Nortel Networks Ltd. plans to restate its financial results-again-as well as push back filing its 2005 annual report to the end of April.
The bookkeeping-challenged Canadian equipment vendor also reported preliminary fourth-quarter results, posting a stunning $2.2 billion net loss from $2.9 billion in revenues. During the quarter, Nortel agreed to pay $2.5 billion to settle two class-action lawsuits stemming from past accounting indiscretions.
The company said its restatement for the first nine months of 2005 would pare down sales by $162 million and earnings by $95 million. Further revisions are expected to reduce sales prior to 2003 by $470 million and net profit by $99 million, Nortel said.
During a conference call last Friday, Nortel Chief Financial Officer Peter Currie said the restatements were necessary because of “misapplications of accounting theory.” He also noted that Nortel has adopted more conservative accounting interpretations than it practiced in the past.
When asked why the company must continually restate its financials, Mike Zafirovski, Nortel’s chief executive officer, explained that the adjustments came to light during a contract review and audit of 2005’s results.
“We are minimizing the chance of further restatements,” Zafirovski said. “I’ve never seen a more thorough review of a contract in my life. … We went through hundreds of contracts to make sure they were done correctly for the last several years. When it became clear that we should be booking a one-time adjustment, we decided to restate.”
Currie commented that the restatements of the past, under the rule of Nortel’s previous CEO Bill Owens, were due to problems in other areas of the company’s finances.
Zafirovski said he remains confident that, despite Nortel’s troubles, the company should become profitable by 2008.
“Our priority is to have accurate financial information,” Zafirovski said. “Although the need to restate certain financial statements is unfortunate, it’s the right thing to do. This revenue is real-it was recognized in the wrong periods. The restatements do not affect the company’s cash positions.”
Regarding the company’s future-including where it will invest its $1.9 billion research and development budget-Zafirovski said he plans to announce Nortel’s strategy within the next 12 months. He added that he would like to increase the number of developers Nortel employs in its labs.
“The proof will be in the upcoming results,” Zafirovski said. “We’re looking at 2006 to reverse the trend of the last few years.”
Wall Street wasn’t too bothered by Nortel’s news as the company’s stock dropped only three cents to $3.06 per share following the announcement.
However, analysts weren’t so nonchalant.
“They shot themselves in the foot again,” fired Jeff Kagan, a telecom industry analyst. “This is a continuing problem after the last few years of doing the same thing.
“This news bothers everyone, investors, customers and workers. The company has been battered in recent years, but we thought it was now over and the company could start its recovery. Getting back on track is enough of a challenge as the industry continues to change. I don’t think there is anything really wrong with the company, but when they have these accounting issues it makes it very difficult to develop the kind of trust they need from investors and customers and workers. Companies usually have to deal with competitors in the marketplace, but Nortel has to also worry about their own selves.”
