The credit crunch, Cisco and Nortel

I was talking with my friend Gennady Weizman yesterday about medium term (as in the next 6-18 months) impact of the current financial markets crisis on the tech market.   Most of our business is in the telecom industry – so I have an interest in whether our clients will have money to spend.

it appears to me that there is a significant difference in the threat surface for telecom business today than 8 years ago when the dot.com bubble burst.   Back in 2000, the telecom service providers and their technology suppliers were living off the bubble, overpriced products and services and an over-supply of fiber and network infrastructure.  It took the the telecom industry 7 years to recover but today the industry is healthy with multiple growth drivers in VOD, IPTV, broadband, triple-play, VoIP, HDTV, 3G cellular, WiMax and mobile data.

Cisco is my personal indicator – if their orders (many from telecom service providers) drop then it’s a sign that the consumer credit crisis is trickling back up the supply chain to the equipment vendors.

Cisco shares declined in Nasdaq trading after John Chambers forecast the first revenue drop in five years because of the financial crisis. Sales may fall as much as 10 percent in the second quarter, which ends in January

The business took a hit  with the credit crunch, driving October 2008 orders for Cisco products down 9 percent. Chambers said that his comfort level with the forecast was the lowest since the dot-com bubble burst in 2000. Cisco plans to save $1 billion in costs over the next three quarters by freezing hiring, business travel and relocation expenses.

Chambers is usually an optimistic fellow – so should we be worried?

If you’re holding Nortel stock – you have a problem:

In a report titled “I would like to refill my Prozac prescription,” RBC Capital Markets analyst Mark Sue said Nortel’s “marginalized industry position,” combined with the bad economy, means the company’s outlook may deteriorate before stabilizing. Sue rates Nortel “Underperform” with a target price of $1.50, down from an earlier $2.

The cellular and Internet industry is fundamentally strong – far healthier, and apparently much better managed than the US automobile industry.  Cisco orders are down 9% in October but they’re not on the verge of bankruptcy like GM.

Wired and cellular service providers have their key assets in the consumer market – and are vulnerable to the consumer credit crunch and a slowdown in usage of telecommunications. The slowdown will move back up the supply chain but as long as the vendors control costs – it will be a drop in net revenues not a crash like GM or Lehman Brothers. I predict a slowdown for 6-18 months with the telecom market hitting the bottom in another year and staying there for a while. This time recovery will be faster – but I predict that sales for Cisco,  Nortel and Motorola will get worse before they get better.

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