Battered network makers face a new slump

By Jim Christie

SAN FRANCISCO: For the past year as the telecommunications industry imploded, desperate network equipment suppliers, including Cisco Systems Inc. and its rivals, have leaned more heavily on bricks-and-mortar companies in other industries to make sales. Those sales have become more important during the slump. But now they are threatened, analysts caution, with corporate confidence under pressure and new signs that investment on information technology is being ratcheted lower.

In recent weeks telecom gear suppliers Alcatel, Lucent Technologies Inc., Nortel Networks Corp., JDS Uniphase Corp., Ciena Corp., Tellabs Inc. and Redback Networks Inc. have warned of weaker demand. Meanwhile, Cisco Chief Executive John Chambers has said his customers are having a harder time projecting near-term business trends amid the weak spending climate.

Industry leader Cisco gets about 80 percent of its revenues from such "enterprise" customers, up from about 65 percent to 70 percent in 2000 when the telecom-spending boom was still on, Pacific Growth Equities analyst Erik Suppiger said. "People are more cautious than they were three or four months ago," Ryan Molloy, an analyst with SoundView Technology Group told Reuters. "Spending will definitely be at a challenging level in the near term."

Analysts earlier this year had been hopeful that business demand, while down significantly from the tech boom, would settle into a stable range as companies found their footing and raised capital investments in a creeping economic rebound. That has not happened and now corporations are expected to cut investment in gear for managing online traffic, investments touted for their ability to boost productivity and expand e-commerce.

"Our channel checks have supported our thesis that enterprise customers are tightening their spending budgets, eliminating purchases, deferring buying decisions and downsizing deal sizes," a recent Salomon Smith Barney research note said. "We believe weakening conditions in September will likely set the tone for tight spending conditions through the end of 2002," the Salomon analysts wrote.

Extreme Networks Inc. on Monday warned of just that kind of slowdown, saying it expected to post a loss in its fiscal first quarter ending Sept. 29, not the profit Wall Street had expected, as customers delayed orders.

"We believe this is due to concerns about the economy," Extreme Chief Executive Gordon Stitt told analysts.

Pressure for Cisco

Analysts had looked to Extreme as a kind of leading indicator for Cisco, the No. 1 maker of equipment that manages online traffic and whose market share dwarfs would-be rivals. Cisco's market capitalization has plunged to about $74 billion from around $555 billion in late March 2000, when its shares traded at a record high $82. Cisco closed on Friday at $9.46, down 36 cents, or 3.7 percent on the day.

"Overall, end users are very weary about the economic environment and seem very hesitant to spend at this point," Bear, Stearns analysts wrote in a research note this week. A slowing economy "does not bode well for corporate profitability, leading to a muted IT spending environment well into 2003," Deutsche Bank Securities analysts wrote in a research note.

Adding to the telecom woes

Network equipment makers had been desperate for stable sales outside the badly battered telecom sector, which remains under severe pressure, Commerce Capital Markets analyst William Becklean said. The most recent sign was last week's announcement by giant local telephone carrier SBC Communications Inc. that it may cut its 2003 capital spending by up to 38 percent. "The trend had been in place, but this was a real stunner," Becklean said.

UBS Warburg analyst Nikos Theodosopoulos estimates that communications gear orders will fall 15 percent to 23 percent and shipments will drop at least 10 percent to 15 percent in the September quarter from the prior quarter. That compares with a 10-year average of flat quarter-on-quarter orders and shipments in the third quarter, he said.

The American Stock Exchange Network Index, an industry benchmark, is down 94 percent from its lifetime high of 1,401.26 on Sept. 1, 2000 during the Internet boom.

© Reuters Ltd.