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To: Johnny Canuck who wrote (36802)	4/22/2002 2:03:10 AM
From: Johnny Canuck	Read Replies (1) \| Respond to of 68485

Capex Cuts: How Low Can They Go? APRIL 19, 2002 PREVIOUS NEWS ANALYSIS -------------------------------------------------------------------------------- Sources say capex reductions just announced by Qwest and BellSouth could be just the tip of the iceberg. Service providers will likely keep cutting capex, sources say, and they even stand ready to postpone the spending to which they've already partially committed, in requests for proposal (RFPs). These bids on new work, even if they have been awarded to specific vendors, are no guarantee that money will actually be spent on new equipment or facilities. Visible Cuts Let's take it from the top; that is, the spending cuts that are plain for all to see: Qwest Communications International Inc. (NYSE: Q - message board) CEO Joseph Nacchio told investors last night that Qwest's plan to be cash-flow positive by the end of next quarter depends in part on reducing capital spending by at least another $200 million, to between $3.1 billion and $3.3 billion for 2002 (see Qwest to Cut 2,000 Jobs ). BellSouth Corp. (NYSE: BLS - message board) said in its quarterly report this morning (see Bellsouth Reports Q1 Earnings ) that it will spend between $4.2 billion and $4.4 billion, instead of the $4.8 billion to $5 billion it planned at the start of the quarter. SBC Communications Inc. (NYSE: SBC - message board) announced yesterday morning that capital spending won't hit its previously announced range of $9.2 billion to $9.7 billion this year (see SBC Reports Q1 Earnings ). While SBC didn't publicly divulge how far that number would fall, analysts predict SBC will probably cut it by 10 percent. Verizon Communications Inc. (NYSE: VZ - message board) is widely assumed to be ready to lop 15 percent to 25 percent off its $15 billion to $16 billion capex plans this year (see Verizon Next for More Capex Cuts? ). Sprint Corp. (NYSE: FON - message board) intends to cut about $300 million from its original budget of $2.7 billion this year (see Hope Springs From Sprint ). WorldCom Inc. (Nasdaq: WCOM - message board) will likely shave $2 billion, analysts say, off its planned capex of $5 billion to $5.5 billion this year (see WorldCom to Cut Capex? ). These look like the latest of what will be an ongoing stream of capex cuts from leading carriers, continuing for months to come. Last night, Qwest's Nacchio was asked whether the carrier might cut down to $1.5 billion or $2 billion, the very least Qwest has said it needs just to maintain its network. Nacchio equivocated: Estimating spending, he said, "is not a precise science; it's an art form." RFPs: Hidden Cuts? While most carriers say it's unlikely for existing RFPs to be affected by capex cuts, analysts predict they will probably lie fallow for many months more. "[Carriers] are going to wait it out," says Frank Dzubeck, president of consultancy Communications Network Architects. "Lots of these proposals aren't going anywhere for a while." Even proposals for which vendors have already been chosen will probably be stymied. James Jungjohann of CIBC World Markets says he and his colleagues have discovered in interviews with carrier personnel that there is "a disconnect between what is being quoted to vendors versus what is actually planned." (See Don't Trust the Techies ) "The timing of new RFPs being released to OEMs should be viewed with [suspicion]," he wrote in a client note yesterday. In one case, he says, a CTO told vendors that a large next-gen deployment was planned for the fall. The same carrier's internal personnel in charge of actual construction say the work likely won't begin until the summer of 2003. Elsewhere, Jungjohann cites an optical switch manufacturer that was led on by an international PTT, which had even approved a budget for the project; now "the negotiations have stalled, as the carrier appears unwilling to make any capital commitments." Reticence on the part of carriers and their would-be suppliers is clearly evident in recent doings. While most carriers remain cagey about the status of well-known upcoming RFPs (see SBC, Verizon Mull Metro Buys ), some resolutions have apparently been reached in would-be contracts at Verizon -- but no one's talking about the next steps. Even though no public announcements have been made, sources at Verizon say Tellabs Inc. (Nasdaq: TLAB - message board; Frankfurt: BTLA) has won the initial bid in the carrier's broadband crossconnect RFP, a project involving the addition of next-generation gear to Verizon's network. Verizon also plans to make a decision by June 2002 on its long-awaited next-generation metro Sonet RFP, these sources say. In late March, analysts at UBS Warburg estimated the worth of the Verizon crossconnect project at $50 million to $100 million, with the likely winner being Tellabs' 6500. Other bidders that may still be chosen for portions of the work include Alcatel SA (NYSE: ALA - message board; Paris: CGEP:PA) and Lucent Technologies Inc. (NYSE: LU - message board), according to the Warburg note. For Verizon's Sonet project, Warburg said in March that a decision was initially expected in January 2002 and that it would be worth $750 million to $1 billion to the winner. According to Warburg analyst Nikos Theodosopoulos and colleagues, finalists include Fujitsu Ltd. (KLS: FUJI.KL), Lucent, and Nortel Networks Corp. (NYSE/Toronto: NT - message board). Other sources have alerted Light Reading that Verizon has picked Lucent as the key vendor in its "ring DWDM" RFP. This proposal apparently was open for some time (see Tellabs Losing Its Edge? ) and calls for ring capabilities in metro DWDM gear. Lucent has not announced any RFP wins at Verizon. Despite the apparent good news implied by these RFP selections, analysts say none of them will be considered "done deals" until the checks for equipment are written. And Jungjohann and his colleagues suggest the gap between selection and payment could be widening, as carriers seek to put off decisions as long as possible. "Contract awards don't happen until the exec in charge of contracting signs the check. And that's not likely to happen in many of these instances," says CIBC analyst Steven Kamman. "Postponements will give carriers breathing room, and they'll likely continue well into next year." Even Verizon concedes there may be a wait before many projects are realized in the network. "Any proposal is subject to a very rigorous shakedown cruise," says a spokesperson. "How long between an official selection announcement and deployment is anybody's guess." — Mary Jander, Senior Editor, Light Reading lightreading.com