I'm going to post this here since I'll need a sympathetic audience. :)
This morning a friend sent me the Street.com article on networking by Scott Moritz. Unfortunately for him, I have the time to go over the article line by line.
First, the headline:
The chill in the networking sector is spreading.
Is he referring to the stock market or the companies themselves? If the market, then ups and down --- chills and thaws --- come with the territory. If he’s referring to the companies, I believe he’s throwing the baby out with the Iaxis bathwater.
Moritz says:
Recent days have seen a selloff among the telecom-equipment stocks that have led the Nasdaq's rally over the last year. Why? After two years of leadfooted capital-spending growth, phone companies and Internet service providers are easing off the telecom-equipment gas pedal, and Wall Street is taking notice.
What data does he give to support slowing spending by ISPs and service providers? Does he have data from Pioneer, Dell’Oro, Dataquest, Gartner? Does he have quotes from vendors like LU, NT, ALA, and JDSU? Or, mon dieu (get off your duff and makes some phone calls) from the carriers themselves?
No. Instead, he says, “Depressed stock prices, declining revenue growth and limited access to cash are among the factors crimping the once free-spending service providers, which buy the gear that networkers make.”
The only case I’ve seen is Iaxis and even then Deutsche Telecom is rumored to be taking them out, a solution that underlines what I believe, and what I’ve heard others say, will be consolidation among providers. Those who don’t have adequate funding will be snapped up and the survivors will continue their network expansions as planned.
From Dow Jones:
Deutsche Telekom is thought to be in talks about buying the assets of Iaxis, the telecommunications company that went into administration this week, the Financial Times reports.
We can look at carrier earnings, but here I believe there’s a big gulf between those who’ve traditionally carried voice and the new entrants who are focusing on data and Internet services.
WCOM:
· Communications services revenues, net of voice access costs, increased 18 percent year-over-year. Including access costs paid to local exchange carriers, communications services revenues grew $1.2 billion or 14 percent year-over-year to $10.2 billion. Excluding WorldCom’s interest in the Brazilian communications company, Embratel, communications services revenues were $9.4 billion, a year-over-year increase of 13.3 percent or $1.1 billion.
· EBITDA increased by $824 million or 29 percent from the year-ago period to $3.7 billion.
· Operating income increased by $724 million or 41 percent from the second quarter of 1999 to $2.5 billion.
· Cash earnings (earnings before goodwill amortization) per share increased 44 percent year-over-year to $0.56 per common share.
· Net income increased 54 percent to $1.3 billion, or $0.46 per common share.
ATT:
Revenue for the second quarter increased 4.5 percent year-over-year, after giving pro forma effect to the MediaOne (now included within AT&T Broadband) and the IBM Global Network (now AT&T Global Network Services) acquisitions, as well as the impact of the Concert joint venture, certain international divestments and closed cable transactions. Second quarter revenue was $16.221 billion compared to $15.752 billion for the year ago quarter on a reported basis. The increase includes the positive impact of the MediaOne and IBM Global Network acquisitions, partially offset by the effect of the Concert joint venture.
Verizon:
On a combined basis, Verizon's reported net income for the quarter was $4.9 billion, or $1.79 per share, compared with $1.9 billion, or 70 cents per share, in second quarter 1999. Verizon's combined earnings per share (EPS) for the current quarter, adjusted for one-time events and excluding Genuity, were 81 cents. Included in these results are pension settlement gains totaling 9 cents per share. Excluding those gains, combined results were 72 cents per share, which represents a 7.5 percent increase over 67 cents in second quarter 1999.
Qwest:
cnetinvestor.com
Nacchio predicted the company would beat previous revenue forecasts and reach a range of $18.8 billion to $19.1 billion this year, above its previous forecast of $18.5 billion. And in 2001, he said, Qwest's revenues would likely reach $21.3 billion to $21.7 billion, ahead of the $21 billion estimate.
Williams Communications:
Files for convertible for expansion:
biz.yahoo.com
Williams Communications, which completed its initial public offering last September, said recently it plans to spend about $5.8 billion on expansion by the end of 2001.
Global Crossing beats estimates:
cbs.marketwatch.com
upside.com
The Hamilton, Bermuda-based company (GBLX: news, msgs) said in a statement late Thursday that it expects cash revenue from continuing operations, which consist of telecom services and installation and maintenance services, to rise to $5.2 billion, up 7 percent from the previously projected $4.84 billion and up 38 percent from 1999 results.
