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US telcos, vendors look poised to rebound

After a nerve-wracking end to 2008 and a tepid start in 2009, most telecommunications companies seemed to find their financial footing in the late spring and early summer. Many reported higher sales compared with the first quarter and profits mostly improved.

Yet industry executives did not see clear evidence of an end to the U.S. recession despite some pockets of strength. Business failures and higher unemployment - to which telecom companies contributed via steep job reductions - have left little room for rising demand, they say.

"We haven't seen anything dramatically different in the economy," said Tom Richards, chief operating officer of Qwest Communications International Inc., in an interview.

Industry executives are more encouraged, however, that demand will start to pick up by the end of the year and into 2010. And they suggest prospects are good for sustained income growth once the U.S. finally recovers.

How so? The recession, arguably the nation's most severe since the 1930s, has forced an already-lean telecom industry to cut costs and become even more efficient. As sales rise, margins should expand nicely, too.

"We think we are well-positioned for when the economy turns around, when employment starts to turn around," said John Killian, chief financial officer of Verizon Communications Inc.

Making the call
Phone carriers such as AT&T Inc. and Verizon have weathered the recession better than most U.S. companies. They've maintained stable profits and avoided sharp sales declines.

It should come as no surprise. Internet access and phone service, especially wireless, are must-haves for consumers. Demand has been weakest among small and mid-sized businesses. Most of which have cut back on service and some have gone out of business altogether.

Carriers without their own wireless networks, such as Qwest, have less of a cushion. Yet they've also maintained or increased profits by cutting costs almost as fast as sales have declined.

In the second quarter, for example, Qwest reduced operating expenses by 7.8% compared with a year earlier, mostly offsetting an 8.6% decline in revenue.

Phone companies say they have plenty of room to further cut costs, partly by making their networks more efficient, but also with the ax of job reductions.

To cite two examples: AT&T has eliminated 14,000 jobs in 2009, mainly by not filling positions that open up, while Verizon plans to shrink its workforce by an additional 8,000 jobs in the next six months.

The industry's job reductions, however, create a paradox. They boost the potential for higher profits in the future, but contribute to a weak economy now. Until companies begin to hire, the economy is likely to recover very slowly, pushing back the day when growth in profits accelerates.

With the scare from last fall's financial panic fresh in their minds, industry executives make no apologies.

"We're planning for the rest of the year appropriately and planning it cautiously," said AT&T Chief Financial Officer Richard Lindner, who does not expect a recovery in 2009.

Supply squeeze easing
The networkers that supply phone companies with their equipment face a somewhat different situation. They have no direct exposure to consumers and are dependent on what big phone companies do.

Virtually every carrier plans to spend significantly less this year than they did last year. Indeed, capital spending tapered off late last year and remained weak through the first two quarters of 2009.

There's a silver lining, though. Phone carriers plan to spend the greater portion of their capital budgets in the next two quarters.

Tellabs Inc. Chief Executive Robert Pullen, for example, said orders in the second quarter rose to their highest point in more than a year. His firm is a longtime supplier for AT&T and Verizon.

"I believe it's probably too early right now to predict a recovery in the economy, but we are showing some stabilization," said Pullen, who also called underlying business trends "encouraging."

His observations were echoed by Greg Brown, co-chief executive of Motorola Inc. After worrying for the past nine months about how to cut spending, companies are starting to ask again about new products that could improve their business, Brown said.

Alcatel-Lucent Chief Executive Ben Vervaayan, for his part, said he believes a recovery is slowly starting to take hold.

The evidence? Sales in the U.S., still the world's economic engine, only fell 12% in the second quarter compared with a 28% plunge in the first quarter. Another sign: Alcatel-Lucent doesn't have to offer as many discounts to entice clients to buy.

"You can see the U.S. is coming back," he said."I think you will see that trend going into the second half of the year."

Investors seem to think so, too. Shares of every major network vendor have risen in 2009, with the notable exception of Nokia Corp., whose stock is down 14%.

On the upside, Motorola Inc. has jumped 62% in value, Ericsson 24% and Qualcomm Inc. 29%.

Most phone stocks, meanwhile, have either turned positive since the beginning of 2009, or they've sharply cut their losses.

AT&T, for instance, had lost as much as one-quarter of its value earlier this year. The stock was down less than 8% at the end of July.

Источник: Total Telecom

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