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Has Nortel Hit Bottom?

Despite $19.4B quarterly net loss, execs say they've finished cost-cutting measures. The rest is up to the customers

July 20, 2001

4 Min Read
Has Nortel Hit Bottom?

Nortel Networks Corp. (NYSE/Toronto: NT) reported the expected but still stunning $19.4 billion quarterly net loss in its earnings announcement last night (see Nortel Reports 2Q Results). On the bright side, CEO John Roth and CFO Frank Dunn say they've reached the end of layoffs and plant closings.

"Barring major changes, reductions are done," said Roth during a conference call with analysts after market close.

Dunn, who opened the call and announced the results, backed this up, saying Nortel's done what it needs to do. The cost-cutting measures Nortel's taken since January 1, he asserted, will ultimately save the firm $870 million quarterly and $3.5 billion annually. These measures include laying off 30,000 people this year, of whom 23,000 have already been notified, with 7,000 expected to be dismissed over the next eight weeks.

The company's also closed 10 million square feet of office and manufacturing space, equivalent to 36,000 seats, Dunn says. And Nortel's shopping its access business, including its DSL gear, with hopes of closing a deal within 12 months.

Roth acknowledged the pain of the cuts: "When you go as deep as we've gone you lose some very good people indeed," he said.

"We want to drive our break-even point to a sustainable level, then drive revenues up," Dunn said. The goal is to achieve a "cost structure of $5 billion" annually, he added, then focus on mining five key business areas in order to return to profitability -- namely, Network Infrastructure, Wireless Internet, Optical Inter-city, Local Internet, and Photonic Components.

Roth said new products would help the move forward, including the company's new Optera Connect HDX, metro products based on tunable lasers, wireless gear, "intelligent Internet" products for business and consumer use, and data networking gear for enterprises.

Neither Roth nor Dunn would predict just when the turning point to profitability would come, saying the market is still in a state of change, with carrier customers focused more on saving costs than expanding their infrastructure.

Indeed, Roth repeatedly referred to carriers' focus on saving money as a key driver of Nortel's losses. "Our customers are still instructing their engineers to find ways to defer purchases," Roth said. While doing everything they can to avoid capital spending, he asserted, carriers eventually will have to look at expanding their networks again, probably in mid-2002. But he declined to give guidance or issue any specific projections.

Nortel's results were in line with its warnings in June (see Nortel's Nuclear Winter). The huge quarterly net loss translates to a $6.08 net loss per share. Revenues were $4.6 billion for the quarter, 36 percent lower than last year's quarter, and 25 percent lower sequentially (see Nortel Issues Mediocre Q1 Results).

Losses were particularly heavy in the area of optical long-haul or backbone equipment, execs said. Geographically, sales were poorest in North America, where revenues fell 51 percent in the U.S. and 41 percent in Canada.

There were some high points: Growth was up 20 percent in wireless Internet, and sales were good in the Asia-Pacific region -- although this couldn't offset the slide in other areas.

The company also claims to have improved its management of cash and now shows $1.93 billion in cash and cash equivalents as of June 30, 2001, as opposed to $1.64 billion on December 30, 2000. Further, the firm has upped its receivables, reduced its inventories, and is revamping its financing arrangements to strengthen its balance sheet, execs said.

But problems remain. Among them: Nortel is taking an after-tax charge of $12.3 billion for what it terms "the write-down of intangible assets, primarily goodwill related to certain acquisitions." This also was anticipated, as Nortel said in last month's warning that it had reevaluated the purchases of Alteon WebSystems, Xros, Qtera, and others in light of how their valuations have suffered during the market correction of the past few months.

Analysts on last night's call asked a lot of questions, many relating to whether all this really spells the low water mark in Nortel's financials.

Roth and Dunn couldn't be pinned down. "Is this the low water mark? I would say yes, but nothing's for certain," Dunn said, in response to a query about gross margins.

Analysts also confronted Nortel about its lack of guidance and the thousands of extra layoffs it announced last month. One told Roth the company's credibility has been damaged with the financial community.

To this, Roth reiterated that cutting one third of the workforce is the end of it, and that he sees the company moving forward by increasing market share in its five strategic areas. He also blamed the customers yet again (see Sour Grapes of Roth).

"We have every reason to believe we'll gain share. Will it offset customers' determination to run their companies with less capital expenditure? That's the call we're all looking for."

- Mary Jander, Senior Editor, Light Reading
http://www.lightreading.comMovers and shakers from more than 100 companies – including Nortel Networks – will be speaking at Opticon 2001, Light Reading’s annual conference, being held in San Jose, California, August 13-16. Check it out at Opticon2001.

Nortel representatives will also be speaking at StorageNet, Byte and Switch’s annual conference, in New York City, October 2-5, 2001. See: StorageNet2001.

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