Blaming the weak economy and cutbacks in spending by telecom companies that buy the equipment it makes, Nortel projected lower third-quarter sales than analysts had expected, sending its shares plummeting to their lowest level on record.

The announcement was reminiscent of the numerous restructurings and turnaround efforts the company undertook in the years following the bursting of the technology bubble at the start of the decade. Thousands of jobs have been shed since then, amid billions of dollars in losses.

It was also a surprise. As recently as Aug. 1, chief executive Mike Zafirovski said there were no plans for a restructuring.

Although the change in tone was sudden, Duncan Stewart, president of Duncan Stewart Asset Management in Toronto, said Zafirovski couldn't be blamed for trying to run the company calmly for as long as possible.

"When you're the captain of the Titanic, it's a bad idea to run around screaming and weeping. It tends to alarm the passengers."

Since joining Toronto-based Nortel from Motorola in 2005, Zafirovski's promised turnaround has proved elusive. He has overhauled senior management, slashed jobs and made new technology bets by repositioning the company's $1.7 billion R&D budget.

Shares of the one-time market darling dropped 52 percent on Wednesday to close at C$2.76 on the Toronto Stock Exchange. Nortel, once among the Toronto market's most heavily weighted stocks, now has a market cap of just C$1.4 billion.

Lower expectations

Before the trading day began, North America's biggest maker of telephone equipment said it now saw full-year 2008 revenue dropping between 2 percent and 4 percent with gross margin of about 42 percent. Last month it forecast full-year sales to grow at a low single-digit percentage rate with its gross margin at about 43 percent of sales.

"The status quo is not an option for Nortel," Zafirovski told analysts during a conference call.

At least one analyst wondered during the call if Nortel would be able to stand on its own or whether it should merge with another company to survive.

Nortel management appeared focused on staying independent, however. Chief Strategy Officer George Riedel said in an interview: "We certainly have our challenges, but I think we've got momentum as well, and if we stay focused on the growth areas with more firepower, we feel confident we can power through this."

Riedel declined to discuss how profound the layoffs at Nortel would be, but added it would be "naive" to think there will be no impact on jobs.

Nortel's payroll has shrunk to about 32,550 from a peak of more than 90,000 in 2000.

Nortel faces fierce competition from low-cost Chinese vendors— as do its other non-Asian peers such as Alcatel-Lucent—and some analysts have complained Nortel lacks necessary scale to remain relevant.

Arinder Mahal, an analyst at Dundee Capital Markets, said talks regarding a sale of parts of the company are possibly already taking place.

"It's unlikely that somebody will come in and take the whole thing over. It could be more a sum of parts. So that is certainly in play," Mahal said.

Selling "the crown jewel"

Nortel said it would consider selling its growing Metro Ethernet Networks business, which includes optical and carrier ethernet technology. It also said it would look for ways to "mitigate the risks" associated with its 4th generation wireless investments, which could mean partnering with other firms on developing technology.

Analysts noted that the company had been bullish on Metro Ethernet until now. Indeed, Nortel had highlighted customer wins at the unit such as the one announced earlier this month with BCE Inc.'s Bell Canada unit.

"The only reason they're selling it is it's the only one that would actually bring in any money," Stewart said, adding: "It's the crown jewel. It's the best asset in the company, probably."

Nortel said third-quarter revenue is seen at about $2.3 billion with a gross margin of about 39 percent.

It also said revenue in the current quarter is being hampered by foreign exchange fluctuations and some product-delivery delays into the fourth quarter.

Analysts, on average, had expected revenue in the third-quarter of $2.70 billion and full-year revenue of $11.23 billion according to Reuters Estimates.

By: DocMemory
Copyright © 2023 CST, Inc. All Rights Reserved