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