December 23, 2010
sponsored by PCMI
ISSN 1550-9214         

Telecom Equipment Warranties:

Though the totals are down because of all the industry players that have headed for the exits, those who remain are also cutting their warranty expenses. And claims have never been lower as a percentage of sales.

The makers of telecommunications and data communications equipment aimed at both network operators and end users have never paid out a smaller percentage of their product sales to honor warranty claims than they have in 2010.

Claims paid by some 76 telecom and data communications equipment companies are down by 15% so far in 2010, from a total of $1.09 billion in the first nine months of 2009 to only $924 million so far this year. And this decline comes in spite of the fact that Cisco Systems, the sector's largest warranty provider, showed virtually no change in its claims total from last year to this year.

In Figure 1 below, it's clear that an industry-wide decline is under way. The peak came in early 2006 at a level of $555 million per quarter. The deepest part of the trough actually came this year, at $301 million in the second quarter. That surpassed the 2003 low of $315 million, as well as the $335 million low mark set in 2009.

Figure 1
Telecommunications Equipment
Warranty Claims Paid, 2003-2010
(in US $ millions per quarter)

Figure 1

So what's causing the decline? Part of it is the unrelenting pace of mergers and acquisitions, in which companies outside the telecom industry, and sometimes outside the U.S. as well, are taking over the major players. For instance, in 2010 we lost 3Com to HP. In 2009 we lost Nortel Networks Corp. to a bankruptcy-driven sell-off. In 2008 we lost Avanex Corp.; Centillium Communications Inc.; Foundry Networks Inc.; Proxim Wireless Corp.; Radyne Corp.; and Vyyo Inc.

But even the companies still in the industry are paying less. Of the 76 still-current companies we're tracking in this sector, a total of 22 telecom equipment companies saw their nine-month claim total fall by 25% or more, including CommScope Inc.; Powerwave Technologies Inc.; UTStarcom Inc.; Tellabs Inc.; and Arris Group Inc. Another 16 companies saw their claims totals fall by 1% to 24%. Only nine of those 38 companies that saw a claims decline also saw a sales decline.

Falling Accruals

The accruals total, meanwhile, peaked three times in 2005-2007, with the third peak coming in the highest, at $686 million. So far in 2010, telecom equipment providers have set aside $942 million in accruals, about $37 million less than they did in 2009 during the same three quarters of the year.

Of the 76 active companies, 34 reduced their accruals totals, of which 20 reduced them by 25% or more. And of those 34 companies, 25 saw sales increases. So it's not a reduced number of products sold that's driving the reduced need for accruals.

Figure 2
Telecommunications Equipment
Warranty Accruals Made, 2003-2010
(in US $ millions per quarter)

Figure 2

As Figure 2 shows, only four of the last 31 quarters have seen less than $320 million in accruals made by telecom equipment companies. And two of those quarters came in 2009, while two came in 2010. That clearly suggests the effects of a recession. But then there's also the effects of mergers, acquisitions, and bankruptcies, which in some cases took the product lines off the chart.

In Figure 3, however, we're compensating for this attrition. The percentage figures compare the warranty claims of Figure 1 and the warranty accruals of Figure 2 to the sales of all the active companies. So when the claims and accruals of companies such as 3Com and Nortel drop out of the top of the fraction, their sales also drop out of the bottom of the fraction.

Figure 3
Telecommunications Equipment
Warranty Claims & Accrual Rates, 2003-2010
(as a percentage of product revenue)

Figure 3

Clearly, something else is at work here. Neither the industry's claims rate nor its accrual rate has been above 1.7% since 2007. The smoothed-out industry averages haven't been that high since 2006. Claims rates have never been lower than they are now, and the accrual rate has been at or below 1.3% during five of the last seven quarters. Someone must be reducing their warranty costs, not only in dollar terms but also as a percentage of sales.

Cisco Hits a Plateau?

This time around, it doesn't look like Cisco is the responsible party. Yes, the company has been reducing its warranty costs for multiple years. But from the looks of Figure 4, it appears that the sponge has now been wrung out. The big declines of 2003-2007 have flattened out to smaller increments in 2008-2010.

Figure 4
Cisco Systems Inc.
Warranty Claims & Accrual Rates, 2003-2010
(as a percentage of product revenue)

Figure 4

Then again, the 1.35% claims rate Cisco reported in its fiscal year ended July 31 was its lowest ever. The 1.45% accrual rate for the fiscal year was its second lowest ever. So although the rate of decline has slowed, there's still a decline under way.

