Q4: Big Loss, Big Writedowns, Lower Sales

By Mark Evans | Published: March 2, 2009

As expected, the fourth-quarter was a tough one for Nortel as sales dropped 15% to $2.72-billion, while $2.18-billion of write-downs and charges led to a net loss of $2.13-billion.

While the fourth-quarter was not good, Nortel CEO Mike Zafirovski said in a statement there’s a silver lining as “strong operating performance focused on customers, costs and cash resulted in meeting or exceeding guidance for management operating margin and cash. The management operating margin was the highest since 2000, key customer performance and quality metrics were also at multi-year highs, and our fourth quarter operating expenses were down 30 percent from the prior year.”

Some of the highlights from the Q4 and 2008 full-year results were that cash reserves fell to $2.4-billion, while full-year cash flow from operations saw an outflow of $567-million.

As well, Nortel is going to change – again! – how it reports financial results as a result of a new operating model that splits the business into four units: Carrier Networks, Enterprise Solutions, Metro Ethernet and the LG-Nortel joint venture. Each business will include results formerly previously reported under global services.

Picture 7-9

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  • joremero

    The loss is mostly the writedowns…. The results aren't good, but they aren't as bad s they could have been, IMHO

  • joremero

    btw.. you gotta love these always appearing so-called one-time charges lol

    the breakup of the financials into units might give the hint of the unit breakup to come…

  • iwantmoreman

    Though this result is not good but it is not worst for Nortel. The revenue is not as bad as expected… One of the interesting item 2 notice is Carrier Network is performing better than Enterprise Solution (which everyone thought the last item 2 cut off from Nortel)… Q4 result it better then Q3…. I think still Nortel has some enery to come 2 buy… But it all depends on the cruddy management…

    GOD PLEASE SAVE NORTEL !!!!

  • WhoKilledDestroyedNortel

    Amazing…. Nortel created a new Executive Position with big bonus: CRO (Chief Restructuring Officer ! Who want the CFO job ?
    Nortel will be MBA Case Studies for years….

  • Casual_Observer

    Do you have a link ?

  • Baudelaire

    Talking about the distribution of the revenue it is also interesting to note that geographically highest contributors are US and EMEA slightly decreasing in the same proportions followed closely by Asia which appears to be improving. Would be interesting to get the break down per CU and per geographical area to refine the analysis

  • Paycheck

    I'd believe the 50% increase for CN is down to deferred revenue being recognised.

    With all the writedowns a $5.7 Billion loss is still pretty bad . I think the real interesting quarter will be Q1 of this year, especially as Nortel is in Chaper 11.

  • protosphere

    Q4 this was before bankruptcy and mass exodus of customers.
    How bad is it today, with Q109 ending this month.

    How much “available cash” is left today to carry these operations until they are able to present a plan in 90 days they couldn't before bankruptcy let alone now, with admitted surprises can come earlier/ Yet they seek bonuses on already known cost cutting results.

    Fewer analysts track it and the stock is almost illiquid dropping 99% this year alone.

    At over half a billion cash burn per quarter, they don't have much time left from the available cash. No wonder creditors are freaking and things can come earlier. I don't think they can move fast enough to save anything .

  • protosphere

    Didn't they replace a telecom veteran when they promoted than fired Hack to the employees horror and outrage.

    This area did worse of all. Down 30%
    Seems they can do whatever they want after Hackers grabbed Enterprise.

    Perhaps a good indication they should have had these hard to fill roles with people from a telecommunications background, like the Gary's who abruptly departed years earlier for example. It would be interesting to see what their plan was, compared to where they are today?

  • Anonymous

    we already did that in 2001. concluded it was not the way to run a business with crappy finalcials, shoddy management leading to a nortel going bust by 2005. well 3 years later but at least did better than all those dorks who call themselves analysts with predictions of $30 stock price.

  • TongueInCheek

    Nobody should be surprised at the Goodwill write-down. I fully expected this as getting the Goodwill Asset on the Balance Sheet down to zero simplifies any potential division sale.

    Haven't seen any specific numbers on Pension Deficit yet and that may have to wait until the 10K is filed and available.

  • Another_Nortel_Watcher

    Look at which business has the worst performance. It seems to me that Enterprise was *growing* before the Choker took over. I also seem to remember that the Choker was appointed President of Enterprise Solutions to *accelerate growth*.

    Instead, growth has been turned into accelerating decline and Enterprise Solutions has moved from the best performing business to the worst. Now we know which president has been leading the charge into insolvency.

    Quick, somebody give Hackney a retention bonus! A million or so ought to do it.

