Nortel: Slowdown In Available Capital In North America
Dow Jones Newswires
TORONTO -- A slowdown in spending on network gear is the primary reason behind Nortel
Networks Corp.'s (NT) need to lower its financial guidance for the first quarter and the year.
After the close Thursday, Nortel said it now expects a loss from operations in the first quarter of 4
U.S. cents a diluted share, versus the previously expected profit of 16 U.S. cents a diluted share. It
also forecasts revenue of about US$6.3 billion for the quarter, down from the original projection of
US$8.1 billion to US$8.3 billion.
For the year, Nortel now expects revenue growth of about 15%, down from a previous forecast of
30% to 35% and earnings growth of about 10%, versus 30% to 35% originally.
Before the conference call with investors was interrupted by technical proglems, John Roth,
Nortel's chief executive, said the new guidance largely reflected a lack of available capital for new
carriers in North America to buy network equipment.
In addition, incumbent carries were scaling back capital spending to conserve cash. For example,
these carriers were choosing to fill up the exising capacity on their networks before deciding to add
new network capacity, which was delaying purchases.
Carriers are also being more selective in the network equipment they buy. Specifically, unless an
immediate return can be generated from an equipment purchase, carriers are choosing to forgo that
expenditure, Roth said.
The extent of the slowdown in North America obviously caught Nortel by surprise, since it only
gave its previous guidance last month.
Despite the slowdown in North America, Roth said Nortel's business in Europe, Asia and other
parts of the world remains strong.
Company Web Site: nortelnetworks.com
The most significant slowdown for Nortel Networks Corp. (NT) was in North American sales of
long-haul optical transmission equipment - gear used to transmit data via light over long distances -
and in legacy circuit switches, which are being replaced with next generation equipment.
"What we have really seen is the deployment, specifically in the U.S. marketplace, in optical and
circuit switching has slowed noticeably," Frank Dunn, Nortel's chief financial officer said. Dunn said
this slowdown became evident starting at the beginning of February.
Nortel executives expect growth for long-haul optical equipment to resume in the second half of this
year, and as late as the fourth quarter.
However, in the wake of Nortel's warnings and those by others in the industry, investors will likely
remain skeptical about a rebound until concrete proof of such an occurence is evident.
To offset this slowdown, and expectations of a slight decrease in margins for the year, John Roth,
Nortel's chief executive, said that the company plans to cut sales, general and adminstration costs
significantly.
"A lot of spending will be turned down," Roth said.
On a more positive note, Nortel is still seeing relatively strong growth in North America for optical
gear used to expand the capacity of metro networks that connect buildings within a city. The
expansion in capacity of long-haul network over the last few years has led to a bottleneck where
this part of the network connects with the metro part, resulting in expectations of greater growth
now in the metro market.
Nortel Networks also said spending on wireless networksremains strong, although some analysts
have expressed reservations about spending in this sector. A number of wireless carriers are stuck
with heavy debt loads and they also face uncertainty over how quickly next generation wireless
services will catch on.
-Ben Dummett, Dow Jones Newswires; 416-306-2024;
ben.dummett@dowjones.com |
