Nortel hits profit and stock rallies on outlook

TORONTO (Reuters) - Nortel Networks Corp NT.TO NT.N swung to a third-quarter profit and predicted a "very solid" fourth quarter on Tuesday, sending its shares higher, but revenue fell slightly short of expectations as the company ran into problems filling some orders.

Nortel, North America's biggest maker of telephone equipment, said it earned $27 million, or 5 cents a share, in the quarter ended September 30, compared with a year-earlier loss of $63 million, or 14 cents a share.

Investors were pleased with Nortel's results and outlook, driving the shares up C$1.93, or 12.7 percent, to C$17.16 on Tuesday morning on the Toronto Stock Exchange.

The stock is still far from its year high of C$37.35, set in February. It hit a year low of C$14.56 earlier this month.

Nortel continues to be challenged in the markets in which it operates, Chief Executive Mike Zafirovski told analysts during a conference call. Some telecoms companies for example, have chosen to cut their network spending.

"I think it's safe to say that this environment has become tougher," he said. "I think in totality, we are positioned well for modest growth in 2008."

In an interview, Zafirovski characterized the prospect of modest growth next year as the "worst case."

Nortel's outlook came after competitor Alcatel-Lucent (ALU.N) (ALUA.PA) last month said it would cut an additional 4,000 jobs by 2009 and trimmed its full-year revenue growth expectations again after seeing fresh signs of a slowdown.

Nortel reported a 7.8 percent dip in third-quarter revenue due in part to difficulty in filling some customer orders, which led to the deferral of $45 million in revenue. Revenue for the quarter was $2.70 billion, down from $2.93 billion a year earlier.

Excluding the sale of the company's UMTS access unit announced last year, revenue declined by only 2 percent.

Zafirovski said the difficulty in filling orders resulted from "some issues" with a CDMA wireless technology manufacturing center.

Such problems will occur from time to time, but are not expected to plague the company regularly, he added.

Analysts expected Nortel to earn 12 cents a share before one-time items on revenue of $2.78 billion, according to Reuters Estimates

Nortel booked $56 million in restructuring charges during the quarter, compared with $22 million a year earlier.

The company has gone through a number of painful restructurings in the wake of the tech bubble's collapse at the start of the decade. It has also struggled with an accounting scandal, which led it to purge its corner office.

However, despite thousands of layoffs and widespread cost-cutting, the company has been unable to return to its glory days as the darling of Canadian technology investors.

A massive turnaround effort has continued under Zafirovski, who told analysts on Tuesday that his team is overhauling research and development spending to focus most of the money on current and emerging areas, rather than on older, more mature products.

The company said it expects fourth-quarter revenue to be flat compared with the same quarter last year, while it forecast full-year revenue would be down slightly from 2006.

Toronto-based Nortel said fourth-quarter gross margins, as a percentage of revenue, will "improve slightly" from the third quarter. For the full year 2007, gross margins should be "in the low 40s," it said.

"We do expect to have a very solid fourth quarter," Zafirovski told analysts, but added the company had lowered some of its expectations.

Nortel's gross margin improved 460 basis points to 43 percent in the quarter, it said, and its operating margin hit 5 percent, up 277 basis points from a year earlier.

($1=$0.92 Canadian)