Bigger Q4 Loss; Smaller Nortel

By Mark Evans | Published: February 27, 2008

Nortel’s fourth-quarter results produced nothing too exciting after taking into account a $1.04-billion tax-related charge.

The far more interesting development is a plan to slash another 2,100 jobs – something that has been hitting the rumor mill in recent weeks – while moving another 1,000 positions to “higher growth and lower cost geographies”.

Is this the sign that Nortel is resigned to becoming a smaller, but profitable, player in the telecom space? Does it suggest that it’s going to become a second-tier, niche supplier while Cisco, Ericsson, Alcatel-Lucent and perhaps Huawei become the tier-one suppliers.

Here’s an early take on the results by UBS Securities:

“Revenues lower than expected; Gross Margin in-line Revenues/Gross Margin (GM) of $3.198B/43.7%, compared to UBSe of $3.318B/43.6%, consistent with our expectations going into the Qtr. of downside risk to Revenues but in-line GM. Adjusted, Non-GAAP Operating margin of 7.6% was lower than UBSe of 9.8%, on higher opex (36.1% of sales vs. UBSe of 33.8%).

OM in Enterprise and Optical remained at the break-even level, showing no meaningful progress. Nortel profitability continues to be driven by CDMA. Enterprise, Optical Networks miss UBSe; No surprise in 2008 guidance Enterprise and Optical Networks revenues came in lower thanour estimates, while Carrier Networks revenues were in-line and Services higher, benefiting from timing of project completion. Management guided to 2008 revenue growth of low-single digits y/y and gross margins of 43%, consistent with our current estimates (subject to revision) of 2.5% y/y growth in revenues and 43% GM.”

UBS rates Nortel as a “neutral” with a $15 target price that is now under review.

Update: Duncan Stewart has a column in today’s National Post about Nortel and the perils of joint ventures. As well, here’s a Globe & Mail story on the results.

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Observer

Nortelhand - Wall street is full of tricksters, fraud, speculators and traders who want nothing more than to make money at the expense of shareholders. They care little about accounting or finance and thrive on volatility. They are walking the market down as the recession hits in the United States. Once we see a full bear market and there is blood in the streets the buying will start once more and Nortel will be perceived as a good value play. The game goes on.
Nortelhand

the blood has been flowing from Nortel for a long time now. How much more bleeding can it do? Just look at the chart, and they still have not offically said there is a recession yet. Sometimes long hard winters kill sick old animals/companies.
Another Nortel Watcher

AFTER taking into account the tax write-off, EPS is still below market expectations. THAT is what caused the stock value to drop. I'm sure MZs "It's not my fault" finger pointing didn't help any.
Not An Accountant

I have a question and it might sound really stupid. But since I'm not an Accountant I think I can ask it to the commentators of this blog.
OK, NT have "written off" $1bn of deferred tax assets because of governance rules, etc. It's not cash out, we all got this part. But the fact that they had to be written off now, does it automatically imply that these tax credits were "incorporated" in past company balances?
inalmm

if you deduct something from the asset side of the balance sheet you need to deduct the same amount either from equity side or from the liability side just to offset it.

if you look at the 2007-end figures, the ownership equity came in as US$2,7 bn vs the third quarter 2007 figure of US$2,9 bn.

now, you can see that this loss did not affect to the company's shareholders equity, but the it reduced liability side. if it was a real loss, the shareholder equity must have been depressed around US$1 bn.

Nortel has a shareholder equity of around US$3 bn and market cap of US$4 bn.

it means that investors are paying only US$1 bn for the company's future income stream.

does it worth it or not, you decide it?

if you think that Nortel is going to make money in the future hold on to the stock,

if you think that the company will loose more money (reminding that the company made profit out of its operations in 2007) and its equity will melt down, than sell the stock.

regards,
Mr D

Nortelhand, it seems you don't hold out much hope for the future. I agree with your comment about the crew, but if it wasn't for the tax adjustment, Nortel would have made a profit in 2007 - a fact that appears to be missed by a lot of the general commentary.

Also, are you aware of the quote from an analyst at Charter Equity Research: “Growth is very slow for everybody, including Nortel, and it's not going to get any better any time soon"?

