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Group Telecom Takes a Hit

Light Reading
News Analysis
Light Reading
6/21/2002

Large carriers continue to be plagued by fallout from vendor financing deals.

Canadian carrier Group Telecom (GT) is the latest independent North American carrier in danger of defaulting on bank loans. And it says that's because two of its key suppliers, Cisco Systems Inc. (Nasdaq: CSCO) and Lucent Technologies Inc. (NYSE: LU), have cut off funding.

This week, GT said the two equipment providers recently yanked vendor financing totaling US$156 million from the carrier's reach, cutting its available cash nearly in half (see GT Loses Vendor Financing). The effect, analysts say, will be to stifle the revenue growth GT needs to pay its debts.

The news highlights the ongoing consolidation in the telecom sector, as suppliers, strapped for cash themselves, pull key funds from hungry alternative carriers in an effort to avoid risk.

"It's a typical CLEC story," says one Canadian equity researcher, who asked not to be named. "Vendor financing doesn't tie just to equipment. GT is well-positioned, but the market's down as it is. And if you don't have half the cash you did before, it has an impact."

Having acknowledged this impact on its financials, GT seems reluctant to admit that this may hinder its ability to carry on its day-to-day work. The carrier's homepage link launches an automatic letter to customers saying the lack of further help from Cisco and Lucent shouldn't affect GT's service quality.

That's damage control, sources say. "Their network's not complete," says the Canadian researcher. And the lack of funding pulls the plug on GT's plans to finish it, at least for the moment.

One of the projects that may be affected is the network proposed by Canarie Inc., a not-for-profit corporation charged with creating and overseeing the network that links Canada's universities and research centers. GT won an RFP last month to use Cisco and Lucent gear to equip the next iteration of the network (see Canada Bankrolls Provisioning Project).

Despite the setback, GT says it's got enough cash (about US$144 million) to "fund operations while it continues discussions with its secured lenders." But if those discussions fail, it "will have to consider all of its alternatives" when the loan payments come due June 30.

GT's relationships with both Cisco and Lucent were long-standing. Back in September 1998, it announced its first agreement with Lucent, which totaled about CA$315 million (US$207 million, in today's dollars) and included funds for GT's initial buildout in Calgary, Vancouver, and Toronto. GT said in November 2000 that it had closed a financing deal with Cisco worth CA$120 million (US$79 million).

It's not clear how these arrangements changed over time, nor exactly what triggered their severance, which took place after March 31, 2002, when GT happily disclosed the available cash from the agreements as part of its earnings report.

In some ways, Cisco's abandonment of GT is more surprising than Lucent's. After all, Cisco backs other startup carriers, such as Cogent Communications Inc., which as yet have shown paltry returns (see Cogent Conundrum Continues).

But like other suppliers, Cisco and Lucent continue to cut financing. Lucent's reduced its lending budget by over half since the end of 2001, going from US$5.3 billion in December to US$2.2 billion in the latest quarter. Cisco continues to cut financing, although more incrementally: Over the past two quarters, it's shaved US$400 million off the budget to reach a total of US$1.3 billion.

Neither Lucent nor Cisco had comments on the situation at GT, and GT's PR contact said a spokesperson wasn't available at press time.

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

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simontemplar
simontemplar
12/4/2012 | 10:13:51 PM
re: Group Telecom Takes a Hit
This is bad for LU and CSCO, since they are no longer giving away their equipment they really expect customers to actually buy it??

ST
signmeup
signmeup
12/4/2012 | 10:13:51 PM
re: Group Telecom Takes a Hit
Why is that?

Who else are the "customers" gonna buy from? A startup that will probably run out of gas sometime in the next 6 months? Who do you think is winning business right now.... It's not the startups.

What hurts the most is that the big guys like CSCO and LU don't have to worry about startups taking business away, they just have to wait until they go away. The best example of this IMHO is Brightlink. Everyone I talked to loved the product (including WCOM, who had invested in Mahi). Did CSCO swoop down and buy out Brightlink because they really need a STS1 grooming switch? No, they waited until they went under to pick over the bones.

