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WorldCom Spending Pullback Adds Ballast to Sinking Optical Stocks

Scott Moritz

Thursday brought more bad news for the reeling optical sector, as another network builder trimmed its spending outlook and optical-equipment stocks continued to plunge.

WorldCom (WCOM Quote - Cramer on WCOM - Stock Picks) told analysts on a third-quarter conference call Thursday morning it will cut back next year on its network expansion efforts. The company expects to spend $9 billion this year, and probably will fall well short of that total next year. WorldCom was off $2.31, or 9.2%, at $22.94, putting it near its 52-week low of $20.19.

The Jackson, Miss.-based phone and Internet service provider said it will offer more detailed guidance on spending and revenue when it unveils its restructuring plans next week. But CFO Scott Sullivan said spending "will be lower" in 2001.

Sullivan didn't provide specifics, but he said spending would probably be less next year in local access equipment, phone and data switches and undersea equipment. He said spending in those three areas had basically peaked this year.

The pullback could mean less business for WorldCom suppliers such as Alcatel(ALA Quote - Cramer on ALA - Stock Picks), Nortel(NT Quote - Cramer on NT - Stock Picks) and Cisco(CSCO Quote - Cramer on CSCO - Stock Picks). Alcatel sells WorldCom digital cross-connect equipment used in local phone switching offices, says Lisa Pierce, equipment analyst with Giga Information Group, an industry research firm. And both Nortel and Cisco sell WorldCom voice and data switches, says Pierce, whose firm consults to most of the telecom industry.

WorldCom is the third of the nation's top equipment spenders to have said in the past two days that it would be pulling back on network equipment spending. Wednesday, Williams (WCG Quote - Cramer on WCG - Stock Picks) and AT&T (T Quote - Cramer on T - Stock Picks) separately said they were trimming their heavy-spending ways.

The formerly unfazed optical networking sector is now getting crushed under the growing body of evidence that equipment spending is receding more rapidly than expected. The sector is also being punished by the disappointing revenue growth at optical networking leader Nortel Tuesday.

Optical switch and transport maker Ciena (CIEN Quote - Cramer on CIEN - Stock Picks), a big WorldCom supplier, was down 17% around midday Thursday after a 20% selloff Wednesday. Nortel has lost 30% of its market value in two days.

With the top of the buying chain weakening, all eyes will be on JDS Uniphase (JDSU Quote - Cramer on JDSU - Stock Picks) this evening when the company reports quarterly earnings. JDS supplies companies like Nortel and Ciena with optical components for the manufacture of network equipment. JDS will need to post stellar earnings and speak glowingly about the future to ward off continued selling. JDS was off $5 at $66, adding to a 25% thrashing Wednesday.