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Nortel: Dark Rumblings From Ottawa

With its first-quarter 2002 earnings report due April 18, Nortel Networks Corp. (NYSE/Toronto: NT) is once again being hauled into the spotlight of investor concern.

In the process, the company's getting buffeted by criticism and speculation. It seems more dark heralds are expected from Ottawa, although just what the news will be (and how bad for shareholders) appears to be an open question.

In an effort to sift rumor from revelation, here's a rundown of the latest scuttlebutt and what it may -- or may not -- mean:

  • Rumor 1 Nortel's going to have more layoffs. A report issued last week by John Wilson, director at RBC Capital Markets speculated that Nortel would need a further substantial headcount reduction in order to meet its short-term financial goals, including levels of operating expense in keeping with some covenants it's signed with its creditors. Nortel treats this like no news: Its annual report states that 52,600 employees were on board as of December 31, 2001. Today, a spokeswoman writes: “We said on December 21 that we would be approximately 48,000 by the end of the first quarter.”

    Will these cuts of roughly 4,600 more this quarter be enough to lighten the operating load? Only time will tell. "The whole sector is suffering. We don't see a recovery this year and maybe not next. You're going to see more restructuring in general for the industry," says analyst Nikos Theodosopoulos of UBS Warburg.

  • Rumor 2 Nortel will miss its quarter. This appears to be a common assumption on Wall Street. “The chances that Nortel will tweak down its numbers are very good,” says one analyst, who asked not to be named. “Everyone’s scrapping for sales -- the downturn appears to be going on longer than expected.”

    But it looks as if the dip in expectations won’t be too deep, at least in the short term. In a note dated March 15, for instance, Theodosopoulos and colleague Michael Urlocker of UBS Warburg predicted that Nortel will post a loss of $0.14 per share this quarter. Nortel had predicted its revenues would be about 10 percent lower than the last quarter, when the company posted a loss per share of $0.16 (see Nortel Reports on Q4).

    Still, over the long term, the ongoing downturn appears to be taking its toll, and analysts aren't happy about its effects on Nortel. "We are reducing our NT estimates and price target based on continuing industry weakness," Theodosopoulos wrote last week. "Our new 2002 and 2003 estimates are -$0.25 and $0.08 down from -$0.19 and $0.21 respectively. Our new revenue estimates for 2002 and 2003 are $13.4B and $15.0B down from $14.95B and $17.4B respectively."

  • Rumor 3 A monster is lurking in Nortel’s credit covenants. This does not appear to be true. Nortel now has about $4 billion in available credit, with about $1.575 billion of that subject to Nortel's maintaining specific levels of EBITDA and other financial markers of liquidity. Without an advanced degree in finance, the details are fairly inscrutable. But it appears that, despite a general note of alarm in last week's Canadian press, analysts are fairly optimistic that Nortel will be able to draw on its credit or get money in other ways this year. "We still expect Nortel to meet its minimum EBITDA covenants tied to its credit facilities this year even with our new estimate reductions," write the Warburg analysts. Whether the cash infusion solves the company's problems, however, or helps its return to profitability, are in doubt. Theodosopoulos, who hasn't recommended Nortel stock for many months, isn't saying anything further.

  • Rumor 4 Nortel will try to drum up cash through acquisitions and mergers. There appear to be two variations on this theme: One calls for Nortel to buy the wireless division of Motorola Inc. (NYSE: MOT), then turn around and spin off the acquisition along with its own wireless holdings. A second scenario has Nortel selling its optical assets to Cisco Systems Inc. (Nasdaq: CSCO).

    Both seem outlandish to some sources. "I think the Motorola thing came from some bankers hopefully speculating," says the unnamed analyst quoted earlier. "And, hopefully, Cisco learned its lesson with Pirelli."

    When it boils down, the rumors and speculation swirling around Nortel seem to center on a few key points. One is the company's ongoing reliance on legacy Sonet hardware -- and its reduced hope of breaking into new markets aggressively enough to come out ahead anytime soon.

    In its recent annual report, Nortel revealed to what extent its overall sales have slowed and indicated that optical networking, optical Ethernet, and even wireless are coming up short:

    Other concerns center on Nortel's management. New CEO Frank Dunn appears to be a relative unknown to many on Wall Street. Worse, he seems to be thought of as "old guard" and stodgy, someone who may be unable to help pull the company through the industry doldrums.

