Nortel Networks Corp’s revenue-recognition problems have returned to haunt it and it has been forced to delay filing its 2005 annual accounts until the end of April when it will be forced to restate accounts going back more than three years after the discovery of new revenue-recognition errors.
The Toronto, Canada-based company insists that the errors were detected as a result of a review of $30bn worth of contracts undertaken to compensate for internal control deficiencies that emerged during the previous revenue-recognition inquiry.
While the discovery of earlier problems in 2004, which led to the dismissal of CEO Frank Dunn, former CFO Douglas Beatty and controller Michael Gollogly, were linked to allegations that figures were manipulated to increase management bonuses, the company insists that new errors were uncovered by an upskilled financial team applying more conservative accounting principles.
We have no reason to believe there is any malfeasance associated with them, said CFO Peter Currie.
Nortel expects revisions will reduce $157m from 2003 revenue and $91m from earnings and $77m from 2004 revenue and $93m from earnings. For the first nine months of 2005, it will reduce revenue $162m and reduce earnings by $95m. The revisions stretch back to results in periods prior to 2003, when Nortel expects to prune $470m from revenue and $99m from earnings.
Nortel’s failure to make the filing with the SEC put in breach of covenants with holders of its debt and Export Development Canada but they didn’t take action when it was previously late with its filings.
The revenue-recognition problems are unfortunate in that they follow a good year for the company, and CFO Currie forecast that revenue momentum in the second half of 2006 will resulting in mid- to high-single-digit growth for the full year. This is in marked contrast to the prediction of rival Lucent Technologies Inc that 2006 revenue will be essentially flat or increase in the low-single digits.
Preliminary figures show Nortel ended 2005 with a fourth-quarter loss of $2.21bn after the payment of $2.47bn to settle a class action suit from shareholders, on revenue up 13.9% at $2.95bn. This is likely to leave it with a loss for the year of $2.4bn on revenue 10% higher at $10.8bn.
CEO Mike Zafirovski said Nortel grew its business in 2005 for the first time in five years. We are, however, certainly not satisfied with our financial results which in my opinion have not been good in terms of growth, operating margins and cash flows since 1998. We are working diligently to rectify this and we expect that you will start to see improved results during 2006, he said.
He has set in progress a business transformation plan designed to be completed by 2008 focused on improving the company’s internal processes and to pursue market opportunities it can achieve a leadership position and at least 20% market share.
Nortel has already increased investment in the growth areas of IMS, WiMAX, and IPTV, redirecting funding away from its services edge router. It has also announced the sale of assets of its Blade Server Switch Business Unit.