November 1, 2002
Several equipment vendors saw their share prices soar today on talk that Verizon Communications Inc. (NYSE: VZ) will be launching a multibillion-dollar enterprise initiative on Monday.
Several analyst reports today said they anticipate that Verizon on Monday will announce the enterprise data services program it alluded to on its third-quarter earnings call. Speculation has it that the company wants to challenge WorldCom Inc. (OTC: WCOEQ) and Sprint Corp. (NYSE: FON) in the enterprise market and is willing to spend as much as $5 billion on the initiative over the next five years.
While a Lehman Brothers’ report today states that the money being predicted for this project is expected to come out of Verizon’s existing wire-line capex budget, it says it’s the way Verizon will be spending the money that’s important.
"This makes it seem more likely that [Verizon] will actually spend all of their budget," says Lehman Brothers analyst and author of the report Steven D. Levy. "And… it shows that they are initiating new services instead of withdrawing to maintenance of the current network.”
This is especially good news for equipment vendors, which have been hit very hard by big cuts in carrier capital spending over recent months. The Lehman report states that "we believe that this focus on new growth initiatives may be perceived as positive for sentiment towards the equipment vendors.”
It would seem that the good will is already flowing. In trading today, Cisco Systems Inc. (Nasdaq: CSCO), which has a partnership with Verizon, saw its stock price climb nearly 5 percent; and Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) shares jumped more than 16 percent. It was, however, Juniper Networks Inc.'s (Nasdaq: JNPR) spectacular stock-price hike that got the most attention today. That company saw its shares soar nearly 20 percent, climbing from 5.82 to 6.99. CIBC World Markets analyst Stephen Kamman says he believes that the speculations surrounding the Verizon initiative were the driving factor in the rally on Juniper’s stock.
"The chatter on the street is that Juniper has won the Verizon deal, and that seems to be what is moving the stock today," he says, referring to an anticipated but unannounced edge-router deal that Light Reading first reported on back in September (see Juniper Still Working Verizon Deal). However, he warns, "The reaction is out of proportion to the news. Juniper is not some one-trick pony that needs an RBOC contract to survive. I'm not saying that the stock price isn't sustainable. Juniper is a great company, and I think the stock is worth $7. But a 20 percent gain is more a commentary on the state of the industry."
Levy, too, warns against overreacting and expecting one vendor to reap all the benefits of the potential project. “I think it will have more of an impact on the psychology of the entire sector rather than on one particular equipment vendor,” he says. “But if we're talking about a buildout north of a $10 billion, it could make a big difference to a smaller equipment provider.”
While he emphasizes the great possibilities a Verizon enterprise launch could provide, Levy is also wary of predicting that it would indicate the end of the current telecom market misery. "This is an encouraging data point,” he says, “but I wouldn't go as far as to say that this is a sign of a turnaround, as much as I would like to believe that."
Levy expects Verizon’s enterprise initiative to include:
Investments in ATM switching and Frame Relay switching;
Possible expansion of Verizon’s IP backbone to connect isolated points of presence;
Traditional data services, DSL, VOIP, outsourced data storage, firewalls, and VPNs;
Expansion of Verizon’s long-distance offering inside its region and, longer term, maybe outside of its region as well; and
Plans to offer new data services and some long-distance voice services to enterprise customers, with a particular focus on small and medium-sized businesses.
Analysis firm Kaufman Bros. LP also put out a report on the topic today, stating: “We believe the launch will attempt to interconnect islands and major hubs across the Bell Atlantic and GTE properties in major markets over a period of several years."
Verizon had not returned calls by press time today.— Eugénie Larson, Reporter, and Marguerite Reardon, Senior Editor, Light Reading
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