Nortel Lags Lucent
By Scott Moritz
Senior Writer
6/1/2005 4:15 PM EDT
URL: thestreet.com
Nortel (NT:NYSE) won points for punctuality Wednesday, but it's losing ground to rival Lucent (LU:NYSE) .
After swinging to a loss in the first quarter and only vaguely promising to keep up with 5% annual industry growth, Nortel said Wednesday that it would chop some of its 30 research facilities worldwide. In doing so, Nortel joined gear peer Lucent, which also has vowed another round of cuts in a bid to bring expenses in line with ever-shrinking sales.
But otherwise the differences between the two telecom-equipment giants came into sharper contrast. While Lucent CEO Pat Russo told a Lehman Brothers conference Wednesday of growing momentum, Nortel executives on an earnings call saw price pressure and eroding margins.
"Lucent is seriously stretching it out against Nortel, and it ain't even close," says Sanford Bernstein analyst Paul Sagawa.
Of course Brampton, Ont.-based Nortel is still recovering from its "bonusgate" accounting scandal and a three-year-long book-cleaning process. And Nortel did manage to catch up on its paperwork this week by filing first-quarter financials Tuesday. Nortel investors breathed a sigh of relief as the company cleared up its filing backlog and obtained a permanent waiver from its creditor Export Development Canada.
But there's still potential fallout ahead from the shareholder lawsuits and agency investigations involving the company. Analysts note that on-time filings, while huge, don't exactly guarantee imminent success.
"We believe there will be several more quarters of accounting overhang, corporate restructuring and legal battles to work through," Moors & Cabot analyst Matt Hoffman wrote in a research note Wednesday. Hoffman has a sell rating on Nortel and a hold on Lucent.
By contrast, Lucent has been thriving, says Bernstein's Sagawa.
"One company grew their wireless business 4.5% over the last four quarters, and the other grew wireless 33% over the same time frame," says Sagawa. "One company has lost market share in every one of its main businesses over the past two years, while the other is the fastest-growing supplier of wireless infrastructure in the world."
So it's little surprise that Nortel spent a good portion of Wednesday's conference call with analysts talking about another wave of cost-cutting.
On the restructuring front, CEO Bill Owens says there is a need to streamline the company's research and development operations, similar to the reductions that outfits such as Lucent have made in recent years.
Nortel didn't say how many additional jobs would be cut. The company is still in the process of removing 3,250 employees from its payroll; these layoffs are related to a previous cutback announced in the third quarter.
Nortel has also made some questionable moves as it tries to regain its footing and spur sales growth. Last month, the company took a sharp turn into the computer system management arena by agreeing to acquire U.S. government contractor PEC Solutions (PECS:Nasdaq) for $448 million in cash. Nortel says it expects the deal to close this month.
And in December, Nortel signed a $500 million contract to sell network gear to India wireless telco BNSL. But because of cutthroat pricing by rival vendors, Nortel agreed to sell the equipment at a steep discount. The company says it has racked up $165 million in losses on the contract and expects a $20 million loss on the deal this quarter.
Similarly, two years ago, Lucent took a beating at the hands of an Indian wireless telco when the company refused to pay for network gear. Lucent was eventually paid for the equipment.
Lucent has also managed to cobble together an impressive string of wireless customers by taking a dominant position as a supplier of code division multiple access, or CDMA, technology. Lucent also has a promising role in the building of 3G universal mobile telecommunications system, or UMTS, networks.
But mergers among the telco customers threaten to clamp down on all network spending, leaving Nortel at a greater disadvantage, say analysts.
"The combination of domestic wireline customer mergers and a slipping wireless position could further hold revenue growth below current 2005 expectations," writes Hoffman.
Nortel shares rose 20 cents to $2.79, and Lucent was up a penny to $2.82 in late afternoon trading Wednesday. |
