Optical business is declining. In the end, we suspect there's inventory around," analysts at research firm Jefferies wrote in a recent note to investors.
"According to our checks, Corning told investors the weakness in 3Q19 was largely due to Telco customers in emerging markets, and not due to Tier 1 Telcos in the US," wrote the analysts at MKM Partners in a research note, adding that Corning is seeing increased competition from Chinese suppliers in emerging markets like India. "We also heard there was very strong growth (~30%) in Corning's business of selling Data Center fiber to Web Scale customers in 1H19, and 2H19 is seeing some digestion of those purchases. Finally, we believe Corning may be experiencing an inventory correction in Fiber (Optical Communications) after growing 13% organically in the business last year."
In the US, Verizon continues to build fiber to new locations in dozens of markets outside of its traditional Fios footprint in the Northeastern US, while CenturyLink recently announced a major new fiber buildout. However, other operators are slowing their investments in fiber; for example, AT&T recently completed the fiber expansion mandated by the terms of its purchase of DirecTV.