Earnings-warning season is a prime opportunity for telecom equipment companies to air their dirty laundry while investors are growing numb to bad news coming out of the sector. On Friday, Nortel Networks, the world's largest maker of telecom equipment, took full advantage of that opportunity to confess its woes. But Nortel's troubles are deeper than anyone expected, as is the carnage in the entire sector, and all indications are that the tough times are here to stay.
Nortel said it will post a massive $19.2 billion loss for the second quarter, which ends June 30. That loss includes write-downs of $15.2 billion. Before the charges, the company said it will report a loss of $1.5 billion (48 cents a share) on revenue of $4.5 billion, which is $1.7 billion short of the average that analysts were expecting.
Nortel CEO John Roth said 20,000 employees already have been notified that they will be let go, but employees who thought they squeaked through the latest round of layoffs can't relax now – Nortel said 10,000 more job cuts are on the way.
Perhaps most disheartening about the company's announcement was the reason for the shortfall – a fall-off in customer demand. Most severely hurt are the company's long-haul or "inter-city" product lines, and its tapering circuit-switching business. And Nortel's business groups that have seen strong performance of late, such as the wireless division, aren't making up for lost ground.
In an interview last month, Roth admitted that the current economic downturn blindsided Nortel. "It's one thing to see a recession and get girded up, but out of the blue we got whacked," he said. "It was only in October that customers stopped beating me up for not shipping fast enough, and now they say, 'Ship what? I don't need it.' "
Nortel's warning shouldn't have surprised investors, especially after JDS Uniphase, the world's largest maker of networking components, announced Thursday that it will fall well short of its quarterly goals and dramatically lowered its guidance for the next quarter. JDSU's attempt to explain away the shortfall – it cited inventory build-up – effectively foreshadowed the huge inventory write-off Nortel, JDSU's biggest customer, announced Friday.
"JDS Uniphase's preannouncement reflects the continued weakness in carrier spending and inventory backlog," Raj Srikanth, an analyst at Deutsche Banc Alex. Brown, wrote in a research report.
Adding to the telecom equipment sector's doom and gloom, shares of Nortel rival Lucent Technologies took a dive earlier this week after Standard & Poor's cut the company's credit rating to junk status. And last week, high-end router maker Juniper Networks also announced an earnings shortfall.
Investors are now left to speculate about which company in the sector will be the next to confess its troubles. Based on the rampant selling that has followed the bad news from Nortel, JDS Uniphase and Juniper Networks this week, high-flying Ciena looks like the next in line. As of 11:47 a.m. PDT, Ciena shares were off $12.76, or 24 percent, from their closing price Tuesday. Although the optical networking company has yet to signal that it is feeling any pain, investors are growing increasingly wary of Ciena's ambitious revenue growth targets of 95 percent to 105 percent for the year.
In a message to employees Friday morning, Roth said: "By my retirement in April, my goal is to have Nortel Networks returned to profitability." But given that the telecommunications customers who buy Nortel's equipment are dying a slow death, Roth might not have much say in the matter.
