Breaking the Bottleneck: A Wireline Weekly

the telecom equipment market, including our view on the near and longer-term out-look
for individual companies under our coverage universe. During the last two
quarters access vendors’ results have been significantly impacted by exposure to
the emerging carrier market (particularly CLECs and ISPs) and, more recently, a
dramatic inventory build in customer premise equipment (CPE), primarily xDSL and
cable modems as well as enterprise access platforms, following severe component
constraints earlier in 2000 that limited vendors’ ability to satisfy carrier demand. For
example, cable modem shipments significantly exceeded subscriber growth in mid-2000,
with the ratio of shipments to net subscriber additions topping 2.5x in Q3:00.
More dramatically, the multiple of xDSL modem shipments to subscriber additions
averaged 2.9x for the four quarters preceding Q4:00. This more aggressive ship-ment
to subscriber addition ratio in the DSL market suggests that it could take
longer for the inventory issue to be resolved in this segment relative to the cable
modem sector. With all major components now in ample supply we believe that
carriers are now comfortable carrying less inventory than they had at this time last
year. For these reasons we believe it will take at least 6-12 months for the inven-tory
overhang to be resolved, impacting equipment vendors ability to record a sig-nificant
improvement in their results over the next few quarters. Finally, the capital
markets environment for emerging carriers remains closed and has resulted in current 25% decrease in forecast capital spending by the CLECs in 2001. This
suggests equipment suppliers leveraged to this market will need to expand their
product offerings and marketing strategies to target higher growth segments, such
as more established carriers, wireless, and international.
ADC Telecom (ADCT, $9.94, Cap $8.0B, Buy)
We believe that visibility at ADC Telecom remains low across most of its major
business segments. As a result, we estimate the company’s actual results could be
below our top and bottom line forecasts for both FQ2:01 ($825 million and $0.09)
and the full fiscal year ($3.65 billion, reflecting 11% growth, and $0.51). Longer
term, however, we believe that ADC will be one of the first access vendors to re-cover
due to the company’s strong product portfolio, customer relationships, and
leading market share position. One of the major issues impacting near-term visibil-ity
is a buildup in channel inventories. We estimate ADC’s emerging fiber-optic
connectivity/component business (16% of total FQ1:01 sales and 31% of
Broadband Connectivity revenue) could post weak results over the next several
quarters due to the large increases in inventory levels that have occurred among
telecom equipment companies recently. Moreover, almost every optical component
vendor has pre-announced lower CQ1:01 and full year results, including Avanex,
Bookham Corning, JDS Uniphase, New Focus, Newport and Oplink and our checks
indicate that channel inventories remain an issue and may take longer to work
down than ADC management indicated (end of February for Broadband Connec-tivity
and FQ2:01 for Enterprise CPE in the Broadband Access and Transport divi-sion).
Specifically, channel inventories have impacted the results of the Broadband
Connectivity group (52% of FQ1:01 revenue) for each of the last two quarters due
to double booking that occurred in FQ3:00 when the company was capacity con-strained.
Since expanding manufacturing capacity by 1.2 million square feet in
September, the company has been impacted by order cancellations. We continue
to expect mediocre results in Broadband Access and Transport (29%) given some
of the negative fundamentals in DSL central office and cable telephony deploy-ments
in the U.S. as well as soft Enterprise CPE sales (primarily CSUs/DSUs in the
Kentrox division) due to channel inventories.
Next Level Communications (NXTV, $6.00, Cap $505M, Buy)
Due to carriers’ desire to develop VDSL standards as well as a negative capital
markets environment and economic concerns, which are impacting carriers’ willing-ness
to commit to significant new network builds, we do not expect substantial new
VDSL deployments to occur until later this year. In particular, we believe additional
rollouts at Qwest will not begin until at least CQ4:00 versus mid-summer previously.
Therefore, our 2001 estimates for Next Level of $165 million in sales, representing
10% growth, and $(0.90) in EPS could prove aggressive. While we believe that
standardization of VDSL is positive for Next Level as it may lead to more wide-scale
rollouts in the future, delays could occur, resulting in pushed out deployments in the
near term. Our checks indicate that the introduction of Next Level’s new residential
gateway will be delayed from June/July to September/October in order to incorpo-rate
additional features and functionality. These include standards compliance (in
particular, the 998 frequency plan optimized for asymmetric transmission), wireless
LAN functionality, which is expected to reduce installation times to two hours from
approximately five in Q4:00, and support for IP streaming as well as other interac-tive
applications. On the standards front, the ETSI (European Telecommunication
Standards Institute) recently ratified an international VDSL standard and a North
American standard is expected to be ratified by ANSI (American Standards Insti-tute)
in May. In addition, the FS-VDSL Committee, which is backed Bell Canada,
British Telecom, Deutsche Telekom, Ericom, France Telecom, KPN, Korea Tele-com,
Qwest, SBC, Swisscom, Telecom Italia and Telenor, was established in July
2000 to promote standardization, implementation, and deployment of VDSL. The
committee has set as its first goal an interoperability demonstration between VDSL
transceivers from different chip suppliers in September/October 2001. The second
target is an end-to-end system demonstration using equipment from different ven-dors
in October followed by completion of an end-to-end specification in December.

