NT conference call Part 3:
Research and development (R&D) expenses were $616 million, or 14.9% of
revenue, in the quarter, compared with $528 million, or 15.1% of
revenue, in the third quarter of 1997. This reflects planned and ongoing
investments across all Nortel Networks businesses.
Investment and other income was $130 million for the third quarter,
including $117 million in one-time gains.
Cash and short-term investments were $1.9 billion at the end of the
quarter, up substantially from the $495 million at the end of the second
quarter due primarily to cash in hand at Bay Networks and the proceeds
of certain divestitures.
Days Sales Outstanding for the quarter increased by approximately five
days relative to the year-ago period.
Bay Networks merger. Nortel achieved a significant milestone this
quarter with the completion of the merger with Bay Networks, the largest
data networking merger in history. Management is very pleased with the
integration accomplishments to date. Nortel's Enterprise Networks bu
siness line, which includes Bay, is cited in industry reports that
confirm the company's leading position in call-center markets. Bay did
approximately $285 million in sales in the month of September, in line
with Nortel management's expectations. RBOCs represented approximately
20% of Nortel's customer revenues prior to the merger and,
going-forward, they will probably represent less than 20%.
Customer financing. Nortel is highly competitive against Lucent
Technologies (NYSE: LU), Ericsson (Nasdaq: ERICY), and others and does
offer customer financing when appropriate. Nortel continues to be highly
successful in laying off the commitments and has only about $500 million
of customer financing on the balance sheet — and even a substantial
proportion of that is in the process of being laid off. Nortel's
customer financing practices are overseen by a committee of the board of
directors.
Guidance. Management currently expects to see 1998 revenue growth from
ongoing operations, including Bay Networks, to be in the mid-teens.
Looking beyond 1998, discontinuities in the telecommunications market,
such as deregulation, globalization, the need for mobility, and the
impact of the Internet, are creating opportunities for Nortel to provide
solutions to traditional and new customers globally. Revenue growth is
projected in the high 20% range for 1999, including gains attributable
to the Bay merger. Bottom-line growth is projected to be consistent with
a business model that has gross margins at 42%-plus, SG&A expense at 17%
to 18% of sales, and R&D expense of around 14%. The tax rate has been
creeping up slightly. Capital expenditures and depreciation and amortiz
ation are expected to follow historical trends in 1999.
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