How many layers of lipstick can Nortel’s board and executive management apply to the porcine sloth that their company has become?
The corporate bosses at Nortel are up to their old tricks again, spinning mediocre first-quarter results as an auspicious sign of renaissance, even as the company fails to establish meaningful traction in markets such as Metro Ethernet, enterprise networking, and its much-hyped foray into WiMax, a misunderstood technology that has nothing to do with WiFi except for having the same two-letter prefix.
It’s important to note that Nortel’s first-quarter results were significantly enhanced by the release of deferred revenue related to the completion of a big contract in Nortel’s joint venture with LG Electronics that was previously expected to happen in the second quarter.
If Nortel hadn’t moved that revenue forward, the quarter, and the results of its telecommunications unit, would have looked much different. What’s more, by advancing this revenue to the first quarter, Nortel will have to scramble to compensate for it in the second quarter, now well underway.
Although Nortel’s full-year targets are not overly ambitious, investors should tread warily. The company is under siege from lower-cost competitors in its core markets — which is why Nortel has shifted its procurement and other operations to China — and its CDMA base is more albatross than bird of fortune.
Additionally, as noted above, the company is struggling to redefine itself and establish new technology growth markets. It has cut costs to the bone, slashing through meat as well as fat, and there’s a limit to how much more it can do on that front to sustain margins. At some point, sooner as opposed to later, Nortel will have to find top-line growth in attractive markets that offer good, defensible margins.
Do you see it happening? I am extremely skeptical.