WorldCom Bankruptcy Will Have Ripple Effect On Telecom Gear Firms
BY MIKE ANGELL
INVESTOR'S BUSINESS DAILY
WorldCom Inc.'s fall affects employees, investors and bondholders — and a whole lot of telecom suppliers that didn't need more bad news.
The nation's No. 2 long-distance phone carrier competes in many telecom markets — it runs a 12,000-mile fiber-optic network, for example — and is a top buyer of telecom gear. Two telecom suppliers — Lucent Technologies Inc. (LU) and Avaya Inc. (AV) — this week unveiled poor quarterly results as the once-hot industry still seeks a bottom.
WorldCom's high-activity level helped spark the telecom bubble. But its Sunday filing for Chapter 11 bankruptcy reorganization means one of telecom's big spenders will be spending far less. Some analysts say it could be many years before the telecom gear industry sees the level of spending it enjoyed in the late 1990s and 2000.
WorldCom is "going to continue spending, but nowhere near the level of the last few years," said Lehman Bros. analyst Steve Levy. "Most (telecom suppliers) have taken WorldCom out of their expectations."
From 1996 through 2001, WorldCom spent $31.6 billion building its network. Analysts generally estimate that 60% of that was on new equipment. The rest included software, labor and new buildings.
WorldCom's annual spending peaked in 2000 at $9 billion. Now WorldCom says it expects to spend about $2 billion a year. The company hopes to emerge from bankruptcy late next year.
Was Big Nortel Customer
Beneficiaries of WorldCom spending included Nortel Networks Corp. (NT) Nortel, though, says it didn't lend money to WorldCom — suppliers often "carry," or help finance, their big customers' purchases — nor did it have much in the way of outstanding bills from WorldCom.
WorldCom was the first buyer of Nortel's high-speed optical networking equipment. It also bought Nortel's voice and data switches.
WorldCom's spending helped fuel Nortel's 1990s growth spurt. Nortel sold $300 million to $650 million in gear per year to WorldCom, estimates Lehman Bros.
Customers such as WorldCom boosted Nortel's U.S. sales to $16.8 billion in 2000, up 44% from 1999. In 2001, U.S. sales fell to $8.5 billion.
Router maker Juniper Networks Inc. (JNPR) also relied heavily on sales to WorldCom. The carrier accounted for $245 million, or 16%, of Juniper's sales for 2000 and 2001.
Juniper says WorldCom accounted for just $7 million of its $117 million in second-quarter sales.
WorldCom's problems also will be keenly felt by start-up telecom gear makers. Shing Yin, an analyst at telecom consulting firm RHK Inc., says WorldCom gave start-up gear makers a crack at selling to one of the biggest customers around.
"Among the major carriers, WorldCom was seen as the most willing to try out start-up gear," Yin said.
When 6-year-old Juniper was starting out, WorldCom allowed Juniper engineers access to its data network to learn directly how it works.
Spending aside, WorldCom's biggest impact on the gear market might be psychological, some observers say. WorldCom executives were considered authorities on the Internet.
During the late 1990s, WorldCom Chief Executive John Sidgmore, then chief operating officer, estimated 1,000% annual growth in Internet traffic. That would mean the number of bits on the Net would be doubling every three months.
Too Much Hype
University of Minnesota professor Andrew Odlyzko says such a growth rate might have been the case from 1995 to 1997. But since then, he figures, Internet traffic has on average doubled per year, not quadrupled.
"It was people like WorldCom who inflated Internet growth," Odlyzko said. Lucent, Nortel and others "relied on what they heard from carriers, which was based primarily on what WorldCom said."
The latest earnings among telecom gear makers continue to show how much carriers have cut back on spending. Lucent on Tuesday released numbers below analysts' earnings and sales estimates.
For its fiscal third quarter ended June 30, Lucent said it lost 16 cents a share excluding special charges. Analysts polled by Thomson Financial/First Call expected a 14-cent loss. Revenue of $2.95 billion also was shy of estimates of $3.05 billion. In the year-ago quarter, Lucent reported a loss of 39 cents a share on sales of $5.3 billion.
Including charges, Lucent's net loss was $2.30 a share. Lucent said it will shed another 7,000 jobs to deal with the downturn. It forecast a loss of 20 cents a share this quarter.
And Lucent spinoff Avaya Inc. (AV) on Monday said it lost 10 cents a share last quarter vs. a year-earlier profit of 6 cents a share. Revenue slumped to $708 million from $1.1 billion.
Lucent and Avaya have problems, but they weren't large WorldCom suppliers. |
