Telecom sector analyzes history, looks ahead

At the Adams, Harkness & Hill Summer Seminar here, a panel titled "Investing in a Cyclical Market" was an apt one for the telecom sector, pointed out Redback Networks Chief Financial Officer Dennis Wolf.

"It reminds me of something we didn't really believe, but which was true, which is that all technology is cyclical," he said.

Even when things looked good, DMC Stratex Networks Chairman Charles Kissner said, his company "had just been waiting for the next downturn. We were almost paranoid."

"I wouldn't be surprised if a year or two from now we're complaining because suppliers can't deliver fast enough," he added.

That dilemma couldn't come soon enough for many companies supplying the telecom market. However, for now, they're stuck with the current problem.

The telecom downturn started at the top, with traditional carriers cutting back sharply on spending, and alternative carriers going out of business altogether. Those spending cuts trickled down to equipment makers and component companies--and resulted in significant pain for companies several steps removed from the telecom market.

Origins of the fall
The root of the problem, some say, is that the telecom carriers have built all the capacity they will need for some time to come. Indeed, some argue that the carriers have built far too much capacity.

Not everyone agrees with this philosophy, however. Venture capitalist Tim Kraskey, managing director at YankeeTek Ventures, argued that some of the optical fiber in the ground now is years out of date, and some of the rest of the fiber is nearing its capacity levels.

And earlier in the day, Ericsson Vice President Gary Pinkham pointed out that "traffic continues to build in the networks."

"It's only a matter of time before they have to begin spending," said Pinkham. "The question is, how far will operators let (quality of service go)? Sooner or later they have to resume investing, (although) not necessarily at the same level as they did last year."

Of course, when that will translate to a return to spending is not clear.

Back to the basics
But meanwhile, the capital markets have seriously soured on the telecom sector, sending valuations down and making it much more difficult for companies to raise cash either on the public market or through private means.

"We're really back to the basics now," Kraskey said. "You need a real business plan, real teams, real models. You're not going to be able to burn through cash anymore.

At the same time, he said, "I could argue that this is the best time to start a private company. You want to be able to start at the bottom of a cycle and work your way up."

The key thing for companies to focus on, said Vividon CEO David Ellenberger, is to ensure that their products help their customers' bottom lines.

"The customers are asking, 'Help me save money or help me make money,'" he said. "At some point you can't cut any more costs or any more people."

But as companies announce massive layoffs and restructurings, it may be difficult to hold onto those employees. As Adams analyst Blaine Carroll pointed out, "when you announce 20 percent layoffs, 100 percent of the employees worry about them."