Carrier Crisis: Who's Most at Risk?
If one knows where to look, some educated guesses can be made. In its latest report, Optical Oracle, Light Reading's paid subscription research service, probes the financials of eleven top carriers in an effort to sift probable survivors from those most likely to wind up in trouble.
Alarmingly, the report puts better than half the carriers scrutinized in the category of those at risk for potential acquisition or bankruptcy. This group includes Allegiance Telecom Inc. (Nasdaq: ALGX), Broadwing Inc. (NYSE: BRW), Level 3 Communications Inc. (Nasdaq: LVLT), Qwest Communications International Inc. (NYSE: Q), Time Warner Telecom Inc. (Nasdaq: TWTC), and Williams Communications Group (NYSE: WCG).
Some of these are no surprise: Qwest and Williams seem to be featured in weekly news regarding their books. The spotlight's slowly turning to reveal Level 3 Communications Inc. (Nasdaq: LVLT) (see Is Level 3 Next?). While others may have slipped under the radar, the report says that warning signs show they'll soon be directly in its path.
What's this prediction based on? Several factors, led by the overall decline in profitability. "Until profitability reaches an inflection point, pessimism will reign supreme," writes Christopher Bulkey, Optical Oracle research analyst.
By several measures -- including total debt, ratio of debt to equity, and cash flow -- the carriers mentioned above betray serious financial difficulties.
Warning signs are stronger in some areas than others. Level 3, Williams, and Broadwing, for instance, show severe quarter-to-quarter declines in cash flow. TWTC and Level 3 showed fairly recent declines in cash flow. And significant debt increases mark Allegiance, TWTC, and Qwest as trouble spots.
The outlook for capital spending, the potential for consolidation, and pricing trends will play important roles in the future of these carriers. But the going will be slow. According to guidance reports, capex will decline even further in 2002 and the earliest chance for improving the picture won't come until carrier budgets are revised again in the fall of 2003.
Meanwhile, falling prices for certain telecom services, such as private lines, frame relay, ATM, and T3 connections, will continue to hurt carriers to varying degrees.
Can being acquired save the day for some? Perhaps. "M&A activity has the potential to save a few distressed carriers," Bulkey writes. "Keep in mind, however, that many experts we have spoken with haven't shown much interest in the distressed network assets, and much network technology will be thrown in the dumpster. But some combination of M&A activity is likely to occur, with the strongest carriers -- the RBOCs and IXCs -- looking to make deals."
In the end, in fact, it's a thinning of the herd that's needed to save the industry, concludes the Optical Oracle. The bandwidth pricing and supply situation will likely not improve until there are fewer competitors on the market. — Mary Jander, Senior Editor, Light Reading
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Editor's Note: Light Reading is not affiliated with Oracle Corporation.