RPT-ANALYSIS-Telcos, gear makers far from recession-proof

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Tue Dec 16, 2008 4:43pm GMT

(Repeats with no changes to headline or text)

By Ritsuko Ando

NEW YORK, Dec 16 (Reuters) - Phone companies and their equipment vendors are proving far less recession proof than previously thought, as demonstrated by planned cutbacks at AT&T Inc (T.N) and others.

A recent string of bad news is raising worries that conditions will worsen for telecom equipment makers in the new year, with no one expecting a strong recovery in 2009.

"I think this industry's proving less safe than we thought three months ago, six months ago, and probably less safe than we think they are today," said Avi Cohen, head of research at Avian Securities, noting that companies appear to be delaying their less important projects by three to six months.

AT&T, Verizon Communications Inc (VZ.N) and other carriers have become more vulnerable to credit conditions than in the past, when consumers had no option to a landline phone. Now they can now disconnect landlines and choose cheaper services from cable and Internet providers.

A shift to wireless and Internet services has also raised capital spending requirements for carriers, making them and their equipment vendors more vulnerable to credit conditions.

Those trends have been creeping into the market for a while, but the rapid deterioration in the past few months has caught investors by surprise.

Last Friday, French telecom gear maker Alcatel-Lucent (ALUA.PA) forecast a decline of 8 percent to 12 percent in 2009 sales. Its chief executive Ben Verwaayen said he was assuming "in 2010 the market will not be substantially better than in 2009."

His comments followed a surprise quarterly loss from U.S. equipment maker Ciena Corp (CIEN.O) and a weak outlook by ADC Telecommunications Inc ADCT.O.

Such news appeared to have pushed aside bullish arguments that online video traffic will boost demand for network gear, or that the extreme slump in share valuations provided a good buying opportunity. "People are now coming to terms with the macroeconomic deterioration and severity of the credit crisis," said Bernstein Research analyst Craig Moffett. "Equipment makers need to hunker down for a long winter."

MORE CUTS EXPECTED

Top U.S. carrier AT&T, for years considered one of the safest picks in an economic downturn, announced earlier this month that it would cut 12,000 jobs and scale back its network spending in 2009, citing declining landline sales.

Others, including No. 2 U.S. carrier Verizon, are also expected to follow as consumers and corporate clients disconnect to save money. Even profitable companies are likely to focus next year on preserving cash, margins and, if any, dividend payments, analysts said.

Cost cutting plans are expected along with quarterly results in January and February, a discouraging turn for investors who thought carrier spending would protect vendors like Cisco Systems Inc (CSCO.O) and Juniper Networks Inc JNPR.O from the impact of weaker corporate spending.

"Telco economics lag general economic paths by nine to 10 months. So if we truly went into recession a year ago, the telco guys are seeing it more fundamentally now," said Robert W. Baird analyst Kenneth Muth.

While AT&T has said much of its cuts will be in landline rather than its growing wireless and Internet services, analysts say few network equipment vendors will be spared by the general economic downturn.

Muth sees overall landline spending falling 15 percent in 2009, with wireless spending falling 5 percent and data network spending falling around 8 percent to 10 percent.

2001 COMPARISONS

Few analysts are willing to forecast the timing of a recovery, but most agree that 2009 will be bleak with even the most optimistic scenario a stabilization late in the year after an improvement in U.S. consumer and corporate sentiment.

Executives like Cisco CEO John Chambers have stressed that the latest slowdown is no repeat of the burst of the technology bubble of 2001, which triggered bankruptcies and left companies like Qwest Communications International Q.N with a pile of debt and others with a glut of dark fiber, or unused networks.

While analysts agree that the industry indeed does not suffer from much over-capacity this time around, they also say the latest crisis is no less serious due to a more acute and geographically broader-based macroeconomic slowdown.

"This is much more of an extreme, hard, fast economic slowdown," Muth said.

Cisco, Juniper and Tellabs Inc (TLAB.O) shares have all fallen over 40 percent in the past 12 months. Alcatel-Lucent has plunged 70 percent, weighed by skepticism over its trans-Atlantic merger, while Ciena has fallen 85 percent.

"What you're going to hear on quarterly calls in the January-February time frame is management being more downbeat," said Baird's Muth. "I still think there is some downside."

Avian's Cohen said the market is still in the process of lowering its outlook in line with deteriorating conditions.

"Until we see marginal improvement in data points we continue to be concerned. And the best thing to do in this case is ratchet down expectations," he said.

(Editing by Derek Caney)

((ritsuko.ando@thomsonreuters.com; +1 646 223 6084; Reuters Messaging: ritsuko.ando.reuters.com@reuters.net)) Keywords: ECONOMY TELECOMS/ - Keywords: ECONOMY TELECOMS/

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