Nortel Networks Ltd. swung from a $33 million net loss at the close of last year’s second quarter to a profit of $366 million this year, thanks to a 30-percent decline of its stock price during the quarter. The company’s lowered stock price led to an adjustment of its agreement to pay out $2.4 billion in cash and stock to settle a shareholder class-action lawsuit. The adjustment boosted the company’s quarterly earnings by $510 million.
However, during a conference call last week, Nortel President and Chief Executive Officer Mike Zafirovski declined to put an end to speculation about the company’s plans for its UMTS access business, saying only that Nortel is “much more likely” to divest or find a partner for its UMTS business than to bulk it up with an acquisition.
Alcatel Inc. is rumored to be in talks with Nortel for its UMTS business, but neither company has confirmed any such discussion.
However, Zafirovski did confirm that Nortel’s still-profitable GSM business is “not part of the discussion.”
Rumors about Nortel’s plans for its UMTS and GSM businesses began swirling in late last month after of UBS Investment Research noted Nortel was making organizational changes to both businesses. Nortel spokeswoman Jamie Moody told RCR Wireless News that “UMTS is a tough business as there are too many players in the industry. Nortel CEO Mike Zafirovski has pointed out that Nortel’s UMTS business is not performing at the level necessary to continue as status quo.”
Nortel reported second-quarter revenues of $2.74 billion in revenues, up slightly from the year-ago revenues of $2.62 billion.
“Our second-quarter performance underscores both the challenges and good progress we are making with Nortel’s transformation,” stated Zafirovski.
“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,” Zafirovski noted.
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.
