Spate of Bad News Sinks Wireless Sector

Editor's note: Cody Willard's column runs exclusively on RealMoney.com; this is a special free look at his column. For a free trial subscription to RealMoney.com, click here. This article was originally published Monday at 2:50 p.m. EDT on RealMoney.

Whoa, what a couple of days for the telecom sector!

Most recently,

Ericsson

(ERICY)

dramatically missed Street estimates in its first-quarter earnings report Monday morning. I hate to be the bearer of more bad news, but its accompanying cut in numbers and planned headcount reduction are still just the tip of the iceberg.

Wireless is where wireline was 18 months ago: staring into an abyss of financial depression. There are still too many carriers in the U.S., and they're now shut off from the capital markets and are in cash-conservation mode. Mobile messaging and other data applications won't drive significant revenue anytime soon, either. The pain will continue for some time to come, too, particularly for the infrastructure segment. The handset segment should actually see some strength from a consumer replacement cycle, but the infrastructure segment will depend on capital expenditure from the carriers. Without access to capital, there's no capital for capital expenditure.

Lucent

(LU)

and

Nortel

(NT)

still have too much exposure to wireless, yet both companies talked up wireless on their conference calls Monday morning. That really makes me worried about both companies' estimates.

Don't even get me started on

Motorola

(MOT)

. Pain, pain, pain.

Wireline Woes

Ostensibly to delay its own pain,

WorldCom

(WCOM)

coyly waited until most people went home for the weekend to announce Friday that revenue, earnings, EBITDA and every other financial metric you could dream up would be lower than expected. The company also lowered capital expenditure guidance to a new level.

And how about those analyst downgrades? Jack Grubman, the once-ubiquitous Salomon Smith Barney analyst whose days on the Street look numbered, finally downgraded WorldCom stock Monday morning.

The entire service provider industry continues to have serious problems here as the weak economy of 2001 is now reverberating through the teleconomy. As if the popping of the bubble weren't enough, the weak economy is keeping enterprises from spending on telecom and data services, too. The wireline telephony and, particularly, enterprise data services are especially weak, not to mention the crunch that wireless substitution is putting on long distance.

Though I advised readers of

my newsletter to sell WorldCom stock last Wednesday, I still own a small amount. I wish I could cut against the grain here and recommend buying the stock back now, but I can't. Although WorldCom isn't likely to plunge to zero (at least not soon, anyway), it has too much risk and too little upside potential for now.

More Pain From Qwest

Yet more pain for the teleconomy came from

Qwest's

(Q)

4,786th

update to its guidance this year. Despite CEO Joe Nacchio's incessant assurances that Qwest is doing fine, alas, the company continues hurting. What a far cry Qwest's latest guidance is from management's assurances last year that revenue and earnings would grow at a double-digit clip!

I still think the company will make it without any substantial restructuring, but it's still a wreck. While Qwest will still be spending billions (it's close now to the level that I believe is necessary under the regulators' watchful eyes), such spending will be limited to areas of absolute necessity. Qwest has no choice but to maintain and grow its network as an incumbent operator. And in the rural western U.S., that is no cheap task.

These areas of spending include the same old boring areas that I've been highlighting for months -- mainly voice and traditional data (such as frame relay) equipment. Out of luck are start-ups that are pushing newer technologies and products that do little to incrementally grow revenue. That little $500 million to $600 million shortfall that Qwest is predicting for its IP (Internet protocol) and data services means that it won't be buying quite as many routers as

Juniper

(JNPR) - Get Report

might like. And

Sonus

(SONS)

, which counted Qwest as its only 10% customer last quarter, well, that's just a disaster waiting to happen.

Hey, you know

I'm bullish on some sectors of telecom, and this spate of bad news doesn't deter those limited blue-sky thoughts. But wow is this one tough sector to play in!

Cody Willard is a telecom and financial analyst/consultant. He is also founder of

TelEconomics.com. Willard has co-managed $150 million in private investment funds and has headed up the research and analysis division of a venture development company. He has founded several telecom and technology companies and has managed the wholesale division of a $100 million CLEC. At time of publication, Willard was long WorldCom, 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.