August 1, 2008 / 10:55 AM / 9 years ago

Nortel warns of U.S. market woes, shares fall

4 Min Read

<p>A Nortel sign is seen in downtown Toronto February 27, 2008.Mark Blinch</p>

TORONTO (Reuters) - Nortel Networks Corp NT.TO NT.N said on Friday its quarterly loss tripled on restructuring charges and currency exchange losses, and its shares fell as the telecom equipment company warned that a tough U.S. market is choking wireless spending by carriers.

The loss widened to $113 million, or 23 cents a share, from $37 million, or 7 cents a share, a year earlier. The latest results included $67 million in restructuring charges and a loss of $21 million, primarily from mark-to-market losses on interest rate swaps.

Nortel's stock sank C$1.15, or 14.6 percent, to C$6.70 on the Toronto Stock Exchange. Exactly a year ago, it was at

C$23.35.

"The macro environment in the U.S. and the U.S. carrier spend continues to be challenging," Chief Executive Mike Zafirovski told analysts during a conference call. He said this has hurt sales related to CDMA, or Code Division Multiple Access, wireless technology.

This has already started to show up in Nortel's results: its orders fell to $2.15 billion in the quarter from $2.68 billion a year earlier, mostly because of a weaker CDMA market in North America and lower orders from the company's joint-venture with South Korea's LG Electronics.

CDMA is one of several widely-used mobile communications technologies for networks that offer cellphone service.

Edward Snyder, principal analyst at Charter Equity Research, said it could be 2009 before CDMA spending recovers as major U.S. carriers such as Sprint (S.N) and Verizon (VZ.N) are clamping down on spending.

"It's going to get worse," Snyder said. "Sprint's not going to up what they're spending as the U.S. economy slows."

Nortel has said that while CDMA is an important part of its business, it plans to continue to invest in next-generation wireless technologies as well. Some analysts have criticized the move, questioning whether already gunshy carriers will be willing to make the transition to newer technology in an economically uncertain environment.

Reuters Estimates said Nortel lost 13 cents a share, excluding special items, while analysts were expecting a loss of 3 cents.

"Obviously, the quarter is a disappointment to the Street," Snyder said. He said the company still did well at controlling costs and keeping margins steady.

Revenue rose 2 percent to $2.62 billion from $2.56 billion, exceeding the analysts' average estimate of $2.51 billion. However, this was due in part to a deferred revenue release during the quarter.

Gross margin was 43.1 percent, Zafirovski said, adding that the weak economy is increasing the Toronto-based company's focus on cutting costs.

"Of course in this environment, we are increasing our cost controls across the board," he told analysts.

Nortel has recently cut hundreds of jobs and moved others to Asia, where costs are lower, as part of its effort to bring down expenses. But Zafirovski said in an interview there's no additional restructuring planned "as of now."

He also said that given the relatively large number of big players in the telecom gear industry, companies such as Nortel -- as well as customers -- would benefit from consolidation.

As usual, however, he declined to discuss the company's plans for any specific merger or acquisition activity.

The company also affirmed its 2008 outlook for revenue growth at a low-single-digit percentage rate and gross margin at about the business model target of 43 percent of sales.

($1=$1.03 Canadian)

Additional reporting by Scott Anderson; editing by Peter Galloway

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