Yay. 2 telecom articles cited on other threads, first IBD:
Investors Again Fear Slower Telecom Sales
By Mike Angell
Investor's Business Daily
It’s autumn. Time for the leaves - and shares of telecommunications-gear makers - to fall.
The stock of telecom stalwart Nortel Networks Corp. has dropped 11% since the start of September. The largest maker of data networking gear, Cisco Systems Inc. has seen its shares slide 9%.
Shares of Nortel, Cisco and similar companies are being sold as investors worry that telecom service providers might start spending less on gear.
But the fears aren’t new, say many telecom analysts who have seen the market swoon in past autumns. And gearmakers haven’t issued warnings of slowing sales.
“There is a perceived slowing down in telecommunications spending, but we don’t believe there is an actual slowdown,” Lehman Bros. analyst Steve Levy said.
Seasonal Worries
In autumn, telecom carriers such as SBC Communications Inc., Verizon Communications Inc. and AT&T Corp. usually decide how much they’ll spend on new equipment for the upcoming year. They usually reveal next year’s capital spending plans by year-end.
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Image: Carriers' Cash
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As a result, telecom gear shares tend to sell off in the fall on worries about those capital spending plans, says CIBC World Markets analyst Martin Pykkonen.
“You’ve seen times when there’ve been worries about AT&T and its spending level with Lucent this time of year,” Pykkonen said. “In the last few years, it’s never turned out to be a problem.”
The Investor’s Business Daily Telecommunications Equipment Index of 222 companies bears out this pattern. In 1998, the index rose almost every month, but that August it fell 80 points, its biggest drop for the year, and it barely rose in September. During last year’s run-up in telecom equipment stocks, the group was flat in September.
This year, Wall Street’s telecom gear worries started with a Lehman Bros. report on telecom services. The report says telecom service providers get about $2 in revenue for every $1 spent on new gear. But as recently as 1996, telecom gear firms realized revenue of $5 for every $1 spent on gear.
The report says telecom carriers are looking to get closer to that $5-for-$1 ratio.
Levy says investors misinterpreted the Lehman report.
“Carriers want to remain competitive as long as there is a return on their investment,” Levy said. “They have to invest in new equipment. They’re not about to lose market share.”
Voice Profits Shrinking
Still, competition is forcing many carriers to cut their prices and make less money on local and long-distance phone service.
Voice service isn’t a big moneymaker. That’s one reason for Lucent’s slide. Its shares have fallen from 75 at the start of this year to less than 40.
Voice-service revenue grows at about the same rate as the population. Accordingly, sales of equipment that carries voice traffic tend to grow at single-digit rates.
Lucent still gets about 18% of its sales from voice equipment. Nortel gets about 12% of its sales there.
Both firms, though, are battling longtime data-networking leader Cisco in the new types of networks that transmit both voice and data. Lucent and Nortel are shifting toward newer high-growth products such as optical and data-networking equipment. Glasslike fiber-optic lines send data and voice at far faster speeds than is possible with normal copper wiring.
Nortel Is ‘Sold Out’
Nortel Chief Executive John Roth helped stem the recent sell-off in telecom gear stocks. Last week, he told reporters at the opening of a new office that Nortel is “sold out” of optical equipment for 2000. That gave gear stocks a boost.
Optical equipment should account for more than one-third of Nortel’s sales this year. Lucent is shifting its product mix more to optical and data.
If carriers are spending less, “it would affect older technologies rather than Internet technologies,” Pykkonen said. “The balance of sales show a shift toward Internet equipment.”
But with carriers spending such huge sums to upgrade quickly, troubles have emerged.
For example, British Internet service provider Iaxis recently filed for bankruptcy protection. The company owes some $28 million to fiber-optic equipment maker Ciena Corp.
That’s a big hit for a company that reported sales of $233 million in the June quarter. It plans to take a fourth-quarter charge for that debt. Ciena shares fell some 50 points the week after Iaxis’ announcement.
Juniper Networks Inc. also sold to Iaxis. Juniper hasn’t said if it’s having trouble getting paid.
The third strike against the gearmakers was the apparent weakness of some U.S. telecom service start-ups. These aren’t the biggest customers for telecom-gear makers, but they’ve made some big purchases.
The stock market focused on digital subscriber line service provider Mpower Communications Corp. DSL speeds data on normal copper phone lines. The company recently revised downward its earnings estimates for the third and fourth quarters, saying it’s having problems securing high-speed connections to long-distance networks.
“We have seen some second- and third-tier carriers have problems,” Levy said. “But these are the ones with poorly executed business plans.”
Risky Start-Ups?
There’s also been concerns about gearmakers helping fund start-up data-network builders to make sure the start-ups will buy the investors’ gear.
Pykkonen says network gearmakers tread a thin line between expanding sales and managing their credit risks. He expects the recent spate of bankruptcies and downgrades will make network gearmakers more selective.
“Vendors are not going to take an undue risk to grow their sales,” Pykkonen said. “For carriers that look iffy, they’ll just shove that off to third-party financing.”
With the exception of the Ciena charge, no other gearmaker has reported problems collecting bills. Nor does there appear to be a slowdown in spending for data-networking equipment.
“I’m not hearing that (data-network) vendors are saying ‘Ship us what you have now because we won’t have the money later,’ ” Pykkonen said.
And then lightreading>
Tech stocks may have taken a beating in past weeks, but demand continues to look rosy for broadband equipment, according to "eNetwork Infrastructure: Enabling the Networked Economy," a free report from securities and investment firm WR Hambrecht + Co. wrhambrecht.com.
Thanks to Internet demand and increased competition, carriers spent $73.2 billion in 1999 on their network infrastructures--a 30 percent increase over 1998. And they'll keep spending: WR Hambrecht predicts carriers will shell out $87.7 billion for equipment in 2000--more than doubling capital outlays two years ago.
North American Wireline Capital Spending ($B)
Capital spending will grow for carriers of all kinds, the report says, including incumbent local exchange carriers (ILECs), competitive local exchange carriers (CLECs), incumbent and new interexchange carriers (IXCs), and cable operators. But growth will be especially high for CLECs and cable operators (34 percent and 25 percent over 1999, respectively). These are the most aggressive newcomers to the service providers scene.
These carriers seek to improve their networks with optical networking, xDSL gear for voice/data convergence, last-mile access gear, and core IP switching and routing.
The need for innovative technology presents lots of opportunity for startups: According to WR Hambrecht, new companies making high-speed, intelligent networking equipment for Internet backbones fueled $112.3 billion worth of IPOs and acquisitions in 1999.
-- by Mary Jander, senior editor, Light Reading lightreading.com |
