Here is an article form the San Jose Mercury News talking about how networking/telecom equipment/component makers are dealing with the downturn in telecom/networking. WRS' position is not much different from that of JDSU, considering this is where most of WRS' revenue and growth came from. An obvious conclusion is that mostly likely, WRS will do another round of lay off.
Khan
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How telecom companies are managing in the downturn
BY JENNIFER FILES
Mercury News
Networking companies can't change the fact that their industry is in turmoil. What matters now is how they adapt.
Phone companies, Internet service providers and large corporations, which had been racing to build vast networks since the mid-1990s, slammed the brakes on equipment purchases last December. They had built too much, and they were running out of financial justification to continue adding capacity. The downturn has wiped away billions in market value and led to tens of thousands of job cuts at companies from systems builders such as Cisco Systems, Lucent Technologies and Nortel Networks to parts suppliers like JDS Uniphase.
Lack of funds and an overabundance of competition will kill off dozens of equipment companies during the current industry slump, analysts say. And even likely survivors must cut costs, refine strategies and position themselves to bounce back once demand reboots.
These four Silicon Valley communications equipment companies represent different slices of the industry. Here's a look at how they are managing through the downturn:
THE GIANT
Cisco Systems, San Jose
PROS: Size -- and zero long-term debt -- equals strength, even in a slumping market.
CONS: Large enough to be hit from all sides when the industry tanked.
STRATEGY: Scrap projects that will take years to pay off, focusing on promising short-term markets and customer groups.
It was hard to miss Cisco System's hard fall this year. Its years-long revenue rise gave way to gravity and sales plunged 30 percent from the previous quarter, to $4.7 billion, in its fourth fiscal quarter, which ended in April. Cisco's customers -- phone companies, Internet service providers and businesses -- cut orders so sharply, the supplier wrote off $2.2 billion in parts and unfinished products earlier this year. Cisco's stock, its main currency for corporate acquisitions and compensating employees, is down in the mid-teens -- about 80 percent off its high in March 2000.
Some projects are on hold or moving slower as the former fast-growth company absorbs 8,500 job cuts, slashes travel budgets and asks workers to take at least seven days off this quarter, among other cost-cutting efforts.
Some analysts say Cisco continues to overestimate the potential of its markets. Executives still plan for 30 percent to 50 percent annual revenue growth, once the economy rebounds. But if the economy and the communications equipment industry don't come back in a big way, Cisco could be forced into further cuts -- a point chief executive officer John Chambers does not dispute.
For now, however, the networking industry's Goliath has pared down, not backed down. ``They haven't cut off any limbs,'' said Lissa Bogatti, data networking analyst with Credit Suisse First Boston.
But the scaling back is palpable.
Gone is an ambitious plan to sell an optical switch to phone companies. Other cuts, too, have disproportionately affected Cisco's service provider operations, which account for roughly one-third of its revenue. But while sales to corporations are Cisco's mainstay,Chambers is not retracting ambitious plans to become a dominant provider of equipment for telephone companies -- or to tackle newer niches.
``We're focused on our customer needs and tornado markets,'' he said, referring to niches with big potential -- including core Internet Protocol routing, optical networking, content delivery networks, Voice-over-IP (VoIP), wireless, storage, security and virtual private networks.
THE SUPPLIER
JDS Uniphase, San Jose
PROS: Already sells to most telecommunications equipment manufacturers
CONS: Overweight corporate structure could sink in rough industry waters
STRATEGY: Slash costs, tighten customer relationships
In a recent presentation to financial analysts, JDS Uniphase chief financial officer Tony Muller illustrated the telecommunications industry's rough waters with a photo of a kayaker about to shoot down a very steep waterfall. ``Many of the companies will not have a happy ending -- but the river will continue to flow. It will be full of fish, and we're still part of one of the great markets of all time,'' he said.
JDS' goal: To remain the best-positioned provider of fiber-optic components when the industry recovers. A series of 38 acquisitions -- mainly over the last two years, either by JDS or the companies it has purchased -- made JDS the industry's largest components supplier. But the company also became bloated, particularly after big systems customers such as Lucent, Nortel and Cisco slashed purchases. JDS expects $600 million in revenue for the three months ended in June -- $100 million less than it had originally projected. The decline isn't over: For the next quarter, JDS says, revenue will fall to $450 million.
``Nine months ago, it was, `Please ramp up and deliver more and more and more,''' said JDS chief executive officer Jozef Straus. ``Today, most of the customers are really asking us, `Make sure your products are fundamentally providing new solutions to us and have higher value for the same costs.'''
Straus focuses these days on forging tighter relationships with customers and understanding their changing needs.
Internally, JDS is aggressively cutting costs, with 8,000 layoffs so far. It has shifted significant manufacturing operations to lower-cost China. More job cuts and consolidations are likely to be announced when the company next reports financial results, on July 26, Muller said. After all the acquisitions, ``we did go into this downturn with some redundancies,'' Muller said.
