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Four analysts and top management from twenty-two sector firms examine the comunications services sector in this special 98-page Comunications Services issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info470.htm.

TWST: How do you explain the fact that demand for bandwidth was overestimated to such an extent?

Mr. Mobley: Internet usage was one of the big drivers of demand for bandwidth, along with corporations buying private lines, additional lines or T 1 lines. And because the economy has been as weak as it has, demands on the corporate side certainly dropped off, and, of course, Internet usage has matured. At one point, bandwidth demand was growing well over 100% year over year, and recent estimates have put demand for bandwidth growing at only 25% to 30% year over year.

TWST: Gary, what's it going to take to get investors to come back the communications equipment stocks?

Mr. Mobley: I think you can approach it from two different angles. You could have more competition coming on board, with more legislation against the incumbent that will drive new business models or local exchange carriers and competing long-haul carriers. That's really what drove cap ex from the 1996 Telecom Act and beyond. But at the same time, we also need to have people willing to fund these business models, and that's probably not going to be a likely scenario. The incumbent carriers are playing the card that if they have less competition, then they are going to be willing to spend more on new projects because their return on invested capital will be higher if they don't have to share their capital investments with other competing exchange carriers. So I think that the most likely scenario will be that, once we rationalize the industry, consolidate the industry and absorb the capacity out there, return on invested capital will increase for the incumbent carriers. Then we'll resume a normal growth pattern for carrier cap ex, which won't be the numbers that we saw at the peak at the end of 1999 and in early 2000, but will be more in line with the carriers' revenue growth rates — probably somewhere in the range of 6%-9%.

TWST: Gary, where should an investor start who is looking to go back into the communication equipment stocks begin?

Mr. Mobley: That's a fair question. There are many, many companies that I follow that address both the communication service providers as well as the enterprise segment of the market, enterprises being large corporations, government agencies and educational systems. Also, on the wireless and the wireless enhanced services front, I like Comverse (Nasdaq:CMVT). This is a stock that hasn’t had the run that many of the optical networking names have had since late September, but is leveraged to increase traffic of wireless and wireless enhanced services such as voice messaging and, in the future, unified messaging.

TWST: Gary, what’s the bullish case, and what’s the bearish case for the communications equipment stocks?

Mr. Mobley: I think the bullish case is the fact that everybody is so bearish on the group. In other words, expectations are low. Everybody knows that communications service providers in the US are going to decrease their capital spending budgets by 20% next year. People are focused on that year-over-year decline, but are not necessarily focusing on the inflection point. What I mean by that is when we get into the first quarter of 2002, we will have a very bad year-over-year comparison to last year. In Q1 of 2001, carriers were at the peak of their entire budgets for 2001. So we’ll probably get a very sharp decrease in Q1 of 2002 versus Q1 of 2001, and that year-over-year decrease will continue to get smaller and smaller as 2002 progresses. And by the time we get to the third quarter of 2002, we could perhaps see a sequential flattening, or maybe even a sequential improvement, in capital spending. So the trajectory heading into 2003 could be a positive one.

This special issue includes:

1) Communications Services & Equipment - In an in-depth (4,500 words) Analyst Interview, Rick Franklin & Gary Mobley, both Senior Industry Analysts at Bank of America Capital Management, examine the outlook for the sector and share specific stock recommendations.

2) Emerging Communications - In an in-depth (4,100 words) Analyst Interview, Vik Grover, Managing Director at Kaufman Bros., L.P., examines the outlook for the sector and shares specific stock recommendations.

3) CLEC & Incumbents - In an in-depth (4,300 words) Analyst Interview, Thomas Morabito, First Vice President/Senior Telecom Analyst at McDonald Investments, Inc., examines the outlook for the sector and shares specific stock recommendations.

4) CEO interviews (average 2,500 words). Top management of twenty-two sector firms examine the outlook for their firm and the sector.