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July 19, 2001
Nortel Networks Reports Results for Second Quarter 2001
Revenues from continuing operations: US$4.6 billion
Pro forma net loss per share from continuing operations: US$0.48
Net loss including intangible assets write down and other charges: US$19.4 billion
Improved balance sheet performance and increased sources of available liquidity to in excess of US$5 billion
TORONTO – Nortel Networks* Corporation(a) [NYSE/TSE: NT] today reported results for the second quarter and first six months of 2001 prepared in accordance with U.S. generally accepted accounting principles.
Revenues from continuing operations were US$4.61 billion for the second quarter of 2001 compared to US$7.21 billion in the same period in 2000. Pro forma net loss from continuing operations(b) for the second quarter of 2001 was US$1.55 billion, or US$0.48 per common share, compared to pro forma net earnings of US$637 million, or US$0.21 per common share on a diluted basis, for the same period in 2000.
During the second quarter of 2001, the Company continued to execute programs to reduce its cost structure and streamline operations. Specifically, Nortel Networks announced its decision to discontinue its access solutions operations and exit or sell its ownership interest in the various access solutions businesses over the next 12 months. In the quarter, US$2.8 billion (after tax) was recorded related to the net loss for the quarter and the charge for the disposition of the discontinued access solutions operations. The Company also recorded a US$833 million (after tax) charge for restructuring associated with workforce reductions and facilities closures related to business streamlining activities in the quarter. Of the previously announced net aggregate reduction of approximately 30,000 positions, Nortel Networks has completed the process to reduce approximately 23,000 positions to date. The remaining net reduction of approximately 7,000 positions is expected to be completed over the next eight weeks. The benefits from these programs are expected to result in estimated cost savings of approximately US$1 billion (pre-tax) per quarter (up from its previous estimate of approximately US$875 million (pre-tax) per quarter). Nortel Networks expects to substantially realize that level of savings exiting 2001.
Also in the quarter, in light of the adjustment of technology valuations and current business outlook, the Company took a US$12.3 billion (after tax) charge for the write down of intangible assets, primarily goodwill related to certain acquisitions. Including the net loss from discontinued access solutions operations, Acquisition Related Costs(b), stock option compensation from acquisitions and divestitures, one-time gains and charges, and the intangible assets write down, Nortel Networks recorded a net loss applicable to common shares in the second quarter of 2001 of US$19.43 billion, or US$6.08 per common share.
“While I am disappointed with our results for the second quarter, we have taken the right steps in this environment to strengthen Nortel Networks leadership position,” said John Roth, president and chief executive officer, Nortel Networks. “I am pleased with the progress that we have made to date on our “return to profitability” plan. I know this has been a very difficult process for employees, shareholders and our other stakeholders; however, it has been absolutely necessary that we take these steps. We have moved with speed and agility on our workforce reductions, such that these actions are now largely behind us. Looking forward, we are focused on our core businesses, with a strong management team in place driving our investments and programs that will help to shape our future success. We are on track with our expected delivery over the next several quarters of next generation solutions in optical switching, metro optical, IP (Internet Protocol) networking, 3G (third generation) wireless infrastructure and IP services solutions for carriers and enterprises.”
Commenting on cash management and liquidity, Frank Dunn, chief financial officer, Nortel Networks, said, “We are pleased with the success of our various programs, primarily related to inventory and receivables, that drove significant improvements in cash management in June. Our cash outflow from operations was approximately US$500 million for the quarter, which was significantly better than expectations. In addition, our funded customer financing portfolio is essentially unchanged in the quarter and we significantly reduced our unfunded commitments. In the quarter, the Company also strengthened its financial position by obtaining an additional US$2 billion in bank credit facilities, which, combined with other available financing commitments, and current cash balances, provides us in excess of US$5 billion in sources of available liquidity to execute our work plan.”
“During this difficult period in the telecom industry, we are working with our customers as they continue to focus on optimizing existing network resources to drive returns and deliver new revenue generating services. These challenging industry dynamics are expected to continue and we do not expect meaningful growth in spending to occur before the second half of 2002. As a result, our visibility continues to be limited for the near term and we will not provide guidance for the third quarter or full year 2001 at this time,” Roth said.
Revenue Breakdown from Continuing Operations
Network Infrastructure revenues decreased 39 percent in the second quarter of 2001 compared to the second quarter of 2000. Wireless Internet solutions grew substantially in Asia and the United States, partially offset by a considerable decline in Latin America and a significant decline in Europe. Optical Inter-city revenues were down sharply in the United States and Canada and down substantially in Europe, partially offset by considerable growth in Asia. Local Internet revenues were down substantially in the United States, Europe and Canada, and essentially flat in Asia and Latin America.
Photonic Components segment revenues were down 78 percent in the second quarter compared to the same period last year. The sharp decline in the segment was largely due to considerably lower sales of Nortel Networks Optical Inter-city solutions compared to the second quarter of 2000.
Other revenues declined 20 percent in the second quarter compared to the same period last year. Substantial growth in Global Professional Services in Europe, the United States and Asia was more than offset by considerable declines in Enterprise solutions across all regions.
Geographic revenues for the second quarter of 2001 compared to the same period in 2000 decreased 51 percent in the United States, 41 percent in Canada and 7 percent outside the United States and Canada.
