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Optical/IP

Nortel Outlook Worsens

Nortel Networks Corp. (NYSE/Toronto: NT) warned last night that third-quarter 2002 revenues, set for announcement October 18, will fall "approximately 15%" below last quarter's results (see Nortel Lowers Q3 Forecast).

A month ago, Nortel warned it would fall 10 percent below the $2.77 billion the company reported for its second quarter (see Nortel's Bottom Sags and Nortel Still Not Slim Enough). Now revenues are anticipated in the $2.3 billion range. Further, balance sheet adjustments will bring the company's quarterly net loss to about $0.09, two cents worse than First Call estimates.

The news is the latest in a series of warnings based on a famine in telecom spending that has forced analysts to adjust their models for an even longer and darker downturn than anticipated (see Black Friday: More Layoffs Loom and Carrier Spending Hopes Dim). Nortel specifically blamed "further deterioration in spending by services providers, generally in the United States and for wireless networks in Asia," for its latest warning.

Nortel says it still hopes to achieve profitability by the end of June 2003. To reach that goal, the company plans to renegotiate its credit facilities and take further unspecified restructuring actions. And to keep its place on the New York Stock Exchange, Nortel will attempt to gain shareholder approval for a reverse stock split. Typically, companies whose share price lingers for a month at less than $1 are at risk for delisting. Lately, Nortel's been falling into the sub-dollar range, like some other companies in the sector (see Lucent Dabbles Under $1).

Nortel already reworked its credit terms earlier this year, when it gained $1.175 billion in credit in response to its threat to draw down an existing $1.75 billion line rather than risk having no credit (see Nortel Credit Gamble Pays Off). Now, while Nortel's new credit remains undrawn, it looks as though the terms must be extended in light of ongoing market bleakness.

As far as restructuring, lips are sealed at Nortel. While CEO Frank Dunn is quoted in Nortel's press release as saying, "[W]e will continue to... take additional actions, as appropriate, to achieve our profitability goals," a Nortel spokeswoman indicates that's not to be taken literally. "We are not elaborating beyond the release. (It did not talk about additional restructuring or layoffs)," writes Tina Warren in an email today.

But analysts say thousands more heads may need to roll from Nortel in order to reach the stated goal. In a presentation last week, for instance, analyst Steven Levy of Lehman Brothers told investors he thinks Nortel will need to cut more than 5,500 employees to hit its target of 2003 breakeven.

"Nortel highlighted in its late August press release that it plans to now reduce headcount to 35,000, which implies additional personnel cuts of around 5,500... This cutback accounts for just under one-half of the cost savings Nortel expects to achieve," Levy wrote in a note that accompanied the presentation.

And that was before the warning. At press time, Levy's office said the firm is adjusting its numbers in light of the news.

Others say Nortel needs to focus on jettisoning assets that aren't paying off. "Nortel should spin out its whole enterprise business," suggests Frank Dzubeck, president of Washington, D.C., consultancy Communications Network Architects. "Siemens, Alcatel, and Lucent have separate entities. It could be a help to Nortel too." Enterprise kit at Nortel includes LAN switches and enterprise routers acquired through the company's buy of Bay Networks (see Whatever Happened to X?). Also included are a range of Web content delivery and hosting wares, as well as some virtual private networking, voice over IP, and even wireless and optical gear.

Nortel's been taking actions to lighten its load (see Coretek Is Closed and Nortel to Cut Ultra Long Haul?), but Dzubeck thinks it's not cutting enough. Further, efforts to sell its wireless and components businesses seem to produce rumor but no action (see Nortel Close to Components Sale ).

On the stock-split front, Nortel faces other challenges. In an effort to raise its share price above its current low level and avoid the specter of delisting, the company must convince shareholders of the need for a reverse split. Considering Nortel's goal to get its share price up around $10 to $20, that could mean asking shareholders to vote on reducing the volume of their holdings by a maximum ratio of one-for-twenty.

In today's troubled times, some companies have had success getting reverse stock splits approved, perhaps because shareholders see little alternative. Multilink Technology Corp. (Nasdaq: MLTC) recently got a nod on a one-for-ten reverse split (see Multilink OKs Reverse Stock Split), as did CoSine Communications Inc. (Nasdaq: COSN).

At press time, Nortel shares were trading at $0.56, down $0.08 (12.50%).

— Mary Jander, Senior Editor, Light Reading
www.lightreading.com
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Belzebutt 12/4/2012 | 9:41:50 PM
re: Nortel Outlook Worsens Seems like these analysts would like to see Nortel cut enterprise just for the sake of it. Products should be cut because they aren't profitable, not because they fall in a certain category, and nobody so far claimed that enterprise was more unprofitable than other product lines. In fact, it seems like the customers doing the most buying right now are enterprise customers. Why should Nortel get rid of that?

