From the WSJ:
Dow Jones Newswires -- September 27, 2000
Impact Of CLEC Woes On Telecom Equip Makers Seen
Minor
Dow Jones Newswires
(This report was originally published late Tuesday.)
By Janet Whitman
Of DOW JONES NEWSWIRES
NEW YORK -- Concern that major telecom equipment makers will be forced to lower their
guidance because of the recent woes among several upstart telecom companies is overblown,
according to industry observers.
The impact, if any, on the big equipment manufacturers will be minor, they said.
"Equipment makers are going to have some bad customers over the next couple of years," said CIBC
World Markets Corp. analyst James Jungjohann. "But are people going to miss numbers? I don't
think so."
Simply put, the exposure among the major telecom equipment companies to the so-called
competitive local exchange carriers, or CLECs, is not significant enough to prompt a change in
guidance, analysts said.
Vendor-financing deals with upstart telecom companies account for between 10% and 20% of the
big telecom equipment makers' overall business, according to some analysts. And equipment makers
such as Cisco Systems Inc. (CSCO) Lucent Technologies Inc. (LU), Nortel Networks Corp. (NT)
typically minimize that exposure by taking it off their balance sheets and passing it on to third parties
as quickly as possible, analysts said.
Concern about the impact CLECs' woes may have on the telecom equipment sector escalated
Monday with speculation that the recent troubles at ICG Communications Inc. (ICGX) - the
Englewood, Co., CLEC feared to be weeks away from bankruptcy - may prompt Cisco to
preannounce disappointing quarterly results.
That speculation, which the company later dismissed and analysts called "ridiculous," prompted a 5%
sell-off in Cisco's shares. Cisco fell a further 3.5% Tuesday to $55.19 a share.
ICG Communications has financing agreements with Cisco totaling $180 million, of which ICG has
drawn down $99.1 million.
"To suggest that this is a material issue is ridiculous," said Alexander Henderson, an analyst with
Salomon Smith Barney. "First off, $100 million is a drop in the bucket for Cisco. They've got huge
reserves. You'd never see a $100 million charge of bad debt" prompting a change in their guidance.
Henderson said that it's likely Cisco already has passed that exposure on to a third party. "Even if
they did have that exposure, they'd go to the top of the line of people waiting for payment, ahead of
bond holders," he added.
Concerns About Slowdown In Overall Spending
Still, that doesn't mean the troubles among CLECs will be without impact on the telecom equipment
sector.
"The big issue with the health of the CLECs is not whether they're going to go under and result in a
charge for bad debt," said Henderson. "Everyone's got some exposure to that. A little bit here a little
bit there. The big question is: Does it cause a slowdown in overall spending?"
Indeed, some CLECs, such as ICG and Network Access Solutions Corp. (NASC), already have
announced that they will significantly scale back their network buildout plans.
The tight access to capital for competitive phone carriers is expected to prompt many others to
follow suit, analysts said.
CIBC's Jungjohann played down those concerns, saying that if CLECs don't build it, someone else
will.
Rather than building their own networks, a number of CLECs likely will lease networks from
companies such as Level 3 Communications Inc. (LVLT) and Williams Communications Group Inc.
(WCG), he said.
"The demand for bandwidth still has to be solved. It may not be solved by 100 carriers," he said.
"Maybe 20 of them will go away over the next few years and we'll only have 80. But the underlying
bandwidth concerns won't go away. If a CLEC doesn't build it, it means an AT&T or a UUNET or a
Qwest or a Level 3 will."
-By Janet Whitman, Dow Jones Newswires; 201-938-5248;
janet.whitman@dowjones.com |
