The WorldCom Inc. accounting crisis will have a painful and far-reaching effect on equipment vendors, perhaps putting some start-ups out of business, analysts say.
WorldCom was one of the more bullish carriers when it came to purchasing next-generation networking gear, even in these times of sharply curtailed capital expenditures. Now that WorldCom teeters on the brink of bankruptcy and dissolution, many new and established vendors will lose a large and financially significant customer.
“This is a huge problem for everybody,” says Mark Seery, an analyst at RHK in South San Francisco. “It’s going to cause a lot of pain.”
WorldCom this week disclosed that it overstated earnings by $4 billion in an accounting technique that did not meet generally accepted practices. The carrier improperly booked expenses as capital expenditures in what could be one of the largest corporate accounting frauds in history.
Analysts say bankruptcy is inevitable — if WorldCom survives this scandal. In any event, a large customer for many equipment vendors is out of commission for the foreseeable future.
WorldCom accounted for 10 percent or more of Juniper Networks’ quarterly revenue. WorldCom was expected to purchase Juniper’s latest high-end core router, the recently announced T640, and was perhaps a catalyst for its development, Seery says.
Juniper can kiss that business goodbye for now.
“WorldCom was one of the carriers in the short-term opportunity” for terabit-scale routers, Seery says. “WorldCom’s put a freeze on all purchase orders. It will be at least a couple of months before they are unfrozen, and that’s an optimistic projection.”
Juniper Networks said that it has over 500 service provider and carrier customers, in 45 countries worldwide and across different markets – core, edge, cable and mobile. “This diversity has served us well up to this point, and we expect it to do so going forward,” says a Juniper spokesperson.
Juniper says sales to WorldCom is expected to represent less than $7 million of the company’s second quarter results, which is about 6 percent of Juniper’s expected revenue of $111 million. Juniper will report its second quarter results on July 11.
Vivace Networks is an IP multiservice switch start-up that recently announced its products and a Tier 1 carrier win. Though Vivace did not identify the carrier, sources say it was WorldCom.
Vivace did not comment on the impact of WorldCom’s crisis by press time.
Allegro Networks is another start-up developing “multi-routers” for the edge of carrier networks. The company was working with WorldCom on some of the carrier’s requirements for edge routing.
“We’re still working with WorldCom,” an Allegro spokesman claims. “(The scandal) doesn’t affect our relationship at all. If WorldCom failed, those UUNET assets won’t go away. It just delays things more.”
There are others. Virtually all start-ups and incumbents that say they’re in carrier trials or responding to RFPs for multiservice switches, core and edge IP routers, softswitches and media gateways, indirectly refer to WorldCom, among others.
For incumbents, the fallout from WorldCom will hit their earnings if it affects the broader capital markets and already depressed carrier spending. Juniper, however, was the only major vendor for which WorldCom accounted for 10 percent or more of revenue.
For start-ups like Vivace and Allegro, it could mean their survival.
“WorldCom is one of the larger carriers still looking at new vendors,” says Michael Ladam, an analyst at Stratecast Partners. “Unless WorldCom somehow straightens this mess out it will be bad for the new players in general.”
Some of those new players will be hit harder than others, Ladam asserts. Startups developing next-generation multi-service switches that support legacy technologies still in vogue with large incumbent carriers – like ATM and frame relay – in addition to IP and MPLS, may be spared because they’re filling a gap that traditional vendors are ignoring, he says.
Vivace falls into that category, according to Ladam.
Others, like those developing pure Resilient Packet Ring switching and transport systems that do not support legacy SONET infrastructures, are in greater peril, he says.
But if WorldCom dies, its assets will be acquired by another carrier, Ladam believes.
“I don’t think WorldCom is just going to go away,” he says. “There’s just too big a network out there. But whoever takes control of WorldCom it will be looking to change its financial models,” and may not be as bullish on spending for newer, next-generation network technologies.
WorldCom is online at http://www.worldcom.com.