Optical/IP Networks

Telecom: The Fear Factor

Fear of wholsesale meltdown in the telecom market had investors running today, pummeling the Light Reading Index. The LR Index closed down 11.83 (6.09%) at 182.49. Most leading telecom equipment stocks took heavy hits: Several events conspired to roil the telecom markets:

  • More losses at Williams Communications Group (NYSE: WCG) caused investors to dump the stock and generated discussion of potential bankruptcy filing among analysts and traders alike (see Williams Winding Down?). Williams dropped 0.42 (29.58%) to 1.00.

  • Several Wall Street sources said that rumors were circulating that WorldCom Inc. (Nasdaq: WCOM) would miss its upcoming earnings numbers and that financial pressure at the leading carrier was growing. WorldCom dropped 1.48 (15.40%) to 8.13.

  • Enterasys Networks Inc. (NYSE: ETS) acknowledged that it was under investigation by the Securities and Exchange Commission related to accounting practices at an Asian subsidiary. The bad news spread to Riverstone Networks Inc. (Nasdaq: RSTN), which shares the same heritage as Enterasys, but denied any connection. Riverstone has operated independently after being spun out of Cabletron Systems, the former incarnation of Enterasys, earlier in the year. Enterasys stock fell 6.60 (61.11%) to 4.20.

Industry observers attribute the market weakness to a general lack of confidence in the industry and a growing panic that the financial metrics of the carrier business are not stabilizing.

"I think today was a complete loss of confidence as people looked at balance sheets and quarterly results and saw cash flows declining,” says David Segelov, an independent money manager. “When cash flows are declining there is little hope that sales of equipment will improve. There was a decline in data revenue across the board, including at Verizon Communications Inc. [NYSE: VZ] and Level 3 Communications Inc. [Nasdaq: LVLT]. If you start stacking up all the earnings, it’s not a pretty picture.”

Other industry experts said the only hope is that the market may start to consolidate, potentially stabilizing pricing pressures, which have caused the most damage to earnings statements and balance sheets.

"My motto is: 'Learn to love your ILEC,' " says Peter Tierney, a long-time telecommunications executive who is now president of Chronos Communications Inc., a carrier startup. "There will be tremendous consolidation. All of these telecom guys with their stocks under $10 will have a hard time addressing their balance sheet issues."

"This debt issue is suffocating not just [Williams], but the whole space," says Vik Grover, an analyst at Kaufman Bros. LP, speaking of the Williams Communications conference call. “It’s really disappointing what’s happened to the industry. It’s almost unstoppable."

— R. Scott Raynovich, US Editor, and Eugénie Larson, Reporter, Light Reading

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