06 August 2007

NT: Financial Analysis through June 2007

We have analyzed Nortel Networks (NT) financial results, as reported to the SEC on Form 10-Q, for the quarter that ended on 30 June 2007. This post reports on our evaluation.

Nortel is the Canadian-based supplier of products and services to telecom carriers, other networking enterprises, and businesses. Nortel has defied the worst-case predictions and managed to stay in business and even independent, unlike fellow fallen telecom Lucent. For most of this decade, huge losses have been the norm at Nortel, resulting in an unfathomable accumulated earnings deficit of $35 billion (U.S.).

Tougher times also revealed shortfalls in the company's financial controls, resulting in numerous restatements, and allegations of fraud. The restatements, which only go back so far, complicate any financial analysis of Nortel.

Has Nortel turned the corner? Is it now profiting from global economic demand? No, Nortel has lost money in 9 of the last 10 quarters, including the most recent one. In the tenth quarter, a profit was due only to a $500 million legal settlement.

When we analyzed Nortel after the March quarter, the Overall score was an encouraging (for Nortel) 30 points. Of the four individual gauges that fed into this composite result, Cash Management was surprisingly the strongest at 17 points. Profitability was weakest at 4 points. [Note that recent algorithm tweaks led to minor changes in the previously reported scores.]

Now, with the available data from the June 2007 quarter, featuring yet-another loss, our gauges display the following scores:

One has to ask, why are the scores not closer to zero? Do we need to adjust the scoring algorithms, or is there some good news hidden in the results?

Cash Management. This gauge decreased from 17 points in March to 14 points now.

The measures that helped the gauge were:
The measures that hurt the gauge were:

Growth. This gauge decreased from 7 points in March to 0 points.

None of the measures stirred the gauge:

Profitability. This gauge didn't change from last quarter's 9 points.

The measures that helped the gauge were:
The measures that hurt the gauge were:

Value. Nortel's stock price started and ended the quarter at $24.05. The Value gauge held at 5 points.

The measures that helped the gauge were:
The measures that hurt the gauge were:
The average P/E for the Communication Equipment industry is currently 31. The average Price/Revenue for the industry is currently 5.

Now at 25 out of 100 possible points, the Overall gauge for Nortel has been in worse condition. But, we don't yet see an omen of better times ahead. There's also nothing to suggest that the company has slipped into critical condition, so management still has some time to find a better path forward.

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