NEW YORK-Cable equipment makers are expected to post weak sales for the second straight
quarter as AT&T Corp. continues to freeze purchases and other customers slow their network
expansions.
As in last quarter, digital set-top boxes are seen as the only hot item in the sector. Only the manufacturer with
a large exposure to digital set-top boxes, Scientific-Atlanta Inc., is expected to post
strong results.
Most of the others, including C-Cor.net Corp.,
CommScope Inc., Harmonic Inc. and
Amphenol Corp., have warned of a shortfall. Harmonic,
C-Cor.net, CommScope and Antec Corp. have
announced restructurings and layoffs to adapt to the slowing demand for their
products.
As capital markets have dried up, cable operators are scrimping on
transmission equipment, slowing or indefinitely postponing the buildouts of
their networks. Transmission equipment vendors are about six months into
their third major sales slump in the last decade, according to analyst
Lawrence Harris of Josephthal & Co.
The last downturn was 1996 and 1997, as operators swapped systems to
cluster their services in certain cities. Negotiations over those swaps slowed
network buildouts. Due to the last recession and lackluster recovery,
buildouts also slowed from mid-1990 until the spring of 1992.
"The one difference with the 1990 to 1992 period is that, with the exception of
AT&T, the cable operators are in excellent shape, so that it's not a financing
issue, it's more a decision to focus on equipment such as set-top boxes that can generate revenues and
returns on investment," Harris said.
AT&T To Resume Spending - But When?
Nonetheless, this slowdown is severe compared with others, said David Woodle, chairman and chief executive
of C-Cor.net.
"I think this slowdown has been more dramatic and quicker than we have seen in general in the past in
telecom equipment spending," Woodle said.
The slowdown has been exaggerated by the savings efforts of AT&T Broadband, AT&T Corp.'s cable unit. After
halting transmission equipment purchases in November, AT&T said it would resume buying in mid-January.
But almost three months later, there is no indication of AT&T coming back into the market, and most
equipment makers have excised from their forecasts for the year transmission deals with the largest cable
operator.
"My bet is that they won't spend until early to mid-May," said George Hunt, an analyst at Wachovia
Securities. "They'll have to spend at some point, because if they don't, the satellites are going to take their
install base."
Competition for television viewers from satellite communications companies has been the main driver between
recent cable network upgrades. Cable operators aren't expected to increase their investment in infrastructure
until they need to again.
"There will have to be a confidence on the part of the service providers that they'll need to bolster capital
spending in order to capture new consumer spending," said Woodle of C-Cor.net.
Antec, which announced layoffs amounting to 5% of the work force Tuesday, has the greatest exposure to
AT&T. Last year, AT&T accounted for 43% of its revenue. Contacted Tuesday afternoon, Antec spokesman
Jim Bauer said the layoffs reflect the slowing demand for transmission equipment, which AT&T has not started
repurchasing.
"Operators in general are going to spend money on things that generate revenue, like cable telephony, cable
modems, and digital cable," he said.
At the beginning of the year, AT&T resumed buying Antec's equipment for cable telephony, which allows
customers to use their cable line for telephone service, Bauer said. While Antec's sales of transmission
equipment will be soft, he said, cable telephony sales will post solid growth.
The consensus estimate compiled by Thomson Financial/First Call calls for Antec to lose 10 cents a share on
revenue of $164.5 million, compared with a profit of 22 cents a share last year. Although Antec did not revise
financial guidance when announcing layoffs earlier this week, Harris thinks the company will post a 16-cent
loss. Other analysts also think the company might fall short of the consensus view.
"If I had to guess what was going to happen, I would guess they would fall short," said Anton Wahlman of UBS
Warburg, whose earnings view matches the consensus.
The falloff from AT&T, a major customer for most equipment vendors, is compounded by lower purchases from
other cable operators. When C-Cor.net said at the end of March that slowing demand forced it to revise
quarterly estimates and close manufacturing operations, Woodle said the company's customers fall into three
camps. Some cut their capital spending budgets by 10% to 20% this year, he said. Others have slowed the
pace at which they are rebuilding their networks, and as a result will spend 30% to 50% less this year
compared with 2000. Then there are customers who have indefinitely delayed rebuilding cable networks.
For the quarter ended in March, C-Cor.net said it will post a loss of 14 cents to 16 cents a share, excluding
goodwill amortization from the $20 million acquisition of MobileForce Inc. Analysts had been expecting a loss
of 1 cent a share. In the year-ago quarter, the company earned 13 cents a share.
The State College, Pa., maker of transmission equipment expects revenue to come in at $39 million to $40
million. At the end of March, C-Cor.net announced plans to lay off 40% of its work force by year-end, in
response to slowing demand.
Digital Selling Well - For Now
Even as the transmission equipment business dwindles, Scientific-Atlanta is gaining market share at the
expense of other vendors, said Wahlman, the UBS Warburg analyst. Everyone's transmission sales are
faltering, Wahlman said, but Scientific-Atlanta's are holding up better than most.
Scientific-Atlanta is more heavily invested in digital set-top boxes than transmission equipment, and is
therefore somewhat insulated against that sour sector. Analysts are counting on the company's digital set-top
box sales to once again make up for any transmission shortfall. Digital set-top box sales at Motorola Inc.
(MOT, news, msgs) were robust, boding well for Scientific-Atlanta, Wahlman said.
Even as consumer spending slows in other areas, digital set-top boxes are flying right off the shelves of cable
operators. Whether consumers would continue spend an extra $10 to $20 a month for better transmission and
more cable channels in a recession is unclear, analysts say.
"We have had experience with basic cable during recessions, and people have been reluctant to give up their
TV," Hunt said.
Digital set-top box sales propelled Scientific-Atlanta's earnings-per-share for the December quarter 3 cents
above the consensus estimate. Reduced share count added a penny to the December quarter figure,
according to UBS Warburg.
"I still am confident that Scientific-Atlanta is going to have a reasonably good to very good quarter," said Hunt.
"I don't think they're going to blow it away like they did last quarter."
The Thomson Financial consensus view has Scientific-Atlanta's quarterly earnings at 42 cents a share, flat
compared with the last quarter, on revenue of $666.4 million. The company earned 23 cents a share in the
year-ago quarter. Hunt predicts the company will earn 44 cents a share. Other analysts see the company
meeting or beating the consensus view.
No further surprises are expected from Harmonic, Amphenol or CommScope.
In early March, Amphenol said first-quarter earnings will fall between 66 cents and 68 cents a share, on
revenue of $315 million to $320 million. Analysts had expected earnings of 70 cents a share. Amphenol
earned 48 cents a share in the first quarter last year.
Harmonic said last week it will report a pro forma loss of 45 cents to 55 cents a share, excluding goodwill,
amortization and other intangibles. Analysts had expected a loss of 29 cents a share. Harmonic earned 28
cents a share in the year-ago quarter.
The company forecast revenue of $39 million. In February, the company said it would lay off 100 employees or
about 10% of its work force, and take a resulting charge of $800,000 in the first quarter.
Announcing a 13% work force reduction earlier this month, CommScope reiterated that it will earn 27 cents to
30 cents a share in the first quarter, excluding a 2-cent charge for the restructuring. In early March, the
company had said it expected to earn between 27 cents and 30 cents a share. The company earned 32 cents
a share in the first quarter last year. |
