Tech Vendors Hope 2002 is Better

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The fourth-quarter and full-year earnings that cable-equipment vendors reported over the past few weeks have provided a closer view of the financial carnage that steadily worsened throughout 2001.

The bad times were largely due to recession-spending cutbacks, combined with AT&T Broadband's virtual shutdown of cap-ex spending.

Motorola Inc.'s broadband division was one of the hardest hit, with fourth-quarter sales slumping to $580 million from $1.05 billion in the year-earlier period. Year over year, the unit's revenues dwindled from $3.4 billion in 2000 to $2.85 billion.

Scientific-Atlanta Inc. also suffered. The company reported second-quarter sales of $418 million, down from $631 million in the same quarter in the previous year.

Harmonic Inc. and Amphenol Corp. also experienced significant declines in revenue. Harmonic's full-year revenue dropped from $263 million in 2000 to $204 million, and Amphenol reported a drop from $369 million to $260 million, year over year.

Among traditional component manufacturers, only C-COR.net Corp. managed to eke out any gain. The company generated $67 million in revenue in its second quarter, versus $66 million in the comparable period in 2000 and up from $52 million in the first quarter.

Concurrent Computer Corp.'s video-on-demand division also reported a gain in year-over-year quarterly revenues, from $1.8 million to $12.4 million. Those numbers reflect VOD rollouts by Time Warner Cable and others in 2001.

REASONS TO BE CHEERFUL?

Stung by the severe drop in cable operator spending in 2001, some manufacturers are gun shy about promising too much to Wall Street, like S-A's chairman and CEO Jim McDonald, who steadfastly declined to give any estimates to analysts what 2002 would bring.

Still, many executives believe 2002 results will be better than 2001 for several reasons.

First, the pending $72 billion merger with Comcast Corp. has cleared up AT&T Broadband's ownership picture. The MSO even plans a slight increase in cap-ex spending to complete rebuilds in Boston, Chicago and San Francisco prior to its purchase by Comcast.

Second, vendors expect operators to continue investing in plant to deliver VOD, interactive and IP services in an effort to stay ahead of competitors.

Finally, vendors remain hopeful that the economy will snap out of the recession by the second half of 2002, leading to an increase in spending.

"It's going to be a steady progression," said Mike Horton, senior vice president, marketing and communications for Arris Group Inc. "The reality is cap-ex decisions were made in October and November for the first half of the year, so nobody is going to turn that around."

AT&T Broadband will be among the operators increasing its capital outlays after dramatically scaling back expenditures in mid-2001. "The forecasts this year show a nice return," Horton said. "They will be at least back where they were at the end of 2000. Because they dropped so low in 2001, this means a nice return."

"We haven't seen any orders, but our people are more engaged than they've been in a long time," said Anthony Ley, chairman and CEO of Harmonic Inc., about his firm's relationship with AT&T.

C-COR chairman and CEO Dave Woodle said his company has begun receiving small orders from AT&T Broadband. "They moved out to a restart, but not in a big way."

DATA SPENDING TO RISE

AT&T Broadband represents about 5 percent of C-COR's business today, but that could jump to 10 percent "if they plunge back in," Woodle said. "They've been a 10 percent customer before, and we see no reason why that wouldn't occur again."

Overall, vendors are looking for rays of sunshine in a gloomy economy. "We see that market in North America moving a little sideways over the next couple of quarters," Ed Breen, president and CEO of Motorola, told analysts. "We think video on demand, specifically along with some other services, starts to really roll out across the markets. We will start to see an additional uptake in that. But that will take a good part of 2002."

Concurrent expects revenue for its VOD division to be in the $12 million to $14 million range in each of the first two quarters of 2002, at or slightly above revenue figures for the final quarter of calendar year 2001.

Arris's Horton estimates MSOs will gradually increase data spending throughout 2002. He predicts that overall sales for cable-modem-termination systems will rise from $80 million in the first quarter to $100 million in the second, $120 million in the third and $140 to $150 million for the fourth quarter.

Time Warner has talked about rolling out Internet-protocol telephony in 2002, but other MSOs remain in the trial stage. Arris is working with Comcast in IP trials in Detroit and Philadelphia. "Comcast is serious," Horton said. "They recognize that it is bundled service that will generate the revenue."

Harmonic expects first quarter 2002 to look a lot like that latter part of 2001, although Ley anticipates the full year to turn out better than 2001. "Our fiber division was hit very hard by key customers who stop buying for a bit," Ley said.

Cablevision Systems Corp. is using Harmonic's Narrowcast Service Gateway for its VOD rollout. The NSG is part of Harmonic's Broadband Access Network division, which also offers a Gigabit Ethernet product to operators. "We're now seeing initial orders," Ley said, and "we believe we'll see orders in the second half of the year for fiber-to-the-business."

FIBER UPTICK?

Ley believes operator upgrades "will go on for a very long time" to compete with satellite. "Cable can only succeed with interactive services. The future of TV is content on demand."

C-COR has managed to escape much of the severe carnage. Woodle expects 2002 revenue to be up 40 percent from the previous year.

"At the end of the year, we started to get orders once budgets were approved, where people wanted [first-quarter] shipments," he said. "We have better visibility than we had a year ago."

But there weren't any numbers to view from S-A's McDonald. He refused to play the prediction game, but did tell analysts, "We remain optimistic about our transmission business."

McDonald also sounded the theme that MSO upgrades will never be completely done, listing new IP, interactive-TV and phone products. "The buildout is never complete," he said.

"Twenty-five percent of the networks still need to go to 750 megahertz," he said, pointing to the estimated $18 billion in MSO cap-ex spent in 2001. Two-thirds of that money went to infrastructure.

Amphenol chairman Martin Loeffler told analysts that his company experienced "significant declines in sales of coaxial cable" in the fourth quarter. "Our near-term outlook suggests a continuation of sales at or near current levels and persistent pressure on pricing."

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