May 11, 2009
TORONTO - Nortel* Networks Corporation [TSX: NT | OTC: NRTLQ] announced its results for the first quarter 2009. Results were prepared in accordance with United States generally accepted accounting principles (GAAP) in U.S. dollars. The Company also provided an update on its ongoing business and strategic review as part of the Creditor Protection Proceedings.
Commenting on the results of the first quarter of 2009, Nortel President and Chief Executive Officer Mike Zafirovski said:
"First quarter results showed a decline in revenue and margins as expected due to the severe economic downturn and our filings for creditor protection. However, despite the declines we saw this quarter, revenue has stabilized and our cash balance is stable from year-end 2008."
"We accomplished our initial objectives of maintaining our customer commitments and strengthening our operational performance. Network performance and customer service levels are at multi-year highs and customers are expressing their support of Nortel. Our employees have done a tremendous job under challenging conditions."
Nortel filed for creditor protection in multiple jurisdictions on January 14, 2009 after the Company's capital structure and historic financial obligations were exacerbated by the rapid and significant downturn in the global economy and credit markets.
Commenting on Nortel's creditor protection process, Mr. Zafirovski said:
"We are focused on maximizing value for stakeholders, including creditors, customers and employees. Nortel has rich resources, leading-edge know-how and a deep talent base, and it is our responsibility to preserve this value."
"These are the key considerations in our decision-making process, and work is well underway to evaluate the ultimate path forward for our businesses. Discussions are taking place with various external parties, however, decisions have not been taken and we continue to evaluate our restructuring alternatives. To provide maximum flexibility we are also taking the appropriate steps to complete the move to standalone businesses."
"We have made the necessary structural decisions to give Nortel the ability to optimize value, and preserve innovation platforms and employment to the greatest extent possible. Our businesses will have the opportunity to more effectively serve the discrete needs of their respective customers and market segments, while maintaining high customer service and network performance levels."
2009 Financial Highlights
Nortel's overall financial performance in the first quarter of 2009 was impacted by the continued downturn in the economy, which resulted in a decrease in customers' spending levels, as well as the ongoing impacts of the Company's Creditor Protection Proceedings.
Completing the move to standalone businesses
The evaluation of Nortel's businesses - Carrier Networks (which includes Wireless Networks as well as Carrier VoIP and Application Solutions or CVAS), Metro Ethernet Networks, Enterprise Solutions and the LG-Nortel joint-venture - is ongoing. As noted, the Company is taking appropriate steps to complete the move to standalone businesses initiated in late 2008. This will provide Nortel with maximum flexibility to choose the ultimate path forward for each of the businesses.
To achieve vertically integrated and fully independent business units, Nortel will decentralize its Carrier Sales and Global Operations functions over the coming weeks. This will enhance the business units' overall responsiveness to changing customer and market requirements and provide the opportunity to better serve customers.
It is imperative that the independent business unit structure benefit from a streamlined shared-services organization to drive maximum efficiency. Therefore, the Company will expand the Nortel Business Services (NBS) organization to include operational and other functions from Global Operations, Corporate Operations and Finance.
The Company will also continue the necessary work to reduce costs across all of its business units.
Business Highlights
Enterprise Solutions
Carrier Networks
Metro Ethernet Networks (MEN)
LG-Nortel
Revenues
Revenues were $1.73 billion for the first quarter of 2009 compared to $2.76 billion for the first quarter of 2008, reflecting a reduction of 37 percent comprising declines across all business segments. The reduction was primarily a result of the continuing economic downturn and the uncertainty created by the Creditor Protection Proceedings, and the unfavourable impact of foreign exchange fluctuations. Foreign exchange fluctuations adversely impacted revenues by approximately $225 million, representing 8 percent of the decline.
