AT&T Spending Cut Rains on Networkers' Parade

Another big telco slashes capital spending by at least 20%.
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Cheered by an absence of disaster in

Cisco's

outlook, investors found the luxury to take theireyes off the fundamentals.

Take the midday action in the telecom sector after Cisco

(CSCO) - Get Report

said it wouldmake its fiscal second-quarter numbers Wednesday. Telecom equipment stocksrallied even as one of the industry's big customers,

AT&T

(T) - Get Report

, slashed$2 billion from its 2002 capital spending plan.

In doing so, AT&T joined the ranks of big telcos slashing spending byat least 20% next year.

WorldCom

(WCOM)

and

Qwest

(Q)

have already

slashed 2002 capital spending,continuing a yearlong trend in which nearly every phone and Internetcompany has shelved network expansion projects to conserve cash and offset shrinking revenue.

While speaking at an investment conference in New York on Wednesday, AT&TCEO C. Michael Armstrong cited the industry trend of 20% spending cuts for2002. Not wanting to miss out on an opportunity to please his bemusedshareholders, he said spending "will decline at least that much, if notmore."

Investors, caught up in a marketwide rally, nonetheless embarked on afeeding frenzy, buying up the very stocks that stand to suffer the most ascapital spending continues to wither away.

Lucent

(LU)

rose 8%,

Nortel

(NT)

6%,

Ciena

(CIEN) - Get Report

23% and

Juniper

(JNPR) - Get Report

29% as investors huntedfor supposed bargains.

Go Figure

The past year has seen customer frugality put a squeeze on networkinggearmakers such as Lucent, Nortel and Cisco. Just as this year'sspending shortfall caused big suppliers to fire as much as half their staffand slash operations, a new wave of cuts will likely usher in yet morepullbacks.

Historically, Lucent has been one of AT&T's primary suppliers. Lucentis already in the process of cutting its head count to about 60,000 frommore than 100,000 a year ago. Rival Nortel Tuesday

took its staff size plans down to 45,000 from60,000 previously.

"Nortel has recognized the environment and has made its adjustment," says Steve Kamman of CIBC World Markets, who has no rating on Nortel and a hold on Lucent. "Lucent still has the other shoe to drop."

Lucent says "the ongoing downturn of the industry has already beenfactored into our funding plans." A spokeswoman declined to comment onwhether there would be additional job cuts.

Lucent does have a couple factors working in its favor, say someobservers. Lucent has been restructuring for what seems like ages and haswon some major infrastructure contracts recently. And with networkexpansion efforts on hold, more telcos will be returning to Lucent forupgrades and support of existing equipment, which represents a steadyhigh-margin sales stream, Kamman says.

Investors have been tempted to look for silver linings amid theconstantly negative developments across the telecom industry. But asindustry watchers warn, the third and fourth quarters of this year aren'tlikely to provide reliable evidence of the health of the industry.Postponed sales in the aftermath of the Sept. 11 attacks may show up in thefourth quarter, and investors may interpret that as a sustainablesequential improvement.

But as other big spenders join AT&T in winding down their outlays,meaningful improvements might be more of a 2003 event.