WorldCom could spell even tougher times for telecoms

By Matthew Fordahl The Associated Press
Thursday June 27, 2002

SAN JOSE — Telecommunications equipment companies, already battered by a sales meltdown, sustained another hit Wednesday as WorldCom Inc. — a major buyer of networking gear — admitted major accounting fraud. 

Cutbacks by WorldCom, which already plans a massive reduction in capital spending, will trickle through its vendors and will likely have an impact far beyond those companies, analysts say. 

“The WorldCom accounting scandal is pretty much the last thing the doctor could have ordered right now for telecom equipment stocks,” John Wilson, an analyst at RBC Capital Markets, said in a research note. 

Networking gear suppliers have been sputtering since the telecom meltdown began with the collapse of the dot-coms in 2000. 

The news has not improved since, as carriers cut back spending and as aggressive rollouts of networks led to overcapacity, falling prices and — in many cases — bankruptcy. 

Even before Tuesday’s revelation that it disguised $3.8 billion in expenses over the last five quarters, WorldCom was struggling with $32 billion in debt, slowing revenues and a Securities and Exchange Commission investigation. 

Now, the nation’s No. 2 long distance company and a leading carrier of behind-the-scenes Internet traffic said it will only maintain its current network, not expand or upgrade it. 

“There’s not going to be a whole lot of spending on gear there,” said Ryan Molloy, an analyst at SoundView Technology Group. “They’re just going to keep the network running.” 

Juniper Networks Inc. is expected to be among the hardest hit. About 10 percent of the Sunnyvale-based company’s sales are from WorldCom’s purchases of its high-end routers and other equipment. 

“I think 2003 would pose a serious problem because there’s an upgrade cycle that Juniper’s pinning their hopes on that wouldn’t materialize at WorldCom if things really tanked,” Molloy said. 

Shares of Juniper lost $1.16, or more than 18 percent, to close at $5.13 Wednesday on the Nasdaq Stock Market. 

Networking gear leader Cisco Systems Inc. receives about 1 percent of its total revenue from WorldCom, he said. Cisco shares lost 2 cents to $13.43 in Nasdaq trading. 

Nortel Networks Corp., a maker of equipment for optical networks, once had considerable business dealings with WorldCom — until all major long-haul voice and data carriers found themselves stuck with too much fiber in the ground and not enough customers. 

“Nortel Networks has no material exposure to WorldCom, who is primarily an optical customer,” Nortel spokesman David Chamberlin said. 

Still, Nortel shares lost 14 cents, or nearly 9 percent, at $1.47 in New York Stock Exchange trading. 

More significantly, major long-distance carriers such as WorldCom have traditionally been more aggressive than regional phone companies in buying and implementing new technology, Molloy said. 

“It’s the psychological impact of losing a customer that would be more willing to adopt a next-generation platform,” Molloy said. “If we lose one, it makes others less willing to spend and be more careful with their money. It’s kind of a domino effect.” 

And not just telecom gear-makers are exposed. Computer services giant Electronic Data Systems Corp., for instance, runs data centers for WorldCom in a deal that brings EDS $600 million in annual revenue.