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Optical Oracle: More Carrier Cutbacks

Light Reading
News Analysis
Light Reading
11/15/2001

Carrier capital spending has not yet hit bottom. It will continue to deflate for the foreseeable future, starting with a sizeable dip from current levels in 2002.

So says the latest report from the Optical Oracle, Light Reading’s subscription service. Titled “Carrier Capital Spending: Past, Present, and Future,” the report looks at how carrier spending on equipment increased 250 percent from 1997 to 2000, what slammed on the brakes, and what it will take for spending patterns to show significant growth once again.

Based on feedback and financial data from 11 top carriers, the report concludes that carriers, which expanded their capital spending far more quickly than their revenues and profits, have no choice but to cut back. For 2001, carrier capex is poised to decline 16 percent from the previous year, and based on early forecasts from the carriers it will decline another 35 percent in 2002. After that, expect declines of 10 percent per year through at least the next three years, the report says.

The report delves deeply into the mismatch between speculation and reality from the preceding two years that’s made the recent spending decline so severe. “It’s best to look at 1999 and 2000 as anomalies in terms of venture capital, financing from Wall Street, and financing by the equipment vendors themselves,” says the report. “When new technology investments failed to yield the profits or revenue growth necessary to sustain overinvestment, the service providers were forced to scale back.”

The financial bubble created by the financing binge wasn’t the only factor in bringing about the current capex downturn. The business case for spending was never there in the first place, according to the report. This is clearly shown when charting the flow of up-front capital expenditures against carriers’ actual revenue and profit growth.

The report dissects how each individual carrier has contributed to this ongoing trend. By breaking out capital expenditures for each carrier in ratio to its sales, it’s possible to see where some of the existing bright -- and dark -- spots lie.

Clearly, though, only a renewal of infrastructure spending can start shortening the overall downward trend. And that won’t occur until network utilization compels the carriers to revamp their networks. The report says this will be a gradual process that won’t commence until late 2002 or early 2003.

The process won’t be easy to track. According to the report, carriers keep vital information about network utilization, lit and unlit fiber, and use of existing fiber under tight wraps. Without this information, it will be difficult to forecast exactly when carrier networks will be set for expansion once more. But the report says the time will come. “It’s just going to be a long wait -- probably two or three years,” says Optical Oracle analyst Christopher Bulkey.

Optical Oracle is Light Reading's subscription electronic research service for professional investors and industry leaders. More information is available here.

— Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com Editor's Note: Light Reading is not affiliated with Oracle Corporation.

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nevermind
nevermind
12/4/2012 | 7:34:05 PM
re: Optical Oracle: More Carrier Cutbacks

This is just like the reports from a couple of years ago about how carrier networks were going to increase exponentially for the next 10 years, but in reverse. I guess it results from people taking a too narrow of a snap shot then trying to project it out 5 years. I see the same wild speculation for components that I buy. People will give me ridiculous lead times on the order of 52 weeks, then just 8 weeks later the lead times are completely gone and the market is flooded with excess parts. Then there is all this wild speculation about market saturation in parts will go on for years so everyone shuts down their fabs. A few months later there is another shortageG«™and the cycle repeats.

The fundaments from a few years ago have not changed. Internet bandwidth is on the rise, the only thing that is debatably is the rate of growth. As soon as a big customer requests more bandwidth than the carrier has available, the carrier he will expand his network, and he will borrow money to do it if he has to. His only alternative is to give up the customer to another carrier. IG«÷m just an engineering type, but I would be willing to bet that this report will seem ridiculous and irrelevant by the end of 2002. I think it is more likely that we will be on the downside of another cycle of overspending in 3 years.

In the mean time, I will sit back and enjoy my 10-30% gains on all of my optical networking stocks that the analystG«÷s are telling me not to buy because the market wont recover for another few years.
optigirl
optigirl
12/4/2012 | 7:34:04 PM
re: Optical Oracle: More Carrier Cutbacks
I can't help but look at this article and say,

BS.....



whose
whose
12/4/2012 | 7:34:03 PM
re: Optical Oracle: More Carrier Cutbacks
This brillant sage says spending in '05 will be less than '98. Get real. Another new low for LR...
MAMBA
MAMBA
12/4/2012 | 7:34:01 PM
re: Optical Oracle: More Carrier Cutbacks
As the old song goes, "the business model bone's not conneted to techcnology bone..." So what does this mean? Optical market growth is paced by the service providers, and regretably, they don't have a clue. So, for those of you that are anticipating optical stocks to soar upward, I have some beachfront property in the Meadowlands for ya...
cfaller
cfaller
12/4/2012 | 7:34:00 PM
re: Optical Oracle: More Carrier Cutbacks
I agree with Mamba. The end of the string for the service provider is demand for services, and there isn't much growth there.

Although the general conclusion of the report may be a tad too pessimistic, it's pretty much right on. Service providers won't buy too much early next year, and after customer demand stabilizes and goes up again, we'll start to see an uptick late next year.
Scott Raynovich
Scott Raynovich
12/4/2012 | 7:34:00 PM
re: Optical Oracle: More Carrier Cutbacks
Actually, it says that spending will be about the same as it was in 1998. And lo and behold, that is about when the carriers went down the path of massive increases in their capex and eroding profitability. Coincidence? I guess people in this industry have short memories, but one of the main points here is that prior to 1998 and vendor financing, carriers actually had pretty level capital spending budgets. There were only modest single-digit increases. They will revert to the norm.
nevermind
nevermind
12/4/2012 | 7:33:55 PM
re: Optical Oracle: More Carrier Cutbacks
cfaller wrote:
I agree with Mamba. The end of the string for the service provider is demand for services, and there isn't much growth there.
-------------------------------------------------Not much growth in demand? How do you define "not much"? Everyone I know wants more bandwidth, but they canG«÷t get it. Once everyone has enough bandwidth for current services, there will be new applications that require more. I expect the growth model to be similar to PC memory. Until I can download movies in real time on demand, with DVD or better quality, I see plenty of room for growth. Granted their will be dips in demand as the applications catch up and surpass available bandwidth. Am I missing something?


Scott Raynovich
Scott Raynovich
12/4/2012 | 7:33:52 PM
re: Optical Oracle: More Carrier Cutbacks
This is not about whether you want to download movies. This is about people running businesses, and whether anybody will make money from you downloading movies. In fact, the entire optical revolution is about allowing carriers to spend LESS to get MORE bandwidth. That's why it's silly that some of them thought they should boost their capex budgets 250% to build out their networks. DWDM is an inherently more efficient technology. That is why capex will, and should, decline. And we will get MORE bandwidth. But only the players focused on delivering this -- more bandwidth with less expense -- will win.
flanker
flanker
12/4/2012 | 7:33:51 PM
re: Optical Oracle: More Carrier Cutbacks
Scott:

the implications of this report are pretty frightening, and its worth taking seriously. I have two questions:

1) I have seen data that capex peaked in 1999, not 2000. Have you seen evidence of this for individual carriers is FY2000 generally bigger in terms of capex than FY 1999?

2) Capex trends are definitely lumpy. They do not merrily trend upward year over year. The State Dept did a report on the value of telecom equipment exports over the past 10 years and the data was all over the map (and probably not very reliable). But this report anticpates 4 to 5 YOY declines. I hope this is not the case.

runnning_back
runnning_back
12/4/2012 | 7:33:49 PM
re: Optical Oracle: More Carrier Cutbacks
It must be pointed out that most networks are only utilized to between 15-25% of capacity. No scarcity, no premium -- and certainly no motivation to fatten up.

MAN and first mile, OK. But spotty.
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