Earnings reports

Nortel Still Not Slim Enough

Nortel Networks Corp. (NYSE/Toronto: NT) looks to have more cutting to do.

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
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USA 12/4/2012 | 10:04:05 PM
re: Nortel Still Not Slim Enough I don't have the specifics as to the total number they are firing, but cuts have already started in Ottawa.
next-gen-wisdom 12/4/2012 | 10:04:04 PM
re: Nortel Still Not Slim Enough I don't see the giants like Nortel, Lucent, Fujitsu, Alcatel or whatever other telecom company getting profitable this days.
sauron5 12/4/2012 | 10:04:03 PM
re: Nortel Still Not Slim Enough This bear market is making me hungry. I think
I'll break for lunch. I'll take the subway
down to Wall Street and find a place with a
good "Grilled Bull Market" Sandwich but leave
out the "small fry"


zweisel 12/4/2012 | 10:04:03 PM
re: Nortel Still Not Slim Enough the breakdown of employees is highly guarded so the best you would get a rough estimates.
lilgatsby 12/4/2012 | 10:04:03 PM
re: Nortel Still Not Slim Enough Does anyone have the 43,000 break-out to sales/engineering/marketing/r&d/operations/etc?

Would be interesting to see where the bulk of employees are and if it is varies from US to CAN to EU.

Also how many are left in Wireless vs Optical. Seems like NT is really pushing the Wireless and backing away from anything Optical.

benson 12/4/2012 | 10:04:02 PM
re: Nortel Still Not Slim Enough Anybody hear rumours about this?? Are the folks they are currently cutting all coming from optical networking?

If Nortel exits the optical networking market, it will indeed be the final nail in the coffin for the great optical boom of the 90's.

We were once kings....

jgh 12/4/2012 | 10:04:02 PM
re: Nortel Still Not Slim Enough Not true, they have reduced the number of SEs supporting the optical sales specifically the long haul equipment.
Nortel, like the rest of the optical vendors are focusing on the metro solutions, which is quite crowded. Same reason that CIENA purchased ONI for the metro product.
I will say that the Nortel 5200 and 3500 are good boxes, they are still trying to develop new applications like Optical Ethernet
zweisel 12/4/2012 | 10:04:00 PM
re: Nortel Still Not Slim Enough Why would Nortel exit the optical market because of a downturn? It will pick up since most of the planet simply doesn't even have a computer so bandwidth growth will come (when?). Also, the trick is to be sized for the optical market not exit because of losses.
sauron5 12/4/2012 | 10:03:59 PM
re: Nortel Still Not Slim Enough Nortel will probably reduce their Optical
Components production capability and focus
on Optical Hardware platforms and Software.
In effect, they will outsource the components
to more able suppliers and keep development
in house.

This way they can purchase components from
suppliers who will compete on price.

They should never have bought that components
production facility in Zurich from JDSU in
the first place.

umustbejokin 12/4/2012 | 10:03:57 PM
re: Nortel Still Not Slim Enough NT is spending approx $500-600mil/Quarter on R&D. On the Con-Call the analysts kept asking if there was not some discretionary R&D that could be cut to lower the break even point. NT mgmt belives now is the time to maintain the R&D so that when the recovery comes they will be there with the best products & the features that will drive sales. All the analysts can do is run the numbers and being anal-ysts they want to see the number add up to break even. The R&D is vital to gaining market share as customers begin spending money again, and this strategy is already showing results in their increasing market share in wireless, and no they are not getting out of optical, they even grew market share last qtr, especially in long haul.
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