Nortel Still Profitable in 2003

Nortel Networks Corp. (NYSE/Toronto: NT) is closer than ever to turning out a profitable 2003. The company announced its second consecutive quarter of breakeven results and remains profitable so far for the year (see Surprise! Nortel Earns a Profit).

In reporting its second-quarter results after the bell today, Nortel met analysts' expectations with a net loss of US$14 million, which translated into earnings per share of zero. That compares with net earnings of $54 million, or $0.01 per common share, in the first quarter of 2003 and a net loss of $697 million, or $0.20 per common share, in the second quarter of 2002.

After earning $54 million in the first quarter and losing $14 million in the second quarter, the company is still running a net profit for the year.

Even still, management seemed as noncommittal as ever. "The business is stable, it's plateaued... I think we will see some momentum... business is active, but I'm not going to get into forecasting," said CEO Frank Dunn when asked during a Q&A session to predict what the second half of the year would bring.

Analysts had projected zero cents a share, according to First Call, and they are projecting Nortel to earn 0.04 per share during 2003.

On the downside, revenues slipped slightly. Revenues were $2.33 billion, compared to $2.40 billion for the first quarter of 2003 and $2.77 billion for the second quarter of 2002. At the end of the last quarter, the company had issued no revenue forecast.

In commenting on the business climate in the quarterly conference call, Nortel CEO Dunn gave few hints as to when things might improve. But he also didn't fire any large warning signals.

"The underlying demand continues to reflect a cautious spending climate and a long sales cycle," he said. "I'm very cautious, but I'm more comfortable than I was six months ago."

During the Q&A session about the rest of the year, Dunn conjectured that "there is a higher probability of an upside surprise in the second half of the year."

Although the results are by no means stellar, it does mean that even a slight uptick in revenue will translate into profits for the company. This comes in contrast to Nortel's large rival across the border, Lucent Technologies Inc. (NYSE: LU), which is still losing money and earlier in the week said it doesn't expect to turn a profit until next year (see Lucent's Revenue, Losses Shrink ) .

As for specific sectors, Dunn said he was "disappointed" with results in enterprise networking, which declined steeply, but pointed to wireless and optical networking as bright spots. Wireless grew 4 percent from the first quarter, boosted by CDMA business in Asia and GSM and GPRS network buildouts in the U.S. Optical networking sales grew 10 percent.

The weakness in the enterprise business may raise questions about whether Nortel is losing more market share to Cisco Systems Inc. (Nasdaq: CSCO), the leader in that market.

It was apparent that much of Nortel's new business came from Asian service providers, and more than 50 percent of Nortel's revenue now comes from outside of North America.

"We see continued advancement in the delivery of wireless data, and we see strong growth in Asia."

Dunn observed that projects at NTT Communications Corp. helped the optical sales. He also emphasized growth in the voice-over-packet business with North American MSOs and Asian service providers.

Nortel's cash balance at the end of the quarter stood at $4.2 billion, up sequentially by about $200 million. Its total long-term debt stayed about the same at $3.9 billion.

— R. Scott Raynovich, US Editor, Light Reading