TELECOM COMPANIES' WOES CAUSING STATIC FOR SUPPLIERS

By Robert Manor Tribune staff reporter April 18, 2001 The huge boom in spending on communications equipment has come to a sudden stop.

Corporations are scaling back plans to buy computer routers, phone switches, fiber-optic cable and other high-tech gear. Besides the overall weakness in the economy, factors ranging from the end of Y2K investments to the declining fortunes of young telecommunications companies are to blame.

Figures supplied by Bank One Corp. show that after years of rapid growth, spending on communications equipment plateaued in the fourth quarter of 2000 at about $138 billion, then started falling this year. That spells trouble for suppliers big and small, who are coping with what Cisco Chief Executive John Chambers describes as one of the fastest declines of any major industry.

On Monday, Cisco Systems Inc. said it would write off $2.5 billion worth of equipment that, the company acknowledges, it cannot sell at prices it once anticipated. Its third-quarter sales will be off some 30 percent from second-quarter levels.

Lucent Technologies Inc., Cisco and other companies that serve the telecommunications industry are finding their plans crimped because of customers like New York's Winstar Communications Inc.

Winstar, which offers local and long-distance telephone service and Internet access, said recently it would lay off 2,000 people and halt construction on its telecommunications network, cutting capital expenditures this year to $200 million from $700 million.

Lisle-based Tellabs Inc. is one of the victims of the downturn in telecommunications.

This month Tellabs cut its forecast for first-quarter sales to about $772 million, compared with prior estimates in the range of $830 million to $865 million. The company projects earnings per share of 29 cents, compared with prior projections of 35 cents to 38 cents.

The change is due to reduced and deferred spending by major telecommunications carriers late in the quarter, Tellabs said.

"The health of our business depends on the health of our customers, and we're seeing caution from them in the current economic environment," said Richard C. Notebaert, CEO of Tellabs.

Independent telecommunications companies have run into problems getting financing at the same time that competition has gotten fiercer, analysts say.

"You have a lot of competition in the long-distance market," said Matthew Koellner, tech company analyst with H&R Block Financial Advisors. Meanwhile, big corporations are constantly demanding cheaper telecommunications, which is cutting into profits.

"It's really laid a lot of body blows on Cisco and the other equipment-makers," Koellner said. "It's difficult to predict when this situation will turn around."

Telecommunications is nothing if not high-tech, and its fate is closely related to the Internet.

"A year ago investment in high-tech equipment was running at a 65 percent annualized growth rate," said Diane Swonk, chief economist for Bank One. "The sector built capacity as if 65 percent gains would never stop."

In some cases, telecommunications companies are cutting capital spending because they have built the network needed to serve their customers.

"Our business plan calls for us to expand into 24 markets," said John Barnicle, chief operating officer of Chicago-based Focal Communications Inc., which offers local, long-distance and Internet service. "We were largely done with that last year."

Barnicle also said the downturn is helping his firm. Troubled telecommunications companies are selling some equipment they don't need or can't afford

"It is not only less expensive, but they can be used more quickly," Barnicle said, "at prices we can't pass up."

Swonk said another factor hurting the industry is the huge investment made before the year 2000.

The so-called Y2K bug, which was said to threaten the nation's telecommunications network, was squashed by billions of dollars in investment that satisfied demand for some time to come.

"You don't have to spend that money twice," Swonk said.

Investment in communications and high-tech equipment is probably suffering a slight decline so far this year, she said. Even so, Swonk said she expects sales will revive later this year.

http://www.chicagotribune.com/business/printedition/article/0,2669,SAV-0104180320,FF.html

-- Martin Thompson (mthom1927@aol.com), April 19, 2001