Nortel makes money despite falling revenue

Nortel swung to a profit in the third quarter despite falling revenue.

Nortel Networks achieved a measure of financial recovery in the third quarter as it posted a small profit, even while revenue for most of its businesses fell.

The carrier and enterprise network vendor, emerging from years of mismanagement and still struggling against bigger rivals, ran a tighter ship during the quarter. Its operating expenses fell 3 percent and operating margin was Nortel's biggest since 2004, the company said.

That helped Nortel post net income of US$27 million and earnings per share of $0.05, turning around from a net loss in the same quarter last year of US$63 million or $0.14 per share.

But revenue fell 8 percent from a year earlier, to US$2.7 billion. Part of this was due to Nortel's sale last year of its UMTS (Universal Mobile Telecommunications System) business: Excluding that impact, revenue fell just 2 percent. But even discounting it, the company's sales to carriers fell 11 percent. Only the company's enterprise business posted higher revenue, with an 18 percent boost from a year earlier to US$671 million. Nortel's services business had flat revenue.

The enterprise business has posted revenue gains for five consecutive quarters now, according to Nortel. In a news release, the company cited gains in all product portfolios and said its joint venture with Microsoft for unified communications has gained more traction. The companies have more than 300 joint customers and 900,000 licenses for their system, which combines Nortel telephony products and services with Microsoft software.

President and CEO Mike Zafirovski has tried to restructure and resize Nortel to be more competitive against Cisco Systems and other rivals. Nortel is overshadowed by Cisco in the enterprise business and faces a tougher challenge in the carrier network business, where there are fewer customers due to consolidation and competition from Asia is growing. Costs have come down as a result of Zafirovski's efforts: The company's third-quarter research and development spending was 12 percent lower than in last year's third quarter. The sale of the UMTS division and lower employee costs accounted for much of that drop, the company said.

But the revenue picture isn't expected to get much better. Nortel forecast revenue to be flat in the fourth quarter and down slightly for the full year compared with 2006.

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