Spirent on an upward spiral

Telecommunications has become a business of near-constant technological change. Networks are constantly evolving, driven by a growing need for higher speeds and higher capacities in order to cope with the ever-increasing volumes of data generated in the digital age. The increasing popularity of services like facebook, BBC's iPlayer or Apple's iPhone applications, has put intense pressure on operators to increase bandwidth.

But technology investment is an expensive business and, despite burgeoning bandwidth demand, operators have curtailed capital expenditure in the wake of the credit crunch. That's proved bad news for Spirent, which supplies testing services to equipment vendors designing new kit, and operators looking to integrate the latest technology into their networks. As Spirent points out, they've been trying to squeeze more out of existing investments in test technology.

Despite suffering from a collapse in industry spending, there has at least been a silver lining for Spirent. Its own trading may have deteriorated, but its competitors - such as Agilent and Ixia - have fared worse, enabling it to pick-up market share during the downturn. Agilent, for example, saw comparable revenues slip 48 per cent in 2009's second quarter, against a 13 per cent decline at Spirent. 

Spirent's management puts this down to the launch of a number of new products. It has continued to invest heavily in research & development, increasing its budget 17 per cent to £25.1m at its half year, equivalent to 18 per cent of sales - enabling it to roll out new products.

And, with a product suite that's well aligned to market needs, Spirent is primed for growth as the telecoms industry recovers. Analysts believe capital expenditure has now passed the trough, and that there's likely to be several years of sustained investment as operators roll out networks to satisfy demand for high-speed data on the move. Operators can't delay network upgrades indefinitely, and spending that was put on hold in the first half is now expected to flow through into the second half. As broker Numis Securities points out, Spirent's strongest ever growth previously came in the first year of recovery after 2003's downturn, when underlying sales climbed 31 per cent.

Nowhere is the consumer demand for the mobile internet more apparent than in the development of handsets. Smartphone sales have continued to rise even as overall handset volumes have slipped, thanks to the popularity of devices such as Apple's iPhone and Palm's Pre. Google, too, has entered the handset arena with its Android operating system, and several new manufacturers are said to be planning devices based on the software.

This proliferation of high-end technology is particularly good news for Spirent, as it offers testing products and services that make sure these devices work in the real world. It works with both handset vendors and network operators and, with a staggering array of models to test across differently configured networks based on a variety of standards, there's likely to be no shortage of work in the future.

Spirent is the market leader in testing for third-generation standards including UMTS and CDMA EV-DO, being used by China Telecom. It's also set to launch a fourth-generation (4G) device testing solution, based on the so called LTE standard (Long Term Evolution) and will be working closely with US operator Verizon which has plans to launch the world's first 4G service. The company is also enjoying success in non-mobile technologies, in particular its solutions for Ethernet networks, which are evolving into the new standard for very high speed fixed line data networks.

Of course, as the telecoms industry shifts towards new standards, demand for those legacy products that Spirent sells will inevitably weaken, sometimes before revenues from new technologies have hit critical mass. That was partly behind the 10 per cent fall in first-half sales (at constant currency) seen in its communications business, and chief executive Bill Burns thinks that, although the worst is over, recovery could be muted. But cash generation remains strong - it generated free cash flow of £27.1m in the first half, and Numis expects the cash pile to hit £102m by the year-end.