Nortel 4Q Net Loss Widens - More Job Cuts Planned
Published on: 27th February 2008
TORONTO -(Dow Jones)- Nortel Networks widened its fourth-quarter loss because of increased tax reserves and announced it will cut another 2,100 jobs as part of its turnaround plan as it struggles with a slowdown in spending by its carrier customers, particularly in the U.S. because of that country's struggling economy.
The sluggish outlook for Nortel and the telecom-equipment industry as a whole prompted a sell-off in the already hard-hit stock. In New York Wednesday, the stock is down $1.68, or 15%, to $9.77 on 2 million shares, after having lost 24% this year before Wednesday.
"We're very disappointed in the level of the stock performance over the last 12 months," Mike Zafirovski, Nortel's president and chief executive, said in an interview. However, he believes that as long as the company continues to follow its strategy of gaining market share in certain segements and improving operating margins, the stock price will eventually improve.
However, some analysts are concerned Nortel is spreading itself too thin and should give up trying to compete in new areas such as 4G wireless network gear, which is expected to attract a lot of competition.
The difficult conditions faced by the telecom-equipment sector are evident in the Nortel's guidance for 2008.
Nortel expects 2008 revenue to grow in the low single digits on a percentage basis. Analysts' mean estimates were for growth of 4% to $11.43 billion.
"Most specifcally, the short-term concerns are in North America both in terms of the carrier spend" and the possible increased competition and the cost pressures that the company's major North American carriers face, Zafirovski said on the company's earnings conference call.
Nortel's carrier business has been particularly hard hit by the slowdown in spending on CDMA network wireless gear by Sprint Nextel.
Overall, the networking giant reported a net loss of $844 million, or $1.70 a share, compared with a prior-year net loss of $80 million, or 19 cents a share.
The latest results included a $1.04 billion charge from boosting the valuation allowance against Canadian deferred tax assets. Such assets are tax credits for previous losses a company can use to reduce its future tax burden. The prior year included a $234 million litigation settlement Nortel made.
A Nortel spokesman said the charge in connection with Canadian deferred tax assets shouldn't be intepreted as an indication that the Toronto company will face losses or little profit in the coming years. The charge is a non-cash item the company only had to take because of specific changes in Canadian tax rates, the spokesman said.
The changes included a tax rate cut to 15% from 19% and a lowering in the value of the future stream of taxable income Nortel apportions to Canada due to an appreciation in the Canadian dollar. There were also other factors around timing of when the company earns the amount of taxable income needed, explained Nortel Chief Financial Officer Pavi Binning.
Revenue dipped 3.7% to $3.2 billion. The company had expected flat revenue, plus or minus $100 million for the quarter.
Revenue at the carrier business - Nortel's largest unit - dropped 9.5% to $1.35 billion. The segment's results were hurt by divestitures, offset in part by growth in CDMA and VoIP.
The mean estimates of analysts polled by Thomson Financial were for earnings of 47 cents a share on $3.28 billion in revenue.
Gross margin rose to 43.7% from 39.8%, the highest figure in three years.
Global-services sales rose 12%, reflecting strong growth in network-implementation services, support services and managed services. Revenue from the company's Metro Ethernet network dipped 4.5%, largely due to decreases in long-haul optical revenue and drops in legacy data, partly offset by increases in metro optical.
Wednesday, Nortel outlined the next steps of its turnaround plan - to cut another 2,100 positions, representing about 6.2% of its global work force - and move about 1,000 positions to "higher-growth and lower-cost geographies." The plan also includes the sale of some real estate assets.
The company expects the moves to save it about $300 million a year, and cause about $275 million in charges and $250 million in cash outlays. About 70% of the charges are expected to be incurred in 2008.
Nortel has struggled to overcome the effects of a 2004 accounting scandal that led to the firing of its chief executive and other executives. Since being named CEO in late 2005, Zafirovski has laid off thousands of workers, sold and shuttered unprofitable businesses, and smoothed operations to cut costs.
Firms such as Nortel have been dealing with the anticipation of the next generation of technology that can handle the high-speed data necessary for richer Internet and video features on cellphones, as new entrants from China put downward pressure on prices. Nortel has said it is beefing up efforts to create data networks for businesses, service carriers' equipment, and develop networks that can carry Internet-based voice and video transmission and the wireless broadband technology known as WiMax.
Meanwhile, there has been chatter that Nortel has been in talks with Motorola to combine their wireless-infrastructure units in a joint venture in response to slowing growth in the telecom-equipment industry. A deal with Motorola would combine the companies' versions of the GSM network technology used in much of the world with the CDMA technology popular in the U.S. and Korea. It is an area of the industry that has suffered in recent years as wireless carriers in the U.S. and overseas consolidate, giving them greater bargaining leverage over equipment makers.
Company executives declined to specifically address these rumors. However, Zafirovski said that the company is "99.9%" focused on organic growth to achieve its turnaround plan. In a separate interview, however, he didn't discount the possibilities of future joint ventures or acquisitions. He said Nortel has the processes in place to be a much larger company and integrate a significant acquisition if the right one presented itself.
-By Ben Dummett, Dow Jones Newswires; 416-306-2024; firstname.lastname@example.org
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