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