Revenues B/(W)
| Q1 2009 | YoY | QoQ | |
| Carrier Networks | $ 737 | (32%) | (48%) |
| Enterprise Solutions | $ 395 | (41%) | (34%) |
| Metro Ethernet Networks | $ 360 | (10%) | (21%) |
| LG-Nortel | $ 188 | (66%) | (7%) |
| Other | $ 53 | 0% | 6% |
| Total | $ 1,733 | (37%) | (36%) |
CN revenues in the first quarter of 2009 were $737 million, a decrease of 32 percent compared with the year ago quarter with impacts across all businesses. A majority of the decline was in the wireless segments, and in addition to the factors above, included a reduction in spending by certain customers as a result of their change in technology migration plans.
ES revenues in the first quarter of 2009 were $395 million, a decrease of 41 percent compared with the year ago quarter as a result of the factors noted above, namely decreased customer spending and decision-making deferral due to the economic conditions and the uncertainties created from our Creditor Protection Proceedings.
MEN revenues in the first quarter of 2009 were $360 million, a decrease of 10 percent compared with the year ago quarter with impacts across all businesses. Excluding the negative impact of foreign exchange fluctuations, revenues for MEN would have declined 6 percent year-over-year. In addition to the factors above, revenues from certain customers in the first quarter of 2008 that did not repeat to the same extent in the first quarter of 2009 also impacted year-over-year comparison.
LG-Nortel revenues in the first quarter of 2009 were $188 million, a decrease of 66 percent compared with the year ago quarter. In addition to the factors described above, a majority of the decline was in LGN Carrier, primarily due to the completion of a certain customer contract obligation that resulted in the recognition of previously deferred revenues in the first quarter of 2008 not repeated in the first quarter of 2009 and high sales volumes related to our 3G wireless products in the first quarter of 2008 not repeated to the same extent in the first quarter of 2009, as well as a significant foreign exchange impact due to the devaluation of the Korean WON against the US dollar. The decrease was partially offset by the completion of a certain customer contract obligation resulting in the recognition of previously deferred revenues in the first quarter of 2009.
Deferred Revenues
Deferred revenues balances decreased by $142 million during the first quarter of 2009 compared to a decrease of $266 million in the first quarter of 2008.
Gross Margin
Gross margin was 36.1 percent of revenues in the first quarter of 2009. Excluding charges related to the cancellation of certain equity-based compensation plans and workforce and other cost reduction activities that historically would have been recorded in special charges, gross margin would have been 38.1 percent (b) of revenues. This compared to gross margin of 41.6 percent for the first quarter of 2008. Compared to the first quarter of 2008, in addition to the items already noted, gross margin declined primarily as a result of the unfavorable impact of foreign exchange fluctuations, and the unfavorable impacts of product mix and price erosion partially offset by a decrease in inventory provisions.
Operating Expenses
Operating Expenses B/(W)
| Q1 2009 | YoY | QoQ | |
| SG&A | $ 528 | 12% | (13%) |
| R&D | $ 341 | 19% | (2%) |
| Total Operating Expenses | $ 869 | 15% | (8%) |
A focus on costs resulted in lower operating expenses compared to the year ago quarter. Operating expenses were $869 million in the first quarter of 2009. This compares to operating expenses of $1,017 million for the first quarter of 2008.
SG&A expenses were $528 million in the first quarter of 2009, compared to $597 million for the first quarter of 2008. Excluding charges related to the cancellation of certain equity-based compensation plans and workforce and other cost reduction activities that historically would have been recorded in special charges, SG&A expenses would have been $445 million (b) . Compared to the first quarter of 2008, in addition to the items already noted, SG&A was favorably impacted primarily by headcount reductions and lower spending levels across all categories including a reduction in sales and marketing investment in maturing technologies.
R&D expenses were $341 million in the first quarter of 2009, compared to $420 million for the first quarter of 2008. Excluding charges related to the cancellation of certain equity-based compensation plans and workforce and other cost reduction activities that historically would have been recorded in special charges, R&D expenses would have been $309 million (b). Compared to the first quarter of 2008, in addition to the items already noted, R&D was favorably impacted primarily by headcount reductions, the cancellation of certain R&D programs, and Nortel's exit from the WiMAX business, as well as lower discretionary costs relative to the first quarter of 2008.
