Will New Strategy Help Spirent Communications Plc Turn The Corner?

Mark Rogers discusses the new strategy at Spirent Communications Plc (LON:SPT).

Mark Rogers

As the Head of The Motley Fool’s UK Investing Team, Mark approaches the stock market with the same old-fashioned business instincts and values that he honed growing up around the family business. An investor for 20 years, Mark specialises in unearthing top-quality under-the-radar investments in the small-cap market. He currently serves as Director of Investing for Motley Fool UK services and Managing Director of Motley Fool UK.

Published 27 February, 2014 11:19 am GMT

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The shares of Spirent (LSE: SPT) continued their recovery on Thursday morning, gaining 4% to reach 112p, after the hardware-testing firm released its annual results. Whisper it, Fools, but that’s a 31% rebound in Spirent’s market value in just seven short weeks.

So, do these results prove that Spirent has turned the corner, or is this just a brief respite for investors?

Well, it’s been obvious for a while that 2013 was a turbulent year for Spirent. Bill Burns stepped down as CEO in September, competition intensified in the data centre market, Spirent lost market share, and lower orders led to a slump in both sales and profits.

But with the shares 32% lower than they were three years ago, the market is already well aware of the difficulties facing Spirent’s core business — the real question is, what are management’s plans to turn Spirent around, and to win back its previous level of profits?

That’s really what investors were looking for in Spirent’s recent results, and new chief executive Eric Hutchinson offered a comprehensive update on the company’s strategy. The following take-away points stood out to me:

Spirent’s traditional customers are under severe pressure, possibly permanently so;
Rapid technological change is disrupting Spirent’s profitable niche in 3G technology;
Spirent blames itself for “historical under investment” in developing new systems;
The company will now focus investment on areas where it holds a leading niche…
… such as Network Testing, new 4G testing opportunities and live network monitoring;
With the primary goal of making Spirent more agile, efficient and more useful to customers.

Emphasis was also placed on reorganising how Spirent’s teams work internally, with a view to unleashing a more innovative, creative approach to solving problems.

On the face of it, Spirent has been a victim of the ever-changing nature of communications technology — but also its own complacency and poor organisation. Spirent might be helpless to avoid the first obstacle, but it seems to be taking firm action to ensure it’s fully-equipped to compete as the market changes.

I’m afraid it remains to be seen whether these initiatives will be enough to one day restore the £115m operating profits Spirent earned in 2011 … but so far, the market seems encouraged by the new strategy.