And now that 3Com and Nortel are gone from the sector, Cisco accounts for a full 36% of the claims and 38% of the accruals. Back in 2005-2006, its "share" of the telecom sector's warranty costs was under 20%.

So really, what we're seeing in the data of Figures 1 through 3 is the effect left behind by the exit of several major players, combined with the continued cost reduction by the one remaining major player.

Other Datacom Companies

Motorola, we should note, hasn't yet provided any 2010 data, so we're continuing its presence at 2009 rates. Last year, it reported $311 million in claims, so we're figuring its three-quarter year at $233 million, until the annual figures are available in March.

There are still a few independent companies competing against Cisco in the data communications equipment business. Chief among them are Extreme Networks and Juniper Networks, which we shall now spotlight.

Extreme Networks saw sales rise 36% in the quarter ended September 26. But claims remained about the same while accruals fell. The result is a massive reduction in the claims rate from 3.3% a year ago to 2.4% now, and a massive reduction in the accrual rate from 2.7% a year ago to 1.9% now.

Figure 5
Extreme Networks Inc.
Warranty Claims & Accrual Rates, 2003-2010
(as a percentage of product revenue)

Figure 5

Neither percentage is a new low record for the company, however. In fact, as can be seen in Figure 5, most of the data points since the middle of 2007 have been between two percent and three percent. So, as was seen with Cisco, the big reductions in cost came in 2003-2007. Now they're becoming harder to find.

Juniper Networks, on the other hand, had a positively awful warranty track record in 2003-2004, plus a spike at the end of 2008. But except for those anomalies, it has produced warranty costs mostly in the range of 1.5% to 2.5% of sales.

In Figure 6, the data shows that Juniper's claims rate has remained below two percent since the beginning of 2009, with the accrual rate jumping above that line only once in the past seven quarters. And if we could somehow average the trough and spike of the third and fourth quarters of 2008, we'd be within that 1.5-to-2.5% range for most of the past four years.

Figure 6
Juniper Networks Inc.
Warranty Claims & Accrual Rates, 2003-2010
(as a percentage of product revenue)

Figure 6

Juniper saw its product sales rise 26% in the quarter ended September 30, compared to the same quarter a year ago. Claims and accruals also rose, but not as quickly. So the claims rate fell from 1.9% a year ago to 1.7% now, while the accrual rate fell from 2.3% a year ago to 1.7% now. As Figure 6 shows, however, both the claims and accrual rate were a bit lower earlier in 2010.

Consumer-Facing Warranty Costs

Netgear is more into the consumer side of the datacom industry. Its network storage solutions as well as its gadgets for Internet and cable TV connectivity are aimed primarily at the home and small business. We mention that because we suspect it's part of the reason the rates in Figure 7 are so unusually high.

So far in 2010, Netgear has reported a 38% jump in sales, so business is good. But the company also reported a 31% jump in warranty claims, and a rise in accruals from $27 million in the first nine months of 2009 to $49 million in the first nine months of 2010. And Figure 7 is the result.

Figure 7
Netgear Inc.
Warranty Claims & Accrual Rates, 2003-2010
(as a percentage of product revenue)

Figure 7

Normally, a claims or accrual rate over five percent is a cause for worry. But Netgear has seen its accrual rate drop below that level only once in the last five years. And its claims rate hasn't been below 5% since 2003. So whatever is keeping this company afloat, high warranty costs are evidently not a problem.

Another Exit

CPI International, meanwhile, is also in the digital video, Internet and broadcasting industry, but its customers are the network operators rather than the end users. CPI is the parent company of Communications & Power Industries Inc. It is making its first and probably last appearance here, thanks to an agreement with Veritas Capital to be taken private for $19.50 per share in cash.

In Figure 8, we see warranty expense rates mostly between one and two percent for the past eight years. There was a bit of a dip in both claims and accrual rates in the fiscal year ended October 3, 2008, and a bit of a rise in the early quarters of calendar 2010.

Figure 8
CPI International Inc.
Warranty Claims & Accrual Rates, 2003-2010
(as a percentage of product revenue)

Figure 8

Tellabs, meanwhile, seems to be trying to answer the question of just how low a company can take its warranty expenses. After registering a claims rate just under two percent in the middle of 2003 and an accrual rate of 3.3%, the company has now turned in two quarters in 2010 in which both rates were under 0.5%.

Tellabs is also focused on the carrier and network operator market. Its broadband access solutions pass more than 5 million homes in North America, the company says. And its mobile Internet offerings are focused on enabling network operators to handle the expected demand for increased speed and bandwidth for their customers' wireless devices.

