Companies like Nortel Networks and Lucent Technologies, which make equipment for optical telecommunications networks, were counting on the demand for Internet bandwidth to keep ballooning for years to come. Now things look different because phone service carriers are buying less telecom equipment.
"Clearly the optical industry is digesting some over capacity," said Christin Armacost, an analyst at SG Cowen Securities. "All of these companies are going to have to rationalize expenditures to preserve some earnings for the year."
The immediate impact for both companies might be on the success of their efforts to spin off their business units into separate companies.
Nortel announced last July that it had discontinued talks to sell its optical components unit to Corning. That occurred when things looked far more upbeat. Nortel said at the time that the business grew 150 percent in the second quarter of 2000 compared to the year-before quarter.
Optical component stocks like JDS Uniphase have since fallen from great heights as vendors cut back on component spending because of bloated inventories.
Nortel says it still wants the spinoff to happen. "It's still on the table and it's a strategy that we intend to follow through with," said Vicki Contavespi, a spokeswoman for Nortel. However, the company may have to wait until the stock market and the components market improve to get better value.
For the fiscal year 1999 ending Sept. 30, 1999, Lucent's revenue increased 20 percent to $38.3 billion from $31.8 billion in fiscal 1998, before sliding back to $33.6 billion in 2000.
The company's spinoff plans are part of a massive restructuring that includes layoffs and the outsourcing of some manufacturing.
Lucent announced last Wednesday that it is considering options for its fiber business, which include an outright sale of the unit or a possible joint venture.
"This is an asset sale," said Steven Levy, an analyst at Lehman Brothers, "it doesn't make any sense to me strategically."
The fiber unit could be released in some rough waters. Corning, a company that makes glass fiber for optical networks, warned investors Monday that full-year earnings estimates will not meet previous company expectations.
Lucent is also moving forward with the planned IPO of its optical components business, known as Agere Systems.
Wall Street watchers expect the IPO to be priced sometime this week. This comes the week after the Nasdaq Stock Market fell to about 60 percent from its highs a year ago and three optical component companies, Chorum Technologies, WaveSplitter Technologies, and Optical Micro Machines have withdrawn their planned IPO offerings.
But Lucent appears to want the deal to go through regardless of the gloomy environment, mostly because it needs cash. Last September, the company reported that it had about $10.9 billion of current liabilities, or debt due within one year.
Under the terms of the IPO, about $2.5 billion in short-term debt will move from Lucent onto Agere's balance sheet. Also, the banking firms that underwrite the deal will receive shares of Agere in exchange for taking on some of Lucent's debt, which also helps strengthen the company's debt position.
Lucent even lowered the IPO price on Feb. 26 to a range between $12 and $14 a share from $16 and $19 a share.
"The underwriters have a significant interest in sending this through, and since Lucent isn't sensitive to price, (the underwriters) will set a price where they can find buyers," said Levy.
Yet despite the slowdown in sales, equipment makers are still optimistic enough to invest heavily in new optical technology.
Nortel on Monday announced its next-generation optical hardware for long-haul networks. The technology, which will be in trials this summer and early next year, will move data at 40 to 80 gigabits per second, providing four to eight times more capacity than the current technology that moves data at 10 gigabits per second.
Cisco Systems on Monday announced new optical hardware for areas in metropolitan areas, while Lucent announced the creation of a new start-up called AraLight that will design and build components for building optical equipment. AraLight has received $10 million in venture capital from Signal Lake Venture Fund, Ridgewood Capital and Solar Venture Partners.
So as the industry invests in its future and waits for the eventual turnaround in sales, a key question remains unanswered. When will the turnaround begin and how much financial pain must be endured until then?