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AUGUST 18, 2004
By Roger Crockett Nortel's Day of Reckoning On Aug. 19, new CEO Bill Owens will start a series of restatements that could go a long way to determining the tech giant's fate Nortel investors have endured a winter, spring, and summer of uncertainty about the financial performance of Canada's largest high-tech company. The eight-month wait will end Aug. 19, a date that's now shaping up as Reckoning Day for the Brampton (Ont.) telecom equipment maker. That's when Nortel (NT ) execs plan to reveal what they're calling "limited preliminary unaudited results" for the first and second quarters of 2004. Company spokeswoman Marion Mackenzie says it will be a "milestone" in investors' minds. "We want to give the investment community a glimpse as to what's happening at the company," she says. The question: Will it be a milestone of achievement or of ruin? On Aug. 17, both Nortel and the Royal Canadian Mounted Police confirmed in press inquiries that the company is under a criminal investigation, apparently focused on its past accounting practices. Investors seemed to take the news in stride, mostly because Nortel already faces a criminal probe by the U.S. attorney in Dallas and civil inquiries by the U.S. Securities & Exchange Commission and the Ontario Securities Commission. Nortel shares dropped two cents, to close at $3.40 on Aug. 17. 50% LOWER? Nortel said it will provide an update on its own internal investigation of accounting issues in its report tomorrow. But what the markets seem most interested in at this point is whether Nortel has reconciled its past troubles and managed to turn a real profit this year. It reported earnings of $732 million in 2003 after a loss of $3.4 billion in 2002. Nortel has been struggling to win back investor confidence since early this year when its CEO, CFO, and other top financial executives left the company amid the discovery of accounting errors for each quarter in 2003. It's now laboring to restate earnings back to 2001. But Nortel says when it finally restates 2003 earnings alone, they may be more than 50% lower than first posted. This year's first- and second-quarter results, to be reported on the 19th, will be estimates, Nortel says, thus subject to change. The final 2004 results, as well as restatements of previous years, aren't expected until the end of the third quarter of 2004. SPENDING AGAIN. While it seems difficult to fathom, if Nortel has somehow managed to isolate its accounting mess under new CEO Bill Owens, it could be riding a recent surge in the telecom industry's momentum. After two years of stale spending, telecom carriers have doled out a bit more cash this year. In July, Nortel rival Lucent Technologies (LU ) reported its fourth consecutive profitable quarter on an 11% increase in sales. Other equipment providers such as Juniper Networks (JNPR ), Motorola (MOT ), and Cisco Systems (CSCO ) have also performed well through the midpoint of 2004. Much of the strength has come from demand by wireless carriers and wireline telecom customers looking to update older systems with new Internet-based gear. Those two areas are Nortel's best. It has landed coveted wireless contracts with the likes of AT&T Wireless in the states and Telstra in Australia. And Nortel's Net-based systems have gained traction with customers such as Verizon (VZ ), Bell Canada, and Cable & Wireless (CWP ). In recent interviews, CEO Owens told BusinessWeek that customers with longstanding ties to Nortel have hung in with it, even as it struggles to deal with its accounting issues (see Owens in this July 21 video interview). What's unclear is whether they have given new business to Nortel competitors. Success by Lucent and Juniper might have come at Nortel's expense. CROSSROADS. S&P analyst Ken Leon says many telecom carriers have been making multiyear capital-spending decisions this year, and usually they want to deal with suppliers they consider stable partners for the future. Nortel could be at a crossroads. If it disappoints investors on Aug. 19, the stock, which traded in the $60 range four years ago, could plummet further. A recovery even to Nortel's latest 52-week high of $8.50 is probably out of reach in the near future. But if Owens & Co. can show Wall Street that Nortel has cauterized past damage and is back on a growth track, it could put its troubles behind it. Wall Street will soon learn whether this telecom-equipment giant, once Canada's most valuable company, is on the way to regaining its 1990s' glory or facing a more ominous scenario.  Crockett is deputy bureau manager of BusinessWeek's Chicago bureau
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