Turnaround for telecom? Well, maybe

THE BALTIMORE SUN

The telecommunications sector continues to be riddled with cutbacks -- ranging from layoffs to lowered financial forecasts.

Ciena Corp., the Linthicum-based fiber-optics equipment maker, lowered financial forecasts for its fiscal first quarter and laid off 400 workers, or 12 percent of its staff, this month. The company also cut 380 jobs in November.

Corvis Corp. of Columbia reported that its revenue in the fourth quarter was less than a third of what it was during the corresponding quarter one year earlier. That telecom equipment-maker laid off about 300 employees in November.

And Lucent Technologies Inc., the New Jersey-based telecommunications equipment company, has whacked its staff from 106,000 in January 2001 to 62,000 as of Dec. 31. It expects to be down to fewer than 55,000 employees by midyear.

The free fall has wiped out tens of thousands of jobs and knocked once high-flying stocks into the single digits in some cases, leaving analysts and industry experts agreed on just one thing: Eventually the industry will recover. The big question is when.

"At some point we're going to come out of this and we're going to come out of it roaring like a lion," said Robert Rosenberg, president of Insight Research Corp. of Parsippany, N.J.

Analysts said the dot-com collapse and the recession are among the reasons for the sector's struggles. Signals of its recovery range from contract wins to new product announcements to more capital spending from carriers.

Before the sector begins to pick up, there will be consolidation among the carriers -- some of which has already started, said Rick Schafer, a research analyst for CIBC World Markets in Denver.

"At the end of the day, the only way that the equipment guys are going to really get healthy again is if their customers get healthy," Schafer said. "And that's what this consolidation is all about."

When carriers stop continually cutting their capital expenditure forecasts, it's a signal the sector has hit bottom, Schafer said.

"I think we're getting pretty close," Schafer said. But while the rate of erosion has slowed, the sector hasn't hit bottom yet, he said.

More contract awards from companies such as Verizon Corp. and AT&T; Corp. will be an indicator that conditions are improving, said Joe Gladue, a telecommunications equipment analyst for the Chapman Co. in Baltimore. "Those announcements have been few and far between in the last six months," he said.

AT&T; announced last week that it was using Ciena equipment to upgrade its nationwide network. Schafer said the deal is a positive but doesn't change the immediate financial outlook because both companies likely knew about it for a while.

Nancee Ruzicka, a telecommunications analyst for the Yankee Group, believes that the sector has already bottomed out and said the biggest signal that the worst is over is new-product announcements.

"For a while there, there was just nothing," she said. "Nobody was working on anything new and you didn't get a sense that anyone was thinking that far ahead."

But companies, including Lucent, have recently announced new products, she said. "Those sorts of things are happening again, which really does lead me to believe that it's on it's way," she said.

Some companies see signs of a bottom as well.

John W. Loose, Corning Inc.'s president and chief executive officer, said during a conference call this month that Corning still faces uncertainty, but he is "increasingly comfortable" that the first quarter will mark a bottoming out for the company. It is still too early to gauge the pace of recovery, he said.

And when Lucent released its first-quarter earnings last month, the company's executive vice president and chief financial officer, Frank D'Amelio, said in a statement: "We continue to believe that revenues in the first fiscal quarter of 2002 represented the low point for Lucent sales in the current market downturn."

Others are less optimistic.

David Cooperstein, a research director for telecommunications at Forrester Research who believes that the sector hasn't hit bottom yet, doesn't expect improvement until 2003. Budgets are already set for this year, so it will take at least until next year before carriers increase their spending, he said.

Mark Lutkowitz, an analyst for Charlottesville, Va.-based Communications Industry Researchers, also feels that the sector is not likely to speed up until 2003.

Lutkowitz said the signs will be obvious: Sales will go up and the layoffs will end. But he wouldn't be surprised if growth in the sector slowed even more before it got better.

"When we're going to get back to more favorable days?" he asked. "I don't know that anybody really knows that for sure."

Corvis is already taking steps for when those better days do come. Mark Dill, vice president of marketing communications for Corvis, said the Columbia company is enhancing its portfolio of products and accumulating lab trials with customers to position itself coming out of the downturn.

"What we say is, 'Do you want to work with a vendor that has a proven path, with a guide that has a map, or do you want to work with someone who says trust me, I'll get you there, but they have no proof,'" Dill said.

And with $660 million in cash and short-term investments, analysts say, Corvis has enough money to ride out the storm.

Ciena is well-positioned to come out strong after the downturn, analysts and the company say.

"We're in a period of consolidation and retrenchment in the carrier space, which has led to the malaise in the equipment sector," said Steve Chaddick, Ciena's chief strategy officer.

Analysts agree that Internet and data traffic on the networks is increasing and, at the end of the day, carriers will have to be able to manage it. Insight Research estimates that carriers will have to spend $50 billion over the next five years to keep up with demand or traffic will start to slow down.

"The silver lining is, traffic continues to grow and you're going to have to build the highways to handle that traffic," said Schafer of CIBC World Markets.

Gladue of Chapman Co. believes that Ciena's customer base and its focus on "next generation" equipment make it among the best positioned when the sector starts to pick up.

Nevertheless, he said, there isn't a consensus on when that might be.

"I think there's some hope that we're around the bottom," Gladue said. "But I think people hoped that six months ago as well. I think there's more hope than firm conviction."

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