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Nortel Reports Financial Results for the First Quarter 2008
May 2, 2008
"Nortel had a strong first quarter, driven by the completion of a contract in our LG-Nortel joint venture and continued improvements in gross and operating margins. Nortel's operating margin, a critical measure of our plan's traction, expanded for the seventh consecutive quarter year over year, recording a 512 bps improvement to 4.7 percent," said Mike Zafirovski, Nortel president and chief executive officer. "We expect to achieve our full year guidance and we continue to make solid progress against the strategy to turn around the company. Our relentless focus on execution and our determination to deliver value to customers is strengthening the foundation upon which to build our performance over the balance of 2008 and beyond." 2008 Financial Highlights
Business Highlights
Revenue Revenue was $2.76 billion for the first quarter of 2008 compared to $2.48 billion for the first quarter of 2007 and $3.20 billion for the fourth quarter of 2007. In the first quarter of 2008, revenue increased by 11 percent compared with the year ago quarter and decreased by 14 percent compared to the fourth quarter of 2007. The first quarter of 2008 included the release of deferred revenue associated with the completion of a large contract in the LG-Nortel joint venture.
Carrier Networks (CN) revenue in the first quarter of 2008 was $1,218 million, an increase of 21 percent compared with the year ago quarter and a decrease of 10 percent sequentially. Compared to the year ago quarter, CN revenue benefited from the LG-Nortel joint venture contract completion, partially offset by a slight decline in CDMA and lower legacy switching sales. Enterprise Solutions (ES) revenue in the first quarter of 2008 was $641 million, an increase of 7 percent compared with the year ago quarter and a decrease of 16 percent sequentially. Compared to the year ago quarter, ES revenues were positively impacted by higher voice and applications revenues, primarily from customer migration to unified communications, partially offset by a decline in the data networking business primarily from lower sales in the North American and EMEA regions and significant contract completions in the first quarter of 2007, not repeated to the same extent in the first quarter of 2008. Global Services (GS) revenue in the first quarter of 2008 was $516 million, an increase of 15 percent compared with the year ago quarter and a decrease of 15 percent sequentially. The first quarter showed strong growth in network implementation services and managed services, partially offset by a decline in network support services. Compared to the year ago quarter, GS revenue benefited from the LG-Nortel joint venture contract completion and other growth in implementation services primarily in the Asia region. Metro Ethernet Networks (MEN) revenue in the first quarter of 2008 was $327 million, a decrease of 12 percent compared with the year ago quarter and a decrease of 24 percent sequentially. The year over year decrease in revenue was primarily due to decreases in optical and data revenue resulting from the completion of large contracts in the first quarter of 2007 not repeated to the same extent in the first quarter of 2008. Deferred Revenue Deferred revenue balances decreased by $266 million during the first quarter of 2008 compared to an increase of $32 million in the first quarter of 2007. Gross margin Gross margin was 41.6 percent of revenue in the first quarter of 2008. This compared to gross margin of 40.4 percent for the first quarter of 2007 and 43.7 percent for the fourth quarter of 2007. Compared to the first quarter of 2007, gross margins benefited primarily from productivity improvements partially offset by unfavourable product mix and lower margin deferred revenue releases. Operating Expenses
Operating expenses were $1,017 million in the first quarter of 2008. This compares to operating expenses of $1,013 million for the first quarter of 2007 and $1,153 million for the fourth quarter of 2007. Selling, general and administrative (SG&A) expenses were $597 million in the first quarter of 2008, compared to $604 million for the first quarter of 2007, and $678 million for the fourth quarter of 2007. Compared to the first quarter of 2007, SG&A was favourably impacted primarily by savings from previously announced restructuring programs, partially offset by investments in sales and marketing and negative foreign exchange impacts. Research and development (R&D) expenses were $420 million in the first quarter of 2008, compared to $409 million for the first quarter of 2007 and $475 million for the fourth quarter of 2007. Compared to the first quarter of 2007, R&D was favourably impacted primarily by savings from previously announced restructuring programs, partially offset by negative foreign exchange impacts and investments in new technologies. Operating Margin Operating margin was 4.7 percent in the first quarter of 2008, compared to (0.4) percent for the first quarter of 2007 and 7.6 percent for the fourth quarter of 2007. The first quarter of 2008 operating margin increased by 512 basis points compared to the year ago quarter, marking the seventh consecutive quarter of year over year improvement. The improvement was driven by higher gross margin and lower operating expense to revenue. Other Special charges in the first quarter of 2008 of $88 million related to costs associated with previously announced restructuring plans. Other income (expense) - net was $37 million of income for the first quarter of 2008, compared to income of $66 million in the first quarter of 2007 and income of $93 million in the fourth quarter of 2007. Other income