Optical/IP Networks

Optical Hearts of Darkness

Early Tuesday morning, the market looked like it would ignore the latest stream of bad news from three large optical companies, but then afternoon came.

Leading markets indices deteriorated throughout the day, and things couldn't have been more gloomy in telecom. The Light Reading Index hit an all-time low of 266.54, falling 10.65 (3.84%).

Late yesterday afternoon,
Alcatel SA (NYSE: ALA; Paris: CGEP:PA) announced a fresh series of U.S. layoffs (see Alcatel to Lay Off 2,500 in US). The news brings Alcatel to a 27 percent announced reduction in its U.S. workforce this year. And the company acknowledges that further layoffs are still to take place outside North America, in a sweeping plan to eliminate a majority of manufacturing plants worldwide.

For its part, Corning Inc. (NYSE: GLW) announced new writeoffs, charges, layoffs, and plant closings amounting to more than $5 billion (see Corning Downsizing Photonics). The human toll: 1,000 more employees. The company also announced cessation of its common stock dividend and closure of its submarine pump business.

Corning executives delivered the news in depressing monotones during a conference call late Monday. They laid the blame on sharply reduced orders for photonics parts, particularly long-haul amplifiers in the North American market.

Newport Corp. (Nasdaq: NEWP) chimed in with its own tale of woe (see Newport Looks to Restructure). Despite $54 million in orders received in the second quarter, about $13 million in orders was cancelled. In all, fiber optic orders are down 68 percent sequentially, Newport says.

Investors at first seemed determine to suck it up, but then started the selling. Corning shares ended down 0.98 (6.49%) at 14.10. Alcatel shares fell 0.55 (3.38%) to 15.70. Newport shares ended the day at 23.56, down 0.49 (2.04%).

Investors must now be wondering how far things must sink before the capitulation is complete. There was some upside in the news: Corning, for instance, stressed that its photonics business would still achieve sizeable growth in revenues this year, despite the downturn. And Newport indicated that, while orders are down, it "expects to report 60 percent year-over-year growth in revenues and earnings for the [second] quarter."

For better or worse, the market also appears to applaud the layoffs as evidence that companies are attempting to get their priorities in focus. "Companies need to get costs down to where they can make a profit at lower revenue levels," says David Jackson, optical networking components and systems analyst at Morgan Stanley Dean Witter & Co..

Analysts warn against clinging to positives too strongly, however. "On Corning, many investors think that the stock has 'bottomed', " says Jackson. "We estimate fair value [of Corning shares] at $10-$12, and think that the lack of positive catalysts and the stream of bad news from the telecom sector will push the stock down... possibly lower... We think that the investors who still hold GLW haven't yet accepted that the business will be weak for that long."

Still, Jackson anticipates recovery, albeit not soon. By mid-2002, he says, investors should start to see improvement in company "fundamentals," followed several months later by actual improvements in stock prices.

- Mary Jander, Senior Editor, Light Reading

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