Interesting article from the NT thread...
From the Montreal Gazette
Friday 27 April 2001
Slowdown a shock: Roth
Nortel chief takes heat from investors at annual meeting from investors
ANDY RIGA
The Gazette
Roth: Nortel's customers got hit suddenly by a credit crunch.
"How did you drop the ball like that?"
That was the first question aimed at John Roth yesterday, as Nortel Networks Corp.'s chief executive faced shareholders for the first time since he suddenly slashed the company's rosy 2001 forecast in February, a move that sent its stock plummeting and led to plans for 20,000 layoffs.
The investor with the blunt question was taking part in Nortel's annual meeting in Calgary.
He wanted to know why Nortel, equipped with sophisticated planning and inventory systems, was so slow in reacting to a drop in spending among customers. How could "you not have had a better grasp of the business?" he asked Roth, who has been criticized by investors and pundits over the debacle. "The burden of responsibility falls on your shoulders."
In his response, Roth admitted Nortel was caught off-guard by the slowdown, but he blamed it on a sudden and dramatic credit crunch that hit its customers, something that couldn't have been spotted by Nortel's systems.
"As recently as October of last year, all the conversations I was having with my customers were: 'John, you haven't shipped me enough equipment yet, when are you going to get the volume up, how are you going to get more to me?' " Roth said.
In its planning, Nortel relies heavily on guidance from customers' network-planning and marketing departments, he added.
But they had no inkling of a looming slowdown until it was too late for the giant, Brampton, Ont.-based maker of equipment used for telecommunications carriers.
After pouring hundreds of billions of dollars into Nortel's customers over the past few years, investors suddenly turned off the taps early this year. That left the clients short of cash, so they couldn't buy the Nortel equipment they needed, Roth said.
"The people we (had not talked) to were the treasurers, who found out in January that they were having difficulty raising the money. That word did not filter down to the network-planning people and the marketing people until quite late," Roth said.
"The lesson we've learned is we need to stay very, very close to the financial component of our customers, as well, because even though the network engineers want to do it and the marketing people have the ambitious plans, if the capital markets are cutting off our customers, we need to be aware of that."
Other high-technology companies have also learned that lesson the hard way, Roth added. "I must say, (with) the change of guidance I gave on Feb. 15, I was leading, I think, most of the high-tech companies in the realization that this event was coming on," he said.
He pointed to an announcement by Cisco Systems Inc. last week warning that third-quarter earnings and revenue will fall far short of forecasts, amid decreasing demand and increasing inventory backlogs.
Cisco was one of the first to warn of a high-tech slowdown, but its earnings warnings have grown steadily grimmer over the past few months. Cisco was "probably the last one to announce that they've seen the same effect as we did" in February, Roth said.
Nortel's CEO was also grilled by another shareholder during the meeting. "My question is going to reflect the mood of just about all the shareholders here, and that is the stock price," the investor said. (Nortel's now-sagging shares soared to $124 last summer. The stock fell $1.16 to $22.43 in Toronto trading yesterday.)
The shareholder wanted to know if Nortel planned "anything like a share buyback or anything (else) to increase the value of the current stock price."
Roth didn't answer the share-buyback question, instead saying his focus is on boosting Nortel's bottom line.
"The variable that we can control, of course, is earnings," he said.
"This year, obviously with the pullback, it's going to be difficult, but we're focused on getting earnings back up to what the market expects from us and to drive it to new levels."
He also reminded shareholders of Nortel's stellar performance since he took over as CEO in October 1997. "Over the last four years, while we have doubled sales, we've almost quadrupled operating earnings."
Since February, Nortel has issued two profit warnings and announced several rounds of layoffs.
After seeing revenue jump 42 per cent to $30.3 billion U.S. and operating profit soar 61 per cent to $2.3 billion in 2000, Nortel posted a 2-per-cent drop in sales in the first quarter of 2001, and a $385-million (U.S.) net operating loss.
In an earlier presentation to shareholders, Roth said he's confident about the company's future.
Though customers are now focusing on squeezing more money out of existing equipment, he said eventually they'll have to buy new gear from Nortel to keep up with growing amounts of data on their networks, and the arrival of the wireless Internet.
"In the long term, this business continues to move ahead," he said, though he gave no indication of when he expects a turnaround at Nortel.
"This, by all accounts, is going to be a difficult year for the company, but we are going to come through it in good shape and we have the products to do (that). "We'll be properly sized and we're aiming to come out of this a stronger company as a result." |
