Nortel foretells

Riverstone Networks investors got an unpleasant surprise yesterday when the company revealed that, despite progress in equipment sales, its profit horizon has slipped further away, in part due to the cost of its accounting problems.

For Nortel Networks investors, the news may have carried an allegorical sense of foreboding. Thursday morning Nortel will reveal some preliminary financials on the first half of 2004, and it's unclear whether Nortel's news will resemble Riverstone's. Nortel's legal and accounting problems far outweigh Riverstone's; it faces multiple investigations, both internal and external, criminal and regulatory, U.S. and Canadian. (According to the latest reports, the company is now being pursued on horseback.) During tomorrow's conference call, Nortel employees will be eager to hear their bosses detail plans to further cut costs, still a vital imperative for the company and one that could leave more people jobless. But analysts and investors will pay particular attention (as Riverstone analysts did) to exactly how profitable or unprofitable Nortel truly is today and how profitable next year will be.

The issue of Nortel's profitability won't be merely a matter of correcting its past financial records. As Riverstone found out--trying to iron out finances amid an almost complete turnover of accounting staff while fending off lawsuits and working with investigators--massive restatements don't just shed light on profitability, they can also affect profitability.

E-mail me at egubbins@primediabusiness.com.