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Service Provider Networks / (none) / View from the Edge:

We've only just begun

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Just when you thought the news couldn't get any worse, UBS Warburg says carriers have already spent as aggressively as they will from quarter to quarter this year.

As a result, UBS last Wednesday downgraded seven companies, including Cisco, Nortel, Ciena, ADC Telecommunications, Avici, Juniper and Tellabs.

Sign up for Jim Duffy 's "View from The Edge" newsletter and get this column sent to your inbox each week.

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% of their 2001 budgets in the first quarter, UBS says, while in years past they would have only spent 20%.

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

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

"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 states in its report. When telecom operators spent only 20% 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 says.

Things may get worse before they get better. Preliminary data gathered by UBS shows that spending in 2002 will be 7% 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 2- or 3-year rationalization process, UBS suggests.

Fasten your seatbelts.


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