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Technology Stocks : Nortel Networks (NT)

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To: hari t who started this subject10/22/2000 3:45:56 PM
From: peggylynn   of 14635
The Ottawa Citizen published an article on some of the recent CLEC failures including Nettel. According to last earnings NT's uncollectibles for the first half of 2000 rose is real terms by $82 million from 1999 but dropped as percentage of revenues (2.90% from 3.43%). At last earnings someone from Nortel (I believe it was John Roth) mentioned that NT had the uncollectibles under control. I have also noticed that articles similar to the one in the Ottawa Citizen do a very poor job of distinguishing between the the level of risk for a company with a with a strong product portfolio versus one that is trying to bolster a weak product line with vendor financing. - peggylynn

Stout4555 on Yahoo posted some additional info regarding Nortel's policies for vendor financing. The link for the MSDW report is

MSDW on vendor financing (A Day with CEO 6/13/200)

NT is providing vendor financing as needed to boost new business. The company chooses what to finance based on strategic priorities at the time. In the past it has supported PCS build-out, select optical system sales, and CLEC growth. It is currently providing selective financing for DLECs, ASPs, and UMTS applications. Nortel is experienced with vendor financing. Over the last five years, it has financed over $23 billion and then laid-off the debt with no recourse (mainly to large commercial banks).

1999 Financial Report

(c) Revenue recognition - Revenues are generally recognized, net of trade discounts and allowances, upon shipment and when all significant contractual obligations have been satisfied and collection is reasonably assured. Software revenues are recognized when delivered in accordance with all terms and conditions of the customer contracts and upon acceptance from the customer. Revenues on long-term contracts are recognized using the percentage-of-completion method. Profit estimates on long-term contracts are revised periodically based on change of circumstances, and loss on contracts are recognized immediately.

(m) Allowance for credit losses - Nortel maintains an allowance to absorb credit-related losses in its portfolio of on-balance sheet and off-balance sheet financing assets and liabilities (the Financing Portfolio). The Financing Portfolio is primarily composed of medium-term and long-term customer recievables and guarantees. This allowance is part of the provision for uncollectables. This allowance is reviewed quarterly for adequacy of impairment coverage and, in managements opinion, is considered adequate to absorb any credit-related losses in the Financing Portfolio.

Credit risk - Nortel limits its credit risk by dealing with counterparties that are considered of high quality and by utilizing an internal credit committee that actively monitors the credit exposure of the Corporation.


Baby Bell failures could loom large for telecom giants

Nortel says it has safeguards to protect it

Bert Hill
The Ottawa Citizen, with files from Citizen News Services

The recent failure of several small U.S. telephone companies is creating troubles for Lucent Technologies that could spread to other players, including Nortel Networks.

The reason is that major telecommunication companies have long won big contracts for new equipment by financing the deals. But companies that are both bankers and technology developers can get hit even harder if deals go bad when market conditions change.

Lucent warned this month that earnings would be depressed, in part, by the need to increase reserves to cover bad loans.

Xerox Corp. disappointed the market with sharply lower earnings last week, in part because of soured so-called vendor financing.

Nortel said that it's internal financial controls will protect it.

"Lucent's troubles are particular to that company," said Nortel spokesman Jeff Ferry. "We have been doing vendor financing for many years and we make conservative provisions (to protect) against bad debts."

In addition, he said Nortel sells the debts quickly into larger credit markets and that provides additional safeguards.

Still, Nortel has already been involved as a creditor in two troubled deals that have come to light.

In addition, two deals this week show how the financing works -- and can go astray.

In one deal Nortel agreed to finance 50 per cent of a $1-billion equipment purchase by Aerie Networks of Denver. The start-up wants to build a 36,000-kilometre fibre-optic network linking major U.S. cities.

In the second deal involving a troubled small carrier, Nortel refused to grant more assistance to Universal Broadband Networks. It already owes Nortel $12.8 million U.S. and possibly more.

Universal of Irvine, California said it was surprised at the decision and warned investors that the future of the company is in doubt.

"(Tuesday) morning we were informed that Nortel's credit committee had decided not to extend any additional funding or to finance additional equipment for the company. Unfortunately, market conditions beyond our control dictate these circumstances."

After years of explosive growth, the competitive carrier business in the U.S. is clearly consolidating and weaker players are dying or being absorbed. For example, Nortel has $150 million invested in Nettel Communications, a Washington, D.C., company that filed for bankruptcy protection earlier this month.

The Washington Post reported that Nortel was among the major creditors in Nettel, which listed $133.5 million in assets and $155.7 million in debts.

A Nortel affiliate provided $45 million for equipment purchased by GST Telecommunications, a Vancouver, Washington, carrier that hit the wall earlier this year. GST assets were subsequently acquired by Time Warner Telecom of Denver for $690 million.

Paul Sagawa, an analyst with Sanford Bernstein, first highlighted the problem last month when he warned that many small telephone companies simply can't afford to keep up buying new equipment at the current rate. He downgraded his recommendation on Nortel and Cisco Systems.

He said few of the scores of new phone companies are generating sufficient cash to pay borrowing costs on new equipment, regardless of their desires to keep up with the competition.

So far, the issue of financing customers is a small part of the problems facing Lucent and other players. Nortel should be in much better shape to get over any financing bumps.

The extraordinary growth of Nortel's fibre-optic product sales and profit has been largely at the expense of Lucent, the previous market leader.

Cisco Systems has also had its trouble with hard-pressed customers.

American MetroComm Corp. filed for bankruptcy in August, leaving

$53 million owed to Cisco in doubt. Lucent is indirectly owed $26 million.

Ciena Corp., a Nortel competitor, plans to write off $28.2 million in accounts owed by bankrupt customers.

Lucent is selling securities backed by customer loans worth $1.1 billion into money markets.

Such transfers allow companies to clean up their balance sheets.

According to a September article in Barrons, Lucent tried in June to sell some of the $2 billion in vendor financing it had extended to Winstar Communications for less than 90 cents on the dollar to junk-bond market.
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