Canadian telecom equipment maker Nortel (NYSE:NT) reports Q2 2006 earnings results tomorrow. Want to know what Wall Street expects to see? Read on. Want to know what really matters? Read on a bit more.

What analysts say:

  • Buy, sell, or waffle? Thirty-one analysts still have faith enough in Nortel to spend their days watching it struggle. Two of them rate the stock a sell; 10 think you should buy it; the other 19 say just hold.
  • Revenues. On average, they're looking for 8% sales growth to $2.7 billion.
  • Earnings. They're also expecting a reversal of last year's loss for a $0.02 per-share profit.

What management says:
In June, Nortel unveiled a plan that CEO Mike Zafirovski is confident will return the company to consistent profitability. Chief among the elements is a restructuring of the firm's pension benefits, aimed at reducing annual pension costs by $100 million per annum by 2008. By "restructuring," it appears Zafirovski means freezing or ending the defined benefit plans and replacing them with defined contribution plans. Or in English, eliminating pensions and moving employees to 401(k)s. If successful in pushing the changes through, this would reduce Nortel's unfunded pension liability deficit by $400 million (and show one of the first corporate reactions to recent moves by U.S. regulators to require firms to show their unfunded pensions as balance sheet liabilities). My guess is that Nortel will succeed in getting the pension plan changes pushed through, as it'll be riding a trend among other large corporations in this respect. The other two major steps, improving global operations and simplifying the corporate organization, have more the feel of glowing generalities, although they do include the specific target of laying off 1,900 workers. Eventual goal: cutting another $275 million in costs in 2007 and 2008, combined.

What management does:
With old rivals Lucent (NYSE:LU) and Alcatel (NYSE:ALA) set to merge and become stronger, even as its own margins continue to compress, Nortel needs to move quickly if it's to stem the still-flowing tide of red ink shown in the table below.

Margins %

12/04

3/05

6/05

9/05

12/05

3/06

Gross

41.4

41.7

42.4

42.6

40.9

39.6

Op.

(1.7)

(2.1)

(0.4)

1.7

0.2

(1.4)

Net

(2.2)

(3.9)

(3.5)

(1.8)

(24.5)

(25.1)
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

Furthermore:
On a final note, readers of TheWall Street Journal may have noticed an article in Monday's section C, describing another dilemma that Nortel faces. Years of losses have netted the firm a boatload of deferred tax credits (commonly called "NOLs," or "net operating loss carryforwards") that can be used in years when the firm earns a profit to reduce the amount of taxes it must pay on said profits. Problem is, the firm needs to actually earn profits to use these credits. If it doesn't get to generating some black ink soon, the credits will become increasingly unlikely to ever be usable, and the firm will face pressure to write them off forever.

Competitors:

  • 3Com (NASDAQ:COMS)
  • Avaya (NYSE:AV)
  • Ciena (NASDAQ:CIEN)
  • Cisco (NASDAQ:CSCO)

Is your mood unreasonably good today? Could you use more depressing news about Nortel to help bring you down? We're here to help:

Fool contributor Rich Smith does not own shares of any company named above.