By Ian Karleff
TORONTO, April 16 (Reuters) - Analysts expect Nortel Networks Corp. (NYSE:NT - news; Toronto:NT.TO - news) to announce deeper job cuts amid slumping sales when it reports first quarter results on Thursday as it struggles to stop the bleeding and return to profitability. ADVERTISEMENT
The Brampton, Ontario based maker of telecom equipment said this month that sales would miss earlier guidance of 10 percent decline from the fourth quarter and come in at only $2.9 billion.
Its proforma losses, including a $200 million write down for obsolete equipment, are expected to hit 14 cents a share, which is slightly higher than estimates of a 13 cent loss.
``They functionally warned twice during the quarter so there is not a lot of mystery left,'' said Salomon Smith Barney analyst Alex Henderson.
``But we are still trying to figure out how they return to profitability. The magnitude of the losses they are producing needs at least another 10,000 people to come out to get back to break-even.''
Nortel has already virtually halved its workforce, slashing 47,000 jobs and creating a slimmed-down company with 48,000 workers. But analysts say further cuts will be needed if Nortel is to meet its goal of reaping a profit by the fourth quarter.
Other equipment vendors, including Lucent Technologies (NYSE:LU - news) are rumored to be contemplating as much as 10 percent in additional job cuts as some network customers keep spending to a minimum, and others go bankrupt.
Nortel stock, in the doldrums for months, were up 45 Canadian cents at C$6.20 in Toronto on Tuesday, and up 32 cents at $3.92 in New York.
Dealers said the sector was reacting favorably to Corning (NYSE:GLW - news) Inc.'s forecast of a narrower than expected first quarter loss, although the world's largest maker of fiber optic cable said it may cut up to 12.5 percent of its work force.
``We think 10,000 to 15,000 (jobs) at both Lucent and Nortel is necessary in order to get back to break even,'' said Henderson.
LOOK AT COSTS
Mark Lucey, an analyst at TD Newcrest, said he is skeptical that Nortel's current cost structure will enable it to turn profitable by the fourth quarter.
An analysis of Nortel's profit margins excluding abnormal inventory write-offs will give a clearer assessment of how far off profitability lies, he added.
``They took a $200 million charge for excess and obsolete inventory, which will affect gross margins, but what is the underlying gross margin activity? Because that is a big swing factor on where their break-even point really is,'' said Lucey.
Investors will also examine how much cash Nortel consumed in the quarter, and whether they can maintain a cash balance of $3 billion as forecast early this month.
And while first quarter results are not expected to sway significantly from the new guidance, analysts are hoping for a taste of what's to come for the rest of the year.
``They will announce a pretty decent quarter, but people will be looking for their outlook for the next quarter which could be challenging,'' said Truc Do, an analyst at Lazard Freres & Co. LLC.
Capital expenditure estimates for operators of wireless and wireline networks continue to erode, with UBS Warburg lowering its projections last week to a 19 percent decline in 2002 spending from an earlier forecast of a 15 percent drop.
Lazard's Do expects Nortel to forecast flat to lower revenues for the second quarter ending June 30, with weak orders from China -- because of the restructuring of the phone industry in that country -- taking most of the blame.
Also weighing on revenues will be anemic sales to corporate or enterprise customers and a poor showing from fiber optics equipment, which in 2001 plunged to one-third of 2000 levels because of a glut of equipment in the market.
Do said one bright spot will be wireless as Nortel continues to announce contract wins in this area from networks upgrading to packet-based data systems.
Nortel said on Tuesday that British mobile phone network mm02 granted it a ``significant'' portion of a 1.4 billion pound contract, after a six-month review of spending saw the initial contract figures ratcheted down by 22 percent.