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Has Nortel Hit Bottom?

Light Reading
News Analysis
Light Reading
7/20/2001

Nortel Networks Corp. (NYSE/Toronto: NT) reported the expected but still stunning $19.4 billion quarterly net loss in its earnings announcement last night (see Nortel Reports 2Q Results). On the bright side, CEO John Roth and CFO Frank Dunn say they've reached the end of layoffs and plant closings.

"Barring major changes, reductions are done," said Roth during a conference call with analysts after market close.

Dunn, who opened the call and announced the results, backed this up, saying Nortel's done what it needs to do. The cost-cutting measures Nortel's taken since January 1, he asserted, will ultimately save the firm $870 million quarterly and $3.5 billion annually. These measures include laying off 30,000 people this year, of whom 23,000 have already been notified, with 7,000 expected to be dismissed over the next eight weeks.

The company's also closed 10 million square feet of office and manufacturing space, equivalent to 36,000 seats, Dunn says. And Nortel's shopping its access business, including its DSL gear, with hopes of closing a deal within 12 months.

Roth acknowledged the pain of the cuts: "When you go as deep as we've gone you lose some very good people indeed," he said.

"We want to drive our break-even point to a sustainable level, then drive revenues up," Dunn said. The goal is to achieve a "cost structure of $5 billion" annually, he added, then focus on mining five key business areas in order to return to profitability -- namely, Network Infrastructure, Wireless Internet, Optical Inter-city, Local Internet, and Photonic Components.

Roth said new products would help the move forward, including the company's new Optera Connect HDX, metro products based on tunable lasers, wireless gear, "intelligent Internet" products for business and consumer use, and data networking gear for enterprises.

Neither Roth nor Dunn would predict just when the turning point to profitability would come, saying the market is still in a state of change, with carrier customers focused more on saving costs than expanding their infrastructure.

Indeed, Roth repeatedly referred to carriers' focus on saving money as a key driver of Nortel's losses. "Our customers are still instructing their engineers to find ways to defer purchases," Roth said. While doing everything they can to avoid capital spending, he asserted, carriers eventually will have to look at expanding their networks again, probably in mid-2002. But he declined to give guidance or issue any specific projections.

Nortel's results were in line with its warnings in June (see Nortel's Nuclear Winter). The huge quarterly net loss translates to a $6.08 net loss per share. Revenues were $4.6 billion for the quarter, 36 percent lower than last year's quarter, and 25 percent lower sequentially (see Nortel Issues Mediocre Q1 Results).

Losses were particularly heavy in the area of optical long-haul or backbone equipment, execs said. Geographically, sales were poorest in North America, where revenues fell 51 percent in the U.S. and 41 percent in Canada.

There were some high points: Growth was up 20 percent in wireless Internet, and sales were good in the Asia-Pacific region -- although this couldn't offset the slide in other areas.

The company also claims to have improved its management of cash and now shows $1.93 billion in cash and cash equivalents as of June 30, 2001, as opposed to $1.64 billion on December 30, 2000. Further, the firm has upped its receivables, reduced its inventories, and is revamping its financing arrangements to strengthen its balance sheet, execs said.

But problems remain. Among them: Nortel is taking an after-tax charge of $12.3 billion for what it terms "the write-down of intangible assets, primarily goodwill related to certain acquisitions." This also was anticipated, as Nortel said in last month's warning that it had reevaluated the purchases of Alteon WebSystems, Xros, Qtera, and others in light of how their valuations have suffered during the market correction of the past few months.

Analysts on last night's call asked a lot of questions, many relating to whether all this really spells the low water mark in Nortel's financials.

Roth and Dunn couldn't be pinned down. "Is this the low water mark? I would say yes, but nothing's for certain," Dunn said, in response to a query about gross margins.

Analysts also confronted Nortel about its lack of guidance and the thousands of extra layoffs it announced last month. One told Roth the company's credibility has been damaged with the financial community.

To this, Roth reiterated that cutting one third of the workforce is the end of it, and that he sees the company moving forward by increasing market share in its five strategic areas. He also blamed the customers yet again (see Sour Grapes of Roth).

"We have every reason to believe we'll gain share. Will it offset customers' determination to run their companies with less capital expenditure? That's the call we're all looking for."

- Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com Movers and shakers from more than 100 companies – including Nortel Networks – will be speaking at Opticon 2001, Light Reading’s annual conference, being held in San Jose, California, August 13-16. Check it out at Opticon2001.

Nortel representatives will also be speaking at StorageNet, Byte and Switch’s annual conference, in New York City, October 2-5, 2001. See: StorageNet2001.

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kephill
kephill
12/4/2012 | 8:04:06 PM
re: Has Nortel Hit Bottom?
My personal experience leads me to believe Roth is probably correct in blaming the carriers. I signed a contract with Verizon over 7 months ago for a DSL line in my office. I do not have that line even though they have billed me for it. They have given me 2 sets of IP gateway addresses and usable IP addresses. Neither set responds to a ping. They are trying to do everything over the phone from Dallas, Texas to my office in Everett, Washington. It has been a very frustrating experience. The carriers are trying to do everything as cheaply as possible with no thought to the quality of service.
tiredofit
tiredofit
12/4/2012 | 8:04:05 PM
re: Has Nortel Hit Bottom?
duh...subject says it all

"Barring major changes, reductions are done," said Roth during a conference call with analysts after market close.

