Clouds gather in carrier spending slowdown
Uncertainty in the overall economy has led large North American telecom carriers to grow increasingly conservative in their spending, a phenomenon that, according to some industry analysts, has intensified in recent weeks. As tension swells, equipment providers can only wonder when conditions will improve, but a pair of analyst assessments this morning provides scant hope for a quick recovery.
“Our discussions with carriers and vendors appear to indicate that we've taken another notch down in demand over the recent weeks,” Mark Sue, managing director of RBC Capital Markets, wrote in a research note this morning. “This cycle may last 12 months, if not longer.”
Though Tier 1 and Tier 2 carriers appear to be maintaining their near-term capex plans for now, Sue wrote, “The urgency may no longer be there, and we're already picking up signals of deal push-outs.”
Though consumer electronics purchases around the holidays may help stimulate the sector, the near-term environment could likely cause inventory backups for equipment vendors and heat up price competition in the wireless infrastructure space, Sue wrote.
Sue’s prognosis is particularly dour for Alcatel-Lucent -- which he predicted “will remain challenged for some time,” with weak cash flow likely extending to at least next year’s second half -- and for Nortel Networks, of whose recent move to try to sell its metro Ethernet and optical division Sue wrote, “The timing likely couldn't have been any worse.” In addition to macroeconomic forces, a deteriorating market for CDMA wireless gear is likely to impede both vendors, he wrote.
Morgan Keegan analyst Simon Leopold echoed many of Sue’s sentiments in his own note this morning.
“While our checks indicate that carriers have maintained budgets and project plans, they have become increasingly nervous,” Leopold wrote. “[Third-quarter] spending could be a bit light, and in [the fourth quarter], we expect less than seasonal sequential improvement in North American spending, with cable TV exposure as our preferred sub-sector.”
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