Tough Times Ahead for Nortel

Investopedia has a blunt take on Nortel’s prospects: it’s going to be a tough road ahead. While Ben McClure, is director of McClure & Co., gives the company credit for dealing with its accounting woes and putting its financial books in order, he warns if investors believe “Nortel is about to shows signs of its old glory, you better think again”. Well, it’s highly doubtful there are any investors who believe Nortel’s is showing signs it will get to relive the heady days of the telecom boom again but McClure’s cautious approach is healthy. Here’s some more from the article:

While the management team is headed in the tight direction, it’s going to take a long time to right this badly battered ship. For starters, Nortel continues to produce lousy results. Sales of wireless data equipment fell 4% last quarter, and sales at its cellular equipment business plunged 11%. These businesses account for nearly half of Nortel’s total revenue. Gross margins fell by 4%. One bright spot is voice over packet-switched Internet technology, where sales increased by 10% last quarter. 

Despite McClure’s bearish take, do not be surprised if Nortel’s bottom line shows significant improvement over the next few quarters as CEO Mike Zafirovski’s restructuring plan, which includes job cuts and operational streamlining, starts to generate dividends. The emotional attachment Canadian investors have with Nortel could cause the the stock to jump on any hint of good news/a recovery.

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2 Responses to “Tough Times Ahead for Nortel”

  1. Godzilla Says:

    “do not be surprised if Nortel’s bottom line shows significant improvement over the next few quarters as CEO Mike Zafirovski’s restructuring plan, which includes job cuts and operational streamlining, starts to generate dividends”

    Mark

    You assume flat or rising revenues. Once you have established a breakeven position, any revenue above that falls disproportionately to the bottom line, as the incremental costs are small. The reverse is also true.

    Notwithstanding Z’s effort on setting a lower breakeven, it won’t do him any good if he can’t raise revenues. And with annual price erosion, unit volume needs to increase proportionately just to stay in place.

    Just as everyone else is asking, where is the strategy that is going to increase the top line?

  2. nortel Says:

    good points. my assumption is based on the idea mike z.’s recognizes there is plenty of low-hanging fruit in terms of cost reductions that can be achieved. in theory, this could boost profits even if revenue is flat. of course, if prices drop at a greater pace than mike z. can slash expenses and/or nortel struggles to find new sales, then it could be a different story.

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