Management Operating Margin (a)
Management operating margin was negative 14.1 percent of revenues in the first quarter of 2009 compared to positive 4.7 percent for the first quarter of 2008. Excluding a non-cash charge of $91 million related to the cancellation of certain equity-based compensation plans and $59 million related to workforce and other cost reduction activities that historically would have been recorded in special charges, management operating margin would have been negative 5.4 percent (b) of revenues. The first quarter of 2009 management operating margin decreased by 1,880 basis points compared to the year ago quarter. The decline was due to lower gross margin and a decline in revenues that outpaced reductions in operating expenses.
Net Loss
The Company reported a net loss in the first quarter of 2009 of $507 million, or $1.02 per common share on a basic and diluted basis, compared to net loss of $138 million, or $0.28 per common share on a basic and diluted basis, in the first quarter of 2008.
Other expense - net was $70 million for the first quarter of 2009, compared to $1 million in the first quarter of 2008. Other expense - net included a currency exchange loss of $57 million, a loss of $5 million related to hedging activity and costs associated with divestiture-related activities of $3 million.
Earnings attributable to non-controlling interests (formerly minority interests) was an expense of $26 million in the first quarter of 2009, compared to an expense of $78 million for the first quarter of 2008.
Interest expense was $77 million in the first quarter of 2009, compared to $80 million for the first quarter of 2008.
Income tax expense was $7 million in the first quarter of 2009, compared to an expense of $36 million for the first quarter of 2008
The net loss in the first quarter of 2009 of $507 million also included reorganization costs of $52 million related to the Creditor Protection Proceedings and the application of SOP 90-7and a non-cash write-down of goodwill of $48 million. 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.
Cash
Cash balance at the end of the first quarter of 2009 was $2.48 billion, up from $2.40 billion at the end of the fourth quarter of 2008. The increase in cash was primarily due to cash from operating activities of $202 million, partially offset by the net unfavorable foreign exchange impacts of $54 million, cash used in financing activities of $48 million and cash used in investing activities of $18 million.
(a) Management Operating Margin is a non-GAAP measure defined as Gross Profit less SG&A and R&D expenses. Management Operating Margin percentage is a non-GAAP measure defined as Management Operating Margin divided by Revenue. Nortel's management believes that these measures are meaningful measurements of operating performance and provides greater transparency to investors with respect to Nortel's performance and supplemental information used by management in its financial and operational decision making. These non-GAAP measures may also facilitate comparisons to Nortel's historical performance and competitors' operating results. These non-GAAP measures should be considered in addition to, but not as a substitute for, the information contained in Nortel's financial statements prepared in accordance with GAAP. These measures may not be synonymous to similar measurement terms used by other companies.
(b) Each of Management Operating Margin, Gross Margin, SG&A Expense and R&D Expense, excluding the impact of charges in relation to the cancellation of certain equity-based compensation plans and restructuring charges that historically would have been recorded in special charges, are non-GAAP measures. Nortel's management believes that these measures are meaningful measurements of operating performance and provides greater transparency to investors with respect to Nortel's performance and supplemental information used by management in its financial and operational decision making. These non-GAAP measures may also facilitate comparisons to Nortel's historical performance and competitors' operating results. These non-GAAP measures should be considered in addition to, but not as a substitute for, the information contained in Nortel's financial statements prepared in accordance with GAAP. These measures may not be synonymous to similar measurement terms used by other companies.
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 [1]. For the latest Nortel news, visit www.nortel.com/news [2].
