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Telecom mergers rein in growth for U.S. network gear makers

Telecom mergers rein in growth for U.S. network gear makers

By Lehar Maan and Abhirup Roy

(StartName) – U.S. network gear makers are bracing for slower revenue growth in the second half of the year as telecom operators, their main customers, postpone spending until the dust settles on several big mergers.

Telecom giants AT&T Inc and Sprint Corp are taking time to decide whether to upgrade existing wired networks or roll out 4G networks, forcing gear makers to cut expectations for what is usually the stronger half of their year.

Ciena Corp and Finisar Corp last week joined their peers in forecasting a weak current quarter, citing delays on closing sales to customers in North America. Analysts say a slowdown could last two or three quarters.

AT&T is set to buy DirecTV for $48.5 billion and Deutsche Telekom AG is seeking buyers for T-Mobile US Inc after the collapse of a sale to Sprint – which itself was bought last year by Japan’s Softbank Corp.

“When deals get done, when operators come together, typically the vendors experience a pause,” said Simon Leopold, analyst at Raymond James.

Most affected by the slowdown in orders will be those network gear makers with the greatest exposure to the telecoms business, such as Ciena, Juniper Networks Inc and JDS Uniphase Corp.

Others, including F5 Networks Inc, have been spared the brunt of the slowdown in telecom spending as they get a large chunk of their revenue from enterprise customers, who are still spending to upgrade networks and guarding data from hackers.

Shares of F5 Networks and Aruba Networks Inc, another company with greater exposure to enterprise customers, rose 11 percent and 21 percent respectively between the end of June and Friday’s close.

In contrast, shares of Juniper, Ciena and JDS Uniphase have fallen between 5 percent and 11 percent in the same period.

At least 11 brokerages cut their price target on Juniper’s stock after the company reported results in July, while at least 10 raised their target on F5 Networks after the company reported.

Mergers between U.S. telecom companies were affecting spending decisions, which in turn could delay some of Ciena’s projects, Chief Executive Gary Smith said on a post-earnings conference call last Thursday .

U.S. network gear makers have grown accustomed to strong results in the final two quarters of the calendar year, riding high on a decade-long trend among telecom operators of spending big in the second half.

The reverse will be true this year. Evercore Partners analyst Mark McKechnie said telecom operators would spend about 45 percent of their budget in the second half versus 55 percent in a typical year.

“The investor position is relatively cautious for the next couple of quarters,” said UBS Equities analyst Amitabh Passi.

(Additional reporting by Anya George Tharakan in Bangalore; Editing by Robin Paxton and Savio D’Souza)

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