  • exnt2

    not bad as I expected worse. 2.72 billion is decent compared to whats happening. q1 is a wait and see. mostl ikely its going to tank 30%.

    do not like Zman's talk. if Roese was mr. hyperconnectivity Z is mr. operational excellence. thats all he talks about. he should not be CEO but maybe a VP of a band of black belt kung fu guys. just my reading between the lines.

  • AZBY

    I see atleast one positive sign – the cash down is lesser than anticipated – we were burning appr. $300m a quarter prior to this – in the 4th quarter, it is lesser – about $175m.

  • netas

    results are not so bad. the company's operating margins has improved which is perfect. the loss is related to no cash items, which is good. once the company tackles the severance payments issue, nortel will back to business again.

    any idea on how nortel will solve its severance payment issue? asset sale, government subvention, swap with nortel sahres? any idea?

  • AZBY

    the correct numbers: $89m cash outflow for the quarter compared to $567m for the year.

  • felixmk

    My summary: not bad. They are cutting costs faster than they are cutting sales. ;-)

  • felixmk

    Nortel does not have to solve the severance payments issue, it's up to the courts. Pensioners, people with severance are just creditors like the company that cleans the buildings and did not get paid. The courts will figure out who gets how much, then Nortel exits bankruptcy, then the execs get more big bonuses, then the company goes back into bankruptcy, then repeat until done.

  • Casual_Observer

    if this works for Nortel, bankruptcy protection is going to become a viable options for many states, cities and companies who's liabilities are greater than their falling income and devalued assets. I feel sorry for anyone that is reliant on a pension check to make ends meet because very soon the checks are going to stop arriving for a lot of people. Of course Nortel won't survive because of its sheer lack of expertise in being strategic enough to grow the business. A techonology company without a Chief Technology Officer is not a company that has growth in mind. All of Nortel's businesses are on borrowed time. It will be interesting to see Q1 numbers come April because Q1 was when they filed for bankruptcy protection. The Q4 numbers don't mean much because they are backward looking.

  • felixmk

    You are right. The fastest way to get rich as an exec in the USA is to find a company with good OPERATING margins but still losing money with bad capital structure. Take it bankrupt, get rid of unnecessary debt, leases, pensions, businesses. Set yourself up with big bonuses for doing this and for taking it out of bankruptcy. Then, collect bonuses for cost cutting, get it out of bankruptcy, company rapidly becomes profitable due to operating profits. Then get an even bigger bonus by re-taking it public. Its been done – look at UAL.

  • xnt

    It is easy to report record operating margins, when recurring costs are moved elsewhere under the guise of one time charges. Nortel has been laying off people since 2001. When ongoing layoffs and downsizing and offshoring are part of the buisness plan, it is dishonest to call them one time charges, and report improved operating margins.

    Hackney “destroyed” the Enterprise business. I'll wager he'll get the largest retention bonus.

  • Casual_Observer

    Then, collect bonuses for cost cutting, get it out of bankruptcy, company rapidly becomes profitable due to operating profits.

    Let's wait and see what the Q1 numbers are. UAL is a completely different industry. Nortel has yet to stop bleeding cash and will likely continue to do so as the economy slows down and sales drops off a cliff. I think there are few people alive who actually were adults during the great depression so there is no reference as to what's about to happen or happening.

  • penske_file

    Looks like Pavi will be the CRO and the CFO according to Z-Man. I wonder if this was the only way to legally give Pavi more money right away. Unlike some of the other executive positions, Pavi is the one guy Nortel would probably need to keep around the most. I suspect Mike Z had plans to use him in the bankruptcy capacity way back when he hired him after his Marconi experience.
    Also – Mike changed his tune last fall and started to blame all of our problems on the global recession & financial crisis – how does he explain the dramatic drop in stock price from the prior 3 years?

  • grindstone

    Since 2001? We have had regular layoffs since I started in 1989. We have been outsourcing and offshoring regularly since 1995. And you are absolutely right, it is an ongoing operating mode, not a “one time” charge.

  • Nortelguy

    So, does this mean that they can pay me my Q4 SIP that they conveniently decided against doing?!

  • One_way_ticket_to_Chapter_7

    The CN revenues defy logic. 50% up QoQ (bonuses for all EXECs !!!). Either there were was massive deferred revenue recognition or we pulled a “Frank Dunn”. Regardless, it is not sustainable as CDMA will fall off a cliff soon with the evolution to LTE all but agreed to and nortel losing Vz and presumably the rest of its best customers soon.

    As for Enterprise, I guess it is no surprise Hackney is driving it into the ditch. At least with the re-org, he can suck in the profitable services business and ruin it as well.

    Can't imagine Q1 will be anything but a disaster with all the distractions.

