Nortel Profit Steeply Lower; Revenue 'Modest'

Nortel Networks Corp. (NT), one of the world's largest telecom equipment suppliers, reported steeply lower fourth-quarter earnings on Monday and forecast only "modest" revenue growth for the first quarter.

The company, which has been restating several years of results to correct accounting errors, filed the fourth-quarter results after normal regulatory deadlines had passed.

Shares of Brampton, Ontario-based Nortel tumbled almost 7 percent, or 22 Canadian cents, to touch a new year low of C$2.98 on the Toronto Stock Exchange on Monday. In New York, they fell 4.8 percent, or 12 cents, to $2.37.

The company said it earned $133 million, or 3 cents a share, in the quarter ended Dec. 31, down 75 percent from $528 million, or 12 cents a share, in the year-before quarter.

Revenue was $2.6 billion, down from $3.27 billion in the fourth quarter of 2003. It was about $200 million less than Nortel had forecast because the company decided to defer revenue, Nortel chief financial officer Peter Currie told a conference call.

Analysts had expected earnings of 2 cents a share and revenue of $2.83 billion, according to Reuters Estimates.

"There were little rays of hope here and there. But costs are high for the next quarter or so. I don't think they have turned the corner," said Edward Snyder, an analyst at Charter Equity Research. "In the meantime, investors are not waiting around. Those dollars are going to go somewhere else."

Wireless products revenue slipped 11 percent to $1.28 billion, wireline sales tumbled 19 percent to $461 million, and optical revenue fell 28 percent to $226 million.

Gross margin was 45 percent of sales in the fourth quarter, compared with Nortel's targeted 40 percent to 44 percent range, driven by higher-than-expected sales of traditional products.

JP Morgan analyst Ehud Geldblum singled out a $221 million shortfall in wireless revenue for the quarter, and pointed to the U.S. market, which accounts for 45 percent of the company's sales, as the culprit.

"Combined with wireless weakness, we believe this points to Nortel's struggle in US GSM (global system for mobile communication), where spending continues to decline," he wrote in a note to clients.

But he also noted the bigger-than-expected margins.

Nortel is moving closer to reporting financial results in a timely manner, but has warned that its first-quarter numbers will miss a regulatory deadline. It expects to file those by the end of May and hold its annual general meeting June 29.

The company is trying to recover from extensive accounting problems that sparked criminal and regulatory probes. In January, it restated several years of results to correct bookkeeping errors.

"I'm satisfied that we have stabilized Nortel's financial reporting, providing a basis to go forward, but we have a long way to go," Nortel chief executive Bill Owens told a conference call.

Currie said later the transformation process will take another 18 to 30 months to complete.

Expenses rose to $542 million in the fourth quarter, from $481 million, as Nortel continued to spend on its restatements and invest in reorganizing its finances. Currie said he sees operating expenses rising slightly in the first quarter of 2005, compared to the same time last year.

Owens said Nortel would try to squeeze costs in 2005, and that by the end of April, it had shed more than 2,400 of the 3,250 jobs that it had said would go. Job cuts would be completed by the end of the second quarter, he said.

The company said it expects "modest growth" in revenue for the first quarter of 2005. It also expects full-year gross margins to be 40 to 44 percent of revenue, and first quarter gross margins in about the same range.

For 2004, Nortel said it lost $51 million, or 1 cent a share, compared with earnings of $434 million, or 10 cents a share in 2003. Revenue for the year was $9.8 billion, down from $10.2 billion in 2003.