Industry Description
The telecommunication networking equipment manufacturing industry in the U.S comprises the production of wired voice and data communication devices such as telephone switching systems, telephones, answering machines, routers, modems, and gateways (NAICS 33421). Over the past decade, the industry’s focus has shifted toward the production of IP-based telecommunications and networking equipment.
The following are some basic characteristics of the telecommunication networking equipment manufacturing industry:
- Telecommunication networking equipment manufacturing industry has a combined revenue of $6.1 billion, with a declining growth rate of 0.4% in 2019-2024
- There are approximately 200 businesses as of 2019
- The telecommunication networking equipment manufacturing industry employs approximately 83,700 people
Industry Trends
The telecommunication networking equipment manufacturing industry is highly fragmented and has low levels of market share concentration. The largest players have numerous locations across the U.S., while small players are typically independently owned and operated in 1-2 states. Some key external factors that influence this industry are (i) households with at least one computer, (ii) broadband connections, and (iii) competition. Each of these is described in further detail below.
The percentage of households with at least one computer in the U.S. continues to increase the industrial demand for various industry products. Around 95% of households in the nation owned a personal computer in 2021. As households continually gain ownership of personal computers their need for industry products increases. The increase in demand for these products will increase consumer spending on such products. This then causes an increase in industry revenue and profitability.
The increased number of broadband connections increases the demand for industry products as individuals use of smartphones and PCs for personal and work uses normalizes. The increased demand for industry products means companies need to manufacture more products to meet the growing market for their products. Around 97% of households in the U.S. had broadband internet connections in 2021. As such, many internet service providers have had to increase their network investments to keep up with the rapidly growing online traffic volume. This means that the industry has many sales opportunities for industry products to consumers.
Intense competition from international brands has led to the industry maintaining low prices, which has led to declining profit margins over the years. The pricing of consumer-oriented gadgets similarly plummeted, further hurting profit margins. However, some larger firms saw higher profit margins since they concentrated on creating high-tech or finished products as well as designing and developing networking equipment. Most manufacturing is outsourced to contract businesses with lower profit margins and more capacity, which lowers production costs per unit. The competition in the industry is positive for consumers because it gives consumers a diverse range of high-end products to purchase and use for their benefit.
The telecommunication networking equipment manufacturing industry in the U.S is influenced by external elements, such as the increased percentage of households with computers, the proliferation of broadband connections, and increased competition abroad. The growing number of households in the U.S. owning computers and the growing number of broadband connections has caused an increased demand for industry products. Additionally, the increased competition in the industry will similarly foster the growth of quality products.
Key Performance Metrics
In evaluating the telecommunication networking equipment manufacturing industry, the following metrics can provide useful information in comparing a subject company to guideline companies and transactions.
- Backlog
- Lead time
- Mean time between failures (MTBF)
- Network reliability
- Product lifecycle
- Research & development (R&D) intensity
Industry Organizations & Publications
The following organizations publish useful information:
- CTIA
- National Educational Telecommunications Association (NETA)
- Telecommunications Industry Association (TIA)
- USTelecom
Guideline Information: Private Purchase Transactions
Most telecommunication networking equipment manufacturing companies are privately owned. While there are publicly traded companies, data regarding the sale of 100% of closely held telecommunication networking equipment manufacturing companies is generally the best source of information to appraise a subject company.
The following are typical appraisal multiples from sale of telecommunication networking equipment manufacturing companies:
- Revenue multiples between 0.3 and 2.0 times
- Gross Profit multiples between 0.8 and 6.7 times
- EBITDA multiples between 13.8 and 40.6 times
In selecting guideline transactions, it is of critical importance to select transactions that are similar to the subject company. Unique factors for any subject company must be considered to yield credible results. Additionally, industry economic conditions also vary over time, which must also be considered.
Guideline Information: Publicly Traded Companies
Most telecommunication networking equipment manufacturing companies are privately owned; however, there are a few that are publicly traded, meaning it is possible to compare a subject company based on industry metrics and appraise using industry multiples. However, as with the guideline transactions described above, it is of critical importance to select publicly traded companies that are similar to the subject company. Also be aware that multiples of certain publicly traded companies may not accurately reflect a subject company.
The four largest publicly traded U.S telecommunication networking equipment manufacturing companies ranked by market capitalization are:
- CIENA Corp. (CIEN) – $7.7 billion market capitalization
- Extreme Networks Inc. (EXTR) – $1.8 billion market capitalization
- Infinera Corp. (INFN) – $1.5 billion market capitalization
- Netgear Inc. (NTGR) – $456.6 million market capitalization
The Price-to-Earnings (P/E) ratios of these four companies range between 13.4 times and 19.6 times.
Appraisal Rules of Thumb
Please note you should never use a Rule of Thumb in place of a professional appraisal. You will never see a competent professional appraiser do their work using a Rule of Thumb. The professional standards that govern professional appraisal practice, which all professional appraisers should follow, specifically prohibit the use of Rules of Thumb.
Telecommunication networking equipment manufacturing companies are businesses sold based on sound economics. These economic considerations can be measured using the key performance indicators described above, but such economics cannot be accurately summarized in these simple formulae.