Even hot product shops like Tellium ( TELM) are shivering as the tech-spending frost hardens. Like so many of its upstart brethren, the networking gearmaker is finding itself stuck out in the cold as investors focus on its miserly customers rather than its compelling optical switching technology. Friday, Tellium stock slid 14% amid worries that big telcos' belt-tightening will squeeze even more air out of the company. Tellium stock has already fallen more than 80% from its 52-week high.
Friday's worries started with the fact that Qwest ( Q) and Dynegy ( DYN), two of the optical shop's three customers, have made dramatic spending cuts in recent weeks. A research report predicting further cuts from Dynegy greased the skids for Tellium's fall, along with Tellium's failure to win new customers for its core optical switch. The company's third customer is Cable & Wireless ( CWP). Optical switches are sort of the heart and brains of new fiber-optic networks; they manage the pulsing lightwaves that carry bits of information from one point to another. It's been said that one day all networks will be optical, but the telecom collapse of the last 18 months suggests that day may not come for a long time. With the backdrop of a slowing economy, phone companies have been struggling with dwindling revenue and narrowing margins, due in part to overcapacity and vicious price competition. Thus the hunker-down phase, in which new network expansion projects -- such as the optical upgrades that shops like Tellium are desperately wagering on -- get shelved or killed. Tellium has quite notoriously had several telcos testing its gear, including AT&T ( T). But investors have grown skeptical about big announcements that are always, according to industry chatter, just around the corner. And with outfits like AT&T doing their own cost-cutting, the skepticism may well be prudent. "We don't even know if AT&T is going to be in this network-buildout business any more, so it's difficult to see them spending $100 million on Tellium optical switches," says U.S. Bancorp Piper Jaffray analyst Conrad Leifur, who has a market perform rating on the stock. Piper Jaffray has no underwriting ties to Tellium.