included interest and dividend income of $38 million, a foreign exchange loss of $19 million and a $16 million gain on an interest rate swap. Minority interest was an expense of $78 million in the first quarter of 2008, compared to an expense of $22 million for the first quarter of 2007 and an expense of $39 million for the fourth quarter of 2007. Minority interest expense included an expense of $11 million related to the ongoing payment of preferred shares dividends, but was primarily driven by the profitability of the LG-Nortel joint venture. Interest expense was $80 million in the first quarter of 2008, compared to $96 million for the first quarter of 2007 and $80 million for the fourth quarter of 2007. Income tax expense was $36 million in the first quarter of 2008, compared to an expense of $13 million for the first quarter of 2007 and an expense of $1,040 million for the fourth quarter of 2007 which included an increase to the valuation allowance against the deferred tax asset of $1,043 million. Earnings The Company reported a net loss in the first quarter of 2008 of $138 million, or $0.28 per common share on a basic and diluted basis, compared to net loss of $103 million, or $0.23 per common share on a basic and diluted basis, in the first quarter of 2007 and net loss of $844 million, or $1.70 per common share on a diluted basis, in the fourth quarter of 2007.
The net loss in the first quarter of 2008 of $138 million included special charges of $88 million for restructurings, a loss of $19 million due to changes in foreign exchange rates, a charge of $12 million related to a patent lawsuit settlement and a gain of $16 million primarily from mark-to-market gains on interest rate swaps. The net loss in the first quarter of 2007 of $103 million included a shareholder litigation gain of $54 million reflecting a mark-to-market adjustment of the share portion of the class action settlement and special charges of $80 million for restructuring. The net loss in the fourth quarter of 2007 of $844 million included a reduction of the deferred tax asset of $1,043 million, special charges of $38 million for restructurings, a gain of $23 million on the sale of assets, a gain of $40 million due to favourable effects of changes in foreign exchange rates and a gain due to a market value adjustment of $15 million on an interest rate swap. Cash balance at the end of the first quarter of 2008 was $3.22 billion, down from $3.53 billion at the end of the fourth quarter of 2007. The decrease in cash was primarily driven by a cash outflow from operating activities of $260 million, cash used in investing activities of $44 million and cash used in financing activities of $14 million. The cash outflow from operating activities of $260 million included a net loss of $138 million and outflows of $264 million primarily related to the payment of 2007 bonuses and fourth quarter sales compensation, $121 million related to pension funding, $51 million cash payments related to our previously announced restructuring plans, partially offset by net cash inflows of $99 million of working capital and non-cash additions including $82 million of amortization and depreciation and $78 million of minority interest primarily related to profitability of the LG-Nortel joint venture. Outlook (a) Nortel reiterates its financial outlook for the full year 2008, and continues to expect:
About Nortel Nortel is a recognized leader in delivering communications capabilities that make the promise of Business Made Simple a reality for our customers. Our next-generation technologies, for both service provider and enterprise networks, support multimedia and business-critical applications. Nortel's technologies are designed to help eliminate today's barriers to efficiency, speed and performance by simplifying networks and connecting people to the information they need, when they need it. Nortel does business in more than 150 countries around the world. For more information, visit Nortel on the Web at www.nortel.com . For the latest Nortel news, visit www.nortel.com/news . Certain statements in this press release may contain words such as “could”, “expects”, “may”, “anticipates”, “believes”, “intends”, “estimates”, ”targets”, “envisions”, “seeks” and other similar language and are considered forward-looking statements or information under applicable securities legislation. These statements are based on Nortel's current expectations, estimates, forecasts and projections about the operating environment, economies and markets in which Nortel operates. These statements are subject to important assumptions, risks and uncertainties, which are difficult to predict and the actual outcome may be materially different. Nortel has made various assumptions in the preparation of its financial outlook in this press release, including the following company specific assumptions: no further negative impact to Nortel's results of operations, financial condition and liquidity arising from Nortel's restatements of its financial results; increase in sales to Nortel's enterprise customers and wireless service provider customers in the Asia Pacific region as a result of Nortel's joint venture with LG Electronics Inc.; improvement in Nortel's product costs due to favourable supplier pricing, offset by higher costs associated with customer deployments in emerging markets; cost reductions resulting from the 2008 and 2007 restructuring plans; increased employee costs relative to expected cost of living adjustments and employee bonuses; and the effective execution of Nortel's strategy, including the execution of Nortel's supply chain strategy and the implementation of its Business Transformation initiatives in 2008. Nortel has also made certain macroeconomic and general