Big Gain Lifts Nortel

But revenue and gross margin fall short.
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swung to a second-quarter profit, aided by a big gain tied to the value of stock the company issued in a class action lawsuit settlement.

For the quarter ended June 30, the Toronto-based telecom gearmaker made $366 million, or 8 cents a share, reversing the year-ago loss of $33 million, or a penny a share.

The latest quarter included a shareholder litigation recovery of $510 million, reflecting a mark-to-market adjustment of the share portion of the global class action settlement, special charges of $45 million for restructuring and a loss of $10 million on the sale of assets.

Revenue rose to $2.74 billion from $2.38 billion a year ago.

Analysts surveyed by Thomson Financial were looking for a penny-a-share profit on sales of $2.8 billion.

"On the plus side, we saw strong order growth of 22% and increased sales momentum, but gross margin was up only modestly and not at the 40% target we have set for ourselves," said CEO Mike Zafirovski.

"We remain intensely focused on delivering improved financial performance and there's solid traction on significant business transformation initiatives, including the go-to market supporting our Enterprise business, the development of our Services business, our strategic alliance with Microsoft, and across the board cost management programs. Together, these efforts are enabling us to deliver greater customer value and substantially enhance Nortel's competitiveness," continued Zafirovski.

Mobility and Converged Core Networks revenue rose 7% from a year ago and 12% sequentially to $1.59 billion. Enterprise Solutions and Packet Networks revenue slid 1% from a year ago but rose 23% sequentially to $1.07 billion. Deferred revenue fell sequentially by $14 million and backlog rose by $194 million.

Gross margin was 39% of revenue in the second quarter of 2006, primarily impacted by geographic and product mix, and competitive pricing pressures. This compares to gross margin of 43% for the second quarter of 2005 and 38% for the first quarter of 2006. Compared to the second quarter of 2005, gross margin was hit by pricing pressures and unfavorable product mix, which was partially offset by higher sales volumes.

For the full year, Nortel said it expects high single-digit revenue growth, gross margin of around 40% and operating expenses flat to up. For the third quarter, the company expects revenue growth in excess of 10% compared to the third quarter of 2005 and gross margin and operating expenses to be in line with full-year guidance.