Spirent Communicaton's telecoms customers cutback on investment

Tightening economic conditions have forced Spirent Communications’ (SPT) customers to pull back on spending in the second half of 2022. Spirent's order intake for the year dropped 2 per cent to $623mn (£519mn) and management now expects revenue for the current year to drop.  

When economic conditions tighten, telecommunications companies cut back on spending which means less demand for Spirent’s testing and assurance services. In the lifecycle service assurance business, revenue increased 1.1 per cent for the full year. However, this growth was weighted to the first half and “customer purchasing decision delays in the latter part of the year” meant adjusted operating profit was down 19.2 per cent to $51mn.

Networks and security fared better as it as not as closely linked to telecoms companies’ investment decisions. Adjusted operating profit increased 36.7 per cent to $86.8mn and a “refreshed portfolio” allowed Spirent to take market share.

Concerns that Spirent’s drop-off is something more sinister than just the economic cycle is relieved by a glance at rival Keysight Technologies (US:KEYS). In the first quarter of the year, Keysight’s orders fell 13 per cent and yet its share price is down just 6 per cent for the year compared with Spirent’s 30 per cent drop. Keysight still trades on a FactSet consensus forward price/earning ratio of 20 compared with just 14 at Spirent.   

Spirent’s free cash flow increased 12.9 per cent to $104mn which, on revenue of $607mn, shows it is doing a good job of turning its work into dollars. We still think the structural growth trends of 5G investment will drive the business forward and 2023 will just be a temporary blip in a share price graph that has been moving up and to the right for the most part. Buy.

Last IC View: Buy, 277p, 4 Aug 2022