industry assumptions in the preparation of its financial guidance including: global service provider capital expenditures in 2008 reflecting low to mid single digit growth as compared to mid to high single digit growth in 2007; global growth rate to remain stable with investments in next generation products and services to exceed declines in purchases of legacy equipment; and a moderate impact as a result of expected industry consolidation among service providers in various geographic regions, particularly in North America and EMEA. The above assumptions, although considered reasonable by Nortel at the date of this press release, may prove to be inaccurate and consequently Nortel's actual results could differ materially from its expectations set out in this press release. Further, actual results or events could differ materially from those contemplated in forward-looking statements as a result of the following (i) risks and uncertainties relating to Nortel's business including: significant competition, competitive pricing practice, cautious capital spending by customers as a result of factors including current economic uncertainties, industry consolidation, rapidly changing technologies, evolving industry standards, frequent new product introductions and short product life cycles, and other trends and industry characteristics affecting the telecommunications industry; any material, adverse affects on Nortel's performance if its expectations regarding market demand for particular products prove to be wrong; the sufficiency of recently announced restructuring actions; any negative developments associated with Nortel's suppliers and contract manufacturing agreements including our reliance on certain suppliers for key optical networking solutions components; potential penalties, damages or cancelled customer contracts from failure to meet delivery and installation deadlines and any defects or errors in Nortel's current or planned products; fluctuations in foreign currency exchange rates; potential higher operational and financial risks associated with Nortel's efforts to expand internationally; potential additional valuation allowances for all or a portion of Nortel's deferred tax assets if market conditions deteriorate or future results of operations are less than expected; a failure to protect Nortel's intellectual property rights, or any adverse judgments or settlements arising out of disputes regarding intellectual property; any negative effect of a failure to maintain integrity of Nortel's information systems; changes in regulation of the telecommunications industry or other aspects of the industry; any failure to successfully operate or integrate strategic acquisitions, or failure to consummate or succeed with strategic alliances; Nortel's potential inability to attract or retain the personnel necessary to achieve its business objectives or to maintain an effective risk management strategy; (ii) risks and uncertainties relating to Nortel's liquidity, financing arrangements and capital including: any inability of Nortel to manage cash flow fluctuations to fund working capital requirements or achieve its business objectives in a timely manner or obtain additional sources of funding; high levels of debt, limitations on Nortel capitalizing on business opportunities because of senior notes covenants, or on obtaining additional secured debt pursuant to the provisions of indentures governing certain of Nortel's public debt issues; Nortel's below investment grade credit rating; any increase of restricted cash requirements for Nortel if it is unable to secure alternative support for obligations arising from certain normal course business activities, or any inability of Nortel's subsidiaries to provide it with sufficient funding; any negative effect to Nortel of the need to make larger defined benefit plans contributions in the future or exposure to customer credit risks or inability of customers to fulfill payment obligations under customer financing arrangements; or any negative impact on Nortel's ability to make future acquisitions, raise capital, issue debt and retain employees arising from stock price volatility and any declines in the market price of Nortel's publicly traded securities; and (iii) risks and uncertainties relating to Nortel's prior restatements and related matters including: any negative impact on Nortel and NNL of such restatements; legal judgments, fines, penalties or settlements related to the ongoing criminal investigations of Nortel in the U.S. and Canada; the significant dilution of Nortel's existing equity positions resulting from the approval of its class action settlement; or any significant pending or future civil litigation actions not encompassed by Nortel's class action settlement. For additional information with respect to certain of these and other factors, see Nortel's Annual Report on Form10-K and other securities filings with the United States Securities and Exchange Commission. Unless otherwise required by applicable securities laws, Nortel disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. *Nortel, the Nortel logo and the Globemark are trademarks of Nortel Networks. Nortel will host a teleconference/audio webcast to discuss First Quarter 2008 Results: Date: Friday, May 2, 2008 To take part in the audio Webcast, please visit: www.nortel.com/q1earnings2008 To participate in the audio teleconference and Q&A, please call:
*** Please dial in at least 15 minutes prior to the start of the event *** Replay: A replay of the audio teleconference will be available at 11:00 a.m. ET at:
Audio webcast replay: www.nortel.com/q1earnings2008 Contacts for Press and Analysts: Media Mohammed Nakhooda Investors | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
