Nortel Down on Lower Margin Forecast

Its shares were down 63 cents, or 15 percent, at $3.43 in midday trading on the New York Stock Exchange.

The Brampton, Ontario, maker of telecommunications equipment warned investors that "it is clear that our business model is not achieving our targeted operating cost performance of below 40 percent of overall revenue and our targeted gross margin percent of mid-40s."

National Bank Financial analyst Tom Astle said, "We translate this as 'there is a good chance we are not making money' in the first half of 2004."

Astle doesn't own Nortel stock, and his firm hasn't received investment-banking fees from Nortel over the last 12 months.

Nortel is required by securities regulators to issue biweekly updates of its financial review until it files up-to-date financial statements.

Nortel's previous update earlier this month triggered an initial surge in its stock, with some investors encouraged that the company hadn't made any further adjustments to the restatements it expects to make its financials for prior quarters.

However, Nortel's press release at that time also provided some hints to the difficulty Nortel will face to generate profits in future quarters.

At the time, Nortel said it had become clear that it would need to adopt an "improved cost structure."

Though Nortel has previously suggested the need for further cost cuts to generate profits, the explicit nature of the warning Tuesday may help explain the sharp decline in the company's stock price.

"Management had never formally announced the potential for shortfalls in operating profitability in the past," Steve Levy, analyst at Lehman Brothers, pointed out in a note.

On the positive side, Levy noted that Nortel repeated that 2004 revenue will grow faster than the market.

Levy doesn't own the stock and his firm doesn't have an investment-banking relationship with Nortel.