Nortel: Material Margin Madness

Nortel Networks Ltd. (NYSE/Toronto: NT) shares were shellacked this morning after the company said in a statement that it wasn't achieving its profit-margin goals (see Nortel Provides Status Update).

In morning trading, Nortel shares lost $0.59 (14.50%) to change hands at $3.48.

Today's curiously worded release could have easily set you off track – that is, unless you actually read past the second paragraph:

"The Company and NNL reported that there have been no material developments in the matters reported in their status updates of June 2, 2004, June 29, 2004, and July 13, 2004, with the exception of the matters described below," read the second paragraph of the release, part of a biweekly update that Nortel is providing the Ontario Securities Commission.

Of course, there were material developments. It was exactly the "matters described below" that caught investors' attention and gave the share price a 15 percent haircut. In the paragraph that followed, president and CEO Bill Owens had this to say:

"I remain pleased with Nortel Networks market momentum and continue to expect our revenues in 2004 to grow faster than the market (which we expect will grow in the low to mid single digits). However, as we move through 2004 and based on the work to date on our financial results, it is clear that our business model is not achieving our targeted operating cost (SG&A and R&D) performance of below 40 percent of overall revenues and our targeted gross margin percent of mid 40's."

Nortel said it is taking steps "to put into place an improved cost structure to optimize our financial performance." It also said it is working on its financial restatements and expects to "be in a position to announce" limited preliminary unaudited results for the first and second quarters of 2004 – and provide another update – in mid August.

In recent weeks, Nortel had already hinted that more cost-cutting might be needed to get the company back to healthy profit margins as it tries to move beyond the "accounting-challenged" tenure of ex-CEO Frank Dunn (see Nortel Gets Federal Subpoena, Dunn's Done With Nortel , Nortel Rattles Nerves). As highlighted in Headcount last week, Nortel's Owens provided some warning that something was up (see Headcount: Fair Warning).

What could lie ahead? When a company says "cost-cutting," it usually means layoffs. The only other options would be for Nortel to sell some assets or look for operational moves, but given its past extensive garage sales and recent restructuring deal to sell manufacturing to Flextronics Corp. (Nasdaq: FLEX), the most obvious moves have already been made (Nortel Sells Plants, Supplies Update and Nortel Sells Directory Biz). Of course, it could sell one of its four core divisions (Optical Networks, Wireline Networks, Wireless Networks, and Enterprise Networks), and there has been some chatter about this in the past. The wireless division would probably garner the most interest, but that's also what generates the most revenue for the company (about $1.4 billion per quarter).

— R. Scott Raynovich, US Editor, Light Reading

For more info on the state of industry financials, check out the coming Light Reading Live! event:

  • Light Reading's Telecom Investment Conference, in New York City, November 10.

  • <<   <   Page 3 / 3
    inauniversefarfaraway 12/5/2012 | 1:24:24 AM
    re: Nortel: Material Margin Madness crm366x wrote:

    Finally, with regard to Ciena - I'm no analyst but there seems to be some risk- note that they are still loosing money but with a good cash position they havesome breathing room. Furthermore, without the need to implement massive jobcuts in a hurry, a whole bunch of techies got to work a few extra years. I know the market doesn't care but I, as an individual, think this is good.

    This sounds like Ciena merely got itself a write-off. It's investment in VC capital shows up on the balance sheet as gain, and people get to work for a couple of years. Worst case it becomes a write-off.

    While it's better than being liquidated by the vc's, it still only postpones the inevitable.

    It's a wonderful world.

    dodo 12/5/2012 | 1:24:23 AM
    re: Nortel: Material Margin Madness Check the "who's who" list of those on the OSC's radar.
    reference schedule "A" from

    "Each of the Respondents is, or was, at some time since the end of the period covered by
    the last financial statements filed by NNC and NNL, namely September 30, 2003, a
    director, officer or insider of NNC or NNL and during that time had, or may have had,
    access to material information with respect to NNC and NNL that has not been generally

    Bill Kerr and Pahapill are on the list!!!!!!!!
    No-tell 12/5/2012 | 1:24:13 AM
    re: Nortel: Material Margin Madness Dodo, re-read the passage carefully. What it says is that since September 30, 2003, the people on the list likely have had access to non-public material information. The fact that Pahapill and Kerr are on the list is no big news...they're the new top finance gurus at the company. Of course they have access to material information.
    <<   <   Page 3 / 3
    Sign In