Watch Out Nok....
Cisco, Lucent, Nortel Weighed Down By Loans?
APRIL 13, 2001
Inter@ctive Investor via NewsEdge Corporation : Lucent Technologies, Nortel
Networks and Cisco Systems will continue to be weighed down this earnings
season by the billions they collectively loaned to now ailing telecommunications
service providers, according to analysts.
In recent years, the big network equipment makers captured new customers and
padded their sales by providing emerging telecommunications carriers the money
they needed to buy gear to build their networks. But many start-ups such as
those offering digital subscriber line (DSL) services are flopping--and that''s bad
news for the network equipment providers that loaned them money.
While Wall Street analysts say it''s too soon to tell how much loan defaults will
affect Lucent, Nortel and Cisco, they predict potential big losses because many
more struggling start-up carriers are expected to die off this year. And the ones
that do survive won''t spend as much money on networking equipment as they
have in the past few years. Troubled WinStar Communications, for example, is
stopping construction on its network to focus on profits.
"It''s quite a debacle. There will be massive consolidation in the (start-up service
provider) market," said financial analyst Michael Davies, of Landenburg
Thalmann. "Long term, the networking companies will recover and get beyond
this, but in the next two or three quarters, they will see an impact."
Analysts say the faltering start-up carriers are affecting network equipment
makers in three ways: Some start-ups can''t repay their debts, forcing networking
companies to eat the loans. These now gun-shy networking companies like
Lucent, Cisco, and Nortel will see reduced sales because they are loaning less to
carriers that otherwise can''t afford to buy new equipment.
Thirdly, bankrupt service providers will resell for cut-rate prices the networking
equipment used to build their networks, which could further hurt sales of new
networking equipment for their former suppliers. Rather than buying new
equipment from the networking companies, more established service providers
can acquire nearly new equipment at huge discounts from the out-of-business
start-up service providers.
"Some carriers can buy used products that are just as good and significantly
cheaper. That will detract from revenue growth," Davies said. "The used
equipment will have a lingering affect for a couple of quarters at a minimum."
Bills pile up
Networking companies are already feeling pain from the state of struggling
service providers and, in some cases, their related loan defaults. For example,
ICG Communications, which filed for bankruptcy last fall, owes $42 million to
Lucent and $18 million to Cisco. Picus Communications, which recently went out
of business, owes Nortel $1.4 million. And earlier this week, Cisco said
Convergent Communications defaulted on its loan.
The number of struggling emerging carriers continues to grow. Internet service
provider PSINet last week said it is running out of money and may file for
bankruptcy. NorthPoint Communications recently laid off more than two-thirds of
its work force, shut off service to thousands of customers, and sold its remaining
assets to AT&T. Covad Communications shut more than 260 central offices and
announced a profit warning in February.
Cisco, Nortel and Lucent representatives say the companies have strong
guidelines established to approve loans to customers.
"We''re being more selective in how we use this as a resource," a Lucent
spokeswoman said. "We continue to evaluate opportunities on a case-by-case
basis and offer financing only when it makes good business sense."
Most analysts believe Lucent is more at risk from bad loans than Nortel and
Cisco, both now and in the near future. Last October, Lucent blamed its earnings
warning partially from start-up carriers that couldn''t pay their bills.
"The companies with the stronger product lines, Cisco and Nortel, have the
opportunity to pick the best accounts," said B. Alexander Henderson, of Salomon
Smith Barney. "Lucent has a much weaker portfolio, and they''re more desperate
for business."
Lucent loaned $1.8 billion, with a total of $5.7 billion in loan commitments, while
Nortel loaned $1.8 billion with a total of $4.1 billion in loan commitments,
according to the companies. The term, "loan commitments," is the total amount
Lucent has promised to loan to carriers if they comply with all facets of the loan
agreement such as making profit numbers.
Cisco in January announced it had $475 million in loans for its last quarter. Of
that amount, $340 million was loaned to established customers, while $135
million went to start-ups, according to analyst company SG Cowen.
After Lucent''s warning in October, Cisco and Nortel executives were quick to
maintain that Lucent''s problems with bad loans are isolated. Cisco, for example,
said it has taken a conservative approach by accounting for bills potentially going
unpaid, nullifying the impact of such expenses on the bottom line. But in their
latest filings with the Securities and Exchange Commission, Cisco and Nortel
state that future loan defaults could harm their businesses.
Henderson, of Salomon Smith Barney, predicts some one-time charges this year
resulting from bad loans.
"There will be some sizable write-offs," Henderson said. "But it''s not that big a
deal forward-looking. Are they going to take charges that impacts them from an
operational perspective? Not really. It''s really a one-time charge, and it goes
away."
Cisco above the fray?
Another analyst, speaking on the condition of anonymity, said Cisco faces the
least risk from bad loans. "They don''t have as much exposure," the analyst
said. "It could be a few 100 million of doubtful accounts. They can write that off
and hit their bottom line a little bit. Lucent and Nortel would have a much larger
scale write-off because their exposure (to loans) is larger."
Larger companies have long offered financing deals to customers to help make a
sale, especially in the once highly competitive technology market of the past few
years. But with the capital markets drying up as venture capitalists and banks
lend money less freely in the current economic downturn, networking companies
may face increased pressure to offer loans to potential customers to make a
sale.
Smaller networking companies like Cisco rival Juniper Networks have been
unscathed because they don''t offer loans. But Cisco, Lucent and Nortel say they
still plan to offer financing to customers, just not at the same pace as they have
before. Lucent, for example, said it is taking more of a critical eye toward loan
applications, but will still finance companies in emerging areas such as wireless.
"There will be a trend to reduce the level of financing offered. It makes sense in
this environment," said SG Cowen analyst Michael Jung.
<<Inter@ctive Investor -- 04-12-01>> |
