Ethernet equipment

JV Helps Nortel Bust Q1 Estimates

Nortel Networks Ltd. gave its supporters something to cheer about Friday morning by announcing first quarter revenues of $2.76 billion, 11 percent better than a year earlier, and much higher than Wall Street estimates. (See Nortel Reports 1Q08.)

On average, analysts had been expecting revenues of $2.49 billion, so the vendor's sales came in $270 million ahead of expectations.

The news sent Nortel's stock up by $0.70, more than 8 percent, to $9.40 in pre-market trading.

But there's a simple explanation why Nortel did so much better than expected: Deferred revenues from the completion of a "significant" LG-Ericsson Co. Ltd. joint venture contract, which had been expected to boost the balance sheet in the second quarter, arrived earlier than expected. And as Nortel noted that its "deferred revenue balances decreased by $266 million during the first quarter of 2008," it looks like that single LG-Nortel deal accounted for pretty much all of the company's unexpected sales.

Nortel also reported a year-on-year improvement in its gross margin (41.6 percent) and operating margin (4.7 percent), and said it's still on course to grow its full year revenues "in the low single digits compared to 2007," when sales totaled $10.95 billion.

The downside, though, was that the Canadian vendor still reported a net loss of $138 million, or $0.28 per share, worse than last year's $103 million deficit. Much of this year's first quarter loss was accounted for by $88 million of restructuring costs. After those costs and other one-time charges and gains, Nortel's net loss was $35 million. (See Nortel Slashes 2,100 Jobs.)

Carrier Networks benefits
The vendor's Carrier Networks business unit benefited from the unexpected LG-Nortel revenues: Its revenues grew 21 percent year-on-year to just over $1.2 billion, and it reported an operating profit of $259 million (see the table below).

Table 1: Nortel Q1 2008 Revenues Growth
Q1 2008 revenues Year-on-year growth
Carrier Networks $1,218 million +21%
Enterprise Solutions $641 million +7%
Global Services $516 million +15%
Metro Ethernet Networks $327 million -12%
Other $56 million 0%
Total $2,758 million +11%

Sales of GSM and WCDMA mobile equipment almost doubled to $536 million thanks to that joint venture business.

But elsewhere in wireless, Nortel noted that revenues from CDMA network equipment declined to $555 million compared with $568 million a year earlier, though CFO Pavi Binning noted that a decline of just 2 percent in revenues in what is a high-pressure market was a decent result. Rival vendor Alcatel-Lucent (NYSE: ALU) also reported the same downward trend in CDMA sales during its first quarter results. (See AlcaLu Posts Loss, Warns on Full Year and CDMA Hits AlcaLu's Wireless Biz.)

The carrier business also saw revenues from circuit and packet voice solutions drop to $127 million from $170 million a year earlier, reflecting the ever-decreasing demand for traditional TDM voice switches.

Metro Ethernet division in decline
While Nortel's Enterprise and Global Services lines of business also grew their sales, the Metro Ethernet Networks group saw its first quarter sales fall. Nortel said that decrease was "primarily due to decreases in optical and data revenue resulting from the completion of large contracts in the first quarter of 2007 not repeated to the same extent in the first quarter of 2008."

The Metro Ethernet group, for which Nortel has high hopes as interest in technologies such as PBB-TE (Provider Backbone Bridge -- Traffic Engineering) and 40 Gbit/s and 100 Gbit/s optical grows, reported an operating loss of $25 million. (See A Guide to PBT/PBB-TE.)

But CEO Mike Zafirovski, talking on today's earnings conference call, was optimistic about the future for the group, noting that 40 Gbit/s optical products are now shipping, that Nortel has a 100 Gbit/s optical trial, and that there is an "increasing number of Carrier Ethernet trials with carriers." (See Nortel Aims for Ethernet Profits, Nortel Trots Out 40Gig, and Comcast, Nortel Put 100G to the Test .)

And CFO Binning stated that Nortel expects a better operational performance in the group in the second half of the year, and that current interest in 40 Gbit/s optical is expected to convert into sales.

— Ray Le Maistre, International News Editor, Light Reading

digits 12/5/2012 | 3:41:47 PM
re: JV Helps Nortel Bust Q1 Estimates It's a real up and down day for NT's share price.

The initial headline figures sent its stock up $0.70, more than 8 percent, to $9.40 in pre-market trading.

Then, once investors relaized that the sales bump came from a large contract that was all set to be recognized in the second quarter anyway (which means analysts will now have to adjust their second quarter forecasts), those gains vanished, and now NT's stock is trading down 4.25 percent at $8.31.

But the important part of today's earnings announcement seems to be that Nortel reckons it is going to hit its 2008 targets in terms of revenues and margins, no matter which quarter this or that business falls into.

In a sane world, that might have left Nortel's share price largely unchanged.

More worrying is that Nortel's current market capitalization is just $3.6 billion, and it's share price is down about 70% in the past year.

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