FOOL ON THE HILL: An Investment Opinion
With data requirements continuing to increase at 1000% per year, the alleged "bandwidth glut" seems to be fantasy. But in some regions broadband access is either unavailable or prohibitively expensive with wireline technologies. Enter Adaptive Broadband and its fixed wireless solutions. The company has sequential sales growth of 106%, elegant wireless Internet technology, and lighting-fast throughput compared to DSL. This one could be a contender.
There are a number of approaches to solve the last mile bandwidth deficit. Adaptive Broadband (Nasdaq: ADAP) produces equipment that promises a low-cost, high-throughput solution that has attracted increased attention from infrastructure companies, incumbent local exchange carriers (ILECs), competitive local exchange carriers (CLECs), and Internet service providers (ISPs), which generally lack the distribution network to end users. Adaptive Broadband is one of the emerging leaders of "fixed wireless" broadband products, a technology that is quickly gaining credence and business momentum for its ability to provide high-speed data services to a much wider market than is otherwise practical.
Adaptive Broadband's signature products are the AB-Access family, point-to-multipoint two-way broadband wireless solutions. There are a number of reasons that this technology is going to be very attractive to service providers. It is not tied to a wireline infrastructure, which means that deployment of Adaptive Broadband equipment will prove quicker and cheaper to build and operate. And with xDSL technology, the most prevalent telecommunications service provider wireline solution to non-commercial customers, there are several limitations. First and foremost is that of proximity: an xDSL subscriber cannot be more than two miles away from a central office, a threshold that is not too difficult in densely inhabited areas, but not in areas that are more sparse. And the cable plant needed for DSL is expensive to install and operate.
Finally, DSL is dependent on the quality of the local loop, which varies greatly in certain regions, and much more so internationally. Plus wireless offers throughput of up to 25 Mbps (with plans to increase this to a horse-choking 100 Mbp), sufficient for videoconferencing and streaming video applications. For its part, xDSL runs only as high as 7.1 Mbps, and suffers from slower upstream than downstream flow. Wireless is cheaper for the customers, requires significantly lower infrastructure costs, and has the added benefit of providing the highest data throughput of any point-to-multipoint medium.
One interesting element about Adaptive Broadband's product mix is that it provides some advantages even over other wireless services. AB-Access technology ranges from 2 to 42GHz, but its first releases are in unlicensed frequency bands -- called the U-NII (unlicensed national information infrastructure) in the U.S. -- at 5GHz, and 2.5GHz multichannel multipoint distribution service (MMDS) bands. This means that there is no FCC filing requirement nor is there an expense associated with reserving spectrum. On the other hand, being unlicensed also means that interference is much more likely than it is at licensed frequency bands. Adaptive Broadband's time division duplexing (TDD) technology solves much of this problem by allocating "spectrum on demand." The company expects to offer products for global LMDS (local multipoint distribution service, 24 to 42GHz) and 3.5GHz European bands later this year.
What makes Adaptive Broadband's technology attractive to ISPs is its sophisticated subscriber management features, which allow new customers to be brought online almost instantaneously. Further, this management system allows for advanced pricing and allocation regimes. For example, if a user knows that the highest throughput he or she would ever need is 500 Kbps, then the service level can be priced accordingly, and changed remotely should the need arise. Service providers can then offer flexible pricing based on time of day, throughput maximums, and other considerations that would allow the customers to have customized tariffs and allow the ISP to smooth out its load by offering incentives for non-peak usage of the network.
Fiber optics is the only medium that can provide more throughput speed than wireless, but there are some drawbacks, not the least of which is the fact that fiber is so expensive to lay -- approaching $250,000 per mile -- making it uneconomic for distribution purposes to anything but the densest data users. In the U.S. and other developed countries, we have significant fiber backbone deployments, but in less developed countries the amount of wireline infrastructure is inadequate even for simple voice applications, much less more data-intensive applications. For this reason, Adaptive Broadband's CFO, Donna Birks, expects "the wireless broadband industry to exceed $100 billion in aggregate over the next 10 years."
Brett Welborn points out in his report, Fixed Wireless Internet, that "even in [many] countries that have the infrastructure in place to support Internet access, exorbitant cost structures remain." So clearly, if the technology works, it's fast, it's cheap, and it's reliable, wireless Internet access may become prevalent not only in the areas where it is the only practical solution on a high broadband basis, but also may be quite competitive in areas where DSL and cable are also available.
And this is what Adaptive Broadband is seeking to address. The company has been around for a while. Previously named California Microwave, it provided radios and electronics to the military. But earlier this year Adaptive jettisoned its other, slower product lines to concentrate on wireless Internet. Its sales growth has been sharp, with its last four quarters having been $1 million, $2 million, $8 million, and $17 million sequentially. More importantly, or impressively, Adaptive Broadband has a booked sales backlog of more than $1.2 billion of its AB-Access products. In the past year, such U.S. companies as U S West, now Qwest Communications (NYSE: Q), and privately held Fuzion Communications have purchased and/or tested Adaptive Broadband products.
There are plenty of other proponents in this arena, most well-known is likely to be Metricom (Nasdaq: MCOM), which also uses a narrow band of unlicensed spectrum to provide 128 Kbps service to any end user within range of its microcells. But Metricom's technology and Adaptive's technology address two separate markets.
To meet its manufacturing volume requirements, Adaptive Broadband has outsourced to Solectron (NYSE: SLR) to meet the already billion-dollar level of orders on its plate. The company has announced that it expects to move into cash flow profitability in fiscal 2001. To this end, along with its rates of growth (106% from the previous quarter), Adaptive Broadband is seeing a nominal increase in its gross profits, and continues to ramp up its research and development efforts.
The biggest risk to Adaptive Broadband's growth? There is always the proverbial "execution risk," though to date its TDD strategy has kept it well ahead of the innovation curve. Also, Adaptive may end up with significant competition in this area, not least of which from its potential customers, which may choose to self-provide customized solutions. Still, the addressable market for wireless Internet is enormous, and Adaptive Broadband is well-positioned to grab a big share of it.
What is your impression of the wireless Internet? Does Adaptive Broadband have the sauce to be a dominant power? Come share on the Fool on the Hill or the Adaptive Broadband Discussion Boards.