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WorldCom Spending Call Rings the Slowdown Bell

Scott Moritz

With the WorldCom (WCOM - Cramer's Take - Stockpickr) numbers in, it looks like equipment spending by the big service providers will be flat this year.

And that's the good news.

The bad news is that many of the remaining phone companies, Internet service providers and cable companies, stricken by a flight of support in the stock and debt markets, have shifted to survival mode and slashed their capital budgets. Names like Genuity (GENU - Cramer's Take - Stockpickr), PsiNet (PSIX - Cramer's Take - Stockpickr) and Teligent (TGNT - Cramer's Take - Stockpickr) don't exactly make up a robust junior varsity squad.

Combine the industry's sagging dynamic with the backdrop of a slowing national economy and the prospect of flat spending almost seems optimistic.

And as we have seen, when there is any pinch at the source of cash atop the networking industry pyramid, the pain is felt across a wide range of suppliers, from the big gear makers to the component manufacturers.

Pain Still Hurts

Though spending forecasts have been falling over the past several months, the notion of a spending pullback continues to strike hard at companies, including Cisco (CSCO - Cramer's Take - Stockpickr), Nortel (NT - Cramer's Take - Stockpickr) and JDS Uniphase (JDSU - Cramer's Take - Stockpickr). Each of these networking gear makers is in the midst of vast efforts to expand capacity. Yet those plans were hatched last year, when equipment spending reached an all-time high, rising 30% from 1999's already exalted levels.

Aside from Sprint (FON - Cramer's Take - Stockpickr) and Qwest (Q - Cramer's Take - Stockpickr), which project sizable budget increases, many of the spending projections amount to best-case scenarios. Verizon (VZ - Cramer's Take - Stockpickr), for example, last week explicitly hinged its spending forecast on the nation's economy. "If there is any significant slowdown," said Verizon's CFO Fred Salerno, "we have the levers in place to be careful about capital spending and expenses."

The first lever may have been pulled Wednesday, when Verizon said it was cutting the equivalent of 10,000 jobs this year. And, as some analysts point out, Verizon is now under less pressure to invest in its network, as competitors like NorthPoint fail and the likes of Covad (COVD - Cramer's Take - Stockpickr) slash expansion plans.

Short-Distance?

Take AT&T (T - Cramer's Take - Stockpickr) as another example. The nation's top phone and cable company has seen no end to the deterioration of its long-distance business, which serves as its primary cash supply. Meanwhile, the company is grappling with a four-way breakup and burdened with $65 billion in debt. Last fall AT&T suspended equipment orders for its cable division in an effort to manage costs, so it's hardly far-fetched to imagine that a slowing economy would continue to inhibit spending plans.

WorldCom had already warned in October, when it reported third-quarter earnings, that it would be trimming its 2001 spending plans. The Jackson, Miss.-based phone and Internet service provider is attempting to manage its own rapidly declining long-distance revenue.

WorldCom has about $25 billion in debt on its balance sheet and expects to go back to the bond market in the first half of this year for additional funding. If revenue continues its slide and the economy stalls, keeping up with those loans is certain to take priority over new equipment purchases.

Now that that cycle has started with some companies, the question becomes: How long and how deep it will go?