With two precincts reporting, signs are that the telecom equipment ticket is in for a bigger rout than the pollsters expected.

Recent declarations from

Qwest

(Q)

and

WorldCom

(WCOM)

suggest that even the most dire assumptions about network equipment spending have been rosy. Qwest, long one of the bright spots in the cash-strapped telecom business, on Monday slashed its 2002 capital budget by 26%. The announcement came just two weeks after WorldCom cut its spending target by 20%.

The spending cuts are far deeper than even the most critical Wall Street analysts predicted. Now, if the other big spenders follow suit, the big telecom firms' spending could fall short of the lowest Wall Street target by as much as $7 billion. That's obviously bad news for investors betting that

Lucent

(LU)

,

Nortel

(NT)

and

Cisco

(CSCO) - Get Report

have weathered the worst of the storm, and could foretell another wave of job cuts and asset sales at the once-hot networkers.

Taking a Bath

"This is a whole new environment," says Lehman Brothers' Blake Bath, who has been among the most aggressive analysts on Wall Street in predicting capital spending cuts. "We are seeing a confluence of a number of different forces: The capital markets want these carriers to reduce spending. The buyers have power for the first time in five years. You are seeing the completion of a lot of big projects. The competitive threats are diminishing.

"And there is some scope-narrowing going on, with some prodding from the capital markets," Bath continues. "Carriers realize they don't need to be all things to everyone."

Erosion
Spending plans at seven big telcos*

*AT&T, WorldCom, Sprint, Qwest, Verizon, SBC, BellSouth. Source: Lehman Brothers

Qwest, which is both a regional Bell and one of the nation's top long-distance service providers, said Monday that it would cut $2 billion off its spending plan next year. Late last month, WorldCom, the nation's No. 2 long-distance carrier, lopped $1.5 billion off its projected budget.

Underlining the depth of the cuts, even the pessimistic Bath underestimated the size of the WorldCom and Qwest cuts by $1.6 billion.

The rationale for the cutbacks isn't hard to figure. With declining phone service sales combining with a deteriorating economy, telcos find they have even less reason to expand their networks and even more reason to squirrel away their cash. Take two of the top spenders, the regional Bells

Verizon

(VZ) - Get Report

and

SBC

(SBC)

. The companies have neither the high-growth mandate from Wall Street nor the competitive imperative to defend their turf to maintain current spending levels.

To be sure, the behemoth Bells tend not to veer wildly one way or another in their spending habits. Still, the arrow is pointing down. Verizon and SBC representatives declined to comment on 2002 spending plans.

The Pain

Any additional cuts will increase the pain for Lucent, Nortel, Cisco and the rest of the equipment sector. Facing 2001 industrywide spending cuts of 5%-10%, these outfits recently completed plans to scale down their operations by as much as half. Now they face the prospect of customers cutting back even more deeply. That could force another series of layoffs, writedowns and assets sales. And the companies' stocks, already down 80% and more from a year ago, could fall further.

Welcome to the telecom recession, says Friedman Billings Ramsey analyst Susan Kalla, who has been one of the most pessimistic and accurate researchers on the Street. According to Kalla, we have just ended the first year of a three-year downturn for the network gearmakers.

Kalla says

Sprint

(FON)

will be the next phone company to stop the shopping and announce deep budget cuts. Risking a guess, Kalla says Sprint will probably slash 2002 spending by about $1.5 billion, or 27%, to $4 billion. Sprint declined to comment on spending projections.

"There's no way the service providers can keep up the big spending," says Kalla. "The cheap money is gone."