The future:
Data networker Ascend (ASND:Nasdaq) lends
risky customers money in order to win their
business, illustrating the fiercely competitive nature
of networking.
In an interview with TheStreet.com, CFO Michael
Ashby confirmed Ascend is lending money to
competitive local exchange carriers, or CLECs, a
new breed of phone company. These loans, called
working capital loans, are new to Ascend -- and, in
this case, to Wall Street, which until recently was
unaware of Ascend's decision to lend to
customers.
"We have only just started doing these loans,"
Ashby says. This is because CLECs are forcing
Ascend to match bids by rivals including Lucent
(LU:NYSE), Northern Telecom (NT:NYSE) and
Cisco (CSCO:Nasdaq), according to Ashby.
In the third quarter five small, private CLECs
exacted loans from Ascend in return for buying its
network equipment. In case the loans aren't paid
back, Ascend added an $8.7 million write-off to its
"general and administrative" expenses.
"We've eliminated the risk entirely by writing it off
upfront," Ashby says, adding that Ascend had to
make the concession in order to compete.
In the past Ascend has provided some
telephone-carrier customers with attractive
financing terms by, for example, deferring
payments for six months or so. But the new
working capital loans are different, and carry an
increased risk of default.
"That's obviously confused people, but the upside
is if they pay for it," says Ashby who feels the five
CLECs, which he declined to name, represent very
low risk. The business practice will continue:
Ascend likely will take a similar, smaller charge
this quarter, Ashby says. The loans won't affect
earnings estimates.
A Lucent spokesman says that for some time the
company has lent money to customers, especially
CLECs and wireless phone companies. The
spokesman added that Lucent is careful not to
damage its own credit rating by incurring risk; in
fact, Lucent often sells the debt to outside financing
firms. Ascend is trying secure similar
arrangements. Cisco and Nortel could not be
reached to discuss the issue.
Less-established CLECs have been financially
squeezed as capital markets have dried up in
recent months, a trend that threatens to damage
growth in the network equipment sector.
"As the capital markets tighten up a bit, you would
expect that CLECs would turn to vendor financing,"
in which they borrow money from the likes of Cisco
and Ascend, says analyst James Henry with Bear
Stearns. However, Henry says the 15 or so largest
CLECs are healthy.
"I do not see incremental risk to Ascend or any of
the other vendors," Henry says.
But another pro sees trouble.
"It appears that we're borrowing from the future to
make dollars for today," says analyst Craig
Johnson with the Pita Group. |
