Nortel Provides Q1, Q2 Estimates

Nortel reports estimated unaudited revenues for the first six months of 2004 of approximately $5.1B; announces layoffs to cut costs

August 19, 2004

15 Min Read

TORONTO -- Nortel Networks Corporation (NYSE:NT - News; TSX:NT - News) today announced estimated limited preliminary unaudited financial results for the first and second quarters of 2004, prepared in accordance with United States generally accepted accounting principles, and new strategic initiatives to reset its business model. These initiatives include a new streamlined organizational structure to improve alignment with enterprise and carrier customers, which is intended to enable the Company to build on its market leadership in developing the converged networks of the future and improve business efficiency and operating cost performance in an increasingly competitive market. The streamlined organizational structure will lead to an approximate 10 per cent workforce reduction.

Nortel Networks also provided an update regarding the progress of the Audit Committee's continuing independent review, including the termination for cause of seven finance executives. The Company also provided an update on the progress of its restatements and revisions to prior period financial results.

Today's announcements serve as a status update by the Company and its principal operating subsidiary Nortel Networks Limited ("NNL") pursuant to the alternative information guidelines of the Ontario Securities Commission. These guidelines contemplate that the Company and NNL will normally provide bi-weekly updates on their affairs until such time as they are current with their filing obligations under Canadian securities laws.

"We are pleased to be able to communicate preliminary first and second quarter 2004 results and details of a new streamlined organization," said Bill Owens, president and chief executive officer, Nortel Networks. "With the restatement moving toward completion, we are focusing our full attention on driving the business forward with a focus on costs, cash and revenues as overall strategic imperatives. With our proven strengths in high performance high reliability networks, supported by our new simplified organization, we are well-positioned to deliver the secure, reliable converged networks customers are demanding to increase their own competitiveness."

Estimated Limited Preliminary Unaudited Results for the First and Second Quarters of 2004

Estimated unaudited revenues for the first six months of 2004 were approximately US$5.1 billion, with approximately US$2.5 billion in the first quarter and US$2.6 billion in the second quarter. Estimated unaudited net earnings per share in the first half of 2004 were US$0.00 to US$0.02, with US$0.00 to US$0.01 in the first quarter and US$0.00 to US$0.01 in the second quarter, in each case on a fully diluted basis.

Estimated unaudited net earnings in the second quarter of 2004 included a benefit of approximately US$0.02 per share on a fully diluted basis related to a customer contract settlement in South America.

Estimated unaudited revenues by segment on a percentage of revenue basis for the first and second quarters of 2004 were: Table 1:

Percentage of Revenue

Q1 2004

Q2 2004

Wireless Networks



Enterprise Networks



Wireline Networks



"The revenue performance reflects our customers' continued investment in our solutions as a provider of choice in building secure converged networks and their ongoing confidence in Nortel Networks," said Owens.

Gross Margin

Gross margin for the first six months of 2004 is estimated at approximately US$2.2 billion, or approximately 43 percent of revenues, with approximately US$1.1 billion in each of the first and second quarters. Margins in the second quarter reflect lower margins related to initial wireless deployments and the mix of wireless revenues in the quarter.


Selling, general and administrative expenses ("SG&A") and research and development expenses combined are estimated at approximately US$2.1 billion for the first six months of 2004 and were approximately equal in the first and second quarters.


Cash balance at the end of the second quarter of 2004 was approximately US$3.7 billion and was approximately US$3.6 billion at the end of the first quarter of 2004.

Timing of Final Unaudited Results

These estimated limited preliminary unaudited results are subject to change and to a number of important limitations described below under "Status of Restatement and Filing of Financial Statements". The final unaudited results for the first and second quarters of 2004 will be available upon the filing of the quarterly reports for such periods, which the Company expects to file by the end of the third quarter of 2004.

Strategic Plan

Nortel Networks believes significant opportunities for growth exist across the marketplace and particularly in emerging markets such as China and India as customers evolve their networks to high performance converged networks underpinned by high security and reliability. Security and reliability have always been fundamental requirements for service provider networks of all types and they are increasingly important to governments, defense interests and enterprises around the world. Nortel Networks is driving its strategy with the aim of growing market share and to leverage its strength in high performance, high reliability networks in opportunities such as those mentioned above.

Existing and new competitors are aggressively positioning themselves to capture significant growth opportunities. At the same time, the financial results for the first and second quarters of 2004 announced today indicate that the Company's business operations are not achieving the targeted operating cost performance.

