What's Behind Qwest's Numbers?

It was a grim week in the optical networking market, with the Light Reading Index dropping 22.22 (10%), ending at 211.04, weighed down by warnings from several large players, such as Ciena Corp. (Nasdaq: CIEN) and Lucent Technologies Inc. (NYSE: LU).

But perhaps the worst news of all, possibly setting off the chain reaction of bad news, came from Qwest Communications International Corp. (NYSE: Q). Yesterday Qwest warned Wall Street that it will fall short of its expected revenue target and will be cutting capital spending yet again (see Qwest Lowers Expectations). Qwest announced lower than expected revenues for the fourth quarter, an 11 percent reduction in its staff, and another reduction in capital spending. Capital spending projections for 2002 were cut from $5.5 billion to between $4.2 billion and $4.3 billion.

The ripple effect was seen everywhere, most especially at Ciena. But one of the lingering questions is which networking gear in particular will be affected by continued capital spending cuts. Long-haul optical transport will likely take the brunt of the cuts, say analysts, while optical switching and IP routing may see little impact.

Qwest's cutbacks on its spending shouldn't have come as that much of a surprise. Last month, the carrier informed contract workers and others working on network buildouts to halt all projects until further notice, while it figured out which products to spend money on and which not to (see Qwest Slowdown Spooks Investors). Still, the news was a blow to some of Qwest’s major suppliers. Ciena Corp., which noted on its earning call yesterday that Qwest accounted for a large proportion of its 2001 revenues, is the best example of how companies supplying Qwest have and will be affected by the reductions (see Ciena Casts Cloud Over 2002). Long-haul appears to be the largest casualty in Qwest's cutbacks. Ciena is one of Qwest’s two premiere providers of such gear, along with Nortel Networks Corp. (NYSE/Toronto: NT).

“Qwest’s cutbacks have already trickled down the food chain to Ciena,” says Rick Schafer, an analyst with CIBC World Markets. “I think the Street was prepared for the capex to come down to the $4 billion range, but I don’t think they were prepared to see Ciena’s guidance so low.”

Another optical long-haul player affected by the cutbacks is Corvis Corp. (Nasdaq: CORV). The company has already gotten the green light from Qwest for its ultra-long-haul product. But shipments and deployments have been pushed back into 2002. Schafer says that this has already been priced into Corvis’s current stock price, but he says the big question now is when in 2002 will those Corvis deployments take place?

While long-haul transport will likely be cut from Qwest’s spending list, some analysts say they are optimistic that the carrier will continue spending on optical switching. Schafer says that Qwest has continued to spend in this area and is expected to spend even more on it next year. This will likely benefit Ciena to some degree, since it sells its CoreDirector optical switch to Qwest. Tellium Inc. (Nasdaq: TELM), another optical switch company that has a contract with Qwest, could also reap the benefits of continued spending in this area.

“I’m glad that we aren’t in the DWDM business right now,” says the chairman and CEO of Tellium, Harry Carr. “Optical switching is still growing because it adds savings to the network.”

As for the company’s contract with Qwest, Carr is optimistic that things will continue to run smoothly. “Obviously, our guidance of 10 to 20 percent increase over next quarter makes a pretty clear point that we don’t think this will impact us negatively. We expect that Qwest will live up to its contract commitments. We have no reason to believe otherwise.”

Alex Henderson, an analyst with Salomon Smith Barney says that Qwest will also likely continue to spend on IP routing and switching. Although Qwest hasn’t historically been a big buyer of IP gear, he says, any upside from the carrier is still good news for companies like Juniper Networks Inc. (Nasdaq: JNPR), Riverstone Networks Inc. (Nasdaq: RSTN), and Cisco Systems Inc. (Nasdaq: CSCO), which have already sold to Qwest.

“Qwest says it will be spending on certain hotspots,” says Henderson. “And data networking is one of them. This is where they will need to spend money, and they will. The wireline and optical sectors will likely be the hardest hit by this.”

— Marguerite Reardon, Senior Editor, Light Reading
Page 1 / 2   >   >>
HarveyMudd 12/4/2012 | 7:25:58 PM
re: What's Behind Qwest's Numbers? QUEST is the smallest of all RBOCS.

QUEST never learned to conserve its resorces. It attempted to establish R&D center in which it has no experience. QUEST also a lot of company resources in product trials from any and all companies. The losses due to senseless trials amount to millions of dollars and it also results in loss of opportunities.

QUEST also wasted a lot resources in establishing IP network.

QUEST always wanted to be the news and paid no attention to managing the company. The company has relatively little experience in management.

Overall it wouldbe difficult for Qwest to recover unless further drastic cuts in expenses and drastic workforce reductions are undertaken.
iptwister 12/4/2012 | 7:25:56 PM
re: What's Behind Qwest's Numbers? HarveyMudd,

We take your posts much more seriously when you spell the subject's name correctly.

dietaryfiber 12/4/2012 | 7:25:54 PM
re: What's Behind Qwest's Numbers?
Anybody got any ideas on how this impacts Next Level Communications?

dietary fiber
Pearl 12/4/2012 | 7:25:53 PM
re: What's Behind Qwest's Numbers? Why is anyone surprised over this? Qwest basically canned their MOST RFP in Sep after more than 8 months in process, cutting their metro build plans from 25 cities to 2, quietly telling the vendors that CAPEX was not going to be budgeted for the program. This was a clear indicator that they would not need additional backbone capacity either.

All the major carriers are in a "build to demand" state for at least through the first or second quarter of 2002.
hmt 12/4/2012 | 7:25:51 PM
re: What's Behind Qwest's Numbers? ONI gets major chunk of its business from Qwest as per their financial statement filings to SEC. With Qwest cutting spending on all corners, Metro DWDM build up is getting effected in a big way too. Qwest can now lease the metro BW from the CLECs which have already gone throu the metro build up phase & have reduced the prices of wavelengths in the metro core to pennies for a dollar they were charging a year back.
Also after Qwest bought US-West, the carrier is leaning towards everything which other ILECs ask for in their networks especially OSMINE certification from Telcordia etc etc & ONI having not done any of that yet makes them even less likely to gain traction in the ILEC accounts.
HarveyMudd 12/4/2012 | 7:25:49 PM
re: What's Behind Qwest's Numbers? In my communication on QWEST, I did not spell the name of QWEST correctly. Please read QWEST in place of QUEST.

Sorry for the inconvenience.
optical_guy 12/4/2012 | 7:25:44 PM
re: What's Behind Qwest's Numbers? Reasonably off topic, but the mob is kicking themselves that they didn't invent OSMINE....extortion by another name should generated $$.

toll booth willy 12/4/2012 | 7:25:43 PM
re: What's Behind Qwest's Numbers? Now we have the unions, we have the gambling; and they're the best things to have. But OSMINE is a thing of the future. And if we don't get a piece of that action, we risk everything we have. I mean not now, but, ah, ten years from now.
cfaller 12/4/2012 | 7:25:41 PM
re: What's Behind Qwest's Numbers? "The Godfather"
scream 12/4/2012 | 7:25:38 PM
re: What's Behind Qwest's Numbers? Pearl - you seem to have good insight. What's relationship between Qwest and Mahi and Maple after this?
Page 1 / 2   >   >>
Sign In