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, clueless about its own

business outlook, said Thursday that its recovery hopes hinge on the telecommunications service companies.

Of course, that is relying on a bunch of companies that are piling into bankruptcy courts, drawing down loans and screaming for better financing terms from suppliers such as Nortel.

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A Few Good Days and Suddenly It's 1999 Again

On its conference call after the market closed, a call that some analysts characterized as "dismal," Nortel CEO John Roth said it's "likely to be a tough year for service providers and vendors."

That's putting it mildly, says

Sanford Bernstein

analyst Paul Sagawa.

"They are saying things won't start to improve until the entire carrier industry restructures," says Sagawa, who rates Nortel a hold. "Do they know how long that is going to take?"


Trying to take some matters into its own hands, Nortel made more cost-cutting moves. The company said it is firing an additional 5,000 employees, bringing the job-cut total to 20,000 by midyear, a strategy that it says will save $2 billion annually.

Nortel also happily reported that it reduced its inventory by $200 million last quarter, a mere 4.6% reduction from the $4.3 billion it was carrying at the end of last year. Nortel promised to show significant improvement in inventory reductions in future quarters. But when company execs were asked what a normal inventory level should be, they said they were unable to determine that because they didn't know what their future sales would be.

When asked if gross margins had reached a bottom in the 30% range, Nortel said it was unable to provide guidance on that.

Another notable company reaction came in response to questions about vendor financing, or lending to buyers. Nortel reduced its commitments by $1 billion last quarter, leaving the total outstanding commitment at $4.7 billion.

Nortel execs said they have taken a much more cautious approach to financing, a common refrain these days, judging by comments from the likes of






. Nortel noted that in the past four months it has "walked away" from a deal in which a customer asked for financing to make the sale.

But "that's sort of like closing the barn door after the horse ran away," says one New York analyst with no rating on Nortel.


Despite the gloomy tones on the call, Nortel shares were up 1% to $18.05 in after-market trading.

"I'm surprised that investors are reacting with enthusiasm after such a dismal story," says Bernstein's Sagawa.

While it's hard to say if Nortel has hit its lowest of lows, it's fairly easy to see it won't be improving anytime soon, judging by the health of its customers.

"The long-haul business is scorched earth these days," says Sagawa, referring to the drop-off in prices, the overcapacity of bandwidth and the duel to the death going on among network builders.

"It's like there are 16 gunfighters at the OK Corral," says Sagawa. "It's mutually assured destruction."