Nortel Puts UMTS On a Limb

Nortel Networks Ltd. says its UMTS (3G) wireless business will operate as a separate business unit from its GSM business, and that the future of that 3G business is under scrutiny.

In reporting its second quarter results, Nortel noted that it has "recently determined that our UMTS solutions and GSM solutions businesses will start operating as separate business units... as the second generation GSM and third generation UMTS technologies are at two very different market stages." The company added: "We also intend to decide whether to expand, partner, or divest our UMTS solutions business." (See Nortel Reports Q2.)

According to reports coming from Paris, a divestment to Alcatel (NYSE: ALA; Paris: CGEP:PA) looks most likely. (See Is Alcatel Moving on Nortel Mobile Assets?.)

As for the second quarter's numbers, revenues were up 5 percent year on year to $2.74 billion, though that's less than the $2.8 billion analysts were expecting.

Nortel earnings benefited from a $510 million gain from the value of the stock paid out in a class action settlement (Nortel's share price has dropped since the settlement was announced), giving it a second quarter net income of $366 million, or 8 cents per share. Analysts had expected earnings of 1 cent per share.

Gross margins disappointed at 38.8 percent, up slightly from the first quarter but down from 43.3 percent a year earlier, and lower than the vendor's 40 percent target, due to "competitive pricing pressures and unfavorable geographic and product mixes, partially offset by improvements in our cost structure as a result of lower materials pricing," the company noted.

In a prepared statement, CEO Mike Zafirovski said: "Our second quarter performance underscores both the challenges and good progress we are making with Nortel's transformation. On the plus side we saw strong order growth of 22 percent and increased sales momentum but gross margin was up only modestly."

Nortel's share price closed Wednesday at $2.04.

— Ray Le Maistre, International News Editor, Light Reading

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