Mr. Kelleher: I wear a lot of hats at my company, but I remain a Senior Analyst covering what I call the communications equipment universe, which we'll focus on today. As a sidebar, I also cover five communications semiconductor companies: Qualcomm (QCOM), Texas Instruments (TXN), Broadcom (BRCM), Analog Devices (ADI), and then a component-semiconductor hybrid in Vishay Intertechnology (VSH). I also have another window on the group because I cover the EMS (electronic manufacturing services) segment. Now that Solectron has been absorbed by Flextronics (FLEX), I cover the four leading North American EMS companies and that's Flextronics, Jabil (JBL), Celestica (CLS), and Sanmina-SCI (SANM). My communications equipment universe, as you know, has also been cut down in numbers recently since Avaya became a private company. Alcatel and Lucent combined, which lessened my universe. Those two are out and then one was added, Ericsson (ERIC), this past summer. In the carrier area, I've got Adtran (ADTN), Alcatel-Lucent (ALU), Ciena (CIEN), Ericsson, Motorola (MOT), Nokia (NOK), Nortel (NT), Sycamore Networks (SCMR) and Tellabs (TLAB); in components I have ADC Telecom (ADCT), Corning (GLW) and JDS Uniphase (JDSU); and in the enterprise area, Cisco (CSCO), Extreme Networks (EXTR), Foundry Networks (FDRY), Juniper Networks (JNPR) and Polycom (PLCM). Juniper, as we know, is a straddling company; it's mainly carrier-directed, but because it's a data networking or routing company I keep it in the enterprise group. So I really do cover the waterfront in this area.
TWST: As we look back over the first three quarters of this year, how did
business turn out relative to your earlier expectations?
Mr. Kelleher: I would say business was a bit better than I expected,
particularly in the enterprise space. I haven't necessarily made every change I
want to in my earnings expectations for some of these companies, but in general
I'm maintaining the EPS growth rate. For many of the enterprise companies it's
still fairly robust, particularly at Foundry, Juniper, Cisco and Polycom.
On the other hand, in the carrier space, many of the issues that are harming
Ericsson right now were more visible to the North American-centric players
earlier on, and I would say that Alcatel-Lucent's wireless business is North
American-centric. There were three downward guidance revisions from Pat Russo
and the Alcatel-Lucent team over the course of the year, so you could see that
coming.
Motorola had its issues in handsets. That business kind of blew up for them, but
at the same time that obscured the struggles they were having in the network
business. Motorola's carrier networks business has been combined so many times
with other business, it's a little bit hard to determine where their wireless
carrier network business stands, but generally we have modeled it much lower.
Nokia's carrier business was also obscured by the merger into the Nokia-Siemens
venture, in which Siemens' (SI) legal problems continue to play out. Beyond the
bribery scandal, we model that the Siemens part of the JV has really struggled.
Nortel has gone through some changes over the course of the year; they were
practically at zero margin.
Finally, Tellabs has gone from struggling to a truly troubled company because
their cash cow business of wireless backhaul, which was keeping the 5500 series
alive, is declining rapidly. So generally on the components and the enterprise
side, I've just seen better results over the course of the year than in carrier.
The drumbeat of concern was building strongly throughout the carrier-centric
companies all through the year.
Tickers included in this excerpt: ALU, CIEN, CSCO, ERIC, GLW, JNPR, MOT, NOK, NT, QCOM, TLAB, TXN
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