Cisco Systems Inc. announced 6,000 layoffs Thursday after issuing a quarterly report showing tepid growth. The company's struggles, shared by the entire telecommunications equipment industry, appears inexplicable at first in light of the rapid growth of mobile communications traffic.
I need to make two disclosures at this point. One, I'm already personally invested in the sector. Two, the company I bought, Juniper Networks Inc., is by a wide margin the worst investment I've made in the past decade.
But the growth story in the communications industry remains remarkably compelling, which is why I haven't bitten the bullet and sold my Juniper stock. According to Cisco's widely-read Global Mobile Data Traffic Forecast Update, 2013 saw mobile data traffic increase 81 per cent in year over year terms. The report noted that mobile traffic last year was 18 times the size of the entire global Internet in the year 2000.
Global Mobile Data Traffic (actual and projected)
* = projected
SOURCE: Cisco Global Mobile Data Traffic Forecast
This growth is forecast to continue. The average annual compound growth rate of mobile data traffic is forecast at 61 per cent until 2018, driven by an expected 800 per cent increase in the number of wearable devices and the proliferation of network-hogging 4G devices.
The issue for equipment companies like Cisco and Juniper is that, to date, equipment-related spending by telecom services providers like AT&T Inc., Vodafone Group PLC and Rogers Communications Inc. has been growing at much slower rates than data traffic.
Between 2009 and 2013, equipment spending by providers rose by an average 5.6 per cent pace while mobile traffic climbed by an average 105 per cent per year.
A report by U.S. – based Telecommunication Industry Association however, suggests the tide is turning and that telecom providers are ramping up spending to maintain current levels of service. The report notes:
"Growing consumer demand for data led to a double-digit increase in spending on wireless telecommunications equipment last year, as carriers rolled out long term evolution (LTE) networks. Meanwhile, specialized services that rely on, and protect, data – including cloud services, machine-to-machine communications (M2M) and cybersecurity – all saw large spending gains in 2013. In fact, spending on cybersecurity grew faster in 2013 than in any recent year, and has shown significant increases in each of the last three years."
The rise in industry spending and undeniable growth in mobile telephony are reasons for investors to hope that Cisco's struggles will be short-lived. At this point, Royal Bank of Canada analyst Mark Sue has an "outperform" rating on the stock, writing that the company "has levers to provide a pathway to earnings growth" and that he views Cisco as "a relative safe haven."
I've been wrongly invested in the telecommunications equipment sector for years, even committing the cardinal sin of averaging down. But I continue to believe that the rapid growth of mobile data traffic across the globe will create a bright future for the industry.
Follow Scott Barlow on Twitter at @SBarlow_ROB.