The hits just keep on coming at Nortel (NYSE:NT), the ever-increasingly less-massive Canadian telecommunications and data networking equipment company. The latest in a long string of successive disappointments comes in the form of a warning from the company that its third-quarter revenues will decline from its second quarter's and that its full year's revenue growth will fall below industry averages.
This comes on the tail of a warning at the end of July that the company was not going to meet its gross profit margin goals of the mid-40% range and that its restatement would wipe away more than $730 million in previously reported profits. There were a few other things that I noted several months ago:
- Nortel is currently working on restatements of its financial statements from 2001 to the present.
- Nortel is under investigation by the Securities and Exchange Commission, the U.S. Justice Department, and the Ontario Securities Commission.
- Nortel is facing criminal investigations in Texas, while Canadian authorities consider similar action.
- Its reported earnings from 2003 will be halved after the restatement.
- This is still at its essence a telecommunications equipment company, and telecommunications hasn't turned around.
- Nortel is in technical default with some of its creditors.
This latest warning is a very, very bad sign. Previously, the company had expected that its overall profitability would drop but that its equipment mix would help it generate more customer wins. Now it's failing to meet profit goals, and other telecommunications equipment companies are growing faster, and as Nortel's CEO William Owens noted recently, Nortel must now contend with lower-priced competition from China from companies such as Huawei, where no such competition had existed in the networking sector in the past.
The company noted that it now expects second-quarter revenue to be in the range of $2.6 billion, but it did not give a specific target for the third quarter. What hurts here is that shareholders had been able to talk their way past the restatements, the executive firings, the turmoil, and the restructuring because of a belief that Nortel was a growth company with a superior core line of products, especially in the wireless sector. As long as Nortel was winning customers faster than Lucent (NYSE:LU), Ericsson (NASDAQ:ERICY), and other wireless network providers, this faith in the underlying strength of the company made some sense. But if Nortel is losing market share, this core growth/underlying strength thesis starts to come apart. While Nortel's new management team sports the bona fides for turning it around, a company that lacks several years' worth of credible financial statements and seems to be losing ground to its competition would have to have some massive margin of safety before I'd be interested. With Nortel, I don't see any such thing.
Fore more Foolish coverage, see:
- Enticed By Cheap, Cheap Nortel?, by Ben McClure
- Feeling Nortel's Pain, by W.D. Crotty
- Nortel's Big What-If, by Ben McClure
Bill Mann does not hold shares of any company mentioned in this article. Please view his profile for a complete list of his holdings.
