Still Time to Pull the Switch On Telecom Equipment?

Cisco's (CSCO) latest quarter was the talk of the town, and looking at the recent PPI data on telecom equipment (switchboard and switchgear apparatus) it should be no surprise.

The next fair question for any skeptical investor, of course, is whether the best ever pricing environment means things can only get worse. To gauge the market, I looked at some recent calls from a variety of telecom equipment makers.

Cisco doesn't seem worried.

Although competition remains robust, we believe we are gaining market share versus almost all of our major competitors in most product categories. But we also believe we are getting a larger share of our customers' total spend on communications and IT.

(Excerpt from full CSCO conference call transcript)

Nortel (NT) isn't raising prices, but doesn't seem to feel pressured.

I am very pleased we're delivering measurable progress on margins. This is evidence of our processes and productivity improvements and, but also pricing discipline. And we're bringing value with a great level of discussions. We're improving productivity. Obviously we're not increasing prices but there is a disciplined process and I think we're demonstrating we're able to deliver strong.

(Excerpt from full NT conference call transcript)

Juniper (JNPR), however, voiced some concern over competitors with "nothing but price to offer."

Certainly demand is -- as long as people continue to value their networks equal to or beyond what they have, which we believe they are, and then on top of that, they use them more than they did before. Every time something like the iPhone comes out, making it easier to put YouTube videos up and for people that demand higher bandwidth applications, that only adds to the demand curve. So there’s a lot of innovation going on in that space and all of it makes positive contribution to the infrastructure market.

Pricing is at it has always been -- it’s always a challenge in a given case and clearly some of our competitors have nothing but price to offer. So we’re aware of that but I wouldn’t say that’s changed in the last couple of years, so probably not a big difference that I would note.

I do think what people can most easily judge the success of the company by is do we continue to gain in the markets that we serve? Do we continue to gain the market share and continue to improve the operating model of the company in the process and continue to grow the generation of our cash and the kind of things that we think make the business healthy and healthier today than it was yesterday and healthier tomorrow than it is today, so we’ll continue to push all those metrics.

(Excerpt from full JNPR conference call transcript)

Alcatel-Lucent (ALU) is already seeing pressure.

Our Q2, 2007 gross margin suggest difficult pricing environment, one that has been impacted in the short-term and not only our need to withstand some level of collective efforts by our competitors to unseed us our customers but, as well they -- need occasionally to support some product migrations. Additionally for this transition year of 2007, we are strategically reinvesting the gross margin savings in selective markets to position the company for the long-term, while achieving most of our operating expense savings on a comparable basis.

In the second quarter gross margin was negatively effected by or negatively impacted by an unfavourable product in geographic mix, continued investments as I described and the impact of some product transitions cost as customers migrate their networks.

(Excerpt from full ALU conference call transcript)

All in all, it seems like a very company-specific environment, one in which it makes sense to stick with the leaders.

Comments

[schmitt]

Where did you get the graph data? Something is wacky since the bubble isn't showing up there.

[WilliamTrent]

The graph is the 12-month change in PPI for switchgear from the BLS. I don't think the bubble affected the equipment prices so much as the stock prices.