Mixed Signals for Telecom Firms

The sizzling rally last year in telecommunications stocks is, within only a couple of weeks, rapidly fading from memory.

On Tuesday Tellabs Inc., a leading provider of gear for managing traffic on telephone networks, joined a growing list of telecom companies that are stumbling out of the gate in 2000 with disappointing financial results and plummeting stock prices.

The pullback hasn’t been limited to companies that build the infrastructure “guts” that transmit voice, data and other signals. It’s spread among several sectors of the telecom arena, as Wall Street and Main Street investors alike are growing increasingly skittish about the slowdown in the companies’ red-hot growth.

Tellabs’ warning not only followed a downbeat outlook from Lucent Technologies Inc. earlier this month, but it also came on the same day that AT&T; Corp. posted lower fourth-quarter earnings, and the stock of SBC Communications Inc.--the holding company for Pacific Bell--fell to a 52-week low even though SBC posted a moderate rise in fourth-quarter profit.

Analysts cautioned that investors should be wary about throwing in the towel on these stocks, saying there are vast differences among these companies’ problems and that it’s by no means an industrywide slowdown in demand for telecom services and equipment.

Tellabs, based in Lisle, Ill., and some other telecom equipment giants are undergoing big and expensive shifts in product development and manufacturing to introduce new technologies that are, for now, slowing their growth, analysts said.

Estimating how long that transition will take is tricky, of course. But “you have an industry that continues to experience very healthy demand” for its products, said analyst Paul Silverstein of investment firm Robertson Stephens in New York. “The big trends are very much intact.”

Long-distance carriers such as AT&T;, MCI WorldCom Inc. and wireless phone companies also “are facing a more competitive environment, and that’s good for the equipment companies because they [the carriers] will have to spend more” on new gear to keep pace with their rivals, said Steven Levy, an analyst with Lehman Bros. in New York.

All of which is why investors seemed clearly divided Tuesday about whether the telecom downturn is a bump in the road or a prolonged slump.

Tellabs’ stock, which for several years has outperformed the general market by a wide margin, plunged $9.56 a share to close at $59.50 on Nasdaq, after the company warned that its first-quarter 2000 earnings will lag analysts’ expectations.

AT&T;’s stock was down much of the session, but finished up 81 cents, to close at $51.31, and SBC dropped $2 a share, to close at $40, in New York Stock Exchange composite trading. Ciena Corp., another network-gear maker, fell $2.88 to close at $74 on Nasdaq.

But investors bid up some other telecom shares that have taken a drubbing so far in January. They included Lucent, which gained $2.13 a share to $55.69 on the NYSE, and MCI WorldCom, which had dropped 19% so far in January, regained $2.38 a share to $43.19 on Nasdaq.

Nortel Networks Corp., another major provider of telecom networking equipment and a Tellabs rival, gained $8.88 to $108.88 a share on the NYSE. Then, after the markets closed, the company posted a fourth-quarter profit, versus a year-earlier loss, and announced a 2-for-1 stock split.

Qualcomm Inc., a leader in wireless phone technology whose stock has tumbled 20% in January, illustrated the market’s confusion Tuesday.

Qualcomm’s stock rebounded during market hours with a gain of nearly $9 a share, to $149 on Nasdaq. But after the market closed, the San Diego-based company reported sharply higher fiscal first-quarter earnings but warned that it might ship fewer wireless-related chips and phones in its second quarter ending March 31 because of parts shortages and other factors. So, in after-hours trading, Qualcomm’s stock plunged $12 to $137 a share. Three weeks ago, the stock stood at $200 a share.

In the equipment sector, analysts said there were clear differences between the announcements made by Tellabs and Lucent, even though both sent their stocks plummeting.

Tellabs’ fourth-quarter results exceeded expectations, but its executives warned that the company’s first-quarter earnings would come under pressure from a higher tax rate and added costs for rolling out enhanced versions of its equipment, including its flagship Titan brand.

That’s actually a bullish sign, said analyst Levy, because the company “is spending some extra bucks to make sure the transition goes as smoothly as possible.”

Also, Tellabs not only “has a long history of exceeding expectations, it also has a long history of guiding [analysts’ forecasts] up” for future quarters, and that didn’t happen Tuesday, said Silverstein.

But “it’s not a warning flag,” he said. “Most of it is due to [Tellabs’] investment in its business.”

Lucent, on the other hand, warned earlier this month that it would miss Wall Street’s forecasts for its fiscal first quarter ended Dec. 31 for several reasons, including that it wouldn’t be able to fulfill orders for some of its newest gear, including fiber-optic networks that expand customers’ transmission capacity.

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EARNINGS REPORTS

For more on telecom earnings, C3. Other earnings, C2, C3, C4

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Static on the Line

After soaring in the fourth quarter, shares of many telecommunications industry leaders have tumbled in recent weeks, in a decline that has included all major segments of the industry--from long-distance to regional phone firms to equipment suppliers. How Standard & Poor’s indexes of stocks in those industries have fared, monthly closes and latest:

Long-distance phone stocks

Regional phone stocks

Communications equipment stocks

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Telecom Turmoil

Here’s a look at how some key telecom shares have fared. The list includes long-distance companies, regional phone firms and equipment suppliers. Tuesday closing prices are for regular trading (not including after-hours activity).

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52-wk. Tues. Decline Stock (ticker) high * close from high Lucent Technologies (LU) $84.19 $55.69 --33.9% SBC Commun. (SBC) 59.88 40.00 --33.2 MCI WorldCom (WCOM) 64.50 43.19 --33.0 Qualcomm (QCOM) 200.00 149.00 --25.5 Tellabs (TLAB) 77.25 59.50 --23.0 Global Crossing (GBLX) 64.25 51.88 --19.3 AT&T; (T) 63.38 51.31 --18.1 GTE (GTE) 78.50 68.75 --12.4 Ortel (ORTL) 171.00 150.69 --11.9 JDS Uniphase (JDSU) 248.50 232.00 --6.6 Nokia (NOK) 196.00 183.00 --6.6 Nortel Networks (NT) 110.00 108.88 --1.0 S&P; 500 index 1,478.38 1,410.03 --4.6

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*Includes intraday trading.

Source: Reuters