Canadian network solutions company Nortel Networks Corp. (NT, NT.TO) Monday reported a loss in the third quarter, hurt mainly by a non-cash charge of US$3.21 billion to write-down goodwill and deferred tax asset. The company also said it plans to cut about 1,300 positions under its 2009 restructuring plan.
In addition, the company's principal operating subsidiary Nortel Networks Ltd. has decided to suspend the declaration of preferred share dividends. Moving forward, Nortel updated its fiscal 2008 revenue decline forecast in light of challenging environment and stronger U.S. currency.
On a GAAP basis, the company reported a net loss of US$3.41 billion, or US$6.85 per share, compared with a profit of US$27 million, or US$0.05 per share, last year. For the second quarter, the company's net loss was US$113 million, or US$0.23 per share.
The latest quarter's results included an increase in the valuation allowance against deferred tax assets of US$2.07 billion, a goodwill write-off of US$1.14 billion, special restructuring charges of US$50 million and an asset sale gain of US$6 million. Also included in the recent quarter results were a foreign exchange rate related loss of US$7 million, a mark-to-market gains on interest rate swaps of US$2 million, M&A related costs of US$9 million, an investment sale gain of US$7 million and a money market investment loss of US$10 million.
Meanwhile, the third quarter of 2007 included special restructuring charges of US$56 million, foreign exchange rate related gains of US$67 million, and mark-to-market gains on interest rate swaps of US$14 million.
Adjusted net loss for the quarter was US$150 million, or US$0.30 per share, in comparison with a profit of US$46 million, or US$0.09 per share, in the same quarter of 2007.
On average, 19 analysts polled by First Call/Thomson financial expected a loss of US$0.30 per share for the quarter. Analysts' estimates typically exclude special items.
Quarterly total revenues declined to US$2.32 billion from US$2.71 billion in the year-ago quarter. Analysts were looking for third-quarter revenues of US$2.31 billion. For the second quarter, the company's revenues were U$2.62 billion.
Products revenue totaled US$2.01 billion, lower than US$2.38 billion generated in the previous year. Services revenue dropped to US$313 million from US$327 million a year ago.
Business wise, Carrier Networks, or CN, revenue declined 24% from last year to US$822 million. Enterprise Solutions, or ES, revenue reached US$616 million, down 8% from the previous-year quarter. Further, Global Services, or GS, delivered quarterly revenue of US$507 million, a 6% drop from the same quarter last year. In addition, Metro Ethernet Networks, or MEN, posted quarterly revenues of US$317 million, down 12% from the year-ago quarter.
During the quarter, Nortel got lesser orders worth $2.02 billion, compared with $2.38 billion a year ago. The company attributed the fall in orders to lower CDMA orders in North America and lower ES orders, partially offset by growth in GS and MEN.
Among others in the sector, Communication services provider Alcatel-Lucent (ALU) has recently reported a narrower third-quarter loss, while revenues dropped over 6% on decline in carrier sales.
Another peer Motorola Inc. (MOT) on October 30 posted a loss for the third quarter compared to a profit last year, hurt by one-time items and weak sales, as the Mobile Devices segment witnessed a 31% decline in sales. On November 5, Cisco Systems, Inc. (CSCO) said its first-quarter profit remained essentially flat with last year even as sales increased 8% in what it called a very a challenging global economy.
For the nine-month period, Nortel recorded a net loss of US$3.66 billion, or US$7.36 per share, wider than a net loss of US$113 million, or US$0.24 per share, in the previous year. Revenues totaled US$7.7 billion, down from US$7.75 billion in the same quarter last year.
Nortel said that it will decentralize its several corporate functions and transition to a vertically integrated business unit structure to give greater financial and operational control to the business units, increase accountability for overall performance, and reduce the duplication inherent in matrix organizations, effective January 1, 2009.
