Global Insight Perspective | |
Significance | Nortel has posted a net income of US$366 million for the second quarter of 2006, compared to a loss of US$33 million a year earlier. |
Implications | While the company labours to cut costs and reposition itself, a risky move—such as exiting the GSM market to focus on the CDMA market—could reduce its clout, making it vulnerable to takeover. |
Outlook | Although profit growth was helped by a one-off gain, the company's renewed performance is indicative of its ongoing transformation designed to put it back on track after the 2004 accounting scandal. |
Communications equipment maker Nortel has posted a 4.8% year-on-year (y/y) rise in second-quarter revenue to US$2.74 billion, from US$2.62 billion a year earlier, marking a reversal in fortunes. The company has stated that higher demand for GSM and UMTS wireless equipment, and for data networking and security solutions, helped boost second-quarter revenue. It expects revenue to grow by 10% in the third quarter of the year, and at a rate in the "high single digits" for the full year. A one-off gain of US$510 million, related to shareholder litigation recovery, helped the company to post a net income of US$366 million, compared to a loss of US$33 million a year earlier.
However, Dow Jones reports that without the gain, the company would have still posted a small loss. "The profit improvement was driven primarily by the mark-to-market adjustment related to a shareholder settlement rather than ongoing operations,” chief executive Mike Zafirovski said in a statement. “We remain focused on delivering improved revenue and financial performance throughout the rest of 2006”. Nortel also incurred a US$45-million restructuring charge and a US$10-million loss from an asset disposal deal.
Outlook and Implications
- Uneasy Road Ahead: Despite posting revenue and profit rises, Nortel is yet to fully recover from the accounting scandal that engulfed it in 2004. Since taking over as chief executive last year, Zafirovski and his team have pushed hard to transform the company and save it from the brink of collapse. In a statement, he commented that the second-quarter performance underscored both the challenges and progress related to Nortel's transformation. Apart from the hangover from its 2004 crises, the company is battling to regain its stronghold in the highly competitive communications equipment market. With the growing rate of consolidation in this area, and the merger of Alcatel and Lucent, speculation has been rife that Nortel is a takeover target. In June this year, the company, announced plans to cut 1,100 jobs in its Canadian operations, while creating 800 new roles at its lower-cost operations in Mexico and Turkey. Nortel last month signed a partnership deal with Microsoft to develop IP products for the corporate market (see World: 28 June 2006: Nortel to Cut 1,100 Jobs).
- GSM versus CDMA: Nortel epitomises the dilemma raging on among equipment vendors, regarding the need to channel their resources into a particular standard. Earlier this week, the company was rumoured to be planning to sell its UMTS operations, and possibly its GSM ones, to Alcatel in order to concentrate on its CDMA business. Although such a move is contiguous with the company's new strategy of exiting markets in which it does not have 20% market share, selling its UMTS and GSM units would leave it in a precarious situation, ill-equipped to withstand the choppy nature of GSM-versus-CDMA battles. As more and more mobile operators join the GSM bandwagon, the effective addressable CDMA market continues to shrink (see World: 3 August 2006: Alcatel in Talks on Nortel's UMTS Assets)