Nortel: No Mercy

Nortel wins a new customer and settles its lawsuit with Extreme, but analysts still give it a good slapping

September 30, 2002

4 Min Read
Nortel: No Mercy

Nortel Networks Corp. (NYSE/Toronto: NT) has suffered several setbacks lately, but today it reported two pieces of positive news.

In the first of two press releases this morning, Nortel announced that it had settled its patent infringement lawsuit with Ethernet switch maker Extreme Networks Inc. (Nasdaq: EXTR) (see Nortel Settles With Extreme). In the second, it announced that it has won a new contract for the Passport multiservice switch family (see Syringa Picks Nortel Passport).

While the company’s stock closed up $0.09 (20%) to $0.54 a share today, most analysts were unimpressed by the news.

“Restructuring its balance sheet is critical. Any new business at this point is irrelevant,” says Edward Jackson, an analyst with U.S. Bancorp Piper Jaffray.

The new contract announced today is with Syringa Networks, a consortium of 12 independent service providers in rural Idaho, for its Passport multiservice switches. The network buildout, which was begun in 2001, will span 1,419 miles and provide broadband access to more than 40,000 customers throughout Idaho and Wyoming, when it’s completed at the end of this year.

Syringa Networks is using the Passport switches for its ATM backbone and has already deployed several Passport 15000-VSS multiservice switches. It plans to deploy several more Passport 15000-VSS devices in the coming months to better serve its residential, business, and government customers.

The actual dollar amount of the contract was not revealed in the press release, but based on the fact that the entire network buildout was worth an estimated $40 million when it was first announced, this contract is likely worth only a few million dollars at best -- a drop in the bucket, considering Nortel is expected to bring in over $2 billion in revenue for the third quarter.

“To be honest, I didn’t give it a lot of attention,” says Timothy Bechter, an analyst with Legg Mason Inc.. “How much could a consortium in Idaho actually bring in? Not enough to make much of a difference.”

Nortel also announced that its patent infringement lawsuit against Extreme has been settled and dismissed in the U.S. District Court of Massachusetts. The two companies have agreed to a cross-licensing deal, details of which were not disclosed.

Nortel originally filed the suit back in March 2001, accusing Extreme of violating six patents, which appear to be related to multiservice metro switching. Nortel had asked for $150 million in damages. Extreme countersued in May 2001, denying all charges.

While specific details of the agreement have been kept under wraps, in a telephone interview this afternoon Extreme's CEO, Gordon Stitt, said that the suit will have "no material impact on" the company. According to the agreement, Extreme will license the Nortel patents for five years. The company will be required to make small royalty payments to Nortel. Nortel will also license some of Extreme's technology for the next five years.

Jackson of U.S. Bancorp Piper Jaffray, who covers Nortel and Extreme, says that both companies have more pressing matters to deal with. Both have preannounced lower-than-expected earnings for the quarter that ended in September (see Extreme Reports Preliminary Q1 and Nortel Lowers Q3 Forecast).

“We saw a general softness across all regional areas,” says Stitt. “I’d like to think things can’t get any worse, but I don’t have enough information to call a bottom at this point. Luckily for us, the enterprise business isn’t going through the same restructuring that many of the service providers are going through. Hopefully, with a little economic recovery, things can stabilize."

Nortel announced last week that it would fall short of its revenue goals for the third quarter. This was the second time it lowered expectations in the past two months. The company now says it expects to report around $2.3 billion for the third quarter, down 15 percent from last quarter’s revenues. It also announced last week that it would be closing its Coretek business and laying off more workers (see Coretek Is Closed and Nortel Outlook Worsens). It bought Coretek for $1.4 billion in stock in March 2000.

And if things weren’t already bad enough for Nortel, SBC Communications Inc., a major Nortel customer, announced it would cutting its capital spending budget for 2003 -- again (see SBC Cuts Capex, Jobs). All the recent bad news has left many analysts questioning Nortel’s viability.

“I’m not saying that they will go bankrupt for sure,” says Jackson. “But the risk of bankruptcy is very real. It’s not a farfetched idea, anymore.”

Jackson downgraded the company’s stock last week to market underperform. But other analysts say Nortel will likely weather the storm without having to resort to bankruptcy protection. They point to the $4.8 billion in cash the company has on hand. They claim that even with sagging sales the company should have enough to last another 15 months.

— Marguerite Reardon, Senior Editor, Light Reading

Subscribe and receive the latest news from the industry.
Join 62,000+ members. Yes it's completely free.

You May Also Like