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Telecom Vendor Woes to Last Longer Than Previously Feared

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NEW YORK (Dow Jones) Companies that sell networking gear to telecommunications service providers face a tough couple of quarters.

Numerous vendors have warned about difficulties and delays in equipment orders and a reluctance to spend on the part of their carrier customers. While some are hopeful for a rebound in the first half of next year, others are starting to believe the downturn will last several quarters, requiring companies to further lower estimates.

Telecom equipment, once thought to be somewhat insulated from the broader economic environment because of the continued demands in communications, is showing cracks in the demand picture that portend a slowdown that could last well into next year.

"Based on our data, I expect carrier spending to get better in the second half of next year," said Samuel Wilson, an analyst at research firm JMP Securities.

Telecom spending tends to lag corporate spending by several months, Wilson said. Most industry players expect companies to start spending again in the second quarter, suggesting carriers will spend a quarter or two later.

Ciena was the latest company to warn of a slowdown in spending by the top-tier carriers. Earlier Thursday, the company issued fiscal fourth-quarter revenue forecast of $190 million to $210 million, well below the $263 million analysts had projected.

"I think what we're seeing is increased scrutiny on capital expenditure driven by the macro-economic uncertainties," Ciena President and Chief Executive Gary Smith said in an interview with Dow Jones Newswires. "We don't have great visibility on what will happen."

Ciena follows a number of companies that warned of a looming slowdown. Networking titan Cisco Systems's chief executive, John Chambers, said during the last quarterly conference call that revenue growth in the next two quarters would slow, and that he was getting mixed signals on capital expenditure from the service providers. ADC Telecommunications and Acme Packet both cut their forecasts for the year.

Ciena's warning spooked the broader technology market Thursday. The Dow Jones Wilshire U.S. Technology index fell 2.6%. Ciena sank 25% to $13.11, while bellwether Cisco fell 4.2% to $22.33. Juniper Networks was down 5.6% to $23.79, ADC lost 5.2% to $9.18, and Tellabs gave back 5.2% to $4.90.

The major U.S. carriers, meanwhile, haven't changed their stance. AT&T spokesman Fletcher Cook said the company still expects capital expenditures to be in the mid-teens as a percentage of its revenue. But during the last conference call, Chief Financial Officer Rick Lindner said that, following heavy spending in the second quarter, AT&T would look to spend slightly less in the second half.

Verizon's spending is on pace with its expectations.

"We've certainly seen the effects of the economy, but it hasn't caused us to change our gameplan," said spokesman Eric Rabe.

Qwest affirmed its capital-expenditure estimate.

AT&T, Verizon and Qwest haven't yet released their expectations for capital spending for next year.

The carriers themselves didn't fare wellin trading Thursday. AT&T slipped 1.7% to $31.86, Verizon fell 3.2% to $34.56, Sprint Nextel Corp. (S) lost 5% to $8.14, and Qwest Communications International declined 3.2% to $3.98.

Protection Gone

Many of the telecom and networking vendors were seen as somewhat insulated from the broader environment. Many of their products allow the communications network to run efficiently, and the companies tout the quick return on investment for the equipment.

Ciena, which makes equipment that helps transport data across great distances, illustrates that it, too, is vulnerable.

"I don't think anyone is immune to the macro global environment," Smith said, adding, however, "We're in a good space."

Smith noted that, while orders have been delayed, its customers haven't cancelled any projects.

"The pipeline is filled, but we're not closing (orders)," he said.

The ambiguity in orders will likely have companies providing shaky estimates for the following quarters.

"None of these companies have visibility," Wilson said. "Ninety days ago, Ciena was talking about how great business was."

There continues to be great demand placed on network equipment because of the increased traffic traveling through those lines. The more that people access video content or play videogames over the Internet, the more need there is to add capacity to those lines.

Vendors that sell products to help speed up and secure corporate networks, for example, were looked at as safe havens. Riverbed Technology and Blue Coat Systems, for example, both surged after their recent quarterly report. But Ciena's warning had shareholders of these companies spooked as well.

Blue Coat fell 6.8% to $16.88, while Riverbed was down 6.6% to $15.40. Blue Coat Chief Executive Brian NeSmith said in an interview last month that he noticed large orders were harder to get through than before.

-By Roger Cheng, Dow Jones Newswires; 201-938-2020; roger.cheng@dowjones.com

(END) Dow Jones Newswires

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