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Nortel beats estimates
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July 25, 2000: 6:08 p.m. ET
Networking equipment maker raises revenue growth rate forecast
By Staff Writer David Kleinbard
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NEW YORK (CNNfn) - Nortel Networks Corp., the second-largest maker of telecommunications equipment in North America, on Tuesday reported second-quarter net income that exceeded analysts' expectations and increased its revenue and earnings outlook for the remainder of this year.
Brampton, Ontario-based Nortel (NT: Research, Estimates) said net income from operations for the quarter rose to $561 million, or 18 cents per share, from $320 million, or 11 cents, in the same period last year. Analysts surveyed by First Call expected the company to report second-quarter net income of 15 cents per share.
Revenue rose 48 percent to $7.82 billion from $5.28 billion.
"Nortel Networks had another quarter of outstanding growth, which reflected our continued market leadership in key growth segments," said Nortel President and CEO John Roth in a news release. "In particular, our optical Internet, wireless Internet, and high-speed local Internet solutions revenue grew at rates of more than 150 percent, 18 percent, and 80 percent, respectively, over the second quarter of 1999."
Nortel's management said they are revising their outlook for full-year 2000 results because of an 85 percent increase in orders in the first half of the year. The company now expects its percentage revenue growth in 2000 over 1999 will be in the low 40s, up from its previous view of 30-to-35 percent. Nortel's percentage growth in earnings per share from operations in 2000 compared with 1999 will be in the high 30s, Roth said.
"Looking forward to 2001, we expect to continue to grow significantly faster than the market growth rate of 20-to-21 percent, with anticipated growth in revenues and earnings per share from operations in the 30-to-35 percent range," said Frank Dunn, Nortel's chief financial officer, in a news release issued after the market closed Tuesday.
While analysts participating on a Nortel conference call Tuesday afternoon were pleased with the company's overall revenue and earnings growth, they felt that the 18 percent increase in revenue from wireless Internet equipment was low given the growth rate of that market.
Stock has quadrupled over past 12 months
Nortel stock rose 5 to 87 and stood at 86-3/4 in after-hours trading Tuesday, reaching a new 52-week high and giving it a market capitalization of $240 billion. That is 49 percent higher than the market cap of arch rival Lucent Technologies (LU: Research, Estimates). Lucent's stock is 41 percent off its 52-week high, after the company issued two earnings warnings so far this year.
Nortel's stock has quadrupled over the past 12 months as the company has expanded its lead in the ultra fast-growing area of optical networking, which is the transmission of data using beams of light instead of electrons flowing over copper wires. Fiber optic cables have much higher data transmission speeds and lower signal loss rates than copper wires.
Nortel has been on an acquisition binge to expand its presence in optical networking. In the first quarter, the company announced or completed the acquisitions of three optical networking companies for a combined sum of $7.9 billion. Nortel said Monday that it plans to spend $1.9 billion to more than double its optical networking production capacity over the next 18 months. That comes on top of $660 million of optical production capacity investments Nortel announced over the past nine months.
The company said on a conference call Tuesday afternoon that it expects to exceed its goal of shipping $10 billion of optical networking systems this year. Nortel said that it will sell about $2.5 billion worth of optical networking components this year (optical networking systems consist of more than component parts), which would be a 200 percent increase from last year.
"We conservatively estimate that this business could range in size from $4 billion to $5 billion in 2001," said CS First Boston analyst James Parmelee in a research note.
No comment on possible Corning deal
Nortel's management declined to comment Tuesday on press reports that it is discussing the possible sale of its optical equipment arm to Corning (GLW: Research, Estimates), in a transaction that reportedly could be worth up to $100 billion. According to an article that appeared in the Wall Street Journal, Nortel could end up owning a 50 percent stake in Corning, a major maker of fiber optic cable, as a result of the transaction.
The share prices of both firms have rocketed this year as investors have re-evaluated the outlook for high-tech equipment makers. Recent deals, including JDS Uniphase Corp.'s (JDSU: Research, Estimates) proposed $41 billion purchase of SDL Inc. (SDLI: Research, Estimates) two weeks ago, have highlighted the merger trend in the sector. 
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