Telecom Scare Shakes Market

Have public markets soured on service providers? Does this herald a coming slowdown in networking sales, as carriers are forced to halt their network buildouts for lack of funds?

These are questions haunting optical investors this week, in the wake of several disconcerting events, including a financial restructuring by Qwest Communications Corp. (NYSE:Q); an IPO withdrawal by Broadview Networks Holdings Inc. (see Broadview Pulls IPO); and news that the alleged bankruptcy of Iaxis Ltd. had forced Ciena Corp. (Nasdaq: CIEN) to log a multimillion-dollar write-off (see Ciena Spooks the Market).

Indeed, Wall Street ran scared on Friday, fleeing anything that had to do with telecommunications equipment. Large equipment providers such as Ciena, Cisco Systems Inc. (Nasdaq: CSCO), Nortel Networks Corp. (NYSE/TSE: NT), Lucent Technologies Inc. (NYSE: LU), and Juniper Networks Inc. (Nasdaq: JNPR) each lost between 2 percent and 8 percent of its value. Juniper was the hardest hit, dropping 7.5 percent, or 16 points, to $199 in late afternoon trading.

But analysts warn investors not to be too quick to jump to conclusions. "There's an overall perception that carriers are having problems getting financing. But that's not completely true," says Brian Etten, research associate at investment firm WR Hambrecht & Co..

He says a lot depends on the type of carrier and the type of financing sought. Data CLECs and smaller carriers such as Covad Communications (Nasdaq: COVD), Northpoint Communications, and Rhythms Netconnections (Nasdaq: RTHM) have seen their stock prices fall in recent months. But other carriers, like Qwest, are showing signs of robust capital spending. (On a call with analysts last night, Qwest reportedly revised its cap-ex numbers up, to $9 billion from $8.5 billion.) And there seems to be plenty of private funding for selected providers.

One reason for this is that data CLECs take a long time and lots of cash to reach profitability. They must establish enormous subscriber volume, and they face lots of competition. This naturally is leading to a shakeout.

Other sources also downplay the panic. "Everyone on Wall Street is back from vacation, and looking for something to worry about," says Andre Desautels, an analyst with Trilogy Advisors. "The volatility and confusion and manic depressive behavior is at an all-time high. But most checks show that demand remains extremely robust."

Desautels admits, however, that it's high time the carriers started selling services to justify many of their purchases.

"Bottom-line, if the service providers do not make adequate returns on all the equipment they are buying, they will slow down their spending, and equipment providers will suffer." He notes that the much-heralded "value-added services" and Application Service Provider models have been slow to develop.

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