Spending Slowdown at AT&T?
Notter noted today that excess Project Lightspeed inventories and a budget-related capex slowdown at AT&T Local could decrease equipment orders in the fourth quarter.
In a research note issued this morning, Notter writes that conversations with industry contacts suggest that "there could be excess inventory building up around AT&T's Project Lightspeed deployment."
Notter says the excess inventory comes from an aggressive build plan for Project Lightspeed that translated into aggressive forecasts and ordering in previous quarters. However, his contacts say the carrier has struggled to get all its work done.
"It appears that the RBOC may have over-ordered equipment relative to their actual rates of deployment. That's now translating into excess inventory at Lightspeed and slowing order rates for equipment manufacturers. We think this will most likely impact the equipment manufacturers' businesses in Q4," Notter writes.
Due to budget-related issues, Notter says AT&T Local is constraining capex spending. "We've heard that AT&T Local is now asking its people to hold off on any deferrable network projects until next year's capex budget," Notter writes.
As a result, Notter says the company is mining its installed base of chassis-based equipment for spare line cards that could be redeployed, and is also running inventories at lower levels than normal.
AT&T denies any sort of capex slowdown is happening. In an email, a spokesperson for AT&T writes: "We continue to expect capex for this year and next to be in the midteens as a percentage of total revenue.
"Project Lightspeed deployment is not delayed or behind schedule. We're on track to pass eight million homes with our fiber network by the end of this year, and we plan on providing an update in December on our plans to expand our U-verse deployment to our Southeast region."
But Notter notes the companies most likely to be affected by the slowdown he sees are ADC (Nasdaq: ADCT), Adtran Inc. (Nasdaq: ADTN), Alcatel-Lucent (NYSE: ALU), Ciena Corp. (NYSE: CIEN), CommScope Inc. , and Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA).
Adtran already revised its forecast for its fiscal third quarter, reporting that revenues would be flat quarter-over-quarter. Adtran's SVP and CFO Jim Matthews says, "Overall, carrier spending appears to be constrained in the third quarter, and AT&T has shown constrained spending in particular, along with Windstream." (See Adtran Reports 3Q Forecast.)
But Matthews says he believes the reduced spending is temporary, and he pointed out new business that Adtran won with AT&T for the company's Total Access 5000 product, which he sees ramping up in 2008.
Mark Borman, VP of investor relations at ADC, says that since ADC only provides components for AT&T's Project Lightspeed, his company's exposure to the slowdown was limited. "It's not as significant a part as some of the other vendors."
Borman also says that spending slowdowns at this time of year aren't unusual: "Typically, what you find at projects like Verizon FiOS or Project Lightspeed is that they start going into capital planning activities for the next year. This is not unusual, and so I think the market is overreacting."
While other analysts agreed that some companies with exposure to AT&T were feeling a slight revenue hit, they disagreed with where that slowdown was happening.
Morgan Keegan & Company Inc. analyst Simon Leopold says, "I believe AT&T is trying to tighten up their capital spending, but there are two exceptions to where they are spending. I think they are spending on Lightspeed and I think they're spending on anything related to Ethernet and business services. If you look at AT&T as four companies -- the old AT&T, SBC, AT&T Wireless, and BellSouth -- I think the old AT&T is still spending, and I think the other three are not."
Merriman Curhan Ford & Co. analyst Tim Savageaux thinks the slowdown could be limited just to the former BellSouth. He says, "The most recent data point we have is the ADC telecom report noted strength at both the long distance and historical SBC market, but continued weakness at BellSouth."
While analysts disagree on where the weakness in AT&T was coming from, they believe the slowdown is temporary. Leopold says, "It's really a slowdown to assess where they are before they complete their fourth quarter spending."
In his research report this morning, Notter writes, "AT&T-related issues will be short-lived for the equipment vendors. AT&T remains ultra-committed to the Project Lightspeed initiative as well as the overall maintenance and growth of the AT&T Local infrastructure. We expect that this slowdown will be a distant memory for investors in early 2008."
— Ryan Lawler, Reporter, Light Reading