CDMA drives Nortel profit despite deferred sales

Nortel Networks is back in the black, posting a third-quarter profit of $27 million after slipping back into a loss at the halfway point of the year. But revenues were down across all of Nortel’s divisions, with the notable exception of its enterprise solutions business. Despite the revenue shortfalls, though, president and Chief Executive Officer Mike Zafirovski said on the company’s earnings call that the worst of its restructuring woes are behind it and revenue numbers should improve in many suffering business units in the current quarter.

In a note released this morning, UBS Investment Research called Nortel’s results “good but not impressive,” attributing most of the gross margin improvement to a shift toward Nortel’s CDMA business, which grew from 19% of total revenue in the second quarter to 22% in the third.

CDMA network revenue fell 8% in the quarter to $542 million, which Zafirovski attributed to a change in manufacturing plants leading to $45 million in revenue being deferred. However, Zafirovski said fourth-quarter CDMA sales would be above last year’s. Packet and circuit switch sales also suffered in the third quarter, falling 32% to $147 million. A potential bright spot for Nortel that wasn’t recognized last quarter will be its first WiMAX revenues, Zafirovski said.

“We expect the WiMAX story to start getting traction as 2007 winds down,” he said. “We’re looking at the carrier business to develop a franchise in WiMAX.”

Nortel has scored several trials and commercial wins for its smart-antenna-based WiMAX gear, including dual wins in Taiwan and a contract in Greece. But like its competitors, Nortel has yet to turn any of those customers wins into lines on its earnings statements. As Sprint builds out its first WiMAX networks this quarter and other operators around the world follow suit, WiMAX will start to figure into vendor revenues.

Nortel’s LG joint venture also helped drive operating profit in the third quarter, to the tune of $65 million on $200 million to $250 million in revenue, UBS said—a margin of 25% to 30%. “We remain doubtful whether this level of profitability is sustainable and would expect LG-Nortel operating margins to trend towards the 10-15% range.”

Nortel’s largest division, carrier networks, saw a 19% year-over-year drop in revenue to $1.08 billion, mainly due to the sale of its UMTS business to Alcatel-Lucent. Zafirovski pointed out that UMTS is the single fastest growing segment in the wireless industry and accounted for a large portion of its revenue growth, though the business was not profitable. Adjusted for the UMTS unit sale, revenue was down 11%, as all of its technology groups suffered slackened sales.

Nortel’s global services unit saw revenue flatten year-over-year at $540 million, but the company reportedly gained momentum in the multimedia and hosted call center segments. Its metro Ethernet business reported a 13% dive in sales to $360 billion, due to a huge drop-off in data networking and security revenue, though its optical networking unit sales remained stable. The brightest spot for Nortel, however, was its fast-growing enterprise business, whose revenue rose 18% to $671 million.