As the telecom downturn persists, analysts say more layoffs are in the offing for suppliers already hit hard by staff reductions.

Analysts note a need for further headcount reductions at Nortel Networks Corp. (NYSE/Toronto: NT); and rumors are swirling that Cisco Systems Inc. (Nasdaq: CSCO) may be cutting again.

These layoff talks come after today's Wall Street Journal and Reuters news service cite sources inside Lucent Technologies Inc. (NYSE: LU) to the effect that Lucent will make a series of tweaks and cuts to its headcount throughout the organization until it reaches an employee census of "just over 50,000" by the end of June 2002.

Lucent already has issued plans to cut its workforce to 55,000 by the end of June. It's also said that profitability probably won't happen until 2003 (see Lucent Weighs on the World). As to the possibility of additional layoffs, a company spokesperson says: "We don't comment on rumors, and we'll have more to say on the workforce status in our quarterly report April 22."

Nortel has been cited by several analysts recently as being likely to undergo further cuts. "They need to cut another 2,500 to 3,000 to improve their numbers," says Duncan Stewart, portfolio manager at Tera Capital Corp. And late last month, John Wilson of RBC Capital Markets reportedly stated that Nortel must cut 5,000 to 10,000 more jobs if it intends to break even by 2003. Nortel won't comment on these reports, saying any updates will come with its quarterly report April 17.

Sources say Cisco has been rumored to be contemplating cuts in its facilities in North Carolina and Canada. Some say Cisco makes a practice of ranking its employees annually and lopping off the 5 percent that wind up on the bottom of the list for whatever reason. This year, as the downturn persists, they claim Cisco will likely stick to that custom.

For its part, Cisco refuses to comment on layoff rumors. And while it acknowledges that it aims for 5 percent attrition based on management evaluations, spokespeople stress that any cuts made as part of this "performance management" program are not related to cost-cutting layoffs.

Analysts say none of these rumors should come as a surprise. "When numbers keep decreasing because customers aren't buying, well, you can only manage expenses so much before you need to cut," says Frank Dzubeck, president of Communications Network Architects, a Washington, D.C., consulting firm.

Dzubeck says many companies are being faced with the need for further cost reductions, as carriers continue to cut their spending plans (see WorldCom to Cut Capex? and SBC, Verizon Mull Metro Buys). He further notes that both Lucent and Nortel may find themselves cutting in one part of the company while outsourcing to new hires in remote locations. Manufacturing and software development, for instance, are cheaper to support in, say, Asia than in North America or Europe, and the companies may find ways to increase their reliance on these alternative sites.

Dzubeck and others say the overall downturn has pushed hopes of recovery well into 2003. And he says much depends on the outcome of legislation that may or may not leave the RBOCs free to extend their markets and start buying equipment again (see Tauzin-Dingell Takes Another Step).

Other sources say that, while the potential for more cuts is no surprise, it's hard to gauge what will be needed to get the industry back on its feet again.

"It's clear [these companies'] costs are not in line with revenues," says Steve Kamman of CIBC World Markets. "What's not clear is how far costs will have to come down." He's hesitant to make any predictions, particularly when it comes to Lucent.

"Call me in August," he says. "Every time I've tried to find the bottom with Lucent, it hasn't held."

— Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com