It's becoming increasingly clear that telecom vendors across the industry are suffering through a sluggish first quarter in part due to "inventory absorption," which is how the financial analysts at Raymond James put it.

Network operators in North America snapped up all the equipment they could during the COVID-19 pandemic, largely due to traffic spikes amid a troubled supply chain. Now, as the pandemic abates and supply chains relax, they are trying to put those stashes to use.

As a result, they're not buying anything else, and it's not clear when that might change.

Corning's decline

The latest data points come from Corning, which reported a 6% quarter-over-quarter decline in its fiber business. That's noteworthy considering Corning is a core vendor for fiber cabling, and US telecom operators are in the midst of a "historic" fiber network buildout effort.

Figure 1: (Source: Pixabay)

Corning's fiber slowdown was due to "a greater-than-normal seasonal volume decline associated with the pacing of customer projects," according to the financial analysts at Raymond James. "We interpret this as inventory absorption."

Corning CEO Wendell Weeks obliquely addressed the topic during his company's earnings call this week.

"Since they couldn't get everything they needed, [they] over ordered ... all sorts of things," Weeks said, according to a Seeking Alpha transcript.

He acknowledged that Corning's fiber customers are in the midst of putting their fiber inventory into action. But he stopped short of predicting a massive upswing in demand after the operators work through their inventory backlog.

"We're just going to play out a little bit more conservatively and not plan on ... a big jump up in the back half [of this year]," Weeks said.

Corning is seeing sluggish fiber trends both among hyperscale data center operators and fiber network operators like AT&T and Frontier Communications, he added.

A spreading concern

Corning isn't the only vendor to address the inventory situation. Both Ericsson and Nokia blamed "inventory adjustments" in North America for sluggish sales of 5G equipment.

Similarly, Viavi, Adtran and Lumentum all issued financial warnings ahead of their first quarter reports.

According to the Raymond James analysts, other vendors that could be affected include CommScope, Juniper Networks and Coherent. Part of the firm's reasoning is based on the outsized role that Corning plays in the overall market for fiber networks.

"Corning's commentary paints an encouraging longer-term picture but provides a cautionary near-term signal," the analysts said. "We believe investors hold concerns about hyperscale slowing, and continued inventory absorption exasperating the year-over-year declines in US telco capex vs. 2022."

Indeed, analysts at Dell'Oro Group recently warned that worldwide telecom capex – the sum of wireless and wireline telecom carrier investments – increased at a low single-digit rate year-over-year in 2022. They said that was down from high single-digit growth in 2021. And the firm warned of "sharp capex cuts in North America" over the next three years.

"The clouds are black on the horizon," wrote analyst Joe Madden, of Mobile Experts, in a recent column in FierceWireless.

Where's the bottom?

The pressing question, according to the financial analysts at B. Riley Securities, is when the downturn will end.

"While this is the first phase of a slowdown due to inventory correction ... our concern is there could be a second phase of a slowdown, which could be more severe than the first phase, if and when the economy enters into a lengthy recession," they wrote in a recent note to investors. "The second phase will be triggered by service providers reducing capex due to the recession, which will adversely impact those in the supply chain."

Corning's Weeks offered some inconclusive comments on when the company's fiber business might return to growth.

"That can happen quickly," he said, explaining that Corning is ready to supply more fiber if it sees an increase in demand. "But we're just not seeing it."

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