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Nortel Networks operating losses may continue through midyear: analysts
GILLIAN LIVINGSTON
TORONTO (CP) - Nortel Networks will post a first-quarter operating loss of up to
$360 million US - its first in years - and industry watchers expect Canada's premier
technology company will continue to lose money as it adapts to slower telecom
spending. "I see what the size of the loss is expected for the first quarter, and quite
frankly it may be difficult for them to post positive earnings in the second quarter
because they might still be in an adjustment phase," said David Heger, an analyst
with A. G. Edwards & Sons in St. Louis. "It could possibly be the second half of the
year before they can break through to positive earnings again."
Over the past several years the telecommunications equipment giant has produced
massive net losses - $3 billion US in 2000 - due to writeoffs from acquisitions, but it
has reported profits from day-to-day operations.
Nortel, which will report its first-quarter results Thursday, warned at the end of March that it expects an
operating loss of 10 to 12 cents US a share - deeper than it had said in February. With about three billion
shares outstanding, that puts its operating loss at $300 million to $360 million US.
Revenue will slacken to about $6.2 billion, as telecom companies reduce or defer capital spending or demand
cheaper products, said Nortel, which reports in U.S. dollars.
That's a sharp contrast to the year-earlier period when revenue rose 48 per cent to $6.32 billion and earnings
from operations were $347 million.
It's also a huge shift from the fourth quarter of 2000, with revenue of $8.82 billion and operating earnings of
$825 million.
"The very fact that Nortel earnings can melt that fast, I think, should hopefully open some investors' and
analytical eyes to take a much closer look at this company," said Ross Healy, president of Strategic Analysis
Corp.
"It calls into question just how fundamentally and basically profitable Nortel actually is."
It won't be a surprise if the company has an operating loss for the second quarter, Healy said.
"With a strong downturn, that downturn didn't end abruptly on March 31," he noted.
"One would indeed expect that there would be some downward momentum into the second quarter which
would make the second quarter even potentially worse than that."
Investors may also see a deterioration in the fibre-optic leader's balance sheet. An unknown is whether Nortel
will take writedowns on financing it provided to some customers, Heger said.
Some small telecom carriers could run out of cash in the near future, causing lenders, such as Nortel, to be
forced to account for that on their books.
Analysts and investors, who have seen the company's share price dwindle by about $100 from last year's peak
to the $25 Cdn range, will be listening closely to what CEO John Roth expects over the next few months.
However, they may not hear much. In late March, Roth refused to give a forecast for the year because he said it
was too tough to tell how long the downturn would last.
Nortel has been cutting costs, but some say it hasn't done enough, emphasized by the first-quarter loss. The
company will cut 15,000 jobs by the end of the year, and has told employees to reduce expenses.
Heger said in the last year Nortel boosted staff, partly through acquisitions, and raised component production
capacity in expectation of continued strong growth.
Now it has to retrench radically.
"I'm just afraid that's going to take several quarters to work through," Heger said.
"It's going to be a challenge for them to move as quickly as possible to wind back the cost structure to be in line
with a lower revenue base than what they had previously thought."
He added: "I'd like to hear - besides job cuts - what else they're doing to adjust the cost structure down."
Cost-cutting combined with an improved market in the latter half of the year might move Nortel back to
operating profitability by year-end, Heger said.
The last full year it had an operating loss was 1993, when it lost $878 million US.
It returned to profitability after cutting about 5,200 jobs and closing several plants, and some observers say it is
poised to repeat this turnaround.
Said Chet White, an analyst with Wells Fargo Van Kasper in Long Beach, Calif.: "The underlying factor of why
Nortel will eventually, in our opinion, return to profitability and get back on its feet is that they really are the
dominant optical networking company in the world."r |
