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WorldCom's bomb

Equipment vendors sucked into mushroom cloud of accounting scandal

By Jim Duffy
The Edge, 07/02/02

The WorldCom accounting crisis will have a painful and far-reaching effect on equipment vendors, perhaps putting some start-ups out of business.

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.

WorldCom last 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% 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, says Mark Seery, an analyst at RHK.

Juniper can kiss that business goodbye for now.

WorldCom has put a freeze on all purchase orders, and it will be at least a couple of months before they are unfrozen, analysts say.

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.

"Other than the impact on the overall telecom market, we don't anticipate any negative impact to Vivace's plans," says Ken Koenig, Vivace chairman, president, CEO and co-founder.

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Allegro Networks is another start-up developing "multirouters" for the edge of carrier networks. The company was working with WorldCom on some of the carrier's requirements for edge routing.

Allegro did not comment by press time on the impact of losing WorldCom as a potential customer.

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 impacts the broader capital markets and already depressed carrier spending. Juniper, however, was the only major vendor for which WorldCom accounted for 10% or more of revenue.

But for start-ups such as Vivace and Allegro, in 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."