Now I don't work for Brightlink, but I do work for a startup so I have seen first hand that customers are avoiding startups like the plague, and going with the incumbents if at all possible.

simontemplar
simontemplar
12/4/2012 | 10:13:50 PM
re: Group Telecom Takes a Hit
signmeup,

I agree with you about the big boys and the dirty pool they play. They entice or in most cases leverage their size and power to offer the "deal you can't refuse" to keep the smaller players with threatening products away.

The smaller players like Brightlink may have the better solution but when LU/CSCO gets infront of the executives and pitches the "have the equipment for free, we'll work out the payment details later" pitch the customers COO/CFO/CEO think they can build for free and perserve their cash.

I think vendor financing should be illegal and then the product regardless of the supplier will have to stand on it's own technical and cost effective merits.

ST
simontemplar
simontemplar
12/4/2012 | 10:13:50 PM
re: Group Telecom Takes a Hit
zweisel said:
... looks like the only ones standing in the vendor space will be Nortel, Lucent, and Alcatel while in on the carrier side it will be the RBOCS ...
----------------------------------------


Unfortunate isn't it.

ST
zweisel
zweisel
12/4/2012 | 10:13:50 PM
re: Group Telecom Takes a Hit
... looks like the only ones standing in the vendor space will be Nortel, Lucent, and Alcatel while in on the carrier side it will be the RBOCS ...
hoffmane
hoffmane
12/4/2012 | 10:13:43 PM
re: Group Telecom Takes a Hit
Perhaps this time Cisco did not take the vendor funding as instant revenue, or perhaps they need to re-state? or perhaps just take a big hit like last time.

Eventually Cisco will fail, people will realize that they are being screwed..again..and again...and again.
techdocs
techdocs
12/4/2012 | 10:13:41 PM
re: Group Telecom Takes a Hit
They can do anything they damn well please. They will be the ONLY VENDOR LEFT. LU, NT, ALA, ERICY, MONI - Are ALL Going UNDER. A quick review of their numbers proves that to anyone with more than two brain cells in their head. Cisco is KING and there is nothing others can do about it. The carriers will move to 100% IP - Cisco territory for Good Soon. Its almost over for these old teledogs. Over for MONI next week, Followed by NT who just DILUTED their stock 40% at a 23.5 Year low of $1.41 - A joke - A total JOKE. And Lucent? Not a prayer in Hell, ALA with their Euro Unions who refuse to cut or layoff is Next on the Block. All Cisco has to do is WAIT.
BobbyMax
BobbyMax
12/4/2012 | 10:13:37 PM
re: Group Telecom Takes a Hit
Cisco, Lucent and many others were immitating car loan model practiced by General Motors and others. This hype was considered by Cisco and Lucent to be so original that its practioners were considered marketing genious and rewarded handsomely. Both of these compoanies failed to relize the defect in the model and lost of Billions of dollars.

All this points to defects in the current trading system. The recovery would never take place until the VC community realizes they have pumped too much money into the system by funding junky companies with identical products ad technologies. Many serial investors are essenttialy cheating start-ups many times over.

It is expected that companies would condemn
the conduct of serial enterpreauners and would conduct its business practices in accordance with the US laws.
BobbyMax
BobbyMax
12/4/2012 | 10:13:37 PM
re: Group Telecom Takes a Hit
Cisco, Lucent and many others were immitating car loan model practiced by General Motors and others. This hype was considered by Cisco and Lucent to be so original that its practioners were considered marketing genious and rewarded handsomely. Both of these compoanies failed to relize the defect in the model and lost of Billions of dollars.

All this points to defects in the current trading system. The recovery would never take place until the VC community realizes they have pumped too much money into the system by funding junky companies with identical products ad technologies. Many serial investors are essenttialy cheating start-ups many times over.

It is expected that companies would condemn
the conduct of enterpreauners and would conductits business practices to follow old
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