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Nortel Outlook: Job Cuts, Zero Growth

Flat revenue growth is the best Nortel Networks Corp. officials expect in the second quarter of 2002, prompting the Internet equipment maker to make cuts in one its least-productive divisions. Nortel took the proactive step of cutting 3,500 jobs in its optical long-haul division and recording a $600 million charge in the second quarter, rather […]

Written By

Jim Wagner

May 29, 2002

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Flat revenue growth is the best Nortel Networks Corp.
officials expect in the second quarter of 2002, prompting the Internet
equipment maker to make cuts in one its least-productive divisions.

Nortel took the proactive step of cutting 3,500 jobs in its optical
long-haul division and recording a $600 million charge in the second
quarter, rather than wait until the third quarter, when the job cuts are
expected to be completed.

The job cuts were prompted after officials realized third and fourth
quarter revenue growth would be “flat to down five percent,” compared to
the first quarter of 2002, which was $11 million lower than
original analyst projections.

Pro forma loss (or net loss before other items like equipment depreciation
and the cost of acquisitions) is expected to decrease sequentially
throughout 2002.

Frank Dunn, Nortel president and chief executive officer, expects no growth
in 2002, though the framework for a turnaround will be in place by the end
of the fiscal year.

“We are aligning our optical business model to where we see the industry
going to ensure we are well positioned when spending resumes,” he
said. “These actions help to do that and will reduce our overall break
even cost structure to approximately $3.2 billion of quarterly revenues
(not including costs related to acquisitions and any special charges or
gains), down from the previous target of approximately $3.5 billion.”

In order to improve the bottom line, which will get no help from revenues
this year, company officials plan on raising capital, possibly through an
equity-sale financial transaction. Nortel has already tapped out its $1.75
billion bank credit, announced at its first quarter call.

To streamline its long-haul division, the Canadian outfit plans on selling
or resizing its division and focusing on its core optical
switching/end-to-end networking management equipment until IT spending
picks up again.

“Optical backbone networks are the foundation of multimedia broadband
networks and we expect Nortel Networks to remain an industry leading
provider of end to end optical networking solutions,” Dunn said. “Going
forward, we will focus on our leadership in optical systems and work with
our partners to ensure ready access to high performance, low cost optical
components.”

Nortel now expects to end the year with 42,000 employees on its payroll
(the company started 2001 with 94,500), the end result of job cuts
throughout 2001 and 2002 to pare back its operations after telecom spending
hit the floor. Last June, Nortel revamped
its entire business strategy to reflect changing times and have been steadily
cutting back since.