No recovery for the telecom sector

The telecommunications sector took a beating this week from bankruptcies and tumbling stock prices as carriers still look for signs of an economic recovery.

Williams Communications Group, the parent company of wholesale carrier Williams Communications Group Inc., kicked the week off by filing for Chapter 11 bankruptcy protection. But bad financial news this week has also extended to AT&T Corp., Teleglobe Inc., WorldCom Inc. and Verizon Wireless Inc. And by the same token, equipment providers like Lucent Technologies Inc. and Ericsson Inc. have been hit.

After weeks of speculation about the company’s financial future, Williams says it filed for bankruptcy as part of a US$6 billion debt restructuring deal it has worked out with its creditors.

Williams Communications Group says its carrier division will run uninterrupted during the company’s restructuring. The company went as far as to say that the Williams Communications division “is not expected to be involved in the Chapter 11 reorganization process.”

Williams’ bankruptcy follows Global Crossing’s Chapter 11 filing in January and may precede those of wholesale carriers such as Level 3 Communications.

“There is much speculation that Level 3 will too have to file for bankruptcy protection in the near term,” says Brownlee Thomas, analyst at consulting firm Giga Information Group.

Financial troubles have spread beyond the wholesale telecommunications market. AT&T and WorldCom have been suffering under lower-than-expected revenues and quarterly losses.

On Thursday AT&T reported a much larger net loss in the first quarter than it did in the quarter a year ago. The telecommunications giant’s net loss totaled $975 million in the first quarter of 2002, compared to a loss of $192 million in the first quarter of 2001.

The carrier also reported an 11 per cent drop in sales for the quarter. AT&T says it expects to see a similar slump in sales in the second quarter.

AT&T continues to point to the failing consumer long-distance market as the prime reason for the company’s poor financials, yet the carrier’s business services division also took a hit. Business services reported $6.53 billion in sales, compared to $6.88 billion in the same quarter last year.

Analysts are not expecting sales to pick up anytime soon. “Business users are holding off on buying new services until the market levels out,” Giga’s Thomas says. Service providers will have to continue to look for ways to reduce debt and keep losses at bay in the interim.

“There’s a truncate on the bleeding, but we haven’t seen the worse yet,” Thomas says.

WorldCom’s earnings for the first quarter were no better than AT&T’s, but the second-largest telecommunications carrier in the U.S. seemed to take a harder hit on Wall Street.

Late last week WorldCom announced that its revenues for 2002 would fall short of expectations. That led to WorldCom’s stock trading below the dreaded $4 per-share price early this week, with little recovery in sight.

The company released its first-quarter 2002 financials Thursday. The company reported $5.08 billion in revenue, down from $5.2 billion in the same quarter in 2001. The company posted a net profit of $184 million for the first quarter, but that’s down from $532 million in the first quarter of 2001.

WorldCom, like nearly all of its competitors, reported slower sales. Its revenue of $8.1 billion was down from $8.8 billion in the same quarter last year.

While WorldCom’s numbers look similar to AT&T’s, the company is carrying more debt than most providers.

Tough times in the telecommunications industry also affect incumbent local exchange carriers like Verizon.

The New York-based company reported a first-quarter loss of $500 million this week. The company blamed the poor performance on the sluggish economy and a $2.5 billion write-down on bad investments, including a stake in troubled network builder Metromedia Fiber Networks.

But unlike some of the long-haul providers, Verizon actually posted better quarterly revenues compared to last year. Verizon says its first-quarter revenues of $16.4 billion are 0.7 per cent higher than the same quarter last year.

International service provider Teleglobe also took a lashing this week, but not from Wall Street. Teleglobe’s parent, BCE, announced Wednesday that it will not provide long-term funding for the carrier. It will only offer short-term funding up to $125 million to keep Teleglobe operational while it explores other funding options.

All roads are pointing toward bankruptcy for Teleglobe unless the service provider finds a new source of funding quickly.

And in an unusual move by domestic corporate standards, the CEO and chairman of BCE, Jean Monty, resigned from the company, taking responsibility for the 2000 Teleglobe acquisition that has turned quite sour for the company.

As it seems that most carriers are in financial trouble these days, users are left questioning which provider is worth teaming with. Thomas says that many Giga clients she talks to are waiting for the dust to clear and for the market to get back on track.

But that doesn’t mean users shouldn’t be renegotiating contracts with their existing carriers. Thomas says that users should add provisions to their contracts that would allow for quick exits if their carrier merges with another company or if it were acquired. Users should also amend their contracts to say if service degradation occurs after a merger or acquisition that they can exit the contract with no penalties.

Users should not re-sign with carriers for another year or more if they are looking at the tail end of a contract now. Instead users should opt for three- or six-month extensions, she says. This would also be a good time to try to reduce service rates. Clearly the carriers are not interested in losing any more customers.

The pain carriers are feeling is rippling through equipment vendors as well. Ericsson and Lucent will cut a combined 23,000 from their respective workforces after posting dismal first-quarter results.

Ericsson said it will slash 17,000 positions after first-quarter 2002 revenue declines of 33.9 per cent year-to-year and 36.9 per cent sequentially, and a huge loss. Ericsson cited further reductions in capital spending by service providers, and said orders were down 40 per cent year-to-year, but were up 10 per cent sequentially.

Lucent said it would cut 6,000 jobs after announcing first-quarter results that included a greater-than-expected decline in revenue, also due to sharply reduced capital spending among service providers. Revenue decreased 40.5 per cent year-to-year to $3.52 billion this quarter. Net loss this quarter was $535 million, or $0.16 per share.

The workforce reductions will bring Lucent’s employment ranks to 50,000 by the end of its fiscal year. Some analysts were slightly upbeat on Lucent’s results, however.

“Relative to market conditions and Lucent’s ongoing turnaround challenge, results this quarter were positive,” says Bill Lesieur, director of Technology Business Research in Hampton, N.H. “The company is making progress in its internal initiatives, but its customers continue to cut spending.”

Service providers announced $3 billion in capital spending cuts last week and more cuts were expected this week, Lesieur says. On the market outlook overall, Lesieur believes the much anticipated signs of recovery for late this year may have to wait until next year.

“The overall telecom industry was generally forecasting a recovery in the second half of 2002 in hopes of creating momentum toward increased capital spending by service providers,” he says. “In reality the momentum did not kick in fast enough, so 2002 will be an unprofitable year for many of the telecom equipment vendors. The recovery is now pushed into 2003, while the telecom industry, both at the service provider and equipment manufacturing level, will consolidate.”

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