To: Jerry Olson who wrote (2966 ) 11/1/2000 11:58:42 AM From: Teri Garner Respond to Comment: Sentiment towards the telecom equipment sector has cooled considerably over the past couple of months as carriers, such as WorldCom, are reducing their capital spending forecasts. There is debate over the size of the reduction. The carriers are saying flat for 2001 while some industry observers anticipate an increase of 20% yoy for 2001 versus 30% in 2000. Regardless, spending is slowing and the effects of the slower spending are being felt across the telecom equipment spectrum as various sectors from optical to general telecom to DSL are feeling the pinch. The weakness in the optical space began with Nortel as it reported slower-than-expected top line growth. JDS Uniphase recently reported it was seeing no weakness in demand, but we believe that tune will change next year. See our recent Story Stock for more details. We continue to believe the valuations on this sector are too high especially in light of the slowing spending forecasts....A number of telecom companies, particularly the emerging CLECs that went to the equity markets to get the funding to build out their network, are seeing their shares fall as investors are becoming less patient. There has been a shift in sentiment towards demanding positive cash flow by a certain date. Specificity is important because in order to remain viable long term, these telecom companies will need additional funding for these expensive projects. The problem here is circular in that it will be difficult to issue new shares when the stock price is low as current shareholders will not be happy about the increased level of dilution that will result. And it's because of this fear of not being able to obtain additional financing that is pressuring the shares in the first place. Many will need additional financing to make it to that cash flow positive goal. These forces on the carriers are spilling onto the equipment providers....The slowdown in spending will affect more than the general telecom equipment makers. For example, the stocks for DSL equipment providers such as CMTN, PDYN and WSTL have been taken out and shot as they have cited recent reductions in capital expenditure forecasts from many of their regional bell customers....Also, the cellular equipment stocks have been under pressure as handset sales forecasts for next year were recently lowered. Motorola and Ericsson guided estimates lower whereas Nokia appears to be taking market share from Ericsson. The weakness in handset sales is spreading to the companies that build the towers etc. The telecom sector is similar to a large family tree as they are all related. If one family member catches a cold, it spreads quickly. The growth potential for the sector has slowed considerably since our last update. As such, we are lowering our rating on the sector from Outperform to Market Performer.
