Vendor chatter for RDOF heats up on earnings calls; service providers are mum

While carriers were tight-lipped about their RDOF prospects during the recent round of earnings reports, vendors talked openly about their opportunities.   

With the first phase of the Rural Digital Opportunity Fund (RDOF) reverse auction kicking off on Oct. 29, service providers of various stripes are currently in a quiet phase. RDOF represents a $20 billion, 10-year opportunity for service providers and their vendor partners to build and connect faster broadband speeds in rural and unserved areas across the U.S.

The first phase of the RDOF is targeting census blocks that are wholly unserved with fixed broadband at speeds of at least 25 Mbps down and 3 Mbps up. The first phase will dole out  $16 billion to census blocks where existing data shows there is no such service available whatsoever, according to the Federal Communications Commission (FCC). The FCC staff has estimated there are about six million rural homes and businesses located in areas initially eligible for bidding in the Phase I auction.

Phase II of the program will make available at least $4.4 billion to target partially served areas, including census blocks where some locations lack access to 25/3 Mbps broadband speeds.

While the reverse auction will run until the bidding stops, vendors are seeing piles of money in the not-too-distant future.

While all-fiber is obviously the fastest, best option for reaching rural areas, it's costly. There are also fiber-fed copper access options on the table, but fixed wireless may emerge as a winning formula for bidders such as Windstream and Verizon. The FCC has also said it will prioritize networks with higher speeds, greater usage allowances, and lower latency for RDOF.

Last month, the FCC announced its list of 386 companies that have qualified to bid in the first auction for RDOF. The FCC said the number of qualified bidders represented a more than 75% increase in the number of bidders than were in 2018’s Connect America Fund Phase II auction.

RELATED: FCC announces 386 bidders made the grade for first RDOF auction

The Connect America Fund (CAF) II was also an FCC program, but it was weighted towards large incumbents such as Lumen (formerly CenturyLink), Verizon and AT&T. RDOF will provide about 24% more money than the CAF II program, but the FCC designed the program to include independent broadband providers, such as rural electric co-ops.

The qualified bidders included Altice USA, Cincinnati Bell, Charter, Cox Communications, Frontier Communications, Hughes Network Systems, Mediacom, SpaceX, US Cellular, Viasat, Verizon, Windstream and Lumen.

"There are 386 qualified bidders that represent over 700 operators, whereas the Connect America Fund was targeted to the large price cap carriers providing a first right of use," Adtran CEO Tom Stanton said on his company's earnings call, according to a Seeking Alpha transcript. "The RDOF subsidies provide an opportunity for rural, local exchange carriers and community broadband providers, such as rural electric follow-ups, to receive 10 years of funding. We expect to see RDOF funding to begin to positively impact our revenue beginning in the mid-2021 timeframe.

"RDOF will start around the turn of the second half (of 2021), but really for it to be material, it’s going to take some time. I don’t see that as a huge kind of wave of things coming in the second half of next year. I think it just starts and starts to ramp up from there."

Calix CEO Carl Russo said on his earnings call that he didn't see anything in the near term that would cause his company to change its RDOF-based guidance. Russo said while there will be an uptick in RDOF activity next year, but "it's a 2022 event."

Also on a recent earnings call, CommScope CFO Alexander Pease said his company was in the process of making a number of investments in its facilities to expand capacity to deliver on the RDOF demand. While there are numerous vendors gearing up to compete for RDOF contracts, Pease said he expected CommScope to have a meaningful slice of it.

With RDOF having a 10-year run rate across a diverse range of communities, opportunities vary for each vendor.

"It is a large opportunity that really is not just in fixed-line access, it's in all sorts of access," said CommScope CTO Morgan Kurk, according to a Seeking Alpha transcript. "The way the government is sending out this money depends on number of users that you're actually going to cover. And so, various different geographies and various different populations will require various different pieces of coverage. It will impact virtually all of CommScope's product lines as our various customers compete in this area.

"I can't quantify it specifically, but a significant portion of the $20 billion will go into installation and a significant portion will go into the types of equipment we make, and some of it will go into types of equipment that we don't make."

Kurk compared RDOF to AT&T's government-awarded FirstNet program due to the funds being directed into a program for broadband networks that that wouldn't ordinarily be built.

Handicapping the RDOF field

While vendors such as CommScope, Calix and Adtran are well-positioned for RDOF contracts due to their end-to-end portfolios and previous work with Tier 2 and Tier 3 service providers, other niche companies will benefit as well.

"One supplier I do think will see some incremental revenue from this is Clearfield, as most of these projects will be conversions from DSL to FTTH or expansions of FTTH projects," said Jeff Heynen, vice president, broadband access and home networking at Dell'Oro Group. "That will benefit Clearfield, as they provide enclosures, fiber huts and other ODN equipment. Calix has the most exposure to the Tier 3 operators and co-ops that are likely to receive the most funding for these fiber build-outs. Adtran would be next, followed by DZS, Nokia, and CommScope.

 "I’m sure that there will be some incremental revenue growth for each of these suppliers, but it will be hard to notice as these projects will be gradually deployed over the course of multiple years. Just think back to how long it took for CAF and CAF II projects to be approved, designed, and then built out."