More cuts at Nortel

Nortel Networks Corp. this week announced it is cutting 3,500 more positions as a result of restructuring its long-haul optical business, which has been hit hardest during the industry downturn.

Optical long-haul was down 77 percent in the first quarter of 2002 compared to the first quarter of 2001. Nortel said it does not expect a meaningful recovery in the long-haul optical market before late 2003/early 2004.

“Nortel is still on a downward spiral of cutbacks, layoffs and declining revenue, which may lead Nortel to becoming a casualty of industry consolidation,” says Bill Lesieur, director of Technology Business Research in Hampton, N.H. “Nortel bet the business on long-haul optical and won big in 1999 and 2000, but the market subsequently collapsed, which thrusted Nortel into a downward spiral of cutbacks, layoffs and declining revenue.”

The company plans to focus on optical switching – embodied in its OPTera HDX/DX products – photonic transport capabilities and network management. This may include selling and/or “resizing” Nortel’s optical components business.

Potential buyers of this business include JDS Uniphase, Furukawa and Corning, analysts say. Agere and Intel are also outside possibilities, they say.

The realignment of the optical long-haul business, including optical components, is expected to be completed by the end of the third quarter of 2002. At that time, Nortel expects its workforce to number 42,000, down from April’s previous headcount target estimate of 44,000. This is less than half of the 94,500 employees the company had in early 2000, just before the industry went into its current slump.

The realignment will force Nortel to record charges of approximately US$600 million, the majority of which will be taken in the second and third quarters of 2002. The company said it now expects revenues in the second quarter of 2002 to be flat to down 5 percent compared to the first quarter of 2002, updating its previous sequential revenue guidance of “not significantly up or down.” Analysts said this downgraded guidance indicates that Nortel’s wireline business is disappointing.

“The revenue performance was weaker than we expected given our view that wireless was performing well for Nortel, thus implying that wireline sales must be weaker than expected,” says Nikos Theodosopoulos, communications equipment analyst at UBS Warburg. “We expected the company to show at least flat sequential sales from the first quarter, given what we believed was a fairly healthy wireless business. Thus, it is our view that the wireline business is showing a sequential decline of 5 percent+ this quarter.”

Overall spending on wireline telephony equipment in the U.S. this quarter will be down about 5 percent given continued weakening fundamentals in the IXC market and continued frugal purchase patterns by RBOCs, Theodosopoulos says.

Nortel is at