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 Tech
2001 Bad; Tech 2002 Any Better?
By Scott B. MacDonald and Joe Moroney
It would be a vast understatement to say that 2001 was a difficult year for the tech sector. Companies across the board saw revenues plunge and capital expenditures decline in the telecommunications sector. The industry was faced with concerns over overcapacity, too much debt, questions of vendor financing (Lucent), and questionable business models (Xerox). Many of the weaker tech companies filed for bankruptcy, while the larger firms opted for downsizing personnel, selling off core assets, and seeking to get additional liquidity when and where they could. All of this turmoil was reflected in drastic falls in stock prices from late in 2000 to lows in 2001 as investor confidence fled and ratings fell. Northern Telecom (NT) went from a high of around $82 a share on the New York Stock Exchange to around $7 a share in December 2001. Other highfliers, such as Lucent, Motorola, Cisco and Oracle, all saw their stock values take a major hit.
What is next for the tech sector? The outlook for the next 6 months is difficult. On a global basis, telecom capital expenditure is expected to decline further, possibly as much as 20% for all of 2002. This is based on a round of announcements by U.S. telecom companies. Qwest, SBC, BellSouth and Sprint are set to reduce costs further, including deeper cuts in capital expenditure. This situation is not helped by the fact that long distance fiber remains heavily oversupplied in both North America and Europe. A reflection of this came in August 2001, when Corning (GLW), announced that slowdown in orders across fiber product lines was severe and unprecedented. Corning also indicated it will idle its optical fiber manufacturing plants and that fourth quarter fiber sales volumes will be less than half of 2000 levels.
Consequently, we see the first half of 2002 as an extension of the major trends evident in the second half of 2001 — ongoing corporate restructurings, which entails reducing fixed-capital expenditures, downsizing personnel, selling non-core assets, and outsourcing of services. Companies such as Marconi (MONI) will be hard-pressed to survive (we regard this UK company as a candidate for takeover). There will also be some level of consolidation. Corning has taken advantage of this downturn to expand, having acquired optical components makers from Pirelli and Cisco and NetOptix Corp. The ability of companies to access capital markets and bank lines will be even more critical than before, especially as banks seek to securitize their loans. Equity values will remain low and volatile.
In December we saw Motorola (MOT) announce the cut of an additional 9,400 jobs over the next 12 months. At the same time, MOT reaffirmed Q4 earnings (which are a small profit), but provided guidance that it expects a loss for Q1 2002. The company indicated that expected sales from operations will fall by about 5-10% from 2001 levels, due to cutbacks in spending on telecom infrastructure equipment in the wireless, broadband and wireless markets. These latest cuts will bring the total number of positions cut at MOT over a two year period to 42,900. This is more than 28% of the total workforce. MOT is hardly alone. We expect to see Lucent and NorTel’s equity prices be highly volatile in the months ahead.
What will make the difference in the second half of 2002 is that the U.S. economy will gradually begin to recover. Demand for tech equipment will slowly begin to pick up, and some of the current overcapacity in the industry will be reduced. Although this does not translate into a quick recovery, it does mean that tech survivors will be well-positioned for a stronger paced recovery in 2003. For the tech sector the trough is in Q4 2001 and Q1 2002, with some degree of stabilization in Q2 and Q3 and recovery in Q4. 2001 was a bad year for tech. 2002 will be marginally better. The saving grace in all of this is that the need for what tech offers -- greater efficiency in the market, office and home -- is not going away. By 2003 companies and peoples will hopefully have the money to buy what is offered in far greater demand.
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Editor: Dr. Scott B. MacDonald, Sr. Consultant
Deputy Editor: Dr. Jonathan Lemco, Director and Sr. Consultant
Associate Editors: Robert Windorf, Darin Feldman
Publisher: Keith W. Rabin, President
Web Design: Michael Feldman, Sr. Consultant
Contributing Writers to this Edition: Scott B. MacDonald, Keith W. Rabin, Uwe Bott, Jonathan Lemco, Jim Johnson, Andrew Novo, Joe Moroney, Russell Smith, and Jon Hartzell
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