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Nortel Bashing Continues

Nortel Networks Corp. (NYSE/Toronto: NT) continues to come under attack from the Wall Street analyst community. S.G. Cowen downgraded the stock this morning, from "Strong Buy" to "Buy."

As of late afternoon, Nortel shares were down about $1.50 to $42.50.

The downgrade follows Nortel's public statement, released yesterday, updating its sales forecasts for next year. In that statement, Nortel CEO John Roth said the company expects revenue and earnings per share from operations in the fourth quarter of 2000 will be in the range of $8.5 billion to $8.8 billion and $0.26 per share. Roth also said Nortel expects growth of both revenue and profits to be in the "low 40s," percentage wise, for the year 2000. The company expects 30 percent to 35 percent of revenue growth in the year 2001. These updates follow Nortel's quarterly conference call one week ago, which disappointed Wall Street.

Many Wall Street analysts were angry with Nortel management for surprising them with less than spectacular third quarter results. To complicate the matter, Nortel's release of the public statement yesterday conforms to the new law, called regulation Fair Disclosure (FD), which requires the company to share all information equally with public investors and analysts.

"It was a management faux pas by setting expectations too high and then trying to set the brakes a little in the conference call," said George Kelly, managing director with Morgan Stanley Dean Witter, of the reaction to Nortel's third-quarter conference call. Kelly was speaking about the performanc on optical networking in the stock market at the Next Generation Networks (NGN) show in Washington D.C.

But despite Wall Street's fury, the disappointing quarter has been linked to issues that indicate it may have been an anomaly.

One source, a former Nortel employee, says the company has been affected by unpredictable sales cycles, caused by semi-annual quotas imposed on the sales force. Because the sales quotas close in the second quarter and fourth quarter of each year, those quarter often yield stronger growth. In fact, Nortel's pattern of growth in the past year backs up this theory. The source says the Nortel management plans to move to quarterly quotas in 2001.

"We've already discussed the results of the 3rd quarter," said Jeff Ferry, a Nortel spokesman. "We outperformed analyst expectations. Comments from former employees don't have a lot of credibility."

Nortel officials also declined to reveal any information about their sales cycles. "The organization of our sales structure is confidential," said Ferry.

Fear of component shortages, which led some companies to double-book orders from Nortel, also led to some unpredictability in Nortel's quarter, as discussed by management in the recent conference call.

"All of a sudden, the product shortages eased up," says Gary Law, VP of marketing for Brightlink Networks Inc., speaking of customer orders for Nortel's OC192 products. "Now they're full to the gills." The customers may have been holding back on ordering any more products until they had reduced their inventories, says Law. "It's the 'slinky' effect. They've satisfied a lot of pentup demand."

Both these issues -- the irregular sales cycle and the management of the supply chain -- appear to be short-term. But they also indicate that Nortel management must work on internal systems and communicate such changes to the public in order to restore investor confidence.

-- R. Scott Raynovich, executive editor, Light Reading http://www.lightreading.com

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