Making Sense of Telecom's Bad News

Before you panic, take stock of what realistically will happen to Qwest, Ciena and Lucent.
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Are you panicking about the somewhat brutal -- certainly scary --

announcements Thursday from telecom biggies

Qwest

(Q)

,

Lucent

(LU)

and

Ciena

(CIEN) - Get Report

? This news needs to be further scrutinized to understand the underlying trends and implications. Let's take a quick look at each announcement.

Qwest for Truth

First up is Qwest, with its slashed growth outlook and 11% workforce reduction. This company's credibility is already trashed -- and I really don't see any reason to believe its guidance now. This is the same company that said for months that it would be able to grow despite the fact that every other carrier on the planet was taking numbers down.

Now, of course, we get the flip side. Suddenly Qwest can admit that the growth won't be there, but says it'll be cutting capital expenditures to nearly unheard-of levels. These guys are doing what they seemingly always do: saying what Wall Street wants to hear.

If the company came out and said, "Our revenue and earnings will be way lower than what you guys expected -- we're gonna lay off another 7,000 folks, but we're keeping cap ex the same," you can be darn sure Qwest stock would be down a heck of a lot more than the 30 cents it dropped Thursday. It closed at $11.80, down considerably from its 52-week high of $48.19.

Here's what will really happen with Qwest's capital expenditures and why you can't put much faith in its ever-lower cap-ex numbers. Over the next few months, management will solidify its strategies and focus and figure out where demand will be. Talent will be shifted into the core areas of focus and budgets will be modified -- some down, some up. But $4.2 billion in capital expenditures at a giant incumbent local exchange carrier like Qwest, with its antiquated and substantially dilapidated network that's still growing? I just don't see it. Qwest is going to need to spend more than that.

Headaches at Lucent

Lucent has problems. Still. I mean, sheesh, former CEO Rich McGinn wrecked this company more than anyone could've thought possible. But most of us recognized that a long time ago -- long before he'd even been ousted. More than market-share loss, Lucent's biggest problem has been its product line. Other than its

old-line voice products and some of its Sonet boxes, it just doesn't seem to have the products to compete effectively.

Nortel

(NT)

is in much better shape than Lucent. Its Passport product line, its metro dense wavelength division multiplexing (a technology that allows carriers to carry

lots

of data on a single fiber) products and its old-line voice products continue to sell well. Nortel also continues to win voice-over-Internet-protocol migration contracts from old-line interexchange carriers like

Sprint

(FON)

. Nortel should be OK this quarter. What's bad for Lucent -- while certainly a function of a harsh telecom environment -- is really just bad for Lucent.

Ciena's Trend

Finally, telecom investors need to take note of one very important trend in the Ciena announcement. The company declined to project earnings Thursday, but said sales probably would come in below 2001 levels and estimated operational losses for the year. Nevertheless, good products with an entrenched customer base will continue to sell well. Specifically, Ciena's killer CoreDirector will continue to see sequential growth -- Ciena's problem is, of course, that its other product lines won't. Ciena had too much demand for the other product lines built into its models; it seems to be late in reacting to the collapse in the long-haul buildout.

Other companies, including some of the companies I've cited in

these columns before, have done a better job of aligning capacity, head count and, importantly, investor expectations to the brave new teleconomy.

None of these announcements is earth-shattering -- or even surprising. There's still money to be made investing in telecom. But as the sergeant used to say on

Hill Street Blues

, "Let's be careful out there."

Cody Willard is president of TelEconomics Consulting, a financial and technology consulting firm. He is also founder of

TelEconomics.com, a Web site devoted to news and analysis of telecommunications stocks. Previously, he was senior analyst for a venture development company, and before that was a partner at the Lanyi Research division of CIBC World Markets. At time of publication, Willard had no position in any of the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Willard appreciates your feedback and invites you to send it to

cody@teleconomics.com.