Nortel Guides Lower on 2001 Optical Sales

Updated from 11:18 a.m. EST:

BOSTON -- Nortel (NT Quote) Tuesday backed away from Wall Street's 2001 optical equipment-sales forecasts, saying its closely watched opticals unit would grow faster than the industry but not as quickly as previously projected.

Backing Off Nortel off the highs

At Nortel's analyst conference here, John Roth, CEO of the Toronto-based optical networking-equipment leader, told analysts in a sidebar gathering that Nortel's optical growth in 2001 will be "north of 40%," referring to the 2001 North American optical-sales growth forecast from industry researcher RHK. But analysts say Nortel had previously guided them to expect 2001 optical-sales growth of at least 50%; one analyst had forecast growth of 80%. The fast-growing opticals business is closely watched on Wall Street, and a third-quarter growth shortfall in that business last month hammered Nortel's stock despite the company's overall strong performance.

Still, in reiterating an upbeat outlook for the coming year, Nortel succeeded in giving its beaten-down stock a much-needed reprieve. The stock rallied $3, or 8.5%, to $38.25 Tuesday, leading a rally in optical stocks that have dropped a third of their value and more in recent weeks.

Growing

Nortel spent much time at Tuesday's presentations selling the crowd of 200-plus people on its prospects for growth, particularly in Europe, where the so-called third-generation wireless infrastructure is about to be built at enormous cost. Nortel says that given its strong relationships with European wireless carriers, the company expects to be the No. 2 wireless infrastructure builder in Europe.

But considering the roller-coaster ride in Nortel stock in recent months, the subject of optical equipment sales growth was impossible to avoid. Regarding the third-quarter shortfall, Nortel said it knew going into 2000 that growth would slow a bit from first-half levels. When the company began to encounter signs that carriers such as WorldCom (WCOM Quote) were hoarding equipment, it became clear that third-quarter sales wouldn't wow Wall Street. But it was also apparent that sales would merely fall to the lower range of expectations, rather than coming in below guidance, Nortel said.

Roth likened the third quarter's equipment hoarding to a "gasoline-shortage mentality" that led to "panic buying." But the executive assured analysts that WorldCom had resumed ordering gear from Nortel, adding that "we are confident in what we are saying about this year's guidance."

Sober Up

Roth conceded that 2001 will offer fewer optical players to take share from, since Nortel has become the clear leader in the sector. But he added that the optical buildout is set to begin next year in Asia and Europe, a prospect that should offer the likes of Nortel plenty of growth opportunities.

Lehman Brothers analyst Tim Luke said Nortel made the remarks after taking a more sober look at the optical sector, "given what's been going on and the experience they had in the third quarter." In that quarter, Nortel beat analysts' earnings estimates and matched revenue targets, but saw its shares plunge 30% after it failed to meet Wall Street's pie-in-the-sky optical-sales targets. Nortel said third-quarter optical sales rose 90%, but that failed to match the second quarter's eye-popping 150% jump. Wall Street took the failure to hit optical-sales goals as evidence of a telecom industry spending slowdown, while Nortel noted equipment-hoarding problems at network-building customers.

Nortel's 2000 optical sales are expected to amount to around $10 billion. At the newly reduced growth forecast, 2001 optical sales will rise to about $14 billion to $14.5 billion, analysts said.