Nortel Networks Corp. CEO John Roth is blaming what he calls: a “disastrous” U.S. market for the company’s forecast of a $19.2 billion loss in the second quarter and for another round of job cuts as Nortel tries to keep its ahead above a sweeping tide of a troubled economy.
In a conference call last Friday morning Roth said that the market continues to be volatile and the future unpredictable. Last Friday Nortel announced forecasts a quarterly net loss of around US$19.2 billion and a net loss on operations of $1.5 billion based on revenue from continuing operations of $4.5 billion in the second quarter of 2001, the company said Friday.
The company also said it would cut an additional 10,000 employees from its work rolls, adding to the 20,000 in job cuts it announced earlier this year.
Nortel will finish notifying the first 20,000 laid-off employees by month’s end, and will complete layoffs of 10,000 more over the next two to three months. The 30,000 employees losing their jobs represent about 21 per cent of Nortel’s workforce, Roth said.
“These are very, very severe steps, very difficult for everyone involved,” Roth said.
Roth said further layoffs could become difficult to achieve without doing damage to the way the company does business, a point which caused one analyst to question the current round of layoffs.
“If they can get along without them (laid-off staff), it makes you wonder why they hired them in the first place,” said Andrew McCormick, a senior analyst for the Aberdeen Group Inc. Nortel may have been guilty of believing its own hype, adding staff for explosive growth that vaporized with the dot-com crash, he said.
Nortel plans to withdraw from the access products business, and has implemented cost-saving programs that it expects will save it $3.5 billion annually, company executives said.
Access products include devices for carriers to handle digital subscriber line services, cable Internet access and dial-up Internet connections. Nortel earned about 8 percent of its revenue from these areas, said Frank Dunn, Nortel’s chief financial officer.
Nortel also said it would cease paying dividends after an already-declared dividend of $0.01875 per common share that will be paid on June 29.
Analysts say Nortel’s travails aren’t unique.
“We’re seeing it across the board. We’re seeing it from Cisco (Systems Inc.), and from Juniper (Networks Inc.) last week,” said Lawrence Orans, a senior analyst from research firm Gartner Inc. Juniper slashed its earnings projection for the second quarter by two-thirds and announced it would cut eight per cent to nine per cent of its workforce. Cisco announced it would lay off 8,500 employees in April along with issuing an earnings warning.
The slide of Nortel rival Lucent Technologies Inc. into the abyss has become the cautionary tale for the post-boom age. It failed to find a way to merge with Alcatel SA and called off talks with the French telecommunication equipment maker last month. Lucent’s bond rating fell to junk levels earlier this week; it must raise $2 billion by selling off assets to maintain its credit facility. It lost $3.7 billion last quarter and announced plans to lay off 10,000 workers earlier this year.
On Nortel’s part, the sharp downturn in results is due to a spending freeze by telecommunication service providers, which are trying to squeeze more out of their existing equipment investments, said Roth.
“We’re finding there are a lot of opportunities for our customers to increase capacity without additional equipment purchases,” by redeploying their existing assets, said Roth. As dot-coms and other traffic-generating customers have filed for bankruptcy, carriers have discovered they can shift bandwidth from their out-of-business clients to other customers without paying for more equipment, he said.
He added that the failure of these traffic-generating companies resulted in a single-digit decline, in percentage terms, in Internet traffic for the quarter, compounding Nortel’s woes. “We think it’s a one time effect,” Roth said.
Nortel intends to focus on its high-growth areas, like the optical backbone, core Internet networks and wireless networks. Focusing on core infrastructure, rather than end user access technology such as DSL (digital subscriber line), is a move that makes sense for Nortel, another analyst said.
“You have to look at the access business, and who’s doing the main business in it is CLECs (competitive local exchange carriers),” said Jim Slaby, a senior industry analyst for Giga Information Group Inc. “Clearly, if you’re in the DSL business, your growth prospects have been greatly diminished in the last six to nine months.”
Along with dot-coms, several CLECs have rapidly folded up shop with the freeze in capital markets, notably the bankruptcy of NorthPoint Communications Group Inc. and Rhythms NetConnections Inc., which is looking for a buyer. Carriers and large businesses buy Nortel products, and the shakeout has reduced the money available to many carriers to make purchases.
While the smaller competitive carriers may be dropping off spending on last-mile connections to the home and business, Nortel and analysts see a bright spot for carriers looking to improve their long-haul networks. “Everyone wants to upgrade their long-haul networks, because it’s a huge cost,” said Slaby. “That’s going to be a red-hot market for Nortel.”
The forecast net loss includes an adjustment to the value of intangible assets of $12.3 billion in connection with the acquisitions of Alteon WebSystems Inc., Xros Inc., Qtera Corp. and JDS Uniphase Corp.’s 980 nanometre pump-laser chip business.
“The result of this action adjusts the asset value on our books for these stock for stock acquisitions to reflect current market valuations, or in other words, it is the equivalent of having made these acquisitions at the current stock prices,” Roth said, according to the statement.
Nortel, in Brampton, Ont., can be reached at http://www.nortelnetworks.com/.
