Nortel Keeps to Profit Path

Nortel Networks Corp. (NYSE/Toronto: NT) execs spent as much time explaining an accounting restatement as in touting another quarter of modestly profitable earnings in the company's third-quarter report tonight (see Nortel Posts Small Q3 Profit).

For the quarter at hand, Nortel reported net earnings of $179 million or $0.04 per common share, and gross margin of 52 percent, busting well beyond analyst estimates. Revenue was slightly lower than the last quarter -- $2.27 billion compared with $2.33 billion logged in June (see Nortel Still Profitable in 2003).

Nortel execs said they expect Nortel to close 2003 with a full-year profit for the first time in six years.

The only tricky part of the quarter came in the announcement of some complicated restatements of past books. A review of the company's assets and liabilities undertaken earlier this year has turned up errors in the books that will result in restatement of Nortel's financial results for 2000, 2001, 2002, and the first two quarters of 2003.

Details won't be disclosed in full until filings are complete in mid-November, but Nortel execs say about $900 million of liabilities previously included in the June 30, 2003, quarterly report must now be reallocated "into prior periods." Also, Nortel has found that $92 million in revenue for the first two quarters of 2003 was incorrectly recognized and needs to be "deferred to later periods."

Analysts on the company's conference call seemed unconcerned with the financial impact of the restatements, which include reductions in net losses for 2000, 2001, and 2002 and revenue adjustments amounting to about 2 percent of the $60.7 billion reported in those years.

Execs were cautious in describing the progress of separate business segments and the industry overall. In general, CEO Frank Dunn waxed positive on sales of wireless gear and packet voice equipment. Enterprise sales seem to have revived a bit since last quarter. But the optical sector is down, and Dunn was clear that the recently announced OME 6500 was a lone bright spot (see Nortel Gets Edgy).

Over the next couple of years, Dunn said carriers won't increase spending to former levels. And what they do spend will be focused on new technologies, such as packet voice, 3G wireless, and optical technology that's more flexible than current approaches. Further, Nortel sees its future not in hardware but software. "Our business is moving to a software business," Dunn said.

— Mary Jander, Senior Editor, Light Reading