Nortel prepares for more cuts

The networking gear maker says it has missed profitability goals and is looking for ways to reduce costs.

Marguerite Reardon Former senior reporter
Marguerite Reardon started as a CNET News reporter in 2004, covering cellphone services, broadband, citywide Wi-Fi, the Net neutrality debate and the consolidation of the phone companies.
Marguerite Reardon
2 min read

Nortel Networks said it is eyeing more cost cuts to hit profit targets as investors wait to see up-to-date earnings for the telecommunications gear maker.

On Tuesday, the Canadian company said that it has missed its goal of pegging operating costs at under 40 percent of overall revenue. In addition, its gross profit margins are below the targeted mid-40 percent range.

The news was revealed in Nortel's regular biweekly update to Canadian securities regulators. The company must file regularly with the Ontario Securities Commission until it is up-to-date on all its financial filings.

The company began reviewing and restating financial results back to 2001 after it discovered that roughly $900 million in liabilities had been either recorded incorrectly or not been properly released. It has yet to report earnings for the year 2003 and the first and second quarters of 2004.

CEO Bill Owens said in a statement that more details on cost-cutting would be revealed when Nortel releases preliminary financial results for the first half of 2004. The gear maker has axed roughly two-thirds of its workforce since 2000, when the telecommunications market was at its peak.

It has also recently divested much of its manufacturing to Flextronics, in a deal that is expected to reduce operating expenses for Nortel.

"As previously announced, I continue to be focused on Nortel Networks' strategic direction and the improvements and efficiencies that we will need to put in place to drive financial performance," Owens said in the statement.

On a positive note, Owens noted that sales in 2004 are expected to grow faster than the overall market.

Analysts said they had expected Nortel to fall short of its operating goals and gross margin targets, but the news still shook investors' confidence, sending the stock down $0.65, or 16 percent, to $3.42 on the NYSE.

"This is not surprising, in our view, as the company has provided several 'hints' over the past few months," Steven Levy, a Lehman Brothers analyst, wrote in a note to investors. "Nonetheless, management had never formally announced the potential shortfalls in operating profitability in the past."

While Levy believes that Nortel is on the right track, he said uncertainty still looms, and investors should keep on the sidelines for now.

"Even though we know when the current period of uncertainty is likely to end, today's disclosure clearly highlights that the uncertainty related to the company's future profitability remains," he said.