Next Year in Networking: Cisco, Juniper and Red Ink

The good news for 2003, networking industry investors and analysts agree, is that Internet router makers Cisco ( CSCO) and Juniper ( JNPR) should prosper.

The bad news is that their many competitors will once again be left behind, possibly damagingly so. Perhaps worst of all, investors shouldn't hold their breath for any bailout mergers at big money-losing gear shops.

So say the respondents to this year's informal poll of tech watchers. surveyed a handpicked group of industry observers on whether the top network equipment suppliers would do better, the same or worse next year. The results drew an unforgivingly sharp line across the industry, with data outfits on the winning side and conventional telecom equipment makers and optical gearmakers on the other.

More good news at Cisco comes as no surprise, and Juniper has long been seen as a strong runner-up in this highly competitive business. What was unexpected was that the handicappers came up with a long list of clear losers in the once-hot optical networking arena, including Ciena ( CIEN), Sycamore ( SCMR), Corning ( GLW) and JDS Uniphase ( JDSU).

While the divide has a technological angle -- with the Internet protocol gearmakers Cisco and Juniper on top -- the reasoning actually ran more along market categories. Our trendspotters picked corporate spending to be the first segment to pick up. Hence Cisco's and to a lesser degree Juniper's favorable prospects.

With phone companies hoarding cash as their businesses slide, the demand for new telecom gear is likely to fall further before it starts to pick up again.

But while Cisco stands to reap the most benefit from a Net gear upgrade cycle, skeptics point out that the data king already dominates the market -- leaving it little room to grow and plenty of opportunity for low-cost challengers to chip away.

Handicapping the Handicapped
Telecom gear watchers sound off on 2003 prospects for a sickly crowd
Company Recent Price Comment
Cisco 12.76 Everyone loves a winner. And when the IT spending music returns, Cisco is looking like the disco of choice. But networking's a tired beat, and Cisco has yet to show investors that it has found the groove in its new growth markets.
Juniper 7.30 Building a faster Internet at narrowband speeds is the right recipe for a belt-tightening era. With big customer and Net leader WorldCom returning to action and corporate spending potentially rebounding, the gear should start moving again.
Lucent 1.23 Proves you can cut all you want and a shrinking market is still a shrinking market. A 6-year-old company that has spent most of that time in a tailspin is hard to get excited about.
Nortel 1.66 Wireless business wags this wounded dog. Reorganization will be put to the test as demand continues to flag on almost all fronts.
Tellabs 6.96 Pushing the sprockets at the heart of the Bells' basic phone business favors this gear maker in cash-conserving times. But there are risks if the biz model is as rusty as the old phone gear.
Extreme 3.06 Casualty of the price wars. Or as one respondent put it: "Extreme is to networking what DeLorean was to automobiles."
JDSU 2.57 Demand for lasers and other components of fiber optic networks isn't returning anytime soon. It promises to be a long, painful wait.
Ciena 5.34 With quarterly sales running at a third of its break-even target, Ciena is gambling that it can outlast its customers' spending freeze.
Corning 3.27 The fiber glut that nearly killed telecom hasn't abated. The buried beast of optical cable still has Corning on the run. Sure, demand for new fiber looks strong -- in the next millennium.
Sycamore 2.88 Given up for dead in last year's poll, this optical equipment outfit hasn't bettered its prospects one bit. Bold tech vision is a hard sell to myopic telecom bean counters.
Source: Detox.

"The pool's not getting larger and this fish is getting pretty big," said one analyst.

After corporate wallets start to open, industry watchers expect phone companies will begin to press some of their shelved projects back into action. The bulk of the work, like local fiber network upgrades and new phone switching systems, is likely to fall to the big telecom gear suppliers Lucent ( LU), Nortel ( NT) and Tellabs ( TLAB), most said.

"These three should be a bit better simply because it can't get much worse," said a money manager.

"I think we bottom around the middle of the year," says another Wall Street analyst. "And the managements of these companies finally get the notion that they need to retreat to a few product lines so that they can differentiate themselves."

Each survey participant was offered anonymity in exchange for unguarded candor.

Last on the recovery line: optics. While it's not a shocker to see the critics nearly unanimous in their bleak outlook for optical component-maker JDS Uniphase, onetime favorite Ciena came in with the second-worst score.

"They are bleeding cash, and the management is not bringing its cost structure down fast enough," said a New York-based analyst. "Their customer base is sub-par and in financial trouble and certainly not spending on long-haul optical. This is not a good combination."

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How accurate is the poll?

Well, four of the companies picked to do worse in 2002 -- Sycamore ( SCMR), Redback ( RBAK), Foundry ( FDRY) and Corvis ( CORV) -- didn't disappoint. Each outfit, at least from a stock performance standpoint, saw declines.

But given the type of year it's been in tech investing, it's little surprise that Juniper, the lone winner in last year's popularity contest, also saw a 50% drop in the market.

On consolidation, sentiment in the previous poll did not point to any major mergers, but most predicted Ciena, Sonus ( SONS) or ONI would be acquired. In a curiously prescient move, Ciena bought ONI.

Though sentiment on big mergers remains negative for 2003, all eyes will still be on Cisco, and the $20 billion cash pile that's burning a hole in its pocket.

Among the logical, though admittedly remote moves that Cisco could make is to buy Fujitsu's North American optical operations. Analysts say it would be the easiest ticket to the Baby Bell ball. Fujitsu has a roster of big telco customers for its metro optical networking gear, which would bolster Cisco's one-product offering in that field, say observers.

But 2003 won't likely be the year of the high-quality deals, given Cisco's reticence and the continued degradation of all the players.

Says one wag: "If there is a deal, it will probably be along the lines of two drunks, leaning on each other to stay upright."

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