Optical/IP Networks

Qwest Slowdown Spooks Investors

Share prices of Qwest Communications International Corp.'s (NYSE: Q) major networking equipment providers got slammed today as investors worried that capital spending may be drying up faster than expected.

The rumors started flying yesterday after the leaking of a Qwest memo saying it was shutting down work by all subcontractors. The memo was first published on the Website F*cked Company and was confirmed today by the company.

The memo carried the subject heading "Directive to stop work on current projects Effective immediately, stop all work being performed in the network effective close of business today." It instructs employees to shut down all subcontracting work as of the close of business Nov. 1.

The work stoppage was for all subcontractors working on projects for 2002, according to Steve Hammack, a Qwest spokesman. The carrier has halted all work and is evaluating each program to determine whether or not it will resume.

When asked if current contracts with suppliers of next-generation gear could potentially be affected, Hammack said, "Absolutely; we’re evaluating all product rollouts for 2002. And where it makes sense, we are using Qwest employees to continue the work on them. But we are also cutting back in some areas."

Shares of Cisco Systems Inc. (Nasdaq: CSCO) fell 0.40 (2.27%) to 17.26, Ciena Corp. (Nasdaq: CIEN) dropped 1.37 (8.32%) to 15.09, Juniper Networks Inc. (Nasdaq: JNPR) sagged 2.44 (11.13%) to 19.48, and Tellium Inc. (Nasdaq: TELM) dropped 0.81 (11.84%) to 6.03. All of these companies have at least some business with Qwest.

One Wall Street analyst cited sources at Redback Networks Inc. (Nasdaq: RBAK) saying the company was told by Qwest officials that it was unlikely to receive any business from Qwest in the fourth quarter. Redback shares rose slightly 0.04 (1.02%) to 3.97.

Some Wall Street analysts downplayed the news, saying their models already assumed the worst, based on information from the recent conference call. In its quarterly earnings release earlier this week, Qwest announced disappointing results and said that further spending cuts were likely (see Qwest's Qwarter Not So Shiny).

In a research note this morning, Alex Henderson, an analyst with Salomon Smith Barney said that he was not surprised by Qwest’s decision. In his analysis, he said that Qwest’s Q4 guidance implies that capital spending would only be $700 million, down from $2.2 billion in Q3.

"Doing the math, last quarter Qwest was on a $733 million per month rate of spending,” he writes. “With a month in the quarter already behind us, in order to achieve $700 million in capex this quarter, the company would need to suspend further spending.”

The true impact on companies is still unknown. Ciena would not comment. A spokesperson says that this is a matter that will likely be discussed on the company’s earnings call in December.

Corvis Corp. (Nasdaq: CORV), which expects to generate its first round of revenue from Qwest at the end of this quarter, says that it has not heard from Qwest regarding any changes to its contract.

While some suppliers have taken a “wait and see” approach, Tellium is adamant that it still expects Qwest to contribute significantly to its current quarter.

“I don’t think it will have any impact on us,” says Harry Carr, CEO of Tellium. “Qwest will definitely still be a part of our fourth quarter, as it has for the past several quarters.”

He went on to comment about Wall Street’s reaction to the news, “Our stock price has been affected a number of times by things going on at Qwest before, and we’ve continued to outperform. Is Wall Street over-reacting? I’d say yes -- in our case I know they are."

— R. Scott Raynovich, Executive Editor, and Marguerite Reardon, Senior Editor, Light Reading
HarveyMudd 12/4/2012 | 7:38:10 PM
re: Qwest Slowdown Spooks Investors Quest needs to be comunicated for its daring steps to rightsize the company and eliminate tricky vendors whose equipment the company does not need. Quest was overwhelmed by vendors such as Cisco, Tellium and others.

It is expected that other RBOCs would eliminate un-necessary buying and cut the staff. Amongst all the RBOCs SBC has been the most inefficient and is also overstaffed. SBC can eliminate 30% of its staff without hurting its ability to provide service.
jrhamp 12/4/2012 | 7:38:10 PM
re: Qwest Slowdown Spooks Investors As a Corvis holder, glad to hear at least at this writing that Q has yet to downscale on the Corvis express buildout. Seems to validate, if holds true through next week that Corvis technology with unique features and benefits will withstand the scale down.
reoptic 12/4/2012 | 7:38:07 PM
re: Qwest Slowdown Spooks Investors Industy in a depression and vendors in denial. WCOM is falling off a similar cliff. Juniper way overvalued given negative market growth, to say nothing of Tellium. Keep whistling past the graveyard...
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