CREDIT SUISSE FIRST BOSTON CORPORATION
Equity Research-Americas
Telecom Equipment-Wireline
Telecom Equipment-Wireline Quarterly
End User Demand Remains Robust Entering 1999;
Several Demand Catalysts Could Emerge to Accelerate Growth in 2000
Executive Summary
Our coverage universe of telecom equipment stocks has rebounded strongly
from the market low recorded on October 8, 1998. The share rebound is
function of a dramatic increase in the U.S. stock market, solid third
quarter earnings results for the sector, and a positive outlook. Wireline
telecom equipment stocks have jumped 66% since October 8th, outpac- ing a
20% advance in the S&P Industrials over the same time period. The rally
has been broad-based with both large capitalization and small
capitalization issues participating.
We are optimistic regarding the outlook for telecom equipment stocks during
1999. Our view is based on strong end user demand for telecom services and
an increasing intensity of competition among carriers that is enhancing the
rate of network upgrades and new application introductions. Important
metrics that we monitor to evaluate end-demand include telephone access
line growth, high speed (T-1 and above) line deployments, Internet
subscriber additions, CLEC line installs, demand for data services, and the
provisioning of new high speed services including data over cable and xDSL
(digital subscriber line). Our analysis indicates end user demand is
healthy and, in some instances, accelerating for tele- com services.
Demand for services and infrastructure may also benefit from the completion
of AT&T's pending acqui- sition of Tele-Communications, which promises to
further intensify competition in the residential local loop. We project
these factors will translate into at least double-digit growth in
communications equipment spending during 1999. Moreover, the potential
exists for an acceleration in the global spending environment beginning in
2000 based upon sev- eral catalysts, including a more rapid introduction of
emerging residential high-speed access technologies, significant
deregulation of the U.S. residential local loop, and an enhanced rate of
deregulation of the European telecom services market.
Our quarterly analysis includes our bottoms-up survey of capital spending
by North American telecom service operators during the last several years
and the spending outlook for 1999. According to our survey, the budgeted
1999 growth rate for wireline telecom infrastructure spending is not
materially different than the initial budgeted growth rates recorded in our
1997 and 1998 spending surveys. That is, we estimate budgeted spending
growth of approximately 2%-3%, in line with our initial budgeted spending
forecasts for both 1997 and 1998. In each of the last two years, we
believe actual spending will significantly outpace the budgeted spending
levels reflecting strong end-user demands and spending needed to counter
competitive threats. We project 1999 spending increases by North American
carriers will equal at least 12%, in line with the initial 12% spending
increase we published in November, 1997 for 1998. The potential exists for
upward revisions to this estimate as the year progresses. For example, we
are currently forecasting growth in wire- line spending for 1998 of 18%, 6
percentage points above our original projection.
The telecom equipment industry during 1999 will be characterized by a
greater intensity of competition among industry participants reflecting the
collision of voice and data networking and a modest deceleration in the
year over year growth rate of investment in telecom infrastructure. This
enhanced competitive environment is already apparent in the U.S. digital
loop carrier market, the global wireless infrastructure industry segment,
and in dense wavelength division multi- plexing (DWDM) systems targeting
the long-haul segment of the market. In this environment, we are
recommending systems companies including Lucent Technologies, Cisco Systems
(CSCO is covered by Paul Weinstein), Northern Telecom and Ascend
Communications. In addition, we believe several product cycle plays where
demand visibility is excellent are appropriate including Uniphase in
optical networking, Tellabs in transmission, COM21 in cable modems and
Carrier Access Corporation in the access services segment of the industry.
Separately, we estimate the fourth calendar quarter of 1998 is tracking
well relative to our expectations for many of the companies under our
coverage universe. It is important to note that a significant percentage
of the quarter remains and that our comments should be viewed as a
mid-quarter update. At this time, we believe the companies best positioned
to record upside earnings surprises include Ascend Communications and
Broadcom Corporation (co-covered with Paul Weinstein) among larger
capitalization issues. Our small capitalization stocks tracking to
positive earnings surprises include Carrier Access Corporation and Com21
(i.e., higher revenues and a smaller loss). We project Lucent Technolo-
gies, Tellabs and Northern Telecom will record earnings in-line to slightly
above consensus expectations. Companies tracking to in-line earnings
releases relative to consensus include Uniphase Corporation, ADC
Telecommunications, Reltec Corporation, General Instrument, and Scientific
Atlanta.
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This memorandum is for informative purposes only. Under no circumstances
is it to be used or considered as an offer to sell, or a solicitation of
any offer to buy, any security. While the information contained herein has
been obtained from sources believed to be reliable, we do not represent
that it is accurate or complete and it should not be relied upon as such.
We may from time to time have long or short positions in any buy and sell
securities referred to herein. This firm may from time to time perform
investment banking or other services for, or solicit investment banking or
other business from, any company mentioned in this report.
Copyright 1998, CREDIT SUISSE FIRST BOSTON CORPORATION
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