The push toward launching LTE networks and increasing consumer demand for data — both mobile and in the home — is causing ISPs and wireless carriers to take a hit on infrastructure investments. In addition, with limited wireless spectrum available, there’s a push to increase data transmission efficiency, further weighing on bottom lines.
Of course, a few companies are making out like bandits: Namely, those that manufacture the equipment used to build up telecom infrastructure and manage IP data transmission.
Verizon (NYSE:VZ) was first out of the gate with widespread LTE, and it reportedly invested $9 billion in 2011 alone, with expectations to spend close to the same amount in 2012. AT&T (NYSE:T), meanwhile, is planning to spend $14 billion over the next three years in expanding its LTE coverage and enhancing broadband service; the company says its total capital spending (that would be on the gear that telecommunication equipment manufacturers produce) will be $22 billion yearly for each of the next three years. Sprint (NYSE:S) began an aggressive expansion of its LTE coverage in the U.S. last year, launching an infrastructure investment phase that’s expected to impact its bottom line for the next two years.
This spending stimulus is beginning to have a profound effect on companies providing the technology and equipment.
A Few Good Months for Infrastructure
Sweden’s Ericsson (NASDAQ:ERIC) recently proved that out in its most recent quarterly earnings report, which had Wall Street chirping. Despite taking a hit from operating losses in its ST-Ericsson joint venture with STMicroelectronics (NYSE:STM), sales were up 5% on the year and 23% quarter-over-quarter. And unlike many technology companies, Ericsson increased its number of employees in 2012, adding 5,730 new staff, including 1,659 in research and development. CEO Hans Vestberg pointed to the U.S. and Canada for the growth, noting: “Throughout 2012 North America was our strongest market, driven by continued mobile broadband investments and demand for services.
ERIC shares jumped 6% on the news, helping to extend a roughly 25% rally from its November lows — that’s more than double the broader market during that time.
Alcatel-Lucent (NYSE:ALU) also has been charging of late, racking up a spectacular 70% rebound since November. The company specializes in mobile, broadband and IP technology and is home to the famed Bell Labs R&D team. ALU has benefited from telecom industry investment in infrastructure upgrades, including a $1 billion-plus contract with India’s Reliance Communications, announced Jan. 16. ALU reports Q4 and full-year 2012 earnings Thursday.
The latest big news to cross the wire when it comes to the infrastructure upgrade rush is Oracle’s (NASDAQ:ORCL) announcement that it’s buying Acme Packet (NASDAQ:APKT) for $1.7 billion. Acme Packet specializes in IP optimization and makes a controller that enables voice, video and text to move securely between wireless and broadband networks. Its technology is used by 1,900 customers globally, including 89 of the top 100 communications companies.
There were rumors that Cisco (NASDAQ:CSCO) was interested in Acme Packet last year, but that didn’t pan out. With the acquisition, Oracle will be competing against Cisco in routing voice calls, video and text messages, bolstering its cloud computing offerings and hoping to capitalize on the expected spending surge as ISPs and wireless carriers ramp up their expenditures on network upgrades.
The Oracle-Acme Packet deal reverberated across several other companies that make products critical to managing web traffic and network capacity. BroadSoft (NASDAQ:BSFT) — a Voice over Internet Protocol (VoIP) specialist — jumped 11% the day of the deal, while Sonus Networks (NASDAQ:SONS) gained 20% on the news.
While 2011 saw the beginning of a massive ramp-up in spending by ISPs and wireless carriers as they began to roll out LTE wireless networks, that trend is continuing — along with pressure from consumers and the FCC to upgrade U.S. broadband. And wireless growth is accelerating outside of north America as well, as the Reliance Communications deal shows.
Just look at the current state of telecommunication infrastructure and the developing demands for bandwidth, accessibility and growth and it becomes clear that the next few years should be good ones for these companies. Along those lines, here are few stats to think about:
- U.S. households have an average broadband Internet connection speed of 6.7 Mbps. That can make even Netflix (NASDAQ:NFLX) HD movie streaming choppy, and just that one streaming service has been fingered for using up as much as one-third of U.S. bandwidth. Take that Netflix situation, and add the 4K Ultra High Definition TVs and streaming services expected to come online this year — even with the newly approved H.265 compression standard, a streaming 4K movie needs a 20-30 Mbps Internet connection (not to mention the added stress on bandwidth).
- While U.S. wireless carriers are ramping up LTE deployment, it’s going to go mainstream in other big markets. India is expected to adopt LTE by 2015, while China is preparing to hand out 4G licenses for 2014 (with China Mobile [NYSE:CHL] expecting to deploy 350,000 LTE stations that year).
- Research firm Forrester estimates that cloud computing will grow from a $41 billion market in 2011 to $241 billion in 2020. That means a lot more more data flying across the web, along with demand for security and mobile access.
In North America, wireless and Internet infrastructure is having a hard time keeping up with big data demand, while in markets like China, growth in building up the network in the first place is rapidly accelerating even as the same bandwidth demand challenges come into play.
Manufacturers like ALU are likely to see the benefits of the resulting investment but even as capacity and capability is improved, pressure on bandwidth will continue, thanks to trends like streaming high-definition video. Companies like Sonus Networks — that intelligently manage traffic and squeeze more out of networks — are liable to see their stars rise as part of this trend.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.