The Ottawa Citizen ran an interesting story a couple of days ago looking at what might happen to Nortel shares when 33 million new shares hit the market next month.
These shares, which represent 8% of the total outstanding, are part of the settlement of class-action lawsuits. Since a deal was made two years ago, their value has dropped to $1.1-billion from $2.5-billion.
According to the Citizen, Nortel CEO Mike Zafirovski has spent $1.7 million over the past year buying stock at prices ranging from $8.30 to $16.
You know…Nortel doesn’t have too many friends out there, especially in the analyst community. That may beg the following questions:
1. Is NT management so busy that they can’t take all of the questions at a quarterly Conference call? C’mon, it takes an extra hour every quarter! We know Mike Z. is a busy guy…but so are we…and even taking into consideration Mike’s stock buys, he has made plenty of money in NT.
2. Why is Ms. Craig {Nortel’s VP of investor relations] so nasty to analysts, not to mention actual shareholders? Whether you like the conclusions of some street analysts or not, they are smart people. Silverstein, Umiastowski, Arya, Bhargava, Coleman, Gelblum, Sue. They have influence. They have been following NT since before Janet, Pavi and Mike were even around. You need the analysts on your team. Don’t be short, don’t be rude, don’t screw them (anymore).
Consider the following:
First, Craig lets her good friend, Gus Papageorgiou at Scotia, (one of the real bulls on NT) get absolutely shanghaied in Q1. It will be a long time before Gus gets a real warm fuzzy about NT. Institutional Investor award for 2008, probably not? Thanks, Janet.
And then from the conference call:
Vivek Arya - Merrill Lynch - Analyst Maybe I could just follow-up with a clarification.
Janet Craig
I don’t know, Vivek, so the clarification okay we’ll see if it goes, okay.
Wouldn’t want to let the Merrill Lynch analyst ask a question! We have rules!
Craig won’t even let Mike Z talk…
Mike Zafirovski - Nortel Networks - CEO
Sorry. In terms of the first element of that question I just missed that because I think Janet was just talking.
Craig
I was trying to interrupt you, if you could only ask one question actually, Paras. Okay, your first question was on deferred revenue?
Janet…don’t interrupt The Boss. And to Ehud Gelblum of JPMorgan:
Craig: One question. One question, thank you.
And to UBS analyst Nikos Theodosopoulos:
Craig: I think Nikos, Pavi answered that question. So we’re going to go to the next caller.
Gee, Nikos, I know you really don’t favour NT. I’ll be extra rude to you just to make sure you never change your mind.
Lots of stuff coming out of the AGM. Among the most interesting is a Reuters story in which Mike Zafirvoski suggests Nortel could make acquisitions to fuel growth but it will refrain given tighter credit markets.
“In the current environment, of course, financing is a challenge relative to where it was a year ago,” he said, adding: “We will not do anything silly.”
Bill Nelson, Nortel’s executive vice-president of global sales, told Reuters that an acquisition could help the company fill in gaps in its technology portfolio, or give it access to markets where it has a small presence.
The last deal of any size made by Nortel was the $99-million purchase of Tasman Networks in December 2005.
The always-optimistic Mike Zafirovski had some bullish things to tell investors at today’s AGM. If you couldn’t make it, here’s the Nortel press release.
The Curious Deferred Revenue Issue and Jaded Analysts
Street analysts again distinguish themselves by fixating on and misinterpreting the LG JV and deferred revenues. Many an analyst had some knucklehead comment when, in fact, NT blew out the numbers…with or without the JV. Part of the blame should go to Nortel IR for not giving some sort of quarterly guidance.
First of all, deferred revenues and joint ventures are not sneaky, bad things. Nortel owns over 50% of the JV. Nortel people are key in managing the JV and do much of the work of the JV. This is not some separate entity that just sends revenue and expenses over to Nortel. This is a real business (http://www.lg-nortel.com/). To make it easier to sell into the Korean market, Nortel has a great Korean partner who has, along with NT, invested cash in the business. What comes out of this business are real revenues, real expenses and real cash.
As reported, NT posted Revenue of $2.758 billion, Gross Margin of 41.6% and operation margin of 4.7%. Obviously, revenue was a blowout with the JV revenue coming a quarter earlier than expected. OK…so take out the JV revenue to try to get to analysts’ numbers and you get $2.508 billion. I have 14 revenue estimates for the first quarter, and the average is $2.4992. That is a beat (2.5080 > 2.4992).
Gross margin: NT reported of 41.6%. I was able to find 12 analyst estimates on Gross Margin and the average was 41.1%. OK, let’s take out the JV for people that feel it is “not real” for some reason. GM would have been even higher since the JV business has a lower than average GM. In fact, the Gross Margin would have been 42.3%…a significant outperformance compared to the analysts’ estimate of 41.1%
The best of all is operating margin, which no one really congratulates NT for blowing out …even without the JV. The 11 analyst estimates I could find for operating margin averaged -.1%. NT reported Operating Margin of 4.7%. Take out the JV, and the operating margin was 1.8%….that is a huge outperformance. Even further, Q1 2008 operating margin was reduced by $29 million due to the weak US Dollar…on an apples to apples basis this lowered the OM by 120 basis points versus Q1 2007. That leads to an operating margin of around 3%!
Hey, I almost forgot that Nortel’s AGM is tomorrow in Ottawa.
Given that Nortel is embracing social media so enthusiastically, the AGM features a Webcast for everyone who doesn’t find themselves in Ottawa tomorrow.
Speaking of AGMs, I still look back fondly at the five-hour marathon in Halifax in 2002 where shareholder activist Robert Verdun went toe-to-toe with CEO Frank Dunn and chair Red Wilson over Roberts Rules. Good times!
Gus Papageorgiou, who has been among the most bullish analysts on Nortel, believes the first-quarter was “important” because it “was the first quarter in quite some time where management was able to meet or exceed expectations while maintaining its previously established guidance”.
Papageorgiou didn’t let his enthusiasm get him completely carried away as he maintained his “sector perform” rating and a target price of $11.50.
Lehman Brother analyst Inder Singh of Lehman Brothers is maintaining his “equal weight” rating on Nortel but reduced his target price to $17.00 to $15.50.
In a research report, Singh said Nortel’s Q1 revenues and EPS were ahead of the estimates and the consensus. That said, he reduced his EPS estimates for 2008 and 2009 to $1.03 to $0.92 and from $1.33 to $1.23, respectively.
Buoyed by year-over-year improvements in profitability in the wake of first-quarter results, Merriman analyst Tim Savageaux has maintained his “buy” rating on Nortel.
In a research note, Savageaux said:
“We believe Nortel has done more than enough both over the past two years and in a surprisingly strong 1Q to merit a revenue multiple above one and P/Es in double digits. Fears of overexposure to CDMA markets for profitability proved unfounded, with solid operating profitability reported both with and without a large LG-Nortel contract.
Also, for the first time, the company has shown strong evidence of SG&A expense reductions and associated operating leverage. The company reiterated growth (low single digit) and profitability (op margin up 300 basis points Y/Y) guidance for the year and we continue to find the sharesdramatically undervalued.”
Although encouraged by Nortel’s improvement in operating margins and sales traction within the enterprise business, S&P is maintaining its “hold” on Nortel because it see “the operating environment becoming more challenging amid a weakening macroeconomic climate”.
As a result, it has lowered it 12-month price target to $10 from $12.
