Will we ever hit the bottom?

The economy seems to be doing strange things to equipment providers' business plans. To survive, companies are changing their business strategies, which often includes the public disgrace of revising financial guidance and laying off employees.

Vendor Cisco Systems has suffered through job cuts and freakishly low stock prices. In addition, the company once known for making 22 acquisitions in a year is reverting from its tactic of acquiring technology to more in-house development (see figure).

But Cisco is not alone. Perhaps of greater concern is that many large equipment vendors are revising their revisions and layering job cuts on top of job cuts. Last week alone, ADC Communications, Ericsson, Nokia and Nortel Networks all announced plans to trim their work forces even more.

Nortel revealed a downsizing strategy and changes in financial guidance in mid-February, but those estimates and cuts apparently were insufficient. The company now expects to report a loss per share between 10¢ and 12¢ for the quarter. Nortel expected revenues to ring in at around $6.3 billion, but that number has slipped to between $6.1 billion and $6.2 billion.

To make matters worse, the company increased its layoff count from 10,000 to 15,000. The additional 5000 workers will be cut by the middle of this year, according to a company spokeswoman.

Nortel President and CEO John Roth said the initial layoffs targeted low-growth areas of the company. The spokeswoman could not comment whether more job cuts are expected.

Similarly, ADC revised its financial guidance and cut additional jobs. ADC expects a loss of 10¢ to 15¢ per share for the quarter — a stark contrast to its original estimate of a 10¢ per share for the same quarter last year — and lower-than-expected operating profit margins in the second quarter.

ADC's newly appointed Chairman and CEO Rick Roscitt blamed the economic downturn and reduced service provider spending for the missed marks and staff reductions.

“There has been a slowdown of telecommunications capital spending,” Roscitt said. “We are reducing the work force by 3000 to 4000, in addition to the 3000 we have already [cut]. That totals about 25% to 30% of the ADC work force.”

ADC also will review non-strategic product lines, consolidate facilities and cut contract and temporary employees. ADC plans to focus on optics, DSL, IP, cable and software, according to Roscitt.

“We are going to focus on key strategic growth areas,” he said, noting that ADC won't cut research and development.

When the bleeding will stop for equipment vendors remains questionable. Most point to the decrease in spending as the primary reason for the sales slump, yet no one seems sure when spending will rebound.

“We are more and more confident every day that it has to bottom out,” Roscitt said.

But the problems faced by equipment providers may be more closely linked to products and business models.

“Cisco has been known for making 22 acquisitions per year, and now they are not. That can be a problem,” said Mark Lutkowitz, vice president of optical network research at Communications Industry Researchers.

Meanwhile, Nortel's difficulties may be attributable to the emergence of competitors rather than the economic slowdown, Lutkowitz said.

“Nortel wants people to believe pullbacks are happening because of the economy, but Nortel has really been hurt by competitors like Ciena with its CoreDirector product,” Lutkowitz said. “With wins like McLeodUSA, where Ciena took over the entire network, and Qwest, which is now looking strongly at Ciena equipment, those are tough blows to Nortel.”