Area telecom firms bet on future growth

Amid bankruptcies and glum economic times in the telecommunications industry, quite a few local telecom companies are riding out the storm while quietly readying themselves for the industry’s next revival.

Survivors include Network Photonics Inc., SpectraLink Corp., Cielo Communications Inc., Intrado and Carrier Access Corp., to name just a few of the dozens of telecom-related companies operating in Boulder and Broomfield counties that stand intact today, still playing in the game that has sunk so many.

?Most companies that have revenues today that have survived to this point are going to continue to survive,? said John Hansen, president and chief executive officer of the Colorado Institute of Technology (CIT). ?The future is bright for those that survive the next 12 to 18 months. They will enjoy the next boom in telecom.?

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Analysts disagree as to when the next telecom boom is due, with guesses ranging anywhere from one to five years out. In the meantime, more blood needs to be shed before any resurgence occurs, they say. Nationwide, telecommunications companies have announced more than 135,000 job cuts through May of this year, according to Challenger Gray & Christmas, a firm that tracks employment trends.

Even the telecom survivors in Colorado have left in their wake job layoffs and worker displacement as the industry readjusted to economic reality.

At Network Photonics, 25 percent of the company has been let go, bringing the headcount down to 105. Carrier Access (Nasdaq: CACS) has about 350 employees, after peaking with more than 500 a couple of years ago. Likewise, Cielo has more than halved its payroll from 100-plus people to about 42 today. Layoffs at larger players like Qwest Communications International Inc. (NYSE: Q) and Level 3 Communications Inc. (Nasdaq: LVLT) reach into the thousands.

?All these guys are suffering the big investment hangover from the past few years,? said Steve Georgis, president and chief executive of Network Photonics in Boulder.

In a recent Gartner Dataquest report on the state of the telecommunications industry, the research firm assigned much of the blame to an excessive reliance on the projected hypergrowth of the Internet. The promises of broadband, high-speed Web access also were overblown, Hansen said.

?Three years ago, you would have thought that broadband was going to cure cancer, the way it was over-hyped,? he said.

As the economy soured and spending on and investment in telecom equipment and services plummeted, companies were left with expensive infrastructures, networks and equipment that weren’t generating the revenues they were projected to.

Already, at least 49 high-profile telecom businesses have either gone bankrupt or ceased operations since the beginning of 2000, according to Miller & Van Eaton, a Washington, D.C.-based law firm specializing in the telecommunications and cable industries. The list includes one-time heavy-hitters such as Williams Communications Group, McLeod USA Inc., Global Crossing Ltd. and Rhythms NetConnections Inc.

?When so many business plans were being based on the Internet doubling in traffic every three months, it became the last great land grab,? Hansen said. When those projections weren’t realized, debt loads skyrocketed, leaving big telecom firms like Qwest and Level 3 with vast global fiber-optic networks, but more than $20 billion and $6 billion of red ink, respectively. Questions as to their long-term viability were raised.

?It’s a little hard to see how Level 3 is going to make enough money to pay back all of its debts,? said Maribel Dolinov, a senior telecom analyst with Forrester Research Inc. in Massachusetts. With the glut in long-haul backbone fiber-optic capacity, much of it laid by Level 3 over the last few years, Donilov is ?doubtful they’ll make it.?

Paul Lonnegren, a spokesman for Level 3, countered that the company is ?financially sound,? with $1.75 billion in available cash. Based on conservative estimates of a pickup in the telecom industry, Level 3 is projecting that it will reach free cash flow, break-even status by 2004, which is the point where the company generates more cash than it spends. It is not necessarily a measure of profitability, however.

?Level 3 believes it will be one of the survivors in the industry and in a unique position to benefit from what we see today (in the market),? Lonnegren said.

Meanwhile, Lucent Technologies (NYSE: LU) recently announced that its third-quarter sales would decline up to 15 percent from second-quarter levels while Level 3 warned that its second-quarter losses would amount to 70 cents a share. Telephone giant WorldCom is facing class-action lawsuits over stock price manipulation as the price of its shares falls to new lows.

