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Updated Outlook - Further Deterioration
The warning regarding likely future capex reductions and the adverse implications
for communication equipment suppliers that we first sounded in our July 16, 2008
“Global Carrier CapEx—Updated Outlook” report is no longer controversial. Since
that report, driven by the deteriorating macro-economic environment, the scope and
magnitude of the risk to suppliers has expanded significantly.
■
Supplier Exposure. Given the degree to which capex is receding, few if any
comm equipment suppliers are likely to escape this downturn unscathed,
although we expect those companies leveraged to L2-3, such as CSCO and
JNPR, will likely fare relatively better. In addition to the large integrated suppliers
that derive the bulk of their revs from carriers, we believe ADTN and CIEN have
the greatest near-term risk. However, we continue to see risk to consensus’s
est.s for all four stocks as well as for all other stocks in our coverage universe
relative to our Street-low est.s given that current consensus rev growth est.s
meaningfully exceed our current capex outlook.
■
Reducing Estimates. Accordingly, we are reducing our rev and EPS est.s for
the following suppliers in our coverage universe (see notes published
concurrently with this report): JNPR (N), ADCT (N), APKT (N), SONS (N), SCMR
(N) and VRAZ (N). Our current est.s for CSCO (N) and ADTN (U) already reflect
our outlook for carrier capex and are currently at the low end of consensus est.s.
We also are reducing our rating on CIEN to Underperform from Neutral.
■
2009 and 2010 Carrier CapEx Forecasts. Reaffirming our negative outlook for
comm equipment suppliers leveraged to capex by service providers, the capex
environment has continued to significantly deteriorate since our July 2008 report.
Based on carriers’ own forecasts, the current 2009 and 2010 outlook is as
follows: Aggregate. (1.1)%/(6.5)% v. 13.1% forecasted growth in CY08.
Wireline. (4.6)%/(6.6)% v. 6.8% forecasted growth in CY08. Wireless.
1.5%/(6.5)% v. 19.6% forecasted growth in CY08.
■
2009 and 2010 Credit Suisse CapEx Forecasts. We now expect carriers
throughout the world to ratchet back their capex plans due to the deterioration in
the macro-economic environment and the constriction of capital markets. We
expect carrier-focused suppliers to be further adversely impacted by the recent
appreciation of the U.S. dollar and additional global carrier consolidation.
Accordingly, we believe all of the above capex forecasts overstate the CY09 and
CY10 growth rates for aggregate, wireline and wireless capex and therefore for
rev and earnings growth for carrier-focused comm infrastructure suppliers. Our
own Credit Suisse forecasts, together with CS’s European Wireless Telecom
Equipment Research Team, are as follows: Aggregate. A (10.2)% decline in
2009 followed by a (0.4)% decline in 2010. Wireline. A (13.0)% decline in 2009
followed by a (2.3)% decline in 2010. Wireless. A (7.6)% decline in 2009
followed by 1.3% growth in 2010.
■
Developed Markets. For North America-based comm infrastructure suppliers,
we are most concerned by the outlook for capex in developed markets. Most
troubling is the U.S. outlook--where the carriers themselves project a (9.4)%
decline in 2009--given that U.S.-based carriers account for the majority of carriergenerated
revs of most North America-based suppliers. Our checks indicate that
both T and VZ are planning at least (5) - (10)% aggregate capex reductions in
CY09, with wireline capex declining by 10+%.
Executive Summary
The warning regarding likely future capex reductions that we first sounded in our “Global
Carrier CapEx—Updated Outlook” report dated July 16, 2008 is no longer controversial.
At that time, we observed,
…Nor is the challenging carrier capital expenditure outlook limited to the nearterm.
Based on carrier forecasts and historical trends, we expect growth to
continue to trend lower for the foreseeable future. Over the course of calendar
2009 and 2010, we expect aggregate global capex growth to significantly
decelerate as carriers in developed markets continue to find a challenging
operating environment and as capex growth in emerging markets naturally begins
to slow due to a rising base.
In the intervening six months since that report, the scope and magnitude of the risk to
carrier-focused communication equipment suppliers has expanded significantly. A number
of communication infrastructure suppliers and communication service providers already
have acknowledged or cited a significant slowdown or decline in the near-intermediate
term outlook for capital expenditures. We now expect carriers throughout the world to
ratchet back their capex plans in connection with deterioration in their business models
due to slowing consumer and corporate demand related to the macro-economic
environment. We expect further downward pressure on carrier capex from the recent
appreciation of the U.S. dollar against most foreign currencies, the constriction of capital
markets and additional global carrier consolidation.
