quote.bloomberg.com
Phone-Equipment Profits at Records on Internet Demand: Outlook
Denver, Dec. 23 (Bloomberg) -- Sam Robinson is a big reason
many of North America's telecommunications equipment and parts
makers, including Nortel Networks Corp. and JDS Uniphase Corp.,
will have record profits in the fourth quarter.
The chief technology officer at software maker Eclipsys
Corp. hooked up a digital subscriber line last month, boosting
the speed of his Internet connection by five times over a
traditional dial-up modem. Already he's asking U S West Inc. to
bring an even faster DSL service to his neighborhood.
''I need as much bandwidth as I can get,'' said Robinson,
who telecommutes from his Denver home to Eclipsys headquarters in
Delray Beach, Florida. ''It's my lifeline to the outside world.''
U S West is buying more Cisco Systems Inc. equipment to add
10,000 new digital subscriber lines a month. The purchases are
part of the billions of dollars phone companies are spending on
everything from switches to fiber-optic components to networking
chips as they try to satisfy demand from consumers and companies
doing business over the Internet.
That means higher profits at Tellabs Inc., the biggest maker
of equipment that regulates traffic on phone networks, and Xilinx
Inc., the No. 1 maker of logic chips that can be programmed for
telecommunications gear. Startups like Juniper Networks Inc. and
Redback Networks Inc. will be profitable for the first time.
''We're probably looking at the best of all possible
worlds,'' said analyst Bill Burt of Eaton Vance Management, which
runs $41 billion of assets in Boston. ''Everyone is sold out up
and down the chain.''
Wireless, Fiber-Optics Boom
Nowhere is business stronger than in wireless equipment.
Shares of Qualcomm Inc., which is selling its cellular-phone
business but will still make semiconductors that run the phones,
are leading the Standard & Poor's 500 Index. The shares have
surged more than 18-fold since Dec. 31, 1998.
Qualcomm is benefiting as mobile-phone makers like Nokia Oyj
pay to use its digital cell-phone standard, the fastest-growing
in the world. The company will see its profit almost triple in
its fiscal first quarter to 95 cents a share from 33 cents,
according to analysts polled by First Call/Thomson Financial.
For Lucent Technologies Inc., the rise to record profit may
be overshadowed by a slowdown in sales growth, analysts said. The
biggest maker of telecommunications equipment is expected to earn
54 cents a share in its first quarter that ends Dec. 31, compared
with 49 cents in the year-ago period.
''The concern is revenue growth,'' said Gregory Geiling, a
J.P. Morgan Securities Inc. analyst, who rates Lucent a ''buy.''
''Relative to Nortel and Cisco, it's not going to look great.''
Lucent's sales growth, 20 percent in fiscal 1999, will slide
to about 15 percent in its first quarter, Geiling said.
Still, the company is doing a booming business in wireless
gear as well as data-networking and fiber-optic equipment, its
products for high-speed telecommunications networks. FleetBoston
Robertson Stephens Inc. analyst Paul Silverstein expects sales of
those products to rise at least 30 percent in fiscal 2000.
Record for Nortel
Nortel, Lucent's biggest rival in North America, is
benefiting most from the race by phone companies such as Level 3
Communications Inc. and Colt Telecom Group Plc to build the most
advanced fiber-optic networks. Shares of Brampton, Ontario-based
Nortel have almost quadrupled this year.
Telecommunication-service providers need to double network
capacity every six to nine months to avoid bottlenecks that can
delay a crucial file or hold up a phone call.
Much of their spending is going to equipment that relies on
laser systems to send information along the hair-thin strands of
glass in fiber-optic cables. Nortel will increase its optical
sales at least 70 percent this year to $5 billion or more.
The company is on track to boost 1999 earnings-per-share by
about 30 percent, more than it forecast earlier this year. In the
fourth quarter, it's expected to earn 46 cents a share before
acquisition costs, up from 36 cents.
''They've put themselves in the right place at the right
time for this whole data explosion,'' said Jae Lee, an analyst at
Minneapolis-based American Express Financial Advisors, whose $125
billion in stocks includes shares of Nortel.
Tellabs, whose main products link different streams of
traffic and restore lost calls in a fiber network, is poised to
report a profit of 40 cents a share, up from 30 cents, on rising
demand for its Titan line.
