Telecom Slump Gets Deeper Amid New Layoffs, Cutbacks
The beleaguered telecommunications industry suffered another blow Monday as wireless equipment manufacturer Ericsson announced 17,000 new layoffs and Lucent Technologies Inc., the world’s largest maker of telecom gear, said it would eliminate an additional 6,000 jobs--a rout that is beginning to rival the dot-com meltdown of the last two years.
Telecom stocks also were battered by the news that WorldCom Inc., the nation’s No. 2 long-distance company, cut its revenue forecast for the year by 5.4%. Investors slashed shares of WorldCom by one-third Monday, erasing $5.8 billion from the market value of MCI’s parent company.
The developments continued the latest streak of bad news that has swept through the telecommunications industry since companies began warning of weak quarterly earnings a few weeks ago. The grim signs suggest that a new round of layoffs and cutbacks is in the offing.
To the Wall Street analysts monitoring the industry, the current hardships among companies that offer phone services and the manufacturers that supply them threaten to surpass the dot-com bust in scope and scale. Already, the telecom industry has shed more than 403,000 workers since the beginning of 2001, which easily surpasses the approximately 145,000 dot-com jobs lost since December 1999, according to outplacement firm Challenger, Gray & Christmas.
And analysts offer little hope of near-term recovery because the telecom firms come at the end of the corporate food chain. They depend on orders from other businesses, which have been wary about investing in new communications systems since the economy began to slump in 2000.
“It has been a very disheartening day,” said John Gonsalves, a vice president with Adventis, a management consulting firm in Boston that focuses on the communications industry. “This is all driven by demand, and that is generated from the enterprise [business] sector. Jitters in the psychology cascade downhill. Enterprise spending drives service provider spending, which drives equipment provider revenue, so it’s all linked.”
Just as the rise of the Internet prompted massive investments in shaky start-ups that ultimately failed, the deregulation ushered in by the Telecommunications Act of 1996 spawned a new generation of firms that are now going out of business--and dragging the rest of the industry with them.
“The Telecom Act created a telecom bubble,” said Pat Comack, a telecom analyst at Guzman & Co. in Miami. “We’re seeing the ramifications of that right now.”
Though many industries are showing signs of recovery this year, the telecom sector tends to lag the overall economy, and it could sink further before hitting bottom.
Last week, firms including cell phone giant Nokia, Baby Bell SBC Communications Inc., equipment supplier Nortel Networks Corp., and local and long-distance service provider Qwest Communications International Inc. offered gloomy sales forecasts and said they would each cut hundreds or thousands of jobs.
Analysts liken the current telecom crisis to a perfect storm. The industry was already struggling under massive debt after spending at least $50 billion to cover the globe with fiber-optic communications networks. Technological advances increased the capacity of those networks far faster than demand from businesses and consumers materialized, driving prices into a death spiral that made the debt all the more burdensome.
“We are witnessing unprecedented events in telecom,” said Cary Robinson, senior research analyst with U.S. Bancorp Piper Jaffray in Minneapolis.
Ericsson, the world’s biggest manufacturer of equipment used to build cell phone networks, on Monday abandoned its projections to eke out a small profit this year and instead said 2002 would be its second straight year of losses. Chief Executive Kurt Hellstrom said the Stockholm-based firm will continue to suffer because wireless network operators recently decided to make additional cuts in their own investment plans.
As a result, Ericsson will lay off nearly 20% of its work force, wiping out about 17,000 jobs. The reductions will be made worldwide and will be concentrated among employees engaged in development activities.
About 7,000 of the cuts will be made by year’s end, with the balance coming in 2003. Ericsson’s American shares dropped 80 cents, or 23%, to close at $2.74 in Nasdaq trading Monday.
Across the Atlantic, U.S. telecom equipment maker Lucent said Monday it lost money for the eighth straight quarter despite a modest uptick in revenue. The Murray Hill, N.J.-based company has already trimmed its payroll from 123,000 in January 2001 to about 56,000 today. An additional 6,000 jobs are scheduled to be shed before its fiscal year ends Sept. 30, and Chief Executive Patricia Russo warned that the cuts could be even deeper. Shares of Lucent rose 20 cents, or 4.6%, to close at $4.49 on the New York Stock Exchange on Monday.
WorldCom shares plunged to their lowest level in almost a decade during Nasdaq trading Monday, the first day of trading since the Clinton, Miss., company lowered its sales forecasts for 2002.
The news affected the entire sector because WorldCom is considered the most admired long-distance company. WorldCom was the most active stock in U.S. markets Monday and had the fifth-busiest trading day ever for a U.S. stock. The shares ended the day at $4.01, down $1.97.
“Investors are wondering, ‘Is this the bottom? Is this where the uptick starts?’ ” Gonsalves said.
He doesn’t think so. Gonsalves said he expects the continuing shakeout to throw a handful of companies into Bankruptcy Court, joining legions of start-ups such as Global Crossing Ltd. The restructurings firms are promising to avoid that fate will inevitably lead to further layoffs, he said.
Monday night, Williams Communications Group announced it has filed for Chapter 11 bankruptcy protection. The move is part of the company’s plan to restructure $5.9 billion in debt amassed in constructing a 33,000-mile fiber-optic network transmitting video, voice and data signals. Williams shares have fallen 96% over the last year to trade at 17 cents a share in over-the-counter trading.
