Reuters Market News
Telecom Equipment Makers Face Dreary ’03 After SBC
Friday September 27, 4:35 pm ET

By Ben Klayman

CHICAGO (Reuters) – As if things weren’t bad enough for the battered makers of telecommunications equipment, local telephone company SBC Communications Inc. (NYSE:SBCNews) has sent another shock wave through the sector by signaling that spending next year will decline even more than expected.

SBC said late on Thursday it would slash its capital spending budget for next year by 25 percent to 38 percent. In an industry already rocked by billion-dollar losses and job cuts, analysts said suppliers will need to steel themselves for more of the same next year.

“With these additional cuts, the magnitude of the pressure that is coming on the equipment vendors is just off the charts,” Salomon Smith Barney analyst Alex Henderson said.

“If this was a football game, the referees would be blowing the whistle for unsportsmanlike conduct, jumping on after the play’s been whistled dead,” he said. “There’s no place to hide here. The numbers here are drastic. This is clearly a bloodbath for these (equipment) companies.”

The American Stock Exchange Network Index (AMEX:^NWXNews), made up of many of the sector’s players, closed off almost 7 percent on Friday.

“This was the first smoke signal that is going to really disturb providers of networking gear that the light at the end of the tunnel is further away than they had hoped,” independent telecom analyst Jeff Kagan said.

Among the biggest losers among individual equipment suppliers were Nortel Networks Corp. (Toronto:NT.TONews; NYSE:NTNews), Lucent Technologies Inc. (NYSE:LUNews) and Advanced Fibre Communications Inc.(NasdaqNM:AFCINews), all of which list SBC as a customer.

But analysts said SBC’s cuts would affect almost everyone in the industry, including France’s Alcatel (Paris:CGEP.PANews; NYSE:ALANews), Redback Networks Inc. (NasdaqNM:RBAKNews), Cisco Systems Inc. (NasdaqNM:CSCONews), ADC Telecommunications Inc. (NasdaqNM:ADCTNews) and Tellabs Inc. (NasdaqNM:TLABNews).


The news is likely to get worse as analysts expect Verizon Communications (NYSE:VZNews) and BellSouth Corp. (NYSE:BLSNews) to follow suit in setting drastically lower 2003 capital spending budgets.

“SBC is an important carrier because they did take down their capex (capital expenditures) quite a bit on a year-to-year basis,” Deutsche Bank analyst George Notter said. “That’s an important precedent. We’ve been hearing negative anecdotes about capex spending out of places like Verizon and BellSouth.”

Deutsche Bank on Friday reduced its view on 2003 capital spending by the telephone carriers to a 15 percent year-over-year decline instead of an expected decrease of 5 percent to 10 percent.

“Seeing a cut this big from a company that’s supposed to be more stable than a lot of the other guys is a little bit worse than I would have expected, but I just don’t see how bad news can surprise people at this point,” Shawn Campbell, an analyst with Northern Trust Corp.’s asset management arm, said of SBC’s spending decline.

Several analysts said the capital spending figures could rise, though, as they believe SBC and the other regional Bell telephone companies are trying to make federal regulators blink.

The Bell companies want to see changes in the rules on giving competitors access to their telephone networks at reduced prices, and SBC’s announcement may be the first of many to put pressure on the regulators, analysts said.

“What we’re seeing now is a very high-stakes poker game being played out, and the table stakes are billions of dollars,” Kagan said.

The cuts could put further pressure on companies undergoing restructuring, especially Lucent and Nortel, Salomon’s Henderson said.

“It’s not a question of liquidity for the two companies. They’ve got a huge slug of cash on their balance sheets,” he said. “The problem is the income statement. How do you downsize a company to get the kind of cost cuts you need to get back to break-even cash flow?”

Other suppliers mentioned by analysts as affected by SBC’s cuts included Japan’s Fujitsu Ltd. (Tokyo:6702.T – News), Juniper Networks Inc. (NasdaqNM:JNPRNews), Ciena Corp. (NasdaqNM:CIENNews), Sycamore Networks Inc. (NasdaqNM:SCMRNews), Sonus Networks Inc. (NasdaqNM:SONSNews), Adtran Inc. (NasdaqNM:ADTNNews) and Corvis Corp. (NasdaqNM:CORVNews).

“This a telecom depression. There is no spending going on,” said Ronald Redfield, portfolio manager at Redfield, Blonsky & Co., a New Jersey investment management firm that owns Lucent stock and has shorted other equipment makers.