Breaking the Bottleneck: A Wireline Weekly
– 5 –
Carrier Access Corporation (CACS, $5.56, Cap $137M, Buy)
Carrier Access’ significant CLEC exposure (54% of Q4:00 sales) and lack of new
product momentum could lead to actual results below our 2001 estimates of $145
million in sales, which reflect a 2% year over year decline (versus an anticipated
25% drop in CLEC capital expenditures) and $0.25 in EPS. We believe it is impor-tant
for the company to refresh its product portfolio to improve its strategic position
and address higher growth markets, such as the transition from circuit to packet
networking. We anticipate that the company’s OEM sales will remain weak, as its
partner, ADC Telecom, also faces slowing sales, channel inventories, and is re-structuring
itself to better align its operating expenses with reduced top-line growth
expectations, including rationalizing its product portfolio. Carrier Access’ recent
product introductions, the ADIT 105 and 205 are mainly targeted at the ADSL mar-ket,
which is being impacted by an inventory overhang. As such, we do not expect
these platforms to become significant top-line contributors in the near future. We
believe that Carrier Access has recently shifted its marketing focus from wireline to
wireless providers, given the more positive capital spending trends in this segment
(10-15% growth versus 5% decline in wireline), as well as to reduce the company’s
exposure to the CLEC market to below 50% of sales in 2001. However, we do not
anticipate increased sales to these operators will be enough to offset the decline in
CLEC capital spending in 2001.

Accelerated Networks (ACCL, $1.38, Cap $67M, Buy)
The outlook at Accelerated Networks remains uncertain in the near-term, given the
company’s high customer concentration (six customers accounted for 100% of
Q4:00 sales), significant CLEC/ISP exposure (100% of revenue), and current man-agement
transition. However, since we recently reduced our sales and EPS fore-casts
significantly, we estimate limited downside risk to our 2001 estimates of $18
million in sales, reflecting a 50% year over year drop (versus an anticipated 25%
decline in CLEC capital expenditures), and $(1.07) in EPS. We believe it is critical
for Accelerated to introduce higher density, more redundant infrastructure platforms
to reduce its reliance on the emerging carrier market and appeal to a wider audi-ence
of larger and more established carriers. The company will also need to
closely monitor its cash burn rate to ensure adequate liquidity until it either breaks
even or capital markets improve. We estimate Accelerated is currently funded
through mid-2002. The company recently replaced both its CEO and CFO with
members of Regent Pacific Management Corp, which was retained by the board to
help reposition the company. Our checks indicate that newly appointed CEO Gary
Sbona and CFO H. Michael Hogan are still in the process of developing a going
forward plan for the company, which they expect to share with analysts and inves-tors
in the next 45 to 60 days.
Com21 (CMTO, $2.19, Cap $54M, Hold)
We believe Com21 will continue to post weak results over the next several quarters
relative to our 2001 forecast of $190 million in sales, representing a 4% year over
year decline, and $(0.80) in EPS owing to a buildup in channel inventories and in-creased
pricing pressures for cable modems. The key near-term issue to track is
the company’s execution on its plan of reducing expenses and lowering its cash
burn rate until it reaches profitability (anticipated in Q3:01). Longer-term Com21
faces competitive challenges given its ongoing focus primarily on CPE. As we re-ported
in our last industry report (see Wireline Weekly 3/14/01), North American
cable modem installation rates continued to show strong momentum, reaching
more than 4.5 million subscribers in Q4:00, representing a two percentage point
acceleration in the sequential growth rate to 27% from 25% in Q3:00. In compari-son,
cable modem shipments declined 16.7% sequentially, indicating that North
American MSOs continue to work through cable modem inventory that built up in
the latter part of last year. However, competitors such as Motorola (36% global
cable modem market share in Q4:00) and component suppliers, including Broad-com,
Alpha Industries, Anadigics, and others continue to cite weak demand from
their cable modem customers, suggesting it may take several quarters before sig-nificant
growth in cable modem shipments resumes. Com21 could also experience
some softness in Japan (approximately 5-10% of sales in 2000) due to economic
conditions affecting the region, which could impact the company’s high margin ATM
CMTS and cable modem business. In addition, we believe pricing pressure in ca-ble
modems could accelerate due to U.S. cable MSOs’ concerted effort to move to
a retail distribution model. In Q4:00, for example, Toshiba (10% global DOCSIS
market share) reported that nearly 25% of its sales were through retailers.