■ 2009 and 2010 Credit Suisse CapEx Forecasts. Accordingly, we believe current
aggregate carrier capex forecasts based on the projections of the carriers themselves
over-state—by as much as 8 - 10 percentage points—the calendar 2009 and 2010
growth rates for aggregate, wireline and wireless capex and therefore for revenue and
earnings growth for communication infrastructure suppliers leveraged to
communication service providers. Our own CY09 Credit Suisse forecasts, together
with Credit Suisse’s European Wireless Telecom Equipment Research team, are as
follows:
Aggregate. A $(29.1) billion, or (10.2)%, decline in 2009 followed by a further
$(1.0) billion, or (0.4)%, decline in 2010 compared to the (0.1)% and (11.1)%
respective forecasts of the carriers themselves.
Wireline. A $(17.9) billion, or (13.0)%, decline in 2009 followed by a further
(2.3)% decline in 2010 compared to the (4.9)% and (11.2)% respective forecasts
of the carriers themselves.
Wireless. An $(11.2) billion, or (7.6)%, decline in 2009 followed by a $1.8 billion,
or 1.3%, increase in 2010 compared to the 3.5% and (11.1)% respective forecasts
of the carriers themselves.
Credit Suisse’s European Wireless Telecom Equipment Research Team, with
contributions from various analysts in Credit Suisse’s Global Telecoms Research
Team, issued a comprehensive report titled “Wireless Infrastructure: Fundamentals +
Financing = Downturn,” issued on November 24, 2008, focusing on the risks to
wireless capex in emerging markets posed by slowing service provider revenue
growth and financing risk related to the tightening of capital markets. This view was
reiterated in the report “Wireless Infrastructure: Survey Says…,” issued on January
12, 2009. Notably, the numbers for wireless capital expenditures in this report differ
from the numbers posted in the Wireless Telecom Equipment Research Team’s
November 2008 report due to our conversion of capital expenditures in non-U.S.
dollars to reflect foreign exchange movements, whereas the Wireless Telecom
Equipment Research team analyzed wireless capital expenditures on a constant
currency basis.■ Supplier Exposure. Given the degree to which capex is receding, few if any
communications equipment suppliers are likely to escape this downturn unscathed,
although we expect those companies leveraged to L2-3, such as Cisco and Juniper,
will likely fare relatively better. In addition to the large integrated carrier-focused
suppliers that derive the bulk of their revenues from the carrier market, we believe
Adtran and Ciena have the greatest near-term exposure while we expect Juniper to
hold up relatively better. However, we continue to see risk to consensus’s estimates
for all four stocks as well as for all other stocks in our coverage universe relative to our
Street-low estimates given the current consensus revenue growth estimates
meaningfully exceed our current capex outlook. Accordingly, we are reducing our
revenue and EPS estimates for the following suppliers in our coverage universe (see
notes published concurrently with this report): JNPR (N), ADCT (N), APKT (N), SONS
(N), SCMR (N) and VRAZ (N). Our current estimates for CSCO (N) and ADTN (U)
already reflect our outlook for carrier capex and are currently at the low end of Street
consensus estimates. We also are reducing our rating on CIEN to Underperform from
Neutral.
■ Carrier Capex Forecasts. Reaffirming our negative outlook for communications
equipment suppliers leveraged to capex by service providers, the capex environment
has continued to significantly deteriorate since our July 2008 report. In aggregate the
carriers are currently forecasting a (1.1)% year-over-year decline in calendar 2009
followed by an additional (6.5)% decline in calendar 2010 v. the previous respective
forecasts of (0.2)% and (3.0)% declines. On a net basis, the current forecasts would
lower capital expenditures through calendar 2010 by an additional (4)%, or $(12.4)
billion v. the previously reported forecasts.
■ 2009 Carrier CapEx Forecasts. Based on carriers’ own forecasts, the current
calendar 2009 outlook for carrier capex is as follows:
Aggregate. Essentially unchanged from the outlook in our July report, (1.1)%
year-over-year decline in 2009 v. our previously published (0.2)% decline, 12.2%
forecasted growth in calendar 2008, 12.8% actual growth in 2007 and 13.7%
average annual growth over the five year 2003 - 2007 period.
