Nortel cost cutting vital to curing cash crunch
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Nortel cost cutting vital to curing cash crunch
TORONTO, July 17 (Reuters) - Telecom giant Nortel Networks
Corp. , which last month warned of massive
write-downs in its second-quarter results, can head back to
profitability if it can rein in costs and keep cash flowing in
to pay off debts, analysts said this week.
Analysts said Nortel, which expects a staggering $19.2
billion loss in the second quarter, could stop losing money by
the second half of this year and turn in profits by 2002.
But in a slumping market for its fiber-optic networking
products, it will have to cope with some $3 billion in short-
and long-term debt, and assess what to do about vendor
financing loans provided to buyers of its costly equipment.
The company, which reports second-quarter results after
Thursday's market close, has already said it is slashing
one-third of its workforce.
"I think they can get to break-even in the second-half.
They have a good shot given the 30,000-man staff reduction.
There is a lot of wood to chop but I think they can do it,"
said Alex Henderson, analyst at Salomon Smith Barney.
Nortel's expected second quarter loss, one of the biggest
in corporate history, includes $15.2 billion of write-downs in
the value of acquisitions made during last year's tech sector
boom -- a rally which brought Nortel shares to a high around
$85, compared with this week's year-low levels around $7.60.
That compares with competitors Lucent Technologies ,
which traded at $6.87 on Tuesday, down from a high of $67, and
Cisco Systems , trading 75 percent off its former high
at $17.77.
Analysts said they expected Nortel to fend off a liquidity
crisis, provided it can shave costs and keep cash flowing to
fund its debt. They will watch for details on new cost-cutting,
and see if Nortel is raising cash by selling off inventory,
offloading acquisitions and collecting on receivables.
CASH CRUNCH
"They have a cash crunch but not a liquidity issue, so they
have to be very careful in managing their business," said
Christin Armacost, an analyst at SG Cowan.
Short-term debt of about $1 billion, due within a year,
plus about $2 billion in long-term debt is a "debt load of no
insignificant quantity," she said.
Armacost does not expect Nortel to yield profits until
sometime next year, and she said the company would find it
challenging just to keep revenues at second quarter levels.
Nortel said in its June warning that it expects sales of
$4.5 billion in the quarter to June 30. It would return to
profitability if annual revenues hit the $20 billion level
after restructuring is complete.
The company steered analysts to expect a loss of 48 cents a
share. But Henderson said the loss would be just 19 cents once
charges of $650 million for the cost of goods sold, $150
million in research and development, and $250 million in sales
and administrative costs were stripped out.
Everybody knows that Nortel's optical business is in a
funk, with an expected 60 percent decline in revenues from 2000
levels, but what isn't known is how cost-cutting will buoy
Nortel's bottomline in the second and third-quarter, he said.
UBS Warburg analyst Michael Urlocker said Nortel had a
"fair amount of financial flexibility" with credit lines
exceeding $4.6 billion. If no debt is tapped, Nortel's cash
deficit would be about $2.2 billion, he added.
ASSET SALES?
The next item to watch will be whether Nortel, on an
acquistion binge last year, now starts selling off assets,
possibly including its Enterprise division, which includes PBX
switching hardware, or software firms bought in 2000.
Armacost expects Nortel to exit the Enterprise business.
But because it would be tough to find a buyer, Nortel could
"shut it down, or slowly let it go to zero."
Other analysts doubt asset sales are in the cards.
"I don't think there are a lot of asset sales coming down
the pipe. We are not goingto do a Lucent here and sell off
lots of business. There is a minor cash crunch, but bankruptcy
isn't and won't be an issue here," said Henderson.
"The restructuring is not the issue. I really want to know
what the operating profits are," he added.
Nortel, like its competitors, sold equipment to network
carriers on a pay-in-installments basis, known as vendor
financing. This spurred sales at the time, but as fledgling
carriers went bust, Nortel's exposure has risen.
"This is a blind spot, because we don't know what the net
cash out the door for vendor financing will be, " said
Urlocker, adding that details will probably not be revealed
until Nortel files its 10Q quarterly financial report with U.S.
regulators.
Urlocker said up to half of $2.8 billion Nortel's unfunded
commitments to carriers could be rescinded as carriers become
ineligible for funding or change their minds on buying.
Armacost said vendor-financing concerns was a minor issue
compared to Nortel's debt load, because commitments "may or may
not even end up being funded depending on performance criteria
that they (Nortel) set up."
($1=$1.54 Canadian)
REUTERS
Rtr 17:47 07-17-01 |
