IS PEC Solutions on the Block?

In a research report, Orion Securities analyst Duncan Stewart suggests Nortel Government Services (formerly known as PEC Solutions) is doing “very badly”, “about to do worse” and could be dumped as a “distress sale” for about $200-million (less than 50% of the $448-million all-cash purchase price two years ago). Stewart’s assertion came after he went through Nortel’s recent 10-Q filing, which shows NGS is struggling amid the delay and/or cancellation of U.S. government contracts. Stewart finds it interesting Nortel has lumped NGS into the “other” category in financial filings with Q3 revenue, which accounted for Q3 revenue of $60-million and $249-million on a TTM basis. “Interestingly, that implies that Q3 NGS sales are lower than last year and lower than the quarterly run rate from the first half of 2006,” he said. “Assuming that NGS is 95% of Other revenue, the business has not grown since Nortel bought it.” PEC was acquired during the resign of Bill Owens, who had strong ties to Washington through his career in the U.S. military. Nortel touted PEC as a core part of its goal to generate more U.S. government business. It paid a premium for PEC, which was seen as a second-tier systems integrator.

5 Responses to “IS PEC Solutions on the Block?”

  1. Not Observer Says:

    In the past and as stated in previous conference calls, NGS revenues were included in Enterprise revenues. They also had to be careful on detail reporting given that numerous contracts are considered Government/Military Top Secret and they had to adhere to Homeland Security laws.

  2. Not Observer Says:

    I found some additional information on Page 4 of their Quarterly Report that Mr. Stewart obviously missed as follows:

    “In conjunction with the establishment of Nortel’s Global Services operating segment in the third quarter of 2006, Nortel has disclosed in its condensed consolidated statements of operations revenue and related cost of revenues from both its products and services. Nortel’s products and services are generally sold jointly as part of a contract and the terms of the contract, taken as a whole, determine the appropriate revenue recognition methods. Product revenue includes revenue from arrangements that include services such as installation, engineering and network planning where the services cannot be separated from the arrangement because fair value could not be established. Services revenue reported on the condensed consolidated statements of operations is comprised of revenue from Nortel’s Global Services segment (excluding services bundled with product sales) and revenue from the acquisition of Nortel Government Solutions Incorporated (“NGS”). ”

    From this information it is clear that Nortel Government Solutions revenues are being declared within the Nortel Global Services segment. Nortel Global Services had $316 Million in Q3 Revenues and $916 Million in Year-to-date Revenues.

  3. nortel watcher Says:

    It seems to me that observers comments are again on track. I used to read with annoyance the material he posted but he has repeatedly said NGS (formerly pec) was an awful purchase and they paid way too much for it. Now I see that not only has NGS lagged in revenue but now they are looking to offload it in a distress sale for less then half of what they purchased it for 2 years ago. What was all of this crap I’ve been reading about contract wins and it being bolstered as such a great company and future revenue stream for nortel as the US govt. ramped up it’s IT purchases. what a complete joke. I stood by this company for the last 4 years and all it has given me in the end is alot of wasted time and money.

  4. jayemmay Says:

    What’s the opposite of the Midas touch, where whatever you touch turns to ashes instead of gold? No matter what it’s called, Nortel has it. It’s very disappointing.

  5. Observer Says:

    It is earnings that are the bottom line not revenues. They can sell all their assets and report a bonanza in increasing revenues but if earnings are still declining, this big trouble where the most brazen of the once bitten still willing to possibly return now demand, “show me the money”…

    Nortel never was a genius in acquisitions having bungled 20 billion during the tech bubble era.

    Post fraud with ongoing investigations, Nortel paid a whopping half a billion bucks Canadian ($448M US) to acquire PEC now cleverly renamed Nortel Government Solutions with declining earnings since 2002, earnings of $15 annually last reported.

    To claim revenues are top secret and not included in Nortel’s numbers strikes me as utterly ludicrous.

    Generally, a company pays what? 3 times earnings for a company? maybe 3 and a half?

    here’s another, Tasman:
    “Still, after nearly a decade in business, the company manages to make less than $10 million in sales per annum – Hoovers puts the amount at $7.8 million. At the advertised price, therefore, Nortel looks to be paying a whopping 12.8 times sales to acquire Tasman’s technology. ”

    OK so the BSNL gamble and losses wasn’t enough, there was no Putian, the long boasted R&D cuts never came through, let alone a plan, Neptune was tossed, the Huawei partnership fell through, even Force 10 recently said no thanks, they have no merger partner in a consolidating sector, they revised even more numbers, and yet cruise along with a green staff hoping some miracle will magically come their way in a sea of insurmountable woes it seems.

    As I said, only to be reiterated in the media, they better concentrate on salvaging what they have (in core business) and tighten their belts exponentially better because after printing so much paper, I honestly believe it is already too late to avoid a liquidity crisis at this point and rate.

    Reverse splits won’t draw institutional investors who would have their stock tanked by increased shorting interest. There are still fines from cash and outlook is only worsening with time and events. It is endless…

    As a staunch critic, I must digress, the punch lines just keep on coming don’t they? I too feel awkward having only volumes and volumes of woes to post and not one thing going for this yesteryear mammoth. The company is total joke, no one takes them seriously anymore.

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