As much as we are only too keen to agree that consumer electronics is likely to suffer a direct hit from the rising tide of recession, what we think we ought to contest is that this relates directly to a chip depression, a collapse of telecommunications revenues with a consequent revenue bomb for telecommunications equipment suppliers and handset vendors alike, an overnight drop in Pay TV service revenues and a reverse for the entertainment that runs on all of this. We also don’t think that IPTV and its ecosystem of independent suppliers of DRM, set tops, EPG software, VoD servers and middleware firms will suffer directly as much as the rest of the economy.
Many of the figures in this area which are dressing up disaster as an effect of the recession are in fact simple signs of the times. Take a look at three companies attached to the segment, none of which blamed the recession, but which reported this week and commentators have taken down results as being recessionary.
Pay TV conditional access group NDS reported down numbers, in both revenues terms and profit. But profits were hit by the rise of the dollar, and revenues were hit by pressure on the specific product lines of NDS and how it charges for them. A number of clients have renegotiated terms and are being charged less for card upgrades. This we take because NDS is expensive, and it is under price pressure from rivals, only at renewal stage, and given that it is broadening its technology offerings, it should be able to turn this trend around in the next couple of quarters.
The number of pay TV homes protected with NDS software rose to 94 million from 78 million in the year and costs went up in line with this, with more smart card deployment cost than NDS would like. It also rose the number of middleware clients and DVRs of its design out there. This doesn’t look like pay TV customers everywhere are ditching their subscriptions, in fact quite the opposite.
If we take a look at Texas Instruments, among the first in the sector to warn that its numbers were off two weeks ago, we see it losing market share to Qualcomm and others in its favored area of chip supply to the handset, and Nokia’s insistence that it would broaden its favors to four major chip suppliers, made last year, is finally coming home to roost. Sure handsets have been down in ASPs slightly, right across the board, and there is a certain amount of reduction in consumer spending affecting this, but operators are still ordering handsets, and people are still making calls, and in the territories which are not 100% penetrated with mobile services such as the US, this should not hit a wall during the recession, although growth may slow.
We asked a spattering of companies in and around the market about their experiences confidentially and mostly we received optimistic replies, with one or two slightly negative.
We got the impression that entertainment and cellular are largely counter cyclical, and that as long as these companies continue to invest in infrastructure throughout the recession, then their suppliers will also be protected, with the exception of consumer electronics where it is a pure retail phenomena.
In a recession, people still make phone calls, they go to the cinema rather than to dinner, but end up staying at home more, where they watch their pay TV service and realize how lost they’d be without it. That’s not to say they won’t trade down if a cheaper one comes along, but this is competition, not recession causing trade downs. We talked to chip suppliers, software suppliers to IPTV and cable, cellular operators and telecommunications chip suppliers and the outcome is a mixed bag.
On the one hand cellcos seem to know they have to keep investing, but on the other, one or two are so spooked by the recession, they say they’ll only invest once they see a drop in revenues. They could opt to roll out femtocells and cease ordering Macrocells, but some will clearly wait 6 months in the hope that their customers will keep spending even if network development stops dead. They can always catch it up later.
The problem for operators is that if they reduce subsidies at a time when people are worrying about pennies, they will risk lowering cellular usage fees, and that’s not good. So handset subsidies are set to stay, and in the developed economies where competition is rife, they cannot afford to look at slowing the rotation rate of new handsets much, for fear of stimulating churn.
Companies which mostly supply OEM and ODM suppliers in Japan, Korea, China and Taiwan, but who do not have deals directly with operators, definitely have not noticed anything, because even if the operators have cancelled orders for completed equipment, their components are still being delivered. And there’s the feeling that if these chips are in handsets, or set tops or digital cameras (which seem to be growing despite the fall in consumer goods) they can expect to continue to grow for some time.
In IPTV there are less deals to be done in Europe, but for the most part this is because it is starting to be semi-saturated and was evident before any credit crunch arrived. Each European supplier is driving up the number of homes they supply and we are told that in the US there are still greenfields deals to be done. The pipeline of these companies has not fallen considerably, even if the decision making time for deals, has gone up.
Similarly set top box suppliers all seem bullish, once again because in IPTV at least, and to some extent in satellite, there are more new homes coming on stream pretty much everywhere and they all need a set top. Cable may not be expanding, but it is re-cycling its set tops to keep up with demand on new capabilities like DOCSS 3.0, switched digital and the addition of multi-room DVR.
Most cellcos we have spoken to say they are still expecting to gain customers, and will continue investment on networks until the recession really bites and then look at it again.
One anecdote is that the Far East foundries for chips have a shorter order book and are offering shorter lead times for orders, but this can still be true without directly affecting our core markets. No major pricing softness has been witnessed here just order flexibility.
Some of those suppliers which do not have very much US business express some skepticism about whether there will be a widespread recession outside the US, but while most agree the effects of the recession are already expanding, they haven’t got the concerns right now, and have no real feel for how bad it will be, and no clues running through their business.
One supplier said that there had been some payment delays but nothing else as finance directors try to build internal cash mountains. He reported no orders or projects being cancelled.
More evidence arrived with more company results from this week. Comcast reported numbers that were more or less in line with Wall Street expectations. Revenue was fractionally off and profitability had been hurt by extra work needed due to hurricanes, but there were mostly no real surprises.
Although Comcast rarely adds brand new customers which add to the total homes signed up, it is expected to sell its existing homes extra services and terms each service per home as a Revenue Generating Unit (RGU). Comcast added only 1.13 million around 180,000 less than Wall Street had estimated.
The slightly lower numbers are 50% taken care of by weaker fixed VoIP line additions than expected, but that’s just AT&T and Verizon fighting back, not the recession. If it was recession, then more would be signing up because they are cheaper. The addition of broadband lines was more or less in line with past performance. The rest of the weakness probably is recession related, which is big chunk of customers deferring upgrades to digital cable from basic analog cable. But it can hardly be considered recessionary when revenues grew 7.1% to $8.1 billion on the quarter.
Take another company, even more dependent upon capital spending, Arris, which this week reported revenues up 17% to $297.6 million, although it said that acquiring C-Cor, itself reliant on mostly cable based VoD equipment, made most of the difference. The company does admit that order backlog is down to around 70% of last year, but that can just be the cable community being cautious and its pipeline may recover.
In Europe there was the same outcome for Viasat numbers and new signups on track, despite softness it perceived in the satellite market and US chip maker Zoran reported sales more or less flat with last quarter and down on this time last year, but explains that this is because some of its revenues are reliant on the software CE markets, but that the digital TV product lines were up 22% for the quarter.
There is undoubtedly a credit crunch and a cash squeeze which is serious in some countries, and easily manageable in others. This is likely to lead to a slow drift into global recession which may continue even after money supply issues become resolved by government intervention. But the high growth areas of entertainment services, wireless and broadband networks won’t in themselves become recessionary, even if growth slows. At least not according the industry itself.