Nortel finances finally up to date

Nortel Networks brought its financial reporting up to date today, reporting first-quarter 2005 financial results and bringing some closure to a financial restatement process that has dogged the company for nearly two years.

"Today marks an important turning point for Nortel," CEO Bill Owens said during today's conference call.

The company reported a $49-million net loss (or $0.01 per share) for the quarter on revenue of $2.54 billion--a 3% sequential decline but a nearly 4% increase from a year earlier. Revenue from GSM and UMTS wireless technology was up 18% sequentially thanks to overseas contracts, which boosted Nortel's wireless segment. Enterprise revenue was up 2% from a year earlier while revenue from carrier packet technology was down 3% from a year earlier despite better than expected sales of optical equipment in the first quarter.

Nortel also reported spending $474 million on research and development during the quarter, $20 million less than in the fourth quarter of 2004. Owens vowed to cut costs further by consolidating some of its more than 30 research and development facilities accrued through a decade of acquisitions. "Nortel will continue to spend appreciably on R&D," Owens said, adding, "We must do what we must do to cut costs in a marketplace that is increasingly competitive. Our competitors have far fewer R&D facilities, and we are on a pathway to look at rationalizing those facilities."

Nortel also mentioned continuing pricing and margin pressure from Asian competitors, on the same day that Asian equipment vendor ZTE announced both a large wireline equipment contract with China Telecom and the establishment of a U.S. headquarters in Dallas, Texas.

In a research note issued before Nortel's earnings call this morning, Lehman Brothers analyst Steve Levy called the vendor's numbers "relatively healthy" overall, while pointing out that its operating expenses were not coming down as fast as originally anticipated. Nortel predicted today that its operating expenses would be 35% of its revenue by the end of the year, the high end of its previous guidance.

In filings to the U.S. Securities and Exchange Commission last night, Nortel predicted net spending decreases among consolidating carriers, particularly in the U.S. "The wireline carriers tend to be relatively stable in their spending, but of course, consolidation has been substantially in the wireless area," Owens said today. "I think this story will play out over time as they attempt to reduce capital spending, and that will affect the market we play in. We feel good about our relationships with these customers, and because of our embedded position in these networks, we feel we'll do well."

Following Nortel's conference call today, Standard & Poor's Rating Services removed the company from the "credit watch" placed on it in late April 2004, while affirming Nortel's long-term "B-" credit rating.