ARAVI
ARAVI
12/4/2012 | 8:04:00 PM
re: Has Nortel Hit Bottom?
Ken, I hope you are correct. I listened to the earnings call yesterday and there were a few key bright spots.

The access to 5B liquidity comes with minimal strings attached (as opposed to LUcifer who has all kinds of strings such as EBITDA).

In spite of Roth avoiding the seasonality question, everyone knows that the 2nd and 3rd quarters are historically the weakest in Nortel's numbers. This means a potential blowout 4th quarter (especially from the current depressed levels). Carriers will start buying in the 4th quarter big time (to avoid having to give up budgeted items).

Everyone forgets that Nortel did hire close to 30,000 last year alone. This provides for a lot of cushion in terms of cutting back, though a lot of long-term employees are getting laid-off along with the new ones. Bottom line is that there are enough people after the 30,000 layoff to keep product development going. Morale is low, but show me a big-cap tech company where morale isn't low...

My only wish is that they get rid of more fat cats from the top levels than they have managed to so far and announce the new CEO candidate soon. However, based on the fact that the repriced options to the employees will be issued in mid January, I suspect that they will hold back CEO search results until the 4Q conf. call (Jan 24th?).
oc-3072
oc-3072
12/4/2012 | 8:03:59 PM
re: Has Nortel Hit Bottom?
mary,
one thing i think is probably relevant to the story, but missing is the fact that nortel's optical inter-city (LH DWDM and ADMs) revenue dropped from $1.8B last year to $293M this year. that's an 84% drop over the same quarter last year. i'd be concerned if i were a nt shareholder....
oc-3072
Lopez
Lopez
12/4/2012 | 8:03:57 PM
re: Has Nortel Hit Bottom?
Roth himself says that only 23,000 of the 30,000 have actually occurred.

Get it over with already! This uncertainty is nullifying productivity, demoralizing the employess and driving many good people to leave of their own accord.
voyeur
voyeur
12/4/2012 | 8:03:57 PM
re: Has Nortel Hit Bottom?
kephill,

"My personal experience leads me to believe Roth is probably correct in blaming the carriers. .....The carriers are trying to do everything as cheaply as possible with no thought to the quality of service."

You are such a Roth cheerleader, it's almost funny. Of course the carriers are trying to cut costs. They, along with the rest of the industry, are bleeding money. Instead of blaming their customers, companies should be trying to come up with better products to speed up provisioning, etc. See below.

http://industryclick.com/magaz...

Carriers can not afford to do a truck roll for every customer any more. They have to do things smarter, faster, and cheaper. As a result, customer service is probably the first to suffer (on that we can agree), but don't tell me NT's customer service hasn't suffered along with the rest of the industry.
screwdriverbob
screwdriverbob
12/4/2012 | 8:03:51 PM
re: Has Nortel Hit Bottom?
If Nortel keeps laying off, how do they plan to grow in the nex-gen space?
lighter
lighter
12/4/2012 | 8:03:42 PM
re: Has Nortel Hit Bottom?
Nortel is feeling the pinch and Cisco will be next! Nobody will be immune to the Comms downturn
for the next 4 quarters. I'm eagerly awaiting the Ciena numbers- this should be interesting! Personally I think they will be ok (maybe not street ok but growth will be evident). The Ciena numbers will be just another nail in Nortel and Lucent's backside and will force them to do more and fast. Expect Lucent and Nortel
to do the obvious (MORE LAYOFFS - DEEP CUTS)

Hopefully they will do the "right layoffs"! But somehow I expect that they will both chop chop
chop. However about early 2003 Lucent and Nortel will realize the stupidity of the 2001 chopping and wonder what the fuck they have done! Will they be the next IBM or DEC? My prediction they will both be DEC!!!!! They all pass the game un-willingly to upstarts (I believe its happening now). These upstarts will be - Ciena, Nokia, Cisco and most likely a couple of startups that are just paper trails at this point- a couple of them will likely become the next Dells of the Telecom revolution.

History is a great guide- look back to 1990 in the PC revolution nobody heard of Dell at this time( I feel telecoms is at this point now)/ Anyway you slice it it will be a very interesting next few years
MarauderNow
MarauderNow
12/4/2012 | 8:03:36 PM
re: Has Nortel Hit Bottom?
Lighter -
I disagree with many of the points you've made at least with regards to NT...
1. I think NT is probably close to being done layoffs...
2. Ciena may experience growth in their numbers, but I don't think they'll be able to the market forever. For one... they're still way overpriced and they won't be able to show the growth numbers they've showed for tremendously long.
3. I think that the products that NT is working on now will position them as a viable competitor against Ciena, especially considering the huge installed base that they can leverage for sales of their Smart Optical software and the HDX and PX...
4. You can't compare Cisco, Nokia or Ciena to Dell... they have completely different models. One... Cisco, Nokia and Ciena are all great innovators. Dell is an assembler... they put together commodity parts with a bit of software. The two just aren't the same...
mr_twinkie
mr_twinkie
12/4/2012 | 8:03:35 PM
re: Has Nortel Hit Bottom?
Lopez:
Yea it's very annoying that layoffs aren't done yet and they are definitely hurting morale.
But I have a feeling, it's more a tug of war between the execs to see whose dept gets burned. Obviously in the last little while, at least one person lost.

screwdriverbob:
The layoffs have been mostly concentrated in legacy areas or development where the ROI wasn't very good. The optical development to say one area has been almost untouched.
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