One-Time Gain Helps Boost Nortel 2Q Earnings

Is Nortel Networks Ltd. on the verge of a turnaround? The beleaguered equipment maker on Thursday reported net second quarter 2006 earnings of $366 million, or $0.08 per share, compared to a net loss of $33 million, or less than .01 cents per share during the same quarter of 2005.

The positive news might turn out to be an anomaly, though, as Nortel attributed the positive news to one-time gains from litigation and a slight increase in revenue. The company recovered $510 million from a shareholder lawsuit but also paid $45 million for restructuring and lost $10 million on the sale of assets.

Revenue totaled $2.74 billion, which did not quite meet analysts’ expectations of earnings of a penny per share on $2.78 billion in revenue, according to a Thomson Financial poll reported by the Associated Press. Still, that compares to Nortel’s second quarter 2005 earnings of $2.62 billion, and $2.38 billion for the first quarter of 2006.

"Our second quarter performance underscores both the challenges and good progress we are making with Nortel's transformation,” said Mike Zafirovski, Nortel’s president and CEO, in a prepared statement. “On the plus side we saw strong order growth of 22 percent and increased sales momentum but gross margin was up only modestly and not at the 40 percent target we have set for ourselves.”

Zafirovski said Nortel is optimistic about various “business transformation” initiatives, including its recently announced unified communications alliance with Microsoft Corp. Under the four-year deal, Nortel will supply the hardware for Microsoft to be able to run traditional business phone systems on software platforms.

“[T]hese efforts are enabling us to deliver greater customer value and substantially enhance Nortel's competitiveness,” Zafirovski added.

Zafirovski has been at Nortel’s helm since November 2005. He came from Motorola Inc. in a bid to reverse Nortel’s fortunes after the equipment maker suffered a period of accounting scandals, management upheaval and overall industry decline.

Under his leadership, Nortel recorded a 7 percent increase in mobility and converged core networks revenue for the second quarter, reaching $1.59 billion, as compared to a year ago. Revenue from enterprise solutions and packet networks dropped 1 percent compared to the second quarter of 2005, totaling $1.07 billion.

Peter Currie, Nortel’s executive vice president and CFO, said company leaders expect to continue “strong revenue momentum” for the remainder of the year, predicting gross margins of around 40 percent.

“For the third quarter of 2006, we expect revenue growth in excess of 10 percent compared to the third quarter of 2005 and gross margin and operating expenses to be in line with our full year guidance," Currie said.

Nortel Networks www.nortel.com

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