Nortel is the Canadian-based supplier of products and services to telecom carriers, other networking enterprises, and businesses. Nortel has defied the worst-case predictions and managed to stay in business and even independent, unlike fellow fallen telecom Lucent. Losses have been the norm at Nortel for most of this decade, resulting in an unfathomable accumulated earnings deficit of $35 billion (U.S.).
Tougher times also revealed shortfalls in the company's internal financial controls, resulting in numerous restatements, and allegations of fraud. The restatements complicate any financial analysis of Nortel.
When we analyzed Nortel after the June quarter, the Overall score was a still-disappointing 25 points. Of the four individual gauges that fed into this composite result, Cash Management was (surprisingly) the strongest at 14 points. Growth was weakest at 0 points.
Now, with the available data from the September 2007 quarter, our gauges display the following scores:
- Cash Management: 6 of 25
- Growth: 2 of 25
- Profitability: 4 of 25
- Value: 9 of 25 (attributable to a new low in Price/Sales)
- Overall: 26 of 100
| ($M) | | September 2007 (actual) | September 2006 (actual) |
| Revenue (1) | | 2705 | 2926 |
| Op expenses | | | |
| | CGS | (1542) | (1803) |
| | R&D | (416) | (474) |
| | SG&A | (613) | (585) |
| | Other (2) | (68) | (30) |
| Operating Income | | 66 | 34 |
| Other income | | | |
| | Investments (3) | (42) | (12) |
| Asset sales | (3) | 15 | |
| | Interest, etc. (4) | 56 | (47) |
| Pretax income | | 77 | (10) |
| Income tax | | (50) | (15) |
| Net Income | | 27 | (25) |
| | | $0.06/sh | ($0.06)/sh |
| Extraordinary items (5) | | | (38) |
2. Amortization of intangible assets + Special charges.
3. Minority interests + Equity in net income of associated companies. Both figures are net of tax.
4. Other income - Interest expense
5. Shareholder litigation settlement expense.
Revenue was 7.6 percent less than in the year-earlier quarter. On a year-over-year basis, Revenue was down 0.5 percent. On a more positive note, Gross Margin increased as Cost of Goods Sold dropped from 61.6 to 57.0 percent of Revenue. Similarly, Research and Development (R&D) expense declined from 16.2 to 15.4 percent of Revenue. The cost control was less successful with Sales, General, and Administrative (SG&A) expenses, which increased from 20.0 to 22.7 percent of revenue.
The lower levels of CGS and R&D outweighed the higher SG&A and greater "special" charges, leading to a near doubling of Operating Income.
Net non-operating income was a substantial $55 million more in the Sept 2007 quarter than the Sept 2006 quarter. The income tax rate is hard to understand in both quarters: 65 percent in the recent quarter and incalculable (pre-tax income was negative) in the year-earlier quarter.
It has been unusual in recent years for Nortel to have a positive Net Income, but they managed to eke out earnings in the last quarter.
Cash Management. This gauge decreased from 14 points in June to 6 points now.
The following measures pushed the score up the most:
- Current Ratio =1.4; rather weak, but above earlier lows.
- Working Capital/Market Capitalization = 20.2 percent, up from 19.5 percent in September 2006. (Ironically, the increase is partly due to the falling stock price)
- Days of Sales Outstanding (DSO) = 88 days, one day less than last year
- Finished Goods/Inventory = 36 percent, this ratio stabilized after having been much higher.
- LTD/Equity = 131 percent; down from 345 percent! Equity is so minimal that small reductions in debt are magnified.
- Debt/CFO = N/A (CFO has been negative)
- Inventory/CGS = 118 days, compared to 90 days last year
- Cash Conversion Cycle Time (CCCT) = 149 days, up from 133 days a year ago, for this measure of efficiency.
The following measure was the one small positive contributor:
- Revenue/Assets = 62 percent, up from 61 percent last year.
- Revenue growth = -0.5 percent year-over-year, down from 10.5 percent
- Net Income growth = N/A.
- CFO growth = N/A.
The following measures pushed the score up the most:
- Operating Expenses/Revenue = 98 percent, down from 101 percent in a year.
- ROIC = 2.7 percent
- FCF/Equity = -17 percent, it was worse last year
- Accrual Ratio = 3.0 percent, up from 1.9 percent in a year.
Value. Nortel's stock price dropped over the course of the quarter from $24.05 to $16.98. Based on the latter price, the Value gauge increased from 5 points in June to 9 points.
The following measures pushed the score up the most:
- Price/Revenue ratio = 0.7, down from 0.9 in September 2006.
- Enterprise Value/Cash Flow = N/A
- P/E = N/A
- P/E to S&P 500 average P/E = N/A
The average P/E for the Communication Equipment industry is currently 26. The average Price/Revenue for the industry is currently 4.6.
Now at 26 out of 100 possible points, the best we can say about the Overall gauge score for Nortel is that has been worse. The positive Net Income in the last quarter could be viewed favorably, but the amount is insignificantly low and CFO remains negative. More than 6 years after the high-tech bubble burst, we don't yet see any firm signs that Nortel has turned the corner towards sustained profitability. Over the years, there have been a couple of encouraging moments. But, they proved evanescent. We need to see more.
Posts
No comments:
Post a Comment