Nortel Forecasts $19.2-Billion Loss, Sets More Job Cuts
Dashing hopes that the worst is over for the beleaguered telecommunications equipment sector, Nortel Networks Corp. said Friday that it will slash an additional 10,000 jobs and post a second-quarter loss of $19.2 billion, one of the biggest in corporate history.
The job cuts follow the 20,000 announced earlier this year at the world’s largest maker of phone equipment. All told, Nortel plans to shed close to one-third of its work force in a drastic attempt to make up for plunging sales. Second-quarter sales are projected to fall to $4.5 billion from $7.8 billion last year.
Although sizable, the expected loss does not wipe out shareholder equity in Nortel.
But the news sent Nortel’s stock to a 52-week low of $8.75 before it closed down 74 cents at $9.86 on the New York Stock Exchange. Other phone equipment companies took a drubbing, dragging the market down. Alcatel Optronics and JDS Uniphase Corp. both hit 52-week lows Friday. Cisco Systems Inc. fell $1.09 to close at $16.65. Ciena Corp. lost $4.53 to close at $40.14. And Juniper Networks Inc. dropped $1.16 to $31.14.
These companies prospered last year supplying phone companies with Internet gear, particularly optical technology to provide faster and more reliable data transmission. This year, however, telecommunications companies throttled back spending. Compounding the industry’s problems is the fallout among telecom start-ups, many of which borrowed heavily from suppliers such as Nortel and Cisco to build their companies.
“The market is contracting at an alarming rate,” said John Roth, Nortel’s chief executive.
The worst may not be over. Roth declined to project when the Brampton, Canada, company might return to profitability, saying “meaningful growth in spending is not expected to occur before the second half of 2002.”
“I would certainly not be surprised to see more layoffs,” said Steve Kamman, an analyst with CIBC World Markets in New York. For the first half, “we watched the plane crash into the water. Now the plane is starting to sink. We are facing a prolonged slowdown of the telecommunications industry. That’s going to be the prognosis well into next year.”
Kamman said many carriers will hold off spending until demand for high-speed data networks catch up. “Last year, you had a 30% increase in capital spending,” Kamman said. “You can’t keep that kind of spending up when revenues are only growing by 11%.”
Kamman said he sees a potential light amid the gloom. Consumer demand for high-speed Internet access continues to grow, placing rising demands on the infrastructure of telecommunications companies. Eventually--maybe late 2002--these companies will have to resume spending on equipment to handle the traffic, Kamman said.
For Nortel, $12.3 billion of the $19.2-billion second-quarter loss comes from write-offs of goodwill associated with its purchases of Alteon WebSystems, Xros and Qtera in 1999 and 2000. Nortel paid $13.8 billion in stock for the three companies.
Nortel also will take a charge of $2.6 billion to exit from some businesses and $830 million to eliminate 20,000 jobs. Its operating loss, the company said, is estimated at $1.5 billion. The remainder, about $2 billion, stems from bad debts and other write-downs.
Also on Friday, Nortel said it had secured $2 billion in credit from J.P. Morgan Chase & Co. and Credit Suisse First Boston and would eliminate its dividend.
Standard & Poor’s placed Nortel on “credit watch,” a signal that the debt-rating agency is inclined to downgrade Nortel’s bonds from an A rating to BBB status.
Nortel’s job cuts are not expected to be completed until September.
Job losses in the technology sector accounted for 41% of the 650,000 jobs eliminated between Jan. 1 and May 31, according to Challenger Gray & Christmas Inc., a Chicago-based outplacement company.
