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Nortel Fans Want Fine Print

Just two days on the job, and already Nortel (NT) CEO Mike Zafirovski has created a stir with investors.

Speaking at the UBS Global Communications Conference in New York on Thursday, Nortel CFO Peter Currie fielded repeated questions on how the company plans to widen profit margins to hit the new boss' somewhat lofty goals.

Zafirovski, the former Motorola (MOT) executive, took his corner office at Nortel on Tuesday. But last month, after accepting the job, the hard-charging new chief introduced himself to investors and employees by outlining six of the company's top weak points and a brief plan of attack for each area.

Among his targets, Zafirovski served up the usual business-revamping fare such as stronger strategic focus and streamlined processes. He also said Nortel should be far more profitable. In fact, Zafirovski wants operating margins somewhere in the range of 14% to 18%, a huge leap from the single-digit percentages the company currently captures.

Dubious investors at the UBS show wanted to know exactly what tricks Nortel could pull out of its big Canadian hat that might yield these kinds of profit gains.

Currie pointed to a few areas such as planned cuts in research and development. Last month, Zafirovski said that R&D was nearly 17% of total sales and considerably higher than the 10%-to-11% range more common to the industry.

"We have costs to cut," said Currie, who was rehired as Nortel's finance chief early this year after a sweeping housecleaning effort to remove the former bookkeeping team in the wake of " bonusgate ." Currie had been Nortel's CFO from 1994 to 1997.

When asked if Zafirovski's mid-teens profit margin goal was achievable, Currie said "I'm supportive of Mike's effort."

But it's clearly not going to be an easy job.

UBS analyst Nikos Theodosopoulos put the profit margin target in perspective by reframing the questions Thursday.

Making Waves
Zafirovski on the Margins

Theodosopoulos said that most of Nortel's closest peers such as Lucent (LU) and Alcatel (ALA) have achieved single-digit operating margins, and that wireless infrastructure specialist Ericsson (ERICY) was the notable exception with a 22% profit margin.

He asked Currie if Nortel -- to expand margins -- had to be more like Ericsson and concentrate on one market segment rather than balance its business across a broad selection of equipment markets.

Currie disagreed with the comparisons, particularly with arch rival Lucent.
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