Phone-Equipment Profits at Records on Internet Demand: Outlook
Denver, Dec. 23 (Bloomberg) -- Sam Robinson is a big reason many of North America's telecommunications equipment and parts makers, including Nortel Networks Corp. and JDS Uniphase Corp., will have record profits in the fourth quarter.
The chief technology officer at software maker Eclipsys Corp. hooked up a digital subscriber line last month, boosting the speed of his Internet connection by five times over a traditional dial-up modem. Already he's asking U S West Inc. to bring an even faster DSL service to his neighborhood. ``I need as much bandwidth as I can get,' said Robinson, who telecommutes from his Denver home to Eclipsys headquarters in Delray Beach, Florida. ``It's my lifeline to the outside world.'
U S West is buying more Cisco Systems Inc. equipment to add 10,000 new digital subscriber lines a month. The purchases are part of the billions of dollars phone companies are spending on everything from switches to fiber-optic components to networking chips as they try to satisfy demand from consumers and companies doing business over the Internet.
That means higher profits at Tellabs Inc., the biggest maker of equipment that regulates traffic on phone networks, and Xilinx Inc., the No. 1 maker of logic chips that can be programmed for telecommunications gear. Startups like Juniper Networks Inc. and Redback Networks Inc. will be profitable for the first time. ``We're probably looking at the best of all possible worlds,' said analyst Bill Burt of Eaton Vance Management, which runs $41 billion of assets in Boston. ``Everyone is sold out up and down the chain.'
Wireless, Fiber-Optics Boom
Nowhere is business stronger than in wireless equipment. Shares of Qualcomm Inc., which is selling its cellular-phone business but will still make semiconductors that run the phones, are leading the Standard & Poor's 500 Index. The shares have surged more than 18-fold since Dec. 31, 1998.
Qualcomm is benefiting as mobile-phone makers like Nokia Oyj pay to use its digital cell-phone standard, the fastest-growing in the world. The company will see its profit almost triple in its fiscal first quarter to 95 cents a share from 33 cents, according to analysts polled by First Call/Thomson Financial.
For Lucent Technologies Inc., the rise to record profit may be overshadowed by a slowdown in sales growth, analysts said. The biggest maker of telecommunications equipment is expected to earn 54 cents a share in its first quarter that ends Dec. 31, compared with 49 cents in the year-ago period. ``The concern is revenue growth,' said Gregory Geiling, a J.P. Morgan Securities Inc. analyst, who rates Lucent a ``buy.' ``Relative to Nortel and Cisco, it's not going to look great.'
Lucent's sales growth, 20 percent in fiscal 1999, will slide to about 15 percent in its first quarter, Geiling said.
Still, the company is doing a booming business in wireless gear as well as data-networking and fiber-optic equipment, its products for high-speed telecommunications networks. FleetBoston Robertson Stephens Inc. analyst Paul Silverstein expects sales of those products to rise at least 30 percent in fiscal 2000.
Record for Nortel
Nortel, Lucent's biggest rival in North America, is benefiting most from the race by phone companies such as Level 3 Communications Inc. and Colt Telecom Group Plc to build the most advanced fiber-optic networks. Shares of Brampton, Ontario-based Nortel have almost quadrupled this year.
Telecommunication-service providers need to double network capacity every six to nine months to avoid bottlenecks that can delay a crucial file or hold up a phone call.
Much of their spending is going to equipment that relies on laser systems to send information along the hair-thin trands of glass in fiber-optic cables. Nortel will increase its optical sales at least 70 percent this year to $5 billion or more.
The company is on track to boost 1999 earnings-per-share by about 30 percent, more than it forecast earlier this year. In the fourth quarter, it's expected to earn 46 cents a share before acquisition costs, up from 36 cents. ``They've put themselves in the right place at the right time for this whole data explosion,' said Jae Lee, an analyst at Minneapolis-based American Express Financial Advisors, whose $125 billion in stocks includes shares of Nortel.
Tellabs, whose main products link different streams of traffic and restore lost calls in a fiber network, is poised to report a profit of 40 cents a share, up from 30 cents, on rising demand for its Titan line.
Filtering Down
Spending on fiber-optic equipment is filtering down to the handful of companies that supply optical parts, making them among the fastest growing in any industry.
