Carrier slowdown eh?
From RBC Dominion Securities report on NT Oct14......
We believe recent industry-wide concerns over carrier spending in 2001 have been overdone, particularly in Nortel’s case given its unique positioning as the industry leader in optical networking.....
.....In telecom equipment, festering worries over a potential slowing in carrier capital spending has chipped away at sector valuations. In our view, blanket concerns about carrier spending ignore the exposure and leverage of individual companies to specific segments of the telecom equipment market......
....We do not see the troubles at Lucent as indicative of any looming industry-wide shortfall. Lucent management took great pains during their conference call October 10 to emphasize the robust nature of the marketplace, laying the blame on poor execution.....
.....Carrier Capex should not be a Concern for Nortel
In addition to the fact that carriers have tended in the past to significantly understate their future capex plans, we note that carrier capital spending budgets also include substantial spending on non-equipment segments such as fiber deployment and outside plant. Although it is possible overall capex could decelerate in 2001 as several fiber builds reach conclusion, we believe that the outlook for the telecom equipment market remains robust. Within telecom equipment it is our view that the marketplace will demonstrate a growing gap between the “have” and “have not” segments. Specifically, we forecast that the markets for optical systems, IP/ATM switching and broadband access (the “have” segments) should continue to grow at rates above 40% through 2001. We believe that “have not” segments such as TDM and legacy data switching are likely to continue shrinking in the remainder of 2000 and through 2001. The single biggest exposure, by far, that Nortel has to carrier capital spending is optical systems (49% of our forecast revenues in 2001) and yet this, in our view, is the single segment with the most immunity to any potential slowing in capex. The reasons are threefold. First, we believe carriers are caught in a “prisoners dilemma” on broadband optical deployment. Essentially, even if everyone wanted to slow spending on optical capacity, it just takes one “cheater” to aggressively build in order to gain a cost and marketing advantage to send everyone else scrambling to buy more gear. Since everyone believes that everyone else is going to cheat, everyone spends. Second, a significant number of fiber builds in North America and Europe are nearing completion in late 2000 and early 2001. The extensive capital deployed in these builds is trapped with no prospect of generating cash flow until it is actually lit, once again driving spending on optical systems. Finally, we estimate the optical equipment market to be roughly US$35Bn in 2000, including both terrestrial and submarine systems, or between just 10-15% of our estimate for the global telecom equipment market this year – leaving plenty of room for carriers to contract spending, if required, in non-strategic legacy segments. |
