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Optical/IP

Nortel Issues Damage Report

Nortel Networks Corp. (NYSE/Toronto: NT) says it's due for a quarterly loss 5 percent greater than it originally anticipated, when it reports earnings on April 18 (see Nortel Lowers Guidance). The company's also planning to draw all of its existing $1.75 billion in credit now, since its banks aren't able to agree on terms to extend its credit in the future.

What's jarring about today's announcements is that they indicate that at least some of Nortel's creditors, faithful to now, are finally losing confidence in the company's ability to turn itself around. And even though Nortel says just three banks have turned tail on them, the gap in trust is likely to prove damaging to Nortel in the long run.

The announcement comes after a period of rising anxiety about the telecom equipment supplier's fortunes. Industry observers had predicted the company would have an earnings shortfall, and the company's debt was downgraded to junk status last week (see Nortel: Dark Rumblings From Ottawa and Moody's Junks Nortel Debt).

Perhaps because everybody had expected the worst, the company's stock rose $0.10 (2.79%) to $3.68 in midday trading. But Nortel shares have lost 40 percent of their value in the last month.

Nortel plans to report about $0.26 net loss per share from continuing operations, including various "acquisition related costs" and charges for ongoing workforce reductions. In total, the company's revenues will be down 16 percent, versus the 10 percent originally anticipated.

The company isn't clarifying much of the detail on the earnings front, saying only that all will be revealed April 18. But it's apparent that layoffs have continued (in line with the company's previously stated plan) and that Nortel continues to suffer the aftershocks of its heyday acquisition mania (see Nortel Shuts Optical Switch Effort and Nortel Buys: Reaping the Whirlwind?). Meanwhile, it seems that customer expenditures still lag.

Nortel says that its predicted results will be in line with the performance guidelines its creditors have stipulated. But three of the 27 banks in Nortel's credit syndicate can't come to an agreement about extending or renewing Nortel's existing credit line -- something that will almost certainly have to happen if the downturn keeps up.

So Nortel has today given notice to the banks that it's drawing on all of its existing credit, as well as activating an associated clause that extends the terms of credit for one year.

"The company does not have an immediate need for these funds," said CEO Frank Dunn in a prepared statement. But he said Nortel will tap its existing credit while it's there, "rather than seeing this source of liquidity eliminated."

What's the upshot? There's talk that Nortel may be a target for acquisition -- rumors that seem to be falling on willing ears, judging by Nortel's stock price. Cisco Systems Inc. (Nasdaq: CSCO) and Alcatel SA (NYSE: ALA; Paris: CGEP:PA) often surface as likely suitors.

For now, though, most analysts are playing their speculations close to the vest, eschewing press calls or predictions of any kind. One thing's guaranteed, though: Investors will be all ears on April 18, when Nortel reveals the next chapter in the ongoing saga.

— Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com
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dljvjbsl 12/4/2012 | 10:38:20 PM
re: Nortel Issues Damage Report Nortel must decide now on its future strategies. The optical strategy promulgated by Roth has been a disastrous failure. There seems to be no possibility that this could become a self-sustaining business that could fund the large amounts of R&D required to remain competitive. Nortel's current strategy seems to be to give away shareholder equity to customers so that they will take equipment. This seems to be placing capitalism on its head.

Is it time now for Nortel to abandon the optical market and obtain what could be had from this move? Optical is just a fancy new transmission market. Transmission has always had the reputation of being a commodity low margin business. A bit is a bit and the price of bits only falls over time. Nortel moved out of transmission in the 70s to concentrate on DMS. If it moves out of transmission now what could it develop in the line of a business where proprietary advantages and their associated high margins could be found? Wireless, enterprise services?
kephill 12/4/2012 | 10:38:19 PM
re: Nortel Issues Damage Report Nortel must stay withs its areas of strength - optical transport, optical switching, wireless, VoIP. The survivability of the company is not an issue. The only question is whether they return to profit this year or next year.
johnjohn 12/4/2012 | 10:38:19 PM
re: Nortel Issues Damage Report As a Lucifer, I hope NT does abandon the optical market. I doubt that will happen though.

Let's say that NT does decided to focus on wireless and that does not pan out. Then what? Back to optical? I don't think it's wise to put all of your eggs into one basket.

I always wonder why Lucent destroyed what once was a complete portfolio of telecom businesses.
zweisel 12/4/2012 | 10:38:18 PM
re: Nortel Issues Damage Report dljvjbsl wrote - "Transmission has always had the reputation of being a commodity low margin business... A bit is a bit and the price of bits only falls over time. Nortel moved out of transmission in the 70s to concentrate on DMS. If it moves out of transmission now what could it develop in the line of a business where proprietary advantages and their associated high margins could be found? Wireless, enterprise services?"

Your arguments above make absolutely no sense whatsoever. Enterprise and wireless are also bit oriented. They are also low margin businesses already and have been for quite some time!

Hello, anyone home?
let-there-be-light 12/4/2012 | 10:38:18 PM
re: Nortel Issues Damage Report "As a Lucifer.."

What's that? A Lucent lifer? Never heard that one before (it's good though)

"I always wonder why Lucent destroyed what once was a complete portfolio of telecom businesses"

Ever heard of stupidity?
dljvjbsl 12/4/2012 | 10:38:17 PM
re: Nortel Issues Damage Report
zweisel writes:
in response to the option of Nortel leving the optical business (as the fiasco that it is):

Your arguments above make absolutely no sense whatsoever. Enterprise and wireless are also bit oriented. They are also low margin businesses already and have been for quite some time!


Well that leaves very little room for optimism for Nortel deosn't it. 3G is too expensive to sell. Our very highly compesated management abandoned the circuit switching anhd enterprise market. I don't really know what is left for Nortel.

I honestly wish this was not so and I hope that this major problem can be overcome. However as it stnads now, Roth halved eh size of Nortel to allow it to break even at $16B. It is now running at $12B. Its technologies are not in demand with optical leading thois in infamy.

Nortel should bite hte bullet and abandon optical and get into a business that has a hope of geenrating soem margins or in reference to optical's performance for Nortel shareholders - some sales.
lightminded 12/4/2012 | 10:38:16 PM
re: Nortel Issues Damage Report What is Nortel going to do with the business formally known as Bay? How is that side of the business doing from a marketshare and profit standpoint? Will they sell it? Bow out? What are your thoughts?
Iipoed 12/4/2012 | 10:38:15 PM
re: Nortel Issues Damage Report They have no current products that compete only old rehashed boxes, merely L2 switches. The need a full suite of wirespeed L2and L3 boxes. Their Alteon acquisition (L4) basically killed
Alteon's product line..

They need an Extreme or Foundry to compete in the enterprise LAN space.
maryhadalambda 12/4/2012 | 10:38:15 PM
re: Nortel Issues Damage Report Right next to old NT buildings in Santa Clara are a brand new spanking set of buildings, which have a big old Nortel Networks sign out front. These digs are all curvy and colorful. How come they are spending money on this stuff when they are such a wreck?
Box 12/4/2012 | 10:38:14 PM
re: Nortel Issues Damage Report Try their Passport 8600 range
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