Trouble Ahead for Telecom Equipment Firms - Barron's

With credit markets as tight as they are, telecommunications companies are scaling back on spending, hurting communications capital-equipment makers in the process. Barron's Eric J. Savitz explains just how poor the outlook is for telecom equipment firms.

Ciena (CIEN) makes a good study of what can happen when carriers stop spending. Its October-quarter revenue fell short of analyst forecasts by nearly 10%, and its projected January-quarter revenue was 7% below estimates. The news pushed Ciena's share price down 20%, while Ciena CEO Gary Smith noted "short-term visibility is limited."

Some stocks are in even worse shape, like Nortel Networks (NT) which is reportedly seeking advice about bankruptcy protection. Others, like Cisco (CSCO), Juniper Networks (JNPR), Ericsson (ERIC), Alcatel-Lucent (ALU) and Tellabs (TLAB), are healthier than some of their rivals but still face a distressing outlook.

Street estimates have already been scaled back for most equipment makers, but those cuts might not be large enough. Over the next few years, carriers will face both weaker demand and maturing debt. With carriers' balance sheets under pressure, equipment companies could see results far worse than the 0% to -5% revenue estimates for next year. Looking at data from the burst internet and telecom bubbles in 2002, capital spending could slide 20%-30%.

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FACTBOX-Telecom operators' cost cuts to hit gear makers

Dec 11 (Reuters) - Nortel Networks shares fell about 25 percent on Wednesday after a Wall Street Journal report that North America's biggest telephone equipment maker has sought legal advice on a bankruptcy protection scenario in the event that its restructuring plan fails. Nortel and other telecom equipment makers are set to face a falling market next year as telecom operators around the world are cutting jobs and slashing other costs.

The following is a list of major operators' recent cost cutting announcements:

SPRINT NEXTEL
Chief Financial Officer Bob Brust said on Dec 9 the No. 3 U.S. wireless service would continue spending on network maintenance in 2009, but would hold off on network expansion to help maintain the company's cash position.

AT&T
The top U.S. carrier AT&T said on Dec 4 capital spending in 2009 will be lower than in 2008. The company is seen spending less in its traditional wireline business, focusing more of its investment in wireless and advanced Internet and video services. It also said it will eliminate 12,000 jobs, or about 4 percent of its workforce, to cope with an economic downturn as well as a decline in traditional phone sales.

TELECOM ITALIA
The debt-laden operator said on Dec 3 it will shed assets worth nearly $4 billion and cut another 5 percent of its workforce to slash borrowings and costs amid a weak economy.

TIM PARTICIPACOES
Telecom Italia's Brazilian subsidiary has earmarked 2.3 billion reais for investments next year, down from 3.3 billion reais in 2008, according to a filing with Brazil's securities regulator on Dec 3.

VIMPELCOM
Russia's No.2 mobile carrier on Nov 25 promised to cut capital spending in 2009 by "tens of percent" from a planned $2.6 billion this year, to focus on repaying its debt.

TELEFONICA
The Spanish telecoms group said on Nov 19 it was confident of reaching its medium-term targets despite an economic slowdown, saying it had a great deal of control over costs.

TELIASONERA
The Nordic operator's capital spending will certainly not rise next year, but a major decrease is equally unlikely as it would be bad policy over the medium to long term, its chief executive said on Nov 19.

MILLICOM
Sweden's Millicom, which specialises in emerging markets, said on Nov 19 it expected capital expenditure to fall to about $1 billion in 2009 from slightly less than $1.4 billion this year.

MTS
The largest mobile phone operator in Russia cut on Nov 13 its capital expenditure forecast for this year to $2 billion from $2.5 billion.

BT GROUP
The operator announced on Nov 13 10,000 job cuts and a plan to trim the cost of its pension scheme just days after it issued a profit warning.

VODAFONE
The operator said on Nov 11 it aims to maintain profits and boost free cash flow by cutting 1 billion pounds ($1.6 billion) of costs.

TELEKOM AUSTRIA
The company said on Nov 11 it plans to slash about 1,250 employees from its work force in 2009.

TELUS
Canada's No. 2 phone company said on Nov 7 it would make even deeper cost cuts than it had planned. Chief Executive Darren Entwistle said Telus will "materially and substantially" cut costs over the remainder of 2008 and beyond to offset its investments in its discount wireless plan Koodo and in other areas.

TELE 2
The Stockholm-headquartere... operator, which runs businesses in more than a dozen countries, including emerging markets such as Russia, said on Oct 22 that it cut its forecast for capital expenditure in 2008 to 4.5 billion to 4.8 billion Swedish crowns from a previous estimated range of 4.8 billion to 5.0 billion Swedish crowns.


ADVANCED INFO SERVICE
Thailand's top mobile phone operator AIS said on Oct 15 it was reviewing its plans to invest $150 million in new 3G technology as the global financial crisis has hit consumer demand.

SINGAPORE TELECOMMUNICATIONS
The firm said on Oct 6 it would cut costs as it said its operations were starting to feel some impact from the global financial crisis.

(Compiled by Tarmo Virki; Editing by Sharon Lindores) ((tarmo.virki@thomsonr... [phone], Reuters messaging: tarmo.virki.reuters.co...

Keywords: TELECOM INVESTMENTS/ Keywords: TELECOM INVESTMENTS/ Keywords: TELECOM INVESTMENTS/ Keywords: TELECOM INVESTMENTS/ Keywords: TELECOM INVESTMENTS/

2008 Dec 15 11:21 AM