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Nortel on the ropes: ‘No way to sugercoat’ tough quarter, economic downturn hurting company

NORTEL NETWORKS CORP. FACES AN UPHILL CLIMB following a third quarter where the company reported losses of $3.4 billion and said it would cut thousands of jobs and say goodbye to a number of high-ranking executives.
Analysts said tough times are ahead and one even suggested bankruptcy could be a possibility for the Canadian networking equipment company.
“It is not a pretty picture,” said Ronald Gruia, a consulting analyst for Frost & Sullivan. “There is no way to sugarcoat it.”
In a note written by RBC Capital Markets’ analyst Mark Sue, Nortel could run out of money before 2011 when its $1 billion bonds mature.
“Considering the worsening macro environment, Nortel’s challenged industry position and concerns related to liquidity while the capital markets are basically closed, we think bankruptcy is a distinct possibility down the road,” according to Sue’s note.
Nortel’s stock also had a rough few days following its third-quarter financials. The stock fell to 65 cents per share on Wednesday, before bouncing back to 78 cents per share on Thursday. But by Friday the company’s stock was down again trading at 56 cents cents per share. Sue cut his projected target price for Nortel’s stock from $1.50 to zero.
During a conference call to discuss the third quarter, Nortel CEO Mike Zafirovski said the economic downturn is a major reason why the company struggled in the quarter. Compounding matters is the company took one-time charges of $3.2 billion, which was comprised of write-down tax adjustments of $2.1 billion and $1.1 billion in goodwill charges.
Revenue decreased 14% for the quarter compared with the third quarter a year ago. The company took in $2.32 billion for the quarter, which is also lower than its second-quarter showing of $2.62 billion.

Carrier networks unit drops 24%
The company’s Carrier Network division revenue declined 24% to $822 million compared with a year ago. Slower spending by its customers, mainly in North America, was a big reason for the loss, company officials said.
Enterprise Solutions accounted for $616 million in revenue, a decrease of 8% compared with the third quarter in 2007. Global Services posted $507 million in revenue, a 6% year-over-year drop, and Metro Ethernet Networks revenue dropped 12% to $317 million.
“These results are disappointing, but with the economic downtown, not surprising,” Zafirovski said.
In response, the company said it would eliminate 1,300 jobs and a total of 2,500 jobs by the end of 2009. The company also unveiled plans to streamline its business practices in an effort to preserve cash and focus on areas that are generating business for the company.
Gruia said it will be tough for Nortel to move forward with its plans because of the current economic climate. He said the company is very diverse with its various segments of business that include enterprise, carriers, optical, service and wireless.
“With so many areas Nortel focuses on, which way do they proceed?” he said. “They are burning cash at a substantial rate.”
The company is also facing a pension deficit that has been reported to be between $2.3 billion and $2.8 billion, Gruia said.
Gruia said he questions whether the company will have enough cash, $1 billion, to move forward with its business operations.
Sue’s note agrees, saying Nortel could be down to $1.6 billion in cash next year. The company is expected to end this year with $2.4 billion in cash.
“The situation is looking very difficult,” Sue wrote.
The company’s asset sales could also have not come at a worse time, according to Sue. The company is trying to sell its Metro Ethernet assets.
“Potential bidders for the company’s Metro Ethernet assets may offer subsequently distressed prices,” according to Sue.
Gruia said Nortel also faces stiff competition from L.M. Ericsson, Nokia Siemens Networks and Alcatel-Lucent. Of the companies, only Ericsson posted a profit in the third quarter.
“Many of Nortel’s competitors have consolidated,” Gruia said. “It makes it tougher to compete with those companies that have scale.”
Gruia said Nortel may have to break up its business segments if it wants to stay afloat. According to Sue’s note, Nortel may have to sell its CDMA assets as well.

Preserving cash
Nortel’s third-quarter results were expected. The company refigured its projection in September as the economy began to spiral downward.
The workforce cuts are projected to save Nortel $260 million for 2009. About 25% of the cuts will be made this year and the rest will occur in 2009.
Nortel will also separate its business model into three areas. One sector will focus on enterprise customers and two others will be responsible for product, services, applications, marketing and portfolio business and market development.
“We are taking aggressive action to reduce cost and preserve cash,” Zafirovski said. “We believe it is time for change.”
The ongoing restructuring and other cost reductions is projected to save Nortel $400 million in 2009. The company also has in place a hiring freeze and a freeze on salaries and has cut its travel budget.
Departing executives are CMO Lauren Flaherty, CTO John Roese, Dietmar Wendt, global services president, and Bill Nelson, executive VP of global sales.
“It is always difficult to see colleagues go, but we made the necessary decision to consolidate our executive layer and reshape Nortel,” Zafirovski said.
For 2009, Nortel expects business to remain around the low end because officials are expecting the economic climate to deteriorate further.
Zafirovski said the company will move forward concentrating on developing enterprise solutions and developing equipment for next-generation networks.
With the changes, Zafirovski said Nortel can become and stay “relevant.”
“This is a critical time for Nortel,” he said.

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