Telecommunications 911: networking, telecom cos. face a financial emergency - Business & Finance - according to Probe Research - Statistical Data Included

Electronic News, July 29, 2002 by Heidi Elliott

The chaos in the telecommunications industry has spread its tentacles to the vendor community.

Research from Probe Research Inc. shows the trouble in telecommunications has wreaked havoc on market capitalization and price/earnings (PIE) ratios among companies in the industry. And the ripple effect hurts.

"It makes it difficult to do any financing at all," said Probe Research COO Allan Tumolillo.

Of 18 companies examined in this field, half have lost more than 90 percent of their market capitalization from their peaks, including EMC, Ericsson, Lucent Technologies, Marconi, Nortel Networks and Sun Microsystems.

Meanwhile, the others have lost more than 50 percent of their market capitalization (see charts).

The traditional telecom vendor list of telcos and wireless companies includes Lucent, Nortel, ADC, Siemens, Alcatel, Marconi, Nokia and Ericsson. Of these, only Alcatel and Nokia have a current PIE ratio since the others had no earnings (or losses).

Within the IP and computer industry group, only two companies had no earnings (EMC and Sun Microsystems). The others, including IBM, Cisco, and Juniper Networks, saw their PIE ratios fall but not as drastically as the telecom vendors.

"The market is saying, 'the period of rapid growth is over,"' Tumolillo said. "Old-line vendors are not really going to participate in future growth."

Tumolillo said these recent moves show that financial markets have sent clear signals. The markets have lost faith in the network service providers; traditional gear providers have been slammed, thanks in part to cutbacks by big telecos and the plateau reached in the mobile market; and the big winners could ultimately be the computer and IP vendors, which have two sectors to sell into (enterprise and carrier) instead of one.

From May 1992 to March 2000 (the peak of the "new economy"), the Nasdaq market grew at an annual rate of 31 percent. In that same time, the Dow grew 17 percent annually. But, Tumolillo noted, the underlying economy grew at 10 percent.

"It's difficult to understand why they should be able to do that. If the general economy grows 5 percent, and stocks grow 10 percent, the ability of the economy to support those stocks is not sustainable," he added. "They just can't support those valuations.

"If profits grow 5 percent a year, that's all the stock should grow," Tumolillo noted.

He predicts that IP and computer-leaning companies will dominate, and future R&D dollars will ultimately favor the computer companies. Probe Research believes several telecom vendors will be taken over or dissolve (as Lycent/Avaya/Agere did). Researchers also predict that at least one major telecom vendor will be taken over by one of the major computer/IP vendors

[GRAPH OMITTED]

Telecom, IP and Computer Vendor Market Performance

                        P/E                                      Pct.
                   Ratio at                       Current  Decline in
             Peak     Share            Current        P/E     Company
            Share     Price              Share      Ratio      Market
Company     Price      Peak      Date    Price  (7/11/02)         Cap

IBM        139.19      37.9   7/13/99    69.41       17.1       50.1%
Oracle      46.47      44.1    9/1/00     9.42       24.2       79.7%
HP-Compaq   68.09      45.4   7/14/00    15.23       32.4       77.6%
Lucent      79.17      74.8  12/20/99     2.35         NA       97.0%
Microsoft  119.25      77.8  12/23/99    52.90       32.0       55.6%
Nokia       62.50      86.7   6/20/00    13.97       18.1       77.6%
Dell        59.00      92.5   3/24/00    23.93       36.8       59.4%
Sun Micro   64.81     116.1   8/24/00     5.40         NA       91.6%
Alcatel     85.25     123.0    9/1/00     6.30        9.1       92.6%
Ericsson    26.17     140.6    8/6/00     1.59         NA       93.9%
ADC         48.75     147.8   7/26/00     2.39         NA       95.1%
EMC        101.81     178.0   9/20/00     8.15         NA       92.0%
Cisco       81.31     217.5   3/24/00    14.05       93.7       82.7%
Juniper    241.81     764.0  10/17/00     7.22       42.5       97.0%
Nortel      84.25   1,871.9   7/24/00     1.44         NA       98.3%
Siemens    121.01        NA    8/1/00    57.46         NA       52.5%
Marconi     35.47        NA    9/6/00     0.12         NA       99.7%

SOURCE: PROBE RESEARCH, INC., AND BIGCHARTS.COM