News of the Week
Active Users At-Work Continue to Grow Significantly, While Total Time
On-Line Moderates
Nielsen/NetRatings recently released their at-work network usage data for the
month of February 2001. We would note that these statistics only track employee
URL usage not email, file transfers, or other data intensive activities ignoring a large
portion of enterprise network traffic. The number of U.S. individuals at-work who
were on-line (active users) increased 27% and 2.0% on a year-over-year and
monthly basis, while the number of people who had access to the Internet, including
those who had access from work but did not necessarily go on-line during the
month, rose 30.0% annually to 42.4 million (see Exhibit 4). On an average user
basis, the number of sessions per month remained flat year-over-year, but fell 9.3%
sequentially while the number of page views per month grew 5% annually but de-clined
11.6% from January. While we believe that long-term end-user fundamen-tals
continue to remain strong, the near term outlook remains unclear due to limited
historical data. For example, while active users continued to grow, total time spent
online declined 5.9% in February (854 million hours down from January’s 908 mil-lion
hours). This decrease could be attributed either to seasonal or economic fac-tors,
the Internet’s increasing ease of use and convenience or a slowdown in
underlying fundamentals. However, the fact that the average number of sessions
per user and the average number of unique sites visited both decreased slightly in
February yet remained higher than December’s averages, indicates a degree of
seasonality. Likewise, while average page views (30) were down in February from
the January 2001 peak of 32 they were still higher than the average for eight of the
last twelve months. The percentage of active to total users, however, reached its
lowest point since Nielsen/NetRatings began tracking this data.
Exhibit 4
U.S. Network Usage At-Work Statistics
Average Usage At-Work Feb-00 Mar-00 Apr-00 May-00 Jun-00 Jul-00 Aug-00 Sep-00 Oct-00 Nov-00 Dec-00 Jan-01 Feb-01
Number of Sessions per Month 39 43 38 40 39 37 41 39 43 40 37 43 39
Number of Unique Sites Visited 31 29 27 29 28 28 30 28 31 29 27 32 30
Page Views per Month 1260 1407 1322 1375 1355 1337 1480 1376 1514 1413 1333 1497 1323
Page V iews p er Session 3233 34343536 36353535363534
Time Spent per Month (hh:mm:ss) 20:21:05 22:04:11 20:06:25 20:46:25 20:30:36 20:08:54 21:53:31 20:58:54 23:11:18 22:23:04 20:28:17 23:20:27 22:07:46
Time Spent During Session (hh:mm:ss) 0:31:08 0:31:01 0:31:24 0:31:13 0:31:38 0:32:35 0:32:13 0:32:06 0:32:34 0:33:13 0:32:55 0:33:46 0:33:40
Duration of a Page Viewed (hh:mm:ss) 0:00:58 0:00:56 0:00:55 0:00:55 0:00:58 0:00:54 0:00:54 0:00:55 0:00:56 0:00:57 0:00:55 0:00:58 0:00:59
Active Users 30.4 31.3 30.9 32.2 31.8 31.8 32.8 33.9 36.1 37.2 37.0 37.9 38.6
Sequential Growth 3.0% -1.4% 4.3% -1.2% -0.1% 3.4% 3.2% 6.7% 2.8% -0.5% 2.4% 2.0%
Quarter over Quarter 1.5% 6.6% 9.1%
Year-over-year 27.0%
Total Time Spent per Month (hours) 618.6 691.0 620.7 668.8 652.1 640.2 718.9 711.1 838.2 831.6 756.8 907.9 854.4
Sequential Growth 11.7% -10.2% 7.7% -2.5% -1.8% 12.3% -1.1% 17.9% -0.8% -9.0% 20.0% -5.9%
Quarter over Quarter 48.3% 6.6% 17.2%
Year-over-year 38.1%
Total Users 32.7 33.4 32.7 34.1 34.4 34.1 34.8 35.9 38.5 39.2 39.4 40.7 42.4
Sequential Growth 2.4% -2.2% 4.2% 0.8% -0.7% 1.9% 3.2% 7.2% 1.8% 0.6% 3.3% 4.3%
Quarter over Quarter 2.8% 4.4% 9.9%
Year-over-year 30.0%
Active Users as % of Total 93.1% 93.7% 94.4% 94.4% 92.5% 93.1% 94.5% 94.5% 94.0% 94.9% 93.8% 93.1% 91.0%
Source: Nielsen/NetRatings
While the growth in active and total users is favorable for CPE equipment vendors,
the lack of consistent, monthly growth in total time spent on-line suggests that curBreaking the Bottleneck: A Wireline Weekly
– 7 –
rent bandwidth demand is not as strong as originally projected. However, as noted
above, these metrics only track a portion of total enterprise network traffic making it
difficult to draw solid conclusions on overall network usage tends. Due to the lim-ited
historical data, we will be closely monitoring at-work network usage funda-mentals
going forward as we expect the next few months to offer a more clear view,
namely, in differentiating between a near-term deterioration in demand and sea-sonal
trends. Specifically, based upon last year’s trends, we would expect March
network usage data to indicate an increase in the number of sessions, page views
and total time spent on-line.
