Mon, Jul 02, 2001 page21

• Analysts don't see rebound for Nortel

  TELECOMS As losses mount for equipment makers, analysts and industry leaders say that although the sector has probably bottomed out, an upturn is not in sight

  • BLOOMBERG
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  Nortel Networks Corp, Ericsson AB and other phone-equipment makers, which are ending the industry's worst quarter in June, are unlikely to see a rebound in the next three months, investors and analysts said.

  Nortel has said it will report a US$19.2 billion loss, chiefly from write-offs, in the quarter ending today, one of the largest in corporate history, and Nokia Oyj cut its profit forecast two weeks ago, pushing shares down 23 percent that day, the biggest decline in a decade. All together, four of the world's top phone-equipment makers have said they expect to post collective losses in the quarter of about US$23 billion.

  "This is not going to be the end of it -- expect more blood," said Dennis See, who manages about US$120 million at Pointworth Asset Management Pte in Singapore. ``There's no sign of a turnaround yet.''

  Phone companies such as AT&T Corp and Sprint Corp.are delaying spending on new equipment as long-distance prices drop.

  In Europe, customers such as Deutsche Telekom AG are teaming up to reduce planned investments after spending US$100 billion on permits to offer faster wireless services. Other corporations are also cutting spending as economic growth slows worldwide.

  About a month into the world's first trial of the speedy, new mobile-phone services, Japan's NTT DoCoMo Inc is struggling with glitches and handset recalls, underscoring concern the new generation of cellphone services -- and demand for new mobile phones and network equipment -- may be years away, analysts said.

  Investors say that's got equipment makers worried they won't see the investments in networks they had hoped for.

  Ericsson, Motorola Inc and others may see earnings improve slightly in the third quarter, although not by much. Analysts expect Ericsson to post a smaller loss in the third quarter than the 5.6 cents-a-share loss they expect for the previous three months. Motorola may break even in the next three months after an expected 12 cents per-share loss in the second quarter, according to analysts polled by Ibes International Inc.

  Ericsson, the biggest maker of wireless networks, expects growth in the phone-equipment market to fall by half this year to between 8 percent and 10 percent, with growth as low as 5 percent for wireless network gear alone.

  Shares of equipment makers are at some of their lowest levels. In Europe, Nokia, Ericsson and Alcatel SA pushed the Bloomberg Europe Telecommunications Equipment Index down two-thirds in the past year. In the US, the regional equipment index -- dominated by Qualcomm Inc, Nortel and Motorola -- lost three-quarters of its value.

  With plunging share prices, phone companies from British Telecommunications Plc, Deutsche Telekom to AT&T may have a harder time raising funds for new networks, analysts said.

  "The industry will be challenged to maintain their revenue stream both in terms of the end customer and in the vendor perspective," said Rick Pryor, senior vice president of mobile communications at Siemens AG in Singapore.

  Marconi Plc, the UK's largest phone-equipment maker warned the six months to September will be "difficult."

  Motorola, the No. 2 mobile-phone maker, may have a larger- than-expected loss in the second quarter because sales of chips for cell phones and other phone equipment have probably fallen more than previously forecast, analysts said.

  "Actually, it would be surprising to me if Motorola did not bring down expectations again," said Mark Roberts, an analyst at First Union Securities in San Francisco, who has a "neutral" rating on the stock.

  Some equipment makers are also being hurt by investments they made in phone companies' networks -- and the companies themselves -- to win orders.

  Lucent Technologies Inc, the biggest creditor of One.Tel Ltd, will struggle to recoup US$312 million from the failed Australian phone company because the value of its main assets, wireless licenses, have tumbled, analysts said.

  "The equipment makers are at the end of the food chain, and they're caught between a rock and a hard place," said John Edwards, who heads the telecom media networks unit of Cap Gemini Ernst & Young in Singapore. "The level of vendor financing for Lucent and Nortel was huge, so there was enormous exposure."

  Demand for telecommunications gear hasn't improved in the second quarter, forcing Lucent, Nortel and rival suppliers to reduce costs as phone companies cancel orders, analysts said.

  Nortel plans to cut 30,000 jobs by September.

  "It's going to look really bad this quarter," said Ken Turek, senior portfolio manager at Northern Trust Corp in Chicago, who holds shares of Cisco Systems Inc and Ciena Corp.

  "A year ago at this point, I'd say it was getting shaky -- now, we're in never-never land."
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