As for a takeover, in the unlikely event this happened, I don't think the approach would be 'using what is good and liquidating what is bad'. The approach would probably be to relocate (i.e. sack) *all* the employees, adopt a very small portion of the plethora of products in the Nortel portfolio, and consign the rest to history. I don't believe this would be in the best interest of the industry, let alone the company.
Nortelhand

I am not an accountant, but wall street is full of them and it seems they are voicing there feeling loud and clear by dumping Nortel. So I guess that a tax loss is just as bad as a sale loss, otherwise wall street would not be dumping? Call me a stupid engineer, but a big negative number is a big negative number and it seems that the accountants on wall street agree with me.
inalmm

the price should come down to reflect US$1 bn asset write off. actually, it happened so. you can think of this deferred asset as a bonus (not paying tax in the future). it had been in the share price and since it is written off, the share price must be adjusted accordingly. hence this is a corporate governance or analyst awareness issue, not an operational issue. in other words, this loss is irrelevant of Nortel's operations. Nortel actually made a profit out of its operations in 2007.

would you guys say the same thing if there were no write-off but a 30 cent earnings per share?
Nortel watcher

ex-nt,

What about adding to your list:

- adjusting Nortel staff salaries downward to within industry average

It is common knowledge that Nortel pays employees above the industry average still today.
inalmm

to make it more clear my previous message,

Dear commentator 'Watcher',

i think Mark Sue must answer this question (deferred tax asset issue). Or, may be the blog owner raise this issue in the front page and we somehow get the answer from the people responsible
Watcher

I just want to know from where the deferred tax balance came from and why there was not any information provided on it before. It raises some questions about the integrity and effectiveness of financial controls after all recent turmoil.....
inalmm

i think Mark Sue must answer this question. Or, may be the blog owner raise this issue in the front page and we somehow get the answer from the people responsible.
Nortelhand

At this point the best thing for employees and investors is for Nortel to sell its self off or be acquired (friendly) by a major that can use what is good and liquidate what is bad. It would be nice if Mike Z could get the acquiring company to make good on the Nortel employees retirements. It is hard to blame the crew if the captain has the pilot chart a course into the rocks, the crew still does its job.

How is that for construtive direction Mr. D?
Great job Mike Z!
Mr D

I see a lot of doom-mongering and negative comments, but nothing particularly constructive except that from 'inalmm'.

Can any of the critics here suggest anything in the way of a realistic strategy?
how about this?

http://www.thestar.com/article/307381
Casual Observer

the quote by Z tells you the blame game has started. I'm sure this will be great for morale. I wonder what other surprises are in store after this quarter. Remember there are still about 10,000 material weaknesses in Nortel's balance sheet. At this point I think the only thing you can trust is the cash that is held by the bankers. At this point you have to feel bad for the employees who've roughed it out thru three administrations which have all failed.
Johnny Aerotek

MONTREAL — Mike Zafirovski, president of Nortel Networks Corp., says “the stars are aligning” for the technology giant and he's counting on the growth of Internet video to provide opportunities for his firm.

“I do believe as 2006 winds down, this will show a nice improvement over 2005,” Zafirovski said Monday during a speech to the Canadian Club in Montreal.

Zafirovski admitted Nortel was “in the form of a perfect storm during the last four or five years, and we do see a place where the stars are aligning for Nortel to come back very strong”.

The Nortel CEO said he was counting on a number of the technological trends like “hyperconnectivity” to help play to the strengths of the company.

October 24, 2006 at 8:00 AM EST
inalmm

in addition to my previous comments, i underline that the loss is because of writing down of a deferred tax assets. this means this is a non cash item. i don't understand why analysts except for Bloomberg one don't mention this fact.
serg

Nortel Stockholder 2008 MUST-DO list

1. get rid of Zaf
Another Nortel Watcher

Stock Price when MZ took over - approx. $35. Current stock price - approx. $9.80. Getting close to 75% erosion. A long way from a 3-5 year turnaround plan with a stock price target of $60.

