Nortel Edges Into Profit

Nortel Networks Ltd. generated a small profit of $27 million, or 5 cents per share, from revenues of $2.7 billion in the third quarter, the vendor reported this morning.

Analysts, on average, had expected revenues of $2.77 billion and earnings of 11 cents per share. Nortel said it had to defer $45 million in revenues after it failed to fulfill some CDMA network equipment orders.

Third-quarter revenues were up slightly compared with the firm's disappointing second quarter, when Nortel reported a net loss of $37 million, but down significantly compared with the same quarter a year earlier, even once the sale of the UMTS/3G access business is taken into account. (See Alcatel Snags Nortel 3G Unit, Nortel Falls Short in Q2, and table below.)

Table 1: Nortel's Q3 2007 Revenues by Division
3Q07 Revenues in US$ millions Compared with 3Q06 reported revenues Compared with 3Q06 excluding UMTS access business* Compared with 2Q07
Carrier Networks 1,080 -19% -11%* +2%
Enterprise Solutions 671 +18% +18% +14%
Global Services 540 0% +6%* +9%
Metro Ethernet Networks 360 -13% -13% -1%
Other 54 -11% -11% -5%
Total 2,705 -8% -2%* +6%
* Third quarter of 2006 included revenues of $123 million in Carrier Networks and $33 million in Global Services that related to the UMTS Access business that was sold on December 31, 2006.
Source: Nortel

The main reason for the year-on-year dip is that Nortel sold a lot less gear to carriers, while its Enterprise business grew and its Global Services division remained stable.

Even taking the UMTS sale into account, the Carrier Networks business reported a drop of 11 percent in revenues compared with the third quarter of 2006. Nortel blames the hiccup on CDMA and "decreases in legacy products."

Nortel's Metro Ethernet Networks division also suffered a significant dip, down 13 percent from last year. That drop, to $360 million from $416 million in the third quarter of 2006, was "primarily due to decreases in long-haul optical revenue… as well as decreases in legacy data." Those decreases, though, were "partially offset by increases in metro optical and carrier Ethernet revenues," where Nortel has been making a lot of noise related to its Provider Backbone Transport (PBT) developments. (See Nortel Wins in Colombia, BT Goes Live With PBT, and Nortel Lands More PBT Action.)

On the plus side, Nortel reported an increase in its gross margin to 43 percent, its highest in nine quarters. Nortel's second-quarter gross margin was 41.1 percent, while it stood at 38.4 percent in the third quarter of 2006.

In this area Nortel is doing significantly better than some of its main rivals: Ericsson AB (Nasdaq: ERIC) reported a third-quarter gross margin of 35.6 percent, Alcatel-Lucent (NYSE: ALU) managed 34.2 percent, and Nokia Networks reported a gross margin of 28.3 percent. (See Profit Warning Slams Ericsson , AlcaLu Cuts 4,000 More Jobs, and NSN Products Face Further Cuts.)

Nortel's order book is also healthier than it was a year ago. Nortel says third-quarter orders of nearly $2.4 billion are up 2 percent compared with a year ago, and up 9 percent compared with last year's quarter, when adjusted for the sale of the UMTS/3G access business.

In the fourth quarter Nortel expects revenues to be about the same as last year's $3.32 billion, with a range of plus or minus $100 million. Given that revenues associated with Nortel's now divested UMTS access business were $157 million, the vendor is on course for a pro forma year-on-year increase in fourth-quarter revenues.

The company also expects its fourth-quarter gross margin to be slightly better than the third quarter's 43 percent and predicts an operating margin of around 10 percent, compared with the third quarter's 5 percent.

Full-year revenues are set to be down slightly compared with 2006's $11.4 billion, though once last year's UMTS/3G revenues of $660 million are accounted for, pro forma full-year revenues could well be up. Analysts, on average, are expecting full-year sales of $11.07 billion.

Overall, the news was met positively by investors, who pushed up Nortel's share price by $0.35, more than 2 percent, to $16.63 in pre-market trading this morning.

Nortel was due to provide further detail in an earnings conference call today at 8:30 a.m. Eastern Standard time.

— Ray Le Maistre, International News Editor, Light Reading

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