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04/25/01
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By Seth Spalding
Worldcom and XO Communications are set to report earnings tomorrow. Given the cap-ex cuts being made by several of their competitors (Verizon, Qwest, and SBC have all reduced their 2001 cap-ex guidance in the last two days), we want to be prepared for more bad news. The table below outlines Worldcom's and XO's major publicly disclosed equipment contracts over the past few years. Given a reduction in capital expenditures, the market is likely to give a negative knee-jerk reaction toward vendors with high exposure to these carriers. We offer more detail with regard to 10% customer exposure below. Worldcom Vendors
Xo Communication Vendors
Source: Epoch Partners and Company Reports Vendor Exposure to XO Ciena: XO has never contributed 10% of Ciena's revenue. Ciena had three 10% customers in 2000 -- Qwest, GTS , and Sprint. GTS has probably been removed from that list, and Verizon was likely added in 1Q01. Sonus: XO has never been a 10% customer for Sonus. Sonus had four 10% customers in 1Q01, Global Crossing, Qwest, PointOne, and Broadband Office. Ceragon: XO was a 10% customer of Ceragon. Further revenue contribution from XO is highly unlikely, though we think this is already reflected in the stock price. Winstar and FirstMark were other 10% customers. Vendor Exposure to Worldcom In the most recent quarter, Ciena, Lucent, Nortel, Cisco, and Juniper all supplied products to Worldcom, but Worldcom was not a 10% customer for any of them. Worldcom was a 10% customer of Juniper until last quarter. Juniper will be exposed if Worldcom lowers cap-ex guidance. Next would be Ciena, who, on a relative basis, would feel the impact of a cut more than Cisco, Lucent, or Nortel. Conclusion On a relative basis, smaller players -- Ceragon, Juniper, and Ciena -- will be hit hardest if XO and Worldcom announce lower cap ex guidance tomorrow. Based on comments from Qwest's and Verizon's earnings calls, vendors are feeling pricing pressure as they bid aggressively for the small pool of deals in the market. Accordingly, we expect gross margin pressure for these vendors. We continue to recommend that investors avoid Ciena and Ceragon shares, and suggest accumulating Juniper shares below $50. *The analyst(s) involved in the preparation of this report has an investment position in the subject security (CSCO) Companies mentioned in this note: Ceragon (Nasdaq: CRNT, $2.67), Ciena (Nasdaq: CIEN, $57.54), FirstMark (OTCBB: FIRME, $0.40), Global Crossing (NYSE: GX, $11.05), GTS (NYSE: GTS, $0.63), Juniper (Nasdaq: JNPR, $57.86), Qwest (NYSE: Q, $38.90), SBC (NYSE: SBC, $40.79), Sonus (Nasdaq: SONS, $24.11), Sprint (NYSE: FON, $21.38), Verizon (NYSE: VZ, $55.18), Winstar (OTC: WCIIP, $34.00), Worldcom (Nasdaq: WCOM, $19.39), XO Communications (Nasdaq: XOXO, $4.50) |
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