Figure 9
Tellabs Inc.
Warranty Claims & Accrual Rates, 2003-2010
(as a percentage of product revenue)

Figure 9

Product sales were up 10% in the quarter ended October 1, 2010. But both warranty claims and accruals were way below 2009 totals. In fact, the company has cut both its claims and accrual rates in half in the past year, to 0.3% and 0.4%, respectively. In fact, when the final figures are in for 2010, it's likely that Tellabs will have reduced its annual claims total for the fifth year in a row!

Happy New Year!

Speaking of years, this is the final newsletter of our eighth year of publishing Warranty Week. Coincidentally enough, our first-ever newsletter was published exactly eight years ago today, on December 23, 2002. In it, we noted that "Online retailers have different approaches to warranty law compliance." That's probably still the case today.

This is the eleventh in a series of industry-by-industry newsletters that examined product warranty claims and accrual trends in detail over the past eight years. Links to the other ten in the series are included below, in case you've missed any.

We'll skip a newsletter next week for the holidays, and will return on January 6, 2011 with the beginning of a series of newsletters about the sale of service contracts and extended warranties in the appliance, consumer electronics, mobile phone, and computer industries. That should carry us through the winter and into the spring, if not beyond.

In the mean time, we want to wish all our readers a very happy holiday period and a safe, healthy, and very prosperous new year!

September 16: Computer Warranty Claims & Accruals
September 23: Data Storage Warranties
October 7: HVAC & Appliance Warranties
October 14: New Home Builders & RV Maker Warranties
October 21: Construction Equipment Warranties
November 5: Aerospace Warranties
November 11: Security Equipment Warranties
November 18: Automotive OEM Warranties
December 2: Automotive Supplier Warranties
December 16: Medical & Scientific Equipment Warranties
December 23: Telecom Equipment Warranties

Warranty Video Service Launched

Alison Griffiths, ALG Associates LLC and the Warranty Chain Management Conference are pleased to announce the official launch of the first ever on-line warranty management and service contract video streaming service.

For the past 18 months, her team has been developing WarrantyVideo (, an online video streaming facility to provide visibility into the insight, discussions and presentations of thought leaders and innovators within the warranty and service contract industries.

Round the Clock Access

WarrantyVideo offers 24/7 access to video recordings of many of the sessions and presentations recorded at recent WCM Conferences. These recordings provide access to information on best practices and lessons learned as well as emerging tools and processes from leading companies in the warranty and service contract arenas, as well as warranty and service contract legislation and case law.

The best practices available via WarrantyVideo cover multiple industries such as automotive, consumer electronics and white goods, as well as multiple subject areas such as warranty benchmarking and analytics, case studies, service delivery, customer experience and quality improvements, warranty finance, and warranty as a competitive advantage.

Registration is free and once you are logged into the site you can choose to view from over 50 video presentations on a pay-per-view basis, with options including single or multi video streaming, or purchase an annual unlimited streaming subscription.

Viewing the content of WarrantyVideo is not intended to replace conference attendance as not all of the presentations, which take place at the WCM conferences, are recorded. Conference attendees also benefit from the on-site opportunity to ask questions of the speakers and network with their peers. Notwithstanding, WarrantyVideo offers the broadest range of online warranty best practices worldwide and is an invaluable resource for those people either unable to attend a conference, or for those who attended a conference but require additional access to conference material.

Special Combination Discount

As a special introductory offer on the launch of WarrantyVideo, every person who registers for WarrantyVideo and purchases the Annual Unlimited Streaming Subscription (for the introductory price of $895.00) will automatically receive an additional 20% discount when they register to attend the 2011 WCM Conference. This discount is applied in addition to any other qualifying discount, such as the Early Bird, Group or Sponsors� discount, giving a combined Early Bird discount of $419 for a single attendee which may increase up to $594 per person when a group of five people register.

Discounts are available for Group Registrations and registration forms are available for download on the following web page:

PCMI - Your technology partner


This Week’s Warranty Week Headlines

Auto service contract company Credexx banned from operating in North Carolina.
Press Release, December 23, 2010
Car Care Plan CEO says UK sales of extended warranties rose 10% in 2010.
Motor Trader, December 23, 2010
Mitsubishi Motors Australia announces winners in its annual Service Skills Program.
Press Release, December 23, 2010
Flextronics to fix mechanical problems in Pennsylvania's new wine kiosks.
Philadelphia Inquirer, December 23, 2010
Service USA expands warranty support service operations in Cuba City, Wisconsin.
Press Release, December 22, 2010

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Warranty Headlines (cont’d)

