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Carrier Spending Hopes Dim

Light Reading
News Analysis
Light Reading
9/24/2002

As the third quarter draws to a close, folk looking to upcoming carrier financial reports for signs of an industry uptick are apt to be disappointed, experts say. Instead of longed-for improvement, the current quarter will likely be the weakest all year. What's more, some now say 2003 spending will drop beyond even this year's levels.

Over the past few weeks, consolidation and crises in the carrier space (see Qwest's Amazing Shrinking Revenues and WorldCom to Restate $2 Billion More? for recent examples) have led to adjustments in guidance from leading equipment and component makers -- adjustments that have thrown even the hardiest optimists.

Lucent Technologies Inc. (NYSE: LU), Nortel Networks Corp. (NYSE/Toronto: NT), Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA), JDS Uniphase Corp. (Nasdaq: JDSU; Toronto: JDU), and others continue to cut costs and forecasts, citing ongoing signs that their carrier customers are nowhere near ready to start buying vigorously again (see Lucent Drops Its Bottom, Nortel's Bottom Sags, JDS Uniphase Warns, Tellabs Lays Off, Warns, and Tellabs Looks to Europe).

It all points downward. "The third quarter will likely drop even further sequentially when it comes to spending," says analyst Steve Kamman of CIBC World Markets.

It's an ongoing trend. This year, all leading carriers, at least the ones still operating competitively, have progressively revised their projections downward.

The negative spiral's likely to continue. For instance, one source familiar with the situation, who asked not to be named, says Verizon Communications Inc. (NYSE: VZ) plans to earmark about $7 billion next year for wireline spending, compared with about $10 billion this year.

This trend in the wrong direction was anticipated last November by the Optical Oracle, Light Reading's subscription monthly research service. In a report titled "Carrier Capital Spending: Past, Present, and Future," the Optical Oracle forecast showed that spending patterns for 2002 would decline by over 30 percent over those of 2001. Further, signs indicated at the time that capex would continue to decrease by about 10 percent annually through 2005. The Optical Oracle will be revisiting the capex question this year in a report to be published for subscribers this November.

Carrier spending is hampered by macroeconomic forces and underutilized facilities, including fiber capacity, according to Optical Oracle research analyst Christopher Bulkey. The next major growth opportunity for optical equipment makers won't materialize until carriers start upgrading their networks significantly, which will take several years, thanks to the overbuilding (and overspending) that occurred in 1999 and 2000.

Other, more recent, analyses show this thesis hasn't changed that much in recent months. Steven Levy of Lehman Brothers, whose outlook has been rosier than that of many other analysts, says he's ready to concede that growth will take longer than he thought.

"Disappointing news out of bellwether telecom equipment companies heavily leveraged to North American spending.... certainly indicates that carrier spending remains under severe pressure and equipment company revenues are likely to materially decline (10% to 25%) sequentially in CY3Q," he writes in a note published September 20. "A number of assumptions we previously made do not appear to be holding, and we have consequently taken a noticeably more cautious stance on North American service provider capex."

Specifically, Levy says that third-quarter carrier spending is likely to drop below second-quarter levels. And while the fourth quarter may show a slight seasonal uptick, "as carriers flush out some of the remaining budget but not all of it," Levy says the rise "might not be meaningful enough to change our view that 2003 spending trends are getting increasingly uncertain."

A lack of confidence about 2003 also pervades the outlook of CIBC's Kamman, although he thinks this year's drastic drop won't be repeated. "Capex dropped 45 percent in 2002," he says. "We think 2003 will drop another 10 to 15 percent beyond 2002."

While all leading carriers have numerous requests for proposal and information pending, Kamman says the aggregate level of new buying activity probably won't be enough to increase overall spending levels next year.

— Mary Jander, Senior Editor, Light Reading
www.lightreading.com

Editor's Note: Light Reading is not affiliated with Oracle Corporation.