360Networks to invest $800 million in Asia Pacific:
dailynews.yahoo.com
Klugman said he was impressed with 360networks' July announcement that it would invest $800 million to build an Asia-Pacific deep sea cable network with Singapore Telecommunications Ltd. subsidiary C2C.
Status of leading vendors:
Nortel:
· Revenues up 48% to US$7.8 Billion
· EPS from Operations up 64% to US$0.18
· Increases Outlook for 2000 - Percentage Revenue Growth in low 40's and Percentage Growth in EPS from Operations in high 30'
JDS Uniphase:
Sales for the quarter were 33% above net sales of $395 million for the quarter ended March 31, 2000 and 173% above pro forma combined sales of $192 million for the quarter ended June 30, 1999. Sales for the year ended June 30, 2000 of $1.43 billion were 143% above pro forma sales for the comparable prior year period.
SDL:
Driven by significant increases in shipments of communications products for both terrestrial and undersea fiber optic systems, second quarter revenue was 156 percent above that reported for the second quarter ended June 30, 1999 and 53 percent higher than revenue in the first quarter of 2000. Revenue from fiber optic communications products increased 60 percent over the first quarter and by 242 percent over the prior year quarter. Results for the second quarter include three full months of operations for the Queensgate and Veritech acquisitions and four weeks of operations at Photonics Integration Research (PIRI). Excluding these three acquired businesses, total revenue increased by 31 percent sequentially and by 116 percent over the prior year quarter, and base fiber optic communications revenue grew by 36 percent sequentially and by 189 percent over the June 1999 quarter.
Alcatel:
Alcatel Press release / Print
Paris, July 27, 2000 - Alcatel (Paris: CGEP.PA; NYSE: ALA) today reported a 33% increase in sales to EURO 7,687 million for second quarter 2000, from EURO 5,772 million for the same period in 1999, with the four Telecom segment sales growing by 37%. Income from operations amounted to EURO 638 million, a 37% increase over EURO 465 million in the second quarter 1999, with the four Telecom segments increasing by 43%. Net income for the second quarter increased to EURO 344 million, representing a diluted EPS of EURO 0.32 ($0.31 per ADS), an increase of 23%. For the first half, total sales increased by 37% to EURO 13,811 million and income from operations more than doubled to EURO 751 million compared with EURO 311 million in first half 99.
Corning:
CORNING, N.Y. — Corning Incorporated (NYSE: GLW) reported today that its second quarter pro forma earnings per share increased 80%. The performance was driven by strong demand for Corning’s high-technology products, particularly its high- data rate optical fiber and cable, and LCD flat-panel display glass. The company reported second-quarter pro forma earnings of $0.94 per share, compared with $0.52 per share in the same quarter of 1999. Pro forma net income for the second quarter of 2000 totaled $271.1 million, approximately double the $136.5 million from the second quarter of 1999..
The third factor Moritz credits with declining spending is “limited access to cash,” and I won’t even waste my time looking at available cash for the major carriers, who, not so incidentally, account for the lion’s share of spending. If he’s referring to emerging carriers, then he should make that clear at the outset and include as much in the headline.
Moritz continues:
While the massive spending on this gear fed a huge boom in networking stocks over the last two years, any pullback stands to be potentially devastating for these richly priced shares. . . .
With spending growth poised to recede, investors are starting to worry about valuations in the networking and telecom-equipment sectors. As a result, the last two weeks have seen sharp selloffs in the shares of these companies, from giants Nortel (NT:NYSE - news) and Cisco (CSCO:Nasdaq - news) to optical equipment start-up Corvis (CORV:Nasdaq - news) and Internet gear pusher Juniper (JNPR:Nasdaq - news). Indeed, the past two days have wiped billions off these company's valuations, as Wall Street begins to consider whether the golden age of telecom spending has passed on.
Nearly every vendor I know of is expanding manufacturing by obscene multiples and this guy’s saying the golden age of telecom spending has passed. How can any self-respecting journalist make comments like that without backing them up with facts?
The following paragraph is so inane Moritz should be reduced to copy-editing at AT&T for the next five years as penance.
Another sign of a change: For the past several days, analysts who have traditionally been bulls on the telecom-services sector have been pointing to these pressures. They expect something -- capital spending, most likely – to give at beleaguered big spenders such as AT&T (T:NYSE - news), WorldCom (WCOM:Nasdaq - news), Sprint (FON:NYSE - news), Qwest (Q:NYSE - news), Williams (WCG:NYSE - news), Level 3 (LVLT:Nasdaq - news) and others. J.P.
