Nortel Comes Up Solid

Nortel (NT - Cramer's Take - Stockpickr) swung to a profit on stronger cost cuts.

The Toronto telecom equipment giant said it had net income of $27 million, or a nickel a share, in the third quarter. Those numbers compare with a net loss of $37 million, or 7 cents a share, in the second quarter and a loss of $63 million, or 14 cents, a year ago.

Third-quarter sales fell 8% from year-ago levels to $2.7 billion. Analysts were looking for an adjusted profit of 11 cents on sales of $2.77 billion, according to Yahoo! Finance.

Thanks to cost cuts, Nortel's gross margin widened to 43% from 41% in the second quarter and 38% last year. Operating margin also improved to 5% from 1% in the second quarter in large part due to a 12% cut in research spending over the past year.

"Nortel achieved solid results this quarter in a challenging business environment," CEO Mike Zafirovski said in a press release.

Looking ahead, Nortel says it expects fourth-quarter sales of about $3.3 billion, about flat with year-ago levels. But margins are expected to continue widening. Nortel says gross margin will improve slightly sequentially in the fourth quarter and that operating margin will be around 10%, a five-percentage-point swing from third-quarter levels.

Nortel joins networking rivals like Ericsson (ERIC - Cramer's Take - Stockpickr), Alcatel Lucent (ALU - Cramer's Take - Stockpickr) and Tellabs (TLAB - Cramer's Take - Stockpickr), which have all seen slumping sales as consolidation among telcos has weakened new equipment spending.

Nortel shares rose 32 cents to $16.60 in premarket trading Tuesday.