Marconi warns on earnings
Profits to halve, 4,000 jobs cut, more to come
By Peter Bale & Madeleine Acey, FTMarketWatch
Last Update: 3:36 PM ET July 4, 2001
LONDON (FTMW) - Telecoms equipment maker Marconi (UK:MONI: news, alerts) (MONI: news, msgs, alerts) finally announced late on Wednesday it expects operating profit to halve this year, as customers slash capital spending.
Its shares are expected to fall by as much as 20 percent on Thursday.
The company blamed a collapse in capital investment by European telecoms groups on the $100 billion European governments charged for third-generation mobile phone licences.
Chief Executive Officer Lord George Simpson said Marconi faced a "much tougher market during the first three months of the year with a very significant slowdown in the approval of capital expenditure by our customers, especially in Europe."
Marconi said it will cut a further 4,000 jobs including around 1,000 management positions. It cited a slowdown in orders that had been worse than expected in the three months to June, as a downturn already evident in the United States took hold in Europe as well.
It said it expected to break even in the first half and to record a stronger half. Sales would fall 15 percent in the year, it said.
The job cuts would see the company take a £150 million charge, taking restructuring charges for the year to a total of £550 million. Taken with previously announced restructuring intended to cope with the U.S. slowdown the cuts would save the company £350 million a year, with £200 million saved this year, Marconi said.
Profits to halve
Excluding its medical division, which was sold to Philips for $1.1 billion earlier on Wednesday, Marconi reported an operating profit of £702 million in the year to March 2001. The warning implies a profit for the year to March 2002 around £350 million.
"Marconi expects sales for the year ending 31 March 2002 to be around 15 percent lower than the previous year and operating profit before exceptional items to be down by approximately 50 percent," Marconi said in its statement to the stock exchange.
The late evening announcement broke a day's silence from one of Britain's leading companies which took the extraordinary step of suspending trade in its shares while a board meeting debated the trading statement and the inherent restructuring.
Simpson told a news teleconference the company had suspended its shares to avoid investors trading on the news of the medical sale without knowing the warning was coming. He said it was in the interests of all shareholders.
Spread-betting services quoted Marconi shares down 20 percent to 190 pence on Wednesday evening. Marconi shares closed on Tuesday at 245 pence, down 7 percent. That compares with a 52-week high of £12.76 and is just off the year low of 225 pence as concern at Marconi's prospects has grown.
The likelihood of a Marconi warning knocked related shares across the sector: Bookham (UK:BHM: news, alerts) (BKHM: news, msgs, alerts) , for which Marconi is a big customer, fell 8.8 percent to 182.50 pence and telecoms testing equipment maker Spirent (UK:SPT: news, alerts) closed 9 percent lower at 205.14 pence.
France's Alcatel (FR:013000: news, alerts) (ALA: news, msgs, alerts) fell almost 8 percent, Nokia (SE:000053994: news, alerts) (NOK: news, msgs, alerts) was down 2 percent in Finland and Ericsson (SE:000010865: news, alerts) (ERICY: news, msgs, alerts) fell 3 percent. See pan-European markets report.
Right track
Simpson insisted the company was still on the right track.
"We think our strategy is right," he told reporters. Marconi was stronger than many of its competitors and would emerge from the current slowdown (he called it a "temporary pit stop) in telecoms infrastructure spending stronger and able to grow shareholder value.
"What we try to describe is an industry and a sector problem. Marconi is doing relatively well. We have not, like many of our peers, moved into losses and we are not, like many of our peers burning cash," Simpson said.
No quitter
Despite substantial shareholder anger at the suspension, the time Marconi has taken to warn and the collapse in its shares over the past year, Simpson said he had never himself considered resigning.
Shareholders may be surprised, however, that the company has made no fresh provisions for write downs of goodwill on acquisitions or for unsold inventory as had been widely expected.
[Harry's comment: Most companies write off all the bad news at once. What is going on here? Do they expect to sell the inventories??]
See Marconi statement on FTMarketWatch real-time RNS.
Medical sale
Separately, Marconi announced it had sold its profitable medical systems division to Philips (NL:PHIA: news, alerts) (PHG: news, msgs, alerts) at a knockdown price, raising $1.1 billion.
Investors and analysts had expected a heavy profit warning - the company's first - at the very least and possibly much, much worse news from the troubled British telecoms equipment maker.
Marconi, has now followed peers in the telecoms equipment industries like JDS Uniphase (JDSU: news, msgs, alerts) , Nortel Networks (NT: news, msgs, alerts) and Tellabs (TLAB: news, msgs, alerts) and warned on profits.
Even Marconi's house broker CSFB downgraded its outlook for the company by 25 percent last month, yet the company had been silent until now, sticking pretty much to its pattern of only six-monthly earnings reports. See story on recent cuts in Marconi ratings.
Most of its rivals in the telecoms equipment and optical fibre industries have reported a worsening outlook and Marconi is particularly exposed to the weakening market in the United States. The company has been heavily criticized by some shareholders for not making clear earlier what its trading position was.
"Their last statement said this year would be better than last year and that's frankly laughable. It's become untenable as events have unfolded," said one analyst. See last Marconi earnings statement.
Separately, Marconi said it had sold its medical systems division to Philips Electronics (NL:PHIA: news, alerts) (PHG: news, msgs, alerts) for $1.1 billion. See more on Marconi medical systems sale.
Disappointing price
David Lis of Morley Fund Management, a major Marconi shareholder, said investors would be disappointed at the amount raised with the sale of the medical division. Some had expected it to fetch around one times annual sales but it had been sold for 0.7 times.
"It's a buyer's market," he said.
The analyst said the sale to Philips looked like a fire sale that would cut £50-60 million of badly needed profit from Marconi, though it would help the company's cash position.
Marconi had already announced a major restructuring to cut back on its own manufacturing operations, farming them out to others, and the suspension of the shares suggested an even bigger shakeup. |
