Nortel's Nasty Surprise

Nortel Networks Corp. (NYSE/Toronto: NT) delivered a blow that left Wall Street reeling after market close today: Citing unexpected delays in capital spending among North American carriers, the company slashed its guidance for the first quarter of 2001.

"The carriers are very nervous about their ability to get new capital," said CEO John Roth in a conference call with analysts late today. "We thought they'd go through this period for about a month, that after January things would clear up." Instead, he says, the carriers have changed the way they're doing business. They're counting "each and every dollar" and seeking to saturate their existing data infrastructure instead of investing in new gear.

As was the case in its last earnings call, (see Nortel Logs Good Quarter, Great Year), Nortel seemed reluctant to point to specific products and markets. Executives did, however, say that sales of optical circuit switching gear was going to be particularly hard hit in the quarter.

All this, Nortel says, has cut the legs out from under its revenue guidance to investors. Revenue growth expectations are now 15 percent for the first quarter of 2001, less than half the original estimate of 30 to 35 percent. Revenues are expected to be $6.3 billion, instead of the $8.5 to $8.8 billion originally set out in last quarter's earnings report. The company expects to realize a loss of $0.04 for the quarter.

What's more, the company says that in order to cut costs sufficiently to meet even these figures, it must lay off 10,000 people, or more than 10 percent of its present work force. Nortel announced in January that it would be laying off 4,000 people, roughly 4 percent of its work force (see Nortel to Cut 4,000 Jobs).

Nortel maintains that throughout all this, it won't be losing any market share. The overall U.S. market, executives say, will realize half of the 20 percent growth the company originally predicted.

The news is in stark contrast to the earnings report early today of Ciena Corp. (Nasdaq: CIEN), in which revenue guidance was raised substantially and executives claimed that visibility into future good fortune was better than ever.

Coincidentally, Ciena's key message this morning was that carriers were turning away from Sonet-based gear and embracing next-generation optical switches. Nortel's guidance reduction seems to bear this out -- at least in part.

Analysts seemed frustrated with Nortel, confronting Mr. Roth during a question and answer period with past reassurances about guidance (see Nortel Soothes Analyst Worries) and telling him the numbers didn't make sense. Some expressed concern that Nortel's numbers could be worse than anticipated.

Nortel wasn't helped by the logistics of the conference call itself: Apparently the overwhelming volume of calls swamped the conference provider, causing analysts to miss most of the first half of Roth's talk.

-- Mary Jander, senior editor, Light Reading http://www.lightreading.com

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abarbier 12/4/2012 | 8:53:33 PM
re: Nortel's Nasty Surprise the economic slowdown will separate the winners
from the losers. NT will lose money next Q (4 cents a share)...they are in BIG trouble as the
massive layoffs indicates.
Is CIEN eating out market share?
ExNortel 12/4/2012 | 8:53:32 PM
re: Nortel's Nasty Surprise Told ya so...glad I left when I did!!!!!

Sorry NT employee's..stick around another 1 to 2 years, your stock will go back up, soon, real soon, really, soon, anytime now, just wait, soon, see, there it go's, .12, only $60 more to go!


ExNortel 12/4/2012 | 8:53:31 PM
re: Nortel's Nasty Surprise Here's the LU quarter FINALLY coming out...a few more to go...

YankeeLondon 12/4/2012 | 8:53:31 PM
re: Nortel's Nasty Surprise >Ironically, Ciena's key message this morning was >that carriers were turning away from Sonet-based >gear and embracing next-generation optical >switches. Nortel's guidance reduction seems to >bear this out -- at least in part.

Ciena's Coredirector appears to be a Sonet MSPP.
I would like to conclude that Ciena's product
obviates the need for a CO to buy separate
Sonet ADM, Sonet DACS or Crossconnects. Ciena's
product seems to be encompass the ADM,DACS,
Crossconnect in one Sonet device.

hippo 12/4/2012 | 8:53:30 PM
re: Nortel's Nasty Surprise it is pretty obvious by now that the big guys are losing their lunch. the little guys are eating them!!!

