ottawacitizen.com
Thursday December 30, 1999
Thursday 30 December 1999
Internet demands boost hardware profits
It's little wonder the profits of Nortel Networks and JDS Uniphase are booming, Erik Schatzker reports.
Erik Schatzker
The Ottawa Citizen
David Harrison, Bloomberg News / Sam Robinson, chief technology officer for Eclipsys Corp. , is a big reason many of North America's telecommunications equipment and parts makers will have record profits in the fourth quarter. He hooked up a digital subscriber line this past month and has boosted the speed of his Internet connection by five times.
DENVER - 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 (DSL) last month, boosting the speed of his Internet connection five times over a traditional dial-up modem. Already he's asking U S West Inc. to bring an even faster DSL service.
"I need as much bandwidth as I can get," said Mr. 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 DSLs a month, part of the billions of dollars phone companies are spending on everything from switches to fibre-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 such as 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 U.S. of assets in Boston. "Everyone is sold out up and down the chain."
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 last Dec. 31.
Qualcomm is benefiting as mobile-phone makers such as Nokia Oyj pay to use its digital cell-phone standard, the fastest-growing in the world. The company's profit will almost triple in its 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 might be overshadowed by slower sales growth. 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 a year ago.
"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 per cent in fiscal 1999, will slide to about 15 per cent in its first quarter, he said. Still, it is doing a booming business in wireless gear as well as data-networking and fibre-optic equipment, sales of which are expected to rise at least 30 per cent in fiscal 2000.
Nortel, Lucent's biggest rival in North America, is benefiting most from the race by phone companies to build the most advanced fibre-optic networks. Shares of Brampton-based Nortel have almost quadrupled this year.
Telecommunications-service providers need to double network capacity every six to nine months. Much of their spending is going to equipment that relies on laser systems to send information along fibre-optic cables. Nortel will increase its optical sales at least 70 per cent this year to $5 billion or more and is on track to boost 1999 earnings per share by about 30 per cent, 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.
Spending on fibre-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 in-house from JDS Uniphase, SDL Inc., E-Tek Dynamics Inc. and Corning Inc. Most of the suppliers are sold out.
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."
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