Carrier spending not expected to rise

Just when you thought the news couldn’t get any worse, New York-based financial services firm UBS Warburg LLC said last month that carriers have already spent as aggressively as they will from quarter to quarter this year.

As a result, UBS downgraded seven companies, including Cisco Systems Inc., Nortel Networks Corp., Ciena Corp., ADC Telecommunications Inc., Avici Systems Inc., Juniper Networks Inc. and Tellabs Inc.

Telecom carrier spending was more front-end loaded this year than in past years, UBS stated in a recent report. Telecom operators have spent about 25 per cent of their 2001 budgets in the first quarter, UBS says, while in years past they would have only spent 20 per cent.

UBS based its conclusions on data from 10 of the largest U.S. carriers, excluding WorldCom. The carriers represent about 70 per cent of the 2001 capital spending in the U.S., and all have spent 25 per cent of their planned capital budgets for 2001 in the first quarter.

Several competitive local exchange carriers have also spent over 25 per cent of their capital budgets in the first quarter, given liquidity issues, UBS stated.

“The data suggests that the remaining quarters in 2001 will not be much better than the first quarter in terms of telecom equipment revenues,” UBS stated in its report. When telecom operators spent only 20 per cent of their budgets in the first quarter, it resulted in “strong sequential improvements throughout the year.”

WorldCom’s spending is more back-end-loaded, but not enough to offset the imbalance in spending with other carriers, UBS said.

Things may get worse before they get better. Preliminary data gathered by UBS showed that spending in 2002 will be 7 per cent lower than it is in 2001.

In order to get a better read on when a recovery might occur, the telecom industry has to undergo more “rationalization” – a politically correct term for bankruptcies, layoffs and consolidations – before spending picks up again. The bad news is, we are only in the first year of what could be a two- or three-year rationalization process, UBS suggests.

Fasten your seatbelts.