So, if the 'weak balance sheet' is the problem, why no mention of it the last 2 years? It's waaay too late to blame this mess on the previous management team. Whatever happens now sticks to MZ. The previous manaement team didn't load up a cabinet with arrogant GE-disciples who don't know squat about the telecom industry. MZ did that all by himself.
inalmm

finally a reasonable comment came from a Bloomberg analyst, please read it and stop being panic. numbers talk. if the one off deferred tax charge is excluded. Nortel would close the year with a profit of 30 cents vs. forecast of 44 cents.

http://www.bloomberg.com/apps/news?pid=20601087...

" Nortel, based in Toronto, wrote down the value of its Canadian deferred tax assets, benefits used to lower future taxes, partly to reflect the drop in Canada's corporate tax rate in 2007 and the rise in value last year of the Canadian dollar, according to a fact sheet sent by spokesman Mohammed Nakhooda.

Profit, excluding the $1.04 billion tax adjustment and other items, was 30 cents a share, missing the average estimate of 44 cents on sales of $3.28 billion in a Bloomberg survey of analysts. "
Timur

The other option Zman has is to split the company up. The mistake that Mike made in the beginning was thinking he could "operate" his way out of the problems that Nortel has. He should have realized that with a poor balance sheet he should have taken a much more agressive approach to break the company up.
Twiddle Dee

We should all breath easier since it is obviously the fault of previous management and not Mike Z's fault. Whew! I thought for sure the guy running the company was the one making the decisions, but it is obvious that it was the previous CEOs that are causing the company to become irrelevant.

But hey we've got this 6Sigma thing figured out and have great Ethics, so that has to account for something. Let our customers know that we have a great process to figure out our products are terrible, and we'll be completely honest about it, THAT is what will move us forward.
inalmm

the balance sheet may be weak. but, i guess the management has not heard of the term increasing the capital via rights issue. if you have a good idea to invest the money raised from shareholders and if this going to put Nortel back on its track, why not implementing rights issue??????

Moreover, if the one-off tax charge has not been wrote down, the bottom-line would reflect more or less the market consensus. i guess the analysts misguided or missed to take into account the tax charge, cause the operating profit came very close to the expectations.

don't panic guys.
Nortelhand

Good Idea inalmm,

Nortel needs to issue more paper. That will boost the company's stock price, and save 2100 jobs. Ya, get real.
Sam

"Unfortunately, the prior management team at Nortel left the company with a very damaged balance sheet," he added. "And with limited resources and little currency to afford a major strategic rethink, the company may have to resort to a year of basic blocking and tackling."

-So I guess they're deciding to fess up. After a few years of smoke and mirrors they're finally passing the blame and forking out excuses...wonderful
ex-nt

Sam, right on. This is capitulation. Nortel hires superstar Mike Z and pays him and his buddies superstar salaries, and now, two years later, they blame the prior management.

Here are a few things where Mike Z should take responsibilitiy:

- not selling UMTS business sooner. Alcatel offered to buy it before, but he hung onto it and then got more losses and less cash.
- bringing in a bunch of expensive sycophants as senior execs
- not shutting down or selling off unprofitable businesses
- concentrating on operations and 6 sigma instead of strategy
- not merging with more powerful competitors when there were opportunities
Blame Game

Zafirovski acknowledged that Nortel's "revamped management team is doing the best that they can."
http://biz.yahoo.com/ap/080227/nortel_mover.htm...

"Unfortunately, the prior management team at Nortel left the company with a very damaged balance sheet," he added. "And with limited resources and little currency to afford a major strategic rethink, the company may have to resort to a year of basic blocking and tackling."

This is what politicians say when they feel the heat. So all the hard talk 2 years ago was nothing but mouthing off that could fill a hot air balloon. Mr. Z, which past regime Owens, Dunn, Roth, Monty, Stern. So if thats the case how about you return the $30 million. This was laid out plain and simple in the books, analyst reports - or you just came on board like a jet set exec not knowing anything about this business.
Building New Realities

Did anyone bother to read the Yahoo article linked by poster "Blame Game"? Here's the link again. http://biz.yahoo.com/ap/080227/nortel_mover.htm...

