Nortel says it's not investigating improper conduct

Nortel Networks clarified that its plans to restate results back to 2003 are not because the company is investigating improper conduct. "The company wishes to clarify that Nortel's internal and external auditors have not undertaken an investigation as to whether any improper conduct may be associated with the need to effect the latest restatement," the company said in a statement Monday.

The restatement, which was announced last Friday, was the third in recent years and brought sharp negative reactions from some analysts. It was those analyst comments that the Brampton, Ontario-based company apparently sought to quell with Monday's statement.

But Nortel customers seem to be unfazed by any of it. "Nobody is upset or concerned," Steve Ford, president of the International Nortel Networks User Association (INNUA) in Chicago, said Tuesday. "We kind of take [the restatements] like water off a duck's back."

Ford, who is coordinator for electronic service at Northeastern State University in Oklahoma, heads the largest Nortel user group, with about 5,000 members.

Ford said the INNUA board was holding a meeting Friday when Nortel's management called to inform itof the restatement.

"They explained things and get credit for contacting us proactively," Ford said. "It's not that Nortel lost revenue. They just put it in the wrong quarter."

Nortel CEO Mike Zafirovski said in a statement Friday that Nortel's third restatement of financial results in recent years was "unfortunate, but the right thing to do."

Nortel described the need for the restatements of results for 2003, 2004 and part of 2005 "primarily due to revenue incorrectly recognized in prior periods that should have been deferred to future periods." The restatement will be issued in April.

Ford is not only the INNUA president, but his job is also affected by the performance of Nortel products, which he said has been good. He oversees three campus voice networks running entirely on Nortel gear and is slowly introducing voice over IP phones, with 400 installed out of 3,000.

One IT manager at another big Nortel user, The Burlington Northern and Santa Fe Railway in Texas, said the latest restatement should not detract from Nortel's strong points. "I have to believe this [restatement] is reflective of poor financial management, but does not have any adverse impact to or is reflective of Nortel's technical capability or product reliability," said Fred Gratke, assistant vice president of telecommunications at BNSF, in an e-mail.

One of the strongest of the negative analyst reactions to the restatement news came from Bill Lesieur, an analyst at Technology Business Research. "Wow, what a mess!" he said in a statement. "Just when you think it can't get any worse for poor old Nortel, another bombshell."

Lesieur also noted that "it seems the right time for the board of directors to flip the switch to break up Nortel for divestiture."

Lesieur said in a later interview that recent comments by Zafirovski that the company needs three to five years to recreate itself are too long a time period, especially when several years is equivalent to several decades in the fast-changing networking market.

While the market for telecommunications products has contracted in the past five years, the top tier of networking equipment makers has not consolidated but should naturally do so, putting more pressure on Nortel's board to do something dramatic, Lesieur said.

Lesieur said he plans to watch closely as Nortel reassesses its portfolio of products. Enterprise customers "need to get Nortel to convincingly demonstrate that Nortel is here for the long term," he said.

Gratke and Ford said Lesieur's suggestion of divestiture is an overreaction.

"Nortel is still top notch and best in class" in innovation and products, Ford said.

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