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 Quote - Cramer on GLW - Stock Picks) 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 Quote - Cramer on CSCO - Stock Picks),
JDS Uniphase (JDSU Quote - Cramer on JDSU - Stock Picks),
Lucent (LU Quote - Cramer on LU - Stock Picks), Corning and
Nortel (NT Quote - Cramer on NT - Stock Picks), 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 Quote - Cramer on T - Stock Picks),
WorldCom (WCOM Quote - Cramer on WCOM - Stock Picks) and wholesalers like
Level 3 (LVLT Quote - Cramer on LVLT - Stock Picks) and
Williams Communications (WCG Quote - Cramer on WCG - Stock Picks) 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."
Scott Moritz
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