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MAY 4, 2005
By Olga Kharif More Grim Tidings for Nortel Its long-awaited 2004 results are in, and while all isn't lost, they don't inspire much confidence for the telecom-gear maker's future For the past year, investors have been in the dark about Nortel Networks' (NT ) financial performance. They could only guess at total revenues and profits, as the telecom-gear maker went through lengthy financial reviews and restatements of earlier earnings. Nortel finally shed some light on its performance on May 2, when it released its fourth-quarter and full-year 2004 results. What investors saw wasn't pretty. Fourth-quarter revenues fell 20% from the year before, to $2.6 billion. Profits dropped 75%, to $133 million, and were well short of Wall Street expectations. For the full year, Nortel's sales were down 3.6%, to $9.8 billion, and it recorded a $51 million loss, compared to a $434 million profit the year before. Not surprisingly, the stock fell to a two-year low of $2.26 after the news. SLIM ODDS? On top of that, Nortel is still battling a slew of shareholder lawsuits, which, together with possible regulatory fines from the Securities & Exchange Commission, could add up to more than $1 billion in potential liabilities, estimates Steve Levy, an analyst with Lehman Bros. in New York. If that weren't bad enough, analysts are starting to doubt whether Nortel can regain the ground lost to rivals over the past year. "The odds of them being on top of their industry are pretty slim," says Peter Hofstra, a senior analyst with AIC funds. With $3.7 billion in cash and equivalents, and dozens of long-time telecom service provider customers, Nortel isn't going to disappear. But the company that used to be on the cutting-edge of the telco business could be starting a long, painful slide into irrelevancy. Simply put, Nortel is falling behind its competitors (see BW Online, 3/22/05, "More of Nortel's Slip Is Showing"). Sales of wireless equipment, contributing nearly half of its revenues, grew 10% in 2005. That doesn't sound so bad, until you consider that global wireless spending rose 25%, according to investment bank UBS. COLD SHOULDER. Nortel's wireless sales grew slower than those of other major vendors, such as Ericsson (ERICY ), Motorola (MOT ), Nokia (NOK ), and Lucent (LU ). Partly, that's due to Nortel's deferring about $200 million in wireless revenue to 2005. But it's nonetheless troubling. Analysts say Nortel is also losing share in optical networking and in voice over Internet protocol (VoIP) equipment, which routs voice calls over the Web. In some cases, Nortel is getting flat-out snubbed by potential customers. On Apr. 28, BT Group (BT ) published a list of companies that will be involved in the construction of its new, $19 billion telecommunications network. Nortel was the only major equipment maker absent from the list. "It's almost like, if you're looking for diamonds, not seeing Tiffany's on the short list," says Bob McWhirter, president of Selective Asset Management funds. Nortel CEO Bill Owens says his company lost out because a switch BT was interested in wasn't ready on time. NARROW MARGIN. But some analysts say it was more than that. Chinese competitors such as Huawei, which did make the BT list, are aggressively pushing their way into the market with low-cost products. Plus, "Nortel has been distracted [with accounting restatements]," says Levy. At a time when some markets for telecom gear are cooling off -- the once-hot $9.8 billion market for optical-networking equipment is expected to grow only 4% this year -- getting shut out of the few big contracts available is hardly good news. Is Nortel toast? Not necessarily. Though it's slumping now, its fledgling VoIP efforts may yet pay off. And a renewed push for government contracts could pay dividends in time. But even if Nortel finds growth there, chances are both businesses will offer lower margins than investors are accustomed to. Already, Nortel predicts that the 45% gross margins it had in 2004 will deteriorate to 40% to 44% this year. With so many problems, it could take a while for this troubled company to find stable ground.  Kharif is a reporter for BusinessWeek Online based in Portland, Ore.
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