Former Auto One owner Matthew Crever charged with pocketing an extended warranty premium.
WKTV-TV Utica NY, December 22, 2010
A/C Filters 4 Less announces lifetime warranty on permanent A/C or furnace filter frames.
Press Release, December 22, 2010
Protect Cell and PhonePhix to provide iPhone insurance underwritten by AMT Warranty.
Press Release, December 22, 2010
A.M. Best affirms financial strength rating of A for Heritage Indemnity Company.
Press Release, December 21, 2010
Evergreen Solar extends materials & workmanship warranty to 10 years.
Press Release, December 21, 2010

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Warranty Headlines (cont’d)

Winters Instruments offers 5-year warranty on all pressure gauges and thermometers.
Press Release, December 21, 2010
Online shoppers should look out for companies that don't have international warranties.
CNET Australia, December 21, 2010
GapCorp & Volkswagen Financial Services sign extended warranty deal in the Middle East.
Press Release, December 19, 2010
Nissan dealer in Jordan in extended warranty deal with Arab Assist.
Press Release, December 18, 2010
CNA Warranty and Maintenance Value Plan to provide medical equipment maintenance plans.
Press Release, December 17, 2010

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Warranty Chain Management Conference


Warranty Headlines (cont’d)

Starting in 2011, foreign used car dealers in Trinidad must have garages for warranty work.
Trinidad Express, December 17, 2010
Warranties can vary on big-ticket items.
St. Petersburg Times, December 17, 2010
Yamaha announces five-year warranty on DSR speakers.
Musical Instrument Professional, December 16, 2010
Hearing on Chinese drywall suit rescheduled to February.
Louisiana Record, December 16, 2010
Embraer names National Airways Corp. as new authorized service center.
Press Release, December 16, 2010

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Warranty Headlines (cont’d)

Creditors are owed more than $2 million by bankrupt Thorne Builders.
Mackay Daily Mercury, December 16, 2010
North Attleboro man charged with defrauding computer companies in warranty scam.
Attleboro MA Sun Chronicle, December 16, 2010
FBI raids Matthew Kuc's home in warranty fraud investigation.
Boston Herald, December 15, 2010
Ford Windstar minivan recall grows as victim's family speaks out.
Associated Press, December 15, 2010
Motor Codes appoints Ron Gainsford chairman of the Independent Compliance Assessment Panel.
Press Release, December 15, 2010

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After Warranty Analytics


Warranty Headlines (cont’d)

Ontario Power Authority's solar & wind projects have domestic content requirements.
Renewable Energy World, December 15, 2010
Two vehicle service contract executives plead guilty to federal felony charges.
Associated Press, December 13, 2010
Interview with Paul Sonderegger, chief strategist at Endeca.
Fierce Content Management, December 13, 2010
PowerGuard Specialty Insurance Services launches new website.
Press Release, December 13, 2010
Easily Moved Equipment adds 10-year warranty on all its gantry cranes.
Press Release, December 12, 2010

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Warranty Headlines (cont’d)

A self-storage manager's guide to handling construction warranty issues.
Inside Self-Storage, December 12, 2010
Apple quietly drops iOS jailbreak detection API.
Network World, December 10, 2010
Court says Advance Auto Parts can limit battery warranty to original buyer.
West Virginia Record, December 10, 2010
Tata Motors announces 4-yr/60,000-km warranty for the Nano.
Press Release, December 9, 2010
Ford and Honda rank highest in J.D. Power and Associates 2010 Customer Retention Study.
Press Release, December 9, 2010

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Entigo, Founding Sponsor


Warranty Headlines (cont’d)

