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Equity research: Symmetricom, Inc.

Part 3
Equity research: Symmetricom, Inc. (Part 3 of 7)

Symmetricom analysis: Stock opportunity and technology changes

Symmetricom, Inc. (SYMM): A case for PTP (IEEE 1588v2) implementation

There are presently about 302 thousand (as per CTIA, the Wireless Association) mobile cell sites in the United States. More of these towers are beginning to support 4G/LTE speeds, but the infrastructure that can support these speeds for current levels of penetration lags the access (user) portion of the networks. This infrastructure is known as backhaul (it connects the cell sites to the core networks of the carriers), and it needs to be upgraded to de-bottleneck both subscriber growth and profitability challenges to this new paradigm of mobile data speed. The upgrade requires a switch or hybrid convergence between time-division multiplexing (or TDM) architecture, in which voice and data are transmitted separately over fixed time sequences, to a packet-based (Ethernet) topology where bandwidth supports sending both signals simultaneously. When updating the backhaul, carriers will need to utilize new protocols for synchronizing signals and time across their networks. This is where PTP (and in turn SYMM) comes in.

Symmetricom Base Case Annual FinancialsEnlarge Graph

Through 2010, Heavy Reading estimated that only 6% of the global cell tower base had upgraded its backhaul, with the US being a laggard in testing new Ethernet backhaul. By 2015, Ethernet backhaul penetration is expected to be 75% as 4G/LTE becomes commonplace. There are several protocols that can be implemented to synchronize packet-based networks, but PTP is the clear gold standard in terms of versatility, accuracy and compatibility. To understand why, I encourage you to read any or all of the following.

  • “IEEE 1588 timing for Mobile Backhaul: The Road to ‘Plug & Play;” June 2011; Heavy Reading
  • Wikipedia page on Precision Time Protocol
  • “Synchronous Ethernet and IEEE 1588v2 Technology;” October 2012; Huawei

Infrastructure changes

I will just say that PTP terminology sounds a lot like a chess game, rightfully so because the advantages are themselves rooted in the strategy of placing clocks with different “moves” (such as grandmaster clocks that are absolute time references) at optimal points on a data network.

At the time of 2011 publication, Heavy Reading had estimated 1.2 million global cell sites would utilize PTP backhaul architecture in 2015—roughly 43% of the new Ethernet backhaul base. This reflects both the switch in backhaul topology on existing cell stations and the addition of new cell stations to meet increased mobile data demand. New cell site supply is a reflection of mobile data demand that is expected to grow at a 75% CAGR (compound annual growth rate) through 2016, and which will otherwise overwhelm current site capacity without the addition of new cell towers or provision of additional spectrum. However, the next big spectrum auction is not until 2015, with the FCC (Federal Communications Commission) only providing a 20% bump every five years. Therefore more towers that will be on a PTP-based backhaul are most certainly on their way.

In addition, small cell stations need to be provided as a complementary piece of infrastructure to cover drop-spots over short ranges and high bandwidth use in dense urban and public areas. Informa Telecoms & Media estimates that small cell units will grow from about 11 thousand today to 92 thousand (+74% CAGR) by the end of 2016. More importantly, the market size is estimated to be $22 billion, with 73% of that coming from but a small volume of small cells on Ethernet backhaul covering the public access (hotspots).

Opportunity ahead

So that leaves a credible market opportunity for a company that is the largest supplier of PTP synchronization clocks. I estimate PackeTime business will grow +25% annually through 2016/2017. I don’t foresee SYMM losing meaningful market share, as it is already penetrated in early PTP adoption and its partnership network is diffuse through both the traditional cell site and small cell parts of the backhaul architecture.

Another nascent end-market of packet-based sync technology is in the power/utilities space. The emergence of smart grids that are PTP-integrated has given SYMM some optimism to capitalize on its SyncServer suite of solutions. This business is still a small component of the PTP book, but will necessarily need to follow suit as Internet standards achieve critical mass conversion.

Traditional Sync still dominates SYMM’s book today as evidenced by sequential declines of (4%) and (17%) in communications revenue during the first half of FY’13. FQ3 saw a 14% recovery due in part to PackeTime orders, but FQ4 is likely be down again at about (6%). Annually, the segment is expected to be down (13%) y/y as the old book decelerates before mobile operators begin cutting checks for new backhaul synchronization.

The Market Realist Take

During its 4Q 2013 conference call, the company said its communications business remains attractive, as it has a long-standing blue-chip customer and a number of growth opportunities. PackeTime sales performance was below internal expectations, as alternative architectures continually deployed.

Symmetricom believes current macro-economic factors are dynamic and uncertain—and that they are likely to remain so in fiscal 2014. If difficult economic conditions continue or markedly worsen, or if there are reductions in government or defense spending or further reductions in wireline modernization spending, its customers may delay or reduce capital expenditures. Among other things, these factors could result in reductions in sales of its products, longer sales cycles, difficulties in collecting accounts receivable, additional excess and obsolete inventory, gross margin deterioration, slower adoption of new technologies, increased price competition, and supplier difficulties.

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