Nortel Networks Corp., the world's No. 1 supplier of fiber-optic network equipment, said today that it will cut 4,000 jobs over the next six months as part of a plan to freeze staffing at 2000 levels and focus on its high-growth businesses.
Nortel, which had about 86,000 staff in 2000, said that the job cuts in poorly performing parts of the company will be balanced by hirings in such high-growth areas as fiber-optics or wireless network technology.
The Brampton, Ontario, company said the first round of layoffs include about 750 staff in Ottawa and another 200 in Toronto, who received pink slips on Tuesday.
"Our goal and expectation is to try and keep our work force flat," said Nortel spokesman Andy Lark.
"We let 200 people go in Toronto, but we hired 200 people in the last four weeks … and the same with Ottawa, we've hired thousands of people in Ottawa."
Nortel employs 35 percent of its staff in the United States and 25 percent in Canada.
Layoffs Come Before Earnings Report
The company's last round of job cuts came in 1999, when it cut nearly 8,000 jobs and sold a string of manufacturing plans under a restructuring.
The news comes a week in advance of Nortel's fourth-quarter results, which are expected on Jan. 18.
"It is an indication that Nortel has decided that earnings matter and that they finally really need to do something about relatively poor operating margins," said Paul Sagawa, an analyst at Sanford Bernstein.
Nortel has posted operating margins of about 8 percent in the last year, he said, vs. competitors' margins in the low- to mid-teen range.
Growing competition in the optical sector and Nortel's third-quarter slowdown in optical system sales may have fueled the staff cost-cutting measures, he added.
Still Aiming for Fourth-Quarter Projections
Rumors that Nortel has been "pretty aggressive" in pricing other products, such as wireless and switching equipment, could have added a further catalyst, the analyst added.
"They may have miscalculated just how well their optical profitability would hold up throughout 2001," Sagawa said.
"And now [they] are thinking maybe they've been too aggressive in pricing and to offset that they need to be more aggressive about costs — which really hasn't been a priority for Nortel for along time"
In an effort to assuage a jittery market that has stripped 67 percent from its stock over the past year and rumors that it was struggling to meet its fourth-quarter financial targets, Nortel has affirmed its fourth-quarter forecasts three times to analysts.
Nortel expects revenues of $8.5 billion to $8.8 billion and earnings of 26 cents a share on a fully diluted basis.
Solomon Smith Barney analyst Alex Henderson said Nortel's decision to freeze its staffing makes sense given the weak economic climate and widespread concerns that customers such as phone companies are slashing their spending plans.
"I think it's good news and in fact prudent of them," Henderson said. "There are some segments of Nortel that do need to be cut, that need to be rationalized, and they've done a pretty good job of managing that. But when things are really booming you're not as focused on tightening your cost structure and taking out expenses."
Cisco in the Same Boat?
Older, slow-growth lines such as office phone systems, or private branch exchanges, could benefit from trimming, Henderson said.
"It is part and parcel of what we would expect most companies to do in this environment and it's not inconsistent with what Cisco just said they were doing," Anderson said.
The chief executive of Cisco Systems Inc., the world's largest supplier of Internet networking equipment, said on Wednesday it was not immune from a spending slowdown.
Nortel, which grew to 86,000 employees last year from 75,000 in 1999, has mushroomed thanks to a string of acquisitions and a hiring spree
In June, the company said it would spend $1.9 billion to more than double its fiber-optic manufacturing capacity. The expansion, which followed an investment of $660 million over the previous nine months, was to add more than 9,600 jobs in North America, Europe and Australia.
Shares in Nortel added about 7 percent today amid broad technology gains, closing up C$3.40 at C$51.10 on the Toronto Stock Exchange and up $2-1/8 at $34-1/16 on New York.