Optical/IP Networks

Nortel Falls Short in Long Haul

Nortel Networks Corp.'s (NYSE/Toronto: NT) downward spiral continues. In its attempts to cut costs and lower its break-even point, the Canadian telecommunications equipment giant announced today that it will cut 3,500 jobs from its optical long-haul business, and it may sell its optical components unit (see Nortel Sees Flat Q2).

Nortel, which once had approximately 100,000 employees on its payroll, said today that it expects its workforce to drop to 42,000, down from last month's target of 44,000. At the end of last quarter, the company employed 47,000 people. The downsizing is expected to be completed by the end of the third quarter (see Nortel's World is Flat).

The latest job cuts and the potential sale or resizing of the optical components unit come as Nortel tries to "streamline" its optical long-haul business, which it doesn't expect to recover until late 2003 or early 2004. The company has previously stated that it wants to back away from the optical industry and concentrate on its wireless business.

David Chamberlin, a Nortel spokesperson, insisted today that the announced cuts will only involve the company's long-haul business and shouldn't affect other Nortel divisions.

The reorganization of Nortel’s optical long-haul business will result in a $600 million charge, with $200 million coming in cash. Most of the charge will be recorded in the second and third quarters, the company said. This charge comes in addition to the $150 million charge the company has said it would take this quarter related to previous layoffs. The company claims to have enough money available to fund the announced restructuring, as well as continued operations. In today’s statement, Nortel also says it expects to remain in compliance with its covenants under various bank facilities.

But many big questions still exist. One centers around any potential sale of the optical components division. Because most of the larger optical components players -- namely, Agere Systems (NYSE: AGR) and JDS Uniphase Corp. (Nasdaq: JDSU; Toronto: JDU) -- are suffering similar financial problems in the same industry downturn, it seems unlikely that any would be in a position to pay a significant amount for Nortel's business.

In a note published today, however, Bill Lesieur, the director of Technology Business Research Inc. (TBR), stated that the latest cutbacks, layoffs, and declining revenue “may lead Nortel to becoming a casualty of industry consolidation.” In the note, he points out that Nortel seems to be having a harder time weathering the storm than major competitors Lucent Technologies Inc. (NYSE: LU) and Alcatel SA (NYSE: ALA; Paris: CGEP:PA).

Nortel is, of course, hoping the cuts will help it get on the fast-track back to profitability, and the firm claims they will enable it to lower its break-even cost structure to about $3.2 billion of quarterly revenues (not including costs related to acquisitions and any special charges or gains), down from a previous target of approximately $3.5 billion. Nortel says it expects the cost structure to be in place by the fourth quarter this year.

The Toronto-based company reconfirmed today that it expects to see improvements in its pro forma net loss this quarter, compared to last. But don’t start celebrating yet. The company also lowered its revenue guidance for the current quarter, saying its revenues may drop as much as 5 percent over the quarter. This is opposed to the flat revenue forecast it gave just a month age.

The drop in revenues should come as no surprise. Nortel has seen its sales and shares plummet in the wake of the telecom crunch, which has literally taken out many of its main customers, while leaving others quaking and determined to spend as little as possible on equipment until the meltdown is over.

In afternoon trading today, the company's shares dropped 9 cents (3.57%) to $2.43. Over the last year, the company's stock has lost more than 80 percent of its value.

— Eugénie Larson, Reporter, Light Reading

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