AT&T spending pullback hitting Cisco

Talk of AT&T cutting back on its capital expenditures for this year have hit Cisco's stock as well as the prospects for other telecom equipment vendors.

Credit Suisse this week downgraded Cisco to neutral from outperform on reports that AT&T will cut back on its 2008 capex budget. Credit Suisse estimates that AT&T spends between $500 million and $1 billion annually with Cisco, or almost 2.5% of Cisco's annual revenue.

Meanwhile, another investment firm issued a bulletin this week that states AT&T capex cuts are likely, though modest in scale. UBS Warburg estimates that AT&T will cut $500 million from its 2008 capex budget, or about 2.5%. The firm says it would not rule out future cuts "if business fundamentals further deteriorate" at AT&T.

A slowdown in spending among the telcos would not be a big surprise given the weak macroeconomic environment, particularly in the US. But it would hurt telco equipment vendors who are already trudging through the muck of a sluggish economy.

Indeed, Cisco CEO John Chambers last week spooked the market by saying Cisco doesn't see spending in IT picking up until 2009. His remarks drove Cisco stock down to its 52-week low.

Infonetics Research says carrier capex is leveling off in North America and Europe this year where carriers are lowering their overall capex-to-revenue ratios to as low as 12% from the norm of 16% to 17%. China and India, meanwhile, will drive a "significant jump" in carrier capex in 2008, due to network construction projects combined with currency appreciation against the US dollar, Infonetics says.

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