"We have put in place a strategic plan that recognizes industry dynamics and the evolution of the converged network, and leverages our acknowledged strengths in high reliability networks and strong customer loyalty. The plan further reflects our renewed commitment to best corporate practices and ethical conduct," said Owens. "Building on this foundation, it is our intention to be optimally positioned to maximize strategic opportunities as they arise. Our ability to be proactive will be fueled by a dedicated emphasis on costs, cash and revenues."

The impact of the strategic plan outlined today, and detailed in the annex to this press release, will lead to an anticipated focused reduction in employees of approximately 3,500, or an estimated 10 per cent of the workforce. This workforce reduction is expected to be substantially completed by year-end, and will be subject to completion of the appropriate information and consultation processes with the relevant employee representatives in certain jurisdictions, as required by law. The Company currently estimates costs of approximately US$300 million to US$400 million in connection with this work plan and is targeting annualized cost savings of approximately US$450 million to US$500 million. The details of this work plan and the timing of the financial statement impacts are expected to be finalized by the end of the third quarter of 2004.

"In an increasingly cost-competitive environment, we are taking the steps necessary to continue to grow market share and, together with the actions announced today, are taking the important steps to improve our profitability and cash generation," said Owens. "I am saddened that these actions will necessitate a decrease in our workforce. Nortel Networks employees have demonstrated remarkable loyalty during this challenging period. I recognize the impact these measures will have on these fine people who have served Nortel Networks well."

The principal components of the strategic plan are:

  • a renewed commitment to best corporate practices and ethical conduct, including through the establishment of a chief ethics and compliance officer;

  • a streamlined organizational structure to reflect alignment with carrier converged networks;

  • an increased focus on the enterprise market and customers;

  • optimized research and development programs for secure, "5 9s" reliable converged networks;

  • the establishment of a chief strategy officer to drive partnerships, new markets and acquisitions;

  • the establishment of a chief marketing officer to drive overall marketing strategy;

  • the strategic review of embedded services to assess opportunities in professional services business; and

  • a distinct focus on government and defense customer segments.

Business Outlook

The Company continues to expect the market will grow in the low to mid-single digits in 2004 compared to 2003, and that its revenues will grow faster than the market. Nortel Networks expects, through the implementation of its strategic plan, to reduce its operating expenses to 35 percent of revenues or lower on an annualized basis in 2005. Considering the impacts of the strategic plan and higher costs associated with initial customer deployments in emerging markets, the Company expects gross margins in the range of 40 to 44 percent of revenues through 2005.

Status of Audit Committee Independent Review; Personnel Actions

The independent review by the Nortel Networks Audit Committee is continuing. The Audit Committee expects to complete that portion of its inquiry which affects the Company's and NNL's ability to finalize and file their audited financial statements for the year 2003 in sufficient time to enable the Company and NNL to file such financial statements by the end of the third quarter of 2004. The Audit Committee anticipates that there will be additional work done on remedial measures, internal controls, and improvements to processes beyond the filing of the Company's and NNL's audited 2003 financial statements.

The Audit Committee review has focused on the establishment, timing of, support for and release of accruals and provisions. Based on the Committee's work to date, the Company has found that a significant number of accruals and provisions were established and/or released in 2002 and 2003 that were not in accordance with applicable generally accepted accounting principles. The Audit Committee's objective is to arrive at a full understanding of the facts and circumstances that gave rise to these errors before audited financial statements for the year 2003 are finalized and filed.

As previously announced on April 28, 2004, the Company terminated for cause each of its former president and chief executive officer, chief financial officer and controller. Today, the Company announced that seven individuals with significant responsibilities for financial reporting at the line of business and regional levels have also been terminated for cause. Four of these individuals had previously been placed on paid leaves of absence, as announced on April 28, 2004. In making these and the previous determinations, the Board of Directors found that each of these ten individuals had primary, or substantial, responsibility for the Company's financial reporting; that if not aware, each ought to have been aware that the establishment and/or release to income of such accruals and provisions were not in accordance with applicable generally accepted accounting principles; and that the improper application of generally accepted accounting principles with respect to these accruals and provisions misstated the Company's financial statements. The Company will demand repayment by these individuals of payments made under Company bonus plans in respect of 2003, and will take further additional action with respect to these individuals, if appropriate.

The Board of Directors reiterated its commitment to continue to fully cooperate with the ongoing investigations of these matters by the regulatory and law enforcement authorities in both Canada and the United States.

As previously announced, the Company has retained outside consultants to assist it in reviewing and assessing its finance organization and the development and implementation of appropriate processes and financial systems. The Audit Committee's independent review is also focused on remedial measures, strengthening internal controls and improvements to processes. Together, the recommendations from these assessments, when completed and presented to the Board of Directors, are intended to strengthen internal controls over financial reporting and address the material weaknesses in internal controls previously identified by the Company's independent auditors. The Company will provide additional details as to these recommendations in connection with the filing of its financial statements for 2003 and for the first and second quarters of 2004 and related periodic reports.

