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Nortel's Numbers: Soon, Maybe

First it was September. Then it was October. Then, on Oct. 27, giant telecom-equipment maker Nortel Networks (NT) announced that its financial restatements for 2003 and the first half of 2004 won't be available until mid-November. For much of this year, Nortel has been hurrying to revise its numbers, after discovering questionable accounting practices extending back several years.

Amid the mess, it said goodbye to former CEO Frank Dunn and several other senior financial executives. In late April, Nortel's board of directors appointed Bill Owens, a former Navy admiral, to oversee the restatement process and swiftly put the accounting debacle in the past.

So why yet another delay? "We want to be absolutely certain that every detail of it can be as correct as it can be," Owens told BusinessWeek in an interview last month. "We don't have the flexibility to have any mistakes in that restatement. It's such a complicated thing to go back three years and review the numbers where there have been a lot of manual entries. It's very, very time-consuming."

"FLIP-FLOPPING." Perhaps so, but investors are flummoxed by the Brampton (Ontario) company's delays. Its stock slipped 3% on the Oct. 27 news, to $3.29. Since Apr. 28, when Owens replaced Dunn, it has plunged 19%. "This kind of flip-flopping is not reassuring to shareholders," says Duncan Stewart, director and portfolio manager at Tera Capital, which owns Nortel shares. "It doesn't give an overwhelming impression that they know what is going on."

Nortel says it no longer expects to file statements for third-quarter 2004 by the November deadline required by federal regulators. It's appealing to the Securities & Exchange Commission for a delay. This also means it must seek a new waiver from the Export Development Canada, a Canadian government-loan facility, which has already granted a previous waiver on a Nortel credit facility.

It's no wonder that Owens, in a written statement Oct. 27, called the decision to delay the timeline "difficult" and "disappointing." Last month, he took time out of a busy schedule to talk with Roger Crockett, deputy manager of BusinessWeek's Chicago bureau, about the challenges of completing the restatement and the opportunities Nortel faces. Edited excerpts from the conversation follow:

Q: Why is it taking so long to complete your restatement?

A: This is a period of real transition for Nortel. We're trying to do a lot of things and trying to do them right -- trying to launch into a different kind of government business that I think will be important and profound to Nortel.

We're entering into the services business and the security business -- to [build] a true, secure Internet. Nortel is as well-positioned as any [telecom-equipment maker] in the marketplace to do that today. We have some exciting new areas. We have a lot of moving parts...lawsuits that we are working our way through, a reduction in people.

But we're trying very hard to get through the issues of financial credibility and get our restatements done completely and with every detail complete so there are absolutely no questions as to the financials at Nortel. We want to take what time it takes to make certain that is the case.

Q: What's your response to investors' perception that announcements of delays in the restatement means management is not in control?

A: My intention is to be as transparent as it is possible to be as we go forward to regain our financial credibility. I want to be certain that the market knows that I'm going to bend over backwards to give the indication that we are [making them] aware of every detail as we become aware of it.

Q: Is the restatement and its delay causing a loss of morale and making employees within your business units lose focus? Also, doesn't the loss of key financial executives affect the ability of your business units to make decisions and forecast market trends properly?

A: Absolutely not. Our finance team is totally devoted to the restatement. We are not defocused because of the work on the restatement. There are always wins and losses. We have several important wins in the third quarter. And sometimes wins don't show up until later. It's difficult to predict when these things will show up.

Q: Why did you change your top-line projections for growth in September, after saying earlier in the year that you would grow faster than the telecom market?

A: We did not change our revenue-growth estimates. We said we would grow in the mid-single digits. That's what we said in all of our previous statements. What we said [in mid-September] is that our revenue growth, compared to [industry growth], is growing slower than the market. Our estimate of what the overall market was doing [changed]. We saw that it was growing faster than Nortel.

Q: What happened that changed your view and made you announce that the market would outpace Nortel's growth?

A: When we looked at the estimated growth rate from a variety of sources, and when our people said to me that it looks like the market is growing faster than we are, then in the spirit of transparency, we thought it was important to say that to the marketplace.

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