JNPR, SCMR, CIEN all report better than expect results.

LU, CSCO, NT all missed or warned.

and it is company specific. the leaner and meaner ones are more flexible and will execute much better.
hippo 12/4/2012 | 8:53:29 PM
re: Nortel's Nasty Surprise btw, stop blaming the US economy slowing more than what you had expected. it is the worse excuse. it is YOUR own problem.

the economy hasn't slowed for those like JNPR, SCMR, and CIEN.
pingu 12/4/2012 | 8:53:21 PM
re: Nortel's Nasty Surprise Good points hippo!

Here is some more reading to put NT's announcement into perspective

From Briefing.com:

Nortel (NT) 29.75 +0.20: It was the best of times. It was the worst of times. Ciena (CIEN) and Nortel are the two cities in this tale. As we cautioned in our earlier Story Stock on Ciena, it was very important to learn the correct lessons from the company's strong earnings report this morning. Our conclusion was that companies with exposure to fewer but stronger carriers and whose business was focussed on equipment which reduced network costs, such as optical switches, would fare better than companies such as NT which had broad exposure to carriers and product lines. It didn't take long to get support for that conclusion. Nortel's downward guidance was rather severe -- Q1 revenue guidance was taken down to $6.3 bln from $8.1 bln. On the conference call, NT didn't mince words about the source of the unexpected weakness; it was the US and it was primarily optical. As the company put it, carriers are investing in utilizing capacity in existing routes but are not looking to build new routes until every network is fully utilized. This actually fits in relatively well with Ciena's message; its DWDM equipment and optical switches can help carriers to increase capacity and reduce costs in existing networks. Nortel is also DWDM player, but it has been to slow to deliver its optical switch and has huge exposure to many other optical segments that build on legacy SONET (sychronous optical network) networks; the demand for which appears to be slackening even as demand for more cost-effective next-generation optical gear offered by Ciena accelerates. What we may be witnessing is a key turning point in telecom evolution. The wait has been on for legacy SONET networks to eventually become extinct as they are more costly than next-gen networks. But with capital flowing freely for years, carriers were building everything -- legacy networks and next-gen networks. With capital now scarce and carriers becoming more disciplined, they are focussing on equipment that can deliver revenue-generating services and reduce network costs. The telecom sector is not a monolith. Just as there was eventually a sifting in the Internet sector that distinguished winners from losers, so too will there be in telecom. Optical companies with exposure to legacy SONET equipment are a much more dubious long-term proposition; these include NT, Lucent (LU), to some extent Cisco (CSCO) given its Cerent acquisition, and Redback (RBAK) with its Siara acquisition (both Cerent and Siara developed boxes that build on legacy SONET networks). Companies that are better positioned to deliver next-gen networks are CIEN, Sycamore (SCMR), and Corvis (CORV). Note: after hours trading on NT saw the stock trading down to 22.75, off 7 from the close. - Greg Jones, Briefing.com

Now read this:

A Death Foretold by George Gilder

ssimmons 12/4/2012 | 8:53:20 PM
re: Nortel's Nasty Surprise What a difference a year makes!!!!

Last year, everyone was saying that Nortel had it made with the right product mix. The reality is that it is big company with a lot of products and a lot of legacy....

Well John Roth.... Remember what happened to Dr. Stern 10 years ago...
femtokid 12/4/2012 | 8:53:20 PM
re: Nortel's Nasty Surprise Cheers Ex

For reminding me, my holiday is dwindling in a puff of SONETless smoke.
Ahh Well.........

40gig anyone
Harley 12/4/2012 | 8:53:19 PM
re: Nortel's Nasty Surprise Now, If Frances Jewels was the CFO of NT, (or better yet, LU), this may not have happened.
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