Nortel Posts Another Loss

The company insists it'll return to profitability next year.
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Updated from 5:35 p.m. EDT

Nortel

(NT)

met recently revised third-quarter financial targets Thursday, posting a set of dreary numbers and sticking with its plans to return to the black.

The Canadian maker of phone gear posted a net loss of 10 cents per share, as sales dropped 36% from a year ago to $2.36 billion. On the almost bright side, Nortel cut its quarterly loss by half sequentially on a GAAP basis, to $1.8 billion, or 42 cents a share, from $3.5 billion, or $1.08 a share in the second quarter.

The company says it continues to cut costs and jobs, maintaining its target for a total staff of 35,000 by year-end and a break-even quarterly revenue level somewhere below $2.4 billion. Nortel says it will reach that break-even level and return to profitability sometime around midyear 2003.

Nortel and telecom equipment rival

Lucent

(LU)

have seen a massive collapse in their sales over the past two years as phone companies pare back spending in an effort to come to grips with their own deteriorating businesses.

One of Nortel's bright spots was an improvement in gross margins. The company said its margin widened to about 36%.

Analysts on the conference call did some quick calculations based on a $2.4 billion quarterly revenue rate and figured that in order to be profitable, Nortel needed gross margins to exceed 40%. But with some products like optical gear still seeing sales running lower than costs, some analysts sought explanations from CEO Frank Dunn on how the company could realistically improve margins in a deteriorating market.

Offering less than rock-solid evidence, Dunn said that while areas like optical gear sales were far from profitable, those margins were improving along with all margins across the business.

But after countless warnings and years of financial erosion, Nortel's "trust us" explanation has worn thinner than the margins on an optical switch, it seems.

"Maybe I went to the wrong business school, but the only way to get your margins up is to get your costs down," says Legg Mason analyst Timm Bechter, who has a hold rating on the stock. "And without their revenues coming up, I don't see how they do it."