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Technology Stocks : Nortel Networks (NT) -- Ignore unavailable to you. Want to Upgrade?

To: Qualified Opinion who wrote (14023)	8/20/2004 9:49:47 AM
From: Cooters	Read Replies (2) \| Respond to of 14638

More from Smith Barney: OPINION Today's Status Update From Nortel Was Slightly More Positive Than Expected Supporting Our Recent Upgrade And Our Buy Recommendation On The Shares Today's status update from Nortel included estimated limited preliminary financials for 1Q04 and 2Q04 and a set of new strategic initiatives designed to reset the business model, including a 10% workforce reduction. The company also reaffirmed that it expects to publish full prior period financial restatements and the audited 1H04 results by the end of September, indicating to us that the overhang on the shares from the accounting issues is likely soon to be fully cleared. We upgraded Nortel shares to 1S (Buy) a couple of weeks ago in anticipation of today's update and today's information was inline to slightly better than our expectations. With the restructurings and business streamlining announced, we are meaningfully raising our forward estimates and reiterating our Buy rating on the shares. 1H04 Revenues And Cash Slightly Better Than Expected, Margins And Earnings Inline With Our Expectations. Unaudited revenues for 1Q04 and 2Q04 were $2.5 billion and $2.6 billion versus our estimates of $2.4 billion and $2.5 billion. We are encouraged by the solid revenue performance during the restatement process, which indicates that Nortel's customer relationships and competitive position remain strong. Gross margins for 1H04 were 43%, which is exactly where we expected gross margins to come in. 1H04 operating expenses were also inline with our forecast at about $2.1 billion. Nortel indicated that EPS for 1H04 were between $0.00 and $0.02 including a two-cent benefit from a customer contract settlement. We had modeled slightly negative but more or less breakeven EPS. Nortel's end of 2Q cash balance of $3.7 billion is about $100 million higher than we had estimated. We believe Nortel finished 2Q at an approximate breakeven net cash position. In 1H04 Wireless Revenues Appear To Have Been Stronger Than Expected And A Greater Portion In The Mix Of Overall Sales. Nortel indicated that Wireless revenues made up 51% of its first half sales against our expectation for Wireless to be 44% of revenues. As a result, all three other segments came in below our revenues contribution estimates. Enterprise was about 21.5% of 1H sales versus our estimate of 25%. Wireline was about 17.5% against our estimate of 20% and Optical made up 10% of sales, just short of our 11% estimate. Management spoke optimistically about the continuing opportunities in 3G UMTS wireless, especially in emerging markets such as China and India. However, Nortel is seeing some pricing pressures in Wireless and this is one factor behind the under-45% gross margins. In the Wireline segment, Nortel noted it is seeing good traction in VoIP softswitching, but noted that revenues have been lumpy quarter-to-quarter due to the nature of large scale carrier rollouts of new technology. Management Spent Most Of The Call Today Talking About Strategy And Business Realignment To Capitalize On The Current Market Opportunity. Nortel unveiled a number of initiatives today with the aim of growing market share, leveraging core strengths, and improving margin performance. These steps include: * A targeted headcount reduction of about 3,500 employees. With the 2,500 employees being transferred to Flextronics (FLEX--$11.20 rated 1H by David Pescherine) and the 3,500 heads announced today, Nortel's employee level will drop from about 36,000 to 30,000. The reduction should be substantially completed by the end of the year. Nortel estimates one- time restructuring costs of $300-$400 million and annualized cost savings of $450-$500 million. Management indicated that U.S. employees in the Wireline division will bear the brunt of the cutbacks. Wireless and emerging market employees are likely to be untouched by the layoff. * Realignment of the current business segment structure. Wireline, Wireless and Optical will be combined into one Carrier Networks division and Enterprise will remain its own division. Pascal Debon, the former President of Wireless Networks will become President of Carrier Networks. * Increased emphasis on the Enterprise and Government markets and Professional Services opportunities. * The establishment on corporate-level Chief Marketing and Chief Strategy Officer positions. Dion Joannou, who was previously President of Central and Latin America, will assume the CSO role. Nortel is searching for a CMO. * Brian McFadden, currently President of Optical Networks, will become CTO effective October 1. Greg Mumford, who is currently CTO, will retire effective October 1. * Seven additional finance employees were terminated for cause, including four that had previously been placed on leave. In April, Nortel had also terminated its previous CEO, CFO, and Controller for cause. * Nortel will demand repayment from these ten individuals for 2003 bonus repayments made based on incorrect financial reporting profits. Nortel is also contemplating other actions against these individuals. Raising Forward Earnings Estimates -- Reiterate Buy Rating. Based on today's call we are making significant changes to our forward estimates, especially for the out years. Our 2004 estimates remain basically unchanged with revenues remaining at $10.4 billion, gross margins remaining at 43%, operating margins still at 2%, and EPS remaining at $0.03. Our 2005 numbers change as follows: * Revenues remain at $11 billion. Gross margins remain at 44%. * Operating margins goes to 7.8% from 4.2%. * EPS goes to $0.14 from $0.07. Our 2006 numbers change as follows: * Revenues remain at $12 billion. Gross margins remain at 45%. * Operating margins goes to 9.7% from 6.4%. * EPS goes to $0.17 from $0.12.