Lehman: Telecom Downturn Is Over

The telecom downturn is over, and the way ahead will be paved with slow but steady growth, according to a note yesterday from Steven D. Levy, managing director of wireline equipment equity research at Lehman Brothers.

"Today we are upgrading our rating on the Wireline Equipment industry to a 1 Positive from a 2 Neutral to reflect our increasing confidence that the fundamentals of the industry appear to have stabilized and are poised to improve in the not-too-distant future," Levy wrote.

Levy says carriers worldwide are likely to collectively spend up to 5 percent more on wireline equipment in 2004. His confidence is based on several factors, including reports from his colleagues at Lehman that say wireless carriers will spend "slightly" more next year. That's big news for the telecom industry, Levy says: "It's the first growth we've seen in three years." Given that many of the companies Levy covers get much of their revenue from wireless carrier spending, that's also very good news.

Lucent Technologies Inc. (NYSE: LU), for instance, gets 42 percent of its revenues from the sale of wireless gear, or equipment needed for wireless carrer infrastructure, according to Lehman. Nortel Networks Corp. (NYSE/Toronto: NT) gets about 40 percent.

Sales to wireless carriers will also buoy revenues of Tekelec Inc. (Nasdaq: TKLC), which supplies nearly 85 percent of its test and measurement gear to wireless carriers; equipment reseller/asset manager Somera Communications (Nasdaq: SMRA), which does over half its sales to wireless providers; and Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA), which does about 40 percent of its U.S. business selling infrastructure gear to wireless carriers, according to Lehman.

Levy's also looking forward to MCI (Nasdaq: WCOEQ, MCWEQ) spending nearly $1 billion in 2004. MCI has indicated it would spend this much on emerging from Chapter 11, Levy says. Also, the carrier's got multiple networks that need to be "rationalized."

But telecom renewal isn't just about how much carriers will spend on vendors' gear. There also are signs that vendors' cost-cutting efforts are paying off in improved margins, Levy says. While that's not as good as having sales go up, "it is encouraging nonetheless," he writes.

While the industry moves forward, some vendors will do better than others. In an interesting twist, Lehman gives Nortel slightly better short-term prospects than rival Lucent.

The firm has upgraded Nortel's rating and moved its forecasts up, projecting 2004 earnings per share (EPS) of $0.08 instead of its previously estimated $0.07. The firm's new 2005 EPS for Nortel is $0.15. For Lucent, the firm anticipates breakeven EPS at the end of December 2003. The firm thinks Lucent will see a 2004 EPS of $0.04 and a 2005 EPS of $0.08.

— Mary Jander, Senior Editor, Light Reading

zoinks! 12/4/2012 | 11:23:43 PM
re: Lehman: Telecom Downturn Is Over Somebody's options are going to make somebody rich!

...but not me.

crackbaby 12/4/2012 | 11:23:43 PM
re: Lehman: Telecom Downturn Is Over Hey, Steve Levy says that the telecom sector is getting better......

(still waiting for his recommendation last year to buy Lucent to be worth a damn though)
walter_100 12/4/2012 | 11:23:41 PM
re: Lehman: Telecom Downturn Is Over Bobby your comments? ;-)
nbwaite 12/4/2012 | 11:23:36 PM
re: Lehman: Telecom Downturn Is Over Let's see:

"Levy says carriers worldwide are likely to
collectively spend up to 5 percent more on
wireline equipment in 2004. His
confidence is based on several factors,
including reports from his colleagues at
Lehman that say wireless carriers will
spend 'slightly' more next year."

Here is a much more solid reason for such
"confidence": For a prediction of "spend
up to 5 percent more", how could he be
proven wrong? Spending 6% more would
prove him wrong, but few people would
blame him. Strictly, literally, spending
could fall to $0 and he would still be

Strictly and literally, an estimate of the
form "up to 5%" really means not more than
5% and for most purposes is silly.

You mean, Lehman actually pays people for
such things? Gee.
Soup 12/4/2012 | 11:23:28 PM
re: Lehman: Telecom Downturn Is Over Let's see, NASDAQ is up some 35% since March this year, and much of the Telecom stock follows this trend. Could it be that a 5% EPS predicted gain is possible? Do ya think, Steve? Who pays these guys and why does anyone pay attention to them?
Networking Analyst 12/4/2012 | 11:23:25 PM
re: Lehman: Telecom Downturn Is Over Who do these people think they are.... the telecom downturn is NOT over and in reality I believe its getting a whole lot worse. It does not take a brain surgeon or someone who is overly sophisticated to figure out what is really happening in the sector. Just a bit of investigation and smart analysis. Any thinking the worst is over is full of irrational exuberance.

If you want to know whether sales of OEM Networking equipment are going to be increasing then look at their customers: Service Providers (SPs)and the Enterprises.

