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Nortel 2Q08 earnings coverage round-up

By Bo Gowan August 1, 2008 6:08 pm EDT

There has been a lot of coverage today on Nortel’s 2Q08 financials - not all of that coverage has been positive obviously. Below I’ve linked to some articles and pulled some quotes from industry coverage.

FYI — Seeking Alpha has posted the transcript from this morning’s call in case you’d rather read it than listen to it.

Here’s a quick list of some articles/blogs that provided some detail, insight and analysis:

Here are a couple of quotes, from both Nortel execs and analysts, from today’s coverage:

  • “We have great capabilities in our business: It’s profitable and we have great underlying technology,” said Zafirovski in a telephone interview. “The question is: Can the industry prosper with so many players?” - Wall Street Journal
  • “They had better than expected numbers all the way down the income statement until the very end,” said Paradigm Capital analyst Barry Richards. “They beat my EBITDA number, my revenue number and every other category until you get to the loss, which is really quite damning.” - Globe and Mail
  • “I don’t think it was a disaster, but it shows the reality of a tough industry, a tough turnaround and a bear market,” says Michael Urlocker, a technology analyst with GMP Securities LLP - Wall Street Journal
  • “Nortel’s revamped management team is doing a commendable job given the macro challenges and the limited internal resources,” Mark Sue of RBC Capital Markets wrote. - Associated Press
  • “We are seeing growth in the areas that we said would be the growth platforms for the next few years,” Mr. Zafirovski said in an interview – Globe and Mail
  • “There’s still a lot of recurring charges for this company,” said Mark Sue, an analyst with RBC Capital Markets in New York. “It does seem like the environment is getting tougher for the back half.” - Bloomberg

Categories: Industry News, Nortel News
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Comments

  1. You are joking, right?

    August 1st, 2008 at 11:10 pm by many

  2. The sad part is they are not. I am hoping to hear an annoncement about exec changes/Cut soon instead of any staff reduction given this lack of execution.

    I am also awaiting the next “restructuring charge” which will eat away the next quarter profits. I thought 6 sigma was supposted to help in this lack of predictability.

    August 2nd, 2008 at 8:26 am by another commentor

  3. Dear Mike and BoD,

    One simple word to remember in all of your upcomming decisions… ”P-R-O-F-I-T”

    And since I’m affraid you still need more clarification: At the very very bottom line (period)

    Can’t beleive I need to post this.

    Shareholder #…

    August 2nd, 2008 at 8:59 am by Frank

  4. I am a long term shareholder, and I do believe Mr Zafirovski have a good plan for Nortel. However I have to admit I am disapointed with the Q2 result. The real issue is the discrepancy between improving operating metrics and the worsening 113 million loss, which is result of minority interest of $55 million and $61 million income tax, primarily driven by the high profitability of the LG-Nortel joint venture. This let investor to believe Nortel’s core business is not improving as the operating metrics indicate, the improving operating metrics are the result of LG venture and defered revenue. Going forward, a key factor to determine Nortel’s EPS and stock price is the minority interest and income tax from LG venture in relation to management’s guidance. I am surprized analysts did NOT ask for clarification in this area.

    August 2nd, 2008 at 2:36 pm by Bo Liang

  5. mike, has kept changing what he is expecting from nortel and which segment of the business he is seeing as core; depending on which biz. performs well that quarter.i am surprised the board still keeps him; chambers at cisco spins too but mostly he delivers.if Mike believes that he is performing and that the market is not reflecting the fundamentals he should start buying a lot of the shares and put his money where his mouth is.

    August 3rd, 2008 at 1:42 am by nishit Mehta

  6. It concerns me the investment houses seem to have a less than clear understanding of the financials presented last Friday. The downgrades over the past two days allude to an erosion in future revenues and a overly aggressive forecast for margin and profitability by management. Again, I do not understand how the forecast can change so dramatically from the June Analyst meeting and the August 1st report. Does management share this concern and have a plan to clarify the facts? The loss of market capitalization by Nortel over the past 18 months is breathtaking and painful for management and shareholders alike. The plan needs to work or be changed.

    August 5th, 2008 at 12:13 pm by Lee Metzger

  7. Unfortunately I don’t believe that as the restructuring is ongoing,I would expect that any changes would only be determined after going through the entire organization with a fine tooth comb,however I think this fine tooth comb has not been able to pass through because of a knot in the organization.

    I just hope that the proper diligence is taken by upper management to resolve this “knot” that is present within the organization.

