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ALVR: Looking for signs of more, sooner WiMax

Think Panmure

We believe the "Band-Aid" overlay of data traffic on voice networks is bursting its seams. Indications are that this is steadily occurring today. The beneficiaries of the move to data network architecture will initially be WiMax vendors, including Alvarion. Across the industry, we believe a tipping point is coming to rapidly escalate WiMax deployments. We maintain our revenue and EPS estimates for 2008 at $293M / $0.16, slightly nudging 2009 down from $377M / $0.46 to $369M / $0.42 on somewhat slower non-WiMax business. We maintain our Buy rating while reducing our price target slightly from $11 to $10.

Our WiMax thesis remains that the original business model rests on deploying teledensity in developing countries and attracting would-be xDSL subscribers in developed countries. Perhaps as soon as mid-2009, however, we believe the mobile feature set will become a primary driver of WiMax carriers' business plans. From a strategic perspective, Alvarion will be a primary beneficiary of all improved WiMax momentum, in our view.

While Alvarion's recent results show steady growth in BreezeMax (WiMax) sales, we anticipate a more rapid growth rate over the next several years, potentially starting in 2009. The initial catalyst will be the continued hapless performance of 3G networks as they vainly attempt to support increasingly sophisticated data-centric applications. As 3G subscriber counts grow, the 3G network architectures and designs will become more transparently flawed, in our view.

We believe today's 3G networks are flawed in 2 fundamental ways. First, the 3G networks were designed as data networks on a TDM voice infrastructure. This leads to poor decisions such as using NxT1 backhaul rather than more flexible and lower cost IP backhaul, and the delays and overheads inherent in TDM networking and TDM / IP translations, adding costs and reducing performance.

Second, today's early 3G networks are predominantly designed to maximize coverage, rather than performance. A primary cause of this principal is the relative lack of available bandwidth. The most stark example is the juxtaposition of AT&T's and Verizon's 700 MHz spectrum holdings (up to 24 MHz each, depending on the market) to be used for 4G / LTE service, versus Sprint / Clearwire's 100 – 150 MHz average. With the existing operator's shoe-horning 3G services into existing spectrum (except T-Mobile, which has secured AWS spectrum), AT&T and Verizon have simply not had the spectrum available to offer carrier-grade mobile broadband services to even lightly penetrated service areas, in our view. As a result, they must choose between 4 unattractive alternatives: splitting cells (expensive), higher modulation rates (expensive), limiting penetration rates, and "best efforts" operations. A casual review of iPhone users' complaints makes clear that AT&T has chosen the latter alternative.

Mobile broadband design goals
There are good reasons to build for coverage rather than capacity, and perhaps this is best demonstrated by M2Z Networks' plans to offer a low-cost portable broadband service. With a mid-speed 768kbps free user base, and a low-priced higher speed 2 – 4Mbps option, M2Z will need reasonable coverage, but not great depth given both the price points and lack of mobility; note that mobility implies handoffs, a level of intelligence infrastructure that is more expensive to deploy and maintain. This is a radically different business model than those promulgated by the cellular carriers pitching mobile data.

WiMax on the way, even in the USA
Although the preponderance of commercial WiMax deployments today are outside the US, we are seeing innovative carriers launching services now both inside and outside the US. Current US deployments include AT&T and TDS Metrocom, both using at least some Alvarion infrastructure, as well as DigitalBridge, Nth Air, One Ring, Razzolink, and Xanadoo, according to the WiMax Forum. More importantly, broader deployments are imminent from Clearwire Sprint Xohm, TowerStream, Craig Wireless, NextPhase, and others, based on our research.

The impact of FDD and TDD
There remain obvious spectrum issues surrounding new wireless broadband networks. As the mobile innovators have chosen the now broadly available WiMax technology to deploy in licensed TDD spectrum, the mobile incumbents are almost universally sticking with plans to build out LTE technology in FDD spectrum, subject to spectrum and technology availability.

We note the paucity of FDD spectrum availability - especially in developed markets - and the difficulty in mixing FDD and TDD spectrum, as well as the inherent spectral efficiency of TDD technology for data networks such as 4G. Indeed, we believe these efficiencies are leading China Mobile, in conjunction with Vodafone and Verizon Wireless, to consider the TDD variant of LTE.

We expect TDD or dual platform FDD/TDD equipment to be available no sooner than 1 – 2 years after the initial FDD LTE equipment. The impacts here are not just on the carriers and infrastructure vendors, but also on the CPE companies who will have seen a vibrant, open community in rapid subscriber growth as LTE's FDD / TDD efforts play out. Should the TDD variant continue to gain momentum, we foresee a potential fracturing among LTE adherents, as well as an easier path to WiMax / LTE harmonization in future.

Estimates
Notwithstanding our optimism, our estimates reflect a base case for deployment, and will reflect the tipping point only after the timing is better known. Our new model assumes relatively heavier CPE contribution during the forecast period, although we believe the CPE business eventually migrates to a CE business, likely with some royalty stream to Alvarion. Although this transition should begin in 2010 or so, our new model reduces expectations for non-WiMax sales, resulting is an approximate $8M drop in our revenue estimates. We also view the most likely source of upside to our estimates as coming from heavier and earlier WiMax deployments, either in developed countries or India.

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