Nortel Sees Q1 Revenue Drop
First, the financials…
Nortel said its revenues are now expected to be flat to slightly down, and that the company is bracing for "a slightly higher loss compared to the first quarter of 2005.”
For its first quarter of 2006, Nortel was expected to report a pro forma profit of 1 cent a share on revenues of about $2.7 billion, according to analysts polled by Reuters Research . That estimate assumed Nortel would improve over its year-ago quarter, where it reported losses of 1 cent a share on revenues of about $2.5 billion.
That news nudged Nortel's shares down 10 cents (3.88%) to $2.48 in midday trading on Tuesday. But earlier on in the trading morning, prior to the news getting out, Nortel's stock was hanging around $2.62.
There was a silver lining to be had, though. "We expect strong revenue momentum for the rest of 2006, resulting in high single digit growth for the full year 2006 compared to 2005," said Nortel's new chief, Mike Zafirovski, in a statement issued by the company.
Wall Street had already been looking for Nortel to improve revenues in 2006 by about 7 percent over 2005, according to Reuters Research. Nortel booked $10.8 billion in revenues during the full year 2005, and the Street wanted to see revenues of $11.54 billion this year. Given the new guidance, Nortel's full-year 2006 revenues could be anywhere from $11.4 billion (a 6 percent jump) to as high as $11.8 billion (a 9 percent jump). (See Nortel Reports Q4 2005.)
But some are skeptical of Nortel's chances that it will hit its revised numbers. "Given the very low 1Q revenues (well below our US$2.60 billion estimate), we believe it will be very difficult to achieve management’s FY06 guidance -- and we suspect they are assuming substantial revenue recognition from the T-Mobile USA 3G roll-out, a contract which they have not yet won," wrote Desjardins Securities analyst Paul Howbold in an early morning note to clients.
On the conference call, Zafirovski, now in his sixth month at Nortel, says the company is probably over-investing in R&D to the tune of about $400 million. His plan is to redeploy those assets and to make better use of the investment that's there in order to drive growth for the company. And, again, he emphasized WiMax, IMS, and IPTV as technologies that Nortel is most strongly committed to.
When asked whether Nortel could keep increasing margins without cutting jobs, Zafirovski said job cuts are a hard reality of the business world, but he called headcount reductions "a rather minimal driver of our plans to improve profitability."
"If you're looking at the areas we've identified in driving margin improvement, very few impact employee jobs directly," he said.
Of course, part of Zafirovski's job isn't just finding new places for Nortel to grow. It also has to rally around those areas where it once led by a mile -- and now leads by a millimeter, if at all.
That's why Nortel today also announced a "new business focus" on driving market share for its metro Ethernet gear, particularly in the area of delivering video content to mobile devices. (See Nortel Targets Ethernet.) The company has installed Philippe Morin as president of its Metro Ethernet Networks group, citing his success as general manager of Nortel's Optical group, a business that Nortel says grew 24 percent last year to $1.2 billion.
"What they are doing here is trying to reenergize their Ethernet portfolio around the convergence of optical and packet platforms," says Stan Hubbard, senior analyst with Heavy Reading. "They've been watching Cisco and Alcatel gain a lot of carrier Ethernet mindshare over the past year, and they now recognize the need to step up their development and marketing efforts to recapture some momentum there."
Nortel's metro Ethernet strategy includes its Provider Backbone Transport (PBT) platform, which is a bit unconventional -- it relies on turning off certain Ethernet features, rather than adding "carrier class" ones -- but has won a vote of confidence from BT Group plc (NYSE: BT; London: BTA). (See BT Likes Nortel's New Ethernet Flavor.) — Phil Harvey, News Editor, Light Reading