Nortel Results Foster Hope
Nortel Networks Corp. (NYSE/Toronto: NT) has at last given the ailing telecom equipment market something to celebrate with its better-than-expected first quarter 2003 results.
The company has helped erase memories of recent dismal performances by returning to profitability for the first time in three years, posting net earnings of $54 million compared to a net loss of $841 million in the same period last year (see Nortel Shows Q1 Profit).
Although Nortel does not provide a breakdown of results for its wireless division, the company has confirmed that the sector now accounts for about 40 percent of its total revenue. The results are all the more satisfying since the vendor has reached its goal of profitability one quarter earlier than it originally predicted. Shareholders are said to have burst into a spontaneous round of applause following Nortel president and CEO Frank Dunn’s announcement.
Looking ahead, the company expects the overall telecommunications equipment market to be down modestly in 2003 compared to last year, but states that capital spending levels for the second quarter of 2003 will be similar to the first quarter. “I’m cautious, but I do think the environment is much more stable,” says Dunn.
While this success is no indication that the company is close to regaining its former glories, the results are good news for the industry as a whole. “If you look at the doom and gloom surrounding the industry and some of the vendors announcing falls in wireless contracts and sales, then certainly there is a bit of optimism out there,” comments IDC’s senior research analyst Paolo Pescatore. “Clearly the company wasn’t doing that well two or three years ago but, they made the cost cutting measures they had to make. They have done a very good job in turning things around, and they have some key wireless customers.”
Meanwhile, German conglomerate Siemens AG (NYSE: SI; Frankfurt: SIE) has registered improved performance at its Information and Communication Mobile unit over the last three-month period. The group posted a profit of €55 million (US$61 million) in the second quarter, up from €44 million (US$49 million) in the year-ago period. The company’s telecom infrastructure division narrowed its loss to €147 million (US$162 million), down from €158 million (US$174 million) a year ago.
The company states that market conditions were “particularly challenging at its Mobile Networks division, where earnings of €44 million [US$49 million] on sales of €1.067 billion [US$1.177 billion] included a net positive effect of €66 million [US$72.3 million] related primarily to a reduction in customer financing exposure.” By comparison, the division’s earnings a year earlier were €33 million (US$36 million). Siemens president and CEO Heinrich von Pierer said that the company’s restructuring was beginning to have a positive impact. “In view of the current economic conditions, I would be generally satisfied with this performance,” he asserts.
Siemens also fares well in the latest Unstrung Insider report – entitled "Financial Health Check: Top 10 Wireless Equipment Vendors" – where the company is rated fourth in a list of the top ten vendors attempting to manage the downturn. Author Gabriel Brown notes that the company’s wireless equipment business is the steadiest of all the vendors analyzed.
These latest results mark a change in fortune for an industry that has suffered greatly from cuts in carrier capital expenditure over the past two years. Nortel and Siemens’ figures are in marked contrast to the recent headlines from Finnish behemoth Nokia Corp. (NYSE: NOK), a fact recognized by the analyst community (see Finns Flummoxed, Flopping and Network Warning From Nokia). “Some of the bigger players are suffering slightly, while the smaller ones that have gone through restructuring seem to be getting themselves back on track,” says IDC's Pescatore.
He adds that Nortel’s upturn in particular can be partly attributed to its expertise in all the major wireless technologies. “The problem Nokia has had is that they are a pure GSM player and don’t have any CDMA network knowledge. Not having any handset business has also allowed Nortel to concentrate on its core area of networks.”
Market leader LM Ericsson (Nasdaq: ERICY) is set to announce its first quarter results next week (Tuesday, April 29th).
— Justin Springham, Senior Editor, Europe, Unstrung