WorldCom Will Ripple Through Chips in Different Ways

Just when you think things can't get much worse, your sinking boat springs another leak.

So the shaky future of WorldCom WCOME, which recently sat atop the food chain as one of the biggest telecom spenders, poses yet one more burden for ailing communications chipmakers.

Granted, many in the group were already slogging along pretty close to the bottom, with stocks like Applied Micro Circuits , PMC-Sierra PMCS, and Vitesse scraping four or five-year lows well before the latest WorldCom revelations. But now, speculation that a leading carrier could go bankrupt has thrown the outlook for telecom spending into further disarray.

The latest news only added to bearish sentiment for market watchers who've lately grown accustomed to capital expenditure cutbacks.

"In my 20 years in this business I've never seen a telecom market this bad. The WorldCom thing just makes it that much more problematic," said Mark Lutkowitz, vice president of optical networking research for Communications Industry Researchers, a market research firm.

As recently as last spring, WorldCom was planning to spend $4.5 billion on capex for this year, though it subsequently whittled down those estimates.

Chipmakers now worry that as the carrier stops buying from networking equipment outfits such as Nortel and Juniper , the networkers will in turn slash their purchase of semiconductors. (See a recent TSC story for how WorldCom's troubles have affected the networkers.)

Granted, it's difficult to suss out exactly how much individual chipmakers will be hurt by WorldCom's troubles, because they don't sell semiconductors directly to the carrier. But generally speaking, the companies most likely to be affected by WorldCom's troubles would be those that make communications chips used in SONET and ATM technologies, which are used in the systems employed by big telecom carriers.

Leading SONET chip suppliers include AMCC, Vitesse, Agere, and Multilink . PMC-Sierra is a major supplier of chips for the ATM protocol.

"It's very difficult to say, there's a fixed dollar amount at XYZ [company] associated with WorldCom spending. But it's fair to assume the communications sector as a whole is going to have a difficult time outperforming in the face of one of the bigger spenders in trouble," said Sandy Harrison, an analyst at Banc of America Securities.

WorldCom's woes also could depress spending by other carriers, suggested Blaine Carroll, an analyst at Adams, Harkness & Hill. "If I'm AT&T or Sprint or some of the ILECs, and all of a sudden my biggest competitor has the potential to leave the industry and is not spending on upgrading their network, I don't have to build out my network to compete."

Another worry: If WorldCom is forced to sell off assets to other carriers, its competitors will be able to pick up used goods on the cheap. They'll need to buy that much less new equipment, which will have the effect of depressing future demand.

"It could be the identical problem Cisco had, where when the dot-coms went broke and all the routers ended up on eBay. So Cisco competed with itself because all that used equipment was out there," said Russ Craig, director of semiconductor research for the Aberdeen Group.

Already on Tuesday, carrier IDT made a $5 billion bid to acquire several major WorldCom divisions.

For communications chipmakers to gain some traction, capital spending will have to improve. But troubles at WorldCom have likely pushed out the timeline for when that will happen.