Hewlett Packard

Jan. 11, 2001 -- Nortel Networks Corp., the world's No. 1 supplier of fiber-optic networkequipment, said today that it will cut 4,000 jobs overthe next six months as part of a plan to freeze staffing at2000 levels and focus on its high-growth businesses.

Nortel, which had about 86,000 staff in 2000, said that thejob cuts in poorly performing parts of the company will bebalanced by hirings in such high-growth areas as fiber-opticsor wireless network technology.

The Brampton, Ontario, company said the first round oflayoffs include about 750 staff in Ottawa and another 200 inToronto, who received pink slips on Tuesday.

"Our goal and expectation is to try and keep our work forceflat," said Nortel spokesman Andy Lark.

"We let 200 people go in Toronto, but we hired 200 peoplein the last four weeks … and the same with Ottawa, we've hiredthousands of people in Ottawa."

Nortel employs 35 percent of its staff in the United States and 25percent in Canada.

Layoffs Come Before Earnings Report

The company's last round of job cuts came in 1999, when itcut nearly 8,000 jobs and sold a string of manufacturing plansunder a restructuring.

The news comes a week in advance of Nortel's fourth-quarterresults, which are expected on Jan. 18.

"It is an indication that Nortel has decided that earningsmatter and that they finally really need to do something aboutrelatively poor operating margins," said Paul Sagawa, ananalyst at Sanford Bernstein.

Nortel has posted operating margins of about 8 percent inthe last year, he said, vs. competitors' margins in the low-to mid-teen range.

Growing competition in the optical sector and Nortel'sthird-quarter slowdown in optical system sales may have fueledthe staff cost-cutting measures, he added.

Still Aiming for Fourth-Quarter Projections

Rumors that Nortel has been "pretty aggressive" in pricingother products, such as wireless and switching equipment, couldhave added a further catalyst, the analyst added.

"They may have miscalculated just how well their opticalprofitability would hold up throughout 2001," Sagawa said.

"And now [they] are thinking maybe they've been tooaggressive in pricing and to offset that they need to be moreaggressive about costs — which really hasn't been a priorityfor Nortel for along time"

In an effort to assuage a jittery market that has stripped67 percent from its stock over the past year and rumors that itwas struggling to meet its fourth-quarter financial targets,Nortel has affirmed its fourth-quarter forecasts three times toanalysts.

Nortel expects revenues of $8.5 billion to $8.8 billion andearnings of 26 cents a share on a fully diluted basis.

Solomon Smith Barney analyst Alex Henderson said Nortel'sdecision to freeze its staffing makes sense given the weakeconomic climate and widespread concerns that customers such asphone 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 needto be cut, that need to be rationalized, and they've done apretty good job of managing that. But when things are reallybooming you're not as focused on tightening your cost structureand taking out expenses."

Cisco in the Same Boat?

Older, slow-growth lines such as office phone systems, orprivate branch exchanges, could benefit from trimming,Henderson said.

"It is part and parcel of what we would expect mostcompanies to do in this environment and it's not inconsistentwith what Cisco just said they were doing," Anderson said.

The chief executive of Cisco Systems Inc., theworld's largest supplier of Internet networking equipment, saidon Wednesday it was not immune from a spending slowdown.

Nortel, which grew to 86,000 employees last year from75,000 in 1999, has mushroomed thanks to a string ofacquisitions and a hiring spree

In June, the company said it would spend $1.9 billion tomore than double its fiber-optic manufacturing capacity. Theexpansion, which followed an investment of $660 million overthe previous nine months, was to add more than 9,600 jobs inNorth America, Europe and Australia.

Shares in Nortel added about 7 percent today amidbroad technology gains, closing up C$3.40 at C$51.10 on theToronto Stock Exchange and up $2-1/8 at $34-1/16 on New York.