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Marconi Stock Tanks

Price drops by more than 50% after company issues profit warning last night

July 5, 2001

3 Min Read
Marconi Stock Tanks

Shares in Marconi Communications PLC (Nasdaq/London: MONI) took an enormous tumble on the London Stock Exchange this morning, falling in value from £2.45 (US$3.44) to £1.185 ($1.67) in the first hour of trading, a drop of more than 50 percent.

The avalanche followed a day of high drama yesterday when Marconi requested the suspension of trading of its shares on the LSE, on a day when Nasdaq was closed anyhow because of the public holiday in the U.S.

At the time that Marconi asked for trading to be suspended, yesterday morning, it said that regulatory requirements made this necessary because it was announcing the disposal of its medical systems business in the morning and its board was meeting during the day with a view to issuing a trading statement afterwards.

In the trading statement issued last night, Marconi warned that operating profits would be halved in this financial year, ending March 31, 2002 (see Marconi Issues Profits Warning). Sales would also be 15 percent lower. The company plans to trim another 4,000 jobs, on top of the 3,000 it announced in April.

The profits warning will have come as a nasty surprise for some investors, who may have been lulled into a false sense of security after statements made by George Simpson, Marconi's CEO, less than a couple of months ago.

At the time Marconi issued its annual results, on May 17, 2001, Simpson said: "We anticipate the market will recover around the end of this calendar year, initially led by European incumbent and established operators. On this basis, we believe that we can achieve growth for the full year."

In a conference call this morning, deputy CEO John Mayo acknowledged that Marconi's prospects had taken a sudden turn for the worse. He pinned part of the blame for this on the huge amount of money -- $100 billion, he said -- that European incumbents have paid out for third-generation mobile licenses. These carriers, many of which are Marconi customers, have had to pull in their horns on day-to-day investments as a result.

"When the finance directors turn off the tap, it happens suddenly," Mayo said. He went on to say that the converse is also true. Carriers will have to resume investment sooner or later, and when the finance directors turn the tap back on, Marconi will be well positioned to take advantage.

Investors don't appear to share that view, judging by the stock market reaction this morning. Many of them appear to be howling for Simpson's blood.

Simpson is planning to make way for Mayo to take over as CEO, by taking the post of chairman. Opposition to this appears to be growing, judging by the remarks of one of Marconi's top five shareholders, quoted in the Financial Times today.

In the conference call this morning, Mayo contended that even after yesterday's profit warning, Marconi was in better financial shape than many of its competitors.

"We are still expecting to report operating profits, and we're still expecting to be reporting positive cash flow, allowing us to use the proceeds of any disposals to pay down debt," he said.

Marconi hasn't indulged in financing carriers and has paid "relatively low multiples" for the acquisitions it's made, unlike many of its major large competitors, Mayo said. "Our customer base is made up of the major PTTs and ILECs of the U.S., and we see these players being strong and long-term survivors."Marconi is winning plenty of monster "frame contracts" with these carriers, but the operators' finance departments have put blocks on issuing purchase orders against these contracts in many instances, Mayo said.

"We believe this is a deferral and not a long-term famine," he added. "As traffic rates in our major customers continue to rise in an unabated fashion, they'll have to return to investment at some point... [Marconi] is well set to rebound when customers turn back to investing."

— Peter Heywood, Founding Editor, Light Reading
http://www.lightreading.com

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