Nortel Networks: Nortel Networks Reports Results for First Quarter of 2002

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April 18, 2002

Nortel Networks Reports Results for First Quarter of 2002

TORONTO – Nortel Networks* Corporation [NYSE/TSE: NT] reported results for the first quarter of 2002 prepared in accordance with United States generally accepted accounting principles, except as noted with respect to pro forma results(a).

Revenues from continuing operations were US$2.91 billion for the first quarter of 2002 compared to US$5.75 billion in the same period in 2001. Pro forma net loss from continuing operations(a) for the first quarter of 2002 was US$463 million, or US$0.14 per common share, compared to pro forma net loss from continuing operations(a) of US$277 million, or US$0.09 per common share, in the first quarter of 2001. Included in the pro forma net loss from continuing operations(a) was an incremental charge of approximately US$200 million (pre-tax) for excess and obsolete inventory, primarily related to recently completed negotiations with all of Nortel Networks major suppliers. Pro forma net loss from continuing operations(a) for the first quarter of 2002 excluded US$378 million (after-tax), mainly comprised of special charges (US$329 million (after-tax)), primarily related to previously announced workforce reductions, and certain costs related to acquisitions (US$51 million (after-tax)). Nortel Networks reported a net loss in the first quarter of 2002 of US$841 million, or US$0.26 per common share.

In the first quarter of 2002, Nortel Networks restructuring efforts, and its focus on core businesses and cash management, continued to drive significant improvements in its bottom line results on a sequential basis and helped to enhance its ongoing financial flexibility. The company recorded a strong cash balance at the end of the first quarter of approximately US$3.1 billion, which decreased from approximately US$3.5 billion at the end of the fourth quarter of 2001. The decrease primarily reflected the loss from operations, the cash costs in the quarter associated with restructuring, and capital spending, which was partially offset by approximately US$500 million from tax recoveries. The cash reserves, combined with existing committed credit facilities, which are undrawn, provide the company with approximately US$6.6 billion in sources of liquidity.

Commenting on the outlook for Nortel Networks, Frank Dunn, president and chief executive officer, Nortel Networks, said, “We expect our customers to continue to limit capital expenditures and, therefore, it is difficult to predict how spending patterns will unfold in 2002. That being said, we do not expect a significant downturn or a significant upturn in our revenues for the second quarter compared to the first quarter of 2002. We will continue to concentrate on our core businesses, focus on building momentum in the market, and gain efficiencies across our business processes. We continue to expect ongoing improvements in our bottom line results as we move through 2002. As we do this, we will be working towards a cost structure, which we expect to be in place by the fourth quarter of 2002, that would drive break even at quarterly revenues of approximately US$3.5 billion (not including costs related to acquisitions and any special charges or gains).”

At the end of the first quarter of 2002, Nortel Networks workforce numbered approximately 47,000. Following the completion of remaining reductions, primarily related to previously announced European work council and joint venture activities, and anticipated non-core business divestitures, Nortel Networks expects to have a workforce of approximately 44,000.

“Despite the lower overall spending by customers, we are making significant inroads in the market with our solutions that deliver the value and cost savings that our customers are looking for from Nortel Networks,” said Dunn. “Some recent market successes included:

Announced new wireless contracts in the quarter spanning all major geographic regions with an aggregate estimated value of approximately US$1 billion;
Momentum with Voice over IP solutions outside North America through announced wins with service providers in Europe, China and Australia;
Continued traction of our metro optical portfolio with wins announced with service providers in the United States, the United Kingdom, India, and Australia, and growing momentum with Fortune 500 enterprise customers;
First customer contract announcements for OPTera HDX; and
Captured number one market share in Voice over IP solutions shipped to enterprises and voice over packet solutions for service providers in the fourth quarter according to recently published industry analyst reports.”

First Quarter 2002 Revenue Breakdown from Continuing Operations
Compared to the fourth quarter of 2001, overall Wireless Networks revenues decreased 6 percent, with a considerable increase in Canada and a slight increase in Europe, which was more than offset by a decrease in the United States and significant declines in Latin America and Asia. Metro and Enterprise Networks revenues decreased 23 percent, reflecting considerable decreases in the metro optical and packet switching and routing portions of the segment across all major regions and substantial decreases in traditional circuit switching in the United States, Europe, and Asia. Optical Long-Haul Networks revenues increased 5 percent.

Compared to the first quarter of 2001, Wireless Networks segment revenues decreased 26 percent, Metro and Enterprise Networks segment revenues decreased 47 percent and Optical Long-Haul Networks segment revenues decreased 77 percent, each reflecting considerable declines across all major regions. Other revenues declined 92 percent, primarily reflecting the impact of reduced ownership in certain joint ventures and divested businesses.

