Nortel's Q1 Results: Heading Towards Solid Ground

(Disclaimer: Any attempt to quickly assess Nortel’s results are always tricky given the company’s approach to reporting its financials. Sometimes, what you see, isn’t always what you get.)

A first-quarter loss of $138-million will attract the attention of many people but there may be signs that Nortel (NT) is headed towards terra firma.

Stripping away a number of extraordinary items, Nortel said its had a loss of 7 cents a share in Q1 compared with analysts’ estimates of 12 cents. Sales, meanwhile, were ahead of forecasts - coming in at $2.76-billion vs. $2.51-billion due to a big contract from its LG joint venture that came in a quarter ahead of schedule. (The Q1 results can be found here.)

“They delivered what they said they would deliver in the first quarter, and that’s a step in the right direction,” Morgan Stanley analyst Scott Coleman told Bloomberg.

Nortel CEO Mike Zafirovski said:

We expect to achieve our full year guidance and we continue to make solid progress against the strategy to turn around the company. Our relentless focus on execution and our determination to deliver value to customers is strengthening the foundation upon which to build our performance over the balance of 2008 and beyond.

More analysis and thoughts later but here are some of the highlights that Nortel offered up:

• Revenue in the first quarter of $2.76 billion was up by 11 percent year over year, which included a release of deferred revenue associated with the completion of a significant contract in the LG-Nortel joint venture that was previously expected to occur in the second quarter.
• Gross margin of 41.6% was up 120 basis points year over year.
• Operating margin in the first quarter of 4.7% was up 512 basis points year over year.
• Cash balance, as at March 31, 2008 of $3.22 billion, included a seasonal outflow of cash from operations in the quarter of $260 million, in-line with the 2008 target.

Here are the details on how each of Nortel’s business units performed during the first-quarter (click to enlarge):

It is interesting to see how metro Ethernet sales are down 12% YOY and 24% sequentially given how the market seems to be fairly strong as consumers demand bigger pipes to access data, streaming video, etc. On the upside, carrier sales showed healthy growth on a YOY basis.

S&P Maintains 'Hold'

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 sees “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.

Comments

[JCopp:]

And don't forget NT has now announced job cuts equal to Canada and half of the U.S. population. I'm sure I received a layoff notice and I've never worked there.

2008 May 04 08:50 PM

[JCopp:]

And don't forget the job cuts. NT has now announced job cuts equal to the population of Canada and half of the U.S. I think I may have received one and I've never worked there.

2008 May 04 08:53 PM

[JCopp:]

And don't forget the announced job cuts equal to the population of Canada and half the U.S. I may have even received one and I've never worked there.

2008 May 04 08:55 PM

[JCopp:]

As you can see I should get one. I'm not great with technology.

2008 May 04 08:56 PM