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06/23/16 05:00:14 PM


According to Cisco Systems (CSCO 29 ****), the average user in the U.S. will generate 119.2 gigabytes of Internet traffic per month in 2020, up 140% from 49.7 gigabytes per month in 2015. Communications equipment companies will likely benefit from network upgrades by service providers trying to meet increased consumer demand for higher Internet speeds and greater data consumption. Providers are coaxing increased speeds out of existing networks by adopting new telecommunication standards like DOCSIS 3.1 while also investing in high-speed fiber optic networks.

DOCSIS 3.1 is an international telecommunication standard that enables additional data capacity through existing hybrid fiber-coaxial (HFC) infrastructure. Much of the expense associated with building a new network comes from the cost of labor to lay new cable. The fact that DOCSIS 3.1 requires no new investment in physical cables is especially appealing to service providers. According to SNL Kagan, the spectral efficiency gains from adoption of DOCSIS 3.1 could net service providers a 30% increase in effective throughput over DOCSIS 3.0. While a 30% increase is not a lot compared to expected growth in overall data consumption, it is only a matter of time before a new DOCSIS standard is released and will coax more speed out of existing HFC lines. The upgrade to DOCSIS 3.1 requires, among other things, that service providers give new routers to customers. ARRIS International (ARRS 23 ****) is the largest provider of DOCSIS boxes holding between 52% and 56% of the total market on a quarterly basis in 2015 according to SNL Kagan. Comcast (CMCSA) accounted for 21% of total revenue for ARRIS in 2015. ARRIS has benefitted immensely from Comcast's focus on dramatically increasing throughput to remain competitive with other high speed internet offerings from firms like Alphabet Inc. (GOOGL) (formerly Google Inc.).

In addition to capacity upgrades to existing HFC networks, many operators will begin to shift spending to full fiber-to-the-home (FTTH) networks. Pushing fiber lines out towards the edge of the network enables providers to offer much higher speeds to customers with increased network capacity. Companies like Amphenol (APH) and Corning (GLW) will likely benefit from increased fiber rollout over the next few years. SNL Kagan projects overall cable provider capital spending will be $15.3 billion in 2019, up from $15 billion in 2015. SNL expects total capital spending to peak this year at $16.6 billion. It should be noted that while overall capital spending is only expected to grow 2% between 2015 and 2019, spending on scalable infrastructure and line extensions are projected to increase 20% over the same period according to SNL. Overall, we expect companies to make gradual upgrades to their networks. Comcast currently offers DOCSIS 3.1 in the Atlanta market but plans to complete deployment across its entire footprint over the next 12 to 18 months.

Amphenol Corporation offers a wide range of products to service the broadband market, from customer premises cables and interconnect devices to distribution cable and fiber optic components, as well as interconnect products integrated into headend equipment. Sales into the broadband communications market represented approximately 6% of the company's net sales in 2015. Amphenol also provides IT and Data Communications (Datacom) customers with products that enable performance at the leading edge of next-generation, high-speed, power and fiber optics technology. Sales into the IT and datacom market represented approximately 16% of the company's net sales in 2015. Demand for Amphenol's products in these markets depends primarily on capital spending by operators for constructing, rebuilding or upgrading their systems.

ARRIS International enables service providers including cable, telephone and digital broadcast satellite operators and media programmers to deliver media, voice and IP data services to their subscribers. ARRS is a leader in set-tops, digital video and Internet Protocol Television (IPTV) distribution systems, broadband access infrastructure platforms and associated data and voice Customer Premises Equipment (CPE). Spending on CPE accounted for roughly 42% of total capital spending in 2015 according to SNL Kagan. ARRIS will likely continue to benefit from Comcast's DOCSIS 3.1 rollout and continued expansion of its DOCSIS 3.0 footprint.

Corning Inc. is a maker of high-technology fiber optics for the global telecom industry and high-performance glass components for the personal computer, television, and mobile device manufacturing industries. The Optical Communications segment represented 33% of Corning's sales for 2015. This segment has, in recent years, evolved from being a manufacturer of optical fiber and cable, and hardware and equipment to being a comprehensive provider of industry-leading optical solutions across the broader communications industry. Corning will likely benefit from increased spending on FTTH networks as companies continue to push fiber lines out towards customers in an effort to increase network speeds and capacity.

Harmonic Inc. (HLIT) designs, manufactures, and sells video infrastructure products and system solutions worldwide. Its products enable customers to create, prepare, and deliver a range of video and broadband services to consumer devices, including televisions, personal computers, laptops, tablets, and smart phones. Harmonic has much less DOCSIS market share then ARRIS, accounting for between 2% and 8% of the total market on a quarterly basis in 2015 according to SNL Kagan. We expect Harmonic to benefit from networking upgrades which will drive increased spending on CPE equipment.

Risks to our outlook include customer adoption of high-speed Internet offerings could be slower than expected, which could reduce capital spending on network upgrades and fiber buildouts. Additional government regulation could also dampen willingness to spend on network upgrades.


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