Still, the company has a noteworthy $1.5 billion in cash. ``There are companies in our industry that are running out of cash,'' Muller said. ``It is a very deep recession - a depression, I would say.''
THE HARD-HIT
Copper Mountain Networks, Palo Alto
PROS: Still hope of selling new products to healthy phone companies
CONS: Its DSL customers -- the ones still in business -- are among the most troubled of the troubled
STRATEGY: Keep trying to hook phone companies with staying power, turn to foreign markets
Copper Mountain's numbers tell one of the downturn's starkest stories.
Founded in 1996, the company makes Digital Subscriber Line equipment that lets phone networks carry high-speed Internet traffic. Copper Mountain was white-hot at the height of the telecom industry bonanza -- Silicon Valley's fastest-growing business, according to Deloitte & Touche, based on revenue growth from $211,000 in 1997 to $112.7 million in 1999.
But the once-promising DSL niche cratered, and Copper Mountain's customers, all new telecommunications firms challenging the Baby Bells, ran aground.
Copper Mountain's sales collapsed from $47 million in the last quarter of 2000 to $8.16 million in the first quarter of 2001. Copper Mountain couldn't shrink its costs at the same rate. The company had been profitable for more than a year before it lost $34 million in the last quarter of 2000. Three months later, that loss had doubled to $67 million.
Copper Mountain's biggest problem? It never cracked the Baby Bells, which now dominate DSL after newer service providers, including the now-defunct NorthPoint Communications Group, lost financing after they failed to produce profits. In the three months ended in March, Copper Mountain's only sizable remaining customer was VersaTel, a Dutch company that offers DSL service in only a few European countries and accounted for nearly 30 percent of the manufacturer's revenue.
Since March, Copper Mountain has laid off 100 people, cutting its workforce to 340 and slashed other expenses. One area it didn't cut was research and development, which had costs of $11.7 million in the first quarter, nearly double a year ago. The company has cash to last at least a few more quarters, but its growth depends on selling to giant local phone companies, analysts say.
Copper Mountain plans to begin selling gear specifically for that market early next year. The new product looks promising, said Frank McEvoy, analyst at U.S. Bancorp Piper Jaffray, but ``that's a tough market to penetrate.'' Nortel abandoned the DSL niche earlier this year, and other companies have cut back on efforts to sell DSL equipment to traditional telephone companies.
``If they don't have success they'll have to do what any company would have to do in that situation, which is scale way back on their expenses,'' McEvoy said.
Copper Mountain put out a press release last year about its recognition by Deloitte & Touche, but the company is less willing to talk these days. A spokesman cited the Securities and Exchange Commission's ``Reg FD,'' a rule limiting the way publicly held companies may disclose information -- but one that does not apply to communications with the press.
THE HOPEFUL
Luminous Networks, Cupertino
PROS: Plays in the industry's one remaining hot spot, the metro market
CONS: Customers undecided between rival new technologies
STRATEGY: Build cutting-edge products that fit in with traditional phone networks
One of the few areas of the communications equipment industry not on life support is the metro market, the systems connecting corporate and residential communications lines to the long-haul networks that criss-cross the globe. After years of heavy investments, corporations and long-haul networks have more bandwidth than they can use -- but traffic between them gets stuck in a bottleneck metro companies propose to solve.
Luminous Networks is one of at least a dozen Silicon Valley firms developing gear to add capacity to metro networks. Still private, the company just raised $80 million in equity -- one of the largest rounds for a telecommunications equipment company since the downturn.
Chief executive officer Alex Naqvi said he expected metro to grow fast, along with the rest of the telecom industry. ``Three years ago, I would have been lying if I told you that I thought this would be the only space that would be hot.''
Hot, yes; untouchable, no. Luminous slowed down hiring back in February, and Naqvi said the most recent round of fundraising was the most difficult he's seen since his first start-up, more than a decade ago.
Normally, Naqvi might have presented to eight investors and received funding from six. This time, he spoke with at least 50 -- and took several months longer than expected -- before he found enough funding at acceptable terms. Plans to go public are on hold.
One ``blessing in disguise'' from the downturn, according to Naqvi: Other metro companies have also had to scale back. Mayan Networks, a San Jose startup, let go 80 of its 110 employees last month. Extreme Networks of Santa Clara, widely regarded as one of the most promising metro companies, laid off 11 percent of its workforce in April. Even Cisco has let go some employees from its metro operations. ``They're interviewing with us, so we know for a fact,'' Naqvi said.
Luminous has announced sales to a couple of customers so far. Some major local phone companies are testing its products, and Naqvi said he expects to be able to announce contracts soon. Luminous is one of the very few metro companies with products certified to go into local phone companies' central network offices -- key to selling to Baby Bells. Now, its biggest challenge will be convincing them that its products will generate enough sales to be worth the huge investments. There will be no $1 million deals, Naqvi says. ``Either they are a $50-to-$100 million customer -- or they're not'' a buyer at all.
Contact Jennifer Files at jfiles@sjmercury.com or (408) 920-5026. |
