Network gear makers set for another painful quarter

Jim Christie

SAN FRANCISCO: After a gut-wrenching two years, the only glimmer of good news

for network equipment makers is that sales are likely to have worsened more

slowly in the June quarter, analysts said.

Earnings reports by network gear makers, due in the next few days, are

expected to show the battered sector has not hit bottom and any hopes for a

recovery have been pushed well into 2003, almost three years after the downturn

began.

The lingering slump has prompted doubts about which vendors, whose sales

reflect investment in high-speed communications networks, will be around when

the dust settles in a once high-flying group that soared during the telecom

spending spree of the late 1990s.

"If you're large, stable, and have a lot of cash that's a good thing

because you'll look like one of those guys who will be in business 12 to 18

months in the future," said Steve Kamman of CIBC World Markets. "If

you're a smaller company revenue-wise, with a more limited customer base and are

cash-flow negative, then people will assume you'll stay like that."

Revenue seen down again



Cisco Systems Inc., the world's No. 1 maker of gear that directs Internet
traffic, expects the networking sector to consolidate to three to five players

and figures to be one of those that defines the industry after the slump.

In the coming days, some seven listed network equipment makers, all of them

smaller than Cisco and all feeling a deeper pinch amid the deep downturn, will

report results for the June-ended quarter.

Revenue for the group is estimated to have fallen 4 percent from the prior

quarter and 40 percent from the year-earlier quarter, according to analyst

forecast data collected by Thomson First Call.

The companies reporting range from Juniper Networks Inc. and Extreme Networks

Inc., which are expected to post revenue of $110 million and $113 million,

respectively, to Copper Mountain Networks Inc., with sales seen below $3

million.

Analysts expect Juniper to post a loss excluding charges, compared to

earnings excluding items a year earlier. Extreme is expected to report rising

earnings excluding items. Copper Mountain is expected to post a narrower loss.

On a net basis, all three posted losses in the most recent quarter.

"The challenge for the telecom equipment companies is to survive this

period without permanently damaging their product lines until the capital

expenditure recovery occurs," Commerce Capital Market analysts said in a

recent research note.

Bottoming out?



Network gear makers have already watched their business and share prices
slide for almost two years. The American Stock Exchange Network Index, a proxy

for the group, is down about 90 percent from its all-time high of 1,401.26 on

Sept. 1, 2000.

Shares of gear makers focused on the cash-strapped telecom industry have been

especially hurt. No. 2 Internet gear maker Juniper, which relies heavily on

telecom sales, reports results on Thursday. Its shares have dropped about 74

percent over the past year.

By contrast, shares of Cisco, which also sells to the corporate

"enterprise" market, have not suffered as much, falling about 30

percent over the same period. Smaller competitors have not fared as well:

Extreme Networks Inc. and Foundry Networks Inc. sell to corporations, but their

shares have sagged about 61 percent and 65 percent respectively over the past 52

weeks.

Contrary to earlier hopes that their carrier business was so bad it had

nowhere to go but up, this year has already been written off by investors,

analysts said. UBS Warburg forecasts global capital spending will fall 22

percent this year, with US spending dropping 34 percent, as major telcos remain

"extremely cautious" with their budgets.

Carriers had slashed spending amid an industry downturn and mounting

financial troubles even before WorldCom Inc. disclosed a nearly $4 billion

accounting scandal that has taken it to the brink of bankruptcy. Meanwhile,

corporate demand has steadied but is not strong enough on its own to lift the

sector, analysts said.

Given the mounting financial pressures on the group, even a flat quarter may

not be taken a sign of a battered industry finding its footing, some analysts

said. "That's not going to be enough for the stocks to generate any

momentum," SoundView Technology Group analyst Ryan Molloy said.

(C) Reuters Limited.