2002 Top Ten: Forecasting Follies
We’ll soon be saying goodbye to 2002, and lots of people will be saying good riddance. It turned into an annus horribilis for many in the telecom industry – or maybe that should be anus, to reflect the number of times pundits proclaimed that we had hit bottom.
Let’s hope that when we carry out this exercise in a year’s time, we’ll be ridiculing the folk that failed to recognize the market upturn. But right now, the reverse is true. The people and organizations on the following list (which includes Light Reading in one instance) simply didn’t face up to the facts in 2002, for one reason or another:
No. 10: Harry Carr on Tellium
Back in January 2002, Harry Carr, CEO of Tellium Inc. (Nasdaq: TELM), predicted $288 million in revenues for his firm in 2002 (see Tellium Looks to Make Its Marks). Well, they could still make it – if they report a $229 million fourth quarter. But given the company's recent track record, it's not too likely (see No. 3 in Turkey Awards).
No. 9: RHK and Frost & Sullivan on OSS
During the worst downturn in telecom history, research firm RHK Inc. said the market for operations support system (OSS) software would push to $50 billion by 2005 – roughly the size of New Zealand's gross national product, and nearly three times Cisco's 2002 revenues (see RHK's Fat OSS). Not to be outdone (or in a spirit of misguided camaraderie – you choose), rival researcher Frost & Sullivan came up with similarly huge projections for billing OSSs alone (see Billing Software Market Worth $30B?). Now we ask you, Who's the biggest OSS?
No. 8: Merrill Lynch and others on free-space optics
Free-space optics (FSO), a wireless technology that uses lasers to connect buildings to fiber at high data rates, was the basis of big reports and forecasts from several analysts up until mid 2002. At that point, it was clear the market opportunity for FSO had gone down the drain with many CLECs, which were supposed to be the key buyers (see The New Reality of FSO). Among the bullish were IGI Group Inc., Merrill Lynch & Co. Inc., and The Strategis Group. “As an analyst, I take some of the blame for this," admitted IGI senior analyst Tony Carmona. "But sometimes we all get caught up in what looks like really cool technology. But I’ve come to realize that a lot of this stuff is baloney. Carriers just aren’t buying it.” No. 7: Numerous sources on Asia
Despite ongoing rants about robust demand in the Asia-Pacific region (the latest being from the International Telecommunication Union (ITU) – see Asia: Biggest Growth Is Yet to Come), it seems opportunities may be far from limitless there. Indeed, rumblings of fiber overbuild, intense competition, and pricing pressure raise alarm bells (see Is a Bubble Building in Asia?). For the diehards clinging to Asia as telecom's Promised Land, we offer the following quotation from Michelle Sie Whitten, president and CEO of China-based cable provider Encore International Inc.: "You don't hear a lot about profitability in China, yet you see a lot of money chasing money there."
No. 6: Light Reading on Lightwave Microsystems
There were omens, but we stubbornly kept the component player on our list of Light Reading's Top Ten Private Companies, albeit with some caveats pointing to the overall tanking of its chosen segment (integrated optics) and management's insistence that the IPO market would return (see Lightwave Microsystems). We should have listened to that little voice over our right shoulder: A few months later, Lightwave Micro had followed its star right over the cliff (see Obituary: Lightwave Microsystems).
No. 5: Ciena and Tellabs on Europe
In today's troubled times, the phrase "international incumbents" sounds pleasantly distant, foreign, unhindered by FCC regulations. Sadly, Ciena Corp. (Nasdaq: CIEN) and Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) have ignored the danger signals coming from the other side of the pond and have chosen to rework their strategies to focus heavily Over There (see Tellabs Looks to Europe and Ciena Follows the Incumbents). Now siren song's turning into a scream, as leading carriers such as France Telecom SA (NYSE: FTE) and Deutsche Telekom AG (NYSE: DT) report ongoing struggles for stability (see France Telecom: Not Out of the Woods, Has Catastrophe Hit the European Telecom Market?, and Debt Weighs on Euro Carriers).
No. 4: Nortel and Lucent on breakeven
This booby prize is a tie. As the year progressed, Lucent Technologies Inc. (NYSE: LU) was feeling for the point at which financials would reach the breakeven level, indicating that sufficient layoffs and cost-cuts had been made. It hasn't hit that bottom yet: A major restructuring announcement in October revealed that 10,000 more jobs will be cut, while the company's product line continues to be "rationalized" (see Lucent Lowers Breakeven, Cuts Again, Lucent to Cut Headcount, Products, Lucent Silences SpringTide, Lucent Clarifies Product Strategy, and Lucent Proposes Reverse Stock Split).
The third quarter proved particularly challenging as well for Nortel Networks Corp. (NYSE/Toronto: NT), which predicted first flat growth, then a 10-percent drop in revenues, then an 18 percent drop (see Nortel's Bottom Sags).
Bottom line (pun intended): Having shrunk headcount by more than half in a two-year period, neither Lucent nor Nortel is sure it's small enough yet.
No. 3: Vik Grover on various telecom **UPDATED 12/27**
Buy WorldCom Inc. (OTC: WCOEQ). Accumulate Qwest Communications International Inc. (NYSE: Q). Hang onto Allegiance Telecom Inc. (Nasdaq: ALGX) and Level 3 Communications (Nasdaq: LVLT). Sell Sprint Corp. (NYSE: FON). Such was the advice delivered by Vik Grover, managing director of equity research at Kaufman Bros. LP -- not in the telecom heyday of 1999 or 2000 -- but in 2002, when we think he should've known better (see Cool Hand Vik).
In his own defense, Grover points out the many solid calls he's made, including a "sell" on Winstar prior to its bankruptcy in 2001, a stance other analysts booed and hissed. And interestingly, Level 3 and Qwest stocks have actually perked up in recent months. Will next year's Follies include "Light Reading on Grover?"
No. 2: Strategis on telecom
On February 25, 2002, The Strategis Group had this to say about a survey it conducted on the state of the U.S. telecom market: "In one of the strongest signs of a turnaround revealed in the new survey, 70% of respondents reported that their organization's sales are expected to rise in the coming six months. This dovetails with results showing a rise in perceived demand for products and services across all industry sectors." 'Nuff said.
No. 1: Jack B. Grubman on telecom
The former Salomon Smith Barney analyst made $20 million in salary and bonuses while reporting bullishly on AT&T Corp. (NYSE: T), Global Crossing Holdings Ltd., Level 3 Communications, WinStar Communications Inc., WorldCom Inc. (OTC: WCOEQ), and other carriers. When his reports failed to tally with the reality of the telecom downturn, stockholders cried that he'd misled them on purpose, allegedly to sustain his firm's financial relationships with the subjects of his reports. Grubman is now the target of over 45 separate complaints filed with state and local regulatory agencies, the Securities and Exchange Commission (SEC), and the NASD, the association of broker-members that serves as the regulatory arm of the Nasdaq market (see Grubman Gets Some New Suits, WorldCom Restatements Top $9B, Williams Shareholders Sue SSB, AT&T Shareholders Sue Salomon, Salomon, Grubman Sued Over Level 3, etc.).
— Mary Jander, Senior Editor, and staff of Light Reading