Wall Street's seeing more weakness in
The telecommunications equipment maker said Monday that it lost a portion of a major contract with U.K. service provider
for core optical gear. Rival
won the entire five-year contract, valued at $900 million, suggesting that a nasty pricing war has ensued in the high-capacity optical transport market that Nortel dominated not long ago. Nortel said in July it was making progress toward landing around half of that contract.
The estimated dollar value of Nortel's expected deal was $500 million -- not a devastating blow in itself, but indicative of harder times ahead as telecom spending continues to wind down and more competitors crowd into Nortel's kitchen. Nortel is already feeling the
pains from spending cuts by customers including
. Given the evidence, many on Wall Street say Nortel
will likely warn that its sales and profit growth may fall below expectations.
analyst Nikos Theodosopoulos wasted little time Monday in issuing a report off the British Telecom development, lowering his 2002 earnings estimate for Nortel to 70 cents per share from 80 cents.
"We believe that Marconi was able to use aggressive pricing to win at BT," wrote Theodosopoulos in his investment note Monday afternoon. "We believe that continuing use of aggressive pricing will cause an additional decline in growth and profitability."
Nortel enjoyed a year or more jump on the rest of the optical pack through early development of transport devices that could deliver communications traffic over fiber optic cable at 10 billion bits per second. Now that Marconi,
are selling the same gear, Nortel will likely not enjoy the higher profit margins it had when it owned the market, say analysts.
Also, Nortel missed a product cycle and is
without an optical switch to manage the traffic unleashed by its 10-gigabit transport machinery. And without a horse in the race, Nortel is vulnerable to upstarts including Ciena,
To make matters slightly worse, many phone and data companies prefer to have at least two suppliers for vital network gear, says
CIBC World Markets
analyst Steve Kamman, who has a strong buy on Nortel. This might spell the beginning of a long period in which Nortel is pushed aside by equipment buyers looking for a better price from a second vendor.
Nortel issued a press release Monday acknowledging that it lost the BT contract, but stressed that it continues to work with British Telecom on other projects.
Nortel shares hit a one-year low Monday, down $1.25, or 7%, to $16.65, amid heavy selling across the market.