Telecom: At Last, the Depression Is Lifting

-- After two years of carnage, the telecom sector is regaining its financial equilibrium

-- The Bell companies will complete reentry into long-distance markets by yearend

Bits of good news keep popping up in a very surprising place: the long-suffering telecom sector. In mid-December, Ciena Corp. (CIEN ), one of the last surviving upstarts in the devastated optical-network arena, actually exceeded Wall Street's revenue expectations for its fourth quarter, and predicted sales would rise 10% in the first quarter of 2003.

Yes, telecom's historic two-year-old depression appears to be coming to a close. Businesses such as Nextel Communications (NXTL ), Nokia's (NOK ) handset division, and now Ciena are reporting better results. Prices for airtime on mobile wireless networks rose 0.5% in September and 1.2% in October, the first increases since the government started keeping records in 1998. New products--from cell phones with color screens to high-speed wireless local-area networks--are catching on. And a rising economy may bring a further lift.

Consider U.S. telecom-equipment revenues. They fell by 25% in 2002, to $166.4 billion, but should merely flatten this year to $165.8 billion, says telecom economist James Glen of Inc. Telecom-services revenue, which rose only 0.07% in 2002, to $393 billion, should rise 4.5% in 2003, to $411 billion. It's no boom. But it has investors feeling cheery. The Standard & Poor's Telecom Index, which lagged the broad market badly for the last two years, is up 39% since October. "I think 2003 will be a turnaround year," Glen says.

Most of the growth will occur in wireless. With U.S. market penetration at 47% of the population, wireless subscriptions are growing 13% a year. That's just half the pace of a few years ago. But prices are stabilizing and the new phones hold promise, so revenue growth has remained above 20%, and capital spending as a percentage of revenue has improved from 44% to 24%, according to Merrill Lynch & Co. It's likely some carriers will start to turn profitable in 2003 for the first time. "I think that (mobile) wireless data will be successful, and we'll start to see the benefits this year," says Philippe Donche-Gay, CEO of telecom and media networks at Cap Gemini Ernst & Young.

Look for telecom mergers to heat up this year. Companies are slowly getting their finances in order, which makes it easier for them to put a value on one another. And regulations that kept the Bells out of long distance are fading, making deals easier.

Possible takeover targets include T-Mobile International, formerly known as VoiceStream. The company was acquired by Deutsche Telekom (DT ) for $26 billion in 2001, and now the big German carrier must raise cash and cut debt. The two most likely buyers are Cingular Wireless and AT&T Wireless (AWE ), because they use similar technology. Another candidate for a merger is BellSouth Corp. (BLS ) Already released from its long- distance restrictions, it could break out of its territory by combining with a national long-distance player such as AT&T. (T )

By the end of the year, expect to see a more stable telecom industry with fewer players. It's far from the telecom fiesta that was envisioned a few years ago. But it's a vast improvement over the wreck of 2001 and 2002.

By Steve Rosenbush in New York, with Roger O. Crockett in Chicago and Charles Haddad in Atlanta

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