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Earnings reports

Nortel Still Haunted by Accounting Woes

Nortel Networks Ltd. shocked the markets this morning with news that it is delaying its fourth-quarter 2005 and full-year financial reports, and restating its 2003, 2004, and first nine months of 2005 numbers, due to "revenue incorrectly recognized in prior periods that should have been deferred to future periods."

Periods prior to 2003 will also be adjusted. (See Nortel Delays, Restates.)

The firm's share price dropped 9 cents, nearly 3 percent, to $3.00 in pre-market trading.

The company has been trying to mend the tarnished reputation it gained during the 2004 accounting scandal, which led to senior resignations, lawsuits, and external and internal investigations. (See Nortel Rattles Nerves, Nortel Fires CEO, and SEC Pops In on Nortel.)

New CEO Mike Zafirovski has been busy building a new team and refocusing the company since he took over in November 2005. (See Zafirovski Adds Another GE Exec to Nortel, Nortel's New Faces Face Tough Task, and Nortel CEO Maps Out His Vision).

In a prepared statement, Zafirovski said: "This revenue is real -- it was recognized in the wrong periods. The restatements do not affect the company's cash position... Our priority is to have accurate financial information. Although the need to restate certain financial statements is unfortunate, it's the right thing to do."

The company says its financial reviews have found that "certain revenue recognized in prior periods should have been deferred and recognized in future periods for contracts involving multiple deliverable elements, including upon the delivery of undelivered elements such as hardware, software and/or services."

The first nine months of 2005 will have revenues revised down by $162 million and net earnings cut by $95 million. Nortel expects 2004 revenues to be revised down by $77 million and net earnings cut by $93 million, while 2003's revenues will be revised down $157 million and net earnings reduced by $91 million.

For the periods prior to 2003, Nortel expects revenues to be revised down by $470 million in total, and net earnings revised down by $99 million.

While audited fourth-quarter results aren't yet available, Nortel did provide preliminary figures. Revenues are $2.95 billion, up sequentially and year on year, while the net loss for the quarter will be $2.21 billion, reflecting the $2.474 billion charge previously announced. On average, analysts had expected fourth-quarter revenues of more than $3 billion. (See Nortel Takes $2.5B Hit.)

Preliminary results for 2005 show revenues of $10.83 billion, up from $9.75 billion in 2004. Net loss will be $2.41 billion, as a result of the previously mentioned one-off charge. Analysts, on average, had been expecting 2005 revenues of $11.08 billion.

The company's annual general meeting planned for May 2 has been postponed.

Nortel also stated today that it plans to boost its annual operating margins by $1.5 billion by as soon as 2008. (See Nortel Targets Higher Margins.)

— Ray Le Maistre, International News Editor, Light Reading

Stevery 12/5/2012 | 4:02:26 AM
re: Nortel Still Haunted by Accounting Woes certain revenue recognized in prior periods should have been deferred and recognized in future periods

ie. I want credit for the revenue.

Gimme a break. Does he think decent analysts fall for this crap?

I'm just going to back out whatever revenue he claims was miscategorized.
ThouShaltNotJudge 12/5/2012 | 4:02:22 AM
re: Nortel Still Haunted by Accounting Woes >> Gimme a break. Does he think decent analysts fall for this crap?

surely not, or at least no more than the world's top investment banks fell for, say, Enron's accounting crap.
russ4br 12/5/2012 | 4:02:14 AM
re: Nortel Still Haunted by Accounting Woes certain revenue recognized in prior periods should have been deferred and recognized in future periods

ie. I want credit for the revenue.


... and they probably want some tax breaks for having incurred the loss "in past years" ... and maybe rolling over tax credits forward against the "new" revenue (i.e. the credit from past years) ... let's get back in black, fast!

... wouldn't this classify as cooking the books?

-russ
marionetteworks 12/5/2012 | 4:02:07 AM
re: Nortel Still Haunted by Accounting Woes 1) NT had a $2.474 billion one-time charge due to the settlement while having a $2.21 billion loss. Does that mean they would have a made $264 million profit if it wasn't for that lawsuit?

2) In the press release there was only talk about revising revenues DOWN in prior periods:

The first nine months of 2005 will have revenues revised down by $162 million and net earnings cut by $95 million. Nortel expects 2004 revenues to be revised down by $77 million and net earnings cut by $93 million, while 2003's revenues will be revised down $157 million and net earnings reduced by $91 million.

For the periods prior to 2003, Nortel expects revenues to be revised down by $470 million in total, and net earnings revised down by $99 million.


But since this revenue was not "fake" and was just reported in the wrong periods, should this money not bring revenues UP for other periods? So which periods will see higher revenue as a result?
stephencooke 12/5/2012 | 4:02:05 AM
re: Nortel Still Haunted by Accounting Woes marionetteworks,

Excellent question! I was wondering about this myself. The part that I found the most confusing were the 2004 numbers where revenues were decreased by $77M but somehow this was amplified so that earnings were reduced by $93M...? Did the $77M put them in a lower tax bracket with higher percentage taxation or did expenses all of a sudden go up with a reduction in revenues...? There has to be something more there.

Steve.
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