Nortel Joins Positive Q1 Vendor Results, But Revenues Down on Prior Quarter

Nortel Networks has reported its results for the first quarter of 2008 and indicates that it views the results positively. Revenues of US$2.76 billion were up by 11% year-on-year (y/y), which, it was noted, was partly due to the accounting of revenues from the completion of a contract through the LG joint venture and released deferred revenues. This was, however, a significant fall in revenues compared with the prior quarter's revenues of US$3.2 billion, which appears to be in line with trends seen at other vendors.

Looking at the businesses operating segments, the Carrier Networks division gained the most revenues, up 21% to US$1.2 billion, benefiting from the LG joint venture but losing out on lower CDMA and legacy switching sales.

Enterprise solutions was up 7% y/y to US$641 million through higher voice and applications revenues, particularly benefiting from migrations to unified communications solutions where Nortel has been active, notably partnering with Microsoft (see World: 12 March 2008: Microsoft and Nortel Launch Unified Communications Solutions). The segment did see some decline in data-networking revenues, particularly in North America, Europe, the Middle East, and Africa, and lower contract repetitions.

Global Services was up 15% y/y to US$516 billion, although that was again 15% down on the prior quarter, with growth in implementation and managed services.

The Metro Ethernet division was the only one to see a drop in revenues annually, down by 12% y/y to US$327 million, attributed to optical and data revenues.

Operating margins of 4.7% were down on the prior quarter when they reached 7.6%, although significantly better than a year earlier when they contracted 0.4%. Operating expenses of US$1.02 billion were marginally higher than a year earlier (US$1.01 billion) but cut significantly on the prior quarter when they reached US$1.16 billion. Some savings were made through restructuring efforts that cut selling, general, and administrative costs. Although research and development expenses of US$420 million were up by US$11 million on the prior year, they were down by US$66 million on the prior quarter.

Overall, Nortel recorded a net loss of US$138 million, including an US$88-million restructuring charge and US$19 million through changes in the foreign-exchange rate—a significant factor that also brought Alcatel-Lucent's otherwise positive figures down (see World: 30 April 2008: Alcatel-Lucent Q1 Revenues Impress; Currency Fluctuations Drag Results Down).

Outlook and Implications

Vendors appear to be coming out of an extremely difficult 2007 with slightly more positive results. Although the mega-mergers of Alcatel-Lucent and Nokia-Siemens still look to have been of doubtful merit they will, however, place the companies in a stronger position to leverage their scale compared with smaller competitors once difficulties have been overcome (see World: 25 April 2008: Ericsson's Fortunes Improve with 5% Rise in Q1 Sales and World: 25 April 2008: Juniper Networks Pushes Revenues Up 31%).

Nortel has been effectively using joint ventures such as those with Microsoft and LG to its advantage, and this presents an alternative to the full-scale mergers that have proved so difficult and should be commended (see World: 18 May 2007: Nortel, Toshiba to Jointly Develop WiMAX Base Stations for Japan and Global Markets). Nortel has recently discussed wholesale restructuring that has been scheduled for the Research and Development segment, and Nortel will have to ensure that together with planned job cuts this does not cause operational problems (see World: 31 March 2008: Nortel Renews R&D Strategy and World: 28 February 2008: Margins Improve But Nortel's Q4 Revenues Down 3.7%; Job Cuts to Continue).

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