It was not Mike Z. that said those things - those were the words of RBC's Mark Sue. In fairness, Blame Game may not be intentionally misleading us. There is a correction posted at the bottom of the article which says: (This version CORRECTS attribution in fifth graf. Should be Sue instead of Zafirovski.)
Nortelhand

Mike Z and company have made of mess of Nortel (and we thought the last group was bad). More Nortel hands are going out the door because of Mike Z and company. Mike Z made Big changes, and they have lead us to a company that is half its size since he took over, filled the top ranks with his friends or other “Smoke Blowers”. When Nortel is sold or bought, I hope Mike and his friends stay at the house and live on the fat they have cut out of this company. I would hat to see them go and do this someplace else.
MT

Back to the Future Part 1, Part 2, Part 3. Now its the next trilogy. It could be a prequel (tiny start 100 years ago) or sequel (where it has not gone before) i.e. merger with Motorola and stock symbol change to MT (read as empty).
ex-nt

I guess the one year turnaround has turned into the two year turnaround has turned into the three year turnaround has turned into four years. Nortel needs a cathartic event like bankruptcy to re-make itself - the incremental cuts and optimism of Mike and his Z-ombies is not working.
HastaLaVista

On Wednesday, Nortel Chief Executive Mike Zafirovski called 2007 a "pivotal year in our transformation" in which "significant progress has been made while upholding the highest standards of ethics and integrity."

Result is huge loss, penny stock. If this is pivotal and progress, what is the future
SpinMachine

close observer you are dead on. this will get cheaper to buy in a year or two. the us recession is going to kill most top line revenues. and its too late for nortel to look at emerging markets. they cannot make a profit in the cutthroat asian market.

africa and middle east have gone to resource hungry china. india, china and most of asia is the mining field of Huawei, ZTE, Fujitsu, Alcatel, Ericcsson and bit Cisco. Rest is fragemented across NEC, 3Com, Hitachi, Juniper etc.
SpinMachine

There is a layoff going on now estimated at 10-15%. This is from the cuts announced last year. Most analysts are slashing ratings to between $8 and $10. Comment of becoming second tier only tells me of where this is headed.

Z's bible is Good to Great. He should write a book on Good to Nothing. Testimonials from his good for nothing cabinet will make it a sell.
Another Nortel Watcher

There is nothing surprising here. As to the idea that Nortel may be "resigned to becoming a smaller, but profitable, player in the telecom space", I don't think so. That would imply that Nortel is going to scale back and focus on a niche in which they are strong, and that's the whole problem. Nortel has become a jack of all trades and master of none. At some point another player will pick up Nortel for 10 cents on the dollar merely to get the footprint. I'm surprised it hasn't happened already.

Way to go Mike Z. I don't know which is less impressive - you and your cabinet or your chairman and your board. None of you know what to do.
A Close Observer

They are trying to participate in too many markets for their meager resources. They need to pick a couple, focus and move on.

The problem for me is “which” markets. Optical is too small. Services will always be advantaged by the maker of the solution being serviced. Carrier will be dominated by Ericsson, ALU, NSN from the top, and Huawei from the bottom. Enterprise communications is shifting to software, which Microsoft will dominate. And the data networking side of Enterprise is Cisco’s business.

The only other option is to merge or be acquired. They don’t have the capital to buy anything of consequence. They would be a good target to buy and break up in some fashion. They’re cheap cheap at the moment. (And every time I say that, they always seem to get a little cheaper later on.)
DCheney

In addition to the 2100 job cuts, Nortel management is moving 1000 jobs offshore. This is a net 3100 firings of existing talent in 2008. Anyone who's been in this business knows that transitions like this don't net anywhere close to the same level of competency. In addition, sending jobs offshore signals that the code is frozen, or is just being maintained. Translate...no new features being added, nothing more to sell.
BoGowan

Keep in mind that one of the commnts in Nortel's announcement was that "in 2007 approximately 30% of the employees in affected positions were redeployed or transferred to other roles in the Company." Z commented on the morning call that they would make efforts to do the same here.

And I thinkg your assumption that "code is frozen" is flawed, assuming that entire teams will be let go overnight and then picked up by a completely new team. Z commented that this restructuring would happen across 2008 and 2009.
Jose?

Go Miguel!
Zero-Man

Thanks Mr. Z, thank you and all your World-Class-Management-Team-Members you brought to Nortel!

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