Geographic revenues for the first quarter of 2002 compared to the same period in 2001 decreased 50 percent in the United States, 50 percent outside of the United States and Canada, and 38 percent in Canada.

Expenses
Selling, general and administrative (“SG&A”) expenses in the first quarter of 2002 were approximately US$744 million. Compared to the fourth quarter of 2001 expenses of US$1.01 billion, SG&A expenses were down by approximately US$265 million primarily reflecting the impact of restructuring and streamlining activities. Nortel Networks expects an ongoing reduction in SG&A expenses moving through 2002.

Research and development (“R&D”) expenses were US$595 million in the first quarter of 2002. The R&D expenses in the quarter reflected focused investments to drive continued market leadership in our core businesses.

Nortel Networks is an industry leader and innovator focused on transforming how the world communicates and exchanges information. The company is supplying its service provider and enterprise customers with communications technology and infrastructure to enable value-added IP data, voice and multimedia services spanning Metro and Enterprise Networks, Wireless Networks and Optical Long Haul Networks. As a global company, Nortel Networks does business in more than 150 countries. More information about Nortel Networks can be found on the Web at www.nortelnetworks.com.

The following notes are important to a reader’s understanding of the information contained herein, including the pro forma information:

Pro forma loss from continuing operations is defined as reported net loss from continuing operations before any “Acquisition Related Costs” (in–process research and development expense, and the amortization of acquired technology and goodwill from all acquisitions subsequent to July 1998, as applicable), stock option compensation from acquisitions and divestitures, all special charges (which includes restructuring), any gain or loss on sale of businesses, one time gains associated with certain investment sales, and any associated items as included in the income or loss of our equity accounted for investments. This pro forma measure is not a recognized measure for financial statement presentation under United States generally accepted accounting principles (U.S. GAAP). Non-U.S. GAAP earnings measures (such as this pro forma measure) do not have any standardized meaning and are therefore unlikely to be comparable to similar measures presented by other issuers. This pro forma measure is provided to assist readers in evaluating the operating performance of Nortel Networks ongoing business and each of the items listed above were excluded because they were considered to be of a non-operational nature in the applicable period. Investors are encouraged to consider this pro forma measure in the context of Nortel Networks U.S. GAAP results (a reconciliation to which is set out in the attached tables).
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 severity and duration of the industry adjustment; the sufficiency of our restructuring activities, including the potential for higher actual costs to be incurred in connection with restructuring actions compared to the estimated costs of such actions; fluctuations in operating results and general industry, economic and market conditions and growth rates; the ability to recruit and retain qualified employees; fluctuations in cash flow; the level of outstanding debt and debt ratings; the ability to meet financial covenants contained in our credit agreements; the ability to make acquisitions and/or integrate the operations and technologies of acquired businesses in an effective manner; the impact of rapid technological and market change; the impact of price and product competition; 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 dependence on new product development; the uncertainties of the Internet; the impact of the credit risks of our customers and the impact of increased provision of customer financing and commitments; stock market volatility; the entrance into an increased number of supply, turnkey, and outsourcing contracts which contain delivery, installation, and performance provisions, which, if not met, could result in the payment of substantial penalties or liquidated damages; the ability to obtain timely, adequate and reasonably priced component parts from suppliers and internal manufacturing capacity; the future success of our strategic alliances; and the adverse resolution of litigation. For additional information with respect to certain of these and other factors, see the reports filed by Nortel Networks Corporation and Nortel Networks Limited with the United States Securities and Exchange Commission. Unless otherwise required by applicable securities laws, Nortel Networks Corporation and Nortel Networks Limited disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

*Nortel Networks, the Nortel Networks logo, the Globemark OPTera are trademarks of Nortel Networks.

Nortel Networks will host a teleconference/audio webcast to discuss Q1 Results.

TIME: 5:00 PM – 6:00 PM EDT on Thursday, April 18, 2002

To participate, please call the following at least 15 minutes prior to the start of the event.

Teleconference:
North America: 888-211-4395
International: 212-231-6049

Replay:
(Available one hour after the conference until 11:59 pm EDT, May 1, 2002)
North America: 800-633-8625
Passcode: 20244192#
International: 858-812-6450
Passcode: 20244192#

Contact for Press and Analysts:

Investors:
Nortel Networks
888-901-7286
906-863-6049
investor@nortelnetworks.com

U.S. Business media:
David Chamberlin
Nortel Networks
972-685-4648
ddchamb@nortelnetworks.com

Canadian Business media:
Tina Warren
Nortel Networks
905-863-4702
tinawarr@nortelnetworks.com

Additional Media & Analyst Contacts

Condensed Consolidated Results
Consolidated Balance Sheets
Supplementary Information