Lucent ( LU) and Cisco ( CSCO) are taking the cake in the latest telecom industry supplier bake-off.
Atlanta telco BellSouth ( BLS) chose the companies to supply optical equipment for an upgrade of its local phone network. Terms of the arrangements weren't disclosed, but Monday's deals mark significant wins for the two big networking gearmakers in a tough industry spending environment. The bigger winner is Lucent, which continues to fight its way back from the steep decline of recent years. The BellSouth pact marks the second major win for the New Jersey company's new-generation synchronous optical networking, or SONET, systems. In late 2001, Lucent staked a big claim to Verizon's ( VZ) future network expansion business. For Cisco, which is healthy but always scanning the horizon for new growth prospects, the victory is more symbolic. In that regard, the deal is a "huge win" for Cisco, which until now had failed to secure a major ongoing contract with any of the nation's four Baby Bells, says optical analyst Sam Greenholtz of Telecom Pragmatics. "These are conservative next-generation technologies," says Doug Green of Bradam Group, a Gainesville, Va., consulting shop. "These are safe bets with the companies that are going to be around."
Phone companies are grappling with ways to drag their aging, congested and largely electronic networks into the modern, more capacious optical era. But getting from the old-line technologies of today to the fiber-optic lines of tomorrow requires the steadying hands of capable suppliers. Typically, big telcos split their long-term equipment contracts among various vendors to avoid being held hostage on pricing or supply terms. "I'm only speculating, but you'd assume the bulk of the contract is going to Lucent, and Cisco is the there to keep them honest," says CIBC World Markets analyst Steve Kamman. Notably omitted from the BellSouth optical plan were Fujitsu and Nortel ( NT), though both got portions of the Verizon project. In any case, the shares of nearly all the telecom equipment makers rose Monday. Lucent added 1% to $2.24 and Cisco jumped 4% to $17.11. Observers caution that investors shouldn't draw too many conclusions about Cisco's prospects in the wake of the BellSouth deal. For one, most of the major contracts related to Baby Bell local optical expansions have been awarded. Also, BellSouth says the equipment deal falls within the company's current $3.5 billion spending plan, making any significant revenue improvements more of a longer-term opportunity. Still, Lucent and Cisco fans are probably happy enough just to have any revenue growth opportunities to point to.