CSFB News on Japan
Japan to Accelerate Shift
to VoIP
• Investment Thesis. We believe that the migration by communication service providers from circuit to packet (IP) voice infrastructure will drive significant growth in Sonus's operating profitability over the intermediate
to long-term investment horizon. We view the migration by service providers to VoIP as a long-term, secular trend that is just emerging from its nascent stage of development. Further, this shift from circuit to packet
voice infrastructure represents one of a handful of sustainable, significant technology product cycles within the communications infrastructure industry.
• Japan government pushes for VoIP adoption. As first noted by
CSFB's Asia Pacific Research Team, the July 20th edition of Nikkei Communication, a Japanese industry trade publication, reports that Japan's Ministry of Internal Affairs and Communications (MIC) is in talks to form an industry trade group on Voice over IP by the end of calendar
2005, with the goal of pushing for the full deployment of VoIP
infrastructure throughout Japan over the next several years. The article specifically sited MIC as stating that the "u-Japan initiative includes plans to implement VoIP toward year 2010…", although the article also noted that "Some news media sited MIC's intent to ask carriers to be VoIP
compliant by 2007." Announced by MIC in December 2004, the "u-
Japan" initiative has a stated goal of achieving "a ubiquitous
network society'(u-Japan) in which `anything and anyone' can easily access networks and freely transmit information `from anywhere at any time' by 2010." While not specified in the Nikkei Communication article, CSFB's Asia Pacific Research Team estimates that such an initiative, if completed by the earlier 2007 date, would require the allocation of approximately $3.6-4.5 billion towards the deployment of IP
infrastructure within the 2006-2007 timeframe.
• Implications for comm infrastructure suppliers. Assuming the Nikkei Communication article is accurate, such an initiative would support our view of the strong market opportunity for suppliers of communications
infrastructure that enables enterprises and service providers to migrate to converged IP infrastructures. Specific suppliers in our coverage universe that could benefit from the sited prospective initiative include Sonus for
carrier class softswitches and media gateways, Cisco and Juniper for IP routing, and UT Starcom for IP-based broadband access equipment. According to a white paper issued by MIC at the end of 2004, 12.7% of Japanese households had adopted VoIP phones (up from 7.3% at the end of 2003), 43% of enterprise WAN trunk systems used IP VPN or
public Internet VPN technology, and 18.7 million households had adopted broadband access technology.
Investment Summary
Sonus most prominent potential beneficiary. Sonus is the most
prominent likely beneficiary of any such major VoIP initiative in Japan. Sonus has a strong market
presence in Japan, with its current service provider customers
including NTT, KDDI, and Yahoo!BB, among others. Given the prominence of these service providers in the
communications market in Japan, we believe that any such Japanese government initiative would lead these companies to meaningfully increase their spending on VoIP
infrastructure, with some if not all of any such increase going to Sonus. Given the prospective size of such a Japanese government-sponsored initiative relative to Sonus's
current revenue run rate, we also believe that this initiative could result in substantial upside to our long-term revenue and earnings forecasts for Sonus.
Other stocks to benefit: CSCO, JNPR, and UTSI. Other prospective beneficiaries of such an initiative include Cisco and Juniper, which dominate the carrier IP routing
market. In addition, Cisco is the leading supplier of enterprise IP routers and switches and has established itself as one of the leading suppliers of VoIP PBXs and handsets in
the enterprise market. Cisco and Juniper are well-positioned to benefit from the secular migration of service providers to converged voice and data IP MPLS infrastructure while
Cisco is also well-positioned to benefit and are well-positioned to benefit from the secular migration of enterprises to collapsed voice and data IP-based infrastructure. UT Starcom, which is the leading supplier of IP-based broadband access equipment to Japan Telecom and Yahoo!BB, also stands to potentially benefit from
any such initiative.
IP equipment market. Beyond the direct impact for those IP
communication equipment suppliers to the Japanese market, such an initiative would bolster our confidence
regarding the intermediate to long-term opportunity for suppliers of IP communications equipment in general presented by the ongoing migration of service providers and
enterprises to IP from legacy circuit switched infrastructure. |
