Promises, promises. Shaking off troubling signs that cash-strapped customers grew even stingier in January, Nortel ( NT) Tuesday said it felt more certain than ever that it will reach break-even by year-end. In a morning-long discussion with analysts and investors Tuesday, Nortel spent much time fielding questions about how a slow start can possibly ensure a strong finish. But CEO Frank Dunn, who is also acting CFO after Monday's departure of Terry Hungle following some apparent trading improprieties, is confident that sales of old gear have stabilized and that new products will fuel growth. While Dunn didn't offer specific targets beyond the current quarter's $3.1 billion revenue projection, he repeated the company line that Nortel will pull out of the red in 2002. "I feel very good about the break-even goal in the fourth quarter," said Dunn at the conference Tuesday. "We are more and more engaged with customers and we are moving ahead. I feel more encouraged than I would have been 25 days ago," Dunn said of his view that a slow but steady return of demand for network gear is under way. But tense investors didn't hear enough evidence to support Nortel's long-term optimism. Instead, they sold on the news that the company may not meet its already lowered expectations of $3.1 billion in sales for the current quarter. Similarly, shares of telecom equipment rivals Lucent ( LU), Ciena ( CIEN) and Cisco ( CSCO) fell 5%, 4% and 2%, respectively, as more gloom gathered over the networking sector. Nortel itself dropped 46 cents to $6.38.
Nortel attempted to distance itself from the vicious downward spending cycle in telecom by casting itself as a leaner, more focused enterprise with much lower cash demands. The company cut its staff by half last year and pared back many unprofitable businesses in a massive restructuring effort. At this point, says Dunn, the company needs far less than $4 billion in quarterly sales to reach profitability. "To give them credit, they've taken a hard hit on lowering costs to reduce liquidity problems," says CIBC World Markets' analyst Steve Kamman, who rates Nortel a buy and Lucent hold. CIBC has done underwriting for Nortel but not for Lucent. "They were basing their projections on the product pipeline, rather than basing it on the industry's spending levels and market share," says Kamman. "They've been realistic about 2002. If they aren't at profitability by the fourth quarter, I think they'll at least be within striking distance."
Ring the Bells
But with top customers such as the embattled WorldCom, Qwest, Sprint and Level 3, it doesn't take a skeptic to question the fundamental strength of Nortel's sales assumptions. In fact, observers note that Lucent's targeted 10%-15% sequential second-quarter revenue growth may be supported by its strong ties to slightly more stable telcos like Baby Bells Verizon and SBC. As TheStreet.com outlined last month, Lucent has a couple well-timed deals with Verizon and SBC in the pipe that are serving to stoke the gearmaker's near-term confidence. Booked business improves visibility, says Lehman Brothers analyst Steve Levy. "The key to Lucent being able to have a sequentially up March quarter lies in their statement that they have two very specific 'revenue recognition' opportunities that are fall into the March period," says Levy, who rates Lucent a strong buy. Lehman has no underwriting ties to Lucent. Another sentiment also working against Nortel is its track record for projecting results. The company has badly misjudged its exposure to macro spending trends in the past. Nortel was still projecting 35% annual growth in the fall of 2000, despite obvious signs that the market was deteriorating rapidly. The company then swung to a massive loss in 2001 as its business evaporated, setting it down the road to restructuring. As is often the case with serial disappointers, investors will likely wait until Nortel stops promising -- and starts delivering.