Nortel Networks Ltd. seems to have emerged from under a financial cloud that has haunted it in recent years. The company recorded net earnings of $45 million, or 1 cent per share, during the second quarter. The results are in sharp contrast to the company’s first-quarter results when Nortel reported a net loss of $49 million, and an improvement from its second-quarter results a year ago, when Nortel reported net earnings of $16 million.
“Nortel’s second-quarter results indicate that Nortel already hit its financial rock bottom. The second-quarter earnings demonstrate a significant milestone in that Nortel generated positive cash flow from its operations,” said analyst Albert Lin of American Technology Research.
Nortel reported total revenues of $2.86 billion for the second quarter, which is 10 percent higher than the $2.59 billion reported in second-quarter 2004. Carrier packet networks contributed $743 million in revenues, a 3-percent increase from last year, and enterprise networks contributed $730 million, a 26-percent increase from last year’s second quarter. GSM and UMTS networks accounted for $719 million, up 1 percent from a year ago, and CDMA Networks contributed $662 million, a 17-percent increase.
Nortel’s gross margin came in at 43 percent of revenue during the quarter, which the company said was in line with its expected range of 40 percent to 44 percent of revenue.
The company counts a cash balance of $3.06 billion.
Based on Nortel’s second-quarter earnings report, investment research firm UBS maintained its Neutral 2 rating of the company and left its outlook unchanged.
UBS noted that Nortel’s wireless network revenues of $1.38 billion, which combine CDMA, GSM and UMTS, fell short of the $1.45 billion that UBS predicted. The firm said the shortfall was caused because the company completed a European GSM contract in the first quarter and a slowdown in GSM/UMTS sales in North America.
Meanwhile, UBS said Nortel’s wireless business saw its biggest gains in CDMA, where revenues grew 24 percent during the second quarter and 17 percent since the second quarter of 2004. UBS explained that EV-DO deployments at Bell Canada Enterprises, Sprint Corp. and Verizon Wireless strengthened Nortel’s financials, but said that the Sprint and Verizon EV-DO rollouts are expected to be completed by the end of this year, which could stabilize Nortel’s CDMA sales.
Lin said Nortel likely will see growth in its UMTS sales during the next two or three years as China upgrades its networks.
“This quarter’s improved financial performance and positive momentum is proof that Nortel is strong, our business is building and our results are heading in the right direction,” said Bill Owens, vice chairman and chief executive of Nortel. “For the full-year 2005 compared to 2004, we expect revenue to grow in the range of 10 percent while reflecting a seasonal pattern. We continue to expect gross margins to be in the range of 40 percent to 44 percent of revenue and operating expenses as a percentage of revenue to be approximately 35 percent by the end of the year.”
