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Nortel Soothes Analyst Worries

Light Reading
News Analysis
Light Reading
11/21/2000

Nortel Networks Corp. (NYSE/Toronto: NT) sought to sooth investors' concerns over earnings and customer inventories at the company’s annual conference in Boston this morning.

Nortel CEO John Roth said he was confident the company would hit its previously stated guidance of revenue and earnings per share in the fourth quarter of 2000. He said that revenues would range between $8.5 billion and $8.8 billion for the first quarter 2001, and that revenue from optical products would grow more than 125 percent in 2000 to exceed $10 billion.

“We have good visibility into our customers, going forward,” said Roth at the conference. “Looking at what our customers expect to do in the next year, our forecast is quite good.”

Nortel officials said the company expects sales and profit per share from operations to increase 30 to 35 percent next year. And they are predicting that the overall market will probably grow about 20 percent.

Company execs also said Nortel is approaching 40 percent growth for the fourth quarter with two thirds of orders already booked for Q4.

“I think Nortel will hit their numbers,” said Max Schuetz, optical networking analyst at Thomas Weisel Partners. “But it may not be as clean and elegant as they would like. They might have to twist some arms for customers to take certain things in Q4 that they otherwise might not take until Q1.”

Regardless of how they get there, this is good news for investors who’ve been spooked over a slowdown in sales amid rumors that some of Nortel’s customers still had excess inventory to deploy, compounded by fears that service providers will buy less equipment in the next year.

Nortel representatives tried to lay these concerns to rest by first addressing the capital expenditure issue (see Analyst Report Defends Optical).

“Yes, capital expenditures are being reeled in,” said Clarence Chandran, COO of Nortel. “But spending is being focused on next-generation technology, not the passé technology like narrowband.”

Roth expanded on this idea, emphasizing the need for Nortel customers to look to new technologies to boost their businesses.

“The world of circuit switching is in decline,” said Roth. “There is no question about that. That is why we decided three years ago to focus on optics and next-generation wireless. That is where customers are diverting their investment. They look at our portfolio and see that Nortel stands out as a supplier that can give them what they need to make the transition.”

Another hot issue on analysts’ minds was the excess inventory that some customers had built up. Nortel’s lead times for shipping products to customers increased to as much as 20 weeks, which led customers like WorldCom Inc. (Nasdaq: WCOM) and Qwest Communications International Corp. (NYSE:Q) to double-order products (see Nortel's Fright Night). This caused a slowdown in Nortel’s third quarter results. But Roth said the situation is under control.

“As we started to close the gap in the second quarter and maintain that production in the third quarter, they [customers] didn’t need the safety stocks they had built up,” said Roth. “For the most part, that is done, and our guidance shows that order flows should get back to normal. There are small pockets of inventory, but that isn’t material anymore.”

Analysts also had questions about Nortel’s vendor financing portfolio, which will increase to $2.5 billion dollars in 2001 from $2.1 billion in 2000. With a squeeze on capital markets and news of competitive local exchange carriers (CLECs) going out of business, analysts are less concerned with the terms of the deals than they are with the health of the service providers being offered these deals.

Again, Nortel executives tried to allay these concerns. Frank Dunn, CFO for Nortel, told investors that Nortel requires service providers to meet critical milestones as well as have strong backing from third-party sources.

“We’re looking for service providers with significant backing, versus going after the smaller startups,” said Dunn.

But he tried to emphasize that this practice hasn’t been born out of the recent CLEC troubles. “This isn’t something that we have just looked at over the past three months. We’ve been looking at this for the last year at least.”

Executives also gave analysts a peak of what is to come down the road. The all-optical MEMS (micro-electro-mechanical system) switch acquired from Xros will be going into beta tests next week and will be generally available by the end of the year, said Chandran. When asked if Nortel was missing a key opportunity to get into this market by going all optical instead of taking an optical and electrical approach, as Ciena Corp. (Nasdaq: CIEN), Sycamore Networks Inc. (Nasdaq: SCMR), and Tellium Inc. have done, Chandran said no:

“We are focused on taking more cost out of the network. So with respect to what those others are doing, we aren’t missing out.”

-- Marguerite Reardon, senior editor, Light Reading, http://www.lightreading.com

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