Nortel To Cut Jobs To Combat Widening Losses

The cuts, announced Wednesday during the Toronto-based vendor's fourth quarter earnings call, stem from Nortel reporting a net loss in the fourth quarter of 2007 of $844 million, or $1.70 per share, compared to a net loss of $80 million, or $0.19 per share in the fourth quarter of 2006. Nortel president and CEO Mike Zafirovski said the networking vendor's losses widened because of a tax-related charge of more than $1 billion.

Nortel's revenue fell 4 percent to $3.2 billion for the quarter, compared to $3.32 billion for the fourth quarter of 2006. Annual revenue was down nearly 4 percent to $10.95 billion from $11.43 billion in 2006.

Zafirovski also forecasted that 2008 revenues will grow only in the "low single digits" over 2007.

To compensate for the revenue tumble, Zafirovski said the vendor will cut 2,100 positions, which represents just more than 6 percent of its workforce of about 35,000. Another 1,000 positions will be moved to "higher growth and lower cost geographies."

The restructuring plan, Zafirovski said, will also include the sale of certain real estate assets. All told those moves are expected to result in annual gross savings of about $300 million, with total charges to earnings of about $275 million and cash outlays of some $250 million. About 70 percent of those charges are expected to be incurred this year, while the remainder will be felt in 2009.

Despite the cuts and the revenue dip, Zafirovski, who took the helm at Nortel in 2005, remained optimistic that his five-year plan, now in its second year, to make the struggling vendor profitable again will come to fruition despite economic uncertainty and continued poor performance.

"Yes, there's a slowdown in the economy, but the move to true mobile broadband is right in front of us," Zafirovski said Wednesday, adding that Nortel's push for "hyper connectivity" will help it make inroads.

Nortel's gross margin was 43.7 percent of revenue for the fourth quarter of 2007, compared to 39.8 percent in the fourth quarter a year before and 43 percent for the third quarter of 2007, Zafirovski said. Nortel projected gross margin will represent about 43 percent of revenue in 2008.

Nortel's revenue also fell in several of its key technology areas. The vendor's largest unit, carrier networks, dropped 9 percent year over year to $1.35 billion; enterprise solutions dropped 3 percent to $762 million and metro Ethernet networks dropped four percent to $429 million. Nortel's global services division, however, saw 12 percent growth year over year, hitting $605 million. Quarter over quarter, however, Nortel's enterprise solutions grew 14 percent, while carrier networks jumped 25 percent, metro Ethernet networks grew 19 percent and global services increased 12 percent.

"It's a challenging environment," the CEO said. "As a result of it, we came at the lower end of our previous revenue guidance."

Still, Nortel saw growth in several key areas, including CDMA, Carrier VoIP and packet optical services, which all came in above market, offsetting some of the drops in other technology areas.

Zafirovski said he expects Nortel to grow in key segments as enterprises transition from IP to unified communications to business optimized communications. He added that Nortel also plans to leverage the drive toward next-generation mobility through 4G, fixed-mobile convergence, IP transport and increased use of applications. Lastly, he said services and solutions are expected to be a strong growth area as Nortel forges on.

Along with technological advances, Nortel is also hoping to drive revenue by working with partners, such as Dell, IBM, LG and Microsoft, which Nortel worked closely with in 2007 to integrate with unified communications on Microsoft's Office Communications Server.

Despite struggling with revenue, Zafirovksi said Nortel will continue to battle against its networking foes, the largest of which is San Jose, Calif.-based Cisco Systems, the market leader. Zafirovski said Nortel expects to remain competitive.

"There is an absolute commitment to competitiveness with Nortel," he said. "We will not blink. We will ensure we can compete against any company, anywhere in the world of any size."