Updated Bloomberg report - Northern Telecom Warns on 2nd-Half Sales; Stock Drops (Update4)
Bloomberg News
September 29, 1998, 6:33 p.m. ET
Northern Telecom Warns on 2nd-Half Sales; Stock Drops (Update4)
(Adds comments from CEO and analyst.)
Brampton, Ontario, Sept. 29 (Bloomberg) -- Northern Telecom
Ltd. said second-half revenue growth will be less than expected
because of disappointing demand in Europe and Asia, according to
analysts who were briefed by the company.
Officials at the No. 2 seller of phone equipment in North
America made the forecast at a meeting in New York limited to
analysts and money managers. Northern Telecom shares fell 5 1/4,
or 13 percent, to 35 1/2, dragging down other phone-equipment
shares. U.S. trading of Northern Telecom was halted about 1 p.m.
Northern Telecom, which is 42 percent-owned by BCE Inc. of
Montreal, is experiencing slower demand in Asia for its products
and has lost some wireless contracts in Europe to rivals,
analysts said. The revenue warning comes two weeks after the
company said it will fire about 3,500 people, or 4 percent of its
workforce, to cut costs.
''Investors are not accepting slower revenue growth,'' said
Robert Wilkes, an analyst at Brown Brothers Harriman who attended
the meeting. ''It's difficult to sustain earnings growth without
revenue growth.''
Brampton, Ontario-based Northern Telecom confirmed in a
statement that it expects third-quarter revenue growth to be ''in
the low double digits.'' Third-quarter and 1998 earnings are
expected to meet analyst expectations, the company said.
Northern Telecom issued its statement four hours after the
shares started falling and three hours after trading was halted.
''We had to understand what people thought they heard,''
Chief Executive John Roth said in an interview. ''We were
surprised with the reaction in the marketplace.''
Lucent Technologies Inc. shares dropped 3 to 74 1/2, while
Ericsson AB American depositary receipts fell 3/4 to 19 1/4 and
Motorola Inc. fell 5/16 to 44 3/16. BCE's shares fell C$3.80
(US$2.51) to C$43.90 in Toronto trading.
Industry Problems
''This likely hurts the major players in the telephone-
equipment business,'' said Tim Luke, an analyst at Lehman
Brothers Inc., who has a ''buy'' rating on Northern Telecom
stock. Luke cut his revenue estimates for Northern Telecom to $17
billion from $18 billion in 1998 and to about $21 billion from
$22.9 billion in 1999.
Two weeks ago, Northern Telecom rival Alcatel SA of France
warned that its profit won't meet forecasts this year amid slower
demand in Europe and Asia, raising concerns that other equipment
makers could face similar troubles.
Lucent, the top seller of phone equipment in North America,
said it's isn't seeing a slowdown. Earlier this month, the
company said it was comfortable with analysts' profit and revenue
estimates for the fiscal year ending tomorrow.
It also said it's taking market share from Northern Telecom,
Alcatel and Motorola. Lucent told analysts it expects fiscal 1998
sales to rise to about $30 billion.
That's left investors in other equipment makers unsure where
the companies stand.
''They're concerned that Lucent could become the Microsoft
(Corp.) of the telecom equipment business,'' Brown Brothers'
Wilkes said.
Meeting Profit Estimates
Northern Telecom told analysts it still expects to meet
profit estimates, helped by cost cuts and sales of more
profitable products. The company is expected to earn 38 cents a
diluted share in the third quarter, 76 cents in the fourth
quarter and $1.83 in the full year, according to analysts polled
by First Call Corp.
''Margins are in good shape and spending controls are in
place,'' Roth said. ''The products that are doing well are high-
margin products.''
Dollar's Impact
The CEO said sales are also being hurt by a stronger U.S.
dollar, which makes goods sold in international markets worth
less when the currencies are exchanged back into dollars.
Before the meeting, Roth said the company expects its recent
acquisition of Bay Networks Inc. to help it gain market share and
exceed the industry's annual sales-growth rate of 14 percent.
''We're talking the long term versus the short term,'' he
said to explain the conflict between his earlier statements and
the warning for this quarter.
Northern Telecom's revenue, excluding Bay, rose 20 percent
last year to US$15.45 billion. By comparison, sales at Lucent
rose 13 percent to $26.36 billion in the year ended Sept. 30,
1997.
In 1997, excluding Bay, Northern Telecom earned US$158
million, or 59 cents a share, in the third quarter and $390
million, or 74 cents, in the fourth quarter. In the full year,
the company earned $805 million, or $1.54 a share, before special
items.
--Andrew Brooks in the Princeton newsroom (609) 279-4066 |
