Nortel to Cut 3,500 Jobs to Boost Profits

Aug. 19, 2004
By Susan Taylor

OTTAWA (Reuters) - Nortel Networks Corp. <NT.TO> <NT.TO> earned stock market applause on Thursday as it slashed more jobs, released on-target profit estimates, and took steps to clean up its accounting mess.

Nortel, North America's largest provider of telecoms equipment, estimated it would end up posting a first-half 2004 profit of up to 2 cents a share.

But it said that to keep costs in line it will cut about 3,500 more jobs, or 10 percent of its workforce, with most of the cuts coming in North America.

The profit estimates provided a much-delayed glimpse into Nortel's finances as the company has spent months untangling accounting irregularities that caused it to postpone releasing results for this year and to restate results for previous years.

Shares in Brampton, Ontario-based Nortel, shot up in early trade, adding more than 7.5 percent to C$5 on the Toronto Stock Exchange and $3.85 on New York.

"The idea that they finally provided some details that everybody had been fretting about has been a relief, that's one reason why the stock is up," said Edward Snyder, analyst at Charter Equity Research.

"Secondly, management has been aggressive in cutting expenses further. The big positive here is that revenue growth looks good still. The forecast is still for growth better than the market."

Nortel said on Thursday it continues to expect its revenues will grow faster than the general market for telecoms equipment, which it sees expanding in the low to mid-single digits in 2004.

Nortel said it expects gross margins between 40 percent and 44 percent of revenues through 2005. Gross margin for the first six months was about $2.2 billion, or 43 percent.

Staff cuts, which are expected to be complete by yearend, will save between $450 million and $500 million annually and result in charges between $300 million and $400 million.

The changes will reduce operating expenses to 35 percent of revenues or lower in 2005, Nortel forecast.

In addition the company announced plans to streamline operations into two major divisions. It will combine its optical, wireless and wireline units into one carrier division. Its existing enterprise business will be the other major division.

It said it will target emerging markets such as China and India, to boost revenue. It will also focus more on deals in the government, defense and service markets to drive sales growth. To implement these strategies, it will appoint a chief strategy officer and chief marketing officer,

"In the areas of China, Asia, central and Latin America, the cuts we've announced will be almost insignificant because these regions are growing for us," chief executive William Owens said in a conference call with analysts. "Most of these cuts will come out of North America ... we have heavily weighted the reductions to management."

The company, which will restate faulty financial results between 2001 and 2003, estimated earnings of between nil and 1 cent per share in each of the first and second quarters of this year. Second-quarter results will include 2 cent a share benefit from a contract settlement.

First-quarter revenue was $2.5 billion and second-quarter sales were $2.6 billion.

Comparisons with year-earlier results are unreliable, the company has said because results for those periods will be restated in late September.

There have been allegations that officers at Nortel cooked the books so that the company could turn a profit in 2003 and cash in on a bonus plan that paid out millions of dollars.

Trying to scrub away the stain left by its accounting mess, Nortel said on Thursday it has fired seven more executives "for cause." They join three top bosses axed in April.

The company also said it will establish a chief ethics and compliance officer and that it is demanding repayment of about $10 million in bonuses paid out in the ill-fated back-to-profit plan.

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