Nortel Networks Corp. is cutting jobs again in another attempt to reduce its operating costs. Nortel's main problem is further capital expenditure reductions at telecom service providers, crimping the networking equipment company's sales.
Nortel had previously said it would lay off employees to bring its staff to 42,000 from about 44,000 in June. Last week the company sharply revised the numbers downward and advised analysts that third-quarter sales will decline 10% rather than stay flat with the $2.8 billion reported in the second quarter, as previously projected.
The job cuts will reduce Nortel's payroll by up to 7,000 within the next few months, to 35,000 from a high of 95,000 in December 2000.
The culprits, as in previous job cuts at the Brampton, Ontario, company, are the weak global economy and especially the tight capex budgets at North American telecom service providers. Those pressures will persist through 2003, said Frank Dunn, president and chief executive of Nortel.
"We continue to see reductions in near-term spending plans by service providers, especially in the United States," Dunn said in a statement. "In light of the ongoing pressure on customer capital spending plans globally, we are taking steps to further reduce our quarterly break-even cost structure to below $2.6 billion."
Nortel had initially indicated it would achieve break-even performance with sales of $3.2 billion a quarter, but it has had to revise the numbers because its customers are not loosening the reins on capex spending, according to analysts.
"The revenue fall disappoints us but does not shock us-in fact, we are getting used to these events," said Thomas Astle, an analyst at Merrill Lynch & Co. Inc., New York, in a report. "The aggressive cost-cutting ...??shows us the company is not yet seeing any light at the end of the tunnel and thus has chosen to reduce the business by 20%."
The capital expenditure cuts at telecom service providers have been particularly severe in the long-haul optical equipment market, a mainstay of Nortel's during the last market upturn. For instance, between 1999 and 2001, Global Crossing, Level 3, and Williams Communications together spent $28 billion on their networks. This year the three companies' combined capex budget is approximately $500 million, according to Gregory Teets, an analyst at A.G. Edwards & Sons Inc., St. Louis.
"With a large amount of capacity easily accessible, spending on long-haul optical equipment will remain at diminished levels until at least 2004," Teets said.