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Backhaul Market Likely to Be Sweet Spot for Tech Investors


Consider these companies and your risk profile because the demand for bandwidth continues to grow.

The markets have been selling off technology stocks like they have the swine flu. Sure, they've had a huge run in 2009 but we may be seeing investors question the nascent recovery. There's no doubt that falling stock prices have created some opportunities for the brave and one area that I know is going to be attractive in 2010 is backhaul.

I'm certain that many of you have your own war stories associated with accessing data on a smartphone using your wireless carrier's network. If you haven't had the pleasure yet, I'm sure you know someone who has. Despite the "battle of the coverage maps" inundating TV commercial time-outs, the coverage is generally not the problem.

The gaiting factor in most networks today is what's called backhaul, or the network segment that connects each wireless cell tower to the carrier's backbone network. The big problem with today's backhaul only started to become evident with the advent of the iPhone (AAPL) and its very heavy demand for data.

When the majority of today's cellular networks were created the predominant technology being used for backhaul was T-1 lines. It made perfect sense from an investment perspective. They were cheap, readily available, and their capacity (1.5 megabits per second) was more than enough to support voice calls.

The bandwidth allotment for a voice call is a meager 64 kilobits per second, so just one T-1 line could support 24 simultaneous calls. From there a little statistical analysis tells you how many T-1s you should start out a new cell site with and thereafter it's largely based on experience. By some estimates, as much as 80% of the cellular backhaul in the US employs T-1 lines.

While a voice call uses a comparatively small amount of capacity, that's certainly not the case as we begin to use the capacity of 3G wireless networks that measure their throughput in megabits per second. In essence, one cell phone session's demand for resources can be four to five times the capacity of the entire T-1 line. That's what happens when you're using your smartphone to download pictures, graphics, and all types of data.

With rush by all carriers to embrace smartphones and netbooks coupled with the advent of LTE (the 4G cellular technology), there's pressure to improve network throughput and we're starting to see the impact.

At AT&T (T), in its recently reported quarter, management announced that wireless data revenue growth was up 26% year-year. Amazingly, multimedia messages doubled from the year-ago period. What's going to happen to those numbers when the iPad hits the network in a couple of months?

AT&T increased its number of backhaul circuits by 100,000 in 2009, a 300% increase. In 2010, capex is expected to be up 5% to 10% year-year with an emphasis on backhaul. On its recent conference call, management suggested the backhaul circuit increase could be 10 times 2009 levels.

Over at Verizon (VZ) they saw wireless data revenue up 27% in the fourth quarter of 2009. While the company is far less forthcoming about the details of its capital spending plans for 2010, it's clear that wireless spending will increase and backhaul will be a point of emphasis.

Carriers aren't the only ones talking about backhaul spending. Some companies are actually seeing it impact their fundamentals.

(TLAB) is an old name in the wireline equipment market but it's been pushing into new markets given the higher growth opportunities with the mobile Internet. In its recently reported fourth quarter, the company saw an 11% sequential growth in its Data Networking/Backhaul operations. More importantly, management expects that growth to continue into the coming year.

Adtran (ADTN) is another equipment OEM heavily associated with the wireline markets. It too has restructured for new opportunities it sees on the horizon. Adtran provides backhaul equipment for fiber-based solutions and, as you can see in the graph below, business is on fire recently.

These are only two companies in the backhaul market. Others include Ceragon Networks (CRNT), Ciena (CIEN), DragonWave (DRWI), Harris Stratex Networks (AVNW), and others. Start doing your work on some of these names and decide which best fits your risk profile. If there's one thing you can be sure of as an investor, consumers' demand for bandwidth will never go down.
No positions in stocks mentioned.
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