Roth sees cloudy horizon

As it warned on June 15, Nortel Networks posted a huge second-quarter net loss and a 36% decline in sales. However, the vendor said it has sufficient cash and credit to stave off a liquidity crisis.

Nortel declined to provide guidance for the third quarter or the full year, saying that it does not expect meaningful growth in spending to occur before the second half of 2002.

“Our visibility still remains clouded, so no forecasts at this point in time,” said John Roth, president and CEO of Nortel. “Engineers are trying to be terribly creative in finding new ways to defer purchases as they improve the efficiency. Ultimately, that will get exhausted… In the long term, this is great for the industry, but in the short term, it sure hurts a lot.”

Nortel recorded a net loss of $19.43 billion, or $6.08 per share, compared with a loss of with a loss of $745 million, or 26¢ per share, in the year-ago period. Nortel’s pro forma net loss from continuing operations, which excludes one-time charges, was $1.55 billion, or 48¢ per share, compared with pro forma earnings of $637 million, or 21¢ per share on a diluted basis, in the year-ago period.

Revenues dropped 36% to $4.61 billion from $7.21 billion in 2000’s comparable quarter, as sales of Nortel’s circuit-switch and optical products plummeted.

Network infrastructure revenues fell 39% from last year, and the company’s optical optical inter-city revenues were down sharply in the United States and Europe, Nortel said. Photonic component sales fell 78% compared to the second quarter of 2000. The one bright spot was wireless Internet, where sales grew “substantially” in Asia and the United States.

“Customers are slowing down their spending,” Roth said. “The slowdown is starting to visibly spread in Europe and Latin America, but at least for now, we continue to see good growth in Asia.”

Nortel’s cash outflow for the quarter was $500 million, “significantly better than expectations,” according to Frank Dunn, Nortel’s chief financial officer.

Nortel had $1.9 billion in cash at the end of the quarter and access to a new, untapped $2 billion credit facility, giving it more than $5 billion in sources of liquidity when combined with Nortel’s commercial paper sources, Dunn said

Nortel has reduced is unfunded vendor commitments by $600 million to $2 billion. Nortel has total commitments of $3.1 billion, down from $5.2 billion at the beginning of the year. The vendor hopes to continue to cut its funding exposure, Dunn said.

About $12.3 billion of the $19.43 billion one-time charge was for the write-down of tangible assets, most of which was goodwill related to $34 billion in acquisitions the company made during the past two years. Specifically, the goodwill write-down was associated with the purchases of Alteon WebSystems, Xros, Qtera and the 980 nanometer pump laser-chip business from JDS Uniphase. Another $2.8 billion in charges was recorded for disposition of Nortel’s access solution operations, and $833 million was for the restructuring costs associated with work-force reductions and facilities closures.

By the end of 2001, Nortel expects to save about $1 billion pre-tax per quarter from its restructuring and cost control measures

The vendor expects to record further restructuring charges in the third quarter to cover the severance pay of discharged worker s and related facility closures.

Nortel has completed 23,000 of the 30,000 layoffs it has announced, with the remaining 7,000 positions to be eliminated during the next eight weeks.