Brave New Networking World Has 360 Offering to Pay as It Gets Paid

Citing a telecom "nuclear winter," 360Networks (TSIX) is spreading the fallout across the networking sector in two parts: a spending cut and -- in a new twist -- deferred payments.

Halfway through the construction of its $7.2 billion global fiber-optic network, 360Networks has cut its equipment spending budget by $500 million. More notably, the company said on an earnings call late Thursday that it is negotiating a pay-as-we-get-paid arrangement with its equipment suppliers.

This new dimension potentially deepens the gloom surrounding the industrywide slowdown in equipment spending, falling squarely as it does in the lap of 360Network's four big suppliers: Nortel (NT), Cisco (CSCO), Alcatel (ALA) and Sycamore (SCMR).

Turnabout

The Vancouver-based wholesale telecommunications seller didn't identify which vendors had agreed to the delayed payment schedule, but some analysts say deferred payments don't bode well for the beleaguered networking sector.

"We believe such payment negotiations may assert significant pressure on the vendors," wrote Lehman Brothers equipment analyst Tim Luke in a report Friday. "Vendors are now not only seeing sales slow down, but their accounts receivables are likely to go up in the near term as a result of such negotiations."

Upstart 360Networks is one of the newcomers to the contemporary crowd of international fiber optic network builders, which includes Global Crossing (GX), Level 3 (LVLT) and Qwest (Q). Initially called Worldwide Fiber, 360Networks debuted with an IPO in April. Its lineage can be traced back to Canadian construction giant Ledcor.

Slashing Top eight equipment buyers (in billions of dollars)
Company	2001	2000	% change
Verizon (VZ:NYSE)	$18	$17.6	2%
AT&T (T:NYSE)	14	14.5	-3%
SBC (SBC:NYSE)	12	12.3	-2%
Qwest (Q:NYSE)	9.5	9	5%
Worldcom (WCOM:Nasdaq)	8.5	9.9	-14%
BellSouth (BLS:NYSE)	5.7	6.2	-8%
Sprint (FON:NYSE)	6.2	4.1	51%
360Networks (WCG:NYSE)	3.25	3.75	-13%
Williams Comm. (WCG:NYSE)	2.9	2.8	-3%
Totals	79.9	79.6	--
Source: Companies

The company said deferred payments for communications capacity from its customers, which include France Telecom (FT), Verio and Deutsche Telekom (DT), have caused it, in turn, to delay payments to its suppliers. This is the first occasion in recent memory in which a buyer has hinged purchases directly on its sales.

The company pulled in its equipment spending budget to $3.25 billion from the $3.75 billion it had initially projected. Cisco, Nortel and Alcatel stand to bear the greatest damage from these cuts. Sycamore in July announced a $425 million optical-switch contract with 360Networks, but a 360Networks spokeswoman says Sycamore gear is critical to its network operations, so that company is less likely to suffer deep cuts.

Sycamore says it hasn't needed to change its outlook for the year.

Highly Confident

360Networks says it is "fully funded," a term that can, but doesn't always, indicate it has enough money to finance its business expansion plans. But with $1.5 billion cash on hand, another $2.6 billion in available credit and $2.5 billion in forecast sales for the year, 360Network executives said they were continuing to look for additional financing options.

Among the options mentioned was vendor financing. In fact, 360Networks said it arranged a $400 milllion loan from one of its vendors, presumably Cisco, Nortel or Alcatel, that would be paid back in increments coinciding with its sales.

As debt and equity markets have turned chilly on networking and telecom companies, the equipment sellers have increasingly stepped forward as one of the last lines of credit. Observers contend vendor financing has helped weaken the quality of the market, by propping up weak business and artificially pumping up future sales growth or loading up suppliers with bad debt.

Earlier this week, Cisco plunged ahead with a new $100 million vendor financing deal, despite just weeks earlier announcing it had sequentially lowered its outstanding loans and that it was proceeding more cautiously into the financing business.

But as some point out, Cisco is in an enviable, if somewhat risky, position to have an ample cash hoard to assist select companies through this downturn. Presumably, Cisco will then be rewarded by its loyal customers when business brightens. 360Networks meets Cisco's demands well, in building a new network with very little old phone gear to impair Cisco's all Internet-gear strategy.

Best-case scenario: If the networking suppliers can survive their customers' nuclear winter, there may just be some real business to harvest after the thaw.

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