Optical/IP Networks

LR Index Sinks to New Lows

It's been an ugly week for the Light Reading Index. Today, after closing at 330.26, down 20.01 (5.71%) on the day, the Index established an all-time low since its launch in January 2000.

A tsunami of negative analyst reports, combined with confusing and unreadable signals from a number of the telecom equipment companies themselves, conspired to push the Index to new depths.

Wall Street analysts have been busy downgrading large companies such as Nortel Networks Corp. (NYSE/Toronto: NT) and ADC Telecommunications Inc. (Nasdaq: ADCT), following reduced guidance and layoffs announced by management (see Nortel Warns of Shortfall, More Layoffs and ADC Lowers Guidance, Head Count). Today, analyst activity calmed a bit, but downgrades were still to be had: Merrill Lynch & Co. Inc. (NYSE: MER) downgraded Alcatel SA (NYSE: ALA; Paris: CGEP:PA) to a Neutral rating.

In the meantime, there is lingering uneasiness about first-quarter results, which will start rolling in next month. The market is unlikely to mount any significant rally until the bulk of the bad news has been made public.

Other factors have pressured the optical stocks. The macroeconomic slowdown has forced large equipment manufacturers and carriers to unload their investments in optical startups (see Broadwing Sells Corvis Shares and ADC Woes Raise Venture Question), flooding the market with insider shares. And carriers appear to have become ever more cautious in recent weeks.

“The most exuberant of carriers have changed their tune from a trumpet blaring aggressive network rollout to a drum roll awaiting the starvation of their competitors,” writes Seth Spalding, analyst at Epoch Partners, in a research note issued Wednesday (see Spalding Sees Ciena Challenges).

In the longer term, there are a some upsides to the market downdraft. For one, the valuations of the large, recently IPO'd optical players with significant cash positions have never been more attractive, and may finally present investors with some real value. Two prime examples: Corvis Corp. (Nasdaq: CORV) and Sycamore Networks Inc. (Nasdaq: SCMR), each of which has $1 billion in cash. Corvis, now trading at about $7, possesses $3.25 per share in cash, and Sycamore, trading at $9, has $3.57 per share in cash. Both companies still boast high growth potential, despite the short-term challenges.

And it's a near certainty that the carrier spending slowdown is only temporary. Traditionally, the first quarter is a weak one for carrier spending, so the second quarter will likely deliver a clearer picture of how conservative the carriers have become.

Some analysts theorize that the carriers are just playing the waiting game, saving cash while younger CLECs burn themselves out of business. On this view, as that process progresses the larger carriers will get back to the business of buying, as the data explosion will continue to force them to upgrade (see Big Carriers for a Big Internet). The current consensus appears to be that buildouts may recommence as early as this summer.

"By the conclusion of the June quarter, visibility should begin to improve and the broadband access technology companies might then be able to better provide achievable projections for the future,” writes Lehman Brothers analyst Steve Levy in a recent research report (see Levy Weighs in on Broadband Access).

-- R. Scott Raynovich, Executive Editor, Light Reading http://www.lightreading.com

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