More Bad News for Optical Stocks as AT&T, Williams Trim Spending Outlook

Two big networking-equipment buyers say they'll trim spending on optical gear next year, adding to the growing evidence of an industry-wide spending slowdown.

Signs that spending is leveling off will add to Wednesday's woes in the once-hot optical sector. Big Williams supplier Nortel (NT), for one, is likely to feel more pain. Nortel Tuesday upset Wall Street with its third-quarter revenue growth, leading to an across-the-board networking selloff Wednesday that pushed the Nasdaq Composite Index down sharply.

Williams Communications (WCG) told analysts on a third-quarter earnings call Wednesday that it would spend about $200 million less on network equipment than it had planned. Meanwhile, AT&T (T) confirmed what TheStreet.com reported last month, saying spending won't be as strong next year as it was this year. Year 2000 spending is scheduled to hit $14 billion at AT&T.

AT&T, which is preparing a four-way breakup, says it is still reviewing its capital budget for next year, but executives on the company's conference call Wednesday said it was "safe to say" spending wouldn't increase. AT&T is building a new parallel fiber optic data network to help meet future Internet traffic demands and is figuring to be a big spender on optical equipment in the coming year.

Williams is in the process of building the nation's third-largest fiber-optic network, and as such is one of the leading buyers of optical networking equipment. But Williams recently found cash a little harder to get a hold of. To raise cash, the company had to liquidate its stake in optical switch maker Sycamore (SCMR) this year. Williams says it will also consider selling Corvis (CORV) and ONI (ONIS) shares to raise more money when possible.

Williams officials weren't immediately available for comment.

The company told analysts that it's original two-year $5.8 billion network spending budget would have to be reduced to $5.6 billion. Williams also said spending in the fourth quarter would drop to between $700 million and $800 million, from $1.1 billion in the third quarter.

One analyst who was on the call and asked not to be identified said it helped confirm what had been long suspected, that Williams was stretched a little thin on cash. The company said it is also considering selling some of its network, a portion of its unused capacity, to raise cash if necessary.

Optical networking leaders have been hard-hit in Wednesday trading: Nortel was down 27%, Ciena (CIEN) 20%, Sycamore (SCMR) 17% and Corvis (CORV) 14%.

Optical component makers further down the supply chain were also pounded: JDS Uniphase (JDSU) was down 23%, Corning (GLW) down 18%, SDL (SDLI) 26% and Avanex (AVNX) 17%.

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