Nortel Networks achieved a measure of financial recovery in the third quarter as it posted a small profit, even while revenue for most of its businesses fell.
The carrier and enterprise network vendor, emerging from years of mismanagement and still struggling against bigger rivals, ran a tighter ship during the quarter. Its operating expenses fell 3 percent and operating margin was Nortel’s biggest since 2004, the company said.
That helped Nortel post net income of $27 million and earnings per share of $0.05, turning around from a net loss in the same quarter last year of $63 million or $0.14 per share.
But revenue fell 8 percent from a year earlier, to $2.7 billion. Part of this was due to Nortel’s sale last year of its UMTS business: Excluding that impact, revenue fell just 2 percent. But even discounting it, the company’s sales to carriers fell 11 percent. Only the company’s enterprise business posted higher revenue, with an 18 percent boost from a year earlier to $671 million. Nortel’s services business had flat revenue.
The enterprise business has posted revenue gains for five consecutive quarters now, according to Nortel. In a news release, the company cited gains in all product portfolios and said its joint venture with Microsoft for unified communications has gained more traction. The companies have more than 300 joint customers and 900,000 licenses for their system, which combines Nortel telephony products and services with Microsoft software.
“The progress is starting to pay off in the investment areas that we’re making,” says Joel Hackney, president of Nortel’s Enterprise Solutions group. “It’s going to be a tough task to keep that level going organically, but we do feel like the investments we’re making are in the right areas and give us the best chance to do so.”
Those investment areas include unified communications; data networking; and applications such as contact center, multimedia and interactive voice response (IVR). In unified communications, the Nortel partnership with Microsoft has signed more than 300 joint customers and 900,000 licenses for their Innovative Communications Alliance products.
In data networking, demand was strong across the product portfolio and in all geographic areas to address convergence requirements, Hackney says. And Nortel’s been winning “side by side” customer comparison of contact centers and IVR applications, he claims.
Nortel invested $300 million in enterprise R&D in 2005, hiking that to $400 million in 2006. This year will see a “significant increase” in that figure, Hackney says.
President and CEO Mike Zafirovski has tried to restructure and resize Nortel to be more competitive against Cisco Systems and other rivals. Nortel is overshadowed by Cisco in the enterprise business and faces a tougher challenge in the carrier network business, where there are fewer customers due to consolidation and competition from Asia is growing. Costs have come down as a result of Zafirovski’s efforts: The company’s third-quarter research and development spending was 12 percent lower than in last year’s third quarter. The sale of the UMTS division and lower employee costs accounted for much of that drop, the company said.
But the revenue picture isn’t expected to get much better. Nortel forecast revenue to be flat in the fourth quarter and down slightly for the full year compared with 2006.