  • rfc1149

    Carrier sales have always been very heavily weighted to 4th quarter. Q4 is always up a lot on Q3 and Q1 is always down relative to Q4. Seems to be the way carriers (or Nortel?) likes to do business for whatever reason. Year on year (or year totals) are far more meaningful.

  • jdifunto

    “reclassification of $286 million of investments to cash related to receipts from the Reserve Primary Fund.”

    would that mean that they burnt through more cash then? If you take out the conversion of investments to cash that would mean that they burnt through $200M.

  • yes4aapl

    While the fourth-quarter was not good, Nortel CEO Mike Zafirovski said in a statement there’s a silver lining as “strong operating performance focused on customers, costs and cash resulted in meeting or exceeding guidance for management operating margin and cash.
    ====
    re
    The problem is still the same
    Lies lies lies
    Creating own measurements to get bonuses for performance!
    Those measurements are misleading.
    I don't have to say they are not GAAP!
    Oh let me explain what GAAP means.
    It means
    Generally Accepted Accounting Principles (GAAP) is the term used to refer to the standard framework of guidelines for financial accounting used in any given jurisdiction. GAAP includes the standards, conventions, and rules accountants follow in recording and summarizing transactions, and in the preparation of financial statements.

    So let me re_phrase it
    If the measurements Mike Z is using are not GAAP what are they?
    What are they?

  • scalpcutter

    Word is there was “massive deferred” revenue but some senior exec will have to come clean and explain what that was. Maybe Lowe?

  • scalpcutter

    deferred revenue means payment received for work that has not yet been performed. How come one thinks of india or china when thinking about this????????????????????????

  • http://nortelinsider.wordpress.com/ Desk Jockey

    As many have pointed out the big story here is the near complete turnaround of Enterprise in the one year that Hackney has had to destroy it!

    Enterprise was one of the strongest and was growing. Hackney made sure to put an end to that! Another example of their anti-Midas touch: Everything they come into contact with turns to sh*t!

  • hangingin

    Former Enterprise VP Slattery went to Cisco to run their Enterprise Voice business and it has grown from 25% market share to 32% since he joined.

  • broadbandbill

    It was strong and growing because of Riedel, who did the same thing at Juniper but it wasn't hackney that killed it; it was Z's decision to put Hackney in charge! So much for having P&L responsibilities…–bb

  • scalpcutter

    Slattery isn't the reason.
    The only reason the market share went up is for a few simple reasons.
    It is a recession and cisco has more cash to burn than the competitors because
    they have lots of money. They can undercut competitors just to get more market share. Don't give slattery credit. He did nothing.

  • Waterloonatic

    What is happening with the Enterprise business these days? Do you think any existing customers are planning to upgrade their CS 1000 software release when the next version is released?

  • xxx_nortel

    Wow, Nortel was actually PROFITABLE in Q4'08 ! Excluding non-cash items (goodwill, tax-writeoff), there was a $60M profit. Pretty good given the economic downturn. Exclude other one-time items and there was a quarterly profit of $0.36/share….not bad for a stock trading at $0.10. Cash balance increased from Q3 to Q4 by $100M. I'm surprised the Nortel press release didn't try to put a more positive spin on the results.

    http://www2.nortel.com/go/news_detail.jsp?cat_i…

    Of course, with orders down, bankrupcty in play, I expect Q1'09 will be quite dire.

  • Ex_Nortel

    The $2.7B in sales and the supposed 36 cents in profit before one time charges is pure vapor. The 50% QoQ growth in Carrier Netwroks was created with deferred revenues and 'sales' from the LG – Nortel JV. The real sales number was probably closer to $2.45B. The Q1 numbers will begin to tell the real tale.

    The gain in cash balances was due to the sell off of short term instruments. In essence, simply moving chips from one bucket to another. Cash burn continues.

    Chapter 11 has shielded Nortel from presenting clarity and transparency as to its numbers. Those areas that could not be made totally opaque, like Enterprise, showed a substantial drop in QoQ and YoY sales. This was the area that the firm was supposedly banking its future on – and had Mike Z's right hand man running the business.

  • Ex_Nortel

    The $2.7B in sales and the supposed 36 cents in profit before one time charges is pure vapor. The 50% QoQ growth in Carrier Netwroks was created with deferred revenues and 'sales' from the LG – Nortel JV. The real sales number was probably closer to $2.45B. The Q1 numbers will begin to tell the real tale.

    The gain in cash balances was due to the sell off of short term instruments. In essence, simply moving chips from one bucket to another. Cash burn continues.

    Chapter 11 has shielded Nortel from presenting clarity and transparency as to its numbers. Those areas that could not be made totally opaque, like Enterprise, showed a substantial drop in QoQ and YoY sales. This was the area that the firm was supposedly banking its future on – and had Mike Z's right hand man running the business.

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