Enterprise Keeps Nortel in LineEnterprise Keeps Nortel in Line
Enterprise customers give Nortel some padding from the impact of cautious carrier spending in its latest quarter
November 8, 2006
Nortel Networks Ltd. reported its third-quarter results yesterday and found itself somewhat cushioned from unpredictable carrier spending by its solid grounding in the enterprise world. (See Nortel Reports Q3.)
First, the numbers. Revenues for the quarter ending Sept. 30 were $2.96 billion, up 17 percent year-over-year and nearly 8 percent sequentially, and higher than the $2.81 billion analysts had, on average, expected.
Net loss was $99 million, or 2 cents per share, which was worse than the penny profit predicted by Wall Street's finest, and a slip back into the red from the previous quarter's profit, though the second quarter benefited from a $510 million one-time gain. (See Wireless Holds Key for Nortel .)
CEO Mike Zafirovski spent much of today's conference call going over the medium-term positive impact of Nortel's ongoing cost-cutting initiatives, as well as talking up the company's prospects in "next generation technologies," such as CDMA EV-DO and WiMax.
But many of the analysts on the call were more concerned about Nortel's gross margins, which, for the fifth quarter in succession, came in between 38 and 39 percent. Zafirovski repeatedly noted that Nortel's management team is increasing its efforts to cut costs and boost growth to get that margin figure above the target 40 percent, which analysts had been expecting in the quarter.
And the CEO made it clear he isn't cock-a-hoop about the current situation. "I'm pleased with our growth but I'm not satisfied with our progress," he stated, saying that pricing pressures, particularly in Europe and emerging markets, and a shift in sales towards newer technologies, which initially have lower margins before volume production benefits kick in, were putting pressure on the margin number.
To counter such measures, Nortel is renegotiating contracts, such as its manufacturing deal with Flex (Nasdaq: FLEX), selling off units that can't deliver profitable growth, and finding new friends to do business with. (See Nortel Sees $1B From Microsoft Alliance and Alcatel Snags Nortel 3G Unit.)
But such reasoning, coupled with a less than exciting outlook for the fourth quarter (more on that later) wasn't enough to calm the pessimists. Having gained 13 cents on Monday to close at $2.39 ahead of the earnings news, Nortel's stock fell 20 cents, more than 8 percent, today to $2.19.
The numbers would have spooked investors even more if it wasn't for healthy CDMA wireless infrastructure sales and Nortel's enterprise customers, who are forging ahead with investments in new technology.
Nortel's Enterprise Solutions group delivered revenues 28 percent higher than the previous quarter at $609 million, about 20 percent of total sales.
Nortel is very bullish about its position in enterprise. At a recent London presentation, Nortel executives were boasting that no other telecom vendor can claim to be as innovative in the enterprise space, proclaiming rival Alcatel (NYSE: ALA; Paris: CGEP:PA) as a declining presence in the market and almost without merit.
Alcatel, though, recently announced third quarter revenues from enterprise customers of €1 billion ($1.3 billion), an increase of about eight percent year-on-year .
Part of the "innovation" Nortel is keen to promote includes its partnership with Microsoft Corp. (Nasdaq: MSFT), which is mentioned by the company's management frequently. But it will be quite a while, late 2007 and into 2008, before the fruits of that relationship make an impact on the bottom line, notes Zafirovski. "Things are proceeding well. There's excitement about the roadmap we have in next generation unified communications, and it's opening doors," says the CEO.
The good news for Nortel is that, should the partnership deliver the goods, it has $1 billion in extra revenues to book towards the latter part of the cited three year period.
And in the meantime there's plenty of business for Nortel's existing circuit and packet voice systems and enterprise data products. Zafirovski says that while Nortel has seen "a noticeable increase in caution by carriers," with enterprises "there's been no slowdown."
Other vendors have also been feeling the impact of greater pricing pressures and the impact of carrier consolidation. (See Lucent Offsets Alcatel Slump.)
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