Execs say they've got newfound "clarity" in carrier plans. But what they see is less capex and more uncertainty

October 18, 2001

3 Min Read
Nortel Says It Sees Clearly Now

Nortel Networks Corp. (NYSE/Toronto: NT) claimed improved liquidity and run rates after the market closed today, even as it posted a sizeable net loss (see Nortel Reports).

Executives said they're now getting clear messages from carriers on their plans for capital expenditures over the next year. And while those messages point to ongoing reductions in spending, Nortel seems hopeful that it's on the straight and narrow path that will eventually lead out of the downturn.

"We are pleased with our progress. We believe our balance sheet positions us well for this economic environment," said Frank Dunn, incoming CEO, on a conference call with analysts tonight. Dunn, whose promotion from CFO to CEO was announced earlier this month (see Nortel Swings Axe, Switches CEOs), is set to take the helm November 1. Outgoing CEO John Roth was on today's call as well, acknowledging it as his last.

Nortel posted $3.7 billion in revenues from continuing operations, alongside a net loss from continuing operations of $3.47 billion, or $1.08 per common share. These figures compare with last quarter's $4.6 billion revenues and stunning $19.4 billion net loss (see Has Nortel Hit Bottom?).

On the plus side, the company wound up the quarter with $3.4 billion in cash and cash equivalents, partly as a result of its successful convertible debt offering in August and the successful writedown of debt (see Nortel Feathers Its Nest).

During the quarter, the company took charges galore, including a $750 million pretax loss for excess and obsolete inventory, mostly related to long-haul "optical inter-city" equipment that didn't sell. Also contributing to the net loss was $380 million "related to charges associated with certain third-party investements" and $767 million related to customer financing (down from $1.1 billion last quarter). There was also an $801 million restructuring charge associated with ongoing workforce reductions and plant closures and $223 million related to "the approximately 50 percent reduction in manufacturing capacity of [the] Photonics Components business."

Gross margin for the third quarter was about 25 percent, compared with 26 percent last quarter, and the execs said, when questioned, that this was probably the "low water mark" for the company.

They reiterated plans to cut Nortel's workforce and assets even further. And they stressed that despite the new clarity in customer relationships, uncertainty remains.

Customers may be ready to plan, but "that's not saying projects will turn into revenue next week," Roth said. Dunn was equally circumspect: "People are going to start getting their acts together, but we won't see a major uptick in the fourth quarter."

Still, the execs remained upbeat, stressing new contracts in key areas such as metro, packetized voice, and wireless.

Analysts questioned just how Nortel could be sure of the new clarity and stabilization it claims to see in customer relations. Wall Street also has balance sheet items under close scrutiny.

In an unadorned farewell to the market, John Roth reiterated support for Frank Dunn and held forth for a few minutes to the effect that the industry is moving as predicted to increased data capacity based on IP -- and he says Nortel is poised to move with it.

— Mary Jander, Senior Editor, Light Reading

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