Nortel Networks Ltd and UTStarcom are on two sides of a stormy boat: Both multinational vendors face accounting travails and both are still gaining contracts, and both are convinced they are heading for smoother waters.
Nortel’s accounting problems have been contradicted by a long list of contracts across three continents-Europe, the United States and Asia. UTStarcom has not only blossomed in China, but it also has begun to extend its tentacles to Europe and Latin America.
Nevertheless, both companies recently lowered their respective quarterly expectations.
In August (reporting its first financials in a year) Nortel said revenues for the half-year totaled about $5.1 billion, with $2.5 billion in the first quarter and $2.6 billion in the second quarter. Net earnings were break-even to 2 cents in the first half, with break-even to 1 cent in the first quarter and break-even to 1 cent in the second quarter.
In September, Nortel said third-quarter revenue would fall short of expectations. But it still holds out.
“As we work through this challenging transition period, completing our restatement activity and implementing the new strategic plan for the company, I am confident that Nortel Networks will be positioned to compete strongly in all of our markets with the right products and services as we move into 2005,” said Bill Owens, president and chief executive officer at Nortel.
With 27 class-action lawsuits on its back and a series of investigations into its financial results, Nortel continues to compartmentalize, pushing to make its business offerings immune to the ravages of its accounting woes. Nortel’s strength has not only been in high-profile Internet Protocol offerings, but also in its ability to compete in all the major technologies.
The company expects to issue another of its regular updates on its financial situation this week.
Meanwhile, UTStarcom says its problems are different than those at Nortel. The Alameda, Calif.-based company believes it is going through an inevitable hurdle.
“The kind of growth we have had does not come without challenges,” remarked Chesha Kamieniecki, senior manger of investor relations at UTStarcom. The company said it was lowering its quarterly estimate due to a slowdown in China and a contract adjustment with Japan Telecom.
The company basked in an initial public offering of $197 million in 2000, and has increased its revenue each year since. For 2000, it reported revenue of $368 million. For 2001, revenues totaled $626 million. In 2002 and 2003, its revenues leaped to $981 million and $1.9 billion respectively.
Kamieniecki said the big growth of the company posed challenges in other parts of its business, including how to handle product shipments, customs and customers. Those challenges led to accounting problems, UTStarcom said. The staff, too, has had to adjust to the growth.
“It’s hard to ask people to double their capability each year,” she explained.
In China, the company has bundled its professional services and equipment sales as one contract, she said. In other markets, services and sales are charged as different contracts.
The Japan Telecom contract was actually upgraded from its original 2004 pact and rolled over to a deal for 2005. That affected UTStarcom’s quarterly forecast and revenue recognition, according to Kamieniecki. Its 2004 contract for $220 million moved up to $290 million for 2005. “We will ship all the equipment and collect all the cash, but the accounting equipment principle says we can’t recognize it (the revenue) until both equipment and services are complete,” she said.
Kamieniecki added that UTStarcom has signed a licensing agreement with IPWireless for TD-CDMA, which is gaining momentum in China, and is making headway in Europe and the United States.