Corning Cites Slowdown in Photonics Division
Just over one month since Corning reaffirmed guidance on 2/16/01, the company
offered new guidance on Monday for 2001 of $1.20-1.30 in earnings per share
(from the previous $1.40-1.43) and $8.2-8.5 billion in revenue (from approximately
$8.6-8.75 billion). Corning maintained Q1:01 EPS guidance of $0.28-0.31. The
company’s pre-announcement is not surprising given the slowing industry demand
for basic infrastructure and Corning’s exposure to the US optical fiber market. Man-agement
indicated that the shortfall is derived from lower expectations in its telecom
segment, which consists of fiber and cable (42% of total sales in Q4:00), photonics
(15% of total sales in Q4:00), and hardware (13% of total sales in Q4:00). Sales in
the photonics division in 2001 are slated to increase 20-25% year-over-year from
the previous 50% guidance (and down dramatically from the original expectation of
100% year-over-year growth). We believe that this reduced forecast reflects the
continued lack of near-term visibility in optical components/modules as a substantial
inventory correction continues particularly at Nortel, which accounts for approxi-mately
60% of this division’s sales by our estimation. We would also note that we
believe that New Focus’ revised guidance as of 3/5/01 already reflects Corning’s
new photonics’ expectations (Corning accounted for 10.5% of New Focus’ sales in
Q4:00). In terms of the fiber business, Corning still contends that it is sold out,
however, it anticipates that the mix of premium fiber (which is higher priced and
higher margin than single mode fiber) will represent 30% of the total volume (down
from the original 35% expectation) in 2001. The company anticipates the pricing
environment will become more favorable given an increase in anticipated medium
sized volumes from international customers as compared to the large volume con-tracts
that the company was awarded in the US in 2000.

Appendix 6
Events Calendar
Mar 2001
Mar 8-11
Mar 12-13
Mar 13-14
Mar 12-16
Mar 17-19
Mar 19-21
Mar 20-22
Mar 22
Mar 22-28
Mar 28-30
CSFB Aspen 2001 Annual Ski Trip (Aspen, Colorado)
W-CDMA (London, UK)
Wireless Java (London, UK)
Internet World 2001 ( Los Angeles, CA)
OSA Executive Forum (Anaheim, CA)
OFC (Anaheim, CA)
CTIA 2001 (Las Vegas, NV)
BellSouth Analyst Meeting (New York, NY)
CeBit 2001 (Hannover, Germany)
International Wireless Communications Expo (Las Vegas, NV)
April 2001
April 2-5
April 2-6
April 9-12
April 17-19
April 18-19
April 23-26
April 25-28
Comdex (Chicago, IL)
3G Week (Paris, France)
B2B Mobile Internet (London, UK)
Next Generation Networks Conference (Burlingame, CA)
IGI Consulting Bandwidth Conference (Boston, MA)
WDMcon 2001 (Reston, VA)
Supercomm Asia 2001 (Shanghai, China)
May 2001
May 3-4
May 6-11
May 9
May 14-17
May 20-23
CSFB Broadband Conference (New York, NY)
NetWorld+Interop 2001- ( Las Vegas, NV)
CableLabs Financial Analyst Conference (New York, NY)
2nd Annual CSFB Communications Technology Conference (Phoenix, AZ)
CSFB Annual European Technology Conference (Barcelona, Spain)
June 2001
Jun 5-7
Jun 6
Jun 10-13
Jun 22-26
Supercomm 2001(Atlanta, GA)
Charter Communications Annual Investor Meeting
Cable 2001 (Chicago, IL)
UTC Telecom 2001 (Milwaukee, IL)
July 2001
Jul 5-7 NFOEC (Baltimore, MD)

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