The Metro Connect conference was held in Fort Lauderdale, Florida, in February.
The main conclusions are as follows:
- 2023: Some moderation. The FTTH investment forecast for 2023 has softened, but we do not believe the softening will make a significant difference
- No change in the long term. We see even less risk to the long-term trajectory of FTTH construction and thus to heavily leveraged companies in this area.
- Leveraged companies: ADTN, CALX, CLFD and DZSI. Among the companies heavily leveraged in the FTTH market are ADTN, CALX and DZSI in the OLT/ONT broadband service market and CLFD in the fiber management market, all of which are rated "Outperform."
- CIEN. In addition, we believe CIEN, which recently entered the FTTH market through its acquisition of Tibit, will benefit from the continued favorable long-term outlook for the FTTH market as FTTH is likely to provide additional, albeit modest, growth in FY23 and increasingly significant growth in subsequent years.
- NOK. Although FTTH accounts for less than 10% of NOK's total revenue, in our view, the company will also benefit from the continued strong long-term outlook for the FTTH market.
- Reduced network expansion plans by AT&T and other Tier 1 and Tier 2 CSPs. The reduction in AT&T's FTTH deployment plan in CY23, along with more modest reductions in FTTH deployment plans by a number of other major tier one and two communications service providers (CSPs), has contributed to a slowdown in the rapid growth of NOK's fixed network business, which is largely made up of FTTH equipment. In our view, the slowdown in growth is already reflected in NOK's outlook for the fixed network business and the wireline infrastructure business that it is a part of.
More detailed conclusions from the conference, based on additional tests and publicly available data published outside the conference, are provided below.
- Slowing FTTH Growth. Macroeconomic conditions, primarily the contraction of capital markets, have led to a slowdown in FTTH network construction.
- Primarily large CSPs. This slowdown appears to be concentrated mostly among large CSPs, led by AT&T.
- Tier 3 CSPs: Mixed Data. For Tier 3 CSPs, the data from the conference was not as clear-cut. Existing projects continue to move forward, but obtaining new capital for new projects has become more difficult and expensive, causing some smaller CSPs to postpone planned construction. However, other CSPs and private market investors have said they plan to accelerate FTTH construction to take advantage of any downturn from other CSPs and investors.
- A meaningful reduction by 2023 is unlikely for ADTN, CALX, CLFD, and DZSI. Publicly announced planned reductions in FTTH construction for 2023 (i.e., FTTH-transmitted homes) by other major Tier 1 and Tier 2 CSPs will not have a significant impact on demand for OLT and ONT in 2023 from ADTN, CALX.
- The risk to the long-term outlook is even less. If there is an impact in CY23, we do not think it will change the long-term outlook for FTTH construction and related products and companies, with any slowdown in CY23 ultimately increasing construction activity in CY24 and beyond and/or extending FTTH growth.
- Demand is not the key constraint. Demand mitigation is not the key issue; rather, according to many market participants, including broadband service providers, the two main issues negatively impacting FTTH deployment activity are government permitting and licensing, and labor shortages.
- Supply Chain - Components. Continued impediments to the supply of semiconductors and other components for OLTs and ONTs continue to impact availability and cost for OLT and ONT suppliers and other companies in the FTTH ecosystem. According to our numerous checks, supply chain constraints remain tight, and no significant improvement is expected in the near future. However, most FTTH companies have indicated that availability and cost issues have stabilized and that they expect significant improvement or complete resolution by the end of CY23.