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rattles opto market -- High-flying equipment makers grapple
with customer slowdown
Electronic Buyers' News
Copyright 2000 CMP Publications Inc.
Lackluster returns last week for Nortel Networks Corp.
threw the entire optical-electronics industry into a panic and
precipitated concerns that the fiber-optic landscape may be
getting soft at the top.
Nortel, the No. 2 optical-equipment manufacturer behind
Cisco Systems Inc., triggered some soul-searching within the
industry when it fell short of investors' lofty expectations
in a market already jinxed by the poor performance Lucent
Technologies Inc. turned in recently.
Nortel's third-quarter results came amid growing
uncertainty in the telecommunications-services sector, and
again raised questions as to how well telecom and
datacom-service providers, OEMs, component suppliers, and
contract electronics manufacturers are managing their
"Does Nortel's slowing in optics reflect slowing spending
by [telecommunication and networking] carriers?" asked Thomas
Astle, an analyst at Merrill Lynch & Co. Inc., New York.
"This issue has had a big impact on the equipment space for
over a month, and Nortel's issues might support this view."
An overview of Nortel's fiscal shortfall indicates that the
company and its customers are having problems gaining
visibility into the supply chain. Third-quarter revenue of
$7.3 billion was about $400 million below some analysts'
estimates, but the real shocker came in the optical-equipment
unit, where sales rose 90% from the year-ago quarter but fell
5% to 10% sequentially. The decline was due to
equipment-inventory overload at Nortel's customers and the
company's inability to secure enough skilled staff to install
optical systems, analysts said.
Nortel lost almost one-third of its stock value on the news
and dragged down investment markets across the globe. The
ground shifted under the entire optical industry, with most
companies in the sector losing up to 25% of their market value
on Wednesday. Nortel, SDL, and JDS Uniphase led the downturn
with all three dropping to less than half of their 52-week
"Nortel's results had one big surprise-optical revenue
declined sequentially. Ouch!" Astle said. "Clearly this event
has shaken our confidence in the company's visibility, and
we're not completely sure if we should buy into the
Investors could be responding to what may be the rumblings
of empty stomachs at the top of the telecom-industry food
chain, analysts said. Investors may be drawing a link, however
tenuous, between the optical-equipment and components market
and the larger telecom world, where service providers like
AT&T Corp., WorldCom Inc., and the Baby Bells are locked
in a struggle for market share.
The problems facing service providers' like AT&T, which
plans to break up into four separate entities, cannot be
isolated from those of equipment suppliers, which in turn,
cannot shield their suppliers from any demand weakness from
above, analysts said.
The closest analogy in this instance can be drawn from the
wireless-equipment market, according to Bill McClean, an
analyst at IC Insights Inc., Scottsdale, Ariz.
"Cell-phone producers in 2000 planned to sell 520 million
cell phones. [They] ordered ICs and components to match this
'plan,' but will sell about 100 million less-still a 50%
growth rate over 1999," McClean said. "It doesn't matter how
fast a market's growing if supply is outstripping it."
The supply-chain management difficulties facing the
optical-equipment industry may be complicated by the recent
sharp increase in capital expenditures at the telecom and
networking carrier level. In 1999 and 2000, telecom-equipment
OEMs raised their capital expenditures by 22% and 33%,
respectively, instead of the 9% and 6% increases forecasted by
The higher capex was a result of moves by the likes of
AT&T, Covad, Level3, Nextel, Qwest, Sprint, Verizon, and
Worldcom to upgrade their networks in order to provide voice
and data transmission over the Internet and cable lines. These
access and service providers have largely chosen fiber-optic
networks because of their higher bandwidth and faster
transmission capacity. However, these companies, which make up
the bulk of the customer base for fiber-optic-equipment OEMs,
are facing a declining consumer telephony industry while
intense competition for market share is creating a chill
within the sector.
WorldCom, Clinton, Miss., further muddied the outlook for
telecom companies last week by announcing higher third-quarter
revenue that nevertheless was weaker than expected. The
telephone and data-services company said revenue rose 10.7%,
to $10 billion, about $500 million short of some analysts'
Until recently, investors who assumed that the fiber-optic
sector was immune to the weakness in the larger telecom market
pushed the leading OEMs' and suppliers' stocks to the
stratosphere. Shares in JDS Uniphase Corp., Nepean, Ontario,
for instance, surged 354% in one year, to $153.38 from $33.75,
while San Jose-based SDL Inc.'s stock witnessed an even more
spectacular 881% hike, to $460.50 from $46.94 during the same
period. Shares of Corning Inc., Corning, N.Y., the No. 2
global optical-components supplier, rose 399%, to $113.31 from
The high valuation given optical-components suppliers and
the equally lofty premiums that the leading players were
willing to pay for their smaller rivals (JDS Uniphase's
purchase of SDl was initially valued at $41 billion) is
fueling growth within the industry. The optical market is
getting crowded as some suppliers divert resources from their
traditional markets to the sector, which Merrill Lynch
estimates will balloon by 2003 to $22 billion from about $5
billion in 1999.
Nortel, WorldCom, and AT&T's problems may have spooked
the investment markets, but bigger problems are lurking if the
fiber-optic-equipment market begins to slow down, according to
Nicholas Economides , a professor of economics and a
telecommunications industry expert at New York University's
Leonard N. Stern School of Business. AT&T's decision to
split its operations will reduce the pressure on the Baby
Bells to deploy DSL lines in a strategy to protect their home
turf from their bigger rival, Economides said.
"AT&T's cable unit created a threat to the monopoly of
local telephone providers and forced them to push hard to
deploy DSL," Economides said. "That threat has been
postponed or eliminated. These companies won't be in such a
That feeling was hard to shake on Wall Street last week
despite JDS Uniphase's positive results, which temporarily
restored investors' faith in the optical sector.
"If there is a slowdown in the optical- networking market,
someone forgot to tell JDS Uniphase," Merrill Lynch's Astle
said. "[But] how much visibility does a component supplier
like JDSU have? Generally, component companies would have less
visibility than an OEM systems maker who deals directly with
the end user."
October 30, 2000