Equipment stocks hit as Qwest cuts costs, spending
(UPDATE: Adds details on contractor projects in paragraph 2)
PHILADELPHIA, Nov 2 (Reuters) - Shares of communications equipment makers such as CIENA Corp. (NasdaqNM:CIEN - news) and Juniper Networks Inc. (NasdaqNM:JNPR - news) fell on Friday as voice and data services company Qwest Communications International Inc. halted work by contractors as it sought to cut costs, analysts said.
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Qwest (NYSE:Q - news), which has been cutting jobs and expenses to offset weak sales in the soft economy, on Friday said it halted work by 1,000 contractors assigned to special projects. Qwest said it will decide on a case-by-case basis which projects would continue, or be canceled or delayed, a spokesman said.
The contractor cutbacks, which Qwest previously announced, will not disrupt work performed by 30,600 Qwest employees on the company's local and global networks, the company said.
Still, investors viewed the halt on contracting work as a sign the company may stop all capital spending in the fourth quarter, prompting fears of revenue shortfalls for equipment vendors, analysts said.
``This is a fairly draconian step that Qwest is taking. Essentially the message here is that Qwest has told all of its contractors, and therefore anybody who is supplying those contractors: 'Cease and desist all installations,''' said Lehman Brothers analyst Steve Levy.
``Qwest has basically said, 'We need to get a handle on what we're spending and what our network looks like and what we need. The only way we can do this is by literally stopping everything,''' said Levy, who cautioned that it remains to be seen how long the halt would be in place and which vendors would be hurt as a result.
Investors dumped equipment stocks, pushing shares of Ciena, which gets about 20 percent of its revenues from Qwest, down $1.37, or 8.32 percent, to $15.09. Juniper, which relies on Qwest for 10 percent of its third quarter revenues, lost $2.44, or 11.13 percent, to $19.48.
UNEXPECTED Q3 LOSS
Qwest on Thursday posted an unexpected third-quarter loss on flat revenues and warned that fourth-quarter revenues would fall short of expectations.
The No. 4 U.S. long-distance telephone company said it has been hurt as the weak economy dampened sales to businesses and consumers and slowed sales of network capacity on its high-speed fiber optic network. Qwest and its rivals have scaled back growth forecasts and cut spending plans.
Qwest last month said it would cut its workforce by 4,000 employees, and shift another 1,000 positions to sales. It also said it would focus on cost-cutting measures such as ``vendor management,'' and reviewing its corporate structure and work flow processes in order to reduce operating costs.
Shawn Campbell, an analyst with Northern Trust Corp.'s asset management arm, said Qwest's slowdown in spending should not be a surprise.
In the first three quarters of the year, Qwest spent about $7.7 billion of its total capital spending budget of $8.5 billion, leaving only $700 million for the fourth quarter, Campbell said.
``We're already a month into the fourth quarter and they've been spending about $700 million a month. So -- boom -- zero to spend for the rest of the year,'' Campbell said.
Although Lucent, Nortel Networks and Cisco Systems do more business with Qwest, suppliers such as Juniper, Ciena, ONI Systems Corp. (NasdaqNM:ONIS - news), Tellium Inc. (NasdaqNM:TELM - news) and Corvis Corp. (NasdaqNM:CORV - news) rely on the company for a greater percentage of their total sales, analysts said.
Shares of ONI Systems closed at $4.95, down 30 cents, or 5.7 percent. Tellium lost 81 cents, or 11.84 percent, to close at $6.03. Corvis closed unchanged at $2.30.
The Standard and Poors Communications Index (^SPCOMM - news) closed slightly higher at $117.11, up 32 points, in line with gains on the broader Standard and Poors 500 Index (^SPX - news), which closed at 1087.20, up 3.10.
Shares of Qwest lost 3 cents, or 0.25 percent, to close at $11.97 on the New York Stock Exchange.
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