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Nortel’s Quarter Perking Up?

Word from the Canadian tundra is that Nortel Networks Corp.’s (NYSE/Toronto: NT) frosty financials may finally be beginning to thaw.

No, the company isn’t exactly ready to melt glaciers with explosive new revenue growth, but the company could be on track to meet -- or even modestly beat -- most analysts’ estimates for the quarter. And these results have diminished the threat of a full-blown liquidity crisis at Nortel, in many people’s minds.

”It’s my feeling that they’ve stabilized their run rate, and that is responsible for the run in the stock,” says Andre Desautels, an analyst with Trilogy Advisors, an investment advisory firm. Nortel's stock has doubled in the past month.

“If they’re able to hang onto this run rate, it takes away a lot of the bankruptcy risk,” adds Desautels.

Most of the strong sales appear to be coming from Nortel’s wireless equipment division. One source from a company supplying Nortel with components says Nortel has increased orders for wireless products (including a wide range of carrier GSM and CDMA equipment) and is having difficulty keeping up with demand in that segment.

Judging by recent announcements, Nortel has been seeing wins in its CDMA and GSM wireless network equipment (see Nortel Bags Unicom Deals, Telstra Goes 1x With Nortel, Nortel Wins in Windies, Nortel Deploys in Brazil). Of course, determining how these announced contracts translate into real revenue is always tricky business (see When Figures Don't Match)

The fourth quarter has traditionally been one of Nortel’s strongest. Two other sources, declining to be named, confirmed that they had heard from internal Nortel sources that the company was seeing some strength, much of which might be due to an end-of-the-year “budget flush” of carrier capital spending.

According to First Call, analysts on average are expecting Nortel to report a loss of 6 cents per share in the fourth quarter of 2002. During the comparable quarter of 2001, Nortel lost 16 cents per share.

A company spokeswoman says the company only communicates about financials through press releases. Nortel expects to report its fourth-quarter 2002 earnings on January 23, 2003.

In the third-quarter earnings release, Nortel CEO Frank Dunn said, "we will continue to reduce our cost structure and drive to a break even model to be in place for the second quarter of 2003 (not including costs related to acquisitions and any special charges and gains) at quarterly revenues of below US$2.4 billion... We expect sequential improvement in our pro forma bottom line results in the fourth quarter of 2002."

Beating the company’s break-even target of under $2.4 billion in revenue would be big news. Indeed, Nortel's stock and bond prices have already responded to such hopes. Its stock price has doubled in the last month. More importantly, bond traders point to the fact that Nortel corporate bonds coming due in 2003, which once traded as low as 65 cents on the dollar, are now trading closer to 95 cents on the dollar. That implies that the bond market has a more optimistic outlook for the company’s ability to repay its debt.

These days, just stabilizing revenue is a big accomplishment, because cost-cutting and “breakeven” plans assume no further deterioration in the business. The company’s plan calls for it to break even next year. The only way that remains reasonable is if revenue stops falling, as breakeven results are pegged to stabilizing revenue and additional cost cuts.

The market now appears to have handicapped Nortel as more likely to recover than Lucent Technologies Inc. (NYSE: LU), if recent action is to be believed. The chart below shows Nortel starting to pull away from Lucent (Nortel’s share price is in black, while Lucent's is in green). Despite the recent optimism in the market, even a strong fourth quarter won’t close the book on the telecom depression. The capital spending outlook for 2003 continues to be cloudy for the telecom industry.

— R. Scott Raynovich, US Editor, Light Reading
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