wsj
January 16, 2001
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Slowdown in Capital Spending
Hurts Data-Equipment Firms
By PETER LOFTUS
Dow Jones Newswires
NEW YORK -- A slowdown in capital spending across the economy is expected to put a damper on the results of data network-equipment makers for the December quarter.
In previous quarters, the growth of the Internet and upgrades to corporate computer networks helped fuel growth at the firms that make switches, routers and other network gear.
But in recent months, many suppliers have seen customers cancel or delay orders. While most networking companies continued to boost profits and revenue from year-earlier levels, they face sequential slowdowns as the softening economy crimps business activity, analysts said.
An early culprit was lack of financing for equipment purchases. A class of telecommunications upstarts known as competitive local-exchange carriers, or CLECs, saw their shares plunge in value throughout 2000 and had trouble raising money to build data and voice networks. More recently, signs of a softer economy have prompted companies across numerous sectors to trim information-technology budgets.
"You've seen a significant slowdown in spending on the part of the carriers," said Clifton Gray, analyst with Kaufman Brothers. "The CLECs are either going out of business or having a difficult time raising cash in the capital markets, and the larger carriers are seeing equity values drop based on decreasing cash flow. One way to minimize cash use is to cut back on spending."
Cisco Systems Inc., the data-networking market leader, fueled concerns about the sector this week when Chief Executive John Chambers said the San Jose, Calif., company's fiscal second quarter has been "a little bit more challenging" than previous quarters.
Mr. Chambers, who was speaking at an investor conference in Arizona, didn't change guidance for the quarter ending in late January. But his remarks triggered a series of reductions in analysts' estimates for company's fiscal 2001 results.
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Steady but Slowing
Cuts in capital spending by key customers are putting a damper on the results of data network-equipment makers.
EPS Revenue
Period Reporting Date Earnings Expected Year Ago Forecast Year Ago Forecast
Cisco 2nd qtr. Feb. 6 $0.13 $0.19 $4.35 billion $7 billion
Foundry Net 4th qtr. Jan. 16 $0.12* $0.12 $55.1 million $100-$110 million
Efficient Net 2nd qtr. Jan. 18 -$0.14 -$0.20 $26.4 million $100-$102 million
* Excluding items.
Source: The companies, First Call/Thompson
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"I think Chambers was really trying to send a signal that the economy and service-provider markets are really not as strong as they hoped," said Thomas Lauria, analyst with ING Barings. "They really saw a lowering of their expectations."
Mr. Lauria matched the consensus estimate in saying Cisco will post earnings of 19 cents a share, excluding special items, for the second quarter ending Jan. 27, up from 13 cents a year earlier. That is unchanged from earlier estimates.
Mr. Lauria, like several other analysts, lowered his full-year 2001 earnings estimate to 76 cents a share from 79 cents, compared with 53 cents for fiscal 2000.
Mr. Lauria also reduced his estimate of second-quarter revenue to $7 billion from $7.1 billion, compared with $4.35 billion a year earlier. Cisco said in November it expects second-quarter revenue to grow sequentially in the high single-digits to low double-digits, compared with the first quarter, when sales were $6.52 billion. Cisco is scheduled to report second-quarter results Feb. 6.
One of Cisco's smaller but fast-growing rivals, Juniper Networks Inc., appears poised to meet analysts' expectations. The Sunnyvale, Calif., maker of Internet core routers hasn't issued any profit warnings, and is scheduled to release results Tuesday.
Juniper will report earnings of 18 cents a share for the fourth quarter, up from two cents a year earlier, estimates Martin Pyykkonen, analyst with C.E. Unterberg Towbin, matching the consensus. Revenue should soar to $269.6 million from $45.4 million last year, he said.
Mr. Pyykkonen doesn't believe the telecom capital-spending slowdown has affected Juniper because even as service providers trim budgets, they are shifting more money to Internet-protocol, or IP, equipment, and away from traditional voice-network gear.
Juniper has gained ground on Cisco, though it remains a niche player. For the third quarter, Juniper's share of the Internet core router market rose to 30% from 22.4% the previous quarter, while Cisco's share fell to 69% from 75.4%.
Juniper has a leg up on Cisco because it sells the fastest core router that can process information on the fastest optical networks, known as OC-192. Cisco plans to introduce a competing product soon.
"They beat Cisco to the punch of having an OC-192 product on the market faster," said Mr. Pyykkonen. Cisco's eventual introduction of a similar product "might mitigate some of Juniper's market share gains going forward," he added.
There already is hard evidence that the capital-spending slowdown has hurt other networking firms. Last month 3Com Corp., Santa Clara, Calif., cautioned that results for its November quarter would be lower than expected because "restructurings" in the telecom sector were causing companies to defer capital spending. Later 3Com reported results in line with reduced expectations.
On Monday, 3Com said it plans to lay off workers as part of a plan to save at least $200 million a year. The company plans to decide by the end of February how many job cuts will be necessary, spokesman Mike MeCey said. There are 11,500 employees of 3Com world-wide.
The company also will trim travel spending and other discretionary costs, find ways to save money on manufacturing and purchasing and might sell plant equipment and property, Mr. MeCey said. A charge of $40 million to $60 million will be taken for this quarter to institute the restructuring, changes 3Com expects will save $200 million to $225 million a year.
Foundry Networks Inc. also has reduced its fourth-quarter forecasts. The Sunnyvale, Calif., maker of Internet switches said last month it expects to report earnings, excluding items, of 11 cents to 14 cents a share for the fourth quarter, below the consensus estimate of 24 cents at that time.
For last year, the company reported fourth-quarter earnings, excluding items, of 12 cents a share. Foundry expects to report revenue between $100 million and $110 million for the latest fourth quarter, up from $55.1 million a year earlier. By comparison, Robertson Stephens analyst Paul Johnson had predicted revenue of $128 million for the latest quarter.
Foundry blamed the expected shortfall on reduced capital spending by Internet-service providers and e-commerce firms. Mr. Johnson now expects Foundry to report earnings of 13 cents a share, one cent higher than the current consensus, on revenue of $100 million. Foundry is scheduled to report results Jan. 24.
Efficient Networks Inc. also has warned of soft results. The Dallas maker of broadband Internet-access equipment said last week it expects to post revenue of $100 million to $102 million for its second quarter ended Dec. 31, up from $26.4 million last year but lower than analysts' estimates. Before the warning, Mr. Gray, the Kaufman Brothers analyst, had expected revenue of $140 million.
Efficient said two key telecom customers didn't place anticipated orders during the quarter. Analysts slashed estimates, producing a new consensus of a loss of 20 cents a share, according to First Call/Thomson Financial, reversing previous projections of a profit of 12 cents a share. The company posted a loss of 14 cents a share for a year earlier. Efficient is slated to report results Jan. 18.
Write to Peter Loftus at peter.loftus@dowjones.com |
