Since the recession, it’s been difficult for technology companies to put together the full package.
In some cases, such as data analytics provider Splunk, growth has been phenomenal but profits have remained elusive as all cash flow from operations has been reinvested in research and development and in hiring new staff. In the case of Splunk, second-quarter revenue rose 50%, but the company isn’t expected to deliver its first quarterly profit until well into 2014.
On the flip side, other tech companies have been bringing in cash flow by the boatload, but have needed to turn to cost-cutting to drive bottom-line growth. Hewlett-Packard, for example, is in the midst of a massive transformation which involves laying off about 8% of its workforce — 29,000 employees — in order to save $3.5 billion annually. The company is still very profitable but is being heavily weighed down by its underperforming PC segment.
The good news is that one tech industry looks like it’s been cleared to put both pieces of the puzzle together: network equipment makers.
It all starts with communication service providers
Source: lllythr, Wikimedia Commons.
For network equipment makers, it all starts with communication service spending. Following the rollout of 4G networks in the middle of the last decade, the great recession put a big crimp in service providers’ plans to upgrade their networks to 4G LTE. With consumer spending weak, many of the biggest names — AT&T, Verizon, Sprint, and T-Mobile — chose to stay the course until there was more clarity within the sector. Apparently things must have improved in a hurry in over the past year, because businesswide consolidation cleared the way for a big boost in infrastructure spending.
AT&T started it off in November when it announced that it would be spending $14 billion over the next three years to greatly expand its wireless infrastructure, with the goal being to catch Verizon, which has more than doubled the number of cities that are 4G LTE-capable relative to AT&T. Following AT&T’s announcement, in 2013 we saw Japan’s SoftBank scoop up a majority stake in Sprint for $21.6 billion, giving the struggling service provider some much-needed capital to expand in 4G LTE network, and T-Mobile gobbling up MetroPCS Communications in order to instantly gain 9 million new customers.
The clarity you seek lies with fiber-optic and fiber-optic component suppliers
By now you’re probably wondering, “How do we know this increase in spending is trickling down to equipment makers? The answer to this question is written entirely in fiber-optic and fiber-optic component suppliers, which have seen a revival of sorts this year. When telecom service companies announce a big boost in spending, it often takes a few quarters for that money to trickle down to fiber-optic providers. Have a look at some of these big EPS hikes in just the past three months.
| Company | Projected Full-Year EPS 3 Months Ago | Current FY EPS Projections |
|---|---|---|
| Finisar (NASDAQ:FNSR) | $0.93 | $1.22 |
| Alliance Fiber Optic (NASDAQ:AFOP) | $1.35 | $1.78 |
| Oplink Communications | $0.97 | $1.04 |
Source: Yahoo! Finance.
Finisar Corporation (NASDAQ:FNSR), a fiber-optic components supplier, just last night reported record first-quarter revenue which handily exceeded the company’s own previous estimates, and guided its second-quarter revenue and EPS well above the existing forecast. Similarly, Alliance Fiber Optic Products Inc (NASDAQ:AFOP), a small-cap fiber-optic components maker, reported a whopping 248% increase in net income in the second quarter, as revenue rose 65%, and also guided its third-quarter results slightly ahead of already boosted Wall Street estimates.
