Nortel Slashes Estimates, Plans 5,000 More Job Cuts

(03/27/01, 7:19 p.m. ET) By Susan Taylor, Reuters OTTAWA—Nortel Networks Corp. confirmed analysts' worst fears Tuesday as the world's No. 1 supplier of telecommunications equipment further slashed its first-quarter estimates and said it would cut 5,000 more jobs amid an ongoing downturn in the U.S. economy and pricing pressure from competitors.

In its second recent cut to estimates, Nortel (stock: NT) said it now expects a loss from operations of 10 cents to 12 cents a share on revenues of $6.1 billion to $6.2 billion.

Analysts polled by research firm First Call/Thomson Financial had expected a loss of 4 cents a share on revenues of $7.7 billion.

In mid-February, Nortel cut its estimates to a loss of 4 cents a share, from expectations of a 16 cent profit, on revenues of $6.3 billion.

The company also abandoned full-year forecasts Tuesday, citing uncertainty over customers' spending plans. In February, Nortel cut revenue growth estimates in half, to 15 percent, and profit estimates by two-thirds, to 10 percent.

Analysts had estimated full-year earnings of 61 cents a share on revenues of $35 billion, said First Call/Thomson Financial. That stood well below the company's guidance of 80 cents a share in earnings and underscored analysts' skepticism with the company's forecast.

"It's pretty bad," said Paul Sagawa, analyst at Sanford Bernstein, who said the warning falls substantially below his estimate of an 8 cent loss for the first quarter. "They've given people carte blanche to cut for the rest of the year—they have no idea what they're going to be able to do for the rest of the year. You're going to see estimates falling like a rock."

Nortel also said it was cutting more jobs, laying off 15,000 staff by mid-2001. That represents about 16 percent of Nortel's 94,500 staff at year's end.

The Brampton, Ontario, company has already cut close to 10,000 jobs and said it would see benefits from those reductions in the second quarter of 2001.

Job cuts will be made in Nortel's slower-growth business units and from "infrastructure" costs, said a Nortel spokesman.

Shares in Nortel, which are nearly 80 percent below their year highs, will likely tumble some more, Sagawa said.

"I think the stock probably can come down another 20-30 percent on this," he said.

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-- Martin Thompson (mthom1927@aol.com), March 27, 2001

Answers

POSTED AT 12:02 AM EST Wednesday, March 28

Nortel shares sink after hours

By SIMON TUCK From Wednesday's Globe and Mail

Ottawa — Nortel Networks Corp. stock tumbled in after-hours trading Tuesday night after yet another earnings warning, as questions grow over its handling of the telecom sector's downturn.

Nortel shares sunk 12 per cent in after-hours trading in the United States to $14.76 (U.S.), down $2 from its close on the New York Stock Exchange, following the telecommunications giant announcement of its second earnings warning and third round of layoffs this year.

The Brampton, Ont.-based company said it will cut another 5,000 jobs and is now expecting to post an operating loss of between 10 and 12 cents (U.S.) a share in the first quarter, compared with the 4-cent-a- share loss that the company had predicted less than six weeks ago.

Unlike its previous warning, Nortel said Tuesday that its prospects for the rest of this year are unclear. The company, like virtually all the key players in the telecommunications equipment industry, has been hit hard in recent months by weakening product markets, a downturn in the broader economy and a slumping stock market.

Analysts gave Nortel executives mixed reviews over their handling of the company's recent woes. Some said the top brass should have provided investors with more realistic guidance weeks ago. "Wall Street likes to get all of the bad news over in one fell swoop," said Jim Jungjohann of CIBC World Markets in Denver. "It doesn't help their credibility."

Mr. Jungjohann said issuing a series of announcements — instead of just one — deters investors. "It basically keeps a lot of investors on the sidelines."

But David Powers, an analyst at Edwards Jones & Co., which is based in St. Louis, said the company shouldn't be expected to issue gloomy forecasts before things look that bad. "There is no near-term visibility in the telecom space," he said. "If they were the only ones doing this, I think it would raise a red flag."

Michael Urlocker, an analyst at UBS Bunting Warburg in Toronto, said technological advances and the phenomenon of just-in-time delivery have made it more difficult for suppliers to provide accurate long- term forecasts. "They can rapidly build out networks and they can rapidly stop building networks."

Another analyst, who asked not to be named, said company executives have done a poor job of managing the downturn, the symptoms of which first showed last fall. "The smoke clouds have been on the horizon," he said. "Nortel executives have repeatedly dropped the ball since September."

Yet analysts agreed that Tuesday's announcement surprised few. "Nobody was expecting Nortel to do really well," said Duncan Stewart, a partner and portfolio manager at Tera Capital Corp. in Toronto.

Mr. Jungjohann also said this latest warning could convince investors that the company — and its stock — have finally hit the bottom. "Now that Nortel has preannounced, I think there might be a lot more people ready to bottom-fish."

Nortel also said Tuesday that the slumping U.S. market means that it will now have to slash about 15,000 jobs — nearly 16 per cent — from its work force, up from a cut of 10,000 it announced Feb. 15. That figure was 6,000 more than had been announced less than five weeks earlier.

One analyst said the company should have done better at realizing how many employees it would need in the coming months. "I think it speaks to a weakness in management," he said. "I think they've been caught off guard not realizing how things have changed."

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-- Martin Thompson (mthom1927@aol.com), March 28, 2001.