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Technology Stocks : Ciena (CIEN) -- Ignore unavailable to you. Want to Upgrade?

To: Ibexx who wrote (11936)	3/25/2002 5:19:41 PM
From: Ibexx	Read Replies (2) \| Respond to of 12623

Article taken from Street.com, thus you need to read it with a grain of salt: <g> Networkers Hope to Ride Metro to Late-Year Rebound By Scott Moritz Senior Writer 03/25/2002 05:03 PM EST Credit-agency worries about Verizon (VZ:NYSE - news - commentary - research - analysis) appear to spell yet more pain for the networking gearmakers, but not everyone sees this familiar saga ending the same way. So far, 2002 is shaping up to be the year telecom wishes it could forget, as revenues dwindle and debts come calling on phone companies like WorldCom (WCOM:Nasdaq - news - commentary - research - analysis), Sprint (FON:NYSE - news - commentary - research - analysis), Qwest (Q:NYSE - news - commentary - research - analysis) and now Verizon. As investors know all too well, when telcos feel a credit pinch, equipment suppliers like Lucent (LU:NYSE - news - commentary - research - analysis), Cisco (CSCO:Nasdaq - news - commentary - research - analysis) and Nortel (NT:NYSE - news - commentary - research - analysis) get steamrolled. But here's the twist: Phone companies -- at least those that stay in business -- can't hold their breath forever. Healthy or not, networks need to replace old gear with new gear, and telcos can only put off purchases for a limited amount of time, say analysts. That means there's almost sure to be a spending rebound within six months, observers say. And that could mean some rare good news for big network gear pushers. Delays and Demand Take Verizon, the nation's largest local phone company. In January it cut $2 billion from its core network spending plans. The new tightfistedness has delayed some big metro network expansion projects and forced the company to rely more heavily on traffic rerouting to relieve strains on busy pathways, says Sam Greenholtz, an optical analyst at the telecom research and consulting firm Communications Industry Research. "Depending on demand, Verizon can reroute metro for about another three to six months," says Greenholtz. And what's true with Verizon is largely true across the local phone industry, as scarce cash forces telcos to forestall for now new gear purchases, says Greenholtz Verizon denies any shift in its strategy and says rerouting has always played a role in its traffic management. Still, Greenholtz' observations jibe with report out Monday from avid spending forecaster Paul Sagawa of Sanford Bernstein. Sagawa's research suggests that while total capital spending is projected to drop about 25% this year, he sees spending hitting the bottom in the first half of this year and improving modestly by year-end. No fool to the whims of phone companies, Sagawa hedges his prediction by saying deeper cuts would destroy his improvement scenario. Growth Story? Verizon's debt expanding faster than revenue 2001 (billions) 2000 (billions) % change Debt maturing this year $18.6 $14.8 25% Long-term debt 45.6 42.5 7 Cash and short-term investments 2.9 2.4 26 Net debt 61.3 54.9 11 Revenues 67.2 64.7 4 Source: Verizon 10-K filing Given the industry's recent performance, investors can hardly be blamed for approaching telecom with caution. "It's hard to work up much enthusiasm yet," says Jerry Paul with Quixote Capital Management, a Denver-based hedge fund. "One day we will emerge from this telecom valley, but there are a lot of issues to clear up before then," says Paul, who has no positions in networking companies. Pillar Verizon is widely considered a pillar of strength among telcos -- but then again, this is a sickly group of late. And if Verizon is any gauge, a robust recovery is still a ways away. S&P lowered its outlook on Verizon to negative from stable Friday on concerns over the telco's ballooning debt levels. Verizon continues to lead the pack in on that front with $61 billion in net debt and more than $18 billion in debt payments due this year. Moody's also reiterated its negative outlook Friday, saying that Verizon may be on the hook for some $20 billion worth of put options in the event that wireless joint venture partner Vodafone decides to reduce its role in the business. Verizon says Vodafone has made no indications that it wants out of the deal. Moody's first put a negative watch on Verizon in April when the company's wireless IPO seemed in doubt. That offering has since been shelved, given the unfavorable environment for wireless stocks. But outlook concerns aside, the two agencies reaffirmed their A-plus and A1 credit ratings on Verizon. Verizon issued a statement Monday in response to the credit concerns. The company said it was in the process of reducing its debt by slashing capital spending and selling local phone assets in Kentucky, Alabama and Missouri. While Lucent already warned of lower-than-expected sales, and Nortel seems to be slouching in that same direction, Cisco has been largely spared much of the negative telecom effects. To wit, Lehman Brothers Monday lauded the router maker as the rare networking outfit that isn't entirely dependent on telecom. As such, Lehman says, Cisco may benefit from modestly improving gear sales to business customers in the second half of the year. Revenue Stream Deferred But some observers suggest that any rosy short-term prognosis for the network equipment industry may lead to a sucker's rally of sorts and for anyone willing to believe it is the beginning of a long-anticipated recovery. In fact, optical analyst Greenholtz says deferred purchases may provide a surge of spending around the turn of the year, but it's not likely to be a recurring pattern. It will be some time later in 2003 when real sustainable demand levels materialize. Quixote's Paul gives it a year or two before surplus inventory and used gear is reabsorbed from the secondary market. "It's going to take 12 to 24 months to clean up issues like used gear, overcapacity, bankruptcies, restructurings and then you need economic growth," says Paul. "There are still a lot of things to work through." Ibexx