Symmetricom, Inc. (SYMM)
To communicate the thesis, I will first briefly step through the value proposition (as I understand it) of a timekeeping solutions business like SYMM and then highlight where end-market inflection points and current business restructuring support my investment thesis.
In general, a company like SYMM exists to satisfy three fundamental imperatives:
Universal time standards haven’t changed much (or they’ve always been an illusion if you follow theories of relativity), but the demands for accuracy and cross-compatibility are at a critical juncture. The major sea change in standard is coming in the form of the Precision Timing Protocol (or PTP) as originally defined in the IEEE 1588v2 standard, a protocol necessary for transitioning mobile networks from a TDM/Voice (2G/3G) framework to an IP-based (4G/LTE) framework. 4G/LTE may seem relatively penetrated today (at least in the US), but the Ethernet backhaul necessary to sustain this infrastructure still lags significantly and most of the world is still not on 4G/LTE. Moreover, small cell stations are on rapid pace to grow out of the high demand for mobile data, and will represent incremental supply to this new packet-based infrastructure. SYMM is a global leader in packet-based synchronization solutions through its PackeTime suite of products and has established partnerships with the likes of Broadcom and Cavium (to name a few) that it expects to leverage in building out this book of business.
When not near a computer, or a watch/clock, we generally rely on GPS to keep time and positional awareness. GPS may be a commonplace standard of timekeeping, but it doesn’t extend to the deep seas (for, say, marine exploration or offshore drilling), or to remote or hostile reaches of the planet (for example, you can’t use GPS to communicate with fellow soldiers while jamming an enemy’s IED). SYMM was first to market in mid-2011 with its line of chip-scale atomic clocks (CSACs), a commercially viable and patented model of a product invented by DARPA (the Defense Advanced Research Projects Agency) in the mid-2000s. The current status quo for deep-sea and military applications are OCXOs, oven-controlled crystal oscillators, which keep quartz crystals in high-precision clocks isothermal under extreme conditions/temperatures that might disrupt the frequency and accuracy of the devices. SYMM offers both OCXOs and CSACs, but is leveraging the strong growth in offshore E&P (exploration and production) drilling to market the latter, which uses 10 to 30x less power, provides greater accuracy, and lasts considerably longer by virtue of being a miniature atomic clock.
Together, PackeTime and CSAC largely define the “New SYMM” and represent about 40% of current revenue. PackeTime is the theoretical successor to SYMM’s Traditional Sync business that served wireline infrastructure when it was still being built out with the older and less accurate NTP time standard. In general, both successor and predecessor are 50% gross margin books and encapsulate much of the Communications segment. CSAC is a lower-gross margin business (35%) than SYMM has seen historically in its Government and Enterprise segment (45%), but it is growing pretty well and offset a little bit of the bloodshed from sequester cuts. The order book is still lumpy and lacks visibility because it is a nascent technology that is primarily consumed by E&P companies whose offshore drilling patterns have more recently been volatile (like BP Horizon) and/or still tied to OCXO. As detailed in the markets overview, I provide support for a base case whereby Ethernet backhaul/small cell and offshore drilling markets grow by 20% to 25% a year for the next few years.
The Market Realist Take
In fiscal 2013, Symmetricom launched several systems and embedded products to meet the evolving needs of Carrier Ethernet, 3G, and LTE networks. These include the Edge Master family of products, such as its TimeProvider 2700 Grand Master Clock and TimeProvider 2300 Boundary Clock to support packet networks at the network edge. Emerging Small Cell deployments will take advantage of these industry-leading synchronization solutions.
In fiscal 2013, it also added a Small Cells category to its SyncWorld Ecosystem Program. This category includes Qualcomm Atheros, Cavium, Broadcom, Mindspeed, Node H, Rakon, and Alcatel Lucent. Symmetricom’s SoftClocks were integrated into Small Cell platforms from Contela, CS Corporation, SK Telesys, and Qucell.
It also enhanced the SSU 2000 platform by adding support for GLONASS Satellite Navigation System to meet customer demand in parts of Europe and Asia Pacific.