Corning Job Cuts Show the Sea Change at Networkers

The first cut isn't necessarily the deepest.

Networking gear suppliers, suddenly face-to-face with dramatically declining demand, have opened the first round of cost slashing and staff cuts. Thursday Corning (GLW) set plans to slash 825 jobs, joining a long list of networking industry giants that have pared back their payrolls in recent weeks.

But there are mounting indications that the downward pressure has only just begun, as Cisco (CSCO), JDS Uniphase (JDSU), Lucent (LU), Corning and Nortel (NT), to name just a few, struggle with excess production capacity and mountains of inventory. And with prices for bandwidth, or telecommunications capacity, plunging and the economy's go-go days behind it, these companies shouldn't expect to get any relief soon from their big customers, the telecom service providers.

More, More, More

This has some of Wall Street's embittered tech investment community predicting that more cuts are in the offing. After all, communications equipment companies are going to have to retool to cope with the sales slowdown brought on by the pullback in telecom industry spending and the sliding economy.

Cutting Edge Growth slowing, networkers cut jobs
Company	Job cuts	% of staff	Date
Nortel (NT:NYSE)	10,000	10%	Feb. 16
Lucent (LU:NYSE)	10,000	10%	Jan. 25
Motorola (MOT:NYSE)	4,000	3%	Feb. 12
JDS Uniphase (JDSU:Nasdaq)	3,000	10%	Feb. 28
Corning (GLW:NYSE)	5%	5%	March 1
IronBridge (private)	170	90%	Jan. 31
Source: Companies

"There is a lot of work left to do in terms of managing costs," says one West Coast-based money manager who asked not to be identified. "The last couple years had everyone focused on growth and now they have to focus on internal costs, rationalizing operations and reducing redundant efforts." The money manager has several large positions across the networking sector.

Who the villain is in all this should be no mystery. If you have read any of the past six months of spending slowdown coverage here at TheStreet.com, you know the blame lies with the phone and Net service providers who must cut spending in order to meet their own looming debt payments and capital expenses. As a result, those companies are now facing restructurings and funding issues of their own.

And no matter what companies say about the prospect of a second-half economic bounceback, the service provider side of the equation isn't improving. In fact, there are new signs that bandwidth pricing and long-distance revenue are taking even steeper falls than previously anticipated.

Competition Writ Large

Susan Kalla, a demand-side analyst with BlueStone Capital , surveys buyers to get an understanding of what lies ahead. She says a recent check with corporate communications services buyers, the decision-makers who choose their companies' long-distance plans, revealed that prices have fallen by 50% in a matter of months.

This correlates with Kalla's earlier findings in what is called the spot market, where wholesale prices for short-term capacity have dropped by half since the end of the year. What's troubling is that retailers like AT&T (T), WorldCom (WCOM) and wholesalers like Level 3 (LVLT) and Williams Communications (WCG) are in a nasty price spiral, which can only continue to cut into their revenues and profits.

Doubly troubling is the overabundance of service providers willing to cut prices to the bone to win customers. Kalla relates an anecdote she uncovered in her research in which a small business had just opened and found itself besieged by sales pitches from 14 phone companies.

The upside: "It's going to be a great time to be a [long distance] customer," says Alan Harris, a money manager with Munder Funds. "There is a lot more capacity coming on. So we think there will be continual cost cuts and employee reductions at large carriers in order to keep up with declining prices.

"This isn't going to stabilize for the foreseeable future," says Harris. "Not through this year, anyway."

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