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U.S. economy blamed for Nortel warning

Canadian communications equipment powerhouse Nortel Networks issues a profit and revenue warning and says it will lay off 10,000 employees.

Canadian communications equipment powerhouse Nortel Networks issued a profit and revenue warning Thursday, blaming the slowing U.S. economy for hurting the company's sales.

Nortel previously lowered its financial performance estimates, but executives now believe the situation is more dire than expected.

"We are now seeing a faster and more severe economic downturn in the United States, which we now expect will result in a slower overall market growth of approximately 10 percent in 2001," Nortel Chief Executive John Roth said in a statement.

Nortel also said it expects to lay off 10,000 employees, up from previously announced numbers.

"We are seeing longer than expected delays in spending by our U.S. customers as they continue to assess the impact of the economic and market conditions on their businesses," Roth said. "We now expect the U.S. market slowdown to continue well into the fourth quarter of 2001."

Nortel expects revenue to grow by 15 percent this year over 2000 levels and its earnings per share from operations to grow by 10 percent. The company said it expects first-quarter revenue of $6.3 billion and a loss of 4 cents per share.

According to a survey by First Call, financial analysts expected Nortel to report first-quarter profit of 16 cents per share on revenue of $8.1 billion.

"This is unusually early in the quarter to warn. It tells you things are pretty bad," said Seth Spalding, a communications equipment analyst at Epoch Partners. "If things are just soft, you usually hold out until the end to see what happens."

Spalding said companies such as Nortel, Cisco Systems, Lucent Technologies and other larger players which make a variety of older networking equipment as well as advanced gear are being hurt by carrier customers that are capping their spending on older systems and turning instead to smaller competitors for advanced systems.

"There's clearly a shift in where the discretionary spending is going," he said.

In a conference call after Nortel announced the shortfall, Roth said the company was a victim of changes in telecommunications budgets among several of its customers. As a result, it only just learned that its justification for maintaining its guidance for the current fiscal year--reinforced by several public comments--was incorrect.

"We had good visibility into the budgets of our carrier customers at that time. Their budgets had been finalized and approved by their boards with good increases," Roth said. "But then they, one by one, implemented a process of a very judicious review of each and every dollar spent.

"The carriers are very, very nervous about their ability to get more capital, and they want to make sure they're able to generate revenue on every dollar spent," he said.

Executives said they plan to reduce expenses to levels comparable with those during the second quarter of fiscal 2000.

Stock in Nortel, which has slid since September, closed less than 1 percent higher Thursday at $29.75. The financial warning was issued after the close of regular stock market trading. In after-hours activity, Nortel shares quickly fell nearly 25 percent.

Communications carriers have reduced their spending on expensive hardware necessary to upgrade their networks for high-speed Internet transmissions and other advanced services. Larger companies such as Nortel, Cisco Systems, Lucent Technologies and JDS Uniphase have been hurt while more nimble, smaller optical and networking competitors have cut into the giants' market share.

Nortel's growth had slowed some in recent months, but the company continued to reassure Wall Street--as recently as mid-December--that it would meet its financial target goals for 2001.

Company executives said overseas markets will continue to remain strong for sales of Nortel's communications gear.

"Partially offsetting the impact of the U.S. market slowdown is the continued solid growth we are seeing in Europe and in the Asia Pacific and Latin America regions," Roth said in a statement.

The company met Wall Street expectations with a fourth-quarter profit of 26 cents per share in January. Nortel also announced layoffs in some low-growth areas last month.