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It has been a while since I paid much attention to what was going on at Nortel (NT), and from what I read at Genuity Capital Markets, star tech analyst David Hodgson doesn’t think I’ve missed anything:

Nortel delivered weak Q2/07, with top-line revenue of $2.56 billion, almost $200 million below consensus of $2.75 billion and our expectation of $2.72 billion. Earnings were weak as well, with GAAP EPS of a loss of $0.07 and adjusted EPS of a loss of $0.07 (excluding foreign exchange gains), below consensus of $0.09.

Gross margin was solid at north of 41%, driven by the benefits of the company’s business transformation in addition to increased discipline with regards to pricing. The offset to this, of course, is lower revenue which impacts operating leverage.

Unfortunately, due in large part to decisions made well prior to Mike Z arriving, Nortel lacks scale in many growth markets within the Carrier space. With our expectation that the strong will get stronger due to their economies of scale and ability to meet customer’s pricing requirements, Nortel may continue to lose share, effectively putting more pressure on cost cutting to deliver profitability.

While the company’s Q3/07 forecast was weak, it is retaining its full-year goals of revenue flat to down slightly and operating margin at 5%. We would note that Q4/07 is likely to be positively impacted to the tune of $300+ million by a decrease in deferred revenue. While this contributes to GAAP profitability, we should note that this has no impact on cash flow and in some cases, could refer to business from some time ago.

While the valuation has become more appealing to us, we need to see some evidence that Nortel is going to become a more focused company before upgrading it. It quite simply does not have scale in too many of its target segments and management needs to make the tough decisions to divest those parts of the business where it lacks scale.

We retain our HOLD rating and $24.00 target.

Source: Nortel Still Lacks Focus - Genuity