“Analysts. . . expect something. . . to give????” Could he be any more vague?
Morgan analyst Tod Jacobs, for instance, predicts a shakeout through consolidation and cuts in spending.
As Lehman Brothers analyst Blake Bath pointed out in a report last week, network builders' recent bout of record spending has coincided with a period of dramatically falling long-distance revenue. Bath predicts that the industrywide ratio of revenue to spending will hit an unsustainable 2:1 next year. Inevitably, service providers will need to squeeze money out of equipment investments, he says.
Shake-out in the emerging carriers? If so, say it. And if that’s all he’s basing his case on, then give the percentage of the networking market involved. What percent do the Iaxis’s of the world represent? And who supplies them? He then says the spending-to-revenue ratio will be 2:1 next year and instead of applauding such fantastic growth, he rattles the “unsustainable” sabre. An entire article devoted to saying growth is slowing and yet he has one statistic that says growth is accelerating and he makes it negative.
Bath says the large-cap telcos will hit their peak spending next year and "then it will ease off dramatically from there." Another dyed-in-the-wool bull, Credit Suisse First Boston's Dan Reingold, echoes that point. . . .
"My numbers for 2001 show a deceleration in the rate of capital expenditure growth," the analyst says. "There was over 30% growth this year in cap ex, and about 20% in 1999, and next year we see a deceleration to 10% growth."
Of course, Reingold sees this as good news for service providers that can stop bleeding money and start selling services. And, for the equipment makers, he says it's not exactly the end of the world.
"This is a peaking process, if they spend $100 billion this year and $110 billion next year, those are big numbers and that's a lot of equipment," says Reingold.
So according to one analyst the rate of growth will decelerate in 2001. I’ve heard many say growth will continue for several years, so how about supplying a few other statistics? Maybe quote RHK’s fiber optics report to show what the data says.
Moritz continues:
Indeed, and spending is likely to continue to be lush even if growth slows.
As telecom service companies have raced to build a bigger Internet, the networking industry has enjoyed two years of phenomenal outlays. This year, equipment spending is expected to reach $115 billion in North America, according to Credit Suisse First Boston. . . .
Very positive numbers, and that’s just for North America, so you’d think the conclusion might be upbeat, but, no:
But signs of strain are starting to show already. Williams Communications, which is in the process of building the nation's third-largest fiber-optic network, has recently found cash a little harder to get a hold of. Williams had to liquidate its shares of optical switch maker Sycamore (SCMR:Nasdaq - news) to raise cash, and says it will also sell Corvis (CORV:Nasdaq - news) and optical gear specialist ONI (ONIS:Nasdaq - news) shares to raise more money when possible.
This “strain” has nothing to do with lack of funds, but the fact companies like Williams have to sell shares in some of their investments. They’re not exactly panhandling on Market Street.
This has brought added pressure to the optical equipment makers that count on new fiber-optic network builders such as Williams, Broadwing (BRW:NYSE - news), and Qwest as customers and also investors.
As competition increases and funding tightens, these upstart network builders and their suppliers are the most vulnerable.
Here Moritz’s thesis has been so diluted it’s hard to tell where he’s going. We now see that the problem isn’t that the carriers aren’t spending, but that they have to sell investments to fund it and this could hurt the young vendors involved. That may be true, but the carriers are having their cake and eating it too --- cash in the shares and if the companies don’t make it, buy from someone else.
He concludes:
"The emerging companies' spending has been far less productive than one might expect in terms of the revenue they have been able to generate on it," says Lehman's Bath. What makes matters worse for the new entrants and would-be start-ups is that a roster of tracking stocks and spinoffs are scheduled to hit the market. Those new issues will hog available investment money, toughening the going for less-established players, says Bath.
His original thesis that ISP and carrier spending is dropping has now boiled down to the fact that for new entrants revenues haven’t ramped in line with spending and that the market could be tough on their stocks in the near-term. I don’t have any problem with this, but I do have a problem with blazing headlines that say carrier spending is slowing when in fact it’s doing the opposite.
"A big part of me hopes I'm wrong on this," says Bath. But the evidence points to further pullbacks in these stocks.
I suspect a big part of Moritz was watching Gena Davis at the Emmys when he wrote this and that he doesn’t give a rats ass what happens to the sector he so cavalierly bashes.
Once in awhile theStreet.com is good. This time they bombed.
Pat (who had to wait for a phone call. . . :)) |
