Nortel sends fresh tremours through technology sector

Click to follow

The Telecoms equipment maker Nortel Networks yesterday warned its first-quarter sales would be worse than expected, blaming continued weak demand from customers.

The announcement, which came just a day after a shock profit warning from IBM, sparked fears that a recovery in the sector was further away than thought.

In a further twist, Nortel said it would also fully draw down a $1.75bn (£1.22bn) bank facility after failing to sign a new deal with its banks but maintained it did not have "an immediate need" for the money.

Nortel, which is based in Canada, said yesterday that its first-quarter revenues would come in at about $2.9bn, a fall of 16 per cent from the fourth quarter of last year.

"As we indicated on February 12, customers were showing more resolve than originally anticipated to minimise spending in the near term," Frank Dunn, the president and chief executive, said.

"For the quarter, we saw limited capital expenditures by customers, resulting in a sequential decline in revenues of approximately 16 per cent compared to our previous guidance of approximately 10 per cent," he said.

Nevertheless, the company said it still expected to report improvements to its bottom line in the first quarter compared with the fourth quarter of last year.

Based on an expected first-quarter net loss from continuing operations of $0.26 a share, the company said it would be "in compliance" with all of its credit facility covenants as at the end of last month.

Nortel, which last week suffered a credit-rating downgrade to junk status from Moody's, said its decision to fully draw the $1.75bn loan, which would have expired today [10 April], was based on wanting to take advantage of that facility's "favour-able terms".

While it said it had won the support of 24 of its 27 banks to get the facility renegotiated, it said it was unable to reach agreement with the remaining three banks.

"The company does not have an immediate need for these funds. However, by taking this action, we have taken advantage of the favourable terms in our current facilities rather than seeing this source of liquidity eliminated," Mr Dunn said.

"The funds from the bank facility will bolster our already substantial cash balance and, together with our other credit facilities, will provide us with significant financial flexibility as we continue to focus on our initiatives for regaining market momentum and profitability," he said.

Nortel, which is due to publish its first-quarter figures in full on 18 April, said yesterday it expected to report a $3bn cash balance at 31 March, including about $500m in tax recoveries.

"We are very pleased with our continued success in cash management. We are driving momentum in the market by making significant inroads with key customers as they continue to demonstrate their acceptance of our industry leading portfolio," the president said.