Nortel makes good on bad news

Twice during the past few months, Nortel Networks Corp. has warned the public that it should lower its expectations for this quarter’s performance.

On Monday, the company succeeded in meeting those diminished expectations. It also said that another 5,000 of its employees would lose their jobs, bringing the total number of planned layoffs to 20,000.

With a restructuring and layoffs in the works, Nortel’s losses amounted to a loss of US$2.58 billion ($0.12 a share). Revenue fell to $6.18 billion – in line with lowered estimates – from $6.32 billion the same quarter a year earlier. Nortel said the 20,000 planned jobs cuts will translate to about $2 billion in cost savings this year. But unlike other telecommunications companies that reported earnings in recent weeks, Nortel did not give any specific guidance for the coming year.

The results and the company’s reticence to comment on its future prospects seem to indicate that Nortel, like the rest of the communications sector, is still swooning and that the company will need at least a few quarters to get its footing back. Any confidence Nortel might have generated among investors, however, might have been undermined by company executives who tried to demonstrate the company’s fortunes were turning around but presented almost no hard data to back up that idea.

Wall Street analysts were unimpressed although Nortel stock rose $0.35, or 2 percent, to $17.80 during regular hours.

“They haven’t seen orders come in and they really have no material evidence” to prove the company’s sales will pick up, said Max Shuetz, an analyst at Thomas Weisel Partners. “But at the same time, they have a theory that a lot of investors want to believe in right now.”

Nortel, along with competitors Lucent and Cisco, have suffered lately as a number of the small, upstart telecom companies that largely contributed to their revenue growth suffered financial difficulties. And some, such as Winstar, have filed for bankruptcy. In a conference call after the earnings announcement, Nortel said 90 percent of its customers are now large telcos, compared with 85 percent last year. The company did not define what it meant by large telcos or how many of those smaller telcos might have dropped off the customer list simply because they are insolvent.

The company portrayed the reduced exposure to smaller companies as beneficial, saying it is stuck in fewer arrangements with struggling telcos. Those companies often require risky financing schemes, something that has hobbled the industry. “A lot of our commitments have been reduced, because certain hurdles were not met,” said Frank Dunn, Nortel’s chief financial officer (CFO). “We are comfortable with our portfolio right now.”

Dunn also promised that the company would not write down excess inventory in the coming quarter, something Cisco recently was forced to do.

Still, it is evident that Nortel has some house cleaning to do. The company, like Lucent and Cisco, has suffered because it has a broad suite of products and many of those products have become a drag on its business. In addition, Nortel also saw a dramatic slowdown in some of its strongest offerings, including its long-haul optical segment. Long-haul optical products were among “the biggest drivers for the company, and it experienced a dramatic fall off,” said Christin Armacost, an analyst at SG Cowen.

But despite the plunge, the company did have reason to be optimistic about other businesses, particularly wireless products. “The wireless group did very well,” said Shuetz. “And carriers that have the best access to capital are still spending there.”

He said earnings for the quarter will not be as important a factor for investors as the company’s outlook for the future. And though the company didn’t give specific guidance, it did have a positive outlook. “It’s all about the outlook for the future,” Shuetz said. “They didn’t give forward guidance, but they said some things to encourage people.”

Still, the excitement could prove premature. “We still think it is a blue-chip type company, and when the market turns, it will be a good stock to own,” said Richard Shannon, an associate analyst at Epoch Partners. But “you will probably be able to pick up some good names – Nortel being one of them – at a similar price in a few months.”

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Jim Love, Chief Content Officer, IT World Canada

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