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Nortel Reports Narrower Loss For Third Quarter

Wall Street Journal
November 9, 2005

Nortel Networks Corp. reported a narrower third-quarter loss, as profit margins remained under pressure amid strong competition for telecommunication-equipment sales.

Nortel, based in Brampton, Ontario, reported a loss of $105 million, or two cents a share, compared with a year-earlier loss of $259 million, or six cents a share.

Revenue climbed 22% to $2.66 billion from $2.18 billion. Revenue for Nortel's carrier-packet division, which sells traditional and Internet-protocol phone-network gear, jumped 41% to $754 million.

The "mixed quarter" was hurt by "weak margins" and generally soft revenue growth except for carrier-packet business, said a research note by Banc of America Securities analyst Tim Long.

Nortel said gross profit margin of 38% of revenue in the quarter reflected an added projected loss of $71 million in connection with a big wireless-equipment contract that Nortel has in India. Nortel has shipped about $300 million of products under the contract so far, and incurred losses of some $265 million, said Nortel Chief Financial Officer Peter Currie.

He said the contract is strategically important to Nortel as it secures a foothold in India. But Mr. Currie said the contract has been "punishing in a profitability sense," and said Nortel doesn't expect to enter into more such loss-producing contracts.

Despite the losses in India, Nortel said it still expects gross margins -- a measure of profitability that includes only certain costs directly tied to revenue -- to be in the range of 40% to 44% for the full year. Revenue is expected to climb about 13% this year, the company said.

Mike Zafirovski, a former Motorola Inc. executive recently recruited to lead Nortel as president and chief executive, has set improved profitability as a top priority. He has established a long-term target of elevating the company's currently negative operating-profit margins to 13% or higher.

"I think we can get there," Mr. Currie said, though Nortel hasn't put a target date on the longer-term improvement. He said Nortel is planning various cost-saving measures, such as streamlining its research-and-development program and putting more of that work in low-cast areas such as China and India. Nortel also expects to become "more selective about the products we sell," he said.

Nortel continues to examine the causes of an accounting scandal that forced the company to restate past results and led to the firing of 10 senior executives last year. Nortel said yesterday that the audit committee of its board "continues to evaluate the causes for the underlying conduct that gave rise to the initial erroneous recognition of revenue and possible remedial measures to strengthen internal controls and processes."

The company ended the quarter with $3 billion of cash and cash equivalents, down from $3.7 billion at the start of the year. Operating cash flow in the latest quarter was negative $145 million.

Shares of Nortel were up 11 cents to $3.32 in 4 p.m. composite trading on the New York Stock Exchange.