Certain statements in this press release may contain words such as "could", "expects", "may", "should", "will", "anticipates", "believes", "intends", "estimates", "targets", "envisions", "seeks" and other similar language and are considered forward-looking statements or information under applicable securities laws. 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 that are difficult to predict, and the actual outcome may be materially different. 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 Creditor Protection Proceedings including: (a) risks associated with Nortel's ability to: stabilize the business and maximize the value of its businesses; develop, obtain required approvals for, and implement a restructuring plan; resolve ongoing issues with creditors and other third parties whose interests may differ from Nortel's; generate cash from operations and maintain adequate cash on hand in each of its jurisdictions to fund operations within the jurisdiction during the Creditor Protection Proceedings; operate within the restrictions and limitations of the current EDC Support Facility or put in place a longer term solution; if necessary, arrange for sufficient debtor-in-possession or other financing; continue to have cash management arrangements and obtain any further required approvals from the Canadian Monitor, the U.K. Joint Administrators, the U.S. Creditors' Committee, or other third parties; raise capital to satisfy claims, including Nortel's ability to sell assets to satisfy claims against us; obtain sufficient exit financing to support a restructuring plan; maintain R&D investments; realize full or fair value for any assets or business that may be divested; utilize net operating loss carryforwards and certain other tax attributes in the future; avoid the substantial consolidation of NNI's assets and liabilities with those of one or more other U.S. Debtors; attract and retain customers or avoid reduction in, or delay or suspension of, customer orders as a result of the uncertainty caused by the Creditor Protection Proceedings; maintain market share, as competitors move to capitalize on customer concerns; operate Nortel's business effectively in consultation with the Canadian Monitor, and work effectively with the U.K. Joint Administrators in their Administration of the European businesses inside U.K. Administration; actively and adequately communicate on and respond to events, media and rumors associated with the Creditor Protection Proceedings that could adversely affect Nortel's relationships with customers, suppliers, partners and employees; retain and incentivize key employees and attract new employees; retain, or if necessary, replace major suppliers on acceptable terms and avoid disruptions in Nortel's supply chain; maintain current relationships with reseller partners, joint venture partners and strategic alliance partners; obtain court orders or approvals with respect to motions filed from time to time; resolve claims made against Nortel in connection with the Creditor Protection Proceedings for amounts not exceeding Nortel's recorded liabilities subject to compromise; prevent third parties from obtaining court orders or approvals that are contrary to Nortel's interests; reject, repudiate or terminate contracts; and (b) risks and uncertainties associated with: limitations on actions against any Debtor during the Creditor Protection Proceedings; the values, if any, that will be prescribed pursuant to any restructuring plan to outstanding Nortel securities; the delisting of NNC common shares from the NYSE; and the potential delisting of NNC common shares and NNL preferred shares from the TSX; and (ii) risks and uncertainties relating to Nortel's business including: the sustained and expanding economic downturn and extraordinarily volatile market conditions and resulting negative impact on Nortel's business, results of operations and financial position and its ability to accurately forecast its results and cash position; cautious capital spending by customers as a result of factors including current economic uncertainties; fluctuations in foreign currency exchange rates; any requirement to make larger contributions to defined benefit plans in the future; a high level of debt, arduous or restrictive terms and conditions related to accessing certain sources of funding; the sufficiency of workforce and cost reduction initiatives; any negative developments associated with Nortel's suppliers and contract manufacturers including Nortel's reliance on certain suppliers for key optical networking solutions components and on one supplier for most of its manufacturing and design functions; potential penalties, damages or cancelled customer contracts from failure to meet contractual obligations including delivery and installation deadlines and any defects or errors in Nortel's current or planned products; significant competition, competitive pricing practices, 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; potential higher operational and financial risks associated with Nortel's international operations; a failure to protect Nortel's intellectual property rights; any adverse legal judgments, fines, penalties or settlements related to any significant pending or future litigation actions; failure to maintain integrity of Nortel's information systems; changes in regulation of the Internet or other regulatory changes; Nortel's potential inability to maintain an effective risk management strategy.
For additional information with respect to certain of these and other factors, see Nortel's Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 and Annual Report on Form 10-K for the year ended December 31, 2008 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.
Note that Nortel will not be hosting a teleconference/audio webcast to discuss first quarter 2009 results.
Links:
[1] http://www.nortel.com/
[2] http://www.nortel.com/news