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Personal Finance > Investing
In Focus: Nortel Networks
February 16, 2001: 2:36 p.m. ET

Bear Stearns telecommunications analyst on Nortel's warning, job cuts
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NEW YORK (CNNfn) - Nortel Networks warned Thursday that a sector slowdown will cause the telecommunications equipment maker to post a first-quarter loss and that it will cut 10,000 jobs.

Wojtek Uzdelewicz, telecommunications analyst at Bear Stearns, commented on Nortel's warning.

In Focus airs daily on CNNfn's network at 12:10 p.m. The following includes comments made both during the show and in the pre-show interview.


CNNfn: Nortel's CEO is now expecting "the U.S. market slowdown to continue well into the fourth quarter of 2001", with many expecting the economy to turn in the second half. Does this comment concern you?

We've been talking about Nortel's issues for months now. We weren't expecting an improvement in the second half. There are structural problems that will take a while to work through and that's why we're cautious on the whole space. I don't think there will be an improvement in the second half.

We started seeing the telecom industry slowdown even before anybody was worried about the economic slowdown.

graphicFor example, if you look at what happened early last year, operators like AT&T (T: Research, Estimates) and WorldCom (WCOM: Research, Estimates) and the CLECs were all having problems, so the problem has little to do with interest rates.

The issues we're facing are structural -- massive overbuild and a bubble in the dot.com area similar to the bubble in the wireline world, and it doesn't matter if Greenspan cuts or not.

We have to take out the excess capacity and bring stability into the market in terms of a competitive environment. We need to see carriers consolidating among themselves. We went from four long-distance carriers like AT&T, Sprint (PCS: Research, Estimates), Worldcom, to 15-20 providers like Level 3 (LVLT: Research, Estimates), Verizon (VZ: Research, Estimates), all getting into long-distance.

There's a lot of extra capacity and competition, and that needs to consolidate. The market can't support 15-20 carriers, especially at the same time that broadband access is not growing as fast as expected.

To support the massive growth on the carrier side, investors provided a huge amount of capital on the equipment side, and as a result we had existing vendors like Nortel (NT: Research, Estimates) and Alcatel (ALA: Research, Estimates) quadrupling their capacity every year or so.

On top of that we had new vendors coming into the market, like Ciena (CIEN: Research, Estimates), Sycamore (SCMR: Research, Estimates) and Corvis (CORV: Research, Estimates), and we went from 15-20 equipment vendors to over 60 that are publicly traded. Add to that the several hundred private startups that are well funded that are providing a lot of equipment to the market. That needs to shake out and consolidate.

Slowing demand coupled with a rapid increase in supply is creating an imbalance that will take a while to  work through the system. Valuations came down dramatically but they're still relatively expensive, with companies trading above or close to their historical multiples, so they're not discounting the slowdown fully.

CNNfn: For the first quarter of 2001, Nortel is expecting revenue of $6.3 billion, or 18 percent less than what analysts were expecting and a loss per share from operations of 4 cents on a diluted basis, down from estimates of 16 cents a share. All of this is after repeating its first-quarter guidance at least three times. What went wrong?

Things developed in the last week or two. They got a lot of feedback in budget plans in the last couple of weeks.

graphicNortel now expects just 15 percent growth in sales and a 10 percent gain in operating profits for the year, down from management's previous forecasts of  30 percent or better improvements. Will Nortel be able to meet these lowered forecasts?

We have a much lower estimate. We revised our estimate to be down 50 percent for the year and we're forecasting much lower revenue growth -- about 9 percent for the year.

The company is now expecting to cut 10,000 jobs. In what areas do you think the cuts will occur?

On the manufacturing side and selling and marketing area, more of the traditional central office business. The circuit switch  business is slowing and they may cut a little on the optical side.

How much will the solid growth in Europe and in the Asia Pacific and Latin America regions be able to offset the losses in the United States?

Our position is more cautious and we see Europe as softer. We're taking a more conservative stance than Nortel management is.

A handful of smaller telecommunications-equipment suppliers that compete with Nortel (like Ciena) have posted recent positive results. What are they doing right?

Ciena is a significantly smaller supplier. Nortel is being impacted by the slowdown in the broader side of the market. Ciena has higher concentration with customers that are doing more aggressive spending. Cisco (CSCO: Research, Estimates) had cautionary guidance and Alcatel lowered their guidance and JDS Uniphase (JDSU: Research, Estimates) pre-announced. Lucent (LU: Research, Estimates) and Ericsson (ERICY: Research, Estimates) and Motorola (MOT: Research, Estimates) all guided numbers lower. Ciena is more of an exception to the rule.

Nortel stock has taken a beating and at $20, it's trading below its 52-week low. Where does Nortel stock go from here?

We think it will be a very choppy outlook given there are still some issues and estimates are not fully revised downward. The valuation is starting to look attractive but there are concerns on the macro level about spending. I would only consider Nortel on a long-term horizon; the stock will be very volatile in the near term.

What's your outlook for the group?

We're somewhat cautious.

What are your favorite names in the sector?

Right now I'm not recommending anything specifically.

-- as reported by Carmina Perez. graphic





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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.