Nortel lowers Q1 guidance

Nortel Networks lowered its revenue guidance for first quarter 2002 from $3.1 billion to about $2.9 billion, a 16% sequential reduction year over year.

The company said it would post a net loss for the quarter of 16 cents per share, including acquisition-related costs and charges pertaining primarily to workforce reductions. Nortel said it would still be in compliance with all credit facility covenants as of March 31, 2002.

However, the company also announced it has notified its banks that it intends to fully draw down its April 2001 $1.75 billion bank facility and exercise its one-year term loan option to obtain an additional year of liquidity under the facility.

Nortel President & CEO Frank Dunn said in a statement the company lowered its guidance in response to customers that “were showing more resolve than originally anticipated to minimize spending in the near term.” Dunn added that Nortel had no immediate need for the funds that would result from the bank draw down, but said the company was taking the action to “take advantage of the favorable terms in our current facilities, rather than seeing this source of liquidity eliminated.”

Industry analysts weren’t surprised by the reduced guidance. Nikos Theodosopoulos, analyst with UBS Warburg, said his firm had lowered its Nortel estimates after the company’s New York City analyst meeting in February. “They pretty much said at that point that things were starting out slow relative to their guidance of $3.1 billion,” Theodosopoulos said. “The $200 million difference is only surprising if you weren’t expecting it.”

Theodosopoulos blamed the ongoing “rationalization” currently playing out in the telecom industry. Bankrupt CLECs are part of the problem, but other carriers, such as Qwest and WorldCom, are under pressure from high debt loads and slowing revenue growth, and consequently not spending money on infrastructure, he said.

In addition, even though competitive carriers are falling off the radar, not many equipment vendors have disappeared. “Equipment companies are suffering a drying up of demand, but not a drying up of competition,” Theodosopoulos said.

While he wasn’t surprised by the lowered guidance, Joy Mukherjee, analyst with A.G. Edwards, said the reduction was significant and is a warning signal regarding the industry’s other equipment vendors, most notably Lucent Technologies.

“This announcement indicates clearly that capital spending among the service providers is not nearing stabilization yet. It would be foolish not to think that Lucent won’t be affected also. Both Nortel and Lucent are similar in a lot of respects, though Lucent does have a little more concentration in the regional Bells than Nortel,” said Mukherjee.