Taiwan-based network device makers including Zyxel Group and Sercomm continue to see telecom customers engaged in inventory adjustments and remain cautious about their operations in the second half of this year, according to company sources.
During an earnings call on August 17, Zyxel Group CEO Gordon Yang stated that after telecom and channel customers pulled orders in the first quarter, they entered a period of inventory adjustments in the second quarter. Yang expects customers' on-hand excess inventory will not finish digesting until the fourth quarter.
Not only are customers facing high inventory levels, but Yang said they are also dealing with high interest rates, which is putting immense pressure on operations for telecom operators with high capital expenditures.
Yang added that customers are being relatively conservative about fees and capital expenditures right now, which is expected to last until the end of 2024. Pull-in momentum is not anticipated to be reignited until interest rates are lowered and opportunities from the US' infrastructure plan heat up.
Sercomm chairman James Wang noted during the company's recent earnings call that its European customers have been adjusting inventories since summer 2022 and are not estimated to begin restocking until fourth-quarter 2023. Customers in North America began adjustments in first-quarter 2023 and will not be finished until the first half of 2024.
While the outlook for the European and North American markets is conservative, growth looks to be strong in emerging markets such as India. Wang estimates that Sercomm will see explosive growth in the Indian market in the second half of this year. Yang said Zyxel expects to see growth in India, Central America, and South America after years of hard work.
According to Yang, revenue from the European market will see either flat or single-digit growth in the next 12 months, while revenue from the US market is expected to remain flat or slightly decline. In the first half of 2023, Zyxel's revenue by region mainly came from Europe at 47%, followed by North America with 28% and emerging markets and Asia Pacific with 25%.
Since the US infrastructure bill was only recently passed, Yang said related projects will not be allocated and started until the end of 2024. Furthermore, since the goal of the plan is to improve the average level of US networks, it will mainly benefit small and mid-sized telecom operators in rural areas, which is the market Zyxel focuses on.
Fiber-optic broadband accounted for as much as 59% of Zyxel's product revenue in first-half 2023, followed by 12% from enterprise networks, 11% from copper broadband, 7% from fixed wireless access (FWA), and 11% from IoT and home network devices.
The period between now and 2024 will be sluggish for broadband networks, according to Yang, citing that telecom operators are generally conservative about sales growth. In terms of projects, the number of new projects started in first-half 2023 was low, only returning to normal recently. Products that have begun to recover include FWA 10G-PON and Wi-Fi 6/6E.
As for Wi-Fi 7, Zyxel subsidiary Zyxel Networks, which focuses on enterprise networks, will launch Wi-Fi 7 commercial wireless base stations by the end of the third quarter. Yang pointed out that the penetration rate of Wi-Fi 7 is estimated to be faster than Wi-Fi 5, but not as good as Wi-Fi 6.
Wi-Fi 7 will start with high-end network products, Yang said. The price of Wi-Fi 7 is expected to fall by the end of 2024. Zyxel will begin designing related products in mid-2024 and start shipping products in the second half of 2024. Yang estimates that the penetration rate will increase rapidly between the end of 2024 and 2025.
Zyxel's second-quarter revenue fell 19.54% sequentially to N$7.13 billion (US$223.15 million), due to customer inventory adjustments and losses from falling inventory prices, but increased 14% on year. The gross margin stayed at 21%, while operating profit reached NT$266 million and net profit after tax was NT$304 million. The cumulative net profit in the first half totaled NT$760 million.
Zyxel expects third-quarter revenue and profit will fall but may recover in the fourth quarter. Revenue for the year is anticipated to be on par with 2022. Profit is also likely to remain flat with 2022 or slightly fall. Looking forward to 2024, even if the industry outlook remains conservative, Zyxel's gross margin could increase.
Article translated by Eifeh Strom
