TORONTO—Nortel Networks Ltd. posted second-quarter profits of $366 million from $2.74 billion in revenues, up from last year’s $33 million net loss based on revenues of $2.62 billion.
“Our second quarter performance underscores both the challenges and good progress we are making with Nortel’s transformation,” stated Nortel’s president and chief executive officer, Mike Zafirovski.
The company said its second-quarter earnings were boosted by $510 million from an adjustment to the company’s agreement to pay out $2.4 billion in cash and stock to settle a shareholder class-action lawsuit. The adjustment was due to a drop in the company’s stock price after the initial settlement deal was negotiated.
Zafirovski pointed out that, “On the plus side, we saw strong order growth of 22 percent and increased sales momentum, but gross margin was up only modestly and not at the 40 percent target we have set for ourselves.”
The company’s second-quarter gross margin came in at 39 percent, barely above the first-quarter’s results, but down from 43 percent a year ago.
Looking ahead, Zafirovski said he sees “solid traction” on the company’s transformation initiatives.
In the third quarter, Nortel expects sales to come in 10-percent higher than they did in the third quarter of 2005. For the year, Nortel said it expects strong revenue momentum.
Nortel’s swing from losses to profits excited independent telecom analyst Jeff Kagan.
“Hallelujah! Now we wait to see what happens next quarter. If Nortel can get a few profitable quarters under their wing, the worst of this distracting, multi-year problem might be over.”
Bear Stearns commented that Nortel’s second-quarter earnings were in line with its expectations, and that the outlook for Nortel is encouraging.
Last week, a report by UBS Investment Research indicating that Nortel was making organizational changes in its GSM and UMTS businesses touched off speculation that the company was preparing to sell off its UMTS business. Jamie Moody, spokeswoman for Nortel, said the company was in the midst of deciding whether to bulk up the division, partner with another vendor on it or to simply divest it.
“UMTS is a tough business as there are too many players in the industry,” said Moody. “Nortel CEO Mike Zafirovski has pointed out that Nortel’s UMTS business is not performing at the level necessary to continue as status quo.”
Alcatel Inc. is rumored to be in talks with Nortel for its UMTS business, but neither company has confirmed any such discussions.
Nortel’s stock price remained relatively flat at $2.02 per share after the news.
