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Nortel's Nuclear Winter

It's turning into a very chilly summer in the Great White North.

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.
This may not be the end of the story. Nortel says its aim is to achieve quarterly revenues of $5 billion by the end of 2001 -- and executives say they'll do what it takes to get there.

"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
http://www.lightreading.com
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jmd 12/4/2012 | 8:14:15 PM
re: Nortel's Nuclear Winter "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."

Can you explain what you mean by cash crunch? Do you mean availability of funding to customers? Cash flow problems at Nortel due to ongoing losses from operations?

thx

Mary Jander 12/4/2012 | 8:14:14 PM
re: Nortel's Nuclear Winter I refer to what analysts such as UBS Warburg say is a shortage of cash due to weakness in revenues and operating results.
lagreuse 12/4/2012 | 8:14:14 PM
re: Nortel's Nuclear Winter A recent article of yours during Supercomm claimed that a primary focus of Nortel in the future will be metro DWDM:

"Nortel aims to increase the reliability of metro services by porting them to Ethernet and using new techniques to make them more manageable... In this vein, Nortel demo'd tunable laser capabilities for its OPTera Metro optical DWDM systems at the show"

Yet no mention of this is made the list of areas that Nortel will spend its R&D dollars on:

"Nortel's now putting its R&D into the following divisions: Optical Long Haul, Wireless Internet, Core IP/Intelligent Internet, and Internet Telephony."

Am I missing something here?
Photonboat 12/4/2012 | 8:14:13 PM
re: Nortel's Nuclear Winter >>Can you explain what you mean by cash crunch? Do you mean availability of funding to customers? Cash flow problems at Nortel due to ongoing losses from operations?<<

It means the latter, i.e. estimates have Nortel being $500 M to $1 B short in meeting losses from operations. (If NT were a person, their checking account would be overdrawn by $500M to $1B)

They can cut expenses further, draw on any possible credit lines that they may have with a major bank, or issue short-term commercial paper (which is debt directly to the market, bypassing a bank--although sometimes a bank arranges this and takes a fee). Lucent is also losing money, and is in a similar situation. That's where you hear about Lucent needing to meet payments, and concern over this prompted S&P to downgrade Lucent debt to "junk" status. Part of the Agere deal was that Morgan Stanley assumed $2.5 B in outstanding commerical paper debt. CP is short term debt to the market.

Nortel is enough of a blue-chip firm that they will find a way to meet any shortfall in cash. However, if they meet this obligation by getting credit (bank loan, commercial paper, or other), they will need to have a really good explanation how they will climb out of the hole. Same for Lucent. That's why Lucent is considering selling the optical fiber business. Nortel may have to sell one of its units, too.
Tod 12/4/2012 | 8:14:13 PM
re: Nortel's Nuclear Winter Not that my two cents counts, but I'd say your right on the money...Let me know if you need a leg up?
jpm5150 12/4/2012 | 8:14:12 PM
re: Nortel's Nuclear Winter That is the most uneducated, illogical, and frankly childish statement ever written. You should be ashamed and may a pink slip find its way to you.
NYGiant 12/4/2012 | 8:14:12 PM
re: Nortel's Nuclear Winter This should teach those arrogant ex-Nortel employees a lesson. All those self styled optical gurus are now un-employed. This is great. Ottawa's so called optical boom is now a big bust. Winter in Ottawa has begun and is going to last a long time.
jpm5150 12/4/2012 | 8:14:12 PM
re: Nortel's Nuclear Winter I totally agree with you and I feel it was just overlooked or accidentally not mentioned. Metro does represent a large portion of their future. But be weary about the HDX switching platform taking more time to release than Nortel leads to believe. They hoped September, but reality is 2002.
ivehadit 12/4/2012 | 8:14:11 PM
re: Nortel's Nuclear Winter why do people turn mean in periods of stress and difficulty. i'm really glad to see the posts in favor of compassion and empathy. everyone has families to raise, careers to consider.
jpm5150 12/4/2012 | 8:14:11 PM
re: Nortel's Nuclear Winter I agree...I used to work for Nortel...and the people that work(ed) there were incredible! The guy NYGIANT, is an absolute idiot! Why would anyone (other than Lucent employee) mention that 30K people out of a job is a good thing. It's not "our" fault the heads of the company did not prepare well for a bad market.
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