No recovery on horizon for telecoms

Layoffs at Ciena continue industry's downward spiral

`Worst depression ever'

Some call revival years away as sector lags U.S. economy

March 28, 2002|By Bill Atkinson | Bill Atkinson,SUN STAFF

Although the nation's wobbly economy is showing signs of strengthening, the telecommunications industry is mired in a deep slump with no end in sight, according to industry experts.

Further evidence came this week when Ciena Corp., a Linthicum-based maker of fiber-optic equipment, said that it eliminated 650 employees, or 22 percent of its work force.

The company already had slashed 400 workers last month and 380 jobs in November. Combined, the layoffs have reduced Ciena's work force by 38 percent.

"This industry now is in the worst depression ever," said Robert Rosenberg, president of Insight Research Corp., a Parsippany, N.J.-based telecommunications market research firm. "I think depression is not too strong a word."

When the battered industry recovers is anyone's guess, but no one is predicting a quick return to health.

"If the economy starts to rebound in the second half of the year, maybe 12 months later we will see a rebound in the telecommunications sector," Rosenberg said.

Susan Kalla's outlook is even grimmer. A telecommunications analyst at Friedman, Billings, Ramsey & Co., in New York, she sees the downturn gripping the industry into 2004.

"It may drag on longer," Kalla said. "Telecom lags the economy on the way down and on the way up. It was one of the last industries to fall once the economy started to degrade. Similarly, it lags on the other side."

Others are more optimistic about the industry's fortunes.

Scott Anderson, senior economist at Wells Fargo & Co. in Minneapolis, said telecommunications companies could begin turning around by the end of the year at the earliest.

"They are the weakest link right now," he said.

What could help is a strengthening economy, he said.

"There are some signs that some technology industries are coming back," Anderson said. "Computers have been doing better with their orders, semiconductors have done better. I think telecom will be the laggard just because of the magnitude of the damage done."

The damage has been severe, and no one knows that better than the telecommunications workers who have lost their jobs.

Already this year, telecommunications companies have announced 60,691 job cuts, up 42 percent from a year earlier, according to Challenger, Gray & Christmas Inc., an international outplacement firm in Chicago.

The cuts have been deep.

Verizon Communications Inc. slashed 16,000 jobs last year; SBC Communications Inc. has dumped 7,500 workers since last fall; Qwest Communications International Inc. could layoff as many as 7,000 and BellSouth Corp. is planning to cut as many as 3,000 jobs.

At the current pace, the number of layoffs would shatter last year's total of 317,777 telecommunications workers who lost jobs.

"Telecom is still experiencing just a tremendous glut in capacity and falling demand," said John A. Challenger, chief executive of Challenger, Gray & Christmas. "I do think there are more [cuts] coming. Coming back to some kind of equilibrium is not complete yet. We are still seeing cuts every day."

In many ways, the telecommunications industry's debacle is a classic boom-and-bust tale.

The boom began shortly after 1996 when the industry was deregulated, opening the gates to all-out competition. A flood of new companies entered the business to provided fiber-optic cables, routers and switching devices.

Spurred by competition, phone companies spent billions improving and expanding their networks, and corporations followed suit by upgrading their systems, experts said.

At the same time, the Internet exploded and promised that huge amounts of business would be conducted through phones and computers, pushing up the demand for telecommunications equipment.

Money poured in from investors, and telecommunications companies spent with abandon.

Telecommunications "exploded in a massive way in two or three years," said Giri Devulapally, a telecommunications analyst at T. Rowe Price Associates Inc. in Baltimore.

But as fast as the industry climbed, it fell even quicker. As the economy slowed and corporate profits fell, businesses across the country fired workers, slashed budgets and abruptly cut technology spending, experts said.

"What really happened is the demand for equipment ... collapsed for the last year and a half," Devulapally said.

Investors retreated, too, and the once free-flowing money suddenly dried up.

The industry "turns around when the capital markets come back, but right now the capital markets are standing down until the turmoil abates," Kalla said. "Equity is nonexistent. When fear drives itself into the market it has a multiplier effect."

With the spigot turned off, more than a dozen telecommunications companies have filed for bankruptcy and others are on the brink of failure.

Global Crossing Ltd. filed for Chapter 11 protection in January, becoming the fourth-largest bankruptcy in U.S. history. Other telecommunications firms that have filed for bankruptcy protection include PSINet Inc., 360networks Inc. and Net2000 Communications. "There has been a rash of bankruptcies," Kalla said.

Experts don't see an immediate spark to ignite a turnaround in telecommunications, unless a change in legislation calls for increased spending in broadband.

"We need to see a turnaround in capital spending, that would help definitely," Anderson said. "A lot of analysts are saying corporate profitability will not turn around until midyear."

As if the industry needs more problems, the Securities and Exchange Commission is investigating the accounting practices and certain transactions of a number of telecommunication companies.

"It is a mess," said Challenger.

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