Status of Restatement and Filing of Financial Statements

The Company and NNL continue to dedicate significant resources to the process to complete their financial statements as soon as practicable. As previously announced, the Company and NNL continue to work on the restatement and revisions of their financial results for each fiscal quarter in 2003 and for 2002 and 2001, and the preparation of their financial statements for the full year 2003 and the first and second quarters of 2004.

As previously announced, the Company and NNL expect to file, by the end of the third quarter of 2004, financial statements for the year 2003 and the first and second quarters of 2004 and related periodic reports, and follow thereafter, as soon as practicable, with any required amendments to periodic reports for prior periods.

Based on the Company's work to date, it currently does not expect changes to the principal estimated impacts from such restatements and revisions to the Company's results previously outlined in the Company's press release dated July 13, 2004, except for the following:

  • approximately three-quarters of the reduction in 2003 net earnings identified to date impacts the first half of 2003 (up from two-thirds previously estimated), with the remaining approximate one-quarter reduction impact to the second half of 2003.

The Company's work to date with respect to the restatements and revisions and the principal estimated impacts mentioned above and the Company's expectations as to timing of the filing of financial statements and related periodic reports remain subject to a number of important limitations, including:

  • the principal impacts are estimated impacts which have been identified by the Company based on the work done to date and are not projections of the final total impacts. As such, the principal estimated impacts continue to be preliminary, partial and subject to change;

  • the ongoing work of the Nortel Networks Audit Committee independent review;

  • the ongoing work to be done by the Company related to the restatements and revisions and the impact of accounting for certain other matters, including foreign exchange; the previously disclosed material weaknesses in Nortel Networks internal controls over financial reporting;

  • the review or audit of the Nortel Networks financial statements by Nortel Networks independent auditors, Deloitte & Touche LLP, as the above estimates of the principal impacts of the restatements identified to date have not been the subject of a review or audit engagement by Nortel Networks independent auditors; and

  • the final determination of the impact of adjustments arising from subsequent events on the Company's results of operation or financial position.

The financial results of NNL are consolidated into the Company's results. NNL's financial statements for the applicable periods will also be restated upon the related restatements of the Company's financial statements. NNL's preferred shares are publicly traded in Canada.

Other Matters

EDC Support Facility

NNL is currently in discussions with Export Development Canada ("EDC") to obtain a new waiver under the EDC performance-related support facility (the "EDC Support Facility") of certain defaults related to the delay by the Company and NNL in filing their respective Q2 2004 Quarterly Reports on Form 10-Q (the "Q2 Reports"), and to extend the current waiver, scheduled to expire on August 30, 2004, related to the delayed filings of their 2003 Annual Reports on Form 10-K and Q1 2004 Quarterly Reports on Form 10-Q (the "Prior Period Reports" and, together with the Q2 Reports, the "Reports"), in each case with the U.S. Securities and Exchange Commission, the trustees under Nortel Networks public debt indentures and EDC. The existing waiver also applies to certain other breaches that have arisen or may arise under the EDC Support Facility relating to the delayed filings and the restatement of the Company's and NNL's financial results.

If NNL fails to obtain a waiver relating to the Q2 Reports by August 24, 2004, or an extension of the current waiver by August 30, 2004, EDC would have the right at such times to require NNL to cash collateralize the support outstanding under the EDC Support Facility and to exercise its rights against the collateral under NNL's related security agreements. There can be no assurance that NNL will receive any new waivers or any extension of the existing waiver from EDC.

The EDC Support Facility provides up to US$750 million in support, all presently on an uncommitted basis. As of August 15, 2004, there was approximately US$274 million of outstanding support utilized under the EDC Support Facility.

Status of Legal Proceedings

A proposed class proceeding has been commenced before the Ontario Superior Court of Justice against the Company, NNL and various current and former officers and directors claiming damages of Cdn. $250 million for alleged breaches of trust and fiduciary duty, oppressive conduct and misappropriation of corporate assets and trust property in respect of the payment of cash bonuses to executives, officers and employees in 2003 and 2004 under the Nortel Networks Return to Profitability bonus program. The claim alleges that the bonus payments were paid based on falsely reported financial performance and diverted the profits of the Company and NNL that ought to have been shared with the Company's shareholders. The claim also seeks an order under the Canada Business Corporations Act directing that an investigation be made respecting these bonus payments.

Nortel Networks Ltd.

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