Wireline. A (4.6)% year-over-year decline in 2009 v. 3.2% forecasted growth in
calendar 2008, 17.6% actual growth in 2007 and 13.9% average annual growth
over the five year 2003 - 2007 period.
Wireless. A 1.5% year-over-year growth in 2009 v. 19.9% forecasted growth in
calendar 2008, 9.0% actual growth in 2007 and 13.7% average annual growth
over the five year 2003 - 2007 period.
■ 2010 Carrier CapEx Forecasts. Based on the carriers’ own forecasts, the current
calendar 2010 outlook for carrier capex is as follows:
Aggregate. A meaningful deterioration from the outlook in our July report, (6.5)%
year-over-year decline in 2010 v. our previously published (3.0)% decline, 17.2%
forecasted growth in calendar 2008, 16.6% actual growth in 2007 and 13.8%
average annual growth over the five year 2003 - 2007 period.
Wireline. A (6.6)% year-over-year decline in 2010 v. 2.2% forecasted growth in
calendar 2008, 22.9% actual growth in 2007 and 13.0% average annual growth
over the five year 2003 - 2007 period.
Wireless. A (6.5)% year-over-year decline in 2010 v. 29.0% forecasted growth in
calendar 2008, 12.0% actual growth in 2007 and 14.5% average annual growth
over the five year 2003 - 2007 period.
■ Developed Markets. For North America-based suppliers of communications
infrastructure, we are most concerned by the outlook for carrier capex in developed
markets given that virtually all of them derive the majority of their revenues from these
more mature markets. We expect year-over-year reductions in developed market
aggregate, wireline and wireless capital expenditures of approximately (12)% in
calendar 2009 followed by 1.3% growth in calendar 2010. Even assuming 2009 and
2010 capital expenditures come in-line with current carrier forecasts, the outlook for
aggregate capital expenditures in the more developed markets of North America,
Western Europe, Japan and Korea in calendar 2009 based upon carrier forecasts is
well below the aggregate global outlook—over (10)% year-over-year decline in 2009
compared to 5.9% forecasted growth in calendar 2008, 8.1% actual growth in 2007
and 10.5% average annual growth over the five year 2003 - 2007 period.
■ U.S. Most troubling, given that U.S.-based carriers still account for the majority of the
carrier-generated revenues of most North America-based communications equipment
suppliers, the 2009 and 2010 outlook for capital expenditures by service providers in
the U.S. on communications equipment is particularly bleak—based on the aggregate
forecasts of the carriers themselves, a (9.4)% year-over-year decline in 2009 followed
by 0.4% growth in 2010 compared to 2.6% forecasted growth in calendar 2008, 7.4%
actual growth in 2007 and 15.1% average annual growth over the five year 2003 -
2007 period. This outlook is driven by our industry checks, which indicate that both
AT&T and Verizon, which together account for approximately 60% of the region’s
wireline and wireless capex, currently plan to reduce their capital expenditures in 2009
by approximately (5) – (10)%.
■ Global Consolidation. We also expect the current calendar 2009 outlook for both
carrier capex and communication equipment suppliers’ revenues and profitability to be
adversely impacted by ongoing global consolidation of service providers.
Consolidation historically has led to approximately (5) – (10)% lower aggregate capex
by the combining entities. The more significant issue for communication equipment
suppliers, in our view, is the concentration of capex in fewer and fewer customer
hands, which leads to: increased margin risk by virtue of increased pricing power of
carrier customers; and increased revenue volatility/outright survival risk related to
increased revenue concentration.
■ Appreciation of the U.S. Dollar and Constriction of the Capital Markets. Over and
above the increasingly challenging macro-economic operating environment and carrier
consolidation, two additional trends likely will have a meaningful adverse impact on
calendar 2009 growth in aggregate global carrier capital expenditures: the significant
appreciation of the U.S. dollar against most foreign currencies over the past half-year
and the current lack of—or severely constrained—access to the debt and equity
capital markets. We believe these risks will especially impact markets outside of the
U.S., with the impact being most acute in emerging markets. All other things being
equal, we believe the appreciation in the dollar and the closing of the capital markets
could reduce carrier capex and carrier-focused equipment suppliers’ revenue growth
rates by at least (5) – (10) percentage points in calendar 2009. As previously noted,
our Credit Suisse European Wireless Telecom Equipment team has set forth a
comprehensive analysis of the financing risk to carrier capital expenditures in its
“Wireless Infrastructure: Fundamentals + Financing = Downturn,” dated November 24,
2008.
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