Nortel’s Earnings Drag Down Fiber-Optic Stocks

Will the fiber-optics sector be the next major technology shoe to drop?

Shares of telecom-equipment giant Nortel Networks plunged in after-hours trading Tuesday after the company’s report of weaker-than-expected third-quarter sales. The decline dragged other fiber optics stocks down as well.

Nortel (ticker symbol: NT) tumbled to $48.75 in after-hours activity after sliding $3.63 to $63.31 on the New York Stock Exchange.

Excluding one-time gains and charges, and costs from stock acquisitions, Nortel said it earned $574 million, or 18 cents a share, in the third quarter. That beat the 17-cent consensus estimate from analysts.

Sales were $7.31 billion, up 42% from a year ago.

But Nortel’s optical network systems sales rose 90% in the quarter, below some analysts’ estimates of growth as high as 125%.

“The revenue was at the low end of the range,” said Salomon Smith Barney analyst Alex Henderson, who still rates Nortel a “buy.” “The growth is a little bit light on the optics side.”

Nortel’s sales of fiber-optic equipment were limited by a shortage of people to install the products, Chief Executive John Roth said in an interview.

Nortel needed more engineers to install and test its optical products, even after it hired an additional 30% the last year, Roth said. It plans to keep hiring and improve productivity to eliminate the problem in 2001.

“Right now, the issue is installing as fast as we can ship,” Roth said. “To do this well, it’s about getting people up the learning curve.”

The problem is training people fast enough, Roth said. Until now, Nortel’s main constraint was a shortage of manufacturing capacity.

But some Nortel customers also bought less optical equipment than expected in the quarter, as they installed products from inventories built up when they feared Nortel and other suppliers would fall further behind, said Chief Financial Officer Frank Dunn.

Nortel expects sales of fiber-optic equipment to exceed $10 billion this year, up more than 125% from 1999, Roth said. But that’s less than the $12 billion Roth said was possible in a September interview.

“We expect the inventory levels our customers have to be worked off,” Roth said. Yet he still said Nortel expects operating earnings to grow 40% this year and between 30% and 35% in 2001.

But amid slowing sales of semiconductors and personal computers, the last thing investors want to hear is that the roaring fiber-optics market could be weakening, analysts said.

Among other makers of fiber-optic equipment, JDS Uniphase (JDSU) plunged to $85 in after-hours trading, after falling $6.13 to $95.06 in regular trading. Corning (GLW) fell to $85 after dropping $7.94 to $93.50 in regular trading.

Also, Applied Micro Circuits (AMCC), a maker of communications chips that gets a fifth of its revenue from Nortel, fell $23.31 to $175 after sliding $10.88 to $198.31 in regular trading.

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Bets on Lower Prices

Here are some major Nasdaq technology stocks and how the number of shares sold “short” increased between Sept. 15 and Oct. 15. In a short sale, a trader sells borrowed stock, betting the price will decline. Note: The short-sale total still may be small compared with a company’s total shares outsXXtanding.

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Outstanding short shares Ticker (in millions): Stock symbol Sept. 15 Oct. 15 Global Crossing GBLX 34.65 46.73 Veritas Software VRTS 38.97 45.75 WorldCom WCOM 29.02 35.99 JDS Uniphase JDSU 31.77 35.65 Amazon.com AMZN 32.30 35.41 Conexant Systems CNXT 12.58 17.08 Covad Communications COVD 3.15 16.57 Qualcomm QCOM 10.44 16.54 Siebel Systems SEBL 10.33 15.17 Xilinx XLNX 5.22 8.11

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Source: Nasdaq