Nortel's Retro Quarters

Nortel Networks Ltd. (NYSE/Toronto: NT) finally filed its first- and second-quarter 2004 earnings with the SEC on Tuesday, showing a modest profit in both quarters (see Nortel Files Some Financial Statements). But analysts say that until the rest of the 2004 numbers are reported, Nortel’s overall health is hard to diagnose.

Nortel reported earnings of $59 million, or 1 cent a share, on revenue of $2.44 billion for the first quarter ended March 31, 2004, compared with a loss of $124 million, or 3 cents a share, on sales of $2.3 billion in the year-earlier period.

For the second quarter ended June 30, 2004, Nortel had earnings of $16 million, or zero cents per share, on revenues of $2.59 billion, up from a loss of $101 million, or 2 cents per share, on revenue of $2.29 billion in the same period of 2003.

“Overall, the earnings are not really that surprising,” says A.G. Edwards analyst Greg Teets. “They have talked about improving margins and reducing opex -- we’ll see how this plays out. We’ll have a better idea after we get the rest of the [2004] numbers.”

In late 2004, Nortel released estimates of the first- and second-quarter numbers, setting analysts' expectations. Those estimates were largely in line with the actual results filed Tuesday.

Nortel has not given a date when the third- and fourth-quarter results will be released, and those numbers will give further insight on Nortel’s fiscal health -- and the damage done to it by the accounting scandal.

“The quarters that matter most haven’t been reported yet,” says Legg Mason Inc. analyst Timm Bechter.

“Nortel said last summer that they would have [the restatement] done by the end of the summer, then by the end of fall, but they are just now getting it done,” Bechter says. “The accounting issues started to impact their sales relationships.

“For Nortel, its not so much a question of their products -- they have one of the strongest product portfolios in the space. What they need is a management team that knows how to make the best of those products."

Several analysts think that further restructuring of the company may take place. Bechter recalls that nine or ten finance people have been replaced already, including CFO William Kerr and controller Anne Pahapill (see Nortel CFO, Controller Step Aside).

A Merrill Lynch & Co. Inc. brief notes that Nortel’s gross margins were 43.1 percent in the first quarter of 2004, and 40.7 percent in the second quarter of 2004, in line with analysts' estimates.

Nortel stock closed up 10 cents at $3.35 in trading Tuesday.

— Mark Sullivan, Reporter, Light Reading

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