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huntseat
huntseat
12/4/2012 | 9:42:56 PM
re: Carrier Spending Hopes Dim
"This trend in the wrong direction was anticipated last November by the Optical Oracle, Light Reading's subscription monthly research service.....The Optical Oracle will be revisiting the capex question this year in a report to be published for subscribers this November. "

So if only we were saavy enough to shell out exorbitant subscriber fees for Optical Oracle we would have known sooner that we are headed for the cliff. Maybe we should include these subscriber fees in the term sheet for the next round.
scooby
scooby
12/4/2012 | 9:42:55 PM
re: Carrier Spending Hopes Dim
Meanwhile the chattel here on the public site were reading stories about how Bell South was going to spend insane amounts of money on dozens of new RFPs.
Scott Raynovich
Scott Raynovich
12/4/2012 | 9:42:55 PM
re: Carrier Spending Hopes Dim
>exorbitant subscriber fees

It costs $1,250 per year.
Scott Raynovich
Scott Raynovich
12/4/2012 | 9:42:54 PM
re: Carrier Spending Hopes Dim
Scooby Doo, where are you?
ahardie
ahardie
12/4/2012 | 9:42:49 PM
re: Carrier Spending Hopes Dim
Oh come on Scott. The guy has a point. You all ran that BellSouth article - completely missing the mark. Meanwhile at almost the exact same time your saying the Optical Oracle was showing a reduction in CapEx.

To have a premium service for clients is one thing - but Light Reading has the responsibility of what it runs for us "unwashed masses".

This is a nuclear winter we're in and your article on BellSouth showed poor judgement and was completely misguided.

Admit when you make a mistake - it makes your service better.
nobollox
nobollox
12/4/2012 | 9:42:49 PM
re: Carrier Spending Hopes Dim
The point is, whatever the capex number is, is far below what every company thinks they have in sales through the next couple of years. If your gut feeling tells you that carriers are hiding their financials in general, what would make you think the capex figure would be any different.

Analysts want carriers to run lean (less capex), vendors want them to buy more equipment (more capex), and employees just want capex to spend so they have a job (any capex will do).

Summary - I still hear that aweful noise of the rollercoaster clicking
hitekeng
hitekeng
12/4/2012 | 9:42:48 PM
re: Carrier Spending Hopes Dim
I agree with "Ahardie"....
Also in the last few months, it has never been more obvious that CAPEX spending levels WILL NEVER come close again to the levels of pre-2000 boom years (at least for the next 3 years). Not in a market when you can now almost count surviving CLECs on your fingers. So with the ever-dwindling competition and the potential cut-throat price wars from bankrupt/restructuring providers (e.g. Yipes, Cambrian, Worldcom,...), ILECs are more inclined to keep milking their existing cows and preserve CAPEX/OPEX as much as possible (if it ain't broken, don't fix!! at least for the next couple of years...)
So I am not sure I would need Optical Oracle or Lehman Brothers to predict the direction of CAPEX spending. Just look around...(out is Optical/Telecom spending for now, in is military/security spending for the next few years...)
Scott Raynovich
Scott Raynovich
12/4/2012 | 9:42:46 PM
re: Carrier Spending Hopes Dim
Boy you guys are tough. You know, I went back and read the article. There was a lot of good information in there, much of it still relevant.
You have to ask yourself, did the story subtract or add to collective knowledge of what was going on at the time.

http://www.lightreading.com/do...

I wouldn't hesitate to run it again. Do we know more today? Of course. Hindsight is 20/20. But the article did point out what we all know -- that promising RFPs can be quashed at any minute to save cash in this disturbing environment.
BobbyMax
BobbyMax
12/4/2012 | 9:42:45 PM
re: Carrier Spending Hopes Dim
Major purchases ( e.g., Class 5 switches) are bought on a cyclical basis. Each product has its own life cycle. It is expected that Capex would decline through the year 2005.

Carriers are expecting next generation of SONET equipment that less expensive and have smaller footprint. Other technologies such as RPR are less likely take roots in the US.

It is primarily a lot of flip flops and and inability to speak truth has caused industry and the investors a lot of anguish.

RBOCs do not have infite capacity to change their transmission gear every year. Allmost all suppliers claim that their productsd are being tested by a carrier> Some of these carriers may not have 5-6 thousand lines.

Many analysts with no technology training provide a lot of misleading information to the shareholders. The escape clause for these so callled analysts is that such and such things were unexpected. It should come as no surprise that foreign investors have lost in the upwards of $8 Trillions forever. This is a form of economic terrorism the likes of which have not been seen in modern times.
Kevin Mitchell
Kevin Mitchell
12/4/2012 | 9:42:42 PM
re: Carrier Spending Hopes Dim
Just because overall capex is diminishing does NOT mean that there are no growth opportunities. Capex is also going to be shifted from legacy spends to new technology spends (not all at once, but in time). In June, BellSouth was talking a new MPLS network. That construction plan was comprised of multiple RFPs for optical gear and routers.

As for capex going forward, the steepest cuts in 2003 will be from the MSOs. The capex to revenue ratios for those companies is still too high (over 30%) and needs to get in line with the telcos (15-20%).
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