Nortel: The Bad News is Good

Wall Street rewarded Nortel for not disappointing them too much. The stock was up as much as 10%

December 21, 2001

3 Min Read
Nortel: The Bad News is Good

When is bad news good? When Nortel's news isn't bad enough.

Nortel Networks Corp.’s (NYSE/Toronto: NT) stock jumped almost ten percent today after it said losses in the fourth quarter would be less than what most analysts were expecting.

The reaction from investors shows just how much expectations have been reset in the telecom equipment market -- and how eager the market is to look for signs that the worst is past.

Nortel said in a statement that it expects to post a pro forma loss per share of 16 cents and an overall net loss per share of 63 cents, both down from the prior quarter. Overall, it expects revenues to be $3.4 billion, down from $3.7 billion in the third quarter. Analysts surveyed by First Call were expecting that Nortel would post a pro forma loss per share of 18 cents and generate fourth-quarter revenue of $3.54 billion.

By late afternoon, the company’s stock was trading up 0.64 (9.75%) to 7.00.

Part of the loss will include $900 million in acquisition-related costs, according to the statement. The company also expects to take a $630 million restructuring charge related to job reductions. Kevin Slocum, an analyst with Wit Soundview, says these charges were anticipated since they relate to previously stated plans.

Why such a jump on what seems like negative news? The answer has more to do with timing than anything else. After Nortel’s competitor Lucent Technologies Inc. (NYSE: LU) announced last week that it would be missing its quarter, and optical competitor Ciena Corp. (Nasdaq: CIEN) also announced disappointing fourth-quarter news, analysts and investors assumed that Nortel would likely experience a similar disappointment (see Ciena Casts Cloud Over 2002 and Lucent Issues Guidance). Juniper Networks Inc.'s (Nasdaq: JNPR) warning yesterday only added to the fears (see Juniper Spooks the Street).“Today’s news was taken like a sigh of relief,” says Slocum. “In the context of what happened last week, the miss wasn’t so terrible.”

Nortel also said today that it has amended its $2 billion, 364-day credit agreements that it entered into in June of this year. Under the amended agreement, the terms have been extended to Dec. 13, 2002, from June 14, 2002. The size has also been reduced to $1.575 billion from $2 billion. The extension of the credit facility is good news for Nortel, which, like Lucent, has been strapped for cash this past year. The fact that the company still has access to capital is a good sign, since some analysts feared that the company might not be able to negotiate new loan covenant agreements.

Also, in the same release today, Nortel announced that it has reduced the estimate for the total number of people it expects to cut from the company as a part of its massive restructuring plan. The new figures spare roughly 3,000 jobs. Instead of a total head count of 45,000, the company expects reductions to finish at 48,000. By December 31st, the company expects to have about 52,000 people working for the company. At the height of the technology boom it had more than 100,000 employees.

— Marguerite Reardon, Senior Editor, Light Reading

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