Nortel's Numbers Bearing the Weight of WorldCom Spending Worries

Even Wall Street bulls are bearish on Nortel Networks (NT Quote), and the prevailing sentiment is that the telecom gear giant will soon slash anew its sales and profit projections.

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With new customers failing, established customers shaken and networking rivals swiping sales, investors and analysts are seeing what Nortel can't: Growth is slowing to a crawl. Nortel last month cut expectations in half, targeting 15% revenue growth for the year, citing the steep economic downturn and heavier-than-expected capital constraints hammering its customers. At the time, the company remained confident that the slowdown would only moderately hurt results for the year.

But Nortel was late to spot the first-half pullback, and it may be late in conceding what many investors are already betting on: that the currents in the networking business are running sharply downhill. That worry was exacerbated by Monday's rumor that big Nortel customer WorldCom (WCOM Quote) was further cutting its spending plans, a rumor the telecom giant declined to discuss. A Nortel spokesman wouldn't speculate on whether the company was preparing any new guidance.

Lowering the Bar

Many Nortel watchers felt the company didn't go low enough when it provided its Feb. 15 first-quarter warning. As concerns about the economy and telecom-industry spending mount, Nortel is appearing increasingly vulnerable; the company's stock, after a long torrid spell through mid-2000, has lost three-quarters of its value since late October, when Nortel reported optical-sales growth that fell short of expectations. Nortel shares rose 37 cents Monday to close at $17.60, just a day after hitting their 52-week low.

"You know, we always thought they would warn again, but we never put a time on it, like what day or week," says Jeff Wrona, a money manager with PBHG Funds, who owns Nortel competitors Ciena (CIEN Quote) and ONI (ONIS Quote), but no Nortel.

Of paramount concern for Nortel is the spending health of WorldCom, one of its biggest customers. Speculation on the Street Monday was that WorldCom had not only cut spending in January but was preparing a significant pullback for the rest of the year.

WorldCom already has cut its spending to between $8 billion and $8.5 billion from $9.9 billion last year, citing dramatically declining long-distance revenue and a greater need to manage expenses.

WorldCom declined to comment on its capital budget, but a spokesman said Monday: "WorldCom is being very judicious in its use of capital. This is an environment that demands that investments earn a good rate of return."

The Pain

It's no secret that WorldCom, which set plans last week to cut 6,000 employees, or 8% of its staff, is struggling with its business and an ongoing restructuring. Adding to Nortel's pain was a spending cut from another customer, 360Networks (TSIX Quote), on Friday. Given the news, some investors say there are better places for networking investments.

"I don't see any good reason to establish a position in Nortel when their customers are struggling and their product mix is still heavily weighted toward more mature businesses," says a West Coast money manager who prefers single-focus networking upstarts such as Redback (RBAK Quote) and ONI.

To make matters worse, respected UBS PaineWebber networking analyst Nikos Theodosopoulos on Monday released a detailed report on Nortel's predicament, cutting his revenue-growth estimate to 4% for the year. Theodosopoulos is only the most recent Wall Street analyst to cut expectations below Nortel's own 15% estimate.