Investment in telecoms kit and new technology is notorious for its uncertainty and so, after a spell of relative stability, testing kit supplier Spirent (SPT) is once again thrust into more stormy trading waters. In a brief trading update today the Crawley-based company spelled out that 'trading conditions softened in the latter part of the third quarter in the United States and China,' says the company, with blockages in the orders pipeline largely to blame.

That sounds like bad new straight off. Last year Spirent earned 88% of its revenues from the US and across the Far East. No wonder the shares have collapsed, down 19% at 79.6p, swiping £120 million off the market value.

On the face of its a narrow third quarter miss to $110 million expectations (probably about flat to last year's $108 million then) doesn't look bad. But it gets worse.

'It is anticipated that the weakened market conditions, affecting primarily the Networks and Applications business, are expected to persist through the fourth quarter,' the company adds. Spirent now anticipates revenues to be in the range of $120 million to $125 million, compared to $115 million in 2013's fourth quarter.

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Analysts have crunched the numbers and the news is not good, 'with what appears to be a 20% profit downgrade,' calculates Investec.

'Based on consensus estimates the net impact on the full year result will be around $24 million,' echoes IT and communications consultancy, Megabuyte. The shares have opened down 16% this morning to 82.6p.

China was always a risk this year in being a key driver of growth (through the likes of Huawei),' explains Investec, which believes that AT&T (T:NYSE) is probably the large customer tangled up in M&A.

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'The weakening of the demand environment is disappointing, given Spirent’s progress in shifting focus and increasing investment in areas with higher potential to deliver both growth and margin improvements,' say N+1 Singer's analysts. Unfortunately, much of the slowdown has come in areas where Spirent has been spending heaviest on R&D, such as Software Defined Networking (SDN) (allows networks to be controlled with lower level functionality) and Network Functions Virtualisation (NFV), which uses hybrid IT systems to connect networks.

'The timing of this downgrade is unhelpful as the strategic plan to revitalise the business has been well underway for some time, inclusive of a one-off step change upwards of $33 million in additional operating expenditure,' says Investec. The investment bank's analysts even call into question the 'credibility of the new strategy and investment plan.'

N+1 Singer concludes that 'we believe that Spirent is in the process of improving its positioning to be able to deliver market leading solutions as demand returns,' but it may be that the only real hope for the share price in the near-term is the hope of takeover speculation.

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Issue Date: 07 Oct 2014