Wireless Holds Key for Nortel

Nortel Networks Ltd. CEO Mike Zafirovski gave a rousing performance on today's second quarter conference call, and projected good times for his company in the second half of this year. (See Nortel Reports Q2.)

Nortel's shares traded near unchanged this morning, recently trading hands at $2.04.

Nortel's second quarter revenues were $2.74 billion, just short of the $2.8 billion analysts were expecting, while net income was $366 million, or 8 cents per share. Gross margin was 38.8 percent, lower than the vendor's ongoing target of 40 percent.

The quarter's profit, though, was largely due to a one-time gain of $510 million from a change in the value of stock paid out in a class action settlement. Without any one-time gains or losses, Nortel would have reported a net loss of $89 million, or about 2 cents per share, compared with the slight profit of 1 cent per share analysts had expected.

But Zafirovski focused on what will happen in the second half of this year. He said third quarter revenues are due to be at least 10 percent higher than the same period in 2005. A 10 percent hike would take revenues to $2.92 billion, higher than the $2.84 billion analysts are forecasting. The CEO also expects high single digit revenues growth for the full year, compared with $10.52 billion in 2005, with gross margins hitting the 40 percent target.

Zafirovski said orders in the second quarter were up 22 percent compared with a year earlier, and that the total order backlog now stands at $5.9 billion.

Revenues from CDMA wireless infrastructure will figure strongly in the second half of the year, added the CEO, with "meaningful shipments" of the latest CDMA 3G technology, EV-DO Revision A, going to Verizon Wireless in the current quarter. (See VZW Taps Nortel.)

In addition, revenues from Nortel's joint venture with LG Electronics Inc. (London: LGLD; Korea: 6657.KS) in Korea are expected to start having a "meaningful impact" on the vendor's numbers in the fourth quarter. (See KTF Deploys LG for HSDPA, SK Launches Network, and Nortel, LG Seal Deal.)

In a research note issued today, Prudential Equity Group LLC analyst Inder Singh wrote that the results were "slightly below expectations," but added that "the shortfall may not have been as severe as some had feared" following "the weakness some competitors reported for the June quarter."

He added that the 22 percent order growth reported for the quarter suggests Nortel should achieve its third quarter and full year growth targets.

The second half of the year should also see the future of Nortel's UMTS (3G) business resolved, as Zafirovski made it clear that Nortel's wireless technology future does not include that particular flavor of 3G.

He said Nortel is "committed to mobility -- we intend to be a leader," but that the company would persevere only in markets where the vendor has "significant market share or a clear path to leadership."

The technologies Zafirovski believes can provide that are CDMA, WiMax, and UTRAN LTE (Universal Terrestrial Radio Access Network Long Term Evolution) or Super 3G, the next shift forwards from UMTS.

CDMA sales in the second quarter were $588 million (about 21 percent of total sales), with Nortel predicting that the market will remain steady over the next few years, an outlook that rival Lucent Technologies Inc. (NYSE: LU) also peddled recently. (See Lucent's Russo: Don't Panic!.)

So what of GSM and UMTS? Zafirovski said the GSM business is "sound and profitable," but that Nortel would be making a decision about "UMTS access -- the process is ongoing."

Sales of GSM and UMTS gear totaled $723 million in the second quarter (about 26 percent of total sales), but Nortel doesn't break that figure down any further.

The strong expectation now is that the UMTS business, which has now been split away as a separate unit from GSM, will be sold. (See Nortel Puts UMTS On a Limb and Is Alcatel Moving on Nortel Mobile Assets?.)

Zafirovski said it would be "inappropriate to say anything more at this stage," but he noted that the break-away UMTS business comprises radio access infrastructure, and does not include UMTS core technologies or any LTE developments.

— Ray Le Maistre, International News Editor, Light Reading

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