    I just find that Mike Z and now Pavi don’t seem to be alarmed enough at the market cap erosion that has taken place over the last 2 years,and I don’t mean “The shareprice is Unacceptable” statement by MikeZ back a couple of months ago.

    Bo-while I appreciate your willingness to be invloved with day to day events and news concerning Nortel and exchanging with bloggers who visit your blog,it is hard to ignore the fact that all the while the stock price just keeps dropping off the face of the earth.

    We are talking multi year lows even as all these positive changes that Nortel has undergone.The market is clearly saying something to Nortel and its executive team,in other words in can be hard to appreciate events that are supposed to be perceived in a positive way when the main pereption of the overall company(shareprice) is falling into the abyss.

    As an example -just before Mike Z took over as CEO the 2005 2nd qtr SG&A total was $579 million in the qtr

    and since the well publicized 2006,2007 and 2008 “restucturing plans” the latest results in the 2nd qtr 0f 2008 show SG&A costs at $575 million-this is drop of $4 million.

    Considering that the 2006,2007 and 2008 restructuring plans involved a total of 6750 headcount reduction or just about 20 percent of Nortel’s entire workforce,this does not include the 2000 jobs to be transferred to “lower cost geographies”

    even if we only include half of the 2100 headcount reduction as part of the “2008 restructuring plan”,this still represents a total headcount reduction of close to 6000 workers or 18 percent of 2005 workforce levels,and again this doen’t include the 2000 jobs being tranferred to lower cost locations.

    Granted the total headcount reduction may not have yet been realized but three years later and assuming that 75 percent of these reductions have been realized,we are sitting at the same SG&A levels as before all of these cuts were even announced.

    So what gives?

    close to a 20 percent reduction in total workforce and the latest qtr’s SG&A levels are practically the same as
    before these headcount redcuctions began?

    This reflects very poorly on managements executing abilities,especially in the SG&A area,as I said this “knot” that is preventing the fine tooth comb from passing through is becoming a real problem.

    Logically with a 20 percent redcution in headcount we should also see thea similar cost reduction in SG&A expenses,or at least be closely related to reflect the cuts that have been made,this means that SG&A costs should be coming in at about $115 million less from 2005 levels or about $465 million per qtr.

    Bo- I’m sure as not only myself but others as well must be concerned with what shows to be virtually no improvement in SG&A levels from 3 years ago,before this 20 percent reduction was even considered,if you can shed some insight on this it would be greatly appreciated.

    many thanks

    August 5th, 2008 at 5:12 pm by Bill Stock

  8. Hello Bo:

    Is there any specific plan to reduce SG&A at Nortel and who is the leader to execute that plan? In every quarterly financial report that Nortel issued , the management kept saying there are a lot of works to be done in SG&A but year after year , there was no progress to reduce it and lost is what we are expecting from every report . The new management team has been in place for more than 2 years and there are no progress to their commitment to recreate a “Great company” in three to five years. Please tell us the truth if they are still believing in that and ask them to deliver something that the market can see that there is a future for Nortel shareholders.

    August 5th, 2008 at 5:48 pm by Long Term Shareholder

  9. Hey guys - the details of our SG&A breakdown are out of my realm of expertise. I’m making a few inquiries to see if there is any insight I can get for you.

    August 5th, 2008 at 6:03 pm by Bo Gowan

  10. Hi Bo
    Your inquiries into SG&A at Nortel is very much appreciated. I am not sure how much information I am going to get but I hope that I will get something meaningful from someone who is leading the effort(s)(if any)to reduce it. I also believe that Nortel Management should update shareholders and analysts progress and success of the efforts to reduce Nortel SG&A in the quarterly report conference call. In case I miss it , please let me know if Nortel has a target of SG&A as a % of its revenue. Furthermore, if SG&A is not meeting that target, what is being done and when does Nortel expect to get there (Everyone knows that SG&A at Nortel is very very high and no one needs to be told that there are a lots of works to be done. What are those works and what are the indicators to measure that Nortel is on track to meet its SG&A target)

    August 5th, 2008 at 10:20 pm by Long Term Shareholder

  11. Excellent post Bill Stock.

    SG&A is high. few years ago SG&A used to be equal R&D spend, but not anymore thanks to all the GE initiatives. Too much fat causing it to be tens of millions above R&D. This should be an easy task for MikeZ to fix. But after all, I started to feel this management is all talk and little action (except you Bo).

    August 6th, 2008 at 8:07 am by commentor

  12. DO you really thik you are going to get anything but a smug noon-answer to SG&A questions? My guess; some critical R&D costs are now hidden from the six sigma GEunses in SG&A numbers.

