WSJ:
Nortel Turns to Mundane Woes
Company Looks Past
Accounting Scandal
To Confront Stagnation
By MARK HEINZL
Staff Reporter of THE WALL STREET JOURNAL
January 25, 2005; Page B2
After moving to resolve an accounting scandal that has occupied Nortel Networks Corp. for the past year, the telecom-equipment supplier now has to resolve a more persistent problem: its stagnant business.
While the telecom-equipment market as a whole isn't exactly zipping along, the outlook for Nortel is particularly sluggish. That is even though the Canadian manufacturer, based in Brampton, Ontario, long has tied its fortunes to the wireless market, the segment of the equipment business with the strongest growth in recent years.
For 2004, Nortel estimated revenue of about $10.1 billion to $10.2 billion, in line with the $10.2 billion reported in its 2003 results -- which were filed with regulators this month after a nearly yearlong delay because of the accounting disaster. In the filing, Nortel slashed its previously reported 2003 net income by 41% to $434 million, and said a dozen senior executives agreed to pay back $8.6 million of bonuses, while five board members would resign. The company remains under investigation by securities regulators and the U.S. Justice Department.
Results for 2004 periods haven't been finalized yet, but for the third quarter, Nortel has estimated it will report a loss of six cents a share, following estimated break-even results for the first half of 2004. Nortel also has estimated that sales of wireless gear made up nearly half of its revenue in 2004's first nine months.
So why the struggle to boost profits?
While demand has grown fast, so has competition among equipment vendors. To win contracts in the wireless sector, Nortel has had to "price aggressively," and "that's going to put some pressure on margins," says Paul Holman, a credit analyst with Dominion Bond Rating Service in Toronto.
Indeed, Nortel bid so low to land a recent $500 million contract in India that it could lose about $200 million on the deal, estimates Lehman Brothers analyst Steven Levy. Nortel eventually could win more business from the customer, India's Bharat Sanchar Nigam Ltd., but it would take $2 billion more of gear sales "just to get back to making some decent money" on the overall business, he says.
A Nortel spokeswoman declined to comment on Mr. Levy's estimates, but pointed to Nortel's description of the contract as "a strategic investment to secure our first wireless-network footprint in India," which is "a key foundation for future growth."
Nortel watchers worry its yearlong accounting problems have led to some lost business. Nortel "is not keeping pace" in developing new products, and is losing some equipment sales to competitors such as archrival Lucent Technologies Inc., says Sam Greenholtz, an analyst at Westminster, Md., telecom consultancy Telecom Pragmatics Inc. Based on discussions with telecom carriers, Mr. Greenholtz says he understands Nortel is "giving some really fabulous prices to maintain its customer base," in some product lines. The Nortel spokeswoman declined to comment on Nortel's pricing.
In focusing its bets on the wireless market, Nortel also steered away from some sectors that have since brightened. During its massive retrenchment a few years ago, Nortel pulled out of the Internet-access equipment business, allowing competitors, primarily France's Alcatel SA, to thrive now that the sector has rebounded sharply.
Still, Nortel says it expects to post increased revenue this year over last year. To help broaden its geographic scope, the company yesterday announced plans to form a telecom-equipment joint venture with Korea's LG Electronics. And Nortel last week announced plans to form a joint venture with state-owned telecom-equipment maker China Putian Corp. to sell third-generation wireless gear in the country. In the meantime, though, China's growth in telecom equipment serves as another thorn in Nortel's side. China's Huawei Technologies, a global telecom-equipment supplier, recently reported a 45% jump in 2004 revenue.
Relentless cost-cutting also will help Nortel's bottom line. The company expects $500 million of savings this year from job cuts and other moves. That should help produce profit equal to about the same amount, or 12 cents a share, according to Lehman's Mr. Levy.
Nortel said it had a cash balance of $3.4 billion at the end of the third quarter, giving the company a cushion as it strives to bounce back. But the company also has a sizable long-term debt load of $3.9 billion and pension and other liabilities of $2.9 billion.
Furthermore, analysts expect Nortel eventually could be forced to pay heavily as a result of lawsuits tied to the accounting mess. A company probe found some executives and finance staff members had used faulty accounting to manipulate results and to qualify for bonuses.
And the company's stock remains deeply depressed. After trading as high as $89 in 2000, Nortel shares have remained under $10 since June 2001. They traded Monday at $3.10, down six cents, as of 4 p.m. in New York Stock Exchange composite trading.
Write to Mark Heinzl at mark.heinzl@wsj.com1 |
