Nortel's 4Q Revs,2001 Guidance To Come Under Scrutiny>NT
By Ben Dummett
Of DOW JONES NEWSWIRES
TORONTO (Dow Jones)--Nortel Networks Corp. (NT) could face a tough time
regaining investor confidence even if, as expected, it meets earnings and
revenue expectations for the latest fourth quarter and reiterates its
financial guidance for 2001 when it reports its financial results Thursday.
On a number of occasions in the fourth quarter, Nortel, Brampton, Ont., a
bellwhether stock for the closely watched fiber-optics industry, reiterated
its fourth-quarter and 2001 guidance. The networking company projects
revenue of $8.5 billion to $8.8 billion and operating earnings of 26 cents a
fully diluted share for the fourth quarter of 2000. For the first quarter of
2001, it is projecting revenue of $8.1 billion to $8.3 billion and earnings
of 16 cents a fully diluted share.
And for all of 2001, it expects revenues and earnings per share from
operations to grow between 30% and 35%.
It's all but certain Nortel's stock would suffer if the company's
fourth-quarter results fell short of guidance or it scaled back its growth
projections for 2001.
Nortel could also face selling pressure even if the opposite is true, given
the 29% decline in the company's stock price the day after it reported
slightly better-than-expected earnings for the third quarter and revenue
within the expected range of analyst estimates back in October.
At the time, invstors were dismayed that overall revenue came in at the low
end of analysts' estimates, and optical sales growth was less than expected.
4Q Revs At Low End Of Range Could Trigger Selling
"If they come in at the lower end of the range or below that (for the fourth
quarter), then U.S. (investors) will get all twisted, just as they did" over
the third-quarter results, said Robert McWhirter, manager of the
Toronto-based C$220 million Triax CaRTS Technology Trust. That said, the
reaction of investors would be tempered if Nortel officials maintain a
bullish outlook for 2001 and don't adopt the cautionary outlook that rival
Cisco Systems Inc. (CSCO) recently took, the manager predicted.
As an example of some of the revenue projections for Nortel's fourth
quarter, UBS Warburg and SG Cowen expect the company to produce revenue of
about $8.73 billion and $8.72 billion, respectively, while Sanford Bernstein
& Co. anticipates $8.56 billion to $8.57 billion.
"Revenue is where I want to see (Nortel) do well," said Duncan Stewart,
Toronto-based manager of the C$10.78 million Tera Capital Global Science and
Technology fund. "The market is always a little suspicious of earnings"
because these results can sometimes be less transparent than revenue
figures, he said.
In addition, any sign that Nortel is falling short of revenue projections
while still meeting or exceeding earnings could be a sign that the company
is relying on the unsustainable solution of cutting costs to meet profit
expectations.
"At some point you go from cutting fat to cutting muscle and bone and you
just can't anymore," Stewart said.
The company's sales of optical networking gear for 2000 and Nortel's
outlook for this business in 2001 will also garner much attention from
investors, both as a measure of the company's outlook and management's
credibility.
Nortel projects sales for this business totaling more than $10 billion in
2000 and it says sales for 2001 will grow at a rate faster than the industry
average growth rate of an estimated 40%.
Investor disappointment over Nortel's revenue results for the third quarter
partly resulted from the company unexpectedly confirming flat to slightly
lower revenues in its optical business in the third quarter versus the
second quarter. Investors were also disappointed with projections of more
than $10 billion in optical sales for the year, since only a few months
earlier John Roth, Nortel's chief executive, had said publicly that sales of
optical network gear could hit $12 billion in 2000.
Concerns Over 2001 Growth Targets
Assuming Nortel meets expectations for 2000, its stock could still suffer if
it doesn't provide investors with evidence to show that its growth outlook
for 2001 is realistic.
Last week, BMO Nesbitt Burns, UBS Warburg and SG Cowen all raised questions
over Nortel's ability to achieve its current revenue and earnings guidance
for 2001, because of the apparent slowdown in telecom equipment spending.
UBS actually cut its 2001 revenue growth estimate to 25% from 30%
previously, or below Nortel's own guidance of 30% to 35%.
"I think the market right now is discounting numbers below what Nortel was
signalling for next year," said Ian Ainsworth, manager of the C$689 million
Altamira Science and Technology Fund. "I think people are anticipating some
revision downward in the number - that's why Nortel is continuing to be
weak."
For Ainsworth, the key to Nortel's results will be the company's "forward
looking visibility" for its optical business and wireless infrastructure
operations, which the company is counting on as major source of future
growth.
In the case of Nortel's optical business, some fund managers are looking for
Nortel to generate growth next year of between 50% and 75%.
Paul Sagawa, technology analyst at Sanford C. Bernstein, whose bearish views
for the telecom equipment group are well-known, believes it would be
unrealistic for Nortel to project optical sales growth of more than 50% for
next year.
He takes this view because the expected overall industry growth rate for
next year is only around 40%. Nortel already commands a hefty share of the
market and it is facing increasing competition in the area of selling
high-speed OC-192 transmission systems - a market it has dominated.
Among other things, Sagawa said he will be focused on how Nortel's margins
perform on a sequential basis in the fourth quarter from the third quarter.
"If margins show a sequential decline that's a bad sign," as it probably
signals increasing competition in the optical arena, "a little bit of
discounting" to secure orders at the end of the quarter and wireless margins
being lower, the analyst said.
Company Web Site - nortelnetworks.com
-Ben Dummett, Dow Jones Newswires; 416-306-2024;
ben.dummett@dowjones.com
(END) DOW JONES NEWS 01-16-01 |
