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