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State of telecom may separate players

With the slowdown in capital spending among telecommunications providers, the message is simple: Only the strong will thrive.

As struggling telecommunications companies cut back on their spending, Wall Street is placing its bets on which network equipment providers will survive these lean times.

The message is simple: Only the strong will thrive.

Telecommunications equipment giant Nortel Networks is set to release end-of-year earnings late Thursday, capping an eventful week for networking financials. Underlying the numbers are technology trends, with companies like Juniper Networks maintaining a stellar earnings record thanks to the niche of the market it competes in. Others such as Extreme Networks and Redback Networks, among others, are showing signs of succumbing to the slowdown in spending that has hit numerous firms.

Spending among telecommunications service providers is expected to grow less this year than in previous years, particularly as emerging carriers struggle to secure the finances they need to pay for their network upgrades.

Juniper's continued good fortune is a result of its strong position in Internet-based routing technology, a high-growth market that shows few signs of slowing, according to analysts.

Martin Pyykkonen, an analyst at C.E. Unterberg, Towbin, said Juniper and networking giant Cisco Systems are better protected from a slowdown in telecom equipment sales because their families of Internet-based routers are in high-demand, as service providers need to speed up their networks to handle the explosion of Net traffic.

Other companies, such as Lucent Technologies and Nortel, have a much wider family of products with much of their revenues still tied to slow-growth voice equipment, Pyykkonen said. Still others, according to analysts, are focused on niche markets that could fall prey to shifts and downturns in spending.

"The Lucent's and Nortel's and so forth are more vulnerable if we get into the deep spending cuts," Pyykkonen said. "All companies are shifting their spending toward IP (Internet Protocol) and away from voice. So, if you're positioned in the growth areas like Juniper is, you're doing well."

Cisco and Juniper are the two primary players in the market for high-end routers that service providers need for their networks. While Cisco still owns 69 percent of the market, Juniper has made huge gains the past two years; its share of the market has grown to 29 percent.

Most buyers of the high-end routing equipment have been emerging service providers, but when the traditional phone companies begin to switch to IP equipment, analysts expect Cisco and Juniper to reap the benefits.

"I think it will be valuable for everyone concerned to get the spectators off the field here," Juniper Chief Executive Scott Kriens said in an interview this week, referring to the companies that are struggling with the downturn in telecommunications investment.

"The companies that can focus and deliver are the ones that will be better off as a result of this climate than if it never happened," Kriens said.

Cisco CEO John Chambers has also claimed that a downturn can only aid his company, since it will make it easier for Cisco to gain market share and cheaper to continue to make acquisitions.

Morgan Stanley Dean Witter analyst Chris Stix said in a report that Juniper's new lower-end routers have sold well. The "edge" routers connect private businesses to the public Internet.

"The company has transitioned itself from a one-trick pony in the core router space to a global company with product spanning from dedicated access, to edge aggregation to core networking," Stix said in his report. "We believe the best is still ahead for Juniper as it continues to execute in these rapidly growing markets."

Pyykkonen added that Juniper's revenue growth is bigger than its larger counterparts because the young company's revenue numbers are smaller. While Nortel's first-quarter revenue is expected to be between $8.1 billion to $8.3 billion, Juniper this week announced fourth-quarter sales of $295.4 million.

"Juniper is growing like a weed, but you've got this situation of smaller numbers," he said.