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Nortel: Krazy About Korea

Nortel Networks Ltd. (NYSE/Toronto: NT) CEO Bill Owens hosted his last quarterly earnings call today, before passing the torch to his successor, and found himself fielding analysts' questions about Nortel's Asia/Pacific business. (See Nortel Posts Q3 Loss.)

Before dealing with India, China, and South Korea, though, Owens introduced his successor, Mike Zafirovski -- "I'm glad he's here," said the outgoing chief -- and talked of growing revenues and renewed vigor in the optical market. (See Nortel, Moto Settle on Zafirovski .)

Nortel's third-quarter revenues were up 22 percent from last year at $2.66 billion, slightly higher than Wall Street's consensus estimate of $2.63 billion. The net loss was $105 million, or 2 cents a share, due to a number of one-time costs and charges, compared with a loss of $259 million a year earlier.

The company's Carrier Packet Networks revenues, including optical products, were $754 million, up 41 percent compared to the same quarter a year ago. Without providing further detail, Owens said this was the best quarter for optical since the first three months of 2003. He said optical sales were benefiting from the capacity demands created by increasing volumes of broadband, wireless, and video traffic, and noted that the vendor's Optical Multiservice Edge (OME) 6500 is now deployed by more than 60 customers all over the world. (See Nortel Expands Optical Line.)

Enterprise networks generated $685 million in revenues (up 16 percent year on year), GSM/UMTS wireless equipment sales were $674 million (up 24 percent), and CDMA wireless infrastructure reported $539 million in revenues (up 5 percent).

CFO Peter Currie said Nortel expected 2005 revenues to be 13 percent higher than in 2004, with gross margins in the 40 percent to 44 percent range.

Yet the third quarter's gross margin rate was just 38 percent. Why? A loss-making deal in India with Bharat Sanchar Nigam Ltd. (BSNL) is largely to blame. (See BSNL Selects Nortel.) Nortel recorded a $71 million loss on that contract alone in the third quarter, and Owens admitted that revenues from the contract to date amounted to just $228 million of the anticipated $500 million total.

That $71 million loss hit the quarter's gross margin by about 3 percent, said the CFO.

In the past, Nortel has cited the BSNL deal as an example of how it can still win contracts in competition against new, low-cost rivals such as China's Huawei Technologies Co. Ltd. and ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763). (See Nortel Posts Q1 Loss.)

Now, though, CFO Currie felt obliged to note that Nortel "expects to build the business profitably… We will look for positive returns from future business."

Further tricky questions arose regarding Nortel's wireless position in China, especially following the vendor's admission that its 3G joint venture with China Putian had failed to materialize. (See Nortel Suffers China 3G Setback.)

Owens said discussions were ongoing with Putian, and Nortel has "other relationships that will position us appropriately for TD-SCDMA," China's home-grown 3G wireless standard. "We're comfortable with those partnerships," he added, without actually delivering any detail.

The Chinese government is expected to award 3G licenses in 2006, with some vendors anticipating carrier capital expenditure on 3G infrastructure to be as high as $12 billion in the first three years of rollout. (See HR: 3G to Shake up China .)

Better news for Nortel comes from South Korea, where the vendor today sealed its partnership with LG Electronics Inc. (London: LGLD; Korea: 6657.KS). (See Nortel, LG Seal Deal.)

Although no revenues have been booked so far, the partners have already secured next-generation 3G infrastructure deals with KT Freetel Co. and SK Telecom (Nasdaq: SKM). (See UBS: Nortel Wins in Korea , KTF Picks LGE, Nortel For 3G, and SKT Taps LGE, Nortel .)

"If you can succeed in Korea, you can succeed anywhere in the world," proclaimed Owens.

He also cited WiMax product developments with LG, saying the resulting technology would be commercially available in the first quarter of 2006.

Nortel's share price was up 3 cents, nearly 1 percent, to $3.24 in late morning trading today.

— Ray Le Maistre, International News Editor, Light Reading

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