Warnings cloud networking sector

Summary:Investors take Nortel's latest warning as another sign that things in the networking market are not well.

Another profit warning from Nortel Networks slammed shares and dragged down other networking firms by market close Wednesday. Analysts and investors grew pessimistic about any hope for a quick recovery in the sector.

Nortel dropped $2.76 to $14, while competitors Cisco Systems and Lucent Technologies fell $2.38 to $15.75 and $1.43 to $10.27, respectively.

JDS Uniphase, which counts Nortel as a major customer, lost $3.41 to $19.91. Ciena, which supplies Nortel and competes with it, dropped $7.06 to $46.75.

Nortel told investors Wednesday that it expects to report a first-quarter loss of between 10 cents and 12 cents per share, on revenue of $6.1 billion. That's down from its already reduced estimates of a 4-cent-per-share operating loss on sales of $6.3 billion.

Nortel had already reported a profit warning for the first quarter on Feb. 15.

Nortel makes products such as switches, wireless and broadband-network systems, and fiber optic products, as do its competitors Lucent and Cisco.

Company executives said its telecom customers are continuing to cut their spending, a trend that has hit virtually every company in the sector.

"We maintain that a second-half rebound in the economy is not likely; that select carriers will further reduce existing Capex (capital expenditure) spending; and that additional adjustments to expectations will be necessary for the second half of the year," wrote ING Barings analyst Tom Lauria.

Lauria cut earnings estimates for Nortel from 65 cents to 40 cents, and lowered his price target from $30 to $20.

He also speculated that Nortel will need to cut more jobs, as will Lucent, which announced in January that it would lay off 10,000 workers.

The slumping sales have stepped up the competitive pressure on pricing in these firms, analysts said.

"Consolidation in the dot-com and CLEC (competitive local exchange carrier) markets means that Nortel will also be competing with slightly used equipment from itself and other vendors," wrote Josephthal Lyon & Ross analyst Lawrence Harris. He cut Nortel earnings estimates for 2001 from 50 cents per share to 5 cents, and revenue estimates for the year from $33 billion to $29.3 billion.

And there are concerns that the damage could be spreading from North America to Europe. Bear Stearns analyst Wojtek Uzdelewicz estimated that almost 70 percent of Nortel's sales in Europe are to next-generation or new operators, and "most of those operators are under significant financial pressure."

He dropped earnings estimates for 2001 from 49 cents per share to 14 cents, and for 2002 from 85 cents to 70 cents.

Virtually no company has been able to protect itself from what Merrill Lynch analyst Tom Astle dubbed the "Optical Dead Zone." For fiscal 2001, Astle dropped his revenue estimates on JDS Uniphase, who counts Nortel as a major customer, to $3.5 billion from $3.6 billion, and lowered earnings estimates from 64 cents to 61 cents per share.

Cisco CEO John Chambers said over the weekend that the slowdown in North American carriers may last longer than originally expected, and he hinted that the slowdown could spread to Europe.

Robertson Stephens analyst Paul Johnson said Chambers' comments, which appeared in an interview in the Financial Times constituted a "second pre-announcement," from Cisco, and he dropped earnings estimates on the company from 59 cents per share to 50 cents per share for 2001.

Salomon Smith Barney analyst B. Alexander Henderson lowered third-quarter earnings estimates for Cisco to 8 cents per share from 12 cents, citing continued weakness in the business.

Topics: Cisco, Networking

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