Slowdown in telecom spending may continue: Analysts

By : |August 29, 2001 0

Ben Klayman

CHICAGO: With telecom carriers keeping their wallets firmly closed, the
industry’s equipment makers can expect the dry times to drag on till next year,
analysts and investors say.

The days of heady growth – at times in 1999 and last year spending on gear
surged 50 per cent – are distant memories industry officials know won’t return
any time soon. Even moderate capital spending growth seems unlikely in the next
18 months.

"What we experienced the last few years was a real fun ride, but the
bubble burst," independent telecom analyst Jeff Kagan said.

That bursting has led to some spectacular disappointments as fiber-optic
giant JDS Uniphase Corp. recently posted one of the largest annual corporate
losses ever at $50.6 billion, while telecom equipment giant Nortel Networks
Corp. reported a second-quarter $19.4 billion loss.

Other tech luminaries such as Lucent Technologies Inc., Cisco Systems Inc.
and Corning Inc. have slashed jobs to reduce expenses in line with the curtailed
customer spending.

"You can’t reduce your interest by waving a wand," said Robert
Gensler, portfolio manager of T. Rowe Price Media & Telecommunications Fund.
"You can reduce your companies that have scaled back the spending plans
that runs the gamut of large players to scrappy, emerging carriers. Qwest
Communications, which acquired Baby Bell U S West last year, has cuts spending
plans twice since early April.

Last month, the No. 4 US long-distance company said its capital spending
would end the year at about $8.8 billion to $8.9 billion, down from $9.5 billion
earlier in the year. It added spending would decline to about $7.5 billion next

Others that have cut spending include telecom giants Sprint Corp. and Verizon
Communications, as well as such smaller players as Canada’s BCE Inc. , data
services company McLeodUSA Inc., high-speed communications services provider
Level 3 Communications Inc. , and voice and data services firm XO Communications

In today’s shrinking environment, it’s even good news when a company simply
maintains its capital spending budgets, like Baby Bells BellSouth Corp. and SBC
Communications Inc. have done so far this year. Several recent Wall Street
surveys suggest things are not about to improve.

Deutsche Banc Alex. Brown analyst George Notter said in July service
providers’ 2001 spending would decline 20 per cent to 22 per cent and companies
had forecast spending will decline another 19 per cent next year.

Robertson Stephens said in June carrier spending would probably fall over the
next three years, with declines of 13 per cent this year, 12 per cent in 2002
and six per cent in 2003.

"When will it end? Our view is probably well into 2002, so at least
another year," Corning President and Chief Executive John Loose told
Reuters in June. The following month, the world’s largest fiber-optic cable
maker cut 1,000 jobs, closed three plants and warned the slowdown could last
another 12 to 18 months.

Many companies, including Corning have relied on international markets,
especially China, to pick up the slack, but that may not last as the malaise
spreads, analysts said.

Getting back in balance
ADC Telecommunications Inc. Chairman and CEO Richard Roscitt recently said it’s
a matter of the industry getting back to a normal level of spending.

"The whole thing’s really an ecosystem. You have to get it back in
balance," he told Reuters. Others wonder whether consumers even want mobile
telephones that can surf the Internet and download music and video.

"Where’s the screaming need?" said a New York investment advisor
and president of North Star Group, Henry Asher. "Maybe we overestimated the
desire that people had for streaming video on their cell phones. Maybe that
isn’t the next great thing."

Many industry executives and analysts believe, however, that carriers will
boost spending again to keep up with growing demand for broadband and Internet
services. "The service providers and the enterprise customers can only hold
off on spending for so long because they still have to meet the demands of their
customers," industry analyst Kagan said. "The question is when are
they going to start."

Gary Smith, president and CEO of optical networking firm Ciena Corp.,
recently told Reuters that demand remains even if carriers are building more on
a just-in-time basis. "People are still inventing great ways to eat
bandwidth – music, video, streaming, corporate stuff," he said. "What
people are trying to figure out is how to make money on it."

And there are still hot areas of demand amid the slowdown as carriers spend
money on next-generation gear to replace aging, inefficient equipment, analysts
said. Industry officials also hope the Federal Reserve Board’s interest rate
cuts will boost flagging spirits, which will in turn lead to increase spending.

"If all the analysts are saying the sun is coming out next year, it will
probably have a positive effect on capital budgets," said Avici Systems
Inc. president and CEO Steven Kaufman.

(C) Reuters Limited 2001.

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