A new accounting stumble took the spring out of Nortel's ( NT) step Friday.
The Toronto telecom gearmaker is planning yet another round of restatements that will erase an estimated $866 million in revenue booked over three years. But Wall Street is more concerned about the challenges ahead. Among the more looming issues, the Toronto telecom shop will likely have to dig deeper than expected into its $2.9 billion cash pile to cover coming obligations on the legal and borrowing fronts. The company is due to dish out a huge hunk of stock to settle shareholder class action claims, threatening current holders with significant dilution. And where Nortel previously saw operating costs coming down, the company now expects expenses to remain flat with last year's levels. Analysts say this means CEO Mike Zafirovski's bold slash-and-burn restructuring plan will be even more arduous then they previously forecast. For the fourth quarter, adjusted operating margins fell 2 percentage points to 5%, well below the 16% target Zafirovski set for the company when he took the job in November. Investors would probably breathe easier if sales were expected to rally. But Lehman Brothers analyst Jiong Shao says in a research note Friday that if you exclude revenue from Nortel's LG joint venture, 2006 sales will be flat with last year. Even so, ignoring the costs -- and the big dilution ahead for investors when Nortel issues 629 million shares, representing a 14.5% stake, to settle the class actions -- the long-term picture still looks good to some observers. "I like the three-to-five year focus to reinvigorate the company, and you can't get there without investment," says Sanford Bernstein analyst Paul Sagawa. Nortel's cash fell to $2.95 billion from $3 billion in the third quarter, and a big chunk of that money has been spoken for. "I'm still worried about liquidity," says Sagawa, who points out that $500 million is earmarked for a settlement of shareholder class action suits tied to Nortel's previous accounting missteps. Another few hundred million of that may go to fines, and $1.5 billion in debt is due in a year. Big payouts and sluggish sales growth probably mean the ax will start swinging again, say some Nortel watchers. "Management indicated that its operational review was continuing," says Desjardins Securities' Paul Howbold. "We therefore expect a further restructuring program to be announced within the next several months." Nortel shares fell 4 cents to $3.05, while rival Lucent ( LU) was flat at $2.82 in midafternoon trading Friday.