Nortel Sees Costs Too High

Nortel ( NT) dropped 10% after repeating that its costs are too high and hinting that cuts are on the way.

The news came as the Brampton, Ont., telecom-gear maker filed its regular biweekly update with Canadian securities regulators. Nortel must file regularly with the Ontario Securities Commission until it is up to date on all its financial filings. The company is delinquent in its filings as it seeks to complete a broad restatement going back three years. Nortel reiterated Tuesday that it hopes to post limited preliminary unaudited results for the first and second quarters of 2004, and to provide an update on the restatement impacts, in mid-August.

Otherwise, however, the company focused on its need to trim overhead. Nortel has already slashed its workforce by two-thirds since its telecom boom-era peak, but big telco customers continue to spend stingily and competition remains fierce.

"As previously announced, I continue to be focused on Nortel Networks' strategic direction and the improvements and efficiencies that we will need to put in place to drive financial performance," said CEO Bill Owens. "I remain pleased with Nortel Networks' market momentum and continue to expect our revenue in 2004 to grow faster than the market (which we expect will grow in the low to mid-single digits).

"However, as we move through 2004 and based on the work to date on our financial results, it is clear that our business model is not achieving our targeted operating cost -- SG&A and R&D -- performance of below 40% of overall revenue and our targeted gross margin percent of mid-40's," the executive continued. "In conjunction with the release of our limited preliminary unaudited results for the first and second quarters of 2004 in mid-August 2004, I will provide a further update on the performance of our business and the actions that we will be taking to put into place an improved cost structure to optimize our financial performance."

Tuesday's comments were similar to those made two weeks ago by the company. "It has become clear that we will need to put into place an improved cost structure to drive financial performance," Owens said in a July 13 press release. "The company will take the necessary steps to ensure that our operations and our investments are focused and that we are creating and leveraging our competitive advantages."

The comments come at the end of a long stretch of job-cutting for Nortel. The company has slashed its workforce repeatedly amid a sharp decline in network spending. This summer, Nortel agreed to sell its remaining manufacturing operations to Flextronics ( FLEX).

Early Tuesday, Nortel sank 40 cents to $3.67.

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