Filtering Down
Spending on fiber-optic equipment is filtering down to the
handful of companies that supply optical parts, making them among
the fastest growing in any industry.
Nortel, Lucent and Alcatel SA are buying more of the optical
components they once made inhouse from JDS Uniphase, SDL Inc., E-
Tek Dynamics Inc. and Corning Inc. Most of the suppliers, which
make anything from lasers to filters to modules that boost the
capacity of each fiber, are sold out.
San Jose, California-based JDS Uniphase will more than
double its fiscal second-quarter profit to 31 cents a share
before acquisition costs from 15 cents. SDL, whose stock has
climbed 10-fold this year, will boost profit to 25 cents a share
from 10 cents.
''The demand is there -- the demand for components, the
demand for systems,'' said Brandywine Asset Management Inc.
portfolio manager Alec Cutler, who runs $2 billion in technology
and utility stocks in Wilmington, Delaware. ''It's almost a give-
it-to-me-at-any-cost situation.''
Chipmakers
The boom extends to companies that make semiconductors for
telecommunications equipment. As service providers buy more
switches and routers, the equipment makers need more chips.
Applied Micro Circuits Corp., whose products include chips
for data switches and fiber-optic equipment, will earn 18 cents a
share, double a year ago. Profit at Xilinx will rise to 38 cents
a share from 24 cents on sales to Cisco and 3Com Corp.
''The results are going to be very good,'' said Eric Efron,
co-manager of the $1.45 billion USAA Aggressive Growth Fund,
which owns Applied Micro Circuits and Cisco shares.
Copper Mountain Networks Inc. is helping to drive the
communications-chip business. The Palo Alto, California-based
company sells equipment that combines traffic from digital
subscriber lines to new phone companies such as NorthPoint
Communications Group Inc.
It's benefiting as more people like Eclipsys's Robinson seek
higher-speed Internet access on DSL services, which increase the
capacity of copper wires by as much as 125 times. Copper Mountain
will earn 8 cents a share in the fourth quarter. A year earlier,
it lost 10 cents a share.
Cisco's Push
DSL is part of Cisco's push into telecommunications from its
base in corporate networking. Sales to providers of Internet and
phone service already make up a third of its revenue. In the
fiscal second quarter ending Jan. 29, that business will
contribute about one-quarter of Cisco's profit, according to J.P.
Morgan's Geiling.
Cisco's sales to corporations, government agencies and
educational institutions, which generate the rest of its revenue,
aren't as strong. Some corporate customers have crimped spending
on fears that the Year 2000 computer bug will disable the
equipment in their networks.
''The money that would go to new equipment is being spent on
Y2K,'' said Brandywine's Cutler. ''Cisco won't have a record
quarter.''
Cisco's profit in its second quarter will rise to 23 cents a
share from 18 cents. Although sales will increase about
41 percent to $4 billion, they'll climb at a slower pace than in
previous quarters.
Chief Executive John Chambers has said the Y2K slowdown will
be a ''one-quarter phenomenon'' for Cisco. Concern about the
glitch also is dimming corporate sales at Nortel and Lucent.
Next year, as Y2K issues fade, uses for the Internet that
weave in more video will trigger a bigger thirst for bandwidth.
For companies with broad product lines focused on high-speed
networking, it could be an even better of all possible worlds.
''These guys really have to screw up to lose the momentum,''
Cutler said.
4th-Qtr Year-Ago Number of
Company Estimate EPS Analysts
Lucent Technologies Inc. (a) $0.54 $0.49 31
Nortel Networks Corp. (b) 0.46 0.36 22
Cisco Systems Inc. (b) 0.23 0.18 36
Qualcomm Inc. (c) 0.95 0.33 15
Tellabs Inc. (a) 0.40 0.30 30
Xilinx Inc. (d) 0.38 0.24 24
JDS Uniphase Corp. (b) 0.31 0.15 34
SDL Inc. (a) 0.25 0.10 20
Advanced Micro Circuits Corp. (a) 0.18 0.09 13
Copper Mountain Networks Inc. 0.08 (0.10) 7
Juniper Networks Inc. 0.02 (0.24) 8
a) Earnings are restated to reflect acquisitions
b) Earnings are before acquisition costs
c) Per-share figures are before Dec. 30, 1999 4-for-1 stock split
d) Earnings are restated to reflect accounting change
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