OTTAWA (Reuters) -
Nortel Networks Corp. investors predicted Tuesday the telecom equipment giant will again slash jobs when it reports long-overdue results this week, and shrugged off news of another criminal probe into its high-profile accounting woes.
Nortel, scrubbing its books as it prepares to restate faulty financials between 2001 and 2003, will release preliminary first- and second-quarter results Aug. 19 in a bid to clear some of the financial fog surrounding the company.
The company's troubles appeared to compound on Monday when it disclosed a Royal Canadian Mounted Police criminal investigation. Nortel already faces a criminal probe in Texas and reviews by Canadian and U.S. regulators.
But even asNortel (NT: down $0.04 to $3.38, Research, Estimates) stock dipped 1.5 percent in New York and 1.8 percent in Toronto, analysts said the probe was immaterial compared to what Nortel says about its costs this week.
Longtime Nortel watchers predict the company, which slashed almost two thirds of its workforce when the tech bubble burst, would issue pink slips once again.
"I think the story is going to be: revenues are fine, margins are not great, what do we do to make our cost structure work better?" said Duncan Stewart, partner and fund manager at Tera Capital Corp., which holds Nortel stock. "They haven't got a lot of options."
Nortel has said it must cut expenses because its operating costs are above its target of 40 percent of revenue, while gross margins are below a goal of mid-40 percent.
"The first focus is going to be continuing the growth of the business ... focus number two is getting the cost structure aligned with the new demand," said Gabriel Lowy, Blaylock & Partners analyst. "I imagine we're going to see another round of downsizing ... I think it's going to be significant."
Analysts are divided on how sharp a knife Nortel will take to operations in a bid to boost profits, but cuts to general operating expenses appear inevitable.
There are estimates Nortel could axe up to 5,000 of its 35,000 jobs. Nortel will move another 2,500 jobs to Flextronics under a previously announced manufacturing outsourcing deal. At its peak in 2000 Nortel had 95,500 employees.
Desjardins Securities analyst Paul Howbold predicts Nortel will cut 3,000 to 4,000 jobs, resulting in $500 million (U.S.) in charges, and fold its optical unit into its wireline division.
Scotia Capital analyst Gus Papageorgiou said the bulk of any cuts should come from general operating, or sales, general, and administrative (SG&A), costs, where Nortel "grossly overspends" rivals Lucent Technologies (LU: Research, Estimates) and Ericsson (ERICY: Research, Estimates).
On a per-person basis, Nortel's SG&A costs are between 53 percent and 70 percent higher than competitors, with R&D costs 42 percent to 70 percent higher, he said in a recent note.
In 2003, Nortel spent about $1.9 billion on operating costs and $2 billion on R&D.
Nortel has not said what figures it will announce from its preliminary, "estimated" results, but analysts expect numbers for sales, earnings, gross margin, operating margins, and cash.
The mean estimate for first-quarter earnings is 2 cents on sales of $2.56 billion and second-quarter earnings of 3 cents on sales of $2.64 billion, according to Reuters Estimates.
"Given the business model guidance provided by the company, break-even quarters are as best as can be expected, assuming no changes to financing costs or tax rates," wrote Merrill Lynch analyst Pat Chiefalo in a note.
"As a rough estimate, every percentage change in operating cost or gross margin impacts the bottom line by 2 cents."
-- All dollar figures are in U.S. unless noted
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