Nortel's (NT) first trip back to profitability didn't last long, but the company hopes to start making the journey a regular event.

There was good news from Brampton, Ontario, on Thursday, as the big phone-equipment maker posted a stronger-than-expected first period that kind of passes for its first quarterly profit in three years. Though it's early yet to say that telecom's long spending crisis has passed, the

apparent success of Nortel's long restructuring offers a bit of hope in a beaten-down sector.

"This helps me believe more in the stability thesis for the industry," says Lehman Brothers analyst Steve Levy, who has a neutral rating on the stock. Nortel shares rose 3 cents to $2.59.

But this being Nortel, the victory didn't come without an asterisk or two. Yes, going by certain measures the company posted a penny-a-share profit in the first quarter. But as Nortel execs noted sheepishly on a Thursday morning conference call, that's before the effect of some performance-based money paid out to workers.

That's to say, Nortel's profitable quarter is actually just another unprofitable quarter -- to the tune of a penny-a-share loss -- if you count the profitability bonuses, an amount that wasn't disclosed.

"Given the fact that a return to profits included discontinued operations, it may be premature, in my view, to be paying out return-to-profit bonuses," says Levy, whose firm has no banking ties to Nortel.

Still, the view from the north was sunny. Though Nortel declined to give any financial projections for the rest of the year, CEO Frank Dunn said he expects "more upside surprises than downside surprises" ahead.

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Indeed, as Levy and others point out, debating whether Nortel had a penny profit or a penny loss misses a bigger picture. It now seems that after two years of radical cuts, including slashing its workforce by two-thirds, Nortel has finally adjusted to the size of today's shrunken networking market.

The fact that Nortel and



saw dramatic increases in their gross margins in the last quarter suggests costs at both companies have come down considerably, say analysts.

"This certainly goes against the common wisdom that vendors are being forced to lower their prices," says Levy.

While it's hard to draw broad conclusions about the industry from Nortel's results, it is obvious just by the nature of the earnings discussion that Nortel has made progress.

It's a pretty good sign for Nortel when the "focus moves away from the balance sheet and on to whether your profits are sustainable," says CIBC World Markets analyst Steve Kamman, who has a sell rating on Nortel and Lucent. CIBC has done investment banking business with Nortel.

"There's still a lot of deep uncertainty hanging over the telecom industry," says Kamman. "But in terms of progress, I'd put Nortel two to four quarters ahead of Lucent."