I also happen to think that it's useful for Nortel to have an enterprise business. Many customers buy both enterprise-class and carrier-class products, and Nortel has some value to offer to them. The two sides also aren't seperate at Nortel, there are many people who've been on both sides, understand both businesses and are able to bridge the two together. This is added value, not something to throw away because other companies have had to sell one of their businesses for cash.
LightMan 12/4/2012 | 9:41:46 PM
re: Nortel Outlook Worsens Frank Dunn is letting the president of enterprise, Steve whathisname, manipulate the whole company. He has continually refused to make the necessary layoff cuts and his organization barely represents 1/5 of NT's revenue yet represents over half of customer facing compensation. So finally he relents and decides to layoff 50 people from his entourage.
What a joke. It is no wonder why the Bay people act like a bunch of prima donna's where customers can't even get sale's people to return their calls.

I guess Steve must have sponsored Frank's $125k raise earlier this year.

Time to clean the attic vs. the basement if you ask me..

Lightman
MrLight 12/4/2012 | 9:41:43 PM
re: Nortel Outlook Worsens Your are being emotional rather than logical.

I agree with the previous post from Bezlebutt [he/she picked the name] that "it's useful for Nortel to have an enterprise business" specifically because "many customers buy both enterprise-class and carrier-class products".

But Nortel needs to be able to bridge the two together much better than they have up to this point. Nortel has a solid portfolio of both carrier and enterprise products, but they don't work as well together as they could. This is the classic "prodigal son" problem, where the carrier business is the dis-enfranchised son.

Almost every big company has had to deal with the "prodigal son" problem in its corporate lifetime, so we know it can be fixed, it just requires the sons to understand that if they work together the rewards are much bigger than if they work divided.

Mr.Light
LightMan 12/4/2012 | 9:41:41 PM
re: Nortel Outlook Worsens Not really emotional, more "matter of fact". I would be whinning if emotional. Logically speaking Bay has been a coveted baby for way to long. Roll some heads. Become light and agile. Their technology isn't improving, sans some Optiva IMHO, so make some deals that others can't hang with.
tmikado02 12/4/2012 | 9:41:36 PM
re: Nortel Outlook Worsens Why cut enterprise??? It is the only thing selling right now. Cisco is still making its numbers and over 75% of its revenues come from enterprise products.

I agree with the previous post - better synergy is needed with the product lines.
lastmile 12/4/2012 | 9:41:35 PM
re: Nortel Outlook Worsens The next step for telecom is FTTH. People are sick and tired of high speed internet. The term "High Speed" is a misnomer. This speed gives nothing except for a not so slow download of trash that no one really wants.
FTTH is unlimited bandwidth at a similar cost structure. Till this becomes a reality, the entire industry will go downhill.
Most naysayers will say that this will never happen because of the cost's involved.
Catch 22?
Reindeer 12/4/2012 | 9:41:34 PM
re: Nortel Outlook Worsens The ANALyst writes "Also included are a range of Web content delivery and hosting wares, as well as some virtual private networking, voice over IP, and even wireless and optical gear."

Quite the analysis! What is left over?
jamesbond 12/4/2012 | 9:41:33 PM
re: Nortel Outlook Worsens also lays off 11,000 folks!

yeah i want a ftth.
Belzebutt 12/4/2012 | 9:41:33 PM
re: Nortel Outlook Worsens Logically speaking Bay has been a coveted baby for way to long. Roll some heads.

Some heads are already rolling.

Being based in Ottawa, I can honestly say that nobody I know in optical, passport and other places feels that Bay is a coveted baby or that they get special treatment. Bay boxes abound here, there are plenty of them to test with and plenty of people know how to use them. Every optical product is tested with the data products. When an issue comes up it's easy to quickly get gear to test with. I really think this is an advantage, LU and ALA can't possibly obtain enterprise gear to test as easily, cheaply and quickly as Nortel can get its own enterprise gear. If it was any better, NT would have to develop enterprise and carrier gear from the same locations, and this is just not possible.
LightMan 12/4/2012 | 9:41:32 PM
re: Nortel Outlook Worsens Either you are in engineering or are not in the know. The sales teams know what I am talking about. Think about it 20% of the revenue and 50+% of the compensation...

Bay sales team n33ds to get their butts to the street. Their products are not going to win on their merits alone.

For grins synonyms of the term, "coveted"

Excerpt: "..., anxiety; yearning, coveting; aspiration, ambition, vaulting..."
[View Entry]

Envy
Excerpt: "...; illwill, spite. envy, covet, burst with envy. envious, invidious..."
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