    August 6th, 2008 at 10:31 am by many

  13. Here are some thoughts on the SG&A questions and comments that have been posted. This is a combination of some comments from the Mike Z conference call, my own thoughts, and some insight I got from others in the know.

    First a few numbers so that they are in one spot for people to see:
    * SG&A for 2Q08 was $575M - that’s down $22M QoQ and $20M YoY.
    * SG&A of $575M for 2Q08 represented 21.9% of total revenues. Since 1Q07, SG&A as a % of revenues has fallen from 24.3% to 21.9%
    * In the preso, the slide on SG&A shows that Nortel’s business model target for SG&A is to get to 15-17% of revenues.

    Now some quotes and thoughts below - note that I’m pulling most of these quotes from the Seeking Alpha transcript of the call here - http://seekingalpha.com/article/88632-nortel-networks-corporation-q2-2008-earnings-call-transcript?page=1

    * I’ve been told that our SG&A improvements are being impacted by an unfavorable financial exchange rate. On the earnings conference call, Pavi specifically addressed this with the following statement:”SG&A continues to be an area of focus for us, while foreign exchange continues to create a head wind with a negative impact of about $20 million for the quarter, we continue to bring SG&A down year-on-year.”

    * Pavi continued: “On the G&A side, we reduced spending by 17%, compared to last year. With reductions in finance and I.T. being the main drivers.”

    * Regarding the “S” part of SG&A (sales and marketing), Pavi stated: “Looking at sales and marketing, we are balancing our need for efficiency, with the need to invest in key sales and marketing initiatives.”
    This last statement is a reference in part to the increase in sales resources focused on the enterprise and global services space. Mike Z also commented during the call that Bill Nelson (EVP of Global Sales) had “increased resources to drive 40-gig in unified communications.”

    * Mike Z also commented several times on the move from the “transitional stage” to being a growth business. I think there is some implied increase in sales/marketing resources needed in a growth model (i.e. in enterprise, 40G, global services).

    * Mike Z made reference to this later in the call with this statement: “Sales and marketing have been one of the few areas [where] we actually have been growing. Pavi had indicated that G&A is down to 15% this year. The sales efforts and marketing efforts within Enterprise on a percentage basis are greater than on the Carrier side, as we have said the investments have been made, training has and is occurring and that’s where we are expecting to see the acceleration of the momentum, which we have seen already this year.” - [Note here that the difference here in the reference to a 15% reduction in G&A is based on a 2Q08 reduction, while the previous 17% number references a year-to-date reduction.]

    So when looking at these comments together, what I see is that Nortel is reducing G&A and making definite progress in this area, but is having to balance that with the need to put more investment in sales and marketing efforts for growth areas of the business as Nortel gradually moves to new areas such as enterprise, 40G and services.

    August 6th, 2008 at 4:21 pm by Bo Gowan

  14. Perhaps Nortel is just in a bad business. Wrong place, wrong time. I appreciate the efforts of management to turn the franchise around. Corporate presentations have been filled with stratgies and a confidence that appears sincere. Whatever the strategy, investor confidence is manifest in the share price. $5.89 this morning is a disturbing indicator for those who remain onboard.

    August 7th, 2008 at 11:47 am by Lee Metzger

  15. Bo-thank you for getting some clarification on the SG&A breakdown.

    I think Nortel should be more pronounced on this because it is well known that management has been slow to address this area and when one first sees these SG&A costs,it gives the impression that the restructuring plan is not going according to plan or how management had first wanted to convey it to investors.

    This has ultimately resulted in a lack of confidence from investors and so therefore I think Nortel’s management would be better served if they were able to provide a more detailed progress report on this stubborn SG&A area.

    I’m sure you can appreciate the fact that Nortel is under a high level of scrutiny particularly when there is a perception of management being unable to execute on their Business Transformation Plan.

    I follow Nortel very closely and had noticed what appeared to be very little progress on reducing their SG&A costs compared to 2 years ago when Z first took the helm.

    For Nortel to breakdown or at least provide greater detail with respect to progress on reducing costs in this area of the organization would demonstrate to investors that management is well in control of this and that progress in this area has not stalled.

