Nortel

(NT)

swung to an unexpected profit in the first quarter despite falling sales, as earnings from discontinued operations and cost-cuts helped boost the bottom line.

The Canadian network equipment maker earned $54 million, or 1 cent a share, on sales of $2.4 billion in the quarter, compared with a loss of $841 million, or 26 cents a share, on sales of $2.9 billion last year. Analysts had been expecting a loss of 3 cents a share in the latest quarter.

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Nortel said the latest quarter included $190 million of earnings from discontinued operations and a restructuring charge of $134 million. The discontinued operations include a $101 million gain from the sale of Arris Group shares and a gain of $95 million from settlement of trade and customer finance receivables.

The company was able to lower its cost of sales $1.37 billion from $2.15 billion in the period and raise overall gross margins to 42.9% from 39.3%, reflecting the benefits of restructuring and strong margins in wireless networks.

Among segments, the company said wireless networks revenue fell 6% sequentiallly, as did enterprise network revenue, while wireline network revenue rose 11% and optical network revenue fell 22%.

Looking ahead, the company expects the overall telecommunications equipment market to be "down modestly" in 2003 compared with 2002. "Given the ongoing economic and geopolitical uncertainty, customers continue to spend cautiously. As a result, the company currently expects the capital spending levels in the second quarter of 2003 to be similar to the first quarter of 2003," Nortel said. It declined to provide specific revenue or earnings guidance.

The shares were up 3.5% to $2.65 on Instinet.