By now most of you should be aware of the article in Barron's that mostly uses material that has been out in the market for quite some time by Susan Kalla of BlueStone Capital. Here is the article posted on the SDLI thread:
Message 15479704
Since Kalla 's views on the telecom equipment sector have been discussed quite a bit on many threads on SI, I am only going to point out something that is Ciena-specific in the article:
>>Kalla also paid attention to early signs the service providers would have to go through massive
restructuring, which could crimp their spending on equipment. Kalla points to a major Ciena
customer, Global TeleSystems, which missed earnings last fall and since has started to restructure.
"Prices are dropping very rapidly, and [service providers] are very highly leveraged. They're going
to come to a point in time where they're going to have to make a decision between paying their
suppliers or paying their interest," says Kalla.
Actually GTS (which has been renamed Ebone) is probably not a very big customer any longer. It was one of the three >10% customers last year but since there was a great deal of press a couple months ago about them, Ciena management was specifically asked about them in the Dec. CC. Greg Smith, COO, clearly stated that GTS was for the most part finished with their network buildout and that he did not expect them to be contributing materially to revenue in the future. Also the CFO was asked if there were any issues outstanding regarding payments by GTS, to which he replied there were not. And on the Feb. CC, Ciena specifically stated that one of last quarter's >10% customers had changed, giving me the impression that another company had taken GTS's place in that large customer category. But since they did not name GTS by name, I can only say this is my "educated" guess. And FWIW, GTS has already become delinquent on interest payments for bonds issued by a subsidiary but since they received permission to do this from an agreement with the bond holders, GTS has not filed for bankruptcy. The situation is rather complicated but if someone wants additional info on the subject, just ask and I will look for the links to a number of articles on the situation.
And it is interesting to note that Qwest has been (and I believe continues to be based on comments by Ciena as recently as Feb 15) one of the three >10% customers...
>>The only companies she's favorably inclined toward are the Baby Bells and Qwest Communications, but she doesn't formally cover them at this point.
<snip>
That's not a good sign for service providers, many of which are cash-flow negative and will need to raise new cash. Qwest and the Baby Bells are the exceptions to the rule. Qwest, an upstart long-distance company, purchased Baby Bell US West for $42 billion last year. And while long-distance prices have fallen off a cliff, local prices have remained much more stable thanks to less competition and less deployment of fiber. It's tougher to lay fiber in the local markets, because it involves digging up streets and getting government approvals. That, combined with the effective monopoly the Bell companies still have on the market, means that the cost per mile for voice and data on a local network is 140 times more than it is for long-distance. Local business, which represents three-quarters of Qwest's sales, gives the company a stable, annuity-like revenue stream. Kalla predicts Qwest will get the regulatory relief it needs to sell its local customers its long-distance services in a year or two. "Qwest will be able to leverage its existing customer base and sell them additional services."<<
PS It would have been nice if the difference in demand for legacy versus next gen equipment had been covered in the article....and there seems to have been a heavy dependence on voice pricing in the analysis.... |