?We have too many suppliers and not enough demand. That has to do with the overall economic health of the country,? Dolinov said. ?And that recovery won’t happen fast enough to keep a lot of the telecom players happy. There’s still a period of consolidation and fallout that need to happen.?

But while analysts acknowledge that more telecom companies will die as a result of the overexuberance of the late 1990s, they say the industry as a whole will prosper over time. Data and voice communication is integral to business and the demand for more bandwidth and faster telephony and computer networking is an irreversible trend.

Gartner predicts that the total telecom market in the North America will rise from $457 billion in 2001 to $651 billion in 2005. Worldwide, the market will grow from $1.4 trillion last year to nearly $2 trillion in 2005. With that kind of money-making potential at hand, the companies that can hold out until the industry achieves stability again will stand to win big.

?The industry will most certainly will recover from this, but it will be more normal and based on fundamentals like getting making a profit and a return on investment,? said Network Photonics’ Georgis, who sees a comeback occurring late in 2003.

Dolinov said a telecom company’s survival will depend a great deal on whether it can develop its own niche and work on something the industry needs with laserlike focus. ?Can you carve out something and be the best at it?? she asked.

With $13.9 million in private financing and almost zero debt, 3-year-old Network Photonics says its advanced optical switching technology is being designed for the next generation telephony and networking equipment that is sold by companies like Nortel Networks and Lucent. The company’s specialty, Georgis said, is responding to a market that is demanding ever smaller, cheaper and faster telecom systems.

?Companies that are saddled with old technology are suffering the most,? he said.

Broomfield-based Cielo, which makes fiber-optic transceivers and transponders, is focusing its efforts on easing the traffic bottlenecks in the shorter-range segments of telecommunications networks, like office parks and cities. It deliberately stayed out of the long-haul portion of the fiber-optic network, which was overbuilt during the telecom frenzy, said Vice President of Sales and Marketing Bob Mayer.

SpectraLink (Nasdaq: SLNK) buffered itself from the telecom downturn by targeting customers that weren’t ?caught in the Internet bubble,? according to Ben Guderian, the company’s director of marketing. Its customer list includes companies in the retail, health care and grocery industries. The Boulder-based, publicly held company adds wireless capabilities to a company’s corporate telephone system. SpectraLink, which has been around for nearly a decade and employs a little more than 300 people, has not had to lay off anyone recently.

Diversity and growth potential have been the watchwords for Carrier Access of Boulder. The company’s equipment, installed at cell sites and central offices, delivers voice and data services throughout a telecom network.

Carrier Access, which was founded in 1992, at first targeted its products at the competitive local exchange carriers like Covad Communications Co. or Colorado-based Rhythms. When it noticed that market struggling, Carrier Access broadened its target market to include cable companies, wireless carriers and the Baby Bells, like Verizon and Qwest.

?Carrier Access is looking for the areas of highest potential opportunity within the telecommunications industry ? and right now that’s wireless, cable and the incumbents (Baby Bells),? said Vice President of Marketing Mark Nixon, who said Carrier Access has $33 million in cash and cash equivalents and no long-term debt.

Boulder-based Intrado (Nasdaq: TRDO) was given a big boost from the government. Intrado manages the 911 emergency data and infrastructure for telecom providers and wireless carriers, including the four Baby Bells, routing calls to nearest emergency operator. The government has mandated that carriers have an effective emergency communications system in place. Intrado filled that niche and saw its revenues more than double to $78 million in 2001 from 1999’s levels.

?Part of the growth has come from satisfying legislative mandates and the pressure on the wireless carriers to turn their emergency services up,? said Michael Dingman, Intrado’s chief financial officer. ?Our business has not been subject to the scrutiny and budget constraints of companies that are in commercial offerings. We don’t sell into a client’s capital budget, but more into their operating budget.?

While none of these local companies is guaranteed survival through the rest of the telecom shakeout, however long it lasts, CIT’s Hansen is confident that their location in Colorado will at least give them an advantage.

?Telecom in Colorado will recover because of the sheer amount of investment here,? he said. ?Denver is a major location between the East and West coasts. There is a tremendous amount of fiber going through Denver.?Contact John Aguilar at (303) 440-4950 or e-mail jaguilar@bcbr.com.