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(Updated from 11:15 a.m. EDT)

Shares of

Next Level Communications


plummeted 54.4% Thursday after a downgrade by a

Lehman Brothers


Drop Step
DSL provider plunges

Steven Levy lowered his rating on Next Level to neutral from buy on concern that revenue will plunge in the wake of the



takeover of

U S West

. U S West had been Next Level's major customer, but according to Lehman, it appears that Qwest will be scaling back on purchases of Next Level's DSL technology, which turns standard copper telephone wire into a conduit for so-called broadband cable and Internet transmission. Next Level said in a press release that it hadn't been informed of any changes in Qwest's plans, though it conceded a pullback could hurt it financially.

Until now, Lehman, a Next Level underwriter, had been the major bull on the stock. Shares of Next Level collapsed 49 13/16, or 54.4%, to 41 3/4, the stock's lowest close ever (the company went public in November 1999) and more than 79% off their 52-week high. Lehman also makes a market in Next Level shares. Majority shareholder



fell 1 1/16, or 2.9%, to 35 7/16.

Next Level makes what is known as digital subscriber line equipment. These devices allow conventional copper phone lines to carry up to 100 times more traffic. Companies like these are focused on opening what is often referred to as the last mile bottleneck. With DSL-enabled phone lines, companies are able to offer customers high-speed Net access in addition to standard phone service.

DSL Downer
Next Level since its IPO

Source: BigCharts

"We believe Qwest is reviewing all its initiatives and is likely to focus going forward on business data and business internet opportunities," wrote Levy. "That makes it likely, in our opinion, that Qwest is not going to move forward aggressively with the VDSL initiative started by U S West.

"Qwest represented 67% of June quarter revenue," Levy continued. "Although this carrier's contribution to sales was expected to decrease on a percentage basis, any shortfall from this customer could materially impact Next Level's top line."

Merrill Steps In

After an apparently hasty call to management in the wake of the Lehman downgrade and Next Level's subsequent press release, analyst Michael Ching of Next Level underwriter

Merrill Lynch

slashed his intermediate-term rating on Next Level to neutral from accumulate in a note that was released around 10:30 a.m. EDT.

"We spoke with

Next Level management this morning and we are somewhat distressed that they seemed a little out of touch with their key customer, Qwest," he wrote. "The fact is that

Next Level's management has no indication as to whether Qwest will actually slow down VDSL development."

Ching indicated that Qwest's business represents about 70% of Next Level's revenue this year and, in his model, would have represented 50% of next year's revenue.

"We believe that even with the stock opening down significantly, the stock will probably be overvalued," Ching concluded.