SeaChange International sees $1.9 million revenue reduction due to a warranty claim.
Press Release, December 9, 2010
Brewer warranty expense reduces Green Mountain Coffee Roasters gross profit.
Press Release, December 9, 2010
HMNZS Otago breaks down again; engine to be repaired under warranty.
Otago Daily Times, December 9, 2010
Ensquared phone insurance is now available for smartphones in Canada.
Press Release, December 9, 2010
Definition of lifetime is slippery when it comes to product warranties.
Minneapolis Star-Tribune, December 9, 2010
Buyer of US Fidelis mansion revealed: NFL agent Harold Lewis.
KSDK-TV St. Louis, December 8, 2010
How the other half lives: Inside the US Fidelis mansion.
KMOV-TV St. Louis, December 8, 2010
Global Warranty Group adds replacement coverage for Apple iPad & Samsung Galaxy Tab.
Press Release, December 8, 2010
AbShield and Sniper touted as solution for Chinese drywall problems.
WLOX-TV Biloxi MS, December 8, 2010
Home warranties are top Angie’s List consumer complaint for 6th year.
Press Release, December 7, 2010
Should you buy a warranty for all electronics?
KGO-TV San Francisco, December 7, 2010
Amazon Kindle owner raps Google & T-mobile for bad warranty service.
Electric Pig UK, December 7, 2010
Review of Steven Rattner’s book Overhaul: An Insider’s Account of the Obama Administration’s Emergency Rescue of the Auto Industry.
Seeking Alpha, December 7, 2010
Chrysler's Sterling Heights Assembly Plant gets best warranty scores in the company.
Press Release, December 6, 2010
American Home Shield launches website for mobile phone users.
Press Release, December 6, 2010
Kenworth Truck & Paccar Financial extended warranty offer ends March 31.
Press Release, December 6, 2010
EVGA offers amnesty to customers who didn't complete warranty registration before deadline.
Bit-Tech, December 6, 2010
Lawyer says oil & gas contractors should use closed end warranties, as in software contracts.
JD Supra, December 6, 2010
Extended warranties: Are they worth it?
GateHouse News Service, December 6, 2010
Extended warranties for smart phones have many pitfalls.
KOMO-TV Seattle, December 3, 2010
How to protect yourself in an "as is" home purchase.
Boston Globe, December 3, 2010
Consumer Product Services opens returns and remanufacturing center near Atlanta.
Press Release, December 3, 2010
Ex-Delphi CEO Battenberg says he doesn't remember in-house lawyer's warning.
Crain's Detroit Business, December 2, 2010
GM sought huge warranty claims payments from Delphi, ex-CEO says.
Detroit Free Press, December 2, 2010
John Chalifoux appointed president of the Motor & Equipment Remanufacturers Association.
Press Release, December 2, 2010
National Petrochemical & Refiners Association testifies against E15 fuel.
Agri News, December 2, 2010
Hewlett-Packard launches HP Next Generation Customer Support Experience.
Press Release, December 2, 2010
Medallion Homes files for Chapter 11 bankruptcy.
San Antonio Express-News, December 1, 2010
Changes in the Australian Consumer Law: What you need to know.
DLA Phillips Fox, November 2010
Capital Home Shield stops taking phone calls or returning emails.
WECT-TV Wilmington NC, November 30, 2010
Toyota loses bid to dismiss acceleration class action lawsuit.
Bloomberg News, November 30, 2010
AGMA calls warranty and service abuse significant threat to high tech industry.
Press Release, November 30, 2010
Raymarine introduces new Rapid Care Warranty Service program.
Press Release, November 30, 2010
CraftMaster Manufacturing lengthens MiraTEC trim warranty from 30 to 50 years.
Press Release, November 30, 2010
Energi Holdings Inc. debuts Energy Savings Warranty Program.
Press Release, November 29, 2010 (PDF file)
Hannover Re to underwrite Energy Savings Warranty Program for Energi Holdings.
Press Release, November 29, 2010
Palm Harbor Homes files for bankruptcy.
Press Release, November 29, 2010
Cavco Industries to provide debtor-in-possession financing to Palm Harbor Homes.
Press Release, November 29, 2010 (PDF file)
How to strike a balance when buying an extended warranty.
Tecca, November 29, 2010
ex-Delphi attorney describes GM's Sept. 2000 threats over warranty costs.
Crain's Detroit Business, November 28, 2010
McCusker & Co. launches extended warranty plan for direct broadcast satellite TV.
Press Release, November 27, 2010
McCusker & Co. adds extended warranty program for surge protectors.
Press Release, November 27, 2010
UK Financial Services Authority closes three satellite TV extended warranty companies.
Press Release, November 26, 2010
UK's OFT seeks views on a possible market study into warranties and repairs.
Press Release, November 25, 2010
Owners of defunct Laser Eye Center of Hawaii asked to fund warranty reserve.
Honolulu Star-Advertiser, November 25, 2010
March Networks analysts worry about warranty volatility for second half of year.
Ottawa Business Journal, November 24, 2010
A.M. Best affirms A- for Virginia Surety and revises outlook to positive.
Press Release, November 23, 2010
Apple retailers bundle GadgetTrak stolen laptop locator service with extended warranties.
Press Release, November 23, 2010
EPA delays E15 decision until December.
Ethanol Producer Magazine, November 23, 2010
Daktronics blames lower gross profit percentage on higher warranty reserves.
Press Release, November 23, 2010
HSA Home Warranty gives competitive advantage to Century 21’s property management division.
Press Release, November 23, 2010

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