Sprint Spending Woes Undercut Cisco Optimism

While Cisco (CSCO Quote) spent the day painting itself as a bright point in a dark telecom industry, Sprint (FON Quote) showed that any light at the end of this tunnel is still a ways off.

Sprint warned analysts and investors Tuesday that sales and earnings would fall below current expectations. Moreover, the company said it would take its problems out on its already hard-hit suppliers by slashing next year's capital spending plan by $500 million, to $3.5 billion.

Capital Spending Budgets of the Top-Six Phone Companies (in billions)
Company	2002	2001	% change	$ change
Verizon (VZ:NYSE)	$14*	$17.5	20%	$3.5
SBC (SBC:NYSE)	9.6	12	20	2.4
AT&T (T:NYSE)	11	14	21	3
Qwest (Q:NYSE)	5.5	8.5	35	3
WorldCom (WCOM:Nasdaq)	5.8	7.5	23	1.7
BellSouth (BLS:NYSE)	4.6*	5.7	20	1.1
Sprint (FON:NYSE)	3.5	5.4	35	1.9
Total	$54	$70.6	23.5%	$16.6
Source: Companies *Assuming 20% minimum cuts

The latest cut puts Sprint's 2002 equipment budget 35% below 2001 levels. It also places Sprint, the nation's third-largest long-distance company, alongside Denver-based rival Qwest (Q Quote) in the 35% budget-cutback club, leaving open the possibility that other big spenders will also cut beyond their already acknowledged 20% spending reductions.

Heavy-Handed

For Cisco, which spent much of the morning projecting abundant fuzzy optimism but offering few specific numbers, the blow of another round of spending cuts could be especially heavy. In trading today, Cisco rose 66 cents to $20.52.

Top Six's Total Spending Spending cuts mean less money for networkers

Source: Companies *projected

Cisco has been among Sprint's biggest suppliers, particularly of broadband gear known as digital subscriber line access boxes, or DSLAMs, and data traffic gear such as core routers. Other big Sprint suppliers include Ciena (CIEN Quote), Nortel (NT Quote) and Lucent (LU Quote). They all rose sharply Tuesday on the back of Cisco's optimism, jumping 7% to 9%.

Cisco and its ilk rose to stardom a few years back when the telecom business was lush with cash. Investors, noting the incredible growth numbers being posted by the networkers, rushed in just before the game ended; many have been stung by the sector's sharp decline from its 2000 highs. Ever since, the telecom gear companies have struggled to maintain profitability, let alone growth, and many have resorted to massive layoffs to stay above water. Needless to say, the more the big telcos pinch their pennies, the less money there is to go around in this crowd.

This Land Is My Land

For its part, Sprint continues to suffer the effects of falling long-distance pricing and narrowing margins that have weakened the entire industry. All this has been made doubly difficult by the economic recession that has reduced spending in practically every business across the land.

Sprint now expects fourth-quarter earnings to be about 32 cents a share, 2 cents lower than anticipated. This projection doesn't include a 5-cent charge for ending the costly new networking project known as ION. Total 2001 revenue is expected to be $17 billion, in line with the low end of expectations. Sprint says next year's sales will be flat to slightly down.

With customers like these, Cisco needs few enemies.