Cisco targeted in spending cut forecast

July 16, 2008, 5:13 PM UTC

By Scott Moritz

The tech sector braces for more spending cuts as a new forecast calls for a pull back on orders for communications equipment.

In a downgrade of Cisco (CSCO) Wednesday to neutral from buy, Credit Suisse analyst Paul Silverstein says phone companies like AT&T (T) are amending their big-spending ways and trimming their 2008 budgets.

“We believe that one or more major carriers will reduce their planned capital expenditures for the balance of calendar 2008,” Silverstein writes. “We are most concerned regarding AT&T,” he continues.

This is particularly bad news for outfits that supply gear to big phone companies. The sector has already been laboring under a stubborn and now widening slowdown in purchases of business technology gear. Just last week, Cisco CEO John Chambers dashed hopes for a near-term recovery of IT spending by putting his best guess for a rebound sometime next year.

In a companion report Wednesday, Silverstein writes that wireline spending in developed countries is darkening the overall 2008 spending picture. Telcos in places like the U.S. and Europe will increase their spending on non-wireless equipment by a mere 6.7%. This “is the lowest growth rate in the past five years and is just over half the 15.9% growth rate in 2007,” Silverstein writes.

On the wireless front, global spending will grow 13.4% this year, up from a 12.3% increase in 2007, but well below the 17.6% average increase over the past five years, according to Credit Suisse.

The possibility of spending cuts isn’t entirely unthinkable given the weakening economy and record-high prices in fuel and raw materials. Businesses have been cautiously containing their tech costs amid the slowdown, but the prospect that phone companies are starting to pinch pennies is a bit of a surprise for some analysts.

With surging video traffic and the worldwide expansion of mobile data and the Internet, the trends seem to favor more spending not less. “No one can afford to pull back,” says one analyst.

But if AT&T taps the brakes a bit, the spending deceleration will be felt among suppliers.

Credit Suisse estimates that AT&T spends between $500 million and $1 billion with Cisco annually. That’s roughly between 1% to 2.5% of Cisco’s top line, Silverstein estimates.

AT&T declined to comment.