    As for someone such as myself who follows Nortel’s financials closely, to have first perceived what appeared to be very little progress in this area,I’m sure if Nortel were to provide greater detail in how they are handling the SG&A progress report,it would also help to instill confidence with investors and reassure them that Nortel has not faltered in this stubbornly difficult area.

    your efforts are always appreciated

    August 8th, 2008 at 11:55 am by Bill Stock

  16. Hi Bo

    just to add some perspective about Nortel’s SG&A situation,there was an article written by Duncan Stewart(a formal analyst turned columnist) in the National Post in which he feels that Nortel’s recognized deferred revenues in the 2nd qtr actually make Nortel’s SG&A costs as a percentage of revenue appear lower than what they really were-

    “The next key metric for investors is spending on SG&A (sales, general and administration). Nortel has done a good job keeping its gross margins high, and its R&D expenditures are in line with its business model, but for the company to make its goal of a 13% operating margin they need to get SG&A down to around 15%. In the second quarter it was 21.9%, which is up from the first and fourth quarters of last year. (It is going the wrong way.)

    But it gets worse: Nortel recognized about US$300-million of deferred revenue from a joint venture with LG in the quarter. Those revenues are legit, but they don’t have various associated costs, so Nortel’s “true” SG&A in the second quarter was likely over 24%.”

    http://www.financialpost.com/analysis/columnists/story.html?id=bcb7bb04-885e-49f4-824b-c361209f8599

    August 9th, 2008 at 2:28 pm by Bill Stock

  17. Duncan Stweart’s analysis sounds more plausable to me than Bo’s regurgatation of information from “others in the know”. Again I think some R&D is hidden in the SG&A numbers.

    August 10th, 2008 at 11:56 am by many

  18. Good Morning Bo,
    Very disappointing call from Lehman this morning downgrading Nortel to sell with a $6 price target. I continue struggle with the effectiveness of management to convey a credible growth story to the financial community. Further, it disappoints me to no end to observe the dramatic shift in sentiment from the June analyst meeting to the August “post earnings” perspective Lehman suggests. How can the company’s prospects slide this fast? Thank you.

    August 26th, 2008 at 10:05 am by Lee Metzger

  19. Lee

    I actually think Nortel’s execs are forced to stay mum while hedgefunds rape the shares.

    The downgrade was an actual maintaining of the $6 price target-interesting how that works.

    What also puzzles me is if these analysts have such great insight into Nortel’s revenue streams,then the CDMA decline would have been very well anicipated by them,even dating back 2 years ago.

    Yet what we also find very interesting is that the powers that took the stock up to $32 from the $21 level immediately following the reverse split were the same people that supposedly have that great insight into Nortel’s revenue streams.

    After all it’s these “dogs” that determine Nortel’s market cap and they do it at will with their victims forced to remain silent.

    Something about this picture surely doesn’t add up,but I can assure you I’m on the case.

    These markets have changed forever and we now know that hedgefunds are wreaking havoc as they control media sources giving them leverage for them to do their damage.

    August 26th, 2008 at 10:30 am by Bill Stock

  20. Bill and Lee…I agree…let me know if I can help, It’s a good management team, but they need a kick in the tail.

    August 26th, 2008 at 10:55 am by bay

  21. If it is a good management team and they believe in what they are doing why are they not buying shares in Nortel?

    August 26th, 2008 at 12:19 pm by nick

  22. Hey Nick - the last time execs buying shares came up we highlighted that Mike Z had bought $1M in Nortel shares. Obviously Nortel execs have to abide by strict rules for buying and selling shares, which I believe has to be submitted and approved far in advance of the action trade.

    August 26th, 2008 at 12:27 pm by Bo Gowan

  23. Hey Bo - Check out this link: http://finance.yahoo.com/q/ir?s=NT

    The only ones who have purchased is Mike, the COB and one other officer, all the rest have and continue to sell.

    I think it is time that the BOD realize that this management team has failed and try to salvage some shareholder value by selling the company.

    Nick

    August 26th, 2008 at 12:44 pm by nick

  24. Obviously, there is no company cash available to support the shares. The Exec’s cannot be expected to muster sufficient capital to stem the tide in any meaningful way. The only option is to keep plugging away.

    August 26th, 2008 at 3:23 pm by Lee Metzger

  25. Bo- tell the BOD to buyback some shares,even if it is a small amount it still shows that they have confidence in their turn around strategy and it will also send a very clear message to investors.

    Nortel shares are being kicked pulled and dragged through the mudd and managememt is just sitting there taking it like they in some weird way the shares deserve this abuse?

    this is utterly ridiculous,the company’s value is at the same level it was at its worse point in history which dates back to 2002!

    The abusers are basically saying that $10 billion of Nortel’s annual sales are a dead end street?

    I know management is very aware of the current shareprice and I know its a tough situation for them to address,but they’ve got to do something to reverse this dreadful spiral.

    August 26th, 2008 at 3:37 pm by Bill Stock

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