The network equipment makers were spitting out teeth again Thursday after two of the sector's heavyweights projected steep losses.

Before the market opened, Wall Street fave

Ciena

(CIEN) - Get Report

forecast a first-quarter loss and a decline of as much as 50% in its long-haul business. Meanwhile

Lucent

(LU)

continued a long run of poor financial showings, saying first-quarter earnings and revenue will fall far short of estimates.

Shares of both companies fell at least 12% in early trading. Several other big networking outfits saw their shares fall as well as investors worried about the evaporating demand for telecom gear.

It Went Bad

Ciena managed to match fourth-quarter earnings and revenue estimates, posting earnings of 5 cents on revenue of $368 million. But the company, which makes gear for the Internet, said first-quarter sales will fall 30%-40% from a year ago, leading to a loss of 8 cents to 12 cents a share for the period. Wall Street expected a 5-cent profit. Ciena said sales of its popular CoreDirector switch will rise sequentially but not enough to offset a fall in long-haul gear sales that could reach 50%.

Downers
Lucent, Ciena giving up ground

For the coming year, Ciena declined to give a specific forecast but said sales would likely be below 2001 levels and that the company would have operational losses for the year while salvaging positive cash flow overall.

"This is bad, real bad," said one New York-based hedge fund manager who has been bullish on Ciena until recently and sold out of his position Thursday.

Ciena's shortfall didn't come as a complete surprise, considering that leading customer

Qwest

has again slashed its capital spending plan for next year. The Denver telco said Thursday it would cut spending by an additional $1 billion, bringing its spending plan to $4.2 billion, or roughly half of its 2001 level. That is by far the steepest cut yet by a big equipment buyer; many of Qwest's rivals, such as

Verizon

and

SBC

, have cut spending by 20%-35%.

Real Bad

Compounding the near-term squeeze, Ciena has pledged to continue investing in the development of future generations of Internet gear and in marketing efforts, which will keep costs high even as revenue plunges. In making that decision Ciena is breaking from the networking pack, where cost-cutting has been rampant as business has vanished.

Some analysts characterized the move as a bold attempt to target market share at the expense of profits. Ciena CEO Gary Smith defended the move, telling analysts on a conference call Thursday that it would be detrimental to the company's long-range success to start curbing tech development and sales efforts now.

Among the more disappointing developments for Ciena last quarter was a shortfall in expected sales growth for its very popular optical switch, the CoreDirector. Sales were expected to double in the fiscal fourth quarter, but instead rose only 60%. Ciena executives downplayed the numbers, saying that paperwork was largely to blame as orders were delivered but not all sales could be recorded without contract acceptance signatures. Ciena was confident that the revenue recognition process would be reflected in the current quarter's results.

Ciena chief Smith said he thought the declining demand for long-haul gear, the optical transport devices used to move intercity network traffic on fiber optic cable, was at a "baseline," but he declined to say when he thought sales would resume growing. He also backed away from an earlier prediction that equipment spending would start to pick up by midyear 2002.

Without citing specifics, Smith said logic alone would suggest that equipment demand will return because phone and Internet traffic levels continue to grow. Due to cash constraints, phone companies like Qwest and others have shifted away from network buildouts and toward incremental upgrades to increase the capacities of their existing systems.

But "this industry builds in plateaus," says Smith. "They eat up the capacity and they build it out again."

Waiting for My Set

Lucent, which has cut its workforce by nearly half over the last year in a vain attempt to get ahead of its revenue erosion, has been in the vanguard of the get-smaller-faster movement. But the results haven't been pretty, so far. The company Thursday projected a 23-cent first-quarter loss on revenue of $3.1 billion to $3.4 billion. Wall Street expected the phone equipment maker to lose 17 cents on sales of $4.4 billion.

Lucent said it expects the first quarter to be the low point in this cycle. The staggering phone equipment giant also says that it isn't in default of its debt covenants, as it is delivering narrowing sequential losses. The debt question is key because Lucent has had to appeal to its bankers in the past to enable the company to continue with its broad restructuring amid a torrent of losses.

Lucent said with some understatement that its reduced guidance reflects "an industrywide reduction in spending for network infrastructure and related services." Indeed, penny-pinching by recession-conscious Baby Bells and the insolvency of practically the entire emerging telecom service industry has brought network equipment to a near standstill over the last year, after years of overspending created a bubble in these stocks that popped in October 2000. Now, after years of expansion and willy-nilly acquisition binges, networkers like Lucent are ruthlessly slashing costs to stay afloat as revenue sags.

If Thursday's numbers are any indications, more cuts are probably on the way.