So let's start with the SPs specifically the former NA baby bells(ILECs). Two weeks ago, BellSouth reduced their estimate for capex from 15% down to 13-14% of revenue (which is slightly down vs.'02). SBC announcened that their capex budget is dropping to $5B this year (originally est at $5-6B) and next year will fall below $5B. Verizon lowered its capex from $12.5-$13.5B to $12-12.5B. And to save time, space, and energy, I won't go into details on the IXCs but summarize the SP group as a whole.
The 1st half of this year NA wireline SPs capex was down 24% vs. 1H'02 and wireless SPs down 23%. Their revenues aren't improving much either... Wired down 6% vs. '02 but wireless (a sort of bright spot partially because consumers have been enticed to use our mobile phones more especially for long distance) is up 9% vs. '02. But let's not get to excited about this as the FCC ruling on mobile number portability will drive prices down as SPs look to hold on to as many good paying customers as they can.... way to go FCC. Oh and while I'm on that kick, nice job on the UNE-P ruling!!! Push the decisions to the states... what a joke, this will be fought in the courts for years to come. What you end up having here is a situation that will drive prices into the ground as the ILECs expand into offering local service in more markets.(just look at AT&T's latest press headings->raised their focus to 30+ states by end of this year) Of course bundled services then come into play but at the end of the day they'll all be lowering their bundled prices. So with revenues down & debt yet to pay off, how are you going to continue to build the infrastructure.
Oh and wait, more problems ahead with more people signing up for broadband usage... But you say that's a good thing because that's more revenue for the SPs. Well not really, you see the prices SPs charge doesn't cover the costs to help build up the networks because the price per bit of traffic isn't high enough and more importantly going down (see Verizon, Bell South & SBCs newer lower DSL prices). As we the consumers enjoy downloading all those wonderful MP3s and video streams network traffic is going up... are you beginning to see a problem here??? So eventually more network capacity with new equipment needs to be put in place, but where's the money coming from?
Ok so let's assume for the minute that somehow this all gets sorted out (I'm not sure how), there's constant discussion that consolidation is going to occur in the industry which should reduce the # of SPs and thus the overbearing competition to lowered pricing. But wait, if you have less SPs which are buying equipment won't that impact the equipment manufacturers; you bet your sweet ...
Alright, I've gone down a long path here so let me pull in the reigns. Major concern #1 for SPs is reducing debt so a large amount of that free cash flow for now is moving to lower the debt and not capex to build the networks. Eventually that has to turn around.... Outside the US, the European SPs have worse debt problems, and the 1H'03 vs. 1H'02 capex #s are also down terribly as well (-30% wireline & -10% wireless). Similiar revenue comparisons also exist (wired -3% & wireless up 12%). Asia Pacific has China & India building network so there's some positive news there (if Reliance will ever sign off on the Lucent deal).
So what we have here an industry that has gotten itself into a financial mess and trying to figure out how to fix its problems while simultaneously causing newer ones (falling price/bit). The true winners in this are us, the consumer, with lower priced phone calls as cheaper DSL access. The key here is not to give back those $ by investing in overpriced networking OEMs stocks. I love Cisco especially with all the cash they have, but even they aren't growing revenues and their gross margins are already unbelievable high (70%). The stock price above $20, I have trouble with but who am I to say.
Comments welcome,

--> note: all of my analysis comes right off the 10Ks/earnings calls so there's nothing confidential about the statements above.
dodo 12/4/2012 | 11:23:24 PM
re: Lehman: Telecom Downturn Is Over NA

Let's put it this way:

Even though they have to put the chinese wall between Research and the investment bankers, these guys need to make money for their end-of the year bonuses.

Hence they think that they can dupe the investors again. The drought is not over yet!
Remember M.Lynch at the beginning of the year trying to pump up Lucent
hitekeng 12/4/2012 | 11:23:14 PM
re: Lehman: Telecom Downturn Is Over When Lehman says the "downturn is over", they actually means to say "it is now time for their firm to cash in on the telecom stocks it bought at 50 cents a pop, so to all those naive investors out there, please start buying to drive the stocks up a bit further before Lehman and their likes could start cashing in".
Where are you Grubman (whatever his name was)???
big daddy 12/4/2012 | 11:23:13 PM
re: Lehman: Telecom Downturn Is Over Yeah, Grubman, where are you?
verstand 12/4/2012 | 11:23:10 PM
re: Lehman: Telecom Downturn Is Over NA

What you did is rational deduction. In economic world, there are emotional factors such as axiety, fear, greed and expection. The negative feeling is more elastic than the positive. What Lehman analyst did could reflect what he was expected. His openion could curtail bad feeling about telecomm in general. Hang on to your own judgement. The market is neither efficient, nor rational.
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