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Mike Zafirovski appeared confident Wednesday even as the head of Nortel Networks Corp. embarked on another round of painful restructuring that will see 2,100 jobs disappear and an additional 1,000 positions moved to low-cost countries.
But analysts on a conference call quizzed Mr. Zafirovski, chief executive officer at the communications equipment maker, about the pace of Nortel's turnaround and questioned whether it's time he turned his attention beyond cost cutting to the company's broader strategy.
A $1.1-billion (U.S.) tax-related charge led to a loss in the fourth quarter, and Nortel's operating margin fell short of its own forecast.
The company's shares slid nearly 14 per cent to $9.68 (Canadian) Wednesday on the Toronto Stock Exchange, not far from a low of $6.90 in October, 2002 (adjusted for a stock consolidation). Just a year ago, the shares traded at $34.61.
Nortel is cutting more jobs as it announces another loss this quarter
Nortel Networks Corp.
Nortel shares where under pressure in early trading Wednesday.
Nortel Networks Corp.
A five-year look at Nortel's share performance.
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While Mr. Zafirovski calls the share performance “disappointing,” it's not making him second-guess the path he has laid out for Nortel.
“Restructuring is lots of heavy lifting,” he said in a later telephone interview. “We never said it was going to be easy.”
The company was bleeding on numerous fronts when Mr. Zafirovski took the helm in November, 2005. Along with cleaning up the accounting mess he inherited and installing a new leadership team, he has focused on turning Nortel into a leaner and more efficient enterprise. A year ago, he slashed 2,900 jobs and shifted 1,000 positions to low-cost countries such as China.
Mr. Zafirovski wouldn't disclose which regions the job cuts would hit this time around. He did say the main catalyst for the reduction is that selling, general and administrative (SG&A) expenses remain too high. That means positions in finance, human resources, and information technology are on the chopping block.
Those SG&A expenses are weighing on Nortel's operating margin, or operating profit as a percentage of revenue. The company reported an operating margin of 7.6 per cent in the fourth quarter. While that's clearly an improvement over 4.2 per cent in the year-earlier period, it didn't meet Nortel's 10-per-cent forecast.
Nortel's new chief financial officer, Pavi Binning, acknowledged that cutting costs won't be enough to expand the operating margin and improve the bottom line. Nortel must also deliver robust and consistent revenue growth, he said.
Excluding the sale of a wireless business, revenue rose 2 per cent in the fourth quarter, missing some analysts' estimates. Nortel's aim is to post a gain this year in the low single-digits.
For all of 2007, Nortel posted a loss of $957-million (U.S.), due to the tax charge, compared with a profit of $28-million a year earlier.
“Our ultimate success is going to be determined by growth in the business, growth of the products we're talking about,” Mr. Binning said in the phone interview.
Some analysts, however, would also like to see Nortel either slim down or bulk up its product portfolio. Mr. Zafirovski hasn't rushed to divest businesses, and may not be in a good position to make acquisitions considering Nortel's weak stock and the level of debt on the balance sheet.
Of course, Nortel isn't the only one being punished by investors. The economic slowdown is also hammering the stocks of Telefon AB LM Ericsson and Alcatel-Lucent, which are busy slashing jobs.
Nortel said reduced demand from phone customers in North America weighed on its fourth-quarter revenue.
“All technology stocks have really taken a beating in the last two months,” said Inder Singh, an analyst at Lehman Brothers Inc. “In this environment, it's difficult to see anyone stepping in aggressively to buy a stock just because it's cheap.”
RBC Dominion Securities Inc. analyst Mark Sue, however, believes Nortel has its own particular worries and downgraded the stock to Wednesday to “underperform.”
“We think Nortel is in a weak relative position considering its market share and weak balance sheet,” Mr. Sue wrote in a note to clients titled “It's Not Getting Better.”
Don't tell that to Mr. Zafirovski. When Mr. Binning said “hopefully we will prevail,” his CEO suggested removing the “hopefully” part.
