More grim news from network component stalwarts

Earnings warnings from networking bellwethers JDS Uniphase and Broadcom whack the communications industry, offering further evidence of a widespread decline in sales.

3 min read
Earnings warnings from networking bellwethers JDS Uniphase and Broadcom have whacked the communications industry once again, offering further evidence of a widespread decline in sales.

The warnings are a result of a slowing economy that has caused inventory with the companies' customers to balloon and orders for new products to slow, according to the companies involved. This double squeeze of a weakening economy and inventory buildup has also caused other tech giants such as Lucent Technologies, Cisco Systems and Nortel Networks to warn investors of a rough start for sales this year. Those warnings follow a similar slew of bad news from customers such as WorldCom and Sprint.

Growth "is not going to be what they'd hoped for or what the stock market was telling you a year ago," said Richard Cunningham, an optical components analyst for Cahners In-Stat Group.

JDS Uniphase, a maker of components for optical equipment, told Wall Street on Tuesday that it expects earnings of 14 cents a share for the third fiscal quarter ending March 31, and revenue of $925 million. The San Jose, Calif.-based company also said it expects revenue and earnings for the fourth quarter to be little changed from the third quarter.

Analysts polled by First Call expected the company to make earnings of 17 cents a share on revenue of about $1 billion.

Irvine, Calif.-based Broadcom also announced that it expects earnings of 8 cents to 9 cents for the first quarter on revenue in a range between $325 million and $315 million.

Wall Street expected the company, a maker of chips for cable set-top boxes and networking equipment, to post a profit of 25 cents on revenue of $398 million, according to analysts surveyed by First Call.

The two companies are at the whims of the market in the short term, according to analysts, and their size makes it difficult for them to change course immediately in reaction to the anemic economy.

"In the short term, it's difficult to switch focus mid-stream," said David Milligan, a partner at KPMG who covers the optical industry. "In the long term, JDS can target newer markets" that are growing quickly.

The future of these two companies--once Wall Street high-fliers--depends very much on the overall U.S. economy, according to analysts. If the economy perks up, demand for telecommunications gear will break out of its slump, inventories will shrink, and customers will buy components and chips again, analysts say.

Many observers of the economy believe the economic malaise is temporary and that demand will return in the second half of the year. Others are not so sure.

Jim Liang, an analyst who covers Broadcom at WR Hambrecht, says sluggish demand might prolong the pileup of parts at equipment makers, which could mean a turnaround will not happen until much later in the year.

Everything's relative
Despite the tough times that have affected carriers, the equipment providers that supply them, and the components makers that feed technology to the equipment makers, some industry analysts maintain a positive outlook on the communications market and Internet infrastructure projects.

Many analysts and executives at this week's Thomas Weisel Partners Emerging Networks conference in San Francisco believe the growth of the Internet will dictate that communications carriers continue to build and improve their networks. The recent spending slowdown is a short-term problem, they say--and hope.

"I'm quite bullish on technology in the long run," Michael Boskin of Stanford University's Hoover Institution said during a keynote address at the Thomas Weisel show. "There's no doubt that information technology, networking technology, is at the core of that.

"You must think of this as a cyclical condition superimposed on a long-term growth trend," Boskin said.

Others say that although the carriers are being particularly cautious today, they will eventually return to spending on network upgrades and buying more equipment.

"The network providers need to get the bandwidth to their customers. The money will be spent," said Claude Romans, director of access networks research at RHK, a market research firm.

Some analysts also point out that despite the current stream of bad news, the communications sector should come out ahead this year. "The demand is going to continue," said In-Stat's Cunningham. "Any industry would kill for the growth the optical components industry is going to have this year."