Nortel Still Not Slim Enough
That's the primary conclusion to be drawn from the company's quarterly earnings call, in which it announced that it met analyst expectations when it reported a net loss of $697 million, or $0.20 per share, compared to a loss of $19.4 billion, or $6.08 a share, for the same quarter a year earlier (see Nortel Reports Q2 Numbers). On the conference call with analysts and investors, Nortel executives suggested that the company will cut more costs as it strives to reach profitability within the next 12 months.
On an adjusted basis, Nortel said it lost $323 million, or $0.09 a share, which was in line with First Call expectations. This was down from a loss of $1.55 billion, or 48 cents, the previous year.
Despite narrowing losses, the company still saw revenues decrease by about 40 percent. Revenues were $2.77 billion, down from $4.61 billion a year earlier. In May, Nortel said it expected second-quarter revenue to be flat to down 5 percent from the $2.91 billion reported in the first quarter (see Nortel Falls Short in Long Haul).
On the conference call, president and CEO Frank Dunn said the company expects to reach profitability within the next 12 months. But that represents a step back from the last earnings call, in which Dunn said Nortel could break even by Q4 2002 (see Nortel's World is Flat). Dunn also said that he expects carrier spending through 2002 and into 2003 to remain relatively flat.
It all adds up to growing skepticism from both investors and analysts about when and if Nortel can turn the corner. Some analysts, like Alex Henderson of Salomon Smith Barney, say they don’t believe that Nortel could manage profitability with a $3.2 billion break-even point.
When asked by analysts on the call if he would consider lowering the break-even, Dunn responded:
"Are we finding opportunities to go below $3.2 billion? Yes we are. Am I prepared to say what that number is right now? No, because this is work in progress."
“They made it pretty clear that they are not married to the $3.2 billion break-even,” says Steven D. Levy, an analyst with Lehman Brothers. “I don’t think you have to read between the lines to get that. They don’t have the luxury of increasing revenue to grow into that number.”
But Levy says he sees signs of stability in the market. Specifically, he says that North American carriers are starting to slightly increase spending. Also, aside from Juniper Networks Inc. (Nasdaq: JNPR), most telecom companies reporting earnings so far, have seen either flat to slightly increased sales in the U.S. (see Juniper Numbers Raise Questions). Since the North American market is by the far the largest and most important in the telecom industry, this is a good sign that things are starting to stabilize, he says.
“Our basic thesis is that U.S. carrier quarterly capex is not likely to be any worse than it was in the March quarter and that sometime in the second half of 2002 quarterly capex should begin to modestly rise,” he says in a research note published this morning.
This theory seems in line with Nortel’s own projections. Dunn says he expects revenues in the third quarter to be flat with the second, but he predicts a slight sequential improvement moving into the fourth quarter.
Still, stabilization and recovery can’t come quickly enough for Nortel, which is why the company seems eager to cut its break-even point. Exactly what the new number will be or where the cuts will come from is not yet known. Dunn did not outline any specific plan. But Levy believes the break-even will at least be lowered to $3 billion.
Nortel has already halved staff levels over the last 18 months. In May the company announced it was slashing another 3,500 jobs by September, reducing its headcount to 42,000. While more job cuts weren’t mentioned on the call yesterday, Dunn said the company would continue to look at ways to reduce general, administrative, and sales costs, which were $767 million in the quarter. He also mentioned that the company may sell or close its fiber optic components unit.
As for the business, metro, and enterprise network, equipment sales fell 10 percent from the first quarter; wireless equipment sales dropped 1 percent; and optical revenues were flat.
Nortel is trading up $0.01 (0.76%) to $1.32 today.
— Marguerite Reardon, Senior Editor, Light Reading