Analysts say Nortel facing tough road
By Ottawa Business Journal Staff
Wed, Dec 15, 2004 1:00 PM EST
Analysts were not impressed Wednesday by Nortel Networks Corp.'s preliminary third-quarter results and stronger-than-expected guidance for the fourth quarter.
Late Tuesday afternoon, Nortel released what it called "limited estimated unaudited" results for the third quarter, reporting a net loss of six cents, or about $250 million on a cash basis (all figures in U.S. dollars).
The loss included a charge of three cents related to startup costs associated with a new wireless contract in India, an additional charge of two cents for restructuring and a one-time gain that added a penny.
Analysts were expected the company to break even excluding one-time charges or gains.
Revenues were weaker than expected, at $2.3 billion compared with the market estimate of $2.48 billion.
For the fourth quarter, the company offered a more bullish outlook, with revenues of $2.8 billion to $2.9 billion. The consensus among analysts is for revenues in the range of $2.72 billion.
For the full year revenues are pegged at $10.1 billion to $10.2 billion.
Since the restatements expected next month will result in about $460 million in revenues being deferred to 2003 from previous years, full-year revenues for fiscal 2004 will end up being lower.
Analysts responded to the preliminary report by pointing out the company appears to be losing traction on all fronts, especially in the key growth market of wireless which accounts for half of company revenues.
Sales of wireless gear fell by 18 per cent in the third quarter from the second quarter.
In a morning research note, Sanford Bernstein analyst Paul Sagawa wrote, "Nortel is losing share in every major product category".
He pointed out that Nortel has failed to capitalize on the fact that spending on new wireless gear by telecom customers has risen by more than 20 per cent so far this year.
Mr. Sagawa downgraded the stock to "underperform" from "market perform" and cut his target price to $3.15 from $3.40.
At RBC Capital Markets, analyst Mark Sue expressed similar concerns.
"On the top line, we feel better about their ability to win deals. On the bottom line, however, we're concerned about persisting discounting on the wireless infrastructure side and it's hard to say it's a one-time event."
Another area of concern among analysts is Nortel's deteriorating gross margin, which fell to an estimated 37 per cent of revenue in Q3 from 41 per cent in Q2. It was to improve the gross margin that the company announced a fresh wave of job cuts in September that will reduce its global workforce by another 9.3 per cent.
Weighing on margins is the time, effort and money that is being expended on the restatement process. During the quarter, expenses added up to more than $1 billion.
At UBS, analysts Michael Urlocker and Nikos Theodosopoulos also noted the impact of pursuing contracts with low profit margins.
"Nortel's recent success in winning low-priced contracts appears to be having a detrimental impact on the company's margins. We would expect that Nortel might rethink its bids on these types of contracts in the future," the two analysts wrote.
Even the stronger outlook for the fourth quarter earned little praise, with analysts such as JP Morgan's Ehud Gelblum saying it is likely the result of delayed contract closings from the third quarter due to the distraction of the restatement process. |
