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Nortel Sees Early Gains Wiped Away

The stock turns lower as operating margins for the first quarter disappoint.

Updated from 9:13 a.m. EDT

An early rally in

Nortel Networks


was erased as investors took a dim view of its sequential decline in operating margins, despite better-than-expected top- and bottom-line results for the first quarter.

The Toronto-based telecom-equipment giant said it had a loss of $138 million, or 28 cents a share, in the quarter. Those numbers widened from a loss of $103 million, or 23 cents, a year ago, but shrank from a fourth-quarter loss of $844 million, or a $1.70 a share.

Nortel said the loss in the first quarter included charges of $88 million for restructuring, a loss of $19 million due to changes in foreign exchange rates, a charge of $12 million related to a patent lawsuit settlement and a gain of $16 million, primarily from mark-to-market gains on interest rate swaps.

Nortel spokesman Jay Barta said that the company had a loss of 5 cents a share on an adjusted basis, which topped the Thomson Financial target of a loss of 14 cents a share. Also on a bright note, sales rose 11.3% from a year ago to $2.76 billion. Wall Street wanted to see sales of $2.49 billion.

However, Nortel's stock pulled back as operating margin came in at 4.7% in the first quarter, which improved from a negative 0.4% a year ago but slid from 7.6% in the fourth quarter. Nortel has previously said it expects to reach an operating margin of 10% in 2008, and the first-quarter data are a step back from that target.

Shares of Nortel were lately down 28 cents, or 3.2%, to $8.42, having been up 10% before the start of trading.

Looking ahead to 2008, Nortel reaffirmed its forecast that revenue should grow in the low single digits compared to 2007. The company added that gross margin should be 43% of revenue this year.

"We expect to achieve our full-year guidance, and we continue to make solid progress against the strategy to turn around the company," said Nortel CEO Mike Zafirovski. "Our relentless focus on execution and our determination to deliver value to customers is strengthening the foundation upon which to build our performance over the balance of 2008 and beyond."

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