    — Mary Jander, Senior Editor, Light Reading
    http://www.lightreading.com
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    RouterOttawa 12/4/2012 | 10:43:15 PM
    re: Nortel: Dark Rumblings From Ottawa Does anyone else find it curious that the AGM is in Halifax this year (where's that? :-))
    cyber_techy 12/4/2012 | 10:43:11 PM
    re: Nortel: Dark Rumblings From Ottawa Halifax is in Nova Scotia
    lightshow 12/4/2012 | 10:43:10 PM
    re: Nortel: Dark Rumblings From Ottawa I feel for NT. I just don't understand what the useless Roth is still doing lingering around and getting a pay increase. I challenge him to get on this board and comment as to why he got an increase. Actually, I also challenge the newbie in power. They wanna save money, stop paying him!! Ask the employees to take a salary reduction! When the times were good, the salaries increased! Now that the times are bad, NT should just cut salaries and save the talent. Not sure why they have not done that yet. There are a lot of people there that would preferr a salary reduction than no job, especailly in Montreal where there are not to many companies that can absorb them.

    When the times get better, they can get their salaries back with a little bonus if things really turn around. Supply/demand baby!!

    Good luck guys and gals.

    Ex-NT
    fargo 12/4/2012 | 10:43:09 PM
    re: Nortel: Dark Rumblings From Ottawa The people I know at Nortel say you could cut half the employees and no one would notice.

    They also say say they need an infusion of fresh ideas and if and when they get rid of the old boy network they can take advantage of some of the technology that they have.
    Mismanaged 12/4/2012 | 10:43:06 PM
    re: Nortel: Dark Rumblings From Ottawa I am still working at Nortel, in Optical. What I cannot believe is that I am still here. To be totally honest my entire group does nothing productive these days. It is inconcievable as to how badly managed our group is. We have actually had people recently volunteering to take a package and leave and yet they hold on to us. From within, listening to the analysts. You would be hard pressed to find someone working within NT that doesn't think the analysts are right about more layoffs.
    jgh 12/4/2012 | 10:43:06 PM
    re: Nortel: Dark Rumblings From Ottawa As an ex-NTer, it is time to clean out the Canuck mafia and bring in some new people with new ideas. Dunn's strategy is to keep his fingers crossed and hope the telecommunications industry improves. If that doesn't happen in Q2 look for another 10,000 - 12,000 to be let go.
    How much worse can it get, Dunn at Nortel, Russo at Lucent, a bean counter and a salesperson who oesn't know the first thing about business strategy. I'm sure Kodak is happy she is off their payroll.
    Litewave 12/4/2012 | 10:43:02 PM
    re: Nortel: Dark Rumblings From Ottawa Author: fargo
    The people I know at Nortel say you could cut half the employees and no one would notice.


    Its pretty widely known that the 80/20 rule applies to Nortel. 20% of the people do 80% of the work.

    Many large companies are, but Nortel's an exceptionally classic case, its very obvious when you're in there.
    optical_man 12/4/2012 | 10:43:02 PM
    re: Nortel: Dark Rumblings From Ottawa Author: fargo Number: 4
    Subject: NT Rumors Date: 3/27/2002 6:40:05 PM
    They also say say they need an infusion of fresh ideas and if and when they get rid of the old boy network they can take advantage of some of the technology that they have

    fargo,
    they HAD an infusion of fresh ideas. they didn't need it, turns out they were JUST fine without the rabble rousers who tried to change things.........
    all the riff raff with the fresh ideas left over two years ago.
    HiTekRedNeck 12/4/2012 | 10:43:02 PM
    re: Nortel: Dark Rumblings From Ottawa Christ!

    Only folks left at NT are the old boy Canadiens stuck in circuit land! As an Ex-NT person myself, I'll be the first to say there was 2-3 times more fat in the company than needed to be there - since 1998 for sure! I was not part of Bay, but NT should've kept more of the Bay guys around... certainly Roth should've put 1-2 in key executive ranks...

    Someone on LR said it best... Roth did that right angle turn into a f*&^&^%ing wall! Doooooh!

    Good luck to all my fellow fallen comrades. Keep the faith. What comes around, goes around... history proves it every time.

    -HTRN
    mrcasual 12/4/2012 | 10:43:01 PM
    re: Nortel: Dark Rumblings From Ottawa fargo,
    they HAD an infusion of fresh ideas. they didn't need it, turns out they were JUST
    fine without the rabble rousers who tried to change things.........
    all the riff raff with the fresh ideas left over two years ago.


    Hey! I resent being called riff raff!

    I wonder what the org chart is going to look like at the end of the month.

    Funny Nortelism: Merit increases were usually applied on the first paycheck in April. This often meant that they were communicated on or near April 1. HR never saw the irony of this.
    Page 1 / 10   >   >>
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