Further, the company said that although there is no update currently on the review of the potential divestiture of the MEN business, it continues to make appropriate R&D investments to drive innovation and meet all customer commitments.
Nortel also stated that its global services and global operations businesses will be decentralized and transitioned to the business units by April 1, 2009 to ensure there is no impact to customer service. Each of the three remaining business units will begin including services in their reported results as of January 1, 2009. According to the company, the changes will provide it an opportunity for executive and management consolidation across the organization.
The company also said that Chief Marketing Officer Lauren Flaherty, Chief Technology Officer John Roese, Global Services President Dietmar Wendt and Executive Vice President Global Sales Bill Nelson will resign, effective January 1, 2009.
Gordon Davies has been named Chief Legal Officer in addition to his current responsibilities as Corporate Secretary with effect from January 1, 2009. The company's current Chief Legal Officer David Drinkwater will assume the role of Senior Advisor until his retirement on February 28, 2009.
The company has also appointed Lisa Gressel, currently Vice President, Ethics and Compliance, as Chief Compliance Officer, reporting to Davies, with a continuing direct reporting relationship to the Chairman of the Audit Committee of the Nortel's Board of Directors. Gressel's appointment will come into effect on January 1, 2009.
As per the company, current Chief Compliance Officer Robert Bartzokas will retire from Nortel at the end of this year. The Internal Audit function, currently reporting into the Chief Compliance Officer, will report to Executive Vice President and Chief Financial Officer Pavi Binning, with a continuing direct reporting relationship to the Chairman of the Audit Committee of the Nortel Board of Directors commencing as of January 1, 2009.
Further, Nortel said that it expects to slash about 1,300 positions under its 2009 restructuring plan, of which 25% reduction will take place in 2008 with the remainder in 2009. These reductions are in addition to the net 1,200 positions to be eliminated as part of the company's earlier announced restructuring plans.
The job cuts under the 2009 plan are expected to result in annual gross savings of approximately US$190 million, with total charges to earnings and cash outlays of around US$130 million. Of the total charges, about $50 million will be incurred in 2008 with the remainder in 2009. The company also expects about $20 million of the cash outlay in 2008 with substantially the remainder in 2009.
In addition, the company has implemented several other measures to drive cost reductions across the organization and to lower spend levels. These steps involve deeper cuts to discretionary spending, a comprehensive re-evaluation of all real estate holdings, a further review of consultant and professional service relationships with a view to cut back or eliminate spending, a freeze on salary increases, and an extension of the company-wide hiring freeze already in effect. Both the freezes are expected to last through 2009.
Certain of these and other actions, combined with the 2009 restructuring plan and previously announced restructuring plans, are expected to result in annual gross savings of approximately US$400 million in 2009.
Additionally, the Board of Directors of Nortel Networks Ltd., or NNL, a principal operating subsidiary of Nortel, has decided to suspend the declaration of further dividends on NNL's Series 5 and Series 7 Preferred Shares following payment of the previously announced monthly dividend payable on such shares on November 12.
Dividends on the Series 5 Preferred Shares are cumulative and holders of these shares will be entitled to receive unpaid dividends, when declared by the Board, at such time as NNL resumes payment of dividends on such shares. Meanwhile, Series 7 Preferred Share dividend is non-cumulative. Further, NNL does not expect that its Board will declare the December dividend on the Series 7 Preferred Shares by January 30, 2009 and, accordingly, it is expected that the entitlement to this dividend will be extinguished as of that date.
Going forward, Nortel now expects full-year revenue to decline by around 4% in comparison with its prior range of a decrease of 2% to 4%. In fiscal 2007, the company reported revenues of US$10.95 billion. The outlook includes the expected completion of wireless contracts in the fourth quarter representing about US$320 million of previously deferred revenue, the company noted.
NT is trading at US$1.02, down US$0.15, on a volume of 3.77 million shares.
NT.TO dropped C$0.28 and is trading at C$1.21, on a volume of 3.09 million shares.
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