Nortel, Lucent and Alcatel SA are buying more of the optical components they once made inhouse from JDS Uniphase, SDL Inc., E-Tek Dynamics Inc. and Corning Inc. Most of the suppliers, which make anything from lasers to filters to modules that boost the capacity of each fiber, are sold out.
San Jose, California-based JDS Uniphase will more than double its fiscal second-quarter profit to 31 cents a share before acquisition costs from 15 cents. SDL, whose stock has climbed 10-fold this year, will boost profit to 25 cents a share from 10 cents. ``The demand is there -- the demand for components, the demand for systems,' said Brandywine Asset Management Inc. portfolio manager Alec Cutler, who runs $2 billion in technology and utility stocks in Wilmington, Delaware. ``It's almost a give-it-to-me-at-any-cost situation.'
Chipmakers: The boom
The boom extends to companies that make semiconductors for telecommunications equipment. As service providers buy more switches and routers, the equipment makers need more chips.
Applied Micro Circuits Corp., whose products include chips for data switches and fiber-optic equipment, will earn 18 cents a share, double a year ago. Profit at Xilinx will rise to 38 cents a share from 24 cents on sales to Cisco and 3Com Corp. ``The results are going to be very good,' said Eric Efron, co-manager of the $1.45 billion USAA Aggressive Growth Fund, which owns Applied Micro Circuits and Cisco shares.
Copper Mountain Networks Inc. is helping to drive the communications-chip business. The Palo Alto, California-based company sells equipment that combines traffic from digital subscriber lines to new phone companies such as NorthPoint Communications Group Inc. It's benefiting as more people like Eclipsys's Robinson seek higher-speed Internet access on DSL services, which increase the capacity of copper wires by as much as 125 times. Copper Mountain will earn 8 cents a share in the fourth quarter. A year earlier, it lost 10 cents a share.
Cisco's Push
DSL is part of Cisco's push into telecommunications from its base in corporate networking. Sales to providers of Internet and phone service already make up a third of its revenue. In the fiscal second quarter ending Jan. 29, that business will contribute about one-quarter of Cisco's profit, according to J.P. Morgan's Geiling.
Cisco's sales to corporations, government agencies and educational institutions, which generate the rest of its revenue, aren't as strong. Some corporate customers have crimped spending on fears that the Year 2000 computer bug will disable the equipment in their networks. ``The money that would go to new equipment is being spent on Y2K,' said Brandywine's Cutler. ``Cisco won't have a record quarter.'
Cisco's profit in its second quarter will rise to 23 cents a share from 18 cents. Although sales will increase about 41 percent to $4 billion, they'll climb at a slower pace than in previous quarters.
Chief Executive John Chambers has said the Y2K slowdown will be a ``one-quarter phenomenon' for Cisco. Concern about the glitch also is dimming corporate sales at Nortel and Lucent.
Next year, as Y2K issues fade, uses for the Internet that weave in more video will trigger a bigger thirst for bandwidth. For companies with broad product lines focused on high-speed networking, it could be an even better of all possible worlds. `These guys really have to screw up to lose the momentum,' Cutler said.
4th-Qtr Year-Ago Number of
Company Estimate EPS Analysts
Lucent Technologies Inc. (a) $0.54 $0.49 31
Nortel Networks Corp. (b) 0.46 0.36 22
Cisco Systems Inc. (b) 0.23 0.18 36
Qualcomm Inc. (c) 0.95 0.33 15
Tellabs Inc. (a) 0.40 0.30 30
Xilinx Inc. (d) 0.38 0.24 24
JDS Uniphase Corp. (b) 0.31 0.15 34
SDL Inc. (a) 0.25 0.10 20
Advanced Micro Circuits Corp. (a) 0.18 0.09 13
Copper Mountain Networks Inc. 0.08 (0.10) 7
Juniper Networks Inc. 0.02 (0.24) 8
a) Earnings are restated to reflect acquisitions
b) Earnings are before acquisition costs
c) Per-share figures are before Dec. 30, 1999 4-for-1 stock split
d) Earnings are restated to reflect accounting change
Estimates provided by First Call/Thomson Financial
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