Cisco Systems Inc. (Nasdaq: CSCO) is the latest equipment vendor to suffer from analyst speculation over a slowdown in carrier spending for 2001, as its share price slid five percent today (Monday).

Earlier today Tim Luke, analyst with Lehman Brothers, reduced his 12-month price target from around $90 to a level of $60 to $65. While Luke still recommends Cisco as a “buy,” he cautioned investors, primarily due to uncertainty in the marketplace due to tighter capital spending.

“There is definitely a lot of concern about carriers' ability to raise financing for the continued buildout of their infrastructures,” says Paul Silverstein, senior analyst with Robertson Stephens. “A lot of carriers say they are reining in their belts.”

This adjustment comes less than a week after a series of companies reported negative earnings news to Wall Street, sending the Nasdaq reeling. The most devastating news came from Nortel Networks Corp. (NYSE/Toronto: NT), which posted surprisingly low quarterly results in its optical business (see Nortel's Fright Night). Lucent Technologies Inc. (NYSE: LU) also weighed in with reports it had missed its projected numbers and announced that its CEO was replaced (see McGinn: McGone).

“Nortel was the poster child for optics,” says Silverstein. “They were on fire, and that was the example everyone held up. If Nortel had delivered a great quarter, it probably would have delayed the market’s reaction to the carrier spending issue, because you would still have a contrary indicator.”

Ryan Hankin Kent Inc. (RHK), a telecom market research firm, also released a report today stating that carriers expect to only increase spending by 20 percent next year, which is off earlier projections that predicted spending to be around 30 percent. This confluence of events adds up to increased investor uneasiness.

Even a stellar earnings report from JDS Uniphase Inc. (Nasdaq: JDSU), a large optical component vendor, hasn’t soothed investor fears (see JDSU: There's No Industry Slowdown).

But some analysts say that the market is overreacting, particularly in Cisco’s case. For one, Cisco only realizes 40 percent of its revenue from the service provider sector and offers no legacy circuit-based products.

“They are less vulnerable than other vendors,” says Nikos Theodosopolous, managing director at UBS Warburg. “We probably won’t see them continue to accelerate their growth as much as they have in the past, which isn’t such a horrible thing, but in this environment where there is lots of nervousness, people are looking for negative reasons not to invest.”

Theodosopolous says he still is recommending Cisco and says that the true effects of capital spending cuts won’t be known until sometime next year.

In any event, the news may not be so bad for optical vendors that focus on service providers, say analysts. For one, carriers have historically underestimated what they expect to spend for the coming year. And this year may be no different from years past.

Secondly, while the estimate for spending is lower than what has been previously projected, it is still growth. Besides, some analysts say that capital spending should slow down, since the whole point of deploying optical gear is to help reduce costs.

Thirdly, carriers spend capital in several categories, and optical equipment isn’t the only one that will be receiving cuts. In fact, some have predicted that carriers are more likely to cut spending on laying new fiber or buying antiquated telephone switches.

Fourthly, carriers have already installed near-empty conduits for transmitting traffic. For example, they might have 40- and 80-channel DWDM systems with only two channels working. An increasing amount of their spending is going to go into getting a good return on these existing investments, which means deploying more optical switches and line cards that will help fill these pipes.

Technology is still racing ahead. Demand for broadband services is not slowing down. In fact, many carriers are struggling to keep up with demand for cable modem services, DSL, direct fiber connections, and optical wireless connections. Increased demand from customers for more bandwidth translates into a need for higher capacity networks that run beyond OC48 into the reaches of OC192 and OC768. “It's clear that there is no lack of demand for broadband services,” says Silverstein. “But it is the provisioning of these services that causes the bottleneck.”

Still, in the short term, investors are spooked. “I think right now the psychology is such that people are concerned about the slowdown,” says Theodosopolous. “And the latest data points aren’t that promising. We probably won’t see a turnaround until next year. There just isn’t much confidence right now.”

-- Marguerite Reardon, senior editor, Light Reading, http://www.lightreading.com