Slowdown Haze Has Nortel Waving White Flag

Updated from 4:58 p.m. EST:

Nortel (NT) threw up its hands Tuesday, admitting it has no clue how long business will continue to languish.

The company warned of an earnings shortfall for the third time this quarter and set plans to slash an added 5,000 jobs as the economy continues to slow. More to the point, CEO John Roth, who had previously declined to provide earnings or revenue guidance for 2002, conceded that the rest of 2001 is too fuzzy to read now as well. Nortel shares slipped 10% in after-hours trading on Island.

The Toronto-based maker of telecom gear now expects a first-quarter operating loss of 10 to 12 cents a share, wider than the 4-cent loss it forecast Feb. 15. Revenue for the quarter will amount to $6.1 billion to $6.2 billion, down from February's $6.3 billion target. The company had earlier slashed earnings guidance when it reported fourth-quarter numbers in January.

Nortel said last month it would cut 10,000 jobs to cope with the ongoing economic slowdown; Tuesday, Nortel said worsening conditions would necessitate additional layoffs.

Moreover, "given the poor visibility into the duration and breadth of the economic downturn and its impact on the overall market growth in 2001, it is not possible to provide meaningful guidance for the company's financial performance for the full year 2001," Roth said.

No Surprise

It was just last week that one Wall Street analyst said Nortel executives had returned from globe-hopping visits with customers to report that equipment spending budgets hadn't been approved, and that in many cases customers were suffering through a two-month delay in spending approvals. This could account for the lack of financial predictability at Nortel and throughout the networking sector.

Still, the company's efforts to blame the shortfall on the economy haven't met with untrammeled success. "I don't think we've reached any conclusions yet," says one Wall Street analyst who has no rating on the stock and who asked not to be named. "The impact of this downturn is going to pan out company by company. I think Nortel is the most vulnerable because they had such a big year in 2000."

Indeed, many Nortel watchers have predicted an earnings shortfall. Nortel earned the distrust of the Street last fall by talking up its business and then missing its numbers. The disappointment was the first of many shortfalls among the gear makers.

Evidence of Nortel's ongoing deterioration has been mounting recently. The company lost out to rivals for part of a $900 million contract with British Telecom (BT) and another deal with 360Networks (TSIX) in the past two weeks, as a pricing war intensifies across the sector. Adding to that pressure, big customers such as Qwest (Q) have made it clear that they are finding premium used gear for cheap.

Nortel has forecast 14% sales growth this year, but several analysts feel that doesn't reflect the poor health of the market. Earlier this month, UBS PaineWebber analyst Nikos Theodosopoulos cut his revenue-growth estimate to 4%.

Wall Street used its wits and not Nortel's guidance. Hopefully investors were equally wise.

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