Six-Month Results
For the first half of 2001, revenues from continuing operations were US$10.36 billion compared to US$13.02 billion for the same period in 2000. Pro forma net loss from continuing operations(b) for the first half of 2001 was US$1.82 billion, or US$0.58 per common share, compared to pro forma net earnings of US$974 million, or US$0.32 per common share on a diluted basis, for the same period in 2000. Including the net loss from discontinued access solutions operations, Acquisition Related Costs(b), stock option compensation from acquisitions and divestitures, one-time gains and charges, and the intangible assets write down, Nortel Networks recorded a net loss applicable to common shares of US$22.0 billion, or US$6.94 per common share, for the first half of 2001.
Gross Margin
Gross margin for the second quarter of 2001 was approximately 9 percent reflecting charges of approximately US$750 million related to inventory, contracts and customer settlements resulting from the decrease in sales due to the sharp downturn in the market. Excluding the impact of these charges, gross margin for the quarter was approximately 26 percent.
Expenses
Selling, general and administrative (“SG&A”) expenses in the second quarter of 2001 were US$1.64 billion, compared with US$1.41 billion in the second quarter of 2000. The impact of the market slowdown and decline in some of our of customers’ financial condition resulted in provisions of US$300 million in the quarter related to customer receivables and financings. Excluding the provisions, SG&A expenses in the quarter were on track with our plans.
Research and development (“R&D”) expenses were US$910 million in the second quarter of 2001, compared with US$927 million in the second quarter of 2000. The R&D expenses in the quarter reflected planned expenses focused on Optical Inter-city, Wireless Internet, Metro Optical and the Core IP portions of Local Internet solutions and lower spending in other areas.
The financial results of Nortel Networks Limited(a) (“NNL”), Nortel Networks Corporation’s principal operating subsidiary, are fully consolidated into Nortel Networks results. NNL has preferred shares which are publicly traded in Canada. For the second quarter of 2001, NNL took a restructuring charge of US$833 million (after tax) associated with the completion of workforce reductions and the closure of certain facilities related to business streamlining; recorded US$2.4 billion (after tax) related to the net loss for the quarter and the charge for the disposition of the discontinued access solutions business; and took a charge of US$2.1 billion to reflect the write down of intangible assets associated with certain of its acquisitions. All such amounts are included in the consolidated Nortel Networks amounts described above.
Nortel Networks is a global leader in networking and communications solutions and infrastructure for service providers and corporations. The Company is at the forefront of transforming how the world communicates, exchanges information and profits from the high-performance Internet through capabilities spanning the Optical Internet, Wireless Internet, Intelligent Internet and IP (Internet Protocol) technologies and services. Nortel Networks does business in more than 150 countries and can be found on the Web at www.nortelnetworks.com.
Certain information included in this press release is forward-looking and is subject to important risks and uncertainties. The results or events predicted in these statements may differ materially from actual results or events. Factors which could cause results or events to differ from current expectations include, among other things: the impact of price and product competition; the dependence on new product development; the impact of rapid technological and market change; the ability of Nortel Networks to make acquisitions and/or integrate the operations and technologies of acquired businesses in an effective manner; general industry and market conditions and growth rates; international growth and global economic conditions, particularly in emerging markets and including interest rate and currency exchange rate fluctuations; the impact of rationalization in the telecommunications industry; the uncertainties of the Internet; stock market volatility; the ability of Nortel Networks to recruit and retain qualified employees; the ability to obtain timely, adequate and reasonably priced component parts from suppliers and internal manufacturing capacity; the impact of the credit risks of our customers; the entrance by Nortel Networks into an increased number of supply, turnkey, and outsourcing contracts which contain delivery, installation, and performance provisions, which, if not met, could result in Nortel Networks having to pay substantial penalties or liquidated damages; the impact of increased provision of customer financing and commitments by Nortel Networks; potentially higher costs actually incurred in connection with restructuring actions compared to the estimated costs of such actions; and the inherent uncertainties underlying the estimates and assumptions used in calculating asset valuations. For additional information with respect to certain of these and other factors, see the reports filed by Nortel Networks with the United States Securities and Exchange Commission. Nortel Networks disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
(a) On May 1, 2000, Nortel Networks Corporation acquired all of the outstanding common shares of Nortel Networks Limited (formerly called Nortel Networks Corporation) by way of a Canadian court-approved plan of arrangement. Nortel Networks Limited has preferred shares outstanding, which are publicly traded in Canada. Nortel Networks Limited’s financial results have been consolidated into the results reported for Nortel Networks Corporation.
(b) Pro forma net earnings/loss from continuing operations is defined as reported net loss from continuing operations before “Acquisition Related Costs” (in–process research and development expense, and the amortization of acquired technology and goodwill from all acquisitions subsequent to July 1998), stock option compensation from acquisitions and divestitures, and one-time gains and charges.
Nortel Networks will host a teleconference/audio webcast to discuss Q2 Results.
TIME: 5:00 p.m. – 6:00 p.m. EDT on Thursday, July 19, 2001
To participate, please call the following at least 15 minutes prior to the start of the event
Teleconference: Webcast:
North America: 888-363-8644 http://www.nortelnetworks.com/2q2001
International: 212-231-6044
Replay:
(Available one hour after the conference until 5:00 p.m. EDT, July 29, 2001)
North America: 800-633-8625 Passcode: 18244233#
International: 416-626-4100 Passcode: 18244233#
Webcast: http://www.nortelnetworks.com/2q2001
*Nortel Networks, the Nortel Networks logo and the Globemark are trademarks of Nortel Networks.
Contact for Press and Analysts:
Investors:
Nortel Networks
888-901-7286
905-863-6049
investor@nortel.com
Business media:
Andy Lark
Nortel Networks
972-685-7854
larka@nortel.com
David Chamberlin
Nortel Networks
972-685-4648
ddchamb@nortel.com
Additional Media & Analyst Contacts
 Condensed Consolidated Results
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