Monday, July 11, 2011

Weakness in China Telecom Spending?

In the light of the recent profit warning from Ixxia $XXIA I decided to take a closer look at what other players in the industry such as $ARX Aeroflex, Spirent and Anite are saying. In summary, there does appear to be some weakness in emerging market network infrastructural spending. However, this may prove temporary and, merely a consequence of some caution from OEM manufacturers in the light of macroeconomic concerns relating to Japan and Euro zone sovereign debt fears.  In addition, handset and wireless appear to be growing well, so a pick up later in the year is possible.
As a note of caution I have sold off my Spirent position but retain Agilent $A as the co is more focussed on wireless solutions and the division does not make up more than 17% of revenues. The next company to issue a statement is likely to be Spirent in the UK when it gives half year results on the 4th of August.

What they said
Global Markets?
4th May
‘Trading performance for the period is in line with the Board's expectations and continues the positive trend that Spirent reported in its full year 2010 results’.

‘We expect to maintain progress throughout the remainder of 2011’
15th June
‘Despite the decline in revenues compared to the prior quarter, we were able to achieve non-GAAP gross margin of 34.2%, exceeding our prior guidance of 32% to 33%’
‘The sequential decline in revenues was primarily driven by soft demand from our telecom customers, particularly Chinese OEMs’
29th June
‘Network Testing's prospects have been enhanced by the Invex acquisition and its growing global presence. Its broad suite of products means that it is well set to continue to grow, albeit in the first half it is unlikely to exceed the very strong comparative period last year.’
‘While Network Testing's revenue in EMEA increased by 33%, to £12.2m, and in the Americas by 44%, to £5.6m, in Asia it declined by 9%, to £6.3m.’

7th July
‘Delays in shipment approvals from and orders of test equipment by U.S. government entities have caused Aeroflex to reduce its estimated ranges of net sales and Adjusted EBITDA to $198 million to $200 million and $56 million to $59 million, respectively’
‘we had some major achievements this quarter, including record sales of wireless test equipment, our first significant order from a major global manufacturer of wireless infrastructure equipment for next generation LTE(A) TM500 products’
7th July
‘Total revenue for the second quarter of 2011 is expected to be in the range of $67.0 million to $69.0 million, below the company's previous guidance of $78.0 million to $82.0 million.’
‘Second quarter 2011 revenue was impacted by several factors, including lower than expected revenue from Asia Pacific and from certain large equipment makers, as well as orders received late in the quarter that could not be fulfilled in the second quarter’

Network Testing Heading for a Weak Quarter?

I think that it is not unreasonable to expect Spirent to report some softness in this quarter, although it is not clear whether this is the start of at trend or a temporary pause. No matter, I have sold my position and will await their update. Ixxia have confirmed what Finisar said last month so it does appear that Chinese OEM’s have held back on spending.

 I suspect this is a consequence of a reaction to the events in Japan or alternatively part of the same forces that are holding back China LED street lighting expenditure. The latter is a subject well covered on this blog. It will be interesting to see how these pans out with Spirent’s next statement. In view of the sustained weakness in China LED street lighting I have decided to be cautious here.

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