Nortel Can't Seem to Shrink</BR> Enough - TheStreet



is racking up some impressive numbers, but not the kind investors are looking for.

The network gearmaker warned Wednesday of lower-than-expected quarterly sales -- marking its seventh shortfall prediction in 17 months. Nortel also set its seventh round of job cuts and took its fourth stab at predicting a revenue breakeven point, while hinting that it is preparing its second convertible bond offering.

The company's latest warning points out just how steep the road to recovery is shaping up for telecom suppliers like Nortel and rival



in spite of the drastic cost-cutting measures the companies are taking to shore up their balance sheets. Nortel stock, which has lost more than 90% of its value since the Internet building boom peaked in late 2000, dropped 7 cents to $2.45.

More Steps

Though Nortel reiterated on Wednesday its oft-made claim that its liquidity is sufficient, a near-certain return to the capital markets -- the company filed a big shelf offering a few weeks ago, allowing it to sell stock or bonds at any time -- suggests otherwise to some observers. Moreover, the company said it may put its optical component business on the block, further fueling funding concerns. The optical business was once the star at Nortel and still looks forward to a potentially prosperous future, analysts say.

Of course, either asset sales or another equity offering could easily satisfy Nortel's goal of keeping its bankers at bay for the time being. But investors may soon wonder at what cost.

Ironically, Nortel and its banks are locked together in this financing dance. The banks are on the hook with a $3.4 billion commitment in the form of a credit line, which Nortel has not yet drawn. But Nortel has certain terms or covenants it must honor to keep that credit line available.

Analyst Glenn Reynolds of CreditSights says Nortel is in danger of eventually violating its minimum value guidelines, a measure of its cash, investments and other tangible assets such as plant and equipment.

"Nortel needs to do an equity-linked security to shore up its tangible net worth covenant, not to mention the fact they need the liquidity," says Reynolds. "This is an endurance contest and the banks do not want to carry the burden, if bank risk management practices are true to form."

For its part, Nortel says it "expects to be in compliance with its covenants under various bank facilities."


But keeping creditors happy at the expense of investors becomes a difficult balance. Another convertible bond offering, especially with the stock trading in the $2 range, would likely require the sweetening of higher interests rates. Also, another equity offering could dilute the value of outstanding shares.

And the prospect of selling a business unit like optics, which has a bright future and strong growth potential, potentially gives long-term investors less reason to stick around.

Nortel keeps cutting its break-even target...

But revenue keeps falling faster

*Projected.Sources: Company,

Meanwhile, with top customers including






cutting deeply into their equipment spending plans, investors are wondering just when they might see some indication that the company's sales slide is about to stop. They surely haven't seen any signs yet.

No Recovery

After all, the reeling Brampton, Ontario, networking shop said Wednesday that it saw no meaningful recovery in its optical business for another year or more and is subsequently taking most of the jobs from that unit.

Nortel's optical component business brought in about $30 million in sales last quarter, about 10% of its peak 2000 levels, according to USB Piper Jaffray analyst Conrad Leifer, who rates the stock neutral.

Notably, it was breakneck sales optical gear that propelled Nortel's phenomenal performance in 1999 and early 2000. At one point, during the optical bubble, Nortel considered spinning off its oh-so-hot optical parts business, back when investors couldn't get enough of the likes of

JDS Uniphase

. Alas, those days appear to be long gone now.