Citing a "very significant" and "protracted" slowdown in sales of long-haul optical and circuit-switching equipment, John Roth, CEO of Nortel Networks Corp. (NYSE/Toronto: NT) broke the company's recent silence on near-term guidance with a dire "progress report" this morning (see Nortel Projects Loss, Gets Credit).
On July 17, Roth says, Nortel will announce total quarterly net losses of $19.2 billion on total quarterly revenues of $4.5 billion -- representing a net loss per common share of 48 cents.
These figures represent a 27 percent decrease in revenues from the first quarter of 2001 (see Nortel: Losses and Layoffs, Eh?) and a 38 percent decrease from last year's quarter.
The news comes on perhaps the gloomiest day in the current telecommunications recession. Last night, JDS Uniphase Inc. (Nasdaq: JDSU; Toronto: JDU) issued a warning of its own (see JDSU Warns of Another Shortfall). And 360networks Inc. (Nasdaq: TSIX; Toronto: TSX.TO) this morning announced that it would miss a debt payment (see 360networks Misses Debt Payment).
Nortel's news heralds a new round of layoffs and cutbacks. "These are very, very severe steps, very difficult for us, for our employees, shareholders, and customers," Roth told analysts in a conference call this morning.
In an exclusive interview with Light Reading this afternoon, Greg Mumford, president of Nortel's Optical Internet division, reiterated his boss's sentiments: "We don't underestimate the toll this is taking on our employees and their families. We are deeply grateful to our employees, and we are doing everything we can to get through this period of alignment."
The news dropped a bomb on Nortel's share price, which at press time was trading at 9.31, down 1.29 (12.17%).
The sharp downturn was larger than many analysts expected and seems to emanate from a fearsome combination of lost revenues, restructuring costs, restated assets, and a cash crunch.
Roth attributes it to the fallout of reduced orders worldwide, particularly in the U.S. market, where he says new carriers have stopped building their networks and incumbents are getting expert at squeezing more capacity out of existing links, instead of building new ones with optical long-haul equipment.
"At the start of the quarter, many customers were showing us plans for $300 million in investments and identified the routes." By the time the network engineers finished their analyses, he said, the figures were often less than a quarter of the original estimate.
Roth also said that circuit-switching was suffering as a result of RBOCs and other carriers redeploying trunks, instead of creating new ones, and "cannibalizing" existing lines for use by wireless and Internet access services.
Analysts on this morning's call also questioned whether Nortel has lost out as a result of drastic price reductions it's enacted. Roth denied this, saying pricing is "business as usual." But at least one source says he's heard differently.
"Customers tell us Nortel is pricing very aggressively, even undercutting Marconi in Europe," says Michael Urlocker of UBS Warburg.
Whatever the roots of its woes, Nortel is taking a slew of measures to regain its financial footing. These include:
- More layoffs and closures. Nortel plans to lay off another 10,000 employees by September. The new layoffs will bring Nortel's pink-slip total for 2001 to 30,000 -- nearly 32 percent of its 94,500-employee population as of December 2000 and a record among public carrier equipment companies this year.
Nortel's also in the process of shutting down 8.8 million square feet of facilities space worldwide. The company expects to take an $830 million after-tax restructuring charge related to these cuts in the second quarter.
- New credit arrangements. In addition to the layoffs and closures, Nortel's tapped $2 billion in new credit facilities to help it weather the storm, including a bond issue of $1.5 billion and approximately $1.2 billion in commercial paper.
- Jettisoning DSL. Nortel plans a $2.6 billion after-tax charge for discontinuing its so-called "access solutions," which include all DSL voice and data gear. Nortel's now putting its R&D into the following divisions: Optical Long Haul, Wireless Internet, Core IP/Intelligent Internet, and Internet Telephony.
- Re-evaluation of acquired assets. Nortel's also taking "an adjustment to intangible assets" amounting to roughly $12.3 billion. This writedown takes into consideration a significant reduction in the value of goodwill assigned to companies that Nortel's purchased this year, specifically Alteon WebSystems, Xros, and Qtera. Nortel's also re-evaluating its own 980-nanometer pump-laser chip business.
- Focus on big customers. Nortel seems to agree with Wall Street that its present problems can be traced in part to financing the buildouts of greenfield carriers last year. As a result, the company is focusing on larger incumbents.
"These figures [of $5 billion per quarter] don't represent guidance," said CFO Frank Dunn. He said he can't predict when market conditions will enable Nortel to once again forecast significant growth based on new capex -- although Roth hopes